QATAR - The GTL Challenge.

To produce ultra-clean motor fuels, GTL projects present a new challenge to the oil industry as they will be competing with conventional petroleum later on in this century. Attiyah, like his ruler Shaikh Hamad bin Khalifa, has risen to the challenge and said confidently that Qatar will become the capital of GTL as it will be the world's biggest exporter of such fuels.

Hundreds - and not before long thousands - of workers at Ras Laffan are piecing together a coiled labyrinth of pipes which will turn natural gas into ultra-clean automotive fuels. GTL plants will produce a clear liquid which will have the high efficiency of diesel, but virtually none of the sooty pollutants. Millions of diesel cars and trucks around the world could run on this fuel.

The GTL plants under way in Ras Laffan are part of a big bet by a small state to reshape global energy markets. Some of the world's biggest energy companies, including ExxonMobil and Shell have, committed up to $20 bn to build GTL facilities in an industrial park twice the size of Manhattan. They are using an unusual technology whose lineage traces back to Nazi Germany and apartheid South Africa.

The projects are among the largest and riskiest gambles by the industry in many years. Wayne Harms, ExxonMobil's top executive in this emirate, was in early 2005 quoted as saying: "Qatar is going to become in the gas business what Saudi Arabia is in the oil business". Largely blocked from doing business in Saudi Arabia, ExxonMobil is investing in Qatar's natural gas in a big way through a series of integrated ventures. It expects to spend $15-17 bn in the coming years building facilities in the industrial park, including $7 bn for a GTL plant, the largest single investment in the company's history.

These giant GTL facilities - unlike some earlier, smaller efforts - make economic sense because of technological advances and the lower costs from building on a large scale. The result will be an alternative fuel which should be priced competitively with crude oil. The challenges are huge. Only small amounts of GTL fuel are sold in the world today.

The process to make ultra-clean fuels from natural gas gobbles up a lot of energy, and no one has ever built a GTL plant of the size of those being developed in Qatar. If the costs of producing GTL on this huge scale run higher than expected, or if the price of competing crude oil tumbles, the investments could be at risk. But Shell said in the late 1990s the technology it had developed enabled its GTL business to be profitable even if the price of conventional crude oil dropped to $15/barrel.

Qatar has championed GTL in the hope it will provide a new market for its huge gas reserves. If GTL catches on, natural gas could loosen crude oil's grip on one of the biggest energy markets of all - powering the world's vehicles, which accounts for 26% of all energy use. Home to more than 14% of the world's proven gas reserves, with the North Field having enough to meet current world demand for natural gas for 10 years - Qatar should be the leading beneficiary in such a sea change. Attiyah in early 2005 said: "We want to be a big part of bringing this fuel to the world". He calls GTL "the fuel of the 21st century".

Whether or not Qatar's gas bet pays off could be important to the West. Unlike Saudi Arabia, which has long resented Western influences in its closed society, Qatar is courting the US and other industrialised countries. Shaikh Hamad bin Khalifa has radically reshaped Qatar in ways which ruffle Saudi Arabia's feathers. Unlike Saudi Arabia, Qatar has a largely free media. When Riyadh refused to allow US warplanes in the kingdom to fly missions against Saddam's Iraq in the late 1990s, Qatar opened its airspace. The US military ran its war to oust Saddam's regime from Qatar.

The promise of GTL fuel is alluring. Diesel engines tend to get about one-third better fuel economy than gasoline engines. Conventional diesel - made from crude oil - is much higher in pollutants causing smog than is gasoline. By contrast, GTL diesel, because it comes from natural gas, one of the cleanest fossil fuels, has just a fraction of the pollutants found in crude oil. And current diesel engines can run on it without modification.

Despite such benefits, few cars use GTL diesel today. Only a tiny amount is manufactured right now, mostly at small plants in Malaysia and South Africa. Few drivers have ever heard of GTL or are even aware of the possibility of a cleaner diesel. Even some energy companies other than the majors say they are not yet sure exactly how they will market it. They might try to sell it directly to consumers, or initially to refiners who may blend it with diesel fuel they already manufacture. Exxon's Harms says: "We'll put our product where it makes us the most money".

Western energy companies are taking the gamble because GTL plants in Qatar offer a rare opportunity: a chance to make a big investment in a place where there are a lot of undeveloped resources. Despite running up record profits, the oil giants are locked out of much of the Middle East, home to some 65% of the world's oil reserves.

Most of the conventional oil reserves are in Saudi Arabia, Iraq, Iran, Kuwait and Abu Dhabi - which are either unstable or closed to Western development. Qatar, however, is far more open.

In Doha's bustling City Centre mall, a four-story behemoth with an indoor ice-skating ring, women browse in chic shops for Western clothes, although many wear black chadors in public. Women can vote, work and drive in Qatar. Qatar's energy ministry even abandoned the Middle East's traditional Thursday-Friday weekend in favour of a Friday-Saturday break, which kept it more in step with the rest of the globe. The government later followed suit. Indirectly, Qatar is tending to force Saudi Arabia to open up and become less puritanical.

Natural gas is more broadly dispersed around the world than oil. Much of it is in less-insular areas like Russia, Qatar, Norway and Australia. So hopping into the GTL business allows the Western energy companies back in the game, in a big way. Even before GTL, gas was chipping away at oil's position as the world's primary fuel.

Natural gas provides about 24% of global energy today, up from 17% in 1970, thanks largely to a recent spree of building gas-to-power (GTP) plants. If gas supply continues to grow, it could pass coal as the world's second-most-used fuel by 2010 and catch oil as the top fuel by 2025, according to forecasters for Shell. Conventional oil now accounts for 39% of global energy use.

The first GTL diesel from Qatar is expected to hit the market in early 2006. By 2012, Qatar and its partners would produce between 330,000-400,000 b/d. By 2015-16 the output could reach 750,000 b/d - about 6% of current global consumption - if all the GTL projects are to be implemented including those of ConocoPhillips and Marathon.

Diesel usage is expected to grow quickly in industrialised economies, although it is not widespread in the US. While some trucks use the fuel, less than 1% of new cars in the US run on diesel. By contrast, about half the new passenger cars in Europe run on conventional diesel. But the situation in the US is beginning to change quickly due to very high oil prices. On Aug. 30, when October WTI hit a record of $70.85/b, gasoline retail prices in the US began to rise above $3/gallon and at one time they hit $6/g. The spike has prompted people in the US to shift to coal for the production of clean fuels, using well-tested coal-to-gas (CTG) and/or coal-to-liquids (CTL) technologies.

Shell discovered the North Field, the world's biggest accumulation of natural gas, off the coast of Qatar in 1971. The problem was that the gas was too far away from potential markets for a pipeline; and Shell could not get along with the then ruler - Shaikh Khalifa bin Hamad, father of the current emir. In essence, the field - extending to Iran's territorial waters where the field is known as South Pars - was like an enormous bank. But Shaikh Khalifa had no way of getting the money out.

In the mid-1990s, with Hamad bin Khalifa having replaced his father, Qatar began building expensive facilities to chill natural gas into a liquid (LNG) and shipping it to Japan and Western markets on giant thermos-like tankers. The natural gas is chilled, shipped, and then reheated into gas form, mostly for industrial use or for electricity. GTL, on the other hand, transforms the natural gas into automotive fuel.

The chemical Fischer-Tropsch process at the heart of modern GTL plants was developed in 1923 in Germany. That country was rich in coal, but had little petroleum, so two scientists decided to figure out how to turn coal into a liquid fuel. They flooded coal with steam to turn it into a gas, and then ran it through pipes lined with cobalt to create a liquid fuel. The Nazi government subsidised the nascent industry as it geared up its war machine. Germany got 15% of its motor fuel from CTL plants.

After the end of World War II, the US government experimented with the German technology because it feared domestic crude oil supplies were running out. But gigantic discoveries of oil in the Middle East soon led to an abundance of global crude oil, and the GTL and CTL experiments were dropped.

Interest in coal-to-liquids research dried up worldwide - except in South Africa. Like Germany, South Africa has a lot of coal, but little crude oil. The state oil company acquired the rights from Germany to key parts of the technology and developed its own CTL plants. When the UN led an oil embargo against South Africa's government, the country was forced to keep refining its technology. It eventually determined that it was more cost-effective to use natural gas, not coal, as the main ingredient. But South Africa does not have a lot of natural gas.

In the mid-1990s, its former state oil company, privatised and renamed Sasol, went looking for a large supply of natural gas. It set its sights on Qatar. At first, the reaction was lukewarm. Of the first cold calls to Qatari officials, then Sasol's manager of business development Cavan Hill said: "It was like selling encyclopaedias. You knocked on doors and tried to get people interested. There was a lot of scepticism about whether this was an academic curiosity or whether it could be a commercial process". The Qataris brought in an outside energy consultant to analyse the economics of a GTL plant. The results were good enough that Hill was able to secure meetings with Qatar's top officials.

Finance Minister Youssef Hussein Kamal, also chairman of RasGas and the vice chairman of QP, recalls being intrigued when he saw his first vial of gas-derived diesel. (Crude oil is generally black because it is full of impurities such as sulphur). Kamal was in February 2005 quoted as saying of the Sasol promoters: "They showed me this liquid and it was just like water". In July 2001, Sasol and Qatari officials signed an agreement to jointly build the first commercial-scale GTL plant. Then Qatar started leaning on Western energy giants. Attiyah, the energy minister, sent them a message: If they wanted additional access to Qatar's natural gas, they would have to build GTL plants. Exxon's Harms said Attiyah "had to work pretty hard to cajole the companies, to get everyone where he wants them to be, to do GTL projects".

In 2003, Qatar and Shell signed an agreement to develop a portion of the North Field and have a two-train GTL plant built at Ras Laffan under an integrated $6 bn programme to produce 140,000 b/d by 2011. ExxonMobil finalised a similar deal in 2004 for a plant to produce over 155,000 b/d.

Despite the moratorium on further GTL ventures, there are continuing discussions between QP and each of ConocoPhillips, Manathon and other companies keen on having such plants built in Qatar. The proposed joint venture between Sasol and ChevronTexaco to expand Sasol's first GTL plant is most likely to be revived.

Like all alternative fuels, the economics of GTL hinge on world prices of conventional crude oil. Bernard J. Picchi, an analyst for Foresight Research Solutions, says it will cost about $14 to produce every barrel of GTL diesel. With WTI currently above $63/b, this makes GTL look very profitable. If world oil prices plummet to $25/b, a GTL plant still could yield a 19-20% return on investment. Many other than Shell say below $20 oil the returns are not attractive. Shell still finds profit at that level.

Once the first GTL plant is operational in 2006, the natural gas will be fed into a structure which is longer and heavier - at about 19,000 tons - than the main span of the Brooklyn Bridge. The gas is fed through four furnaces where it is mixed with oxygen and water and burned to create a carbon-monoxide gas. The gas is then fed into a 20-storey-tall cylinder with 4-inch-thick steel walls. Exactly what goes on inside is a proprietary secret, but essentially the gas is exposed to cobalt - a metallic-grey ore often found on meteors. When the gas comes into contact with the cobalt, the interaction rearranges the molecular structure and turns the gas into waxy petroleum. This wax is then put under high pressure to break it into diesel, and a smaller amount of other products, including motor oil.

Shell built a similar, but much smaller, plant at Bintulu in Malaysia in 1993 to see if it could make GTL. The fuel from that plant has been used in small-scale tests in buses in London and Shanghai and in a fleet of water-delivery trucks in California. It is also for sale in limited quantities to the public in Germany, Greece and Thailand. In early 2005 Benjasook Chumhepan filled up her Toyota pickup with "Pura Diesel" at a Shell station in Bangkok. GTL diesel costs about 7% more than regular diesel - an effort by Shell to see if drivers are willing to pay a little more for a cleaner fuel. Ms Chumhepan was in early 2005 quoted as saying she was buying it regularly because it cut down on the truck's emissions. She said: "The engine runs smoothly and doesn't emit black smoke".

Nakilat is the name of a Qatari shipping company which will have the world's biggest fleet of LNG tankers (see Gas Market Trends No. 11). Attiyah on March 30, 2005, said Qatar will spend $15 bn over five years to add 70 vessels to its fleet of tankers to export more LNG. Later in the year it was said the number of LNG tankers required for Qatar would exceed 100. "Qatar is well committed and overbooked by 2012 in terms of LNG contracts", Attiyah then told reporters in Seoul. Attiyah, who visited shipyards in the southern city of Pusan, was on a nine-day tour of Japan and South Korea. He met officials of Hyundai Heavy Industries Co, the world's top shipbuilder, and visited shipyards of second-ranked Daewoo Shipbuilding and Marine Engineering Co and Samsung Heavy Industries. The three shipbuilders had already won orders for a combined eight new LNG tankers from Qatar due for delivery by 2007 through earlier deals.

Attiyah visited the US in May where he looked into possible QP investment in LNG import terminals with ExxonMobil and ConocoPhillips. QP is ExxonMobil's partner in such terminals being built in Wales and Italy. QP will have stakes in similar terminals in Asia as well (see Gas Market Trends No. 11).

During the 5th Doha Conference on Natural Gas in early March 2005, one of several events being held annually, Attiyah moved from one hall to another, signing a string of LNG-related contracts with international firms. One deal was for Distrigaz of Belgium to take some 2m t/y of QatarGas-II LNG to Europe starting in late 2007. A day earlier, Attiyah was busy signing a $6-7 bn deal with Shell to develop and produce North Field gas for QatarGas-IV's 7.8m t/y LNG export plant. The signing with Shell followed a ceremony to mark the beginning of construction of the QatarGas-II plant in a $13 bn gas E&P/LNG joint venture between QP and ExxonMobil to produce 15.6m t/y. "The country has assigned its resources to achieve leadership in the gas industry", Attiyah then said, adding that Qatar's LNG production will exceed 30m t/y in 2007 (see Qatar's gas exports in Gas Market Trends No. 11).

Qatari officials say increasing demand in Europe and the US in the coming years makes new LNG capacities targeting these markets viable. Delegates at the conference said most of the American gas import increases through 2025 would come in the form of LNG, as pipeline gas from neighbouring countries such as Canada will decline. The US will need more than 8 TCF/year of LNG imports in 2025, compared with 3.2 TCF in 2003. Attiyah says the share of gas in world energy consumption will rise to 29% by 2020.