The WALL STREET JOURNAL: In Qatar, Oil Firms Make Huge Bet On Alternative Fuel: “Here in the Persian Gulf, hundreds of workers are piecing together a coiled labyrinth of pipes that they hope will turn natural gas into an ultraclean automotive fuel…”: “Some of the world's biggest energy companies, including… Royal Dutch/Shell Group… have committed $20 billion to build GTL facilities in an industrial park here that's twice the size of Manhattan” (ShellNews.net) 15 Feb 05

Supporters Say New Diesel

Is Cleaner, More Efficient;

Untested on Large Scale

'It Was Just Like Water'

By RUSSELL GOLD

Staff Reporter of THE WALL STREET JOURNAL

February 15, 2005; Page A1

RAS LAFFAN, Qatar -- Here in the Persian Gulf, hundreds of workers are piecing together a coiled labyrinth of pipes that they hope will turn natural gas into an ultraclean automotive fuel -- and challenge the oil industry.

These plants will produce a clear liquid that operators say will have the high efficiency of diesel fuel, but virtually none of the sooty pollutants. Millions of diesel cars and trucks around the world could run on this fuel.

The gas-to-liquids, or GTL, plants under way here are part of a big bet by a small nation to reshape global energy markets. Some of the world's biggest energy companies, including Exxon Mobil Corp., Royal Dutch/Shell Group and ChevronTexaco Corp., have committed $20 billion to build GTL facilities in an industrial park here that's twice the size of Manhattan. They are using an unusual technology whose lineage traces back to Nazi Germany and apartheid South Africa. The projects are one of the largest and riskiest gambles by the industry in years.

"Qatar is going to become in the gas business what Saudi Arabia is in the oil business," says Wayne Harms, Exxon Mobil's top official in Qatar. Largely blocked from doing business in Saudi Arabia, Exxon is investing in Qatar's natural gas. It expects to spend $15 billion to $17 billion in coming years building facilities in the giant industrial park, including $7 billion for a GTL plant, the largest single investment in the company's history.

The companies say these GTL facilities -- unlike some earlier, smaller efforts -- make economic sense because of technological advances and the lower costs from building on such a large scale. They say the result will be an alternative fuel that should be priced competitively with crude oil.

The challenges are also huge. Only small amounts of GTL fuel are sold in the world today. The process to make it gobbles up a lot of energy, and no one has ever built a GTL plant of the size of those here. If the costs of producing GTL on this gargantuan scale run higher than expected, or if the price of competing crude oil tumbles, the investments could be at risk.

Qatar has championed GTL in the hope it will provide a new market for its huge natural-gas reserves. If GTL catches on, natural gas could loosen crude oil's grip on one of the biggest energy markets of all -- powering the world's vehicles, which accounts for 26% of all energy use. Home to some 900 trillion cubic feet of natural gas -- more than 14% of world gas reserves and enough to meet current global demand for natural gas for 10 years -- Qatar would be a leading beneficiary in such a sea change.

"We want to be a big part of bringing this fuel to the world," says Qatar's energy minister Abdullah bin Hamad al Attiyah, as he sits in his wood-paneled office, decorated with gold-plated miniatures of offshore-drilling rigs. He calls GTL "the fuel of the 21st century."

Whether or not Qatar's natural-gas bet pays off could be important to the West. Unlike Saudi Arabia, which has long resented Western influences in its closed society, Qatar is courting the U.S. and other industrialized countries. The current emir, Sheik Hamad bin Khalifa al Thani, who ousted his father in a bloodless coup in 1995, has radically reshaped Qatar in ways that ruffle Saudi Arabia's feathers.

Unlike Saudi Arabia, Qatar has a largely free media. When Saudi Arabia refused to allow U.S. warplanes in the kingdom to fly missions against Iraq in the late 1990s, Qatar opened its airspace. The U.S. military ran its war to oust Saddam Hussein from Iraq from Qatar.

The promise of GTL fuel is alluring. Diesel engines tend to get about one-third better fuel economy than gasoline engines. The problem is that conventional diesel -- which is made from crude oil -- is much higher in pollutants that cause smog than is gasoline. By contrast, GTL diesel, because it comes from natural gas, one of the cleanest fossil fuels, has just a fraction of the pollutants found in crude oil. And current diesel engines can run on it without modification.

Despite such benefits, few cars use GTL diesel today. Only a tiny amount is manufactured right now, mostly at small plants in Malaysia and South Africa. Few drivers have ever heard of GTL or are even aware of the possibility of a cleaner diesel fuel.

Even the energy companies say they aren't yet sure exactly how they'll market it. They might try to sell it directly to consumers, or initially to refiners, who may blend it with diesel fuel they already manufacture. "We'll put our product where it makes us the most money," says Exxon's Mr. Harms.

Western energy companies are taking the gamble because GTL plants in Qatar offer a rare opportunity: a chance to make a big investment in a place where there are a lot of undeveloped resources. Despite running up record profits, the oil giants are locked out of much of the Middle East, home to some 65% of the world's oil reserves. Most of the known oil reserves are in a handful of Persian Gulf countries -- Saudi Arabia, Iraq, Iran and Kuwait -- that are either unstable or closed to Western development.

Qatar, however, is far more open. In the capital's bustling City Centre mall, a four-story behemoth with an indoor ice-skating rink, women browse in chic shops for Western clothes, although many wear black chadors in public. Women can vote, work and drive in Qatar, none of which is permitted in Saudi Arabia. Several years ago, the energy ministry even abandoned the Middle East's traditional Thursday-Friday weekend in favor of a Friday-Saturday break that kept it more in step with the rest of the globe. The government later followed suit.

Natural gas is more broadly dispersed around the world than oil. Much of it is in less-insular nations such as Russia, Qatar, Norway and Australia. So hopping into the gas-to-liquid business allows the Western energy companies back in the game, in a big way.

Even before GTL, natural gas was chipping away at oil's position as the world's primary fuel. Natural gas provides 23% of global energy today, up from 17% in 1970, thanks largely to a recent spree of building natural-gas-fired electricity-power plants. If natural-gas use continues to grow, it could pass coal as the world's second-most-used fuel by the end of the decade and catch oil as the top fuel by 2025, according to forecasters for Royal Dutch/Shell Group. Oil now accounts for 39% of global energy use.

The first GTL diesel fuel from Qatar is expected to hit the market later this year. By 2010, Qatar and its partners plan to produce up to 750,000 barrels a day -- about 6% of current global consumption.

Diesel usage is expected to grow quickly in industrialized economies, although it isn't widespread in the U.S. While some trucks use the fuel, less than one percent of new cars in the U.S. run on diesel. By contrast, about half the new passenger cars in Europe run on conventional diesel.

Shell discovered the North Field, the world's biggest natural-gas field, off the coast of Qatar in 1971. The problem was that the gas was too far away from potential markets for a pipeline. In essence, the field was like an enormous bank, but Qatar had no way of getting the money out.

In the mid-1990s, Qatar began building expensive facilities to chill natural gas into a liquid and ship it to Western markets on giant thermos-like ships. The natural gas is chilled, shipped, and then reheated into gas form, mostly for industrial use or for electrical-power generation. GTL, on the other hand, transforms the natural gas into automotive fuel.

The chemical process at the heart of modern GTL plants was developed in 1923 Germany. That country was rich in coal, but had little petroleum, so two scientists decided to figure out how to turn coal into a liquid fuel. They flooded coal with steam to turn it into a gas, and then ran it through pipes lined with cobalt to create a liquid fuel. The Nazi government subsidized the nascent industry as it geared up its war machine. Germany got as much as 15% of its motor fuel from coal-to-liquids plants, according to Texas A&M University history professor Anthony Stranges.

After the end of the war, the U.S. government experimented with the German technology because it feared domestic crude-oil supplies were running out. But gigantic discoveries of oil in the Middle East soon led to an abundance of global crude, and the experiments were dropped.

Interest in coal-to-liquids research dried up world-wide -- except in South Africa. Like Germany, South Africa has a lot of coal, but little crude oil. The state oil company acquired the rights from Germany to key parts of the technology and developed its own coal-to-liquids plants.

When the United Nations led an oil embargo against South Africa's government, the country was forced to keep refining its technology. It eventually determined that it was more cost-effective to use natural gas, not coal, as the main ingredient.

But South Africa doesn't have a lot of natural gas. In the mid-1990s, its former state oil company, privatized and renamed Sasol Ltd., went looking for a large supply of natural gas. It set its sights on Qatar. At first, the reaction was lukewarm. "It was like selling encyclopedias. You knocked on doors and tried to get people interested," Cavan Hill, then Sasol's manager of business development, says of the first cold calls to Qatari officials. "There was a lot of skepticism about whether this was an academic curiosity or whether it could be a commercial process."

The Qataris brought in an outside energy consultant to analyze the economics of a GTL plant. The results were good enough that Mr. Hill was able to secure meetings with Qatar's top officials. Finance minister Youssef Kamal, also the vice chairman of the state-run Qatar Petroleum, recalls being intrigued when he saw his first vial of natural gas-derived diesel. Crude oil is generally black because it's full of impurities such as sulfur. "They showed me this liquid and it was just like water," he says.

In July 2001, Sasol and Qatar officials signed an agreement to jointly build the first commercial-scale GTL plant. Then Qatar started leaning on Western energy giants. Mr. Attiyah, the energy minister, sent them a message: If they wanted additional access to Qatar's natural gas, they would have to build GTL plants. He "had to work pretty hard to cajole the companies, to get everyone where he wants them to be, to do GTL projects," says Exxon's Mr. Harms.

In 2003, Qatar and Shell signed an agreement to build a $6 billion GTL plant. Exxon finalized a deal last year. There are ongoing talks with ConocoPhillips and a joint-venture between Sasol and ChevronTexaco to expand GTL plants.

Like all alternative fuels, the economics of GTL hinge on world oil prices. Bernard J. Picchi, an analyst for Foresight Research Solutions LLC, says it will cost about $14 to produce every barrel of GTL diesel. With oil currently at about $47 a barrel, that makes GTL look sweet. If world oil prices plummet to $25 a barrel, a GTL plant still could yield a 19% return on investment. Below $20 oil, however, the returns aren't attractive, Mr. Picchi says.

Once the first plant is operational later this year, the natural gas will be fed into a three-quarter-mile structure that is longer and heavier -- at about 19,000 tons -- than the main span of the Brooklyn Bridge. The gas is fed through a series of four furnaces where it is mixed with oxygen and water and burned to create a carbon-monoxide gas. The gas is then fed into a 20-story-tall cylinder with 4-inch-thick steel walls. Exactly what goes on inside is a proprietary secret, but essentially the gas is exposed to cobalt -- a metallic-gray ore often found on meteors. When the gas comes into contact with the cobalt, the interaction rearranges the molecular structure and turns the gas into a waxy petroleum. This wax is then put under high pressure to break it into diesel, and a smaller amount of other products, including motor oil.

Shell built a similar, but much smaller, plant in Malaysia in 1993 to see if it could manufacture GTL. The GTL fuel from that plant has been used in small-scale tests in buses in London and Shanghai and in a fleet of water-delivery trucks in California. It's also for sale in limited quantities to the public in Germany, Greece and Thailand.

On a recent day, Benjasook Chumhepan filled up her Toyota pickup with "Pura Diesel" at a Shell station in Bangkok. The GTL diesel costs about 7% more than regular diesel -- an effort by Shell to see if drivers are willing to pay a little more for a cleaner fuel. Ms. Chumhepan says she buys it regularly because it cuts down on the truck's emissions. "The engine runs smoothly and doesn't emit black smoke," she says.

--Kullawee Pongpattanajit in Bangkok contributed to this article.

Write to Russell Gold at russell.gold@wsj.com