Turning Natural Gas into Diesel

In the early months of 1930, the United States patent office recognized an intriguing bit of hydrocarbon alchemy perfected by a pair of German scientists. Franz Fischer and Hans Tropsch had figured out a better way to turn coal into a liquid fuel - an advance that would later become a pivotal source of Nazi Germany's energy needs, fuelling aircraft, tanks and ships.

It was a remarkable technology. It worked not only with coal, but natural gas, using heat and chemistry to transform hydrocarbons into different substances like gasoline and diesel. But when the war ended, the alchemy largely did too. Fuels made using the Fischer-Tropsch process were just too expensive. It was far cheaper to simply pump oil from the ground.

Now, amidst an extraordinary shift in North America's energy supply, a series of companies are re-examining the 80-year-old technology, in hopes of using it to transform cheap natural gas into lucrative oil-like products such as diesel.

Talisman Energy Inc. is among the first, sketching plans for a multibillion-dollar new facility near Edmonton that could process as much as a billion cubic feet of gas a day into 96,000 barrels of refined products.

The renewed interest in this science is opening all kinds of windows into a new energy future. Coal producers are laying plans to make clean fuels from a commodity often considered dirty. Even high-tech companies are eyeing a future where they make "synthetic fuels" out of the very air we breathe to power an economy that can no longer rely on cheap oil.

So-called "gas-to-liquids" technology is the latest novel idea to emerge from an industry rapidly adjusting to what has been called a "revolution" in natural gas. The exploitation of enormous new volumes of shale gas - enough to supply the continent for more than a century - is changing how many companies think about energy supply in coming years.

Canada alone sits on 3,223 trillion cubic feet of so-called "unconventional" natural gas, the Canadian Society for Unconventional Gas estimates. Even if only 10 per cent of that is recoverable, it's enough to make 34 billion barrels of fuel - equivalent to more than 20 per cent of the oil sands. And that's just Canada. Estimates suggest the United States has more than twice as much, and that Europe's reserves rival those in the U.S.

Those enormous volumes of gas have sparked supply glut fears, depressing prices so severely that the U.S. Energy Information Agency now suggests they aren't likely to regain strength until at least 2022.

The result has been a scramble for solutions. Some companies are seeking relatively new solutions, such as the export of liquefied natural gas, which could be loaded on to tankers and shipped to Asia.

Others, like Talisman, are considering turning back the clock to the 1930s, wagering on a technology that continues to hold substantial promise - but also continues to be so expensive that some of the world's most-respected oil companies have abandoned similar projects.

Fischer-Tropsch works by using heat and chemical catalysts to break down a substance like natural gas into its molecular basics - and then rebuild them into something else. Think of disassembling a Lego airplane and forming the blocks into a castle.

The logic behind converting gas to liquid fuel lies in the widely divergent economics of natural gas and oil. A barrel of oil contains roughly six times the energy content of a thousand cubic feet of gas. But in recent years, oil's relative value has far surpassed gas, a trend many expect to continue. Since 6 thousand cubic feet of gas is worth about $24 (U.S.), and one barrel of oil is worth about $100, there is a tremendous profit margin if you can convert one to the other cost-effectively.

The conversion, of course, is tricky business. The plants are expensive - Talisman believes a 40,000-barrel-a-day facility will cost $3- to $5-billion - and more than 40 per cent of the gas gets used up powering the chemistry.

But that still leaves a potentially compelling margin, especially for companies like Talisman, which owns gas-rich land in northeastern British Columbia's Montney play. Not only does it have 7 billion barrels of oil-equivalent gas there, but it's so distant from market that it normally sells at a $1 discount.

"That $1 differential got us very concerned in terms of being at the mercy of a potentially long-term distressed western Canadian gas price," said Paul Smith, the company's executive vice-president for North American operations, in an interview.

So 18 months ago, the company began looking at ways to use gas that don't involve just sticking it into a pipeline. It looked at burning it to generate electricity - and at both liquefying it for export and making it into fuels. It decided against LNG exports, concluding that building large-scale terminals on the West Coast would be difficult. And its math suggested that, with oil at $80 and gas at $5, the technology will work.

The company will, however, take 15 months to conclude a feasibility study before deciding whether it wants to bet on that kind of price spread. In the end, it may simply sell the gas on the open market.

Still, Talisman isn't alone in looking at the technology. Royal Dutch Shell PLC is currently building a massive $19-billion gas-to-liquids plant in Qatar. Coal companies are also looking to the technology as a way to dip into lucrative oil markets.

"We are definitely looking at liquids production options," said Doug Shaigec, president of Calgary's Swan Hills Synfuels, which is working to build a new clean-coal electrical plant.

As Mr. Shaigec sees it, making either coal or natural gas into diesel makes more sense than converting long-distance trucking fleets to run on natural gas, as companies like Encana Corp. have suggested.

Even those who would wean society off oil see the technology as promising. It could, for example, be used to make fuel from pure air - a concept that would sound more like science fiction if David Keith, a scientist at the University of Calgary, hadn't already launched a company working to accomplish exactly that.

"We call it carbon-neutral hydrocarbons." said Mr. Keith, who serves as president of Carbon Engineering Ltd., which is working to build a small demonstration project.

The concept, studied in the 1960s as a way to stock aircraft carriers with liquid fuel, would use electricity - perhaps from nuclear or solar - to capture carbon dioxide from the air and hydrogen from water. Then, using the Fischer-Tropsch process, it could transform them into gasoline or diesel.

And although it would take decades to be competitive with regular oil, it might work in places where, already today, fuel is extremely expensive, such as High Arctic communities and military sites.

Cost is key

Cost has long been the Achilles heel of gas-to-liquids - expensive to build, expensive to run.

"The issue is always the economics," said Dale Simbeck, a consultant with SFA Pacific Inc. who has a long background in gas-to-liquids. History shows the technology has only flourished when, like in Second World War Germany, the price of energy was no object. Even with oil prices over $100, skeptics aren't convinced it will be able to compete, especially since cost continues to be a major concern. At Shell's $19-billion Qatar plant, the initial cost-estimate tripled. In 2007, Exxon Mobil scrapped its own plan for a similar Qatar plant after costs rose to $18-billion from $7-billion.

In large part because of cost issues, estimates for global gas-to-liquids output, which as recently as 2006 called for growth to 2 million barrels a day by 2030, have been dramatically slashed.

Not only is Qatar rich with natural gas, it has the advantage of inexpensive labour. Building such a plant in Alberta would be especially difficult - an issue even Talisman acknowledges.

"A gas-to-liquids plant being constructed in western Canada is going to be competing for scarce resources - people in particular - with oil sands projects," Mr. Smith said.

"The management of the capital costs ... is probably one of the biggest risks that we need to get our heads around."

Environmentalists have also raised concern about the technology, which has been compared to oil sands as an energy-intensive process that produces substantial greenhouse gas emissions. That could make gas-to-liquids plants particularly vulnerable to climate change legislation.

Still, Talisman believes it has a shot - especially since its partner knows more about the technology than almost anyone else. In the past three months, Talisman has signed two $1.05-billion deals with Sasol Ltd., a South African company that is paying up front for a 50-per-cent stake in some of Talisman's most promising northeastern B.C. land. In exchange, it's helping lay the groundwork for the first major gas-to-liquids plant in North America.

Sasol is one of the few longstanding torchbearers for Fischer-Tropsch. Like Germany, South Africa has few oil reserves but great volumes of coal. When the country's apartheid policy triggered an international oil embargo in 1979, it found itself desperate for energy, and Sasol moved quickly to refine the technology and boost its output. Today, it supplies 29 per cent of the country's transportation fuel, and its technology has gained a substantial presence on the world stage, with new and proposed plants in Qatar, Nigeria, Uzbekistan and China.

It recently built a gas-to-liquids plant in Qatar, although that plant took two full years before it operated reliably, and is working with Chevron Corp. to build a similar facility in Nigeria. It has also finished plans for new plants in Uzbekistan and China, although investment decisions have not been made there.

In Canada, it will study one of two options: a 48,000-barrel-a-day facility, and one twice as big. The smaller would consume 450 million cubic feet a day of natural gas, the larger double that.

Both would produce about 75 per cent diesel, 1 per cent liquid propane and 24 per cent naptha. The latter is especially important, since it can be used as a "diluent," or thinner, that allows thick oil sands crude to flow through pipelines. Diluent today is largely imported. Sasol believes it can manufacture a better alternative inside Alberta - so long as it can convince enough people to buy it.

"We have just kicked off our feasibility work and we are very excited," Ernst Oberholster, Sasol's managing director of new business development, said in an interview.

"It is early days," he said. "But it could certainly be a big win-win for us and Canada, because we would be producing that from local gas in Canada."

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HISTORY

1920s

The science behind gas-to-liquids was pioneered by Germans Franz Fischer and Hans Tropsch in the 1920s.

1930s

The first commercial plant to use the technology with coal was built in 1935. Between 1936 and 1939, Germany built a total of nine such plants.

1940s

Together, the German plants were capable of producing 5.4 million barrels of synthetic fuels a year that powered the Nazi war effort. But they were so expensive that, shortly after the war, they were shut down.

By that time, South Africa had already shown an interest. The country has substantial coal, but little oil, making it a natural fit for the technology. In 1947, South Africa passed a Liquid Fuel and Oil Act designed to set a fiscal structure for the new industry.

1950s

In 1950 the state-owned South African Coal, Oil and Gas Corp. Ltd. (Sasol) was created. Five years later, it was pumping the first coal-derived fuel.

1970s

With the 1970s Arab oil embargo, South Africa moved to lessen its dependence on foreign oil. In 1974, Sasol announced plans to build a second coal-to-gas plant. In 1979, it began building a third plant after Iran blocked oil exports as a result of South Africa's apartheid policy.

1980s to present

That plant entered operation in 1982. Today, the firm makes roughly 150,000 barrels a year of synthetic fuels from coal.

Gas-to-liquids has gained traction elsewhere. In 1993, Shell opened a small plant in Malaysia. In 2007, Sasol opened a new joint-venture plant in Qatar. In 2010, Shell began operating its massive Qatar Pearl plant, the world's largest.

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The new-old alchemy: gas to liquids

South Africa's Sasol is spending billions to tie up shale gas properties in Canada, and bring an innovative technology here. Turning natural gas into diesel draws skepticism from others in the energy industry, but Sasol says the current wide gulf between soaring oil prices and depressed gas prices makes its energy alchemy an attractive business.

1. Extract gas

(gas rigs, gas field)

2. Reform gas to syngas

(Refinery)

Natural gas converted to syngas

(Reactors)

Steam is recovered to make power

3. Transform syngas to wax

Key Step

Gas enters reactor and passes through a series of tubes containing a catalyst at 1,400-1,600 degrees C which accelerates chemical reaction (water, heat, steam, waxy hydro-carbon)

4. Refine to end products

Liquified wax is refined into fuel products

(Refinery)

END FUEL PRODUCTS

Diesel / 75%

Naphtha / 24%

Propane / 1%

5. Ship and distribute

HOW IT WORKS

1. Extract natural gas from the ground. Any gas works, but prolific new "shale gas" fields, which require new technology to extract, are especially promising.

2. Syngas is a mix of carbon monoxide and hydrogen. It's made by adding pure oxygen to natural gas, heating it up to hundreds of degrees Celsius, mixing it with steam and passing it over a catalyst. The resulting chemical reaction produces syngas.

3. Using heat, pressure and a different catalyst - often cobalt - the small, simple molecules in syngas are transformed into much larger, more complex "paraffinic"- or wax - molecules. Carbon monoxide has just one carbon per molecule. The wax produced in this step, which resembles what you would see in a candle, can have 30.

4. The wax, which flows like a liquid when it's hot, is brought into a refinery. The process from there is much like any other refinery, where more heat, pressure and catalysts are used to rearrange the big wax molecules into ones that are generally smaller - and thus constitute diesel and other fuels.

5. Most of the product is an ultra-clean biodegradable diesel that's very low in sulphur, and sells at a premium to crude oil diesel. Much of the remainder is naphtha, which can be used to make thick oil sands bitumen flow.

Source: Globe & Mail