The Perils of Moving from Oil to Synthetic Fuel for Vehicles

What happens in a place like Uzbekistan does not usually have an immediate impact on distant energy markets.

Sure, the former Soviet republic nestled in Central Asia has an abundant supply of natural gas; it's the 18th-largest natgas producer in the world. But the policy decisions coming from capital city Tashkent rarely prompt anybody in the West to even look it up on a map. . .

Until recently.

What's happening in Uzbekistan right now has great relevance for the rest of us—especially when it comes to how we power our vehicles.

The (Synthetic) Fuel of the Future

Uzbekistan has its share of infrastructure, economic, currency, and consumer problems. But several years ago, the government decided there was one problem it could do without: reliance on foreign oil.

Everybody from President Islam Karimov on down signed on to a new initiative. Beginning in 2012, all new cars registered in the country would have to operate on natural gas, not on oil. More specifically, the government mandated that synthetic fuels like CNG (compressed natural gas), LPG (liquefied petroleum gas), and LNG (liquefied natural gas) would be the fuels of the future—not gasoline or diesel.

It was a bold move, but then, there were prospects for a great deal of natural gas being extracted in the country. And Tashkent was playing to what it regarded as a national strength.

Now, much of the country's natural gas has low pressure, and that complicates its usage as a conventionally extracted and transported energy source.

So they decided to augment this policy by building a gas-to-liquids (GTL) facility facility—the first in Eurasia and only the third of its kind in the world (after Qatar and Malaysia). The plan was for the plant to produce annually more than 1.4 million tons (10.3 million barrels) of diesel, jet fuel, naphtha (a distillate product best known as a feedstock for high-octane gasoline), and LPG.

An agreement with Malaysian oil major PETRONAS and South African Sasol Ltd. (NYSE:SSL) followed in 2009 to create the joint venture charged with building the GTL plant. Sasol owns the technology and has built the other two GTL plants in existence.

Then the problems started. . .

This Is an Expensive Endeavor

A GTL project is a capital-intensive endeavor anywhere, and investors have to wait a long time for payback.

Estimating how much one of these gas-to-liquids facilities will cost is always a tricky proposition. But Uzbekistan has additional problems, owing to its geographical location, infrastructure problems, and low economic growth rate.

The primary problem emerged in attempting to estimate how much the resulting value-added products (CNG, LPG, LNG) would actually cost.

Hardly helps matters if trying to solve one problem merely creates another—like consumers going broke trying to fill their tanks!

One of the largest shortcomings of GTL is the efficiency of the overall process. There is a significant loss of raw material during the chemical reactions involved in the GTL cycle, making the overall cost effectiveness a very debatable matter.

(Sasol perfected the process for the South African economy during Apartheid, when international sanctions prevented the easy importing of energy. That may well have spurred on a technological breakthrough, but it hardly resulted in low-cost consumer products.)

In Uzbekistan, Sasol is now saying the GTL plant will cost considerably more than the $2.7B revised price tag offered last year. And PETRONAS is downsizing its partnership position in the joint venture supposed to build the plant.

This is becoming a major crisis in a country that intended to lead the world in moving from crude oil to natural gas as a vehicle fuel.

They have plants being built to retrofit vehicle engines, and they have a network of CNG and LPG stations going up nationwide to service those vehicles.

Unfortunately, they no longer have a guarantee that there will be fuel to put in them. . .

Why This Matters to Us (as Consumers and Investors)

In the U.S., there is an overabundance of unconventional gas from shale, coal bed methane, and tight gas wells. In fact, the current production base could easily increase the amount of natural gas being extracted by 25% to 30% a year, if the volume had a ready end use.

There are several outlets for new volume, like the additional transfer from coal to natural gas as the feeder energy stock for electricity generation, or the export of LNG to the hungry European and Asian markets.

However, the real prize would be using that gas to power our own vehicles.

Until the use of gasoline and diesel for transportation is confronted with a viable alternative fuel—capable of broad-based expansion and having a sufficient infrastructure for supply and service—we remain a crude oil-based economy.

Now there have been some dramatic developments, both in building (and retrofitting) vehicle engines to work on gas-based fuels and in providing a wider network for fuel dispensing (primarily CNG pumps, at the moment).

Already, fleets of trucks that used to run on diesel, and metropolitan buses that used to run on gasoline, are now using natural gas-based fuels.

Yet to make a transition genuinely possible, it is the passenger market that needs to be breached.

Even then, there will remain a need for gasoline and diesel availability during a transition period—and beyond.

Unless the EPA (or state equivalents) passes regulations outlawing hydrocarbon transport systems altogether, the traditional internal combustion engine will continue to occupy some percentage of the transportation sector—even when most of us are driving vehicles powered by natural gas or electricity (or hydrogen or. . .).

This is why what is happening more than halfway around the world in Uzbekistan has relevance for us.

To pull off a genuine transition in fuel source, three things are necessary: power systems (engines), a workable distribution system. . .

. . .and sufficient fuel.

As we move closer to looking at a serious transition in the way we move from one place to another, keep in mind that all three of these are necessary.

It doesn't help if somebody comes up with the new engine or builds the distribution network.

If we do not have enough fuel (preferably at less than an equivalent of $5 a gallon), it won't fly, Orville. And that may be what we're seeing in Uzbekistan right now.

Investing in the sector needs to have the same perspective. Don't expect to make a fortune off of this "Brave New World" unless all three factors are in the cards.

Sincerely,

Kent