Shell Makes a Massive Bet on American Natural Gas

Pearl GTL in Qatar. Photo Courtesy of Shell

Royal Dutch Shell (NYSE: RDS-A  ) just took a major first step that could have American natural gas soon fueling everything from 18-wheelers to airplanes. With the global oil giant settling on a site in Louisiana for a proposed gas-to-liquids facility, Shell is one step closer to starting construction on the massive $12.5 billion project. The facility, if built, would bring new jobs, economic development and cleaner burning products to America.

Shell's announcement starts the ball rolling on a plant that would convert natural gas into diesel, jet fuel, and other liquids. The project would create 740 direct jobs, another 3,900 construction jobs, and an estimated economic impact of $77.6 billion in the first 15 years of operation. It's a truly massive undertaking, but one that Shell is certainly capable of seeing through.

The company is a world leader in gas-to-liquids systems and holds 3,500 patents related to the technology. It opened its first facility in Malaysia in 1993 and most recently opened the world-class $18 billion Pearl GTL facility in Qatar. One of the highlights of the Pearl GTL plant is its conversion of natural gas into a blend with conventional oil-derived jet fuel to power a commercial flight by Qatar Airlines.

Gas-to-liquids products like that come with lower emissions and would be lower cost in the U.S. thanks to cheap natural gas. It's that type of transformative technology that Shell is hoping to bring to the U.S. at its Gulf Coast plant. Further, it's a great product line to be in these days.

Oil refiners from Valero (NYSE: VLO  ) to Tesoro (NYSE: TSO  ) are investing to increase capacity to support growing demand for distillates like diesel and jet fuel. This is for two reasons: First, diesel demand is growing at two times the rate of gasoline, and second, refining margins for diesel have averaged twice those of gasoline for the past five years. That's why both are investing to grow distillate yield, with Valero investing in hydrocrackers and Tesoro investing in quick payback expansion projects to increase its yield.

One of the greatest sources of growth for distillates is demand from overseas. The U.S. has actually now become a net exporter of refined petroleum products as demand for diesel and jet fuel is higher than supply in both Europe and South America. This is where Shell's choice of the Gulf Coast makes a lot of sense as a good portion of our petroleum product exports are being shipped out of that region.

Shell's big bet on American natural gas looks like a very smart move. It will take cheap natural gas and turn it into highly valued distillate products like diesel and jet fuel, which should enjoy even higher margins than similar products produced by refiners. Not only that, but the proposed location is ideally positioned along the Gulf Coast to access the lucrative export markets. Bottom line, this project looks like a great one for Shell's investors as well as the American economy.

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  • Report this Comment On September 29, 2013, at 10:19 AM, craigmnilsson wrote:

    Look for the era of cheap Nat gas to end soon, once tankers are filled with LNG heads to foreign markets.

  • Report this Comment On September 29, 2013, at 1:39 PM, TMFmd19 wrote:

    Actually higher gas prices could be a good thing for the economy. There is a lot of higher cost supply sources that could then be opened up. See slide 8 here for example: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...

    In the $5-$6 range there would be quite a supply/demand balance. Further, higher gas prices would halt all the flaring that's happening in the Bakken.

    Matt

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9/22/2014 4:02 PM
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