In an exclusive January 17 interview with Hart Energy, Chief Executive Roy Lipski of U.K.-based gas-to-liquids (GTL) specialist Velocys countered oft-repeated arguments that “cheap” liquefied natural gas (LNG) and compressed natural gas (CNG) would slash diesel-fuel market-share or hobble an emerging gas-to-liquids (GTL) industry.

Velocys is the developer of a novel micro-channel GTL technology that enables relatively small-scale conversion of natural gas to Fischer-Tropsch (FT) diesel, kero-jet, waxes and other FT products including lube specialties.

The company is concentrating marketing efforts on natural-gas producers in North America and the Former Soviet Union (FSU) – both areas where gas is plentiful and relatively cheap by world standards.

The company argues that compared to pushing LNG/CNG transport-fuel schemes, or attempting large-scale GTL projects such as those of Sasol or Shell, projects employing its micro-channel technology enable a relatively low-cost and practical pathway to monetize many “stranded” gas fields and/or avoid gas flaring or venting.

The small-scale GTL scheme also could help many gas producers realize far-higher net margins than by selling “cheap” commodity gas for transport-fuel, power-plant or space-heating markets – assuming a gas pipeline connection is even available nearby to take the gas.

According to Lipski, the Velocys GTL scheme enables gas producers to sell FT diesel wholesale at the equivalent of $7 to $8 per 1,000 cubic feet (mcf) of gas, compared to roughly $4/mcf for natural gas (at the Henry Hub).

Several commercial projects employing the Velocys GTL technology are moving forward in North America and the Former Soviet Union (FSU), Lipski pointed out to us.

Among those are the proposed 2,800 barrel (bbl.) per day Pinto Energy GTL project in Ohio, and a 175 bbl. per day GTL plant just sold to an undisclosed customer in the Commonwealth of Independent States (CIS).

Meanwhile, neither LNG exports nor natural gas transport-fuel schemes are likely to “save” gas producers from the continuing problem of relatively low wholesale gas prices, he said.

“LNG was until a few months ago expected to be a savior for North American gas” producers suffering relatively low margins, he said.

“But a growing realization set-in that it [LNG exports] won’t have a material impact on North American gas prices” for many years to come, with today’s NYMEX forward curve on natural gas futures still dragging-along at under $5 per 1,000 cubic feet (mcf) through 2024,” he said.

Among the factors snagging greater LNG export volumes is political opposition from industrial gas users in the U.S., as well as the skepticism of project developers who have seen numerous LNG projects snagged by delays and cancellations in years past, he said.

As for LNG/CNG transport fuel schemes, the “chicken and egg” problem typical of all alternative fuels remains a major roadblock, he said. That is, fleets won’t buy lots of LNG/CNG trucks unless convenient refueling facilities are available, and refueling station investors won’t invest until they’ve got certainty on sufficient fleet sales volumes.

A recent IHS consulting study found that an investment of roughly $375 million could enable construction of some 250 LNG stations spaced every 300-miles along U.S. interstate highways – potentially incentivizing some portion of U.S. truck fleets to switch from diesel to LNG.

However, it would take many billions of dollars in capex to build a more-robust network of LNG/CNG stations that could attract many more types of fleets and possibly even some portion of the passenger-car market, Lipski said.

But there’s yet another problem: Even those truck fleets hoping to tap today’s relatively meager LNG refueling network face the hurdle of capturing value on truck resale.

Most U.S. fleets sell their trucks after three to five years, and many of these trucks today wind up in Mexico, where there’s no LNG fueling network and hence no market for LNG trucks, he said.

Yet another factor is the relative unpredictability of future LNG retail prices in local market areas, he said. In recent weeks, U.S. natural gas prices shot-up by as much as 10-fold in cold-weather-hit areas. If truckers traveling to or from one of these areas are suddenly hit with a huge increase in natural-gas retail prices during a cold spell, then this bad experience could discourage future, repeat purchases of gas-fueled trucks, he said.

A final factor is a lack of robust financing for massive LNG/CNG refueling infrastructure, he said. “Unless the government funds this, then the money has to come from oil companies and they’re not interested in cannibalizing their diesel business,” he said.

Because of these numerous cost, vehicle resale and infrastructure challenges, “I don’t expect LNG [transport fueling] to happen in a big way,” he said. What’s more, “a significant number of LNG fueling stations won’t increase gas [producer] prices much” because gas consumption for transport would only represent a tiny portion of total gas demand.

While large-scale GTL projects require massive capital, long development times, huge gas resource commitments and coastal locations (to enable GTL products export), the small-scale GTL projects enabled by the Velocys technology would cost much less, require less development time, wouldn’t require huge gas fields or be restricted to coastal locations, he said.

Asked why more small-scale GTL projects haven’t already been commercialized, Lipski told us that “the technology for small-scale GTL has only become ready [for commercialization] in the last one to one-and-a-half years, though it’s been in development for the last 15 years or so.

“I think what you’re seeing [in commercialization] is about normal. It takes time to get these technologies established.

“Once we get [the first commercial GTL projects up-and-running], that’s a catalyst for further projects.”

While Lipski pointed to the Pinto Energy GTL project in Ohio as having a good chance to launch construction later this year, “other projects are not announced yet,” he said. “I believe the best chance [for an early, small-scale GTL project] is not in the public domain yet.”

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