* Shell still interested in further GTL projects
* Sasol, Eni to study building plant in Mozambique
* Smaller-scale GTL may provide a way forward (Adds investor quote, paragraphs 14-16)
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 prospects have been mixed. Costsoverran at Shell's $19 billion plant in Qatar. In December itcancelled 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 enthusiastic than executivesabout large GTL projects. Costs at Pearl soared to $18-$19billion from $5 billion initially. Shell's shares rose after itcancelled the U.S. project on Dec. 5 last year.
"Returns from gas-to-liquids projects are not verypredictable," said Ivor Pether of Royal London Asset Management,which holds Shell shares.
"They depend on the spread being right between volatile gasinput costs and the output price of the product, such as diesel- rather like an arbitrage investment."
"When Shell cancelled that $20 billion Gulf Coast GTLproject at the end of last year, it was probably the first signthings were changing at the company, with greater focus oncapital discipline. The shares responded well on that day andpretty much started outperforming from that point."
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 technology 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 and Jane Baird)
