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Gas-to-Gasoline Plants May Upset Regional Natural Gas Markets

Economics

By Nick Jones  |  November 24, 2021

Last month, energy start-up Nacero announced plans to develop a $6 billion gas-to-gasoline plant in Newport Township, Pennsylvania, with the capacity to produce 100,000 bbl/d of gasoline. This is just one of three plants in development by Nacero, all of similar scale, which will be the first of their kind in the U.S. The firm has stated their plan to eventually build out nine gas-to-gasoline plants across the U.S. Though the technology of converting natural gas into liquid fuels is not new, rising oil prices and regional dynamics have renewed interest in developing gas-to-gasoline projects. Here we examine the fundamentals motivating Nacero’s Pennsylvania project and how it could provide an alternative solution to grow production out of a pipeline constrained area.

Pricing Factors

Despite natural gas prices hitting multi-year highs in 2021, the chart below illustrates that the value-add from processing gas into gasoline has increased. BTU modeled a 4.7-gallon net yield of gasoline from each Mcf of natural gas feedstock, bringing the cost of feedstock to below $1 per gallon of finished product. Accounting for this conversion, the increase in gasoline prices has outstripped the rise in natural gas over the last five years. So far in 2021, this has equated to a $1.49 per gallon margin between gasoline prices and feedstock costs, 24% higher than the same measure in 2016.

gasoline-and-natural-gas-prices

Located in Newport Township, Nacero’s planned Pennsylvania complex will sit near the Transco Pipeline at the edge of the Marcellus shale play, where Transco-Leidy basis has averaged $0.61 below Henry Hub since the start of 2019. Gas production in the Northeast has long been infrastructure constrained with limited capacity driving down basis. In addition to the abundance of cheap gas, ready access to downstream markets in New York and New Jersey was likely deciding a factor in where to put this plant.

location-of-planned-marcellus-plant

Nacero has not disclosed the amount of natural gas to be consumed at this facility, but a proxy can be found in existing methanol plants. The TIGAS process which Nacero has licensed from Haldor Topsoe works by first converting natural gas into methanol and then converting the methanol to gasoline. Nacero plans to run six of Topsoe’s SynCOR methanol trains, for a total capacity of 30,000 Mt/d of methanol production. In effect, this will make Nacero’s gas-to-gasoline plants the largest methanol plants in the U.S., with five times the capacity of the largest current plant.

A 2019 analysis by the U.S. Energy Information Administration (EIA) estimated that the Natgasoline methanol plant in Beaumont, Texas, consumed 150 MMcf/d when running at or above its nameplate capacity of 5,000 Mt/d. BTU independently analyzed gas deliveries to the Methanex complex in Geismer, Louisiana, and estimated that the plant takes in 174 MMcf/d to support its 6,000 Mt/d capacity. Using these plants for reference, a 30,000 Mt/d facility operating at similarly high utilization would be modeled to consume between 870 and 900 MMcf/d.

While it remains to be seen whether Nacero will succeed in building its fleet of gas-to-gasoline plants or whether these plants will be economical once completed, an additional 900 MMcf/d of gas demand would represent a substantial shake-up in the regional balance of Northeast Appalachia. As mentioned above, growth of production in the region has been long tamped down by a lack of sufficient takeaway infrastructure. New pipelines and expansion projects have proven politically difficult in the region. Beyond the Leidy expansion in service next month and the potential completion of Mountain Valley Pipeline in 2022, no further pipeline infrastructure is expected to exit the region. For an in-depth analysis of Mountain Valley Pipelines’ risks to development, see BTU Analytics' November Gas Basis Outlook.

northeastern-appalachia-gas-production

As shown in the chart above, exploration and production operators have moderated development to meet a finite amount of demand that can effectively be serviced through the existing pipeline network. A gas-to-gasoline plant on the scale Nacero proposes could allow for up to a 7% jump in regional production.

BTU Analytics is a FactSet Company. This article was originally published on the BTU Analytics website.

The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

StreetAccount

Nick Jones

Energy Analyst, BTU Analytics, a FactSet Company

Mr. Nick Jones is an Energy Analyst for BTU Analytics, a FactSet Company. In this role, he researches developments and forecasts production in the Rocky Mountain region. Mr. Jones earned his bachelor’s in economics from the University of Michigan.

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