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Gas-to-Liquid: Its Time Has Come

As outlined in an UFTO Note last year (17 May), Gas-to-Liquid (GTL) technology has been around for nearly a century. Known as the Fischer-Tropsch process (FT), it converts gas into a liquid fuel in the form of a refined crude or even a final product such as (clean) diesel. Until recently, conventional wisdom has been correct: use of GTL has been limited by high capital and operating costs.

[In the FT process, synthesis gas (or syngas, H+CO) is reacted in the presence of an iron or cobalt catalyst. End products are determined by the length of the hydrocarbon chain which, in turn, is determined by catalyst selectivity and reaction conditions. Possible end products include kerosene, naphtha, methanol, dimethyl ether, alcohols, waxes, synthetic diesel and gasoline, with water or carbon dioxide produced as a byproduct. Natural gas or coal can be the raw feedstock. ]

Several drivers, however, have combined to change that situation entirely:

– Dwindling world oil reserves and high exploration costs
– Impending limits worldwide on sulfur content in diesel fuel
– Vast quantities of “stranded gas” identified
– Technology advances, thanks to substantial programs by the oil majors

Very recently, these same oil companies have announced multibillion dollar GTL projects. Last October, Shell announced a $5 billion plant in Qatar, and estimated production costs at less than $4 per barrel. As the NY Times reported (Oct 16), Exxon Mobil is also building a plant in Qatar, at a cost of $10 billion, and the South African company Sasol is constructing a 34,000-barrel-a-day GTL plant in Qatar that is expected to come online in 2005. Together with ChevronTexaco, Sasol is negotiating with the government to build another 120,000-barrel-a-day GTL plant. Conocophillips announced its own $5B plant to be built in Qatar. (Seems Qatar is the place to be!) BP’s commercial pilot plant in Alaska is operational.

The petroleum industry has found more than 5,000 trillion cubic feet (tcf) of natural gas in remote locations, an energy equivalent of 500 billion barrels of crude oil. Most of this resource is abandoned in place because of the prohibitive cost of transportation infrastructure.

A new company, World GTL, Inc. was founded in 2000 by industry veterans. Their plan is to acquire ownership rights (in some cases production rights) to certain stranded gas fields at deeply discounted prices, and capitalize on opportunities that now exist to convert these “stranded” natural gas fields into synthetic petroleum products.

Why don’t the majors do this themselves? They do hold on to larger fields and may eventually develop them as LNG sources (or increasingly, with GTL), but they have no interest in smaller fields, e.g. under 3 tcf. This leaves a huge opportunity for players like World GTL. In fact, majors have already said they’d license their GTL technology and help with plant financing. (There is an analogy to the independent oil company movement over the last 20 years in the US. The majors decided that shallow water drilling in the Gulf was not going to work with their overhead costs and targeted IRRs, so they left the area to small independents who have done very well indeed.)

Turning Stranded Gas into Proven Oil Reserves

World GTL has come up with an interesting strategy. Once the development is done on a project (i.e. secure gas rights, do site plan, license technology, do preliminary engineering, arrange financing, sales agreements, etc.) previously stranded gas reserves with little to no value will essentially have been converted to “in the ground” gasoline and diesel inventories which can be easily monetized in the international oil market.

World oil companies are struggling to rebuild and expand their proven reserves which have dropped to dangerously low levels. Reserves can be borrowed against, and this critically important for these companies, not only to be able to invest in the development of those resources, but as a contribution to their balance sheet. The majors are spending an average of more than $5 per BOE (barrel of oil equivalent) just to find bookable reserves today (and that’s not even counting the “fully developed” cost to produce). Every dry hole drilled adds to the problem.

World GTL estimates that ten cents will cover development costs needed to get a BOE to “bookability”, and there is a long list of buyers who will jump at the chance to buy these BOE’s for $1. (Actually better than BOE, because it’s zero sulfur fuel.)

Thus venture returns are possible even before the plant is built. Once it is built, the fully developed cost of production is less than $5 per barrel of finished product, and refinery demand for sulfur free blending stock is already booming. New EPA regulations drastically limit sulfur content of diesel fuel beginning in 2006. Other regions are doing likewise, and refiners have very limited means to comply, especially in light of the lessening supply of lighter crude oil.

The company is currently raising $40 M to take their program to the next level and build two small commercial GTL plants. A great deal of information is available, including a collection of recent articles in the business press.

website: http://www.world-gtl.com/

Contact: David Loring,
President, World GTL Inc., New York, NY
212-858-7636 davidloring@World-GTL.com

[Where the majors have all gone into Qatar with projects that won’t produce anything until at least 2006, World GTL has projects ready to go to relocate and retrofit existing (idle) methanol plants using a unique process with a World GTL patent application filed. This unique process can put these facilities into GTL production with positive cash flows within 12-18 months. The engineering study for the relocation and retrofitting has been completed and there are guarantees involved. Significant project finance assistance is available from certain US government agencies for these specific projects.]

Small scale Gas to Liquids (GTL)

First demonstrated over 80 years ago, GTL has a long and colorful history. It was a mainstay of the German and Japanese fuel supply in WW2. Governments, major oil companies, and new entrants have made substantial investments over the years. While limited commercial operations are in place, the technology hasn’t progressed enough to enable widespread economic use.

Blue Star Sustainable Technologies Corp. has developed a set of new catalytic processes to convert natural gas into clean liquid fuels, as a new variant on Fischer-Tropsch. Based on a number of innovations (pat. or pat pend.), Blue Star reduces costs by simplifying the GTL process and by making small-scale units that can be standardized and mass produced for use in gas fields throughout the world, rather than seeking economies through very large units.

A pilot unit (six barrels per day) has successfully demonstrated all of the process steps. The Company is now building a 10-barrel per day demonstration unit (Blue Star 10) to prove integrated system performance. Designed to operate in remote oil and gas field operations and other applications, the Blue Star 10-demonstration unit is to be located in Wyoming’s Powder River Basin gas field, where very large potential unit sales exist.

BlueStar’s approach is unlike any other player in the GTL industry, with their focus on volume sales of small-scale (10 to 500 BPD) plants. All the others do large scale facilities (10,000 to 100,000 barrels per day), and can produce only a synthetic crude oil which requires further refining.

Remarkably, the liquid fuel produced by Blue Star –in the field– will be suitable for immediate use in diesel engines. (Lab analyses show good properties, and the fuel is EPA registered; engine testing has yet to be done.) The company calls this “Direct Diesel”. Their units could serve numerous potential applications worldwide for small stranded gas fields, as just one example. Coal bed methane also looks like an attractive market possibility, not to mention the 3.7 TCF of gas that is flared around the world each year.

The Blue Star 10 is to be the Company’s first commercial product. It is skid mounted and designed to be transported to remote locations by truck. The Blue Star 10 converts approximately 200 MCFD of natural gas into 10 BPD (420 gallons per day) of a clean synthetic diesel. It also generates 300 kW of excess electricity (6,807 kWh per day). Industrial grade potable water and low temperature heat are the other byproducts of the process. The Blue Star 10 produces minimal toxic or noxious emissions.

These attributes are intended to open markets for applications where either: 1) electrical and fuel delivery infrastructures are not readily accessible; 2) power and fuel are expensive; or 3) there may be on-site uses for heat or water. Broader mandates for clean fuel emission standards are supportive of market development. In particular, the fuel produced by the Blue Star process contains essentially no sulfur, surpassing diesel fuel standards to take effect in 2006. The fuel also has improved combustion characteristics.

Blue Star will capitalize on proprietary catalyst, hardware and system concepts that provide competitive advantages for the development of small-scale GTL facilities. Interestingly, some of Blue Star’s key innovations do not lend themselves to application at large scale, with the important exception of the “direct diesel” capability. Licensing of technology is a distinct part of the company’s future plans.

The Company is also developing a mid-scale unit capable of producing 500 BPD of high-grade synthetic fuel from 5,000 MCFD of natural gas. At this size, the Blue Star 500 can deliver twice the liquid conversion efficiency of the Blue Star 10. The Blue Star 500 would be useful for converting stranded gas fields in the 50 to 100 BCF range in North America and other parts of the world to a high quality, clean and transportable fuel. Many fields with these characteristics are believed to exist worldwide. There are also numerous locations with fields of similar size where gas is currently flared or vented that provide market opportunities for both the Blue Star 10 and Blue Star 500 plants. While significantly larger, the Blue Star 500 is still substantially below the commercial scale targeted by competing companies in the GTL industry.

In Phase I, a prototype of the Blue Star 10 will be completed in 2002 and tested at an application site in 2003. Manufacturing engineering, marketing and business development activities to prepare the Company for commercial introduction of the Blue Star 10 will also be completed during Phase I of the business plan.

Following Phase I, the Company expects to proceed to commercial sales and distribution in Phase II. Manufacturing will be outsourced, possibly offshore and adjacent to international markets as sales volumes grow. A business scenario projecting Phase II performance has been developed. In this scenario, sales of the Blue Star 10 unit are projected to reach 200 units per year in 2008. The first Blue Star 500 unit is constructed in 2007.

The Company seeks a participant to fund a significant share of the next phase of its program (Phase I) covering a two year time period. The total cost of the Phase I program is $12 million. The size of the ownership share available and the structure of such participation are negotiable. Emex Corporation (EMEX-nasdaq) currently owns the Company, and is committed to continuing as an active investor. A business plan is available.

Contact: Nicholas Vanderborgh, President
Blue Star Sustainable Technologies Corp., Arvada, CO
303-432-8630 nvanderborgh@bluestarstc.com

[Text adapted from company materials with further discussions with management.]