It turns out that “freedom gas” means something different in Texas than it does elsewhere in the world.
When the market price of natural gas turns negative, as it did at times over the summer when a lack of pipelines prevented some Texas gas from getting to market, the definition of freedom gas changes.
Without an expectation of profit, natural gas doesn’t look like such a great investment. But there is a way to establish a base price for natural gas in Texas and simultaneously reduce pollution that is harming the health of residents of large cities, like Dallas and Houston. And it can be found in Qatar.
When natural gas goes global, it becomes highly capital intensive and a vicious cycle begins. The Freeport LNG Terminal in Texas, which turns natural gas into liquid that can be shipped overseas, required an investment of $12.5 billion to open the initial production trains. In order to recoup that investment, the plant will have to run at full capacity for decades. For investors in the project, there is the assurance of long-term supply contracts to Japanese buyers, but for companies providing the feedstock there is no assured base price. There have been dozens of energy company bankruptcies in Texas this year, and the outlook for 2020 doesn’t look promising.
The arrival of American shale gas to the international market has had a seismic effect. Oversupply has caused LNG spot prices to plummet around the world, and the price differential between European and Asian markets is fast disappearing. It’s not a situation that is going to improve in the medium-term, according to most industry analysts.
“Thanks to the United States entering the global LNG market, the next three years should be characterized by abundant supply and continued low gas prices, which will be increasingly determined by U.S. LNG cost,” said Armelle Lecarpentier, chief economist of Cedigaz, which advises the International Energy Agency on trends in the LNG market.
And Andrew Harpham, a director at Australian firm Frontier Economics, said: “The LNG markets in Asia are being flooded by cheap American shale gas and it’s having a depressive effect on prices. That is probably a phenomenon that is going to probably last for the next five or six years.”
This is a difficult situation for the industry. A better approach might be to liquefy the cheap natural gas closer to the wellhead, then use that liquid for local transportation fuel instead of diesel or gasoline.
Like Texas, Qatar is a hydrocarbon state. It produces only about 600,000 barrels of oil per day, less than a sixth of Texan levels. But the country holds more than 14% of the world’s natural gas reserves and is the second largest exporter of LNG. It is also the biggest producer of gas-to-liquids (GTL) energy with a combined production of about 180,000 barrels of fuel a day.
GTL fuel is a niche market, but it is becoming increasingly important because of some poor policy decisions made in Europe in the 1990s, when the U.K., Germany, France and Italy decided the easiest way to cut their greenhouse gas emissions was to encourage, through tax incentives diesel-powered cars instead of gasoline vehicles. Diesel fuel produces 15% less CO2 than gasoline per mile driven, and it also generates four times more NO2 and 22 times more particulates, with the latter hovering at street level where people breathe.
The health effects of that blunder have been staggering. King’s College estimates that particulate pollution is responsible for 9,500 deaths every year in the U.K. capital. According to the London mayor’s office, asthma is the most common reason for urgent hospital admissions in children.
GTL fuel is a solution. It has 70% less NO2 emissions, is virtually sulfur-free and has negligible particulate matter. GTL is highly sought-after in the U.K., and it is seen as a transition fuel until the day the majority of the vehicle fleet runs on electric engines.
Texas A&M’s Gas and Fuels Research Center in Qatar houses possibly the most advanced GTL research facility in the world. Royal Dutch Shell has research labs in Qatar Science & Technology Park, which has been instrumental in the technology developed by the South African energy company, Sasol. Shell and Sasol both have significant GTL plants in Qatar. The research that went into building the plants that turn natural gas into clean-burning diesel has largely been conducted by Texas A&M University at Qatar.
“The key to investing in GTL technology is to build the plant when the price of oil is going up,” said Nimir Elbashir, director of Texas A&M Engineering Experiment Station Gas and Fuels Research Center based in Qatar and Texas. “Qatar, Uzbekistan, Kazakhstan and Nigeria are geographically perfect for GTL production because the feedstock is right there and effectively free.” But in the U.S., GTL makes economic sense if oil costs $100 a barrel, nearly twice as high as it has been trading recently.
In order for the gas-to-liquids process to be less expensive than petroleum-based refining for transportation fuels, “the natural gas feedstock has to be essentially free,” said energy researcher David Ramberg, who authored the paper, “The economic viability of Gas-to-Liquids technology and the crude oil-natural gas price relationship.” The “process would have to be efficient beyond what is thermodynamically possible, even under ideal conditions, to produce transport fuel more cheaply than a modern petroleum refinery. In other words, unless the gas is free, GTL cannot compete with petroleum refineries on a cost basis.”
If cost is the determinant to investing in GTL, we should take a more holistic approach to cost, accounting for the cost to human health of breathing NO2, particulates and other harmful emissions.
In a world where flaring natural gas is now widely seen as environmentally irresponsible and increasing numbers of young people are developing pulmonary conditions because of diesel fuel emissions, energy decisions are increasingly becoming disconnected from traditional economic factors. Turning excess gas production in the U.S. into clean-burning fuels will become increasingly attractive if crude oil prices rise and natural gas prices fall.
And public health pressure will also play an increasing role in energy investment.