Technological improvements and investment commitments by the world's largest oil companies suggest that the gas to liquids industry (GTL) is likely to transform itself from a small, specialized producer to a large scale fuel producer over the next decade. As expansion of GTL proceeds, the industry may become a major consumer of natural gas, placing it in direct competition with the growing liquefied natural gas (LNG) industry for access to natural gas supply. If competition leads to tighter than expected natural gas supplies, the result is likely to be higher prices for natural gas consumers over the same time frame that the United States looks to world LNG markets to meet increasing domestic demand. Natural gas consumption in the United States is projected to increase by 18.6% to 26.1 trillion cubic feet per year in 2030, from a baseline of 22.0 trillion cubic feet per year in 2005, according to the Energy Information Administration (EIA) in the Annual Energy Outlook 2007 (AEO). Almost all of the increased demand over that period is expected to be met through an expansion of LNG imports to the United States. Large scale expansion of LNG consumption in the United States is expected even though LNG has several drawbacks. Drawbacks to LNG expansion include the large capital outlays for gas receiving plants in the United States, the political instability and non-democratic governments of some potential LNG producing nations, domestic opposition to facility siting, the lack of a transparent market to determine prices, and the lack of an adequate non-dedicated, competitive, tanker fleet. The major offset to these impediments is the belief that there are very large, economically stranded, volumes of natural gas available in the world waiting to be developed and brought to consuming markets. As these reserves are brought to market, it might mean stable supply, and possibly reduced prices, for U.S. consumers. This report analyzes the development of an industry, GTL, which may grow into a formidable competitor to LNG for worldwide natural gas supplies. While the GTL industry is likely to compete for natural gas supplies, its output, which is mainly liquid petroleum products, such as diesel fuel, will do little to satisfy natural gas demand in consuming nations. The resulting net reduction in natural gas supplies may result in instability in the form of tighter than projected availability, and higher than expected prices in U.S. natural gas markets. These factors may be considered additional impediments to the projected increased dependency on LNG. This report provides and analyzes basic information concerning the GTL industry to inform debate on broad energy legislation, as well as more specific natural gas legislation on supply issues including an Alaskan natural gas pipeline as well as LNG facility development. The GTL industry can be viewed as an alternative to oil refining. The basic technology of the industry dates back to 1923 when two German scientists, Franz Fischer and Hans Tropsch (FT), invented a process that could convert natural gas to a hydrocarbon mixture which could then be upgraded into petroleum products. The FT technology provides an alternative to traditional crude oil refining, as liquid petroleum products, most notably diesel fuel, can be produced from a non-liquid input, natural gas. The process was used by both Germany and Japan during World War II when their access to adequate oil supplies was disrupted by allied forces. In the 1960s, South Africa used the FT process to produce liquid fuels when the United Nations imposed oil import sanctions on the apartheid government. The South African plant used coal as a primary input rather than natural gas, demonstrating the flexibility of the FT process. GTL production continues in South Africa at the Mossel Bay facility, operated by Petro SA. The plant has a capacity of 22,500 barrels per day of petroleum products. Neither the World War II facilities or the initial South African facilities were commercial, profit making enterprises; rather, the facilities were technological solutions to politically disrupted markets. Under normal market prices they would not have been viable. From the 1960s through the 1990s, several companies specializing in synthetic fuels, as well as joint ventures between major oil companies and synthetic fuels companies, explored and developed the basic FT technology as well as other technological approaches. Improvements in cost, efficiency, and plant scale were achieved. Today, enhanced catalyst design is developing as a key factor in improving the production process and reducing capital costs per barrel of product. The first fully commercial GTL plant was a 12,500 barrel per day (bpd) plant built in Bintulu, Malaysia in 1993, and owned by Shell. However, an explosion at the plant in 1997 closed it until 2000. Shell, along with other major oil companies has remained interested in developing the GTL technology. ExxonMobil, ChevronTexaco, ConnocoPhillips, and Marathon all either have demonstration plants running, or have committed to investing in GTL investments, mostly in Qatar, but also in Nigeria and Australia. In 2001, Shell asserted that the capital expenditures for a new GTL facility might decline from $50,000 per barrel to $20,000 per barrel as a result of scale economies consistent with improved technology. The lower level of capital costs per barrel translates into approximately $2 billion for a plant with a capacity of 100,000 bpd. This level of cost is comparable to the cost of a new oil refinery if built in the United States. More recently, Chevron asserted that the capital cost of building a small, 17,000 bpd GTL plant are about $25,000 per bpd, and experts at BP America assert that the capital costs can approach $20,000 per bpd of product output. Economies of scale for very large plants, once they demonstrate technological feasibility, might reduce capital costs even further. Rising capital construction costs could negate the economy of scale effect as is being seen in 2007. Chevron also estimated that the total of fixed and variable costs for a 17,000 bpd plant are about $5.00 per barrel. If natural gas were available at 50 cents per thousand cubic feet, according to Chevron, the cash costs of GTL production might total $10 per barrel. The price of natural gas assumed by Chevron, however, is only a fraction of the current price in the U.S. More expensive natural gas inputs would raise the per barrel cash cost of GTL products. The low price of natural gas used in Chevron's calculations underscores the importance of a large, economically stranded source of natural gas for GTL production. GTL is an attractive option for nations seeking to develop large natural gas holdings, because traditionally they have had only two choices. If the geography was favorable, they could develop their gas fields and connect them by pipeline to consuming markets. If that alternative was not feasible, they could invest in LNG facilities and ship their gas to consuming markets by tanker. In either case, the final product they offered was natural gas, generally for use as a fuel for electric power generation. If the consuming nation had significant domestic gas supplies, the price earned by the producing nation would be based on the price of gas determined in the consuming market. If the consuming nation has no domestic natural gas supplies, the price is likely to be determined as part of a negotiated long term contract, in many cases indexed to the price of oil. GTL offers nations seeking to develop natural gas resources a third alternative, effectively allowing them to diversify their resources beyond natural gas markets. Diversification allows the producing nations to compare relative rates of return from GTL and LNG before choosing an investment strategy. The benefits of diversification are enhanced because the products of the GTL industry do not compete with LNG in the natural gas product market, they compete with petroleum products. The GTL product mix includes a variety of middle distillates, including a large proportion of ultra clean diesel fuel. This product mix is desirable, and likely to earn a premium return, for two reasons. In the European market, and possibly in the future the North American market, diesel powered automobiles and light trucks are expanding their market shares and increasing their fuel needs. In addition, air pollution regulations are clearly moving in the direction of very low, to zero, sulfur content. Diesel fuel derived from GTL processes can meet the 2007 U.S. standards for sulfur emissions without further processing. Producing complying diesel fuel from crude oil at U.S. refineries requires investment at those refineries that might total $4 to $13 billion to meet mandated on-road diesel fuel requirements. As world demand for ultra clean fuels increases, it is likely that the ultra clean fuels produced by the GTL industry will command premium prices, allowing GTL investments to be profitable. The pricing of diesel fuel in the world market is different from that of natural gas, however. Since diesel fuel that meets national environmental regulations is a fungible product whether derived from a traditional oil refinery or from the GTL industry, and is perfectly substitutable, the price received by gas producing nations for their GTL-processed natural gas is far more likely to be influenced by market fluctuations than pipeline natural gas or LNG. The potential for market induced price volatility represents a greater long term risk for producing nations pursuing a GTL-based investment strategy compared to a long term, negotiated LNG supply contract. The value of diversification offered by the GTL industry is that it gives countries with undeveloped natural gas reserves expanded economic choice. Producing nations can choose the alternative use for their gas reserves which offers the highest potential return. If LNG, for example, is the only technologically feasible use for currently stranded natural gas, then it is likely that profit margins associated with LNG will be driven down as more and more nations supply the market. The choice of GTL allows the returns to both LNG and GTL to be balanced as nations make economic choices about which direction they will take to commercialize their natural gas resources.