By Andrew Callus

LONDON (Reuters) - Environmentally-motivated restrictions on flaring off unwanted gas at oil wells are gathering strength and have the potential to stop new projects in their tracks, but a solution may be at hand.

Flaring at sites worldwide burns enough gas to satisfy a quarter of U.S. demand and puts 400 million tons of CO2 - 1.2 percent of emissions - into the atmosphere every year, according to the World Bank-funded Global Gas Flaring Reduction partnership (GGFR).

Oil companies are coming under increasing pressure from governments and environmentalists to end the practice and World Bank resistance to flaring and venting - the release of unburned gas into the atmosphere - is particularly effective in new discovery hotspot Africa, where developers need its backing.

Now engineers believe they have succeeded in miniaturizing the process that changes gas to liquid (GTL), marking a major leap forward in a technology whose economics have so far depended on massive scale.

Royal Dutch/Shell's Pearl GTL plant in Qatar occupies a site the size of London's Hyde Park to make gas into diesel and other refined products, but a miniature GTL converter would sit on a drillship and turn so-called associated gas into synthetic crude to be mixed with naturally occurring oil.

Privately-owned CompactGTL, took a step this week towards getting the first functioning offshore mini-GTL plant on to a working drillship.

Its prototype module, parked on a Brazilian beach, has been operating for 20 months using gas supplied by Petrobras.

It operates without flames, does not require an oxygen supply, and uses only small volumes of fluids in a shipping container-sized device designed to work aboard the floating production storage and offtake (FPSO) vessels that are widely used in modern offshore oil projects.

SBM Offshore, the world's biggest supplier of leased FPSOs, on Wednesday announced a tie-up with CompactGTL.

"This agreement opens the door for the world's first, fully integrated, offshore modular GTL solution for the upstream industry," Netherlands-based SBM said in a statement.

CompactGTL's Director of Business Development, Iain Baxter, said he has six potential customers signed up for feasibility studies, all household names in the international oil industry.

Petrobras and Gazprom are the only two he will name.

MORE THAN EXTRA OUTPUT

The extra output is a bonus, but it is not the main aim, and would not cover the cost of installation by itself. The GTL facility pays for itself by making sure so-called 'associated gas' does not become a barrier to the costly process of the main prize - finding oil.

"The economics are all in the de-risking," Baxter told Reuters on the sidelines of the Gastech conference in London. "For now, it's all about freeing up oil production."

CompactGTL, controlled by private equity investor Coller Capital, has engineering development partnerships with Johnson Matthey, Fluor Corp and Kawasaki Heavy Industries.

It was originally an offshoot of the UK Atomic Energy Authority and was incorporated in 2006.

The company is not alone in the industry, but its main competitor, Japan-based Toyo Engineering Corp which is also developing a prototype for Petrobras, is aiming further down the technology chain with a view to making its GTL plants economically viable in their own right.

FLARING BANS PROLIFERATE

There are other ways to dispose of associated gas.

Some fields re-inject gas into the well to raise pressure and enhance oil recovery but in deep and ultra-deep offshore operations this can become prohibitively expensive. In some geologies it can damage the reservoir.

Piping the gas ashore, or using turbines to generate electricity aboard the rig and sending the power ashore by cable, are other solutions, but both require a ready market.

Neither is practical or viable in the most remote locations.

Compression and liquefication of the gas for shipping are options that have yet to be tried, and with existing technology they would be very costly given the need for special tankers and other equipment.

So flaring has become the favored approach at many oil projects worldwide with Russia, Iraq and Iran the leaders.

GREEN FIGHTBACK

But governments and environmentalists are fighting back.

The GGFR has recruited 20 of the world's top international and national oil companies and a larger number of countries to its cause, and there are now few places in the world where flaring from new projects is tolerated.

Notable exceptions include Russia and the United States, even though flaring at some of the huge new onshore fields in North Dakota and elsewhere is being fiercely opposed by U.S. campaigners.

According to a study produced by consultants Fugro Robertson for CompactGTL and based on field data from analysts Wood Mackenzie, there are some 800 oilfields worldwide and 73 billion barrels - equivalent to about half the reserves of Iraq - where CompactGTL's technology is applicable.

"Flaring is always going to be the cheapest solution, so it's the restrictions on how you can treat the gas that make the value of this technology higher than it otherwise would be," said David Fishman, chief economist at Fugro Robertson.

Offshore Brazil - site of some of the world's biggest recent oil finds - is the perfect market for mini-GTL.

Many fields there are more than 150 km offshore in water as much as 3,000 meters deep. Brazil's government is one of the many that has made most flaring illegal and has cut the practice by 21 percent in the past year.

Baxter hopes GTL-equipped FPSOs can become an industry norm and provide the funding to close the technology gap between giant GTL and mini-GTL.

"We need to make a commercial return first. Then we can re-invest that to bring on the next generation of technology," he said.

(Additional reporting by Jeb Blount in Rio de Janeiro; Editing by David Cowell)