Small gas-to-liquids plants get a huge boost

This week, Waste Management WM +0.61%, Inc., Ventech Engineers International LLC, NRG Energy NRG +0.86%, Inc. and Velocys plc (VLS.L) announced a joint venture to use small-scale gas-to-liquids (GTL) plants to create fuels and chemicals from biogas and natural gas.

The members have committed to work exclusively through the JV in the U.S., Canada, the U.K., and China. This announcement is a very big step in the maturation of the small-scale GTL industry, and it is a very big vote of confidence in the technology. Last year, I interviewed the CEO of Velocys, Roy Lipski, about the potential to successfully bring this technology to the United States and he was cautiously bullish. Today, he speaks with the quiet optimism of an entrepreneur who is finally seeing the financing, technology, project development capabilities and access to fuels aligning.

Image: Velocys

Speaking on the phone from England (although he has now relocated to Houston to be closer to the action), Lipski pointed out that, with this announcement, “this is the first time that large companies have come out and committed to small-scale GTL. It is, we believe, the beginning of the growth in this industry… this JV – which has been under development for quite a while – could be the catalyst we are looking for in this industry.”

The GTL process utilizes the Fischer Tropsch process to convert gas to liquid fuels, a technology dating back to the 1920s and utilized by both Germany in World War II and South Africa during its isolated apartheid era. This process involves three steps:

1)    Conversion of methane into carbon monoxide and hydrogen (syngas) through the reforming process.

2)    Reacting the syngas in the FT reactor to create what are known as long chain hydrocarbons.

3)    Conversion of these hydrocarbons into diesel, naptha, and ‘waxy bottoms,’ which may be further converted to additional diesel and naptha.

While it has been around for nearly a century, GTL has generally been associated with enormous facilities owned by the oil majors and petrochemical giants.  That may be about to change dramatically.

Image: Velocys

Lipski comments that the stature of the smaller GTL technology is raised significantly with the commitment of Waste Management and NRG Energy.

The two companies in particular, Waste Management and NRG Energy are Fortune 500 companies…the partnership has come together essentially to build small GTL plants to convert biogas – technically gas coming off landfill sites – and turning that into useful fuels and chemicals, which is novel. This is a milestone in terms of the renewable fuels industry, because this will be an example of truly advanced biofuels, which government has been keen to incentivize but difficult to get to work economically.

The other new and critical development is the comingling of biogas and conventional natural gas. It allows the partners to improve the economics, since they can take all of the landfill gas produced, and add natural gas from the market to attain the sized facility they desire, rather than having to size to the landfill gas opportunity.

Lipski observes that this approach,

improves economies of scale while still fully utilizing the biogas.  We can produce a truly fungible high quality diesel or jet fuel. We can do at small scale for first time and by comingling we can achieve even better economics.

He also notes that, “To have Waste Management select Velocys technology exclusively is a huge endorsement.”

Waste Management is no stranger to the landfill gas game – the company currently generates about 550 MW of electricity from 270 waste-to-energy landfill sites. The company has also had a pilot small-scale GTL unit in operation for over 10,000 hours at its East Oak Landfill located in Oklahoma (for comparison’s sake, there are 8,760 hours in a year).  This site will be home to the partnership’s first commercial project. Lipski comments that,

The project is already in the advanced engineering stages and it is quite likely to be the first GTL plant up and running in North America.  Our joint venture has plans to do multiples of these plants.  The output will be fuels and chemicals. The landfill gas is cheap and you can get (tax) credits for making fuels out of it.

Meanwhile, NRG brings to the table their vast experience in energy project development. With 46,000 MW of generation under management across the U.S., and a very broad set of project management skills, they bring the requisite expertise to the table.

Lipski thinks we may have seen a sea change in the way GTL is seen.

The new point of view may be that small scale GTL is the way that industry does this.  The complexity, risks, cost overruns, and strains on supply chains make mega-projects impractical. I am of the opinion that, long-term, smaller scale GTL may well exceed the installed capacity of larger plants.  It will certainly happen more quickly than the large scale ones.  I am out here saying small scale is the way forward.

He may have a point. The big plants are not cheap, and the potential for cost overruns is significant. Royal Dutch Shell recently canceled its planned Louisiana venture after the price tag jumped from $12.5 to over $20 bn.

With these small-scale GTL plants, the investments are in the tens to hundreds of millions, rather than tens of billions, though Lipski notes that the cost “depends on size.  I think for this concept you could start doing it in a $50 million range, but the bigger you do it, the better the economics become.”

Small-scale GTL, Lipski observes,

also fits better with the way feedstock is distributed. When we locate, we look for landfill gas.  It’s quite a simple input-output equation.  The input is landfill gas and the output is fuels.  Fortunately, landfills are close to population centers, so there is always a ready market.

There may also be the potential to target small-scale GTL to stranded gas assets, that may not be economical to access through conventional means, such as building new pipelines.

You look at cheap gas, which is found in pockets like the Marcellus, and for the mismatch between production capacity and infrastructure.  Infrastructure cannot grow fast enough to keep up with production capacity.  In some parts of Marcellus, you may be able to get ethane for free because the producers cannot get it to market.  Liquid rich fields may also have low cost methane as a byproduct.  Those mismatches are all over the country, and they will continue to be so, because the unconventional (horizontal shale oil and gas) phenomenon is everywhere.  The U.S. has by far the most advanced infrastructure.  And if you have those mismatches in North America, you will have them anywhere else that shale is available.

Lipski is passionate about the product, the opportunity, and his company, and he is building for the future.

I’m 43 and I’ve been an entrepreneur since the age of 25.  I’ve always thought of entrepreneurs as people who go build companies and sell them and then do it all over again.  About three years ago, I realized this is not the only template for being an entrepreneur.  I want to build a great company that I retire from when I am 65 or 70, and I can say ‘this thing will survive, endure, and have a success far beyond my own days’, like an Apple or Microsoft type of model.  I believe these great companies are born out of dislocations in the marketplace – which we are sitting on right now – with the right product at the right time.  I look forward to the day when we have the conversation when you and I say, ‘remember when we had that discussion in 2014? Now we are a Fortune listed company.’

 http://www.forbes.com/sites/peterdetwiler/2014/03/28/small-gas-to-liquids-plants-get-a-huge-boost/?ss=business:energy