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* Shell still interested in further GTL projects
* Sasol, Eni to study building plant in Mozambique
* Smaller-scale GTL may provide a way forward
By Alex Lawler
LONDON, July 10 (Reuters) - Shell will press on with newplants to convert gas to liquid fuels, its investment andtechnical edge leaving its peers behind in the process once seenas a radical game changer.
The company has seen costs overrun at its flagship Qatarplant, cancelled a U.S. project and is relying on a favourablelink between prices for feedstock natural gas and oil - factorswhich have jangled the nerves of some investors in Royal DutchShell
Investors are also wary of the massive upfront costscompanies face in building the gas-to-liquids (GTL) plants. OnlyShell and South Africa's Sasol have so far made GTLplants work on a large scale.
"Shell is so far ahead technically," said Ed Osterwald, whohas advised companies and governments on GTL and is a partner atconsultants Competition Economists Group. "It is hard to see howanother large company is going to replicate that."
Recent indications on GTL's propects have have been mixed.Costs overran at Shell's $19 billion plant in Qatar. In Decemberit cancelled a proposed plant in Louisiana as costs rose.
But last week, Sasol said it will carry out a feasibilitystudy to build a large site in Mozambique with Eni ofItaly. Shell is also studying the feasibility of building aplant there.
The plants are based on a process developed in the 1920s bytwo German scientists, Franz Fischer and Hans Tropsch. Shell hasdeveloped the process further and has more than 3,500 patents.Sasol also has its own GTL technology.
Only a handful of projects exist. Shell operates Pearl inQatar, the world's largest, and has a smaller site in Malaysia.Sasol has a plant in Qatar and plans to build more, including inthe United States. A Chevron project in Nigeria usingSasol technology is starting this year.
A decade or more ago, the prospect for GTL looked brighter."Gas into oil may revolutionise energy" read a Reuters headlinefrom 1998. Exxon Mobil in the early 2000s planned a similarplant to Pearl, but in 2007 cancelled it.
Shell says that the cancellation of its own U.S. projectdoes not mean it has given up on expanding.
"We continue our investment into technology development andproduct development to increase the value of future GTLprojects," said Guy de Kort, a Shell vice president, at aconference in London.
"We are pursuing other opportunities as well. But theeconomics have to be convincing enough to put our money there."
ARBITRAGE INVESTMENT
Some Shell investors are less enthusisatic than executivesabout further large GTL projects. Costs at Pearl soared to$18-$19 billion from $5 billion initially.
"Gas to liquids is like an arbitrage investment; it dependson relationships between the commodities," said a UK-based fundmanager, a Shell investor. "Avoid investments that depend on amoving price spread."
Shell is happy with how Pearl is performing. Even executivesat rival companies say the investment turned out well as oilprices have risen since 2006, much more than gas prices.
But even with a large source of gas at its disposal andassuming that its energy price forecasting team comes up withfavourable numbers, a potential plant builder still needs totake a brave punt.
"You have to believe that that arbitrage gap is going tosustain itself," said Osterwald. "It is very expensive and thereare a lot of risks, but in the right way it can be verysuccessful."
Smaller projects could be a way forward for the technologythat companies including UK-listed Velocys are lookingto exploit.
Velocys says its GTL techology works at a smaller scale of1,500-15,000 bpd and estimates there is a large market toconvert gas in remote locations and at smaller fields.
"There is no small-scale one yet that's commercial," saidNeville Hargreaves, business development manager at Velocys."But it's coming." (Editing by William Hardy)
