Shell is in the final stages of completing a $19 billion plant in Qatar designed to convert abundant supplies of natural gas into clean burning diesel along with other fuels and byproducts.  The gas-to-liquids (GTL) project is another sign of efforts to tap unconventional sources that can substitute for crude oil.  Interest in such ventures may increase if the price of natural gas remains significantly cheaper than oil on an energy equivalent basis.

As we pointed out last month, recent declines in the price of natural gas have widened the gap between gas and oil on an energy equivalent basis.  In the short run, crude oil and natural gas trade independently based on factors specific to each commodity and oil tends to always trade at a premium to gas.  However, in the long run, wide disparities in the energy equivalent price of similar commodities will increase incentives to substitute the cheaper commodity for the more expensive one.  Shell’s move is one such attempt to benefit from abundant supplies of natural gas.

Shell’s efforts to develop and deploy GTL technology come at a high cost both in terms of capital expenditures on facilities and the high energy costs associated with the process of converting gas to the liquid fuels.  High costs have caused other oil companies such as Exxon Mobil to halt efforts to build large scale GTL plants.  The graphic below illustrates the process Shell has used in the Qatar plant (click on the image for a larger view):

Please click on this link to read coverage of Shell’s new GTL plant in The Wall Street Journal.

Disclosure:  No position in Royal Dutch Shell.