Gas-to-Liquid:

A Viable Alternative to Oil-Derived Transport Fuels?

CraigBrown

WPM50

May2013

The contents of this paper are the authors sole responsibility. They do not
necessarily represent the views of the Oxford Institute for Energy Studies, of
any of the Institutes members, and/or of the authors other affiliations.

Copyright 2013
Oxford Institute for Energy Studies
(Registered Charity, No. 286084)

This publication may be reproduced in part for educational or non-profit purposes without
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ISBN 978-1-907555-74-9

ii

Abstract
A number of high-profile projects and a wave of recent investments have focused attention on
the global gas-to-liquid (GTL) industry, suggesting a latent potential for gas-to-liquid fuels to
usher in a new conceptualization of oil product markets. The clean-burning, high-quality
characteristics of GTL diesel fuels lend support to this outlook, seemingly offering a viable
substitute to oil-derived diesel in the global transport sector. However, doubts over the longterm viability of large-capacity GTL projects in the absence of heavily subsidized gas
feedstock prices leads to an alternative narrative, suggesting that GTL products will have only
a limited impact in the global transport sector by virtue of the industrys unsustainable growth
potential. Evidence of this is seen in Europe, where despite the favourable market conditions
for diesel imports, GTL diesel remains a niche product with relatively narrow commercial
applications. As such, the recent wave of GTL investments may not be totally justified by
market context, and the potential for GTL fuels to impact oil product markets may be
overstated.

Keywords: GTL, diesel, blend stock, transport fuel, natural gas substitution, downstream,
refining, FischerTropsch

iii

Acknowledgments
I would like to thank my advisor Bassam Fattouh at the OIES for his support, guidance, and
suggestions that were instrumental in researching and shaping this analysis. I would also like
to thank Kate Teasdale at the OIES, as well as my editor Catherine Riches for her
comprehensive corrections and comments. I must also acknowledge the contributions and
insight from my talented colleagues at PFC Energy, whose expertise was vital to this analysis.
Most importantly, I would like to thank my family, for their unwavering support and
encouragement.

iv

Contents
Abstract .................................................................................................................................... iii
Acknowledgments.................................................................................................................... iv
Introduction .............................................................................................................................. 1
Industrialization of non-oil-derived fuels ............................................................................... 1
Part I: GTL conversion as a gas monetization pathway....................................................... 4
Gas transportation vs. transformation ..................................................................................... 4
Liquid fuels output capacity ................................................................................................... 6
Product slate characteristics.................................................................................................... 9
Part II: Commercialization of GTL Diesel .......................................................................... 12
Europe: an ideal market context ........................................................................................... 12
Regulatory environment and tight fuel quality specifications .............................................. 13
Structural diesel deficit and gasoil premiums....................................................................... 13
GTL diesel as a neat product or refinery blend stock ........................................................... 14
Optimal commercialization: sulphur vs cetane premium ..................................................... 17
Part III: Global Capacity Development ............................................................................... 19
Prerequisite economic conditions for the support of large-scale GTL capacity................... 19
Global Capacity Outlook ...................................................................................................... 21
Large Scale vs Modular GTL ............................................................................................... 24
Conclusion ............................................................................................................................... 26
Potential of GTL to impact oil product markets ................................................................... 26
References ............................................................................................................................... 27
Other sources .......................................................................................................................... 28

Figures
Figure I.1: The FischerTropsch Synthetic Fuel Conversion Process ....................................... 5
Figure I.2: Chemical versus physical changes and gas monetization ........................................ 5
Figure I.3: Brent Crude Spot Price vs Henry Hub Spot Price (19982008) .............................. 6
Figure I.4: Correlation between ultra-low sulphur diesel spot prices and Brent crude ............ 10
Figure I.V: Product Slates ........................................................................................................ 10
Figure II.1: Europes Oil Product and Gasoil Demand ............................................................ 12
Figure II.2: Adding value to distillation products .................................................................... 16
Figure II.3: Gasoil Spot Price by Sulphur Content (Europe ARA f.o.b.) ................................ 17
v

Figure III.1: Brent crude spot price vs. Henry Hub spot price (200013) ............................... 20
Figure III.2: Crude oil (Brent) to natural gas spot ratio (200013).......................................... 20
Figure III.3: North America Henry Hub Gas Price Evolution ................................................. 23
Figure III.4: Crude Market Evolution ...................................................................................... 23

Tables
Table I.1: Existing GTL Capacity 2012 .................................................................................. 8
Table II.1: Physical Properties Comparison Diesel .............................................................. 15
Table II.2: Physical Properties and Blend stock Opportunities ............................................... 16
Table III.1: Firm proposed large-scale GTL capacity outlook................................................. 21

vi

Introduction
Industrialization of non-oil-derived fuels
The technology to synthesize liquid fuels from hydrocarbons other than crude oil has existed
since the 1920s; however, it has only been industrialized on a limited scale over the past 90
years. In 1923, the German scientists Franz Fischer and Hans Tropsch developed a process of
forming long-chain hydrocarbons by reacting carbon monoxide and hydrogen gas molecules
through a catalyst as a means of producing synthetic liquid fuels. Development of the
FischerTropsch process was encouraged by Germanys post-World War I effort to become
energy independent, and it was shortly thereafter industrialized as part of Hitlers 1936 Four
Year Plan. The German government sought to fuel military vehicles by transforming the
countrys abundant coal resources into motor gasoline and jet fuel, thereby assuaging the war
efforts vulnerability to allied blockades on foreign oil supply (Stranges, 2003).

Due to high production costs and the existence of cheaper alternative crude distillation
methods, however, the nascent industrys development hinged on various forms of
government support and incentives (Stranges, 2003). As such, the earliest developments of
FischerTropsch (FT) technology and the subsequent industrialization of synthetic fuels
were deemed inseparable from the Nazi war effort. Following World War II, international
conventions mandated that Germanys synthetic fuel industry be dismantled,1 and by 1949 the
remnants of the industry had been relocated to Siberia or broken down for scrap iron
(Stranges, 2003). The only other significant industrialization of synthetic fuels occurred
during the apartheid era of isolation in South Africa from the 1950s, when international
embargos severed crude supplies and the countrys National Party bolstered its synthetic fuels
industry in order to derive transport fuels from the countrys indigenous coal reserves.

The synthetic fuels industry has been hindered by its legacy of being foremost a politically
driven, rather than a commercially motivated, endeavour (Greene, 1999). Given this heritage,
it is unsurprising that the industry (and the related outlook for commercialization of gas-toliquid (GTL) synthetic fuels) has suffered from its characterization as a technologically
feasible, but not economically viable, means of converting hydrocarbons such as gas into
liquid fuels (Greene, 1999). Between 1950 and 2010, global volumes of GTL product output

Certain coal to liquid (CTL) plants were relocated to Britain, and those in eastern Germany were dismantled
and relocated to eastern Russia. The ban on synthetic fuels production in Germany was lifted by 1950; however,
the domestic industry failed to stage a recovery.

capacity had materialized at less than 100,000 b/d roughly equivalent to the output of just
one average-sized east European refinery.

However, the recent confluence of several factors has altered the commercial viability of the
GTL industry, suggesting that wide margins and robust revenues can be earned by converting
natural gas into clean-burning liquid fuels and other high value oil-linked commodities.
Broadly speaking, these factors are: (1) improvements in the lifespan of the catalysts used to
derive hydrocarbon chains from natural gas (methane) and efficiency gains in the Fischer
Tropsch process; (2) the detachment of natural gas markets from oil prices and the subsequent
wide differential between the two prices, courtesy of the unconventional gas boom; and (3)
long-term global demand trends favouring low-emissions fuels in the transport sector.

Despite these auspicious circumstances, however, this paper argues that GTL fuels will have
only a limited reach into oil product markets and the transport sector going forward. While
downward pressure on natural gas prices and increasing demand for clean-burning motor
fuels have ushered in visions of a new future of transport fuels [that] will soon go global
(Mackenzie, 2013), the transient conditions that had supported a favourable outlook for the
proliferation of GTL liquid fuels over the period of 200912 have, more recently, shown signs
of deterioration. Moreover, alternative and less capital-intensive pathways to natural gas
monetization are emerging via small-scale modular GTL plants, whose development has
been encouraged by the rapidly increasing supply of unconventional and associated gas which
has necessitated more practical and localized gas monetization solutions. The confluence of
these factors has the momentum to derail the trajectory of the GTL industry from large-scale
capacity builds towards modular sites. This suggests that overall GTL volumes will be smaller
and more dispersed than currently anticipated, dampening the expected impact of GTL fuels
in global oil product markets.

Part I of this paper discusses GTL as a pathway to natural gas monetization, focusing on the
trade-off between gas transportation versus chemical transformation of gas and the respective
commodity market implications. This is followed by an analysis of the inherent product yields
of the FT GTL process, the existing global capacity of GTL liquid fuels output, and product
pricing movements in the corresponding commodity markets. Building on this analysis, Part
II identifies the ideal market conditions supporting GTLs main product yield (diesel), and
identifies Europes low-sulphur and structurally short gasoil/diesel markets as an ideal
2

destination for GTL diesel both in terms of product quality alignment and attractive spot
market conditions. This section also covers the current methods of commercializing existing
GTL diesel supply in Europe, highlighting the gas-derived fuels proclivity to remain as a
niche product even within markets that are significantly short of marketable gasoil and diesel
volumes. This is followed, in Part III, by an analysis of the economic conditions required to
sustain large-scale global GTL capacity, the viability of significant capacity materialization in
the medium- and long-term, and the growing split between emerging modular and large-scale
GTL alternatives. To conclude, this analysis posits that the limited impact and narrow
commercial applications of GTL diesel as evidenced in European diesel markets suggests that
GTL lacks the potential to usher in a significant reconceptualization of oil product markets in
the transport sector even as the global energy context shifts increasingly in favour of gasderived energy sources.

Part I: GTL conversion as a gas monetization pathway

Gas transportation vs. transformation
The boom in unconventional gas and the resulting downward influence on natural gas prices
has motivated major oil and energy companies to seriously reconsider the options for
monetizing natural gas. Methods currently employed to deliver and monetize natural gas are
primarily limited to fixed destination pipelines and, increasingly, to liquefied natural gas
(LNG). While the former method is the less flexible of these options (generally reliant on
long-term and increasingly out of favour oil-indexed contracts between supplier and a limited
number of buyers in a specific market) the latter option allows for significant flexibility in
delivering gas to markets and, moreover, facilitates lucrative arbitrage between regional gas
markets with diverging price dynamics.

Nevertheless, gas monetization via LNG is restricted by the chemical composition and
relatively more limited commercial applications of hydrocarbons in a gaseous state, when
compared to hydrocarbon liquids derived from crude oil. 2 LNG induces only a physical
change in the natural gas input; it is condensed into a liquid state for ease of transport and
then re-gasified at its destination, for commodity markets that remain predominately restricted
to power generation and other stationary sectors (Foster Wheeler, 2005). Developments to
support infrastructure which would enable natural gas fuelling across the dominant global
passenger (and to a lesser extent commercial) vehicle fleet have thus far lagged expectations,
hindering the potential of natural gas vehicles (NGV). This logistical constraint subdues the
medium-term outlook for natural gas substitution in the global transport sector. While gas
vehicles will indeed continue to make strong inroads over time as the infrastructure needed to
accommodate fuelling is put in place, the magnitude of the infrastructure investments required
to significantly offset the hegemony of oil-derived liquid fuels in global transport is only
achievable in an aggressive long-run scenario.

The FischerTropsch gas-to-liquid conversion process alters the molecular configuration and
physical state of natural gas via a combination of the FischerTropsch process and subsequent
molecular cracking/conversion and treatment processes (Figure I.1), thereby opening the
hydrocarbon to broader commercial applications and commodity markets (Figure I.2). In the

Crude oil can be distilled into 19 different products depending on the properties of the crude run and refinery
configuration. In the absence of molecular conversion, natural gas commercialization is relatively limited

transport sector, the FT process renders gas-to-liquid fuels that are readily able to employ the
full array of existing downstream oil product infrastructure due to the identical physical
characteristics of GTL-derived and crude-derived diesel. Applying FT technology to expose
natural gas feedstock to oil-linked commodity markets has become an increasingly attractive
proposition in the persistent high oil price/low gas price environment. As such, the
monetization of natural gas has evolved into a question of whether to transport or transform
the hydrocarbon, in order to achieve optimal gas monetization (Foster Wheeler, 2005).

F-T Process
Catalyst reaction

Liquid
hydrocarbon
strands
(Syncrude)

Oxygen, air
separation
process

Syngas
C02+2H2

Cracking/treatment
process

Natural gas
(Methane)

Figure I.1: The FischerTropsch Synthetic Fuel Conversion Process

LPG
Naphtha
Diesel
Jet fuel
Base oils

C5-C25 hydrocarbon
chains

Adapted from Foster Wheeler (2005) andStanford.edu

Figure I.2: Chemical versus physical changes and gas monetization

New
liquefaction
terminals

Stationary
Physical
Change

LNG
Transport

Weak
infrastructure

Incompatible
pump/retail

New engines

Gas
Monetization

Product
tankers
Product
storage
Transport

Strong
Infrastructure
Fueling
infrastructure

Chemical
Change

Baseoil
lubricants

GTL

Combustion
engines
Petchems
feedstocks

Source: Author representation

Liquid fuels output capacity

Despite the wider market applications associated with chemically transformed GTL products,
the materialization of global operational capacity pales into insignificance when compared to
that of LNG capacity. While the global super-majors have been conducting research on
developing and commercializing gas-to-liquid fuels since at least the 1960s, the tight
correlation between oil and gas markets (see Figure I.3), together with the low oil price
environment, eroded the economic and commercial rationale to develop GTL capacity to any
significant extent until well into the first decade of the twenty-first century. Not only would
the capital-intensive gas-to-liquid conversion process be uncompetitive with crude distillation
in a low oil price environment, but the product would yield narrow (if any) margins relative to
gas feedstock costs on oil-linked commodity markets.
Figure I.3: Brent Crude Spot Price vs Henry Hub Spot Price (19982008)
$/b

$/MMBtu

100

16

90

14

80

12

70
60

10

50

40

30

20
10

Brent Spot Price (lef t axis)

Henry Hub Spot Price (right axis)

Source: EIA monthly averages

As a result, the super-major international oil companies (IOCs) abstained from deriving liquid
fuels from hydrocarbons other than crude oil on a mass-commercialization scale throughout
the twentieth century.3 Although Fischer-Tropsch pilot plants were established sporadically to
test the conversion technology, and to commercialize certain products on a limited scale, the
majors initial F-T GTL and Coal-to-Liquid (CTL) sites proved to be either uneconomical or

This excludes biofuels

too technically challenged to deliver the technology on a global basis, and GTL remained only
a marginal industry. In 1985 ExxonMobil explored synthetic fuels production by opening a
14.5 kb/d test plant in New Zealand that converted methanol into gasoline (MTG), but the site
was eventually shut down in 1997 amidst an environment of persistently low fuel prices
(PennEnergy, 2013a). Shell followed in 1993 with a GTL plant in Bintulu, Malaysia (see
Table I.1), whose aim was to export speciality waxy hydrocarbon products to regional
markets this would become a prototype for later large-scale developments.4 The only other
existing operational GTL plant by the turn of the century was the Mossel Bay GTL plant of
PetroSA, South Africas national oil company (NOC). While the site was the largest GTL
facility in the world by the turn of the century (with a capacity of 45 kb/d in liquid product
output), Mossel Bay was minor in comparison to any standard crude distillation refinery
(NatGas.info, 2013).

The difficult economic conditions faced in sustaining GTL projects on an economic and
commercial level were compounded by the complex technical conversion processes and
massive capital costs, dissuading global majors from aggressively pursuing projects.
Nevertheless GTL, as an alternative gas monetization option, became increasingly aligned
with the needs of emerging regional gas producers and their respective national development
strategies which sought to maximize and diversify the value of abundant national gas
reserves, and the process started to gain attention moving into the twenty-first century
(PennEnergy, 2013b). Gas-producing NOCs in the Middle East, Russia, and the Caspian Sea
region welcomed partnership opportunities with major IOCs that promised to maximize the
value of gas resources for the host government and NOC, while offering the prospect of
healthy revenues for the latter (Crooks, 2007). Gas-rich Qatar stood out in facilitating major
GTL development partnerships. With supportive leadership welcoming foreign partnerships, a
stable operating environment, and abundant natural gas reserves in the massive North Field,
the journey of GTL from a concept through commercial viability became uniquely a Qatari
success story (PennEnergy, 2013b). This was underpinned by the countrys focus on
economic development via natural resources and a responsible diversification of gas
monetization options that favoured opportunities to develop GTL capacity (PennEnergy,
2013b; EIA Qatar, 2013).

The plant is actually a Joint Venture: Shell (72%) Mitsubishi (14%), Petronas (7%), and Sarawak State (7%).

Early in the twenty-first century, ExxonMobil, Shell, and South Africas synthetic fuels
pioneer Sasol had each engaged in separate GTL development partnerships with Qatar
Petroleum (QP). Generally speaking, in exchange for supplying subsidized natural gas
feedstock from the North Field (a critical project enabler) QP would maintain an ownership
stake and/or profit sharing arrangements in the projects (EIA Qatar, 2013). While a number of
collaborations failed to materialize as planned investments costs soared beyond targets,
ORYX GTL, a joint venture between Sasol (49 per cent) and Qatar Petroleum (51 per cent),
became the first partnership site to stream in the twenty-first century. Officially commissioned
in June 2006, the modestly sized 32.4 kb/d plant in Ras Laffan, Qatar paved the way for a
generation of future large-scale plants, enabled by unique economic circumstances and
subsidized or equity gas feedstock.
Table I.1: Existing GTL Capacity 2012

Plant name
Mossel Bay GTL
Bintulu GTL
Mossel Bay GTL Expansion
ORYX GTL Phase 1
Pearl GTL Phase 1
Pearl GTL Phase 2
Total Existing Capacity

Year
Operational
Country
Operator
South Africa PetroSA
1992
Malaysia
Shell
1993
South Africa PetroSA
2005
Qatar
Sasol/Qatar Petrol
2006
Qatar
Shell**
2011
Qatar
Shell**
2011

Nameplate
Capacity*
(bpd)
30,000
14,700
15,000
32,400
70,000
70,000
232,100

Note: Capacity refers to large scale GTL plants (>10,000 b/d), excludes pilot and demo plants
*Refers to liquid fuels output capacity
**Production sharing agreement with Qatar Petroleum

Source: Company websites, various

Four years later, in 2011, the ORYX site was eclipsed both in capacity and project magnitude
by Shells 140 k/bd megaplant Pearl GTL, similarly situated in Ras Laffan, Qatar.5 The
approximately $19bn project (reportedly the largest single investment in Shells history)
focused attention on the GTL industry. The facilitys enormous upside revenue potential and
product slate flexibility, courtesy of deeply discounted, high quality gas feedstock, acted as a
lightning rod for investments in the GTL industry. The project ushered in an unprecedented
wave of media attention, encouraged by demonstrations showcasing GTL diesel powering
Formula 1 racing cars and GTL jet fuel powering flights from Doha International Airport to

Total nameplate capacity is 260 kb/d with 120 kb/d of capacity dedicated to condensates; 140 kb/d is dedicated
to liquid fuels output such as diesel, jet fuel, and LPG

London. Supported by the broader context of retreating gas prices and rising oil and oil
commodity prices, the demonstrations seemingly legitimized the industrys commercial
viability, suggesting GTLs potential to develop as a viable substitute to oil-derived fuels in
increasingly gas-oriented energy markets.
Product slate characteristics
The extraction of long-chain carbon compounds from synthetic gas during the Fischer
Tropsch GTL process (Figure I.1) inherently yields hydrocarbon chains whose molecular
configuration corresponds to the physical properties of middle distillates such as diesel and jet
fuel consumed ubiquitously in the global transportation sector. Accordingly, the high
portion of diesel in the product slate (up to 75 per cent) dictates that the revenue potential of
typical GTL plants is driven foremost by the commercialization of GTL diesel in global
commodity markets.

Commodity prices for transport fuels such as diesel are closely correlated to crude price
movements (see Figure I.4) and, moreover, trade at a premium to crude benchmarks
depending on regional dynamics such as product balances and cyclical demand conditions.
GTL products sharing identical physical characteristics with crude-refined diesel have the
potential to exploit not only the market price differential between gas feedstock and oil prices
but, in addition, the spread between oil benchmark prices and oil product markets. The
confluence of these dynamics leads to significantly wider margin potential than that
experienced by crude-refined alternatives in oil product markets, at least in a context defined
by high oil and low gas prices. Accordingly, the upside revenue potential of large-capacity
GTL builds is dictated by the relatively straightforward principle that the more capacity
dedicated to products trading at a premium to crude a plant has, the higher the plants
revenues will be.

Figure I.4: Correlation between ultra-low sulphur diesel spot prices and Brent crude
$/b
140
130
120
110
100
90
80
70
60
50

Brent crude

US Gulf Coast

ARA Europe

Source: EIA, Bloomberg. f.o.b. spot prices for ARA ULSD and USGC Diesel 2.

As with crude-derived liquid fuels, the quality of the feedstock plays a vital role in
influencing the value of the product yield, and not all GTL plants have the same revenue
potential by virtue of their feedstock and resulting product slate. Depending on the gas
wetness, the type of petroleum product sold from the GTL could vary widely. [Shells] Pearl
GTL has developed substantial condensates capacity [120,000b/d] to accommodate the liquid
streams associated with the North Field gas. (PFC Energy, 2011). This provides the Pearl site
with an even more robust product slate (see Figure I.v.b) than other existing, under
construction, or proposed large-scale GTL builds (see Figure I.v.a), and by extension a more
robust revenue potential on commodity markets.
Figure I.V: Product Slates
Typical Product Slate of Large-Scale GTL Plant

Pearl GTL Product Slate

Base oil
11%

Middle
Distillates
75%

Condensates
23%

Diesel
19%

LPG
12%

Naphtha
20%
Jet Kero
10%
LPG
5%

Naphtha
13%

Source: Sasol and Shell project presentations and websites

10

Ethane
12%

Despite this versatile product slate, however, the middle distillate and base oil products of
Pearl GTL represent some 40% of the projects volume [and] some 50% of the sales value
(Gainsborough, 2009). Given the large emphasis on diesel fuel and the necessary logistical
and market considerations in commercializing GTL diesel, GTL plants have been
characterized as valuable downstream assets in the portfolios of major oil and petrochemical
companies. According to Shell:

Pearl will leverage global supply chains and leading [downstream] marketing positions in
fuels to maximize the value derived from those products the value of [Pearl GTLs]
product slate is comparable to the most complex refineries, but with no feedstock purchase
costs. (Gainsborough, 2009)

11

Part II: Commercialization of GTL Diesel

Europe: an ideal market context
Europe offers an ideal destination for GTL-derived diesel. A combination of stringent fuel
quality specifications and declining domestic supply supports a healthy environment for
gasoil and diesel imports. Moreover, the oil product market is predominately driven by
gasoil/diesel consumption, which accounted for well over half (56 per cent, see Figure II.1.a)
of main product demand in 2012.6 As such, the current application and commercialization of
GTL diesel in Europe reflects the potential of GTL diesel to impact global gasoil markets.
Gasoil, the middle distillate fraction of crude distillation, has a broad range of applications
which span from road and off-road sectors to power generation and marine fuels (see Figure
II.1.b). Diesel is often referred to, interchangeably, as gasoil, as it is a high cetane gasoil that
readily ignites under compression in combustion engines. For this reason, diesel is consumed
primarily in Europes road transport sector in both passenger and commercial vehicles and
accordingly constitutes the bulk of gasoil demand, at roughly 68 per cent in 2012. 7 As
described below, the uptake of diesel over gasoline has been strongly encouraged and
incentivized by national and supranational policies implemented across Europe over the past
several decades in order to promote fuel economy and reduce greenhouse gas emissions. By
2012, diesel accounted for a dominant 70 per cent of Europes motor fuel demand.8
Figure II.1: Europes Oil Product and Gasoil Demand
Europe Main Oil Product Demand (2012)
Fuel Oil
4%

Gasoil Demand by Use

Industria l
3%
Residentia l
10%

LPG
5%
Gasoline
17%

Gasoil
56%

Europe

On-road
Diesel
68%

Na phtha
8%
Jet fuel
10%

Commercia l
6%
Agricultural
6%
Power Gen.
Ra il 1%
1%
Ma rine
OtherBunker
2%
3%

Source: IEA, national sources, and PFC Energy

Source: IEA, national sources, and PFC Energy. Main products classified as gasoil, gasoline, jet fuel, naphtha,
and heavy fuel oils
7
Author estimate for 2012 based on IEA gasoil by use data. Other gasoil uses include home heating, marine
fuels, industrial, and commercial sectors
8
Excludes LPG and CNG consumption, which remains relatively minor on a Europe-wide basis despite strong
uptake in specific European markets. Source, IEA and PFC Energy

12

Regulatory environment and tight fuel quality specifications

The transition to gasoil and diesel consumption in Europe has been hastened by EU
legislation promoting the superior fuel economy offered by diesel combustion engines in its
passenger and commercial vehicle fleets. In order to meet supranational carbon emissions
targets, progressively tighter EU-wide Fuel Quality Directives have mandated a sharp
reduction of sulphur content in gasoil/diesel marketed within the European Union. The
specifications for sulphur content in motor fuels (gasoline and diesel) in the road sector were
reduced from 350 parts per million (ppm) in 2000 to just 10 ppm in 2009. The legislation was
amended in 2011 to encompass gasoil and diesel consumed in off-road sectors such as
railways and inland navigation, and, by 2012, 10 ppm gasoil accounted for an estimated 80
per cent of Europe-wide gasoil demand.9
Structural diesel deficit and gasoil premiums
Meeting the increasingly tighter and broader-reaching sulphur specifications has put greater
strain on Europes refiners, exacerbating gasoil deficits and at the same time supporting
higher spot market prices for gasoil and diesel imports. The gasoil produced by refineries in
Europe has varying physical characteristics in terms of sulphur content (affecting particulate
emissions), cetane index (influencing ignition quality in combustion engines), and viscosity
(affecting energy content and fuel efficiency), each influencing market value. The inherent
physical properties of crude-distilled middle distillates are rarely within the acceptable range
of EU product specification guidelines, meaning that the fuels must undergo extensive
processing and treatment before becoming marketable (domestic) fuels.

Compounding the problem, Europes refinery configuration remains overly skewed towards
fluid catalytic conversion (FCC) units designed to optimize the production of gasoline at the
expense of on-spec middle distillates (notably diesel). The refining complex was constructed
in the wake of World War II and expanded during Europes economic boom years of the
1960s through 1980s when domestic product markets were dominated by gasoline. By the
1980s, however, supranational carbon legislation and Europe-wide policies began to promote
the uptake of the superior fuel economy diesel combustion engines over gasoline, detaching
domestic supply from demand trends and rendering product markets chronically short on
diesel and long on gasoline. Domestic refiners mitigated the expanding product gap by

Author estimates. Based on IEA demand by use data and fuel quality directives.

13

exporting gasoline surplus to markets in the Atlantic Basin, particularly to the structurally
short north-eastern USA, while relying on imports to meet diesel and gasoil demand,
offsetting the immediacy for investing in the expensive diesel-yielding hydrocracking
conversion units. As a result, Europes refining industry continues to be structurally
mismatched for domestic consumption trends, mandating increasing gasoil and diesel imports.

The ongoing dieselization of passenger and commercial vehicle fleets in Europe combined
with the increasingly tight sulphur specifications has sustained upward pressure on spot
prices, particularly following rationalization of around 1.2 million b/d of refinery capacity
across Europe since 2009. Spot market prices for imported ultra-low sulphur diesel (ULSD)
and gasoil have seen continuous upward movement since 2009, creating a favourable context
for imported GTL diesel as either a substitute, or as a blending component, for slightly offspec refinery diesel.

From 2009 through 2012, the average annual spot price of 10 ppm diesel imported into northwest Europes Rotterdam (ARA) hub increased from an annual average of $71.25/bbl in 2009
to $130.69/bbl in 2012. While this evolution is closely correlated to the trend of oil price rises
over the same period, the gasoil/diesel market is also elevated by the deepening structural
supply deficit of low-sulphur diesel. Accordingly, the premium of 10 ppm diesel against Brent
crude markets has continued to widen, improving from an average of $9.51/bbl in 2009 to
$19.06/bbl in 2012.10

GTL diesel as a neat11 product or refinery blend stock

Given the premium enjoyed by ultra-low sulphur gasoil and diesel in Europes product
market,

the

inherently

sulphur-free

GTL diesel

would

appear

to

have

robust

commercialization opportunities within European markets. Nevertheless, the practical

applications of the product remain relatively narrow. While GTL diesel has been showcased
as running neat in combustion engines, it is below the density/energy content requirement to
be marketed completely as a pure motor fuel in Europe, meaning it must be blended with
denser crude-refined gasoil or diesel. Accordingly, GTL diesel is commercialized primarily as
a blend stock in Europe, allowing domestic refineries to enhance the qualities of their gasoil

10

IEA, Bloomberg f.o.b spot prices for ARA 10 ppm diesel

The term neat refers to the fuel running without being blended with an oil-based fuel, a prerequisite typical
of other alternative fuels such as biodiesel and ethanol.

11

14

and diesel pools in order to meet market specifications. Alternatively, foreign fuel distributors
lacking domestic refining capacity can opt to blend GTL diesel into slightly off-spec product
imported from foreign refineries to render a diesel/gasoil product marketable within Europe.

For European refiners, blending GTL diesel into existing refinery gasoil or diesel pools
permits operators with inadequate conversion and desulphurization capacity to modify and
add potentially significant value to their existing (but slightly off-spec) gasoil and diesel
yields (see Table II.1). If a domestic refinery, for example, produces a diesel pool that has
slightly higher than 10 ppm sulphur content (either due to insufficient conversion or
desulphurization or to the physical characteristics of the crude run itself), the refiner may opt
to blend the nearly sulphur-free GTL diesel into the existing diesel pool in order to lower the
overall sulphur content of the refinery diesel pool. Alternatively, if the refinerys diesel pool
is too viscous, or if its cetane number is too low to meet the European Unions mandated Fuel
Quality Directives, refiners can blend GTL diesel to conform the overall diesel pool to
mandated EU market specifications and boost diesel performance under certain conditions.
Table II.1: Physical Properties Comparison Diesel
F-T GTL Diesel Refinery Diesel EU Specification
Sulphur content

<5 ppm

~10ppm

10 ppm max

Cetane number (kg/m3)

>70

4555

4851

Density, 15C

0.77

0.84

0.820.84

Source: Center for Global Energy Studies (2005), EU Directive 2009/30/EC

Because the diesel pool of a refinery is a blend of the various streams of gasoil from the
different distillation, conversion, and treatment units in the refinery, the physical
characteristics of the gasoil or diesel from each of these streams can vary greatly (see Table
II.2). This offers different opportunities in the refining process, based on the specific
characteristics of the gasoil or diesel stream, to blend GTL diesel.

15

Table II.2: Physical Properties and Blend stock Opportunities

Typical Light
Cycle Oil
(LCO) from
FCC
Sulphur content

10,000

Cetane number (kg/m3)

2030
0.900.96

Density, 15C

FT GTL Diesel

Refinery
Gasoil

Refinery
Diesel

EU
Specification
(Euro V)

<5 ppm

50-2,000

>10ppm

10 ppm

>70

<42

4555

4851

0.77

0.86

0.84

0.820.84

Source: Center for Global Energy Studies (2005), PFC Energy, EU Directive 2009/30/EC

Typically, the low quality light cycle oil (LCO) from the FCC is rerouted toward heavier
grade gasoil production, such as heating oil and marine gasoil, or alternatively blended with
heavier fuel oils, rather than undergoing further processing. Each of these heavier products
has less stringent sulphur and cetane requirements, which translates into a lower market value
(Chevron, 2007). On the other hand, the straight run refinery gasoil or diesel derived directly
from crude distillation may need only minor treatment for use as an on-road (Euro-V) diesel
fuel, depending on the quality and physical characteristics of the crude slate (Chevron, 2007).
In order to make the slightly off-spec straight run diesel compatible with regulatory
specifications and combustion engine performance guidelines in the road sector, volumes of
GTL diesel can be blended into the pool of straight-run diesel (see Figure II.3). In addition,
diesel that is cracked from distillate conversion units may need only minor upgrading in
terms of reducing sulphur content or boosting cetane content to attain the road sector
minimum specification of 51 (see Figure II.2), providing another opportunity for GTL diesel
as a blend stock to add value to the refinery yield.
Figure II.2: Adding value to distillation products

.88
.86
.84

Cetane
Number

GTL Value Added

Density
15 kg/l
.90

Light Cycle Oil

Density >.90

+ GTL
90

Refinery gasoil
Density =0.86

80

+ GTL

+ GTL

70

EU Spec
0.82-0.84

Refinery diesel
Density =0.84

.82
.80

60

EU minimum diesel

40

.76

30

.74

20

.72

10

.70

Market Value

+ GTL

Premium Fuel
GTL diesel
Cetane 70+

+ GTL

50

GTL diesel
Density = 0.77

.78

Refinery diesel
Cetane 45-55
Refinery gasoil
Cetane 42

Light Cycle Oil

Cetane 20-30

Market Value

Adapted from Sasol Presentation

Adapted f rom Sasol Presentation

16

Gasoil Value Chain by Cetane

100

Optimal commercialization: sulphur vs cetane premium

The different physical characteristics of gasoil yields translate into disparate market values,
which are dictated foremost by the cetane and sulphur content of the gasoil/diesel yield and its
corresponding marketability. The physical properties of the yield influence the optimal point
in the refining process (more specifically in which gasoil pool) where GTL can be blended in
order to achieve the greatest market value for the given yield of gasoil or diesel. In general,
sulphur-free high cetane diesel marketed at retail pumps as premium diesel (cetane content
above 51) earns the highest market value due to its price premium advantage (consequently
earning higher margins at the pump relative to typical on-spec road diesel). Higher sulphur,
low cetane gasoil used in heating oil and marine bunkers, on the other hand, earns a relatively
low market value (Figure II.3).
Figure II.3: Gasoil Spot Price by Sulphur Content (Europe ARA f.o.b.)
$/b

1,300
1,200
1,100
1,000
900
800
700
600
500

10ppm diesel

50ppm gasoil

1000ppm gasoil

Source: Bloomberg f.o.b. spot prices Europe ARA.

The progressively tighter sulphur content limits for diesel fuels have focused attention on
differentials in market values between the mandated 10 ppm sulphur diesel and higher sulphur
gasoil and diesel markets. As discussed above, the structural conditions within Europes
product markets have resulted in climbing premiums for low-sulphur 10 ppm gasoil and diesel
as refiners struggle to render the product, due primarily to insufficient conversion. At the
17

same time, however, the premium for higher sulphur gasoil used in other sectors has mirrored
the spot market movements of 10 ppm diesel (Figure II.4). This tight correlation suggests that
premiums on European gasoil/diesel markets are driven primarily by the tightness in overall
gasoil supply, rather than by the specific quality of the gasoils sulphur content. Accordingly,
the highest market value from GTL commercialization is likely to come from blending it with
existing refinery diesel pools in order to render a high cetane premium diesel offering that
commands a steep relative pricing premium in the market.

18

Part III: Global Capacity Development

The relatively limited commercial applications of GTL diesel, combined with the industrys
negligible product output capacity relative to global transport demand, suggests that GTL has
only a limited potential to impact global transport markets. In order to support significant
GTL capacity expansion that is independent of heavily subsidized gas pricing, and facilitate
GTL inroads into the global transport sector, a wide differential between oil and gas spot
market prices must be sustained in the long term.
Prerequisite economic conditions for the support of large-scale GTL capacity
The challenging economic constraint of balancing pricing movements in two increasingly
detached commodity markets (see Figure III.1) poses a serious threat to the proliferation of
GTL liquid fuels moving forward. Industry analysts along with the Energy Information
Agency (EIA) suggests that project economics for the type of large-scale plants championed
by Shell, Sasol, and Chevron become uneconomic when oil benchmarks fall below $110/b
and gas feedstock costs exceed $4 per million British thermal units (MMBtu). In other words,
for a large-scale greenfield GTL project of average relative capital investments costs and
product capacity output, oil spot prices must maintain a multiple of over 25 times the spot
price of 1 standard unit (1 MMBtu) of natural gas procured as feedstock in order for the plant
to render the project economically viable.12

Due to volatility in both oil and gas markets, however, this is a risky proposition. Over the
past five years, pressure from the global economic recession, geopolitical turmoil in north
Africa and the Middle East, the advent of hydraulic fracturing, and a boom in unconventional
gas and oil supply have each ushered in significant unpredictability and volatility in oil and
gas markets. Over the period 200812, the multiple of Brent crude benchmark prices to North
Americas Henry Hub (HH) gas spot market (see Figure III.2) varied from a factor of just 7
when oil prices bottomed out in December 2008 (at a time when the HH prices were relatively
buoyant at around $6/MMBtu) to a multiple of 61 when oil reached $120/b in early 2012 and
HH prices fell to under $2/MMBtu).

12

Gas-To-Liquid (GTL) Technology Assessment in support of AEO2013, presentation by the Energy

Information Agency, 2012. www.eia.gov/oiaf/emdworkshop/pdf/AEO2013_GTL_Assessment.pdf

19

Figure III.1: Brent crude spot price vs. Henry Hub spot price (200013)
$/b

$/MMBtu

20
18
16
14
12
10
8
6
4
2
0

140
120
100
80
60
40
20
0

Brent Spot Price (lef t axis)

Henry Hub Spot Price (right axis)

Source: EIA Monthly averages.

Figure III.2: Crude oil (Brent) to natural gas spot ratio (200013)
factor

70
60
50
40
Benchmark threshold: 25

30
20
10
0

Brent crude oil ($/b) divided by HH gas ($/MMBtu)

Source: EIA Monthly averages.

20

Financing large-scale capacity builds is a compelling proposition when market prices for gas
linger at $23/MMBtu and oil benchmarks hover comfortably above $100/b, as was the
prevailing scenario over much of 200912 (Figure III.1). This position was lent further
support by the increasing detachment of oil and gas prices via the de-indexing of gas contracts
to oil prices over the same time period. However, the rationale for GTL conversion erodes as
the oil/gas pricing differential narrows, due to cyclical and/or structural factors in either gas or
oil markets, which compounds the element of volatility facing GTL economics. Accordingly,
the growth potential and actual materialization of global GTL capacity moving forward will
be determined foremost by the duration and sustainability of gas and oil prices on global spot
markets and the ability of prospective GTL operators to secure cheap natural gas in the
absence of subsidized feedstock procurement arrangements.
Global Capacity Outlook
In a sustainable market scenario that supports a sufficiently wide spread between natural gas
and oil benchmarks, the bulk of future GTL capacity additions by volume are anticipated to
come from the development of three proposed large-scale GTL plants. In the short term
(201315), global capacity is expected to expand by 30 per cent (or 72 kb/d) following the
slated completion of projects underway in Nigeria (2013) and Uzbekistan (2016/17) as Table
III.1 shows. Through 2020, an optimistic materialization of large-scale plants which are
currently proposed and past the feasibility study stage could see global GTL product output
capacity expand by 75 per cent on 2012 levels, reaching approximately 400 kb/d.
Table III.1: Firm proposed large-scale GTL capacity outlook

Plant name

Country

Operator

Escravos
Oltin Yo'l GTL
Sasol Louisiana

Nigeria
Uzbekistan
USA

Chevron/NNPC
Sasol/UNG/Petrona
Sasol

Nameplate
Capacity
(bpd)

2013
2017
201819

34,000
38,000
96,000

Firm Proposed GTL Capacity*

168,000

Existing capcity at end-2012

232,100

Potential global capacity 2020

400,100

*Projects past the feasibility study and in FEED process

Note: Capacity outlook excludes modular GTL developments, pilot and demo units

Source: Project websites

21

Proposed
completion

As indicated in Table III.1, the bulk of capacity additions (134 kb/d) through 2020 are
anticipated to come from Sasol. Unlike Shell and Chevron, the pure-play synthetic fuels
company has aggressively targeted large-scale GTL opportunities in North America, as
opposed to locations in gas-rich basins in Nigeria, the Middle East, and Caspian Sea region
where GTL sites are more likely to benefit from heavily subsidized gas prices and large gas
reserves.13 Sasol has announced plans to construct and operate a 96 kb/d GTL plant at Lake
Charles, Louisiana by 2018/19 primarily to produce transport fuels, in addition to high-value
petrochemical products. If materialized, the site will represent the second largest GTL facility
in the world behind Pearl, and more importantly it would be the first large-scale site intended
to leverage predominantly structural market developments within North Americas gas market
to support project feasibility.

Underlying this project, Sasol executives contend that opportunities for US GTL are
advantaged by a favourable long-term oil/gas pricing ratio in North America, citing the
Energy Information Agency (EIA) in forecasting that crude oil multiples (Brent) to natural
gas prices (Henry Hub) will remain above a factor of 20 throughout 2040, presumably
supporting the projects economics (Sasol, 2013). Nevertheless, the recent deterioration of the
gas and oil price differential casts legitimate doubt on the prospects of North American largescale GTL builds in a longer-term scenario. By March 2013, Henry Hub gas prices in North
America had increased to $3.80/MMBtu, the highest price level seen in 18 months (see Table
III.3). Brent crude benchmarks continued to converge downward towards the $100/barrel
market (see Table III.4), with deep inland crude discounts on North America WTI poised to
put even further downward pressure on crude commodity and futures markets. Year-on-year,
the crude oil to natural gas price ratio has eroded from a healthy 57 in March 2012 to a
troubling 28 in March 2013 (see Table III.2). In the medium term, the advent of US LNG
exports is also poised to apply upward pressure on North American hub prices, further
threatening large-scale project economics in North America.

13

Oltin Yo'l is the exception, but the companys plans for two plants in North America (Louisiana and Alberta,
Canada) with a combined capacity of 192 kb/d, would far eclipse Oltin Yo'l.

22

Figure III.3: North America Henry Hub Gas Price Evolution

$/MMBtu

14
12
10
8

Highest price
since Sept. 2011

6
4
2
0

Source: EIA.

Figure III.4: Crude Market Evolution

$/b

160
140
120
100
80
60
40
20
0

Brent Crude

Source: EIA.

23

WTI Spot

Large Scale vs Modular GTL

Despite dual forces exerting opposing pricing pressure on oil and gas markets, GTL capacity
is relatively certain to increase from 232 kb/d at the end of 2012, to just over 300 kb/d by
2015. Nevertheless, post-2015 developments appear increasingly unlikely, as structural
fundamentals apply unfavourable downward pressure on oil markets and upward pressure on
gas spot markets. Moreover, the disparate proliferation of new natural gas reserves, courtesy
of a boom in unconventional gas, favours a shift towards more localized solutions
(particularly in North America) rather than large-scale developments which require, and seek
to exploit, massive gas reserves.

As exploration and production activities shift in favour of unconventional gas and oil resource
plays, GTL commercial developments have already started to capitalize on this trend via
smaller-scale modular plants. Unlike their large-scale counterparts, modular GTL plants
have product sendout capacities of just 13 kb/d and are typically associated with monetizing
small or stranded gas fields and otherwise flared gas lacking viable alternative monetization
options (Baxter, 2012).

An emerging type of FT based GTL solution monetizes associated natural gas by converting
it into high-quality synthetic crude oil at the wellhead. The FT derived synthetic crude oil is
subsequently mixed with the naturally produced crude and delivered to market in the oil
barrel. This solution is employed primarily to unlock oil field value rather than to convert
natural gas reserves into liquid fuels for use in transport and petrochemical sectors, which
marks a significant paradigm shift in gas monetization through the FT GTL process.

Alternatively, a second and emerging type of modular GTL plant links up with downstream
producers who have limited amounts of cracking and conversion capacity already installed, in
order to yield limited amounts of liquid fuels and speciality products on a local basis. This
option is of increasing appeal to smaller North American speciality products producers in
close physical and logistical proximity to shale plays, allowing the producers to capitalize on
low-cost gas feedstock runs as an alternative to crude oil.14

14

Calumet turns crude oil into waxes and white oils, and then into personal care and pharmaceutical products.
Velocys is planning to provide Calumet with technology to use gas instead of expensive crude oil. That same
process can turn gas into liquid fuels, such as gasoline. (Puko, 2013)

24

The future employment of the FT GTL process will ultimately be influenced by a multitude
of factors; these include the plants proposed location, the quality of gas sourced, the capital
investment capabilities, and perceived market conditions both in oil and gas markets. The
emergence of modular GTL given the broader economic constraints affecting large-scale
GTL developments has significant implications for the impact of FT GTL liquid fuels in
transport markets going forward, suggesting a more dispersed and limited proliferation of
GTL liquid fuels by volume.

25

Conclusion
Potential of GTL to impact oil product markets
While FischerTropsch based GTL is a technologically feasible option for diversifying
natural gas monetization opportunities, its implementation on a scale large enough to impact
the hegemony of oil-derived liquid fuels in global transport markets is undermined by
significant economic, and to a lesser extent commercial, constraints. The favourable context
between 2009 and 2012 that was driven by plummeting natural gas prices and stubbornly high
oil prices temporarily supported potential for the GTL industry to offer a seemingly viable
substitute for crude-derived liquid fuels. However, this context has more recently shown signs
of deterioration, due to structural factors in both oil and gas markets, rapidly undermining the
rationale for large-scale GTL projects.

As the GTL industry itself adapts to developments in natural gas supply, it will rationally seek
smaller and more dispersed GTL options that carry a limited capacity to deliver liquid fuels to
transport markets. This paper posits that the confluence of narrowing gas and oil price
differentials and the advent of modular GTL units is sufficient to derail momentum in the
large-scale GTL industry, whose existing supplies will remain niche, but high value,
components primarily in diesel import markets. As such, the current optimism surrounding
the GTL industry as a viable alternative to crude-derived liquid fuels in the global transport
sector is overstated, and the further development of large-scale GTL capacity will fail to usher
in a significant transformation of oil product markets for transport fuels, on either a European
or global basis.

26

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28