New GTL developments emerge in Peru

Mar 08, 2002 01:00 AM

A ground-breaking effort to slash air pollution in Peru's capital and other major cities, along with huge new projects to monetise stranded natural gas, help explain why gas-to-liquids (GTL) is emerging as a valuable industry. GTLN explored the reasons behind new GTL developments, such as Syntroleum's "Talara" GTL project.

Besides local environmental and demand factors favouring GTL, other key factors are:
-- Readily available, underutilized rich associated gas from crude oil production near Talara, and the possibility of developing nearby dry gas reserves inexpensively;
-- The gigantic "Camisea" stranded gas field that will begin to be commercialised via new pipelines to the Pacific coast as early as 2004;
-- A fairly low corporate income tax rate (30 %);
-- Relatively liberal deductions for gas project depreciation and expenses;
-- Elimination of value-added tax on goods & services during exploration phase of gas field development;
-- Scheduled elimination of Peru's import duties on major capital equipment for new construction, and;
-- A straight-royalty scheme (15 % of value at wellhead during capex recovery) rather than gas production sharing. This royalty rises to 21 % at 100-150 % of capex recovery, 27 % at 200 % capex recovery, and 35 % at over 200 % capex recovery.

"Recent changes in Peru's hydrocarbon laws and the ability to negotiate much lower royalties have placed Peru in a favourable position versus major producing countries such as Venezuela and Argentina, which are going just the opposite way to higher royalties and higher government take," as Syntroleum's GTL-Peru project advisor Ron Roberson explains.
What's more, Peruvian government officials indicate that based on favourable circumstances here, GTL should look feasible for the current and future commercial domestic market. For Syntroleum, these particular circumstances include reasonable gas feedstock costs, relatively favourable gas field development costs, reasonable GTL production costs, supporting revenues from accompanying gas-liquids and gas-to-wire sales, and ready access to nearby GTL products markets.
More favourable factors: "Peru is importing more diesel fuel" thanks to a sharp increase in sales of fuel-efficient diesel vehicles in recent years, explains Jose Robles, senior advisor for Peru's Ministry of Energy & Mines (MEM). The diesel supply deficit is approaching about 5 mm barrels/year, mostly high-sulphur fuel (between 0.3 % to 1 % sulphur) from Venezuela, he said.

While sufficient low-cost gas in the near-shore, shallow-water "Northwest" fields near Talara indicates support for expansion of GTL production, "the real challenge is to prove to the rest of the world that GTL can work" at a competitive cost, Robles said. This depends not only upon Syntroleum proving its GTL technology on full commercial scale, but also upon world oil prices rebounding to around the $ 25/bbl range that OPEC aims to defend, Robles said. Meantime, finding a hungry nearby market outlet for GTL products should not be a problem.
Some 60 % of vehicles imported into Peru (no domestic new-car assembly exists here) today are now diesel. On the other hand, over 75 % of car imports are used rather than new vehicles, partly due to Peru's relatively small class of consumers willing or able to buy new cars, as well as some questionable car import duty schemes created during the regime of former president Alberto Fujimori, now exiled in Japan.

Many of the taxis on Lima's streets are old, "dirty" Japanese diesel vehicles converted from right-hand to left-hand drive by local "chop shops" not noted for the highest quality standards, according to Araper, the trade association representing the world's major automakers here. Higher-quality vehicles would require higher-quality fuels, like those from GTL plants (and/or low-sulphur diesel fuels from crude refiners).
Hoping to boost the market for more modern, lower-emissions vehicles, Araper is pushing for much tougher standards (or even a ban) on imported used vehicles in Peru, and it hopes that future government regulations will encourage more new-car sales rather than relatively "dirty" used-car imports, Araper spokesman Peter Davis told GTLN.

This effort is beginning to bear fruit. After extensive discussions between oil industry, automakers, environmental advocates, the World Bank, and federal and local officials, the Peruvian government is about to unveil a "Clean Air Initiative for Lima-Callao." While all the diesel fuel specifications haven't been finalized yet, this plan could require a steep cut in diesel fuel sulphur for metro Lima (including a "superior" grade with a 350 ppm sulphur limit, down from about 7,000 ppm sulphur today) by around 2005, along with a 2,000 ppm sulphur limit for the other diesel grades. Other features of the initiative would include improvements in vehicle import emissions standards (Euro-2 for new vehicles in 2003) and tougher, better- managed inspections on in-use vehicles.

While state-owned PetroPeru's 60,000 bpd Talara refinery is already capable of producing some low-sulphur diesel -- thanks to current low-sulphur crude availability from nearby fields -- the company (representing half the local fuels market) is requesting government funding approval to install new units.
This would mean more hydrodesulphurisation capacity (an extra 3,000 bpd, costing $ 24 mm) and expanded primary distillation unit capacity (15,000 bpd, costing $ 18 mm) to boost heavy-crude capacity. Another $ 138 mm project request aims to install a light naphtha reformer and related desulphurisation and recovery-recovery units. At the same time, having ultra-clean GTL feedstocks available from Syntroleum's planned "phase 2" 5,000 bpd GTL plant could help PetroPeru meet tougher future diesel specifications.
PetroPeru has expressed an intent to negotiate an offtake agreement for the GTL diesel from the future Syntroleum plant near Talara. Syntroleum also sees potential to boost GTL output at Talara to as much as 20,000 to 40,000 bpd in "phase3," perhaps later this decade, potentially giving PetroPeru a bigger boost for low-sulphur, green-diesel markets.

In the meantime, another part of Lima-Callao's "Clean Air Initiative" would boost diesel vehicle taxes relative to other fuels, to discourage the recent "dirty-diesel" vehicle trend. It also would encourage greater use of "clean" LP-Gas (as a substitute for gasoline) and would promote the conversion of some bus lines to compressed natural gas (CNG), once the future gas line from Peru's giant "Camisea" field to Lima comes on-line around 2004.
The "Clean Air Initiative" also will bring large-scale conversion of power generation from heavy fuel oil or high-sulphur diesel to natural gas (from Camisea), in order to cut sulphur oxides (SOx) pollution as well as reduce local power-generation costs. So, the initiative eventually could cut Lima's total diesel fuel demand while boosting diesel vehicle costs. Even so, this shouldn't necessarily discourage clean-diesel development, including GTL.

Even without a "green" fuels premium today, GTL diesel would seem economically attractive, as today's Peruvian diesel market is exceptionally strong. Growing diesel demand (which exceeds local capacity), rather high fuel prices (compared to the US), relatively high import/transportation costs and rather hefty taxes on all motor fuels mean that refinery-gate diesel prices "typically range from $ 0.90 to in excess of $ 1.00 per gallon, averaging around $ 40/barrel," explains Syntroleum's Roberson.
"The local price in Peru for relatively 'dirty,' high-sulphur diesel is therefore considerably higher than the anticipated price for clean [GTL] diesel in the US or Europe," he said. This means the Syntroleum GTL could be sold via PetroPeru's distribution network into a strong diesel market, at prices in the $ 32 to $ 40/bbl range, plus whatever premium it may command for its reducing-reducing value (and its cetane boost) for future "green" diesel specifications for Lima (and eventually, other major cities).

Apart from the Syntroleum project, another massive project is about to have a huge impact on Peru: Development of the currently-stranded 13 tcf Camisea natural gas field in the Amazon. Once this field is fully developed and a new pipeline brings Camisea gas and gas-liquids to the Pacific coast (near Chincha), this potentially could trigger the creation of another GTL project in southern Peru, according to MEM's Robles.
Perhaps boosting such a prospect is the emerging possibility of bringing on-line another huge gas field next to Camisea, representing another 7 tcf. As a result, Camisea and neighbouring gas field development could lead to large-scale LNG exports, GTL, electric power generation, and potentially the construction of a reduced-iron plant that could supply a nearby steel mill on the Pacific coast. On the LNG front, Hunt Oil just signed a front-end engineering & design (FEED) contract last month for a 545 mm cfpd export plant that potentially could come on-line in 2005 or 2006, tapping Camisea gas.

Other possibilities for the "wet" Camisea gas include:
-- More gas liquids (LP-gas) production for continuing "clean" LP-Gas vehicle conversions in Lima;
-- More gasoline feedstocks. This could mean extracting natural gasoline from the wet gas feed, then (potentially) blending it with ethanol manufactured from the ethane portion of the gas, to boost blend octane; and
-- Conversion of some of the gas to methanol and/or methyl-tert-butyl ether (MTBE), a gasoline octane enhancer, as PetroPeru's technical services director Priscila Santivanez told GTLN. Peru will eliminate its 84-octane leaded gasoline grade entirely by late 2004. Three of the four gasoline grades are already unleaded. Due to relatively soft unleaded octane demand (97 RON is the top unleaded grade; 90 the lowest) Peru doesn't need to import a lot of high-octane components, although some MTBE blend does make its way here.

Part of the Camisea gas eventually will be shipped to Lima to replace heavy oil or diesel-fired electric power generation. Potentially, a portion of the gas could support the conversion of a few major bus line routes in metro Lima to compressed natural gas (CNG). But massive CNG conversion or a complete replacement of diesel with CNG seems unlikely due to very high costs of CNG refuelling infrastructure and a complete lack of gas lines anywhere in Lima, as Robles and other government officials said.
However, the push for CNG buses is coming from Sweden and elsewhere, thanks to consulting contracts arranged through the World Bank for the "Clean Air Initiative." This is the continuation of a trend of "development" agencies pushing rather costly CNG over clean-diesel in "emerging" economies, such as Peru. It's a phenomenon that hasn't yet been countered as effectively as it could be by "green" diesel defenders, especially given that relatively "poor" countries and consumers could benefit far more with the lower-cost, green-diesel alternative. On the other hand, the emergence of GTL here probably could help play a role in changing this picture.

Source: Phillips Publishing International, Inc.
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