Gas is great, but can it make money?

Hype, awe and bubbles are inextricable from technology-led enthusiasms. So it was with the battery two centuries ago, the light bulb a few decades later, automobiles and planes in the subsequent half century, and laptops and cell phones in the last two decades. One of the latest fads is natural gas — technological advances that have unlocked vast new volumes, and transformed it from a locally usable fuel into one economically transportable around the world.

Yet, as with all these other technologies, now comes the moment of truth — how do you scale up and make money? If you can’t, the technologies will ultimately return to the shelf until somebody can.

Shale gas is the main fashion. Companies are in a drilling frenzy in Texas, Oklahoma, Pennsylvania. This is not so much because the market demands so much of their product — there is in fact a glut — but because drilling is required by many of the leases. U.S. natural gas prices are below $5 per thousand cubic feet, and the futures market expects the price even five years from now to rise to just $6 per thousand cubic feet — insufficient for most of the fields to break even. So when those leases expire, the boom could shrivel — the companies could look forward in time and decide the risk simply doesn’t justify continued production. Drillers are at work aggressively in Europe and China with hopes of unlocking huge volumes there (such as exploratory drilling in Poland pictured above), too, and meeting demand projected far in the future, but it’s too early to know whether these prospects will turn out as well as the prolific U.S. fields, Andrew Peaple at the Wall Street Journal reports.

Shell is one of the main innovative actors in this technological battle of scaling up. In Australia, the company is building the world’s first floating liquefied natural gas terminal, Reuters reports, to be situated offshore between East Timor and Australia. This facility — six times the size of an aircraft carrier, and able to withstand a severe Category 5 cyclone — is meant to more cheaply bypass the need to build connector pipes and land-based facilities, and allow all processing at the field itself, and the shipment of the resulting LNG directly to customers. This is meant to feed into China’s projected voracious, five-fold growth in demand, from 9 million tons of LNG last year to 46 million tons by 2020.

But producing more gas, and making it more efficient, still doesn’t get it past the profit bar — oil remains far more valuable than gas on a BTU basis. But oil is harder and harder to come by in the volumes projected for demand in coming years, so drillers are having to be fleet-footed in unaccustomed ways. ExxonMobil — which as I write this month in Alberta Oil magazine is doing everything to stay the large and profitable company established by John D. Rockefeller — is attempting to get by with a strategy of tying as much of its enormous Qatari LNG contracts as possible to oil prices. But European customers are protesting this system, seeing as how it forces them to pay the price of one commodity — oil — for another currently much cheaper product, natural gas, Bloomberg writes.

Shell is going another direction — working to make it economical to turn gas into more valuable liquids. For decades, the company has been developing technology called, aptly, GTL, or gas to liquids. It’s working in precisely the same field as Exxon — North Field, straddling Iran and Qatar, the world’s largest at 900 trillion cubic meters, or the equivalent of about 150 billion barrels of oil. To explain, this field alone holds more than half the volume of Saudi Arabia’s entire reported oil supply. Again, this is not the same thing — oil is much more valuable, but in terms of magnitude, you get the picture.

As the Financial Times’ Sylvia Pfeifer reports from Qatar, Shell’s GTL plant at North Field produced its first liquids on Sunday. By next year, Shell plans for North Field to be producing a full 8 percent of its entire global production of hydrocarbons — 260,000 barrels a day of liquids. That includes 120,000 barrels a day of products like propane, butane and ethane, plus 140,000 barrels a day of diesel and lubricants. Pfeifer writes that the operation will churn out $4 billion a year in cash at $70-a-barrel oil, so at $100-a-barrel, the project’s roughly $20 billion capital costs could be paid off in a few years’ time. Shell thinks the project may prove that smaller but similar projects could turn U.S. shale gas into diesel and jet fuels, Bloomberg reports. The company plans to be producing the gas equivalent of 400,000 barrels of oil in North America by 2015. Here is a video of Andy Brown, the Shell executive in charge of the project.