High oil prices have lifted producer interest in liquids-rich natural gas plays; they’ve also pulled up the economic attractiveness of converting gas to liquid fuels and other products.

Analysts at Credit Suisse took note of the recent announcement by Calgary-based Talisman Energy Inc. and South Africa-based Sasol Ltd. Calgary-based Talisman is selling a 50% working interest in its Farrell Creek assets in the Montney Shale to Sasol for C$1.05 billion. As part of the deal, the partners said they will weigh the market viability of converting gas to liquid fuels using Sasol’s gas-to-liquids (GTL) technology.

While “the relative breakeven price for converting natural gas to liquid fuels has risen…the rise has been much lower than the relative increase in [the] value of oil relative to natural gas in North America,” the Credit Suisse analysts said in a recent note.

“Until this year [2010], GTL was considered by some market participants a ‘wannabe’ process, which would never really emerge fully. But North American shale is breathing new life into the process, so GTL may literally only now be coming of age.”

About 15 years ago some GTL advocates were predicting that the process to convert natural gas to gasoil, liquid propane gas and lube oil could work in the marketplace at oil prices as low as $15/bbl, Credit Suisse noted. It turns out that $50/bbl is closer to the magic number, the firm’s analysts said, “in line with the costs of deepwater and most Canadian oilsands projects.”

Products of the GTL process include GTL base oils, which are an alternative starting point for the manufacture of finished lubricants, according to Royal Dutch Shell. “GTL Gasoil is an alternative and economic diesel-type fuel that will contribute to the diversification of diesel fuel supply,” the oil and gas major claims on its website. “GTL Kerosene can be used for heating and lighting but its main use will most likely be for aviation, helping to diversify the aviation fuel supply.” Additional normal paraffin derived from the GTL process can be used to make detergents, and GTL naphtha is an alternative feedstock for chemical manufacturers.

According to Credit Suisse, there will be 300,000 b/d of GTL capacity in operation once the first phase of the Pearl GTL project, a venture of Shell and Qatar Petroleum, is completed in Qatar. South Africa leads in capacity, followed by Qatar and Malaysia.

“When it comes to lube oils, given the more limited size of the global lube oil market, one large GTL plant with a 100,000 b/d capacity should be able to produce up to 25,000 b/d of lube oil, with a major impact on that market,” Credit Suisse said.

A GTL facility in the region could provide a strategic alternative to traditional North American pipeline or liquefied natural gas (LNG) marketing. “The outlook for GTL could be very positive if North American natural gas prices continue to decouple from oil prices. The GTL process produces premium, clean liquids fuels,” the companies said.

For its part, Sasol is far from committing to a GTL project in the Montney. “It is envisaged that the [GTL] feasibility study will commence during the first half of 2011 and would take more than 12 months to complete,” a spokesperson told NGI’s Shale Daily. “The potential site for a GTL facility in North America is yet to be defined, but certain locations within the Alberta province have been identified as potential locations for a GTL facility.”

Talisman said the deal allows it to develop the Farrell Creek area and unlock some of the value of the estimated 44 Tcfe of net contingent resource it holds across the Montney Shale play in northeastern British Columbia. Farrell Creek represents about 22% (9.6 Tcfe) of Talisman’s resource potential in the play and about 27% (51,000 net acres) of the company’s 190,000 net Tier 1 acres of land in the Montney.

“This is a strategic move towards unlocking some of the value of our Montney assets for us and our new partner, consistent with the strategy of derisking and developing Talisman’s very large shale opportunities in the region,” said Talisman CEO John A. Manzoni.

Sasol, which is based in Johannesburg, South Africa, will pay 25% of the consideration (approximately C$260 million) in cash at closing and carry 75% of Talisman’s future capital commitments in the Farrell Creek area to a total of approximately C$790 million. The company will acquire a 50% working interest in all Talisman lands, existing wells and processing facilities in the Farrell Creek region. Talisman and Sasol will each own 50% of the Farrell Creek assets, with Talisman as operator of the partnership. Closing is expected in the first half of 2011.

The play has been largely derisked and production at Farrell Creek was expected to exit 2010 at 40-60 MMcfe/d. Talisman’s processing facilities at Farrell Creek have been expanded to 120 MMcf/d, and the company has secured more than 500 MMcf/d of takeaway capacity from the region, it said.

“The price appears to be very favorable for a 50% interest in 22% of Talisman’s resource potential in the Montney,” analysts at Barclays Capital said in a note. “The transaction implies a value of $6.5-10 billion for Talisman’s assets in the Montney. We would caution, however, that evaluation of the Farrell Creek assets is much further along than the rest of Talisman’s assets in the play…This transaction should allow the company to accelerate its Montney drilling activity.”

The location of the Farrell Creek assets and their access to North American pipeline infrastructure makes them sustainable on a long-term, stand-alone basis, Sasol said. “The existing pipeline infrastructure in North America also allows for other gas monetization options in the future, such as providing for the potential to use the gas as feedstock in an integrated GTL project in the region.”

Sasol has operating GTL projects in South Africa and Qatar, a project under construction in Nigeria and proposed developments in a number of countries around the world.

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