Natural Gas Oversupply: Converting a Problem into Profit

Natural-gas prices have hit rock bottom, reaching their lowest levels since the pandemic began. However, unlike during the height of the crisis when demand plummeted due to people staying at home, the current issue is oversupply.

The surplus of natural gas in the market has prompted some companies to employ an unconventional strategy: converting it into gasoline as a means of generating revenue.

The supply glut is a contributing factor to the multiyear lows in natural-gas prices. On Wednesday, natural gas futures dipped as low as $1.59 per million British thermal units—the lowest intraday price since June 2020. In just the past week, prices have plummeted by 23%.

To combat the effects of this price crash, natural gas producers have been scaling back their operations by reducing the number of rigs they utilize. However, another option being explored is the production of gasoline.

This approach may seem unorthodox considering that gasoline is typically derived from crude oil through a well-established and profitable process for producers, refiners, and gas station owners.

On the other hand, natural gas is primarily utilized for electricity generation, industrial power, and residential heating. Nevertheless, due to the excess supply of natural gas, producers are considering alternative uses for this abundant resource.

A subsidiary of Diamondback Energy, a leading U.S. oil and gas producer, has recently entered into a joint development agreement with Verde Clean Fuels, a microcap company. Their partnership aims to construct a natural gas-to-gasoline plant in the Permian Basin, located in West Texas at the core of Diamondback’s drilling operations.

While natural gas is cheap and readily available in many parts of the U.S., it is particularly abundant in Texas, where it is a byproduct of oil drilling. The booming oil production and lack of natural gas pipelines in the Permian Basin have resulted in a surplus, leading to a significant 70-cent discount on gas compared to Louisiana’s Henry Hub, where U.S. benchmark prices are established.

Furthermore, under the Inflation Reduction Act, the federal government has begun taxing energy producers that release natural gas into the atmosphere. Since natural gas consists mainly of methane, a potent greenhouse gas, this measure aims to curb emissions.

Given the escalating economic and regulatory pressures, natural gas producers are compelled to find alternative ways to utilize their surplus resources.

Turning Natural Gas into Gasoline: A Game-Changing Innovation

The concept of converting natural gas into gasoline has been around for quite some time, but few companies have successfully implemented this process. Verde, however, is paving the way as one of the only facilities in the U.S. that can produce commercial quantities of gasoline through this method.

To create gasoline from methane, Verde combines it with steam and subjects it to a series of chemical processes that transform it first into methanol, and then into gasoline. The resulting gas is notably cleaner than its crude-derived counterpart, as it lacks sulfur and other undesirable chemicals that often find their way into conventional gasoline.

Verde CEO, Ernie Miller, believes that the partnership with Diamondback serves as an important case study. With the current natural gas glut and insufficient pipeline infrastructure to accommodate production levels, finding viable solutions is becoming increasingly critical. As aging Permian wells become more “gassier,” meaning they produce more natural gas with each barrel of oil, producers who fail to capture and utilize this excess gas face escalating methane taxes. Consequently, converting it into gasoline presents a promising opportunity for monetization.

Even if natural-gas prices rise up to $3, Verde remains confident in its ability to generate profit from this process. Although the initial scale of the project may be relatively small, with an estimated production of 3,000 barrels of gasoline per day, Verde plans for future expansion in collaboration with Diamondback.

Kaes Van’t Hof, President of Diamondback, expressed enthusiasm about the project’s scalability, noting the potential for additional natural gas-to-gasoline facilities throughout their West Texas locations.

In summary, Verde’s innovative approach to transforming natural gas into gasoline holds immense potential for addressing the challenges posed by the abundance of natural gas and limited infrastructure. With Diamondback as a strategic partner, this groundbreaking solution may revolutionize the industry.

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