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6. 6.1

ECONOMICS OF GTL Oil and Product Pricing

In assessing likely future pricing for GTL-derived fuel products, there are a number of factors that need to be considered. These include: · · · · · Crude oil price, Refined product price premium, GTL product price premium, and Location.

Crude Oil Price

Crude oil is the main feedstock for refined products and, as such, its fundamental price level is an important influence on wholesale-refined product prices. One of the most important marker crude oil grades is Brent; although being a UK North Sea crude oil grade, it is traded internationally and on the International Petroleum Exchange's (IPE's) crude oil futures market. Consequently, it is used to price other internationally traded crude oil grades, including some in the Asia-Pacific region. In recent years, crude oil prices have been very volatile, with Brent trading at around US$10/Bbl in December, 1998, and averaging US$33/Bbl for September, 2000. The average Brent crude oil price for the period January, 1994 to December, 2000 is approximately US$19/Bbl. However, as may be seen from the figure below, there appears to have been an upward shift in future crude oil price expectations recently, with Brent crude oil envisaged to average US$22/Bbl for the next five years. Additionally, at present OPEC is pursuing a policy of production quota restrictions to ensure the OPEC basket of crude oil prices trade in a US$22-28/Bbl range. Therefore, for the purpose of economic evaluation of potential GTL facilities, GCA used the following crude oil pricing scenario:


US$/Bbl 35 30 25 20 15 10 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Sep-97 Apr-01 2004

Actual Oct-98

Mar-94 Oct-99

Nov-96 Nov-00

Source: Platt's Oilgram Price Report/IPE

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BRENT CRUDE OIL PRICE SCENARIOS Low Case 19 Base Case 22 High Case 25

Scenario Price, US$Bbl ·

Refined Product Price Premium

The refined products that GTL fuels will have to compete against (primarily naphtha and diesel) normally trade at a premium compared to crude oil prices. For the Australian market, refined products are priced on a netback basis from the Singapore cargoes market. Depending on the GTL process utilized, severity of operation and the back-end product upgrading facility employed in the overall GTL facility, a wide variety of products can be made from the GTL process. However, GCA has limited its review to consideration of refined products only. Furthermore, a yield assessment of 20% naphtha and 80% diesel has been assumed to reflect a reasonable product slate from a GTL facility. Using historical price differentials, based on pricing information reported in Platt's Oilgram Price Report, produces the refined product price premiums as illustrated in the accompanying graphic. · GTL Product Price Premium

As well as the refined product price premium, there are arguments that GTL fuel products should attract additional price premium to reflect their high quality and &quot;green fuel&quot; attributes. However, the likely premium obtained will be dependent on the way GTL fuels are marketed. · GTL Diesel


US$/Bbl Naphtha Price Premium, U.S.$/Bbl

40.00 35.00 30.00 25.00 20.00 15.00 10.00

Ja n9 M 4 ay -94 Se pJa 94 n9 M 5 ay -9 Se 5 p9 Ja 5 nM 96 ay -9 Se 6 p9 Ja 6 nM 97 ay -9 Se 7 p9 Ja 7 nM 98 ay -9 Se 8 p9 Ja 8 nM 99 ay -9 Se 9 pJa 99 n0 M 0 ay -0 Se 0 p0 Ja 0 n01

Diesel 4.2

Composite 3.5


In the case of GTL diesel, it is of high quality when compared with conventional crude oil-refined diesel with regards to sulphur, cetane number, aromatics content and density; however, it has relatively poor cold flow properties. The benefits of zero sulphur diesel are marginal since the global trend, including Australia, is progressing towards very low sulphur content diesel (10-50 ppm). Therefore, if GTL diesel is used as a blendstock for sulphur specification purposes, the base blend must either be close to the specification or a large volume of GTL diesel will be required, negating any potential premium. Hence, the major benefit for GTL diesel as a blendstock relates primarily to cetane and aromatics content. Typical GTL diesel has a cetane number greater than 70, compared to a usual diesel product end specification of 50. Therefore, there are opportunities to utilize GTL diesel to upgrade refinery intermediate products to conventional diesel that would

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Gaffney, Cline &amp; Associates

otherwise be blended into fuel oil. Similarly, the diesel specification relating to aromatics content is being reduced, which will impact on refiners' diesel blending activity. However, GTL diesel has zero aromatics content, which will result in the product being of benefit to refiners who are limited in diesel blending due to aromatic specification. The poor cold flow properties of GTL diesel may be a problem in some of the colder climates, but in Australia and much of Southeast Asia this will not be a significant problem. Based on historical price differentials between diesel and low sulphur fuel oil in the Singapore cargo market, the quality benefits of GTL diesel may result in a product price premium of around US$2.0-2.5/Bbl over conventional diesel. As well as utilizing GTL diesel as a refinery blendstock, it could be used as a retail fuel, and compete directly with conventional diesel. Given the lack of infrastructure to have separate diesel storage and pumps on the forecourt, and the envisaged small volumes of GTL product when compared with current diesel demand in Australia (of around 11 MMTe p.a. (250 MBPD)), GTL diesel is unlikely to be produced in sufficient volumes to be marketed separately. Additionally, historically, diesel consumers are much more sensitive to price than they are to premium product issues. Therefore, GTL diesel is unlikely to attract a premium in the retail market. · GTL Naphtha

GTL Naphtha, similar to diesel, is highly paraffinic, which makes it unsuitable for catalytic reforming in crude oil refineries. However, it is suitable for cracking to ethylene. Additionally, the high hydrogen-to-carbon ratio of paraffinic naphtha will make it a good feedstock for fuel cell technology if the technology is developed commercially. However, GTL-derived naphtha is unlikely to attract a premium compared to naphtha cargoes traded in the Singapore market. Overall, based on the previously discussed GTL fuel yield structure, the combined liquid fuel products from a GTL facility are likely to attract a premium of US$0-2/Bbl over crude oil refined products in the Singapore cargo market. The magnitude of the premium will be dependent on whether the GTL fuel is marketed as a refined product blendstock or as a final transport fuel. · Location

Any GTL facility constructed in Australia is likely to be located in either Western Australia or the Northern Territory, remote from the major markets. From this, it is envisaged that GTL fuels will have two main markets, namely the domestic market of Southeast Australia and the export market, into Singapore. The estimated cost of delivering GTL product into these two markets is around US$1.0/Bbl. 6.2 Absolute Economics

Based on public domain information and interviews with the major GTL players, the following assumptions were utilized in the economic analysis:

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­ ­ ­ ­ ­

Project Life Capacity Utilization Inflation Conversion

25 years 30 MBPD 90% 3% p.a. 10 GJ/Bbl of Product 30% 25-year Double Declining Balance



­ Income Tax rate ­ Depreciation




Estimated Costs ­ US$25,000/BPD Capital Expenditure + US$100 m ­ US$1/MSCF Gas Cost ­ US$4/B bl Operating &amp; Maintenance Costs ­ US$1/B bl Product Transportation Cost Estimated Revenues ­ US$22/Bbl Brent Crude Oil Price Scenario ­ US$3.5/Bbl Conventional Product Premium ­ US$1/Bbl GTL Product Premium


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Nominal Pre-Tax Rate of Return = 15% Nominal Post-Tax Rate of Return = 11%

Capital Expenditure 8% Revenue 25% Operating Cost 15%

Tax 11% Shipping Cost 4% Gas Cost 37%

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Utilizing these assumptions together with the aforementioned base case pricing scenario produced the following Net Present Value (NPV) calculations:


Net Present Value, US$ Million 2,500






-500 0 5 10 % Post-Tax Rate of Return I n t e r n a l N o m i n a l P o s t -T a x R a t e o f R e t u r n = 1 1 % 15 20

Given that a typical post-tax nominal, rate of return hurdle rate for a project of this type is around 15%, there is a requirement for the economic parameters to be improved to ensure the project is economically attractive to the project sponsor. The figure below shows the distribution of the GTL project cashflow, providing an indication of the parameters that influence the economics of the project.


Otherwise untapped value for industry and government GTL US$10.5 billion Upstream US$8.2 billion

Revenue 37% Capex 19% Revenue 25% Tax 11% Shipping Cost 4% Capex 8% Opex 15%

Tax 18%

Opex 26%

Gas Cost 37%

Combined US$14.7 billion

Revenue 38% Capex 17%

Tax 17%


Opex 25% Shipping Cost 3%


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Some of the key parameters were modified to identify those that are most influential in the economic analysis. The parameters under consideration were: · · · · Gas Cost (± US$0.5/GJ to reflect the typical gas price for international GTL projects of around US$0.5/GJ); Crude Oil Price (± US$3/Bbl to reflect high and low crude oil price scenarios); Capex (± US$5,000/BPD to reflect the current typically-reported range of US$20,000-30,000/BPD); and Operating Cost (± US$1/Bbl since typical operating costs are reported to be in the range US$3-5/Bbl).

The results of the economic sensitivity analysis are shown in the accompanying graphic, which indicate the primary sensitivity of GTL project economics to the cost of gas, the underlying crude oil price and the capital expenditure requirements.


Gas Price (+/$0.5/GJ) Oil Price (+/$3/Bbl) Capex (+/$5,000/BPD)







Opex (+/- $1/Bbl)










US$ million NPV


Government Incentives

As discussed in the previous section, utilizing the base case scenario, a GTL project will not meet the economic hurdle 15% nominal post-tax internal rate of return. Additionally, if project financing is required, there may be a need to base the economics on the low crude oil price scenario of US$19/Bbl; this reduces the nominal post-tax internal rate of return to 8%. For a manufacturing or LNG-analogous project, this may be acceptable. However, the technical and commercial



Tax Incentives

­ Reduced Income Tax ­ Tax Holiday ­ Improved Depreciation ­ Excise Relief on Products


Other Incentives

­ Grants ­ Soft Loans ­ Equity Stake

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risks associated with GTL projects at present, makes this rate of return unacceptable to most petroleum companies. Alternatively, a degree of integration between the upstream gas field developer and the GTL project sponsor may be feasible, which results in the combined (ring-fenced) projects having an internal rate of return of around 11%, which may be acceptable. However, due to the competition for financing within many petroleum companies, the reduced rate of return may still not be acceptable. As a consequence, there may be a requirement for the government to provide incentives to improve the economics of GTL projects to ensure they are attractive in the context of Australia. Alternatively, the Australian government may provide penalties, such as loss of acreage if not developed within a certain time limit, to encourage timely development of the country's resources. However, this may result in some companies leaving Australia for countries with better petroleum fiscal regimes. The magnitude of government incentives required for each of the important economic parameters was examined. However, there may be a desire for the government to appear even-handed with similar non-GTL projects. · Gas Price

The government could decide to improve the petroleum upstream tax position to compensate for the reduced gas price needed to meet the requisite GTL project and upstream project hurdle rates of return. Based on GCA's UPSTREAM GOVERNMENT INCENTIVES economic model of the current (Effect on Producer's profitability) Australian Petroleum Law for a typical field, similar to a typical Gas Price NPV @15% Tax Payable Northwest Shelf development, US$/GJ Post-tax ROR US$ Million the reductions in government tax US$ Million revenue illustrated above would Base Case 1.00 0 2,000 be required to provide a post-tax rate of return of 15% with a feed Base Case 0.75 -130 850 gas price of US$0.75/GJ, compared to the US$1.0/GJ in Income Tax 0.75 -35 320 (@ 10%) the base case scenario. Two issues that need to be considered in this analysis are: with no incentives the gas field may not be developed at all, reducing the government's tax revenue to zero; and there may be calls from other upstream developers for similar tax breaks. · Realized Product Price

Depreciation 5 years double declining balance 0.75 -130 800

As discussed previously, the crude oil and refined product markets have experienced significant price volatility in recent years. Additionally, GTL projects are sensitive to movements in crude oil prices. The only influence the Australian government can exert on product prices is in the domestic retail market. The government could provide GTL

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fuels with a reduced excise duty, such as that provided to LPG previously. This will have the added benefit of Australia receiving the environmental GOVERNMENT INCENTIVES benefits of the GTL fuel. PRODUCT PRICES In providing an excise duty holiday, there is a choice between offering full excise relief over a short period or reduced excise relief over a longer term. Additionally, if the incentive is associated with tighter product quality, similar to that offered in the EU, it would be available to Australian refiners. The level of excise tax relief required is indicated in the Table. · Capital Expenditure

Oil Price US$/GJ Base Case 22 NPV @15% Post-tax ROR US$ Million -200 Tax Payable US$ Million 1,050

Base Case




Excise Duty Relief 100% for 2 years Excise Duty Relief 20% for 25 years







The government has limited measures available to it to reduce capital expenditure. However, it may provide grants, low interest loans or take an equity stake in the project, thereby reducing the project sponsor's equity requirements and providing an opportunity for an improved project sponsor internal rate of return. In examining this incentive, it was decided to consider interest-free loans over the life of the project only. Additionally, the income tax rate was reduced and depreciation accelerated to assess the impact of these two government-controlled variables on the economic attractiveness of the project. The result of this analysis is summarized below:


Oil Price US$/GJ Base Case Base Case Interest-free Loan for 50% of Capex over life of Project Income Tax Rate 10% Depreciation Double Declining Balance over 5 years 22 19 19 19 19 NPV @15% Post-tax ROR US$ Million -200 -320 -40 -270 -290 Tax Payable US$ Million 1,050 675 675 225 645

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For both the upstream gas field development and the GTL project, the required income tax relief to provide the required internal rate of return for the project is significant. Additionally, the provision of accelerated depreciation appears to have a small impact on the overall economics of the project. Excise relief produced the greatest impact of the government incentives considered. Additionally, if the excise relief is offered over a long period, the impact on the tax received by the government is not adversely impacted. However, this may result in project financing being difficult to find due to the risk of a change in government policy adversely affecting the project's financial success. 6.5 Comparative Country Analysis

In comparing the incentives provided in other countries, due cognisance must be given to the type of development and other government drivers. If the upstream development is an associated gas field with sufficient liquids to be a stand-alone project, the gas may be given a zero value. Additionally, the government may have decided that providing incentives to the project, and reducing the government take, may be preferable to not having a project at all. Furthermore, the government will take a larger view and include consideration of additional benefits to the community and the local economy, such as provision of ancillary services to the project (thus benefiting the local economy) and balance of payment consideration. Therefore, different governments may have considerably different reasons for offering incentives, which may influence the type of incentive, and the magnitude offered. Finally, many of the incentives are on a project-by-project basis. In this way, they are treated as being commercially sensitive and are rarely available in the public domain. When considering countries competing with Australia for GTL projects it is important to understand the country's gas policy. This policy may be effected by a number of different factors including: flaring of gas associated with the country's oil production. Due to the field economics, with respect to liquid production, the associated gas may be offered at a low price; gas resources in high productive fields, with low development costs resulting in low gas prices; and improving fiscal terms for gas projects in an attempt to shift the country's reliance on oil revenue.


These policies, and consequently the fiscal policy of countries, may change quickly with time. However, for a mixture of the reasons above the main GTL competitors are all offering gas at a lower price than currently available in Australia.

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For downstream projects the country comparisons are limited to income tax and depreciation primarily. There is a potential for excise duty relief to be used as an incentive, but this is analogous to providing a price subsidy for domestically consumed product, which may be difficult to quantify. As may be seen from the chart below, there is a wide discrepancy between the fiscal regimes for downstream projects considering GTL plants. These may be split into three groups: Low tax and short depreciation period offered by Indonesia, Malaysia and Qatar; High tax and short depreciation period offered by Alaska, Egypt, Nigeria and Trinidad &amp; Tobago; and Medium tax and long depreciation period offered by Australia and Venezuela.

Comparison of International Fiscal Regimes

60 55 50 45 40 35 30 25 20 15 10 5 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Nigeria Egypt Trinidad &amp; Tobago Indonesia Qatar Malaysia Alaska Venezuela Australia

Income Tax Rate (%)

Depreciation Period (Years)

Source: LNG Action Agenda 2000, DISR

As previously discussed, the main fiscal parameter to an economically successful project is the income tax rate. Therefore, with everything else being equal, Indonesia, Malaysia and Qatar will be more attractive countries to invest in than Australia. Depreciation has a relative small impact on the overall economics of the project. Therefore, for Australia to attract GTL projects a reduction in the income tax rate may be required. This is especially critical given that Indonesia and Malaysia will be competing in the same product market as Australia.

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