ASSESSING THE ECONOMICS OF NORTH AMERICA NATURAL GAS MONETIZATION PATHWAYS Presented by: Ajey Chandra Managing Director Muse, Stancil & Co. June 16, 2015
MUSE, STANCIL & CO. Independent energy consulting firm founded in 1984, providing industry expertise from wellhead to end-user; www.musestancil.com Energy Sectors Served Natural Gas Processing Refining and Refined Products Pipelines Crude Oil Natural Gas Liquids Petrochemicals Biofuels Representative Assignments Market Studies Asset Valuation Project Development Transactional Due Diligence New Technology Assessment Insurance Claims (Property & Business Interruption) Litigation Support Royalty Negotiation/Auditing Contract Negotiation/ Dispute Resolution 2
Available gas liquefaction pathways GTL TECHNOLOGY UPDATE Why GTL? Gas-To-Liquids Pathways Fischer Tropsch R&D work ongoing worldwide to increase efficiency in reaction pathway Engineering design leading to more cost effective process design New market entrants 3
MARKETING GTL TECHNOLOGY IN TODAY S PRICE ENVIRONMENT Is 2015 the Pivotal Year for GTL Technology? 4
GAS LIQUEFACTION PATHWAYS Variety of technology pathways exist for conversion of commercial natural gas to various liquid products Natural Gas Liquefaction (LNG) Natural Gas Conversion Natural Gas to Methanol (GTM) GTM integrated with Methanol to Gasoline (MTG) or other products such as dimethylether (DME) Natural gas to ethylene (OCM) Comparison of Netback Prices, Basis: 2014 Averages and Henry Hub Product Sales Price LNG to Europe LNG to Asia Methanol GTL $9.69/MMBTU $15.78/MMBTU $443.35/MT $104.09/BBL U.S. Dollars Per MMBTU gas processed Revenue 8.73 14.21 13.64 10.41 Shipping (1.00) (2.80) Tolling (2.75) (2.75) (9.11) (5.49) Netback per MMBTU 4.98 8.66 4.53 4.92 5
GAS LIQUEFACTION PATHWAYS Comparison of Netback Prices, Basis: 1Q 2015 Averages and Henry Hub Product Sales Price LNG to Europe LNG to Asia Methanol GTL $8.28/MMBTU $14.30/MMBTU $351.22/MT $64.35/BBL U.S. Dollars Per MMBTU gas processed Revenue 7.46 12.88 10.81 6.44 Shipping (1.00) (2.80) Tolling (2.75) (2.75) (9.11) (5.49) Netback per MMBTU 3.71 7.33 1.70 0.95 Economics of various liquefaction pathways has changed significantly in the past year; specific project economics can varying significantly 6
Stranded Gas WHY CONSIDER GTL? Geographically isolated gas deposits Gas reserves with limited economic market accessibility Gas flaring Diesel Markets Strong diesel demand world wide Emphasis on increasingly cleaner diesel fuel worldwide Significant change in the gasoline/diesel price relationship since 2008 7
Stranded Gas WHY CONSIDER GTL? Geographically isolated gas deposits Gas reserves with limited economic market accessibility Gas flaring Diesel Markets Strong diesel demand world wide Emphasis on increasingly cleaner diesel fuel worldwide Significant change in the gasoline/diesel price relationship since 2008 Small-scale, compact, and mini-gtl enable project development in a wide variety of locations both onshore and offshore 8
WORLDWIDE GAS RESERVES 7,000 6,950 6,900 6,850 6,800 6,750 6,700 6,650 2010 2011 2012 2013 2014 2015 Africa 9% Asia & Oceania 8% North America 6% Central & South America Europe 4% 2% Large-scale GTL already in service in Qatar LNG projects dominate Asia & Oceania Middle East 40% Eurasia 31% 9
WORLDWIDE GAS RESERVES 7,000 6,950 6,900 6,850 6,800 6,750 6,700 6,650 2010 2011 2012 2013 2014 2015 Africa 9% Asia & Oceania 8% North America 6% Central & South America Europe 4% 2% Large-scale GTL already in service in Qatar LNG projects dominate Asia & Oceania Middle East 40% Eurasia 31% BUT many opportunities exist to deploy smaller-scale GTL worldwide 10
GTL PRODUCTS EXCEED STRINGENT QUALITY REQUIREMENTS GTL Diesel ULSD CARB Diesel Sulfur, ppm max <1 10 8 3000 Aromatics, max 0% 31.7% 10% 25% Gravity, API 30+ 30+ 37-51 Cetane Number, min 74+ 40 40 40 Jet Note: ULSD and Jet specifications based on Colonial Pipeline 12/2011 specifications CARB Diesel specification based on Kinder Morgan Pipeline specification 11
GTL PRODUCTS EXCEED STRINGENT QUALITY REQUIREMENTS GTL Diesel ULSD CARB Diesel Sulfur, ppm max <1 10 8 3000 Aromatics, max 0% 31.7% 10% 25% Gravity, API 30+ 30+ 37-51 Cetane Number, min 74+ 40 40 40 Jet Note: ULSD and Jet specifications based on Colonial Pipeline 12/2011 specifications CARB Diesel specification based on Kinder Morgan Pipeline specification GTL produces a perfectly fungible fuel and, therefore, GTL products can be supplied into almost any market 12
Jan-91 Jul-92 Jan-94 Jul-95 Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 Jul-13 Jan-15 Million Barrels per Day Million Barrels per Day DEMAND GROWTH FOR HIGHEST QUALITY PRODUCT Air quality concerns have driven global diesel requirements toward very low sulfur, low aromatic product specifications The U.S. demand for diesel is growing and U.S. refiners are also exporting huge volumes of higher quality diesel fuels These trends are expected to continue 5.5 U. S. Distillate Demand 6.0 U.S. Diesel Product Quality 5.0 4.5 4.0 3.5 3.0 2.5 2.0 5.0 4.0 3.0 2.0 1.0 - Source: Energy Information Administration Domestic Exports Greater than 500 ppm (2,000 ppm) 15 ppm to 500 ppm 15 ppm Source: Energy Information Administration 13
NUMEROUS COMPANIES DEVELOPING MINI-GTL TECHNOLOGY Methion 14
NEW ENTRANTS IN THE MARKET FOR MINI-GTL Company Technology Notes INFRA FT 100 BPD plant (2015) Greyrock FT 1000 BPD plant (2015) Emerging Fuel Tech. (EFT) FT 1 BPD pilot plant Gas2 FT 3 BPD pilot Marcellus GTL MTG 2000 BPD (2016) TIGAS MTG Demo plant in Houston Primus GE MTG 6.5 BPD plant in operation TU Freiberg MTG 15 BPD plant Siluria OCM 1 TPD ethylene pilot plant being constructed Proton Ventures Small scale Ammonia 0.2 MMcfd feed rate (3 TPD Ammonia) 15
Proven chemistry POSITIVE ATTRIBUTES Years of bench-scale testing, industry has fine tuned catalyst and commercialized catalyst manufacturing Scale-up of most of the process components already proven Production of syngas (front end) Hydrocracking of wax and distillation of products (back end) GTL-FT diesel product has been tested in many commercial applications Commercial Aircraft Trucking Industry Military, B52 Bomber Commercial plants have operated in South Africa for many years 16
CHALLENGES Capital cost for fixed-bed reactor processing configuration historically dictated larger projects to capture economies of scale; largest world-scale project completed to date far exceeded budget estimate Margin risk associated with uncorrelated feedstock and product price volatility Catalyst selectivity for wax production versus direct conversion to diesel or gasoline Scale-up of high efficiency, fluidized bed reactors not proven thus complicating process technology guarantees and project finance Physical design, wax separation from catalyst particles Heat balance, highly exothermic reaction requires active control of heat balance to avoid hot spots 17
WILL NORTH AMERICAN ETHANE PROVIDE A SUITABLE FEEDSTOCK? Thousand Barrels per Day Jan-2010 Mar-2010 May-2010 Jul-2010 Sep-2010 Nov-2010 Jan-2011 Mar-2011 May-2011 Jul-2011 Sep-2011 Nov-2011 Jan-2012 Mar-2012 May-2012 Jul-2012 Sep-2012 Nov-2012 Jan-2013 Mar-2013 May-2013 Jul-2013 Sep-2013 Nov-2013 Jan-2014 Mar-2014 May-2014 Jul-2014 Sep-2014 Nov-2014 Jan-2015 Several of the GTL players (Greyrock, Siluria) can use ethane as a feedstock Ethane will be cost disadvantaged until petchem consumption jumps dramatically Excess ethane is being exported from North America 1200 1100 1000 900 800 700 600 500 400 300 200 Refinery and Gas Plant Ethane Production More ethane export capacity being built 100 0 Refineries Gas Plant 18
CHALLENGE CAPITAL COST Number of companies developing modular process design Minimize custom aspects of project design Provide for shop fabrication to improve quality control and compress projection execution timeline With modular approach, smaller projects become economically feasible In addition, developer are seeking brownfield sites or have partnered with integrated producers to integrate smaller-scale commercial units into existing facilities 19
CHALLENGE MARGIN RISK AGE OLD QUESTIONS What will oil and gas prices be next week? Next month? Next year? In 5 years? In 10 years? Commercial viability of small-scale units requires venture capital support; technical advances in reactor design are enabling such projects Project finance will require positive economic margin outlook in the medium to long term Opportunities enabled by new reactor design technologies include: Offshore or floating installations Focus on portable nature of the process Remote locations where liquid takeaway infrastructure is available or can be installed at lower cost than can gas infrastructure In many locations worldwide where gas flaring is being severely limited 20
CHALLENGE CATALYST DEVELOPMENT All GTL catalysts are proprietary although most GTL companies have one or two catalyst manufactures who are licensed to produce Most recent leap forward is catalyst for direct conversion of natural gas to diesel, thus eliminating the wax step Will likely result in reduced capital cost for less complex back end of the process May also have implications for reactor design and ultimate reactor scale up, yet to be determined INFRA Announced investment decision on 100 BPD plant in June, 2014 Pilot Plant to be launched in 2015 Will test additional catalysts and plant configurations Greyrock Direct-to-Diesel TM Catalyst Modular construction of a 1,000 BPD plant Capacity can be increased by adding additional modules Drop in fuel which has been tested in heavy duty engines 21
NON-FT PROCESSES - GAS TO CHEMICALS AND GASOLINE Primus Green Energy 6.5 BPD pilot plant was commissioned in 2013 Currently in third continuous run Producing 93 octane gasoline TIGAS Conversion to gasoline in a single synthesis loop with no need for methanol storage Proton Ventures Gas2Ammmonia process Siluria Conversion of methane and ethane into gasoline and ethylene 22
CHALLENGE REACTOR SCALE-UP Process developers have been mindful of the need for measured scale-up with respect to fluidized-bed reactors Some demonstration scale units have been built and operated to prove aspects of reactor engineering design To address the issue of clean wax separation from catalyst particles, new catalysts are being developed to eliminate the wax production and directly produce diesel; development work continues and the industry awaits commercially-available data on these new catalysts Other developers have focused on innovative changes in fixed bed reactor design developing modular, micro channel reactors Pilot plant and demonstration-scale plants employing micro-channel reactor technology have operated and larger scale commercial projects are being developed Velocycs Compact GTL 23
Siluria NEW TECHNOLOGY Does not go through syngas intermediates 2 CH 4 + O 2 C 2 H 4 + 2 H 2 O + Heat 2 CH 4 + O 2 C 2 H 4 + 2 H 2 O + Heat 24
MODULARIZATION AND ASSEMBLY Several companies are marketing a totally modular solution 1.5 MMSCFD feed gas Water requirement of 600 gallons/hr Electric Power < 0.5 megawatt Produces 100 BPD of hydrocarbon liquids Produces Diesel and Lubricants Includes all major Equipment needed Dual SMR s Onsite storage Membrane H2:CO ratio unit Dual FT recators Distillation and hydrotreater Integrated Control Total site footprint of 90 feet by 70 feet Turnkey package with OSBL connections and built for ISO container shipping 25
CONCLUSIONS A wide variety of options exist for GTL projects Large increase in gas supply in North America has increased the attractiveness of these projects While LNG and large scale GTL projects continue, the newer technology is aimed at mini GTL plants that can be built with smaller gas reserves The smaller units provides good economics by being modular and skid mounted, so they can be constructed in areas that provide market opportunities New technologies are in various stages of commercialization, and there are several very promising start-ups competing for investment funds 26