GCC countries have woken up to the prospect of adding value to their primary export products, crude oil and natural gas, as the growing petrochemical complexes in Ruwais, Abu Dhabi, and in Saudi Arabia's Jubail and Yanbu testify.
But in terms of scale and ambition, the latest addition to Qatar's Ras Laffan industrial park is unmatched. At a cost of at least US$18 billion (Dh66.11bn), Shell is putting the finishing touches to a gigantic gas-to-liquids (GTL) plant. Once it is fully operational, which is expected to be by early next year, the Pearl GTL project will produce a total of 260,000 barrels per day (bpd) of marketable output, much of which will be products such as gasoil, a form of diesel, and kerosene, to be used as aviation fuel. Pearl is by far the biggest industrial hydrocarbons project to date. Over the life of the plant, it will process 3 billion barrels of oil equivalent of gas.
By entering a production sharing agreement with the state-owned Qatar Petroleum, Shell is funding the entire project but will be able to recover the investment costs as well as receive a share of the profits.
The company estimates that at an oil price of $70 a barrel, the project, together with a $2bn liquefied natural gas plant also operated by Shell, will yield it a profit of $6bn a year.
Yet by fronting the entire amount itself, Shell took a big gamble on Pearl. GTL technology had so far been used commercially only by two companies, on a much smaller scale: South Africa's Sasol, who pioneered the technology during the sanctions under the apartheid era; and Shell itself, which is running a 14,700 bpd plant in Bintulu, Malaysia.
"This kind of technology has several kinds of constraints," says Saket Vemprala, an analyst at Business Monitor International. "It's incredibly expensive, it's very energy-intensive, and you have a very long lead time in terms of conceiving and executing a project like this. You will have to be a bit of a hardy investor to pile into that."
At the heart of the gamble is the price discrepancy between oil and natural gas. The larger the so-called gas-oil differential, the bigger the profit margin for GTL products, which then emulate crude-based products at a lower price.
"When you have a wide differential between oil and gas prices, GTL makes sense," says Leila Benali, the director for the Middle East and Africa at IHS Cambridge Energy Research Associates.
The gas oil differential was and is sufficient to justify the investment in Pearl, and the spread is likely to remain wide. Significant extra gas reserves are becoming available in North America due to new methods to extract gas from previously inaccessible shale formations, keeping a lid on prices in that market. Shale gas will become available in other regions, too.
The price of oil has meanwhile remained persistently high this year, buoyed by strong demand from Asia and the shock of Libya's 1.6 million bpd not reaching the market as civil war disrupted production. While the price of crude has dipped to about $85 a barrel after trading above $100 for much of the summer, low inventory levels will probably stop further price erosion.
With a healthy spread between gas and oil prices intact, Shell will profit from turning abundant natural gas from the huge offshore North Field into more profitable GTL products. The project will swell Qatar's coffers even further - the emirate receives the lion's share of profits under the deal - and provide a valuable diversification from liquefied natural gas, the main source of the country's income.
Shell's success in bringing Pearl into service has not gone unnoticed. "This was a massive shot in the arm for the industry," says Mr Vemprala. "The fact that they were able to bring [Pearl] in somewhat on schedule and the fact that it is now exporting cargoes is a big boost for the technology, and the way the market is now with the gas-oil differential, the industry will be paying a lot of attention."
Chevron is already building a GTL plant in Nigeria, while Sasol is considering projects in Canada and the US, with an eye to exploiting North America's huge shale gas reserves.
Shell might well also invest further in GTL production. The Pearl site in Ras Laffan can house a third train, and the company does not rule out an expansion. It is also aware of the opportunities that shale gas offers in the US.
With natural gas in short supply in the GCC region due to insufficient production capacity and its increasing use in power generation, Qatar will remain the only GTL producer in the region for some time.
Having not been blessed with the sizeable oil reserves of some of its neighbours, Qatar is not about to give up its leadership in the field of gas.
