This group brings together the best thinkers on energy and climate. Join us for smart, insightful posts and conversations about where the energy industry is and where it is going.

Post

Could Diesel Fuel Made from US Natural Gas Compete with CNG and LNG?

Geoffrey Styles's picture
GSW Strategy Group, LLC

Geoffrey Styles is Managing Director of GSW Strategy Group, LLC, an energy and environmental strategy consulting firm. Since 2002 he has served as a consultant and advisor, helping organizations...

  • Member since 2018
  • 2,085 items added with 220,593 views
  • Jan 16, 2013 11:31 pm GMT
  • 924 views

Your access to Member Features is limited.

diesel fuel natural gas

The announcement last month of a $21 billion project to capitalize on abundant, low-cost US natural gas should have caught the attention of everyone interested in this resource. As reported in the New York Times, Sasol, a South African energy company, intends to build a 96,000 barrel-per-day gas-to-liquids (GTL) plant in southwestern Louisiana, in conjunction with a new gas processing plant and ethylene cracker. The synthetic diesel fuel produced by this facility would provide a different pathway for shale gas to displace imported crude oil in the US transportation sector, in competition with compressed or liquefied natural gas (CNG or LNG.)

GTL involves a two-step conversion of the methane that makes up the bulk of natural gas into synthesis gas and hydrogen, which are recombined into liquid hydrocarbons by means of the decades-old Fischer-Tropsch (FT) process. GTL is also energy-intensive, with an overall efficiency around 60%. South African companies have vast experience with such synthetic fuels. Sasol are partners in the Oryx GTL plant in Qatar, and their coal-to-liquids plants in South Africa utilize a similar syngas step and the same FT process as GTL.

With the US suddenly perceived to be sitting atop a century’s worth of natural gas, mainly in the form of unconventional gas from shale, tight gas formations and coal-bed methane, T. Boone Pickens isn’t the only one to see an opportunity to displace imported oil with gas. Yet as attractive as that sounds for reasons of energy security and trade, it isn’t obvious whether the public or even fleet operators are willing to switch on a larger scale to a lower-density gaseous fuel requiring both new distribution networks and new or modified powertrains. Only 0.1% of the natural gas consumed in the US now finds its way into vehicles, equivalent to less than 0.1% of US oil demand. Under the circumstances, it would be surprising if someone weren’t looking seriously at GTL, one of the few practical ways to circumvent the mechanical and logistical barriers that have impeded the fueling of more US cars and trucks with natural gas.

When I read about Sasol’s proposed project, I immediately thought of another, less well-known South African synfuels facility. Since 1992 the Mossel Bay GTL plant has been turning natural gas into gasoline, diesel and other fuels, drawing first on the Mossel Bay gas field and then on newer fields as the original one depleted. Although owned by another firm, the ongoing struggles to keep the “Mossgas” plant supplied are well-known in South African energy circles. I can’t imagine Sasol embarking on a project like the one in Louisiana if they had any doubt about their ability to keep it supplied for decades.

Of course volume and price are two very different aspects of supply. A decade ago, conventional wisdom held that GTL required a gas cost of around $1 per million BTUs to be viable. Even with the shale bonanza today’s US natural gas price is well above that level. What now makes it possible to conceive of GTL in the US is that the price of the crude oil used to make diesel and other fuels has risen so much higher than that of natural gas. That comparison is more obvious when one converts natural gas prices into their energy equivalent in crude oil. Today’s US natural gas price is below the $23 per equivalent barrel that it was in 2001. Meanwhile crude oil has increased from about $26 to $95 per barrel. The drastically improved attraction of GTL becomes even clearer when comparing ten years of wholesale US Gulf Coast diesel prices to natural gas prices using the approximate GTL conversion rate of 10 million BTUs of gas per barrel of liquid product.


Picture
 
As the chart above reveals, this theoretical GTL margin has exploded since 2009. Yet it also shows that if gas prices returned to the levels we experienced just a few years earlier, the proposed project would encounter significant risks. Perhaps that helps explain Sasol’s concept of a larger integrated gas complex with multiple sources of margin, capitalizing on the waste heat from the GTL process and the lighter hydrocarbons it yields as byproducts.

It remains to be seen whether GTL will prove an attractive means of leveraging the US shale gas revolution to back out imported oil. However, if Sasol and others proceed with US GTL projects, anyone eyeing our gas surplus for other purposes, whether in manufacturing, fertilizer production or power generation, would face serious competition linked to the global oil market. That includes potential LNG exporters, who passed an important hurdle with the publication of a favorable analysis by the Department of Energy.

A slightly different version of this posting was previously published on the website of Pacific Energy Development Corporation


Image: Diesel Fuel via Shutterstock
Geoffrey Styles's picture
Thank Geoffrey for the Post!
Energy Central contributors share their experience and insights for the benefit of other Members (like you). Please show them your appreciation by leaving a comment, 'liking' this post, or following this Member.
More posts from this member
Discussions
Spell checking: Press the CTRL or COMMAND key then click on the underlined misspelled word.
James Hopf's picture
James Hopf on Jan 18, 2013

Mr. Styles,

What are your thoughts about methanol from natural gas (vs. GTL)?

What I've heard is that gas to methanol conversion is much cheaper and has a much lower energy loss, but that it has been (tragically) all but removed from consideration, due to an EPA ban over (hyped) environmental concerns.

If true, the methanol option would result in cheaper liquid fuel, or would be able to withstand a larger increase in natural gas costs (which are sure to come in the not too distant future!).  The net result would probably be a greater degree of penetration of natural gas into the transport sector, resulting in reduced oil demand/imports, but also in higher (than otherwise) natural gas prices, due to increased gas demand and the fact that methanol can tolerate higher gas prices.

The only losers in this, I suppose, are other domestic users of gas (fertilizers, etc..).  The environment, however, could be a winner.  Not only would more of the transport sector be powered by a cleaner, more domestic fuel (gas vs. oil), but the resulting increase in gas price would result in non-fossil power generation sources being more competitive and would increase their level of penetration in the electric sector.  I suppose that would be contingent on policies that would prevent coal from returning as gas prices increase....

Nathan Wilson's picture
Nathan Wilson on Jan 18, 2013

Some number from ANL-339 (from Argonne National Labs 2005, Well to Wheels study): natural gas to methanol conversion energy efficiency = 68%, natural gas to diesel efficiency = 63%, natural gas liquification to LNG= 91%.

Note that methanol has only half the energy density of gasoline (15.9 vs. 29.8 MJ/L LHV).  So realistically, cars would have to be re-designed to have much larger tanks.  If we go to that much trouble, we might as well switch to cng (which would save money vs gasoline) or to ammonia (which is the only practicle carbon-free fuel, and is the cheapest fuel that can be made from solar, wind, or nuclear power).

Geoffrey Styles's picture
Geoffrey Styles on Jan 18, 2013

I would note that natural gas to methanol is a routine industrial process today and as far as I know the source of most of the methanol used in a wide variety of industrial applications globally.  Methanol as a motor fuel for use by the public is a completely different proposition.  While it has in its favor a slightly better conversion efficiency than GTL, it has numerous drawbacks, including the low energy density that Nathan cited, infrastructure incompatability, along with handling issues that in my estimation render it impractical and undesirable for self-service refueling.  (Please refer to this material safety data sheet.)   Gasoline has hazards, too, but at least isn't a neurotoxin.

Given the enormous investments in existing fleets and fuel distribution infrastructure, the most promising alternative fuels appear to be those categorized as "drop-in", i.e. hydrocarbons similar to current gasoline, jet fuel and diesel, synthesized from non-petroleum sources including biomass, natural gas, or coal (with CCS.)  The other pathway is vehicle electrification, which requires better batteries (higher capacity/quicker recharging.)

John Miller's picture
John Miller on Jan 18, 2013

Geoffrey, similar to ethanol, ‘wood alcohol’ (methanol) was strongly supported during the latter 1980’s and 1990’s primarily by the state of California.  Due to strong state government support, methanol consumption increased from insignificant volumes up to almost 6 million gasoline equivalent gallons per year in 1994.  California built the majority of all U.S. methanol fueling stations and mandated/encouraged growth of U.S. methanol AFV fleets to support this alternative fuel-market.  However, once the California state Government stopped supporting methanol after 1994, total consumption rapidly dropped to insignificant levels by the early 2000’s.

This methanol program development and decline is a classic example how a well intended government policy can artificially support unsustainable alternative fuel markets and how quickly the market can disappear after the government support ceases.

John Miller

Geoffrey Styles's picture
Geoffrey Styles on Jan 18, 2013

John,

I remember that program; it overlapped my time in supply & distribution in L.A.  I had forgotten the volume was so small, though.  6 Mgal/yr works out to 0.04% of the CA gasoline market in 1994: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=C100050061&f=A

Rick Engebretson's picture
Rick Engebretson on Jan 19, 2013

Methanol, combined with fatty acids, has already proven a "drop-in" fuel (biodiesel). And it seem likely that methanol could be used somwhere in the tar sands refining process.

We can all understand the protective instincts of the oil industry, given the enormous investments in extraction, processing, and distribution. But after seeing the battles for and against ethanol "drop-ins" it seems attitudes must change on all sides. We must evolve forward. Strategic, economic, environmental concerns don't afford us much time.

Geoffrey Styles's picture
Geoffrey Styles on Jan 19, 2013

Rick,

Not sure what "protective instincts" refers to, but there should be ample opportunities for methanol, including as a clean and easily transportable gas turbine fuel for locations remote from the gas grid.  The common denominator is handling in an industrial, rather than consumer setting, by trained personnel with proper kit,. 

Geoffrey Styles's picture
Geoffrey Styles on Jan 20, 2013

You raise an important question, but the figures I found don't bear out your extreme view of that comparison.  Here's an analysis done for the California Energy Commission indicating that a bus burning 100% FT diesel would emit 8-12% more CO2 per mile than on CA ultra-low-sulfur diesel from the state's average crude slate, while showing marked improvements on criteria pollutants.  That's within the range of CO2 intensity of various crude oil feedstocks. However, it appears to assume the natural gas source is outside North America, so the FT diesel would be imported by tanker.  Subtract the emissions associated with that portion of the chain and it's closer to a wash.  I searched for a study comparing FT diesel based on US pipeline gas, but I couldn't find one, perhaps because that idea would have looked so impractical just a few years ago.

http://www.energy.ca.gov/2007publications/CEC-600-2007-004/CEC-600-2007-004-F.PDF

James Hopf's picture
James Hopf on Jan 22, 2013

Well, it appears that what I'd read about methanol is wrong (can't believe everything you read, I suppose).

I've generally been a fan of GTL, thinking that it makes more sense than compressed NG, at least for private autos.  The NG fueling process strikes me as being a bit "involved" for the average Joe.  Other issues include the space taken up by the NG tank, as well as significant fueling infrastructure requirements.

That said, I think that compressed NG makes much more sense for heavy trucks and fleet vehicles.  The have professional drivers and having NG fueling stations at our large truck stops is something that I can much more easily imagine.  Space (for the tank) is also less of an issue.  I'm with T-Boone on that one.  For private autos, I put more stock in GTL and/or electric/plug-in vehicles, as ways of using NG.

I'm curious about one thing.  How high do you think NG prices could go before this GTL plant becomes non-profitable?  I'm trying to deduce it from your graph, but my logic is failing me.  (The margin appears to be higher than the current per barrel oil price, but I suppose the point is that a barrel of deisel is worth more than a barrel of crude, how much more, I don't know.)

I suppose my question has two parts.  One, at what NG price would the overall project be non-profitable (in other words, they would not make enough to repay or service their capital costs)?  Two, at what NG price would the incremental operating cost be higher than the revenue from deisel sales (i.e., they would lose money operating it, even if one ignored the sunk capital costs)?

The point is that if they proceed based on a flawed assumption of low long-term NG prices, NG prices will be able to rise much higher than their initial estimate (required to pay off the capital) before they would actually shut the thing down (thus reducing NG demand).  Thus, the facility itself would act to significantly increase NG demand and would put significant upward pressure on prices, even after they've risen far higher than today's prices.  Not that the oil/gas industry would mind any of that!

Geoffrey Styles's picture
Geoffrey Styles on Jan 22, 2013

James,

Remember all those claims that this or that alternative would become competitive when oil reached $100 per barrel?  It didn't come to pass, because that simple relationship missed a lot of important complexities like construction cost inflation and competition for other inputs. Robert Rapier refers to this as the "law of receding horizons."  Similarly, while low natgas prices are a big factor in making GTL attractive, the price spread between crude oil and gas looks just as important.  If natgas prices head back up to $5 or $6/MCF, but crude oil prices rise simultaneously, GTL might remain attractive.

Robert Cormia's picture
Robert Cormia on Jan 23, 2013

Hmmm... we are making more diesel in the United States, with a $21 billion investment? And the right rails over $500M for Solyndra? If these fuels are profitable, they should be able to capitalize the necessary investment on their own. This is just another sign that our motto for energy is 'burn baby burn' and we are just digging an impossible hole to get out of with respect to Green House Gas (radiative) forcing. 

-rdc

Robert Cormia's picture
Robert Cormia on Jan 23, 2013

Timothy,

You obviously have studied organic chemistry and thank you for your post. FT fuel is at least 50% worse in GHGs than using petrol based diesel, which puts it right up there with coal.

-rdc

Geoffrey Styles's picture
Geoffrey Styles on Jan 23, 2013

Surprising that you would assume that taxpayers are funding this project.  Perhaps that says something about our experience of the last few years.  But unlike Solyndra, as far as I know there's no federal loan guarantee or other targeted incentives involved in this project. 

Geoffrey Styles's picture
Geoffrey Styles on Jan 23, 2013

Once again I'd refer you to the well-to-wheels analysis cited below, done for the Calif. Energy Commission.  8-12% higher CO2 than ultra-low-sulfur diesel, based on imported GTL diesel rather than domestic, is clearly not "50% worse than coal."  Or do you have access to a full well-to-wheels analysis that suggests otherwise?

Robert Cormia's picture
Robert Cormia on Jan 23, 2013

Good point - I might have been too hasty in that post! Is this private investment, or a consortium?

-rdc

Geoffrey Styles's picture
Geoffrey Styles on Jan 23, 2013

Wouldn't be surprised if Sasol lined up some partners for this project.  $21 B is a lot for any one company to invest alone.

Robert Cormia's picture
Robert Cormia on Jan 23, 2013

Thanks for the cordial reply - I am completely embarassed by my earlier post. In reflection, if the US moves to (more) advanced biofuels for passenger vehicles, lessing the demand for petroleum to refine gasoline, that would also lessen the amount of petrol available for 'conventional' diesel, and hence the need for (some) natural gas liquids for diesel? Perhaps this is too simplistic. Any idea how much natural gas is needed to convert to a finsihed gallon of diesel? Could we assume 66% yield per therm that would make a little over half a gallon for diesel (BTU=>BTU) Sorry for the mixed units here....

 

Geoffrey Styles's picture
Geoffrey Styles on Jan 23, 2013

No worries.  @10 million BTU/bbl yield, that works out to about 2 gallons of gasoline-equivalent energy (but with much lower emissions than from 2 gal. of gasoline) per gallon of GTL diesel.  What's more germane to Sasol's investment, however, is that the gas input cost per gallon of product is around 90¢ at current natgas prices.

Robert Cormia's picture
Robert Cormia on Jan 23, 2013

Thanks for using units (!) I replicated your calculations but just wanted to be sure. 10M BTU of natural gas (at $4 per mmbtu) yields 44 gal diesel, and $0.9 (90 cents) per finished gallon of natural gas input cost (works out perfectly). The yield on that suggests about 51%, kinda low, but my guess is that the higher hyrdrogen content in natural gas works against yield on Sasol (FT reaction) as you need more carbon going into the conversion to get something looking like diesel on the backend. Meaning CH4 stoichiometry going in and CH2 stoichiometry coming out. Sorry to be a chem-geek but I do math (in public) and like that we can work through the process in a forum! <wink>

-rdc

Get Published - Build a Following

The Energy Central Power Industry Network is based on one core idea - power industry professionals helping each other and advancing the industry by sharing and learning from each other.

If you have an experience or insight to share or have learned something from a conference or seminar, your peers and colleagues on Energy Central want to hear about it. It's also easy to share a link to an article you've liked or an industry resource that you think would be helpful.

                 Learn more about posting on Energy Central »