Sasol Ltd. (SSL, SOL.JO) said Monday it will begin engineering and design work on what would be the first refinery to convert natural gas into diesel in the U.S., paving the way for one of the largest investments from the boom in U.S. shale gas production.
The facility, estimated to cost about $14 billion, would convert low-cost natural gas into clean-burning diesel it can sell at much higher prices. Sasol plans to locate the facility in Westlake, Louisiana, and if greenlighted, it will become the single largest investment in the state's history, Louisiana Gov. Bobby Jindal said. Sasol said it will make a final investment decision on the plant in 2014, after the engineering and design review is finished.
U.S. natural gas prices earlier this year became the lowest in the world as the increasing use of hydraulic fracturing helped bring domestic inventories to record heights. Companies like Cheniere Energy Inc. (LNG) and Exxon Mobil Corp. (XOM) want to export the commodity to profit from the price disparity with other countries, where natural gas can cost five times as much. Gas-to-liquids, or GTL, technology would allow South Africa-based Sasol, the world's largest producer of motor fuel from coal, to tap into the differential between cheap natural gas and relatively-high priced liquid fuel products. Royal Dutch Shell PLC (RDSA, RDSA.LN) is also scouting locations for a possible GTL plant in the U.S.
U.S. natural gas prices for January settled at $3.59 a million British thermal unit on the Nymex on Monday, a price that would put it about $32 a barrel. That compares with $132 a barrel for January Nymex heating oil, used as a benchmark for diesel prices.
GTL plants, however, are expensive--Sasol's Louisiana proposal would cost three times as much as a new traditional refinery. They also have a history of going over budget and past schedule, such as Shell's $19 billion Pearl plant in Qatar. Sasol has already increased the cost of the project by $6 billion from an estimate it made in September, partly because it will be built in two phases, the company said. But despite the staggering cost, Sasol is already considering other GTL projects in North America, Chief Executive David Constable said in an interview.
"The abundance of natural gas in North America gives GTL a great future here," Mr. Constable said. "This is just the beginning."
The plant's two phases would start operations in 2018 and 2019. It would consume about 1 billion cubic feet of gas a day, Mr. Constable said.
Sasol also operates a 34,000 barrel-a-day GTL facility in Qatar.
The large gulf between natural gas and oil prices will eventually shrink because growing demand will lift gas prices and gains in production will bring crude prices lower, said Sarah Emerson, principal at energy consultancy ESAI Inc. But GTL projects should bring decades of profits for companies that can afford the hefty start-up costs, Ms. Emerson added.
"It's a margin story, and the early adopters will make the most money," she said.
Sasol spends about two-thirds of its capital outlay in its home country of South Africa but has said previously it plans to grow its presence in the U.S. and Canada over the next few years. On Monday, it said it will prioritize its projects in the U.S. over Canada.
As part of its U.S. growth strategy, Sasol is also going ahead with the construction of an ethane cracker that will cost between $5 billion and $7 billion and will have an annual production of 1.5 million tons of ethylene. The company said it is putting a plan to build a GTL plant in Canada on hold, having previously said it was thinking about building a 48,000-barrel-a-day plant in Alberta that would cost about $8 billion.
Write to Ben Lefebvre at email@example.com
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