The Gas to Liquids Industry and Natural Gas Markets

Publication Date: November 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Energy

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Abstract:

Technological improvements and investment commitments from the world's largest oil companies suggest the gas to liquids (GTL) industry is likely to expand rapidly over the next decade. GTL uses large quantities of natural gas to produce liquid petroleum products like diesel fuel and home heating fuel. The GTL industry might become an important competitor to the liquefied natural gas industry (LNG) in the effort to secure natural gas supplies. As a result, LNG markets may be tighter, with higher prices, potentially altering LNG's projected role in the U.S. natural gas market.

The Energy Information Administration projects U.S. natural gas consumption increases of 37% by 2025, compared to 2002 levels. Much of this increased demand is expected to be met by importing LNG. LNG is natural gas that has been cooled to a liquid state to facilitate transportation. Although expanding LNG imports has drawbacks, the main positive factor is the belief that worldwide, there are large quantities of natural gas that have previously not had access to the market. Some believe that as the supply of imported LNG expands, it will provide a price cap for U.S. natural gas markets. An expanded GTL industry makes this result potentially less likely.

The GTL industry is poised for a major expansion based in Qatar, but also in Nigeria and Australia. The expansion is being funded by the major oil companies, in some cases in tandem with synthetic fuel companies and national oil companies. The projected expansion of the industry is based on favorable market conditions in addition to advances in technology. High oil and natural gas prices, declining capital investment costs, and improvements in technology that allow large scale production facilities are important factors in the industry's expansion.

The GTL industry offers an attractive choice to nations with economically stranded natural gas reserves because it allows those nations to diversify in the use of their resources. Diversification allows producing nations to gain higher rates of return than through a singular investment strategy. Consuming nations may find that dependence on one supply source, in this case LNG, does not offer the supply security and potential price stability of a diversified strategy.

For the United States, alternatives to increasing LNG imports include a pipeline to bring natural gas from Alaska, expanded exploration and development in areas, both on and off shore, that are currently restricted, and policies to enhance the development of current reserves. None of these alternatives alone is likely to close the projected gap between U.S. natural gas production and demand. The competition for natural gas resources between the LNG and the GTL industries may alter the parameters of the debate.

This report will not be updated.