Open even a fairly narrow hole for arbitrage and human greed and ingenuity will nearly always exploit it. Leave a price chasm as gaping as that between two hydrocarbons – crude oil and US natural gas – and even a 90-year-old technology will get dusted off to profit from it.
That is what South African chemical company Sasol may do in the US as it mulls a $10bn gas-to-liquids (GTL) plant in Louisiana. The fact that a South African company is a leader in the field is instructive. Though converting coal to gas to petroleum has been understood since the 1920s, only Nazi Germany and apartheid-era South Africa used it on a large scale, as oil was artificially scarce. The upfront costs are substantial, so investment represents either desperation or a long-term bet on open market price differentials.
That gap is now massive with Brent crude 27 times dearer per barrel than 1m British thermal units of Henry Hub gas – four times the historical norm – thanks to the shale boom. Already exploiting the differential are US-based chemical producers such as Dow. Even export terminals are being discussed, just a few years after expensive import terminals were mothballed when a projected shortage never happened.
Those white elephants should sound a note of caution for Sasol and others. Pricey GTL plants may make sense in places such as Qatar, where “stranded gas” has no competing buyer, but even those are a bet on oil prices. The US could one day use gas directly as vehicle fuel, as more chemical feedstock, or for exports to Europe or Asia, where gas is far dearer, soaking up the glut. Meanwhile, analysts such as Lippman Consulting see break-even costs for marginal shale gas supply rising by two-thirds in a few years.
Today’s glut has investors invoking Mae West, who said “too much of a good thing is wonderful”. Some things are too good to last, though.
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