US GTL Holds Little Allure for Chevron

on April 29, 2013 at 2:00 PM


Some companies see gas-to-liquids (GTL) as a promising means of converting the US’ massive gas resources into vehicle fuel, but Chevron has little interest in GTL projects in the US.

Chevron is a large player in GTL. The company is a partner in the Escravos GTL plant in Nigeria, which will convert 325 million cubic feet of natural gas per day into 33,000 barrels of liquids, mostly synthetic diesel, and is scheduled to come onstream later this year. Commissioning is underway, but “it’s a complex plant and the commissioning activity will really go on for the bulk of this year,” said Chief Financial Office Pat Yarrington during the company’s first-quarter 2013 earnings call on Friday.

The flood of cheap gas unleashed on the US market by companies drilling in gas shales and other unconventional formations has led some firms, such as South Africa’s Sasol, to examine possibilities for GTL in the US. Following a feasibility study, Sasol decided to proceed with front-end engineering and design for a plant in Louisiana, which would be the US’ first.

Chevron has no such aspirations. “GTL would not rank high in terms of our project alternatives for US natural gas,” Yarrington said.

The company has substantial US gas holdings, such as a large position in the Marcellus shale obtained through its acquisition of Atlas Energy for $4.3 billion – including $1.1 billion in debt – announced in November 2010. But the company is keeping a tight rein on spending in US gas, holding off on an output ramp-up in anticipation of market improvements that will brighten the outlook for returns on dry gas drilling.

“We have really restricted all of our dry gas production to minimum amounts, principally in the Marcellus area,” said Yarrington.

Chevron is able to continue operating in the Marcellus with little-to-no financial obligation, thanks to a provision of the Atlas deal. Chevron effectively purchased a pre-existing agreement requiring India’s Reliance to fund 75% of Atlas’ drilling costs in the play for up to $1.4 billion.

As of March 2013, Reliance had $850 million in outstanding drilling carries remaining. Chevron declined to comment on when Reliance’s funding obligations would be fulfilled, but “by the time the carry is over, it’s our expectation that we would be sitting in a stronger US natural gas price environment”, Yarrington said.

In the meantime, with external funding driving Chevron’s Marcellus activity, Yarrington said that the company has had the opportunity to better understand the field, and to improve drilling efficiencies and lower well costs, which will come in handy when market conditions improve. If that higher-priced gas environment materializes, GTL could lose a great deal of its appeal.