Former Clinton Administration Officials Working On Gas-to-Liquids Superproject

Arkansas may score another superproject coup if a full-scale gas-to-liquids (GTL) processing refining facility developed by two former top Clinton administration officials – Gen. Wesley Clark and Rodney Slater – and a team of energy industry veterans comes to fruition, Talk Business & Politics has learned.

Little Rock-based Energy Security Partners LLC (ESP), co-founded by Clark and former ExxonMobil executive and chemical engineer Roger Williams, is moving forward to build a GTL processing plant that will be the first of its kind in the U.S. at a price tag that will exceed “several billion,” according to two of the foremost GTL experts in the energy sector.

The project, considered by some to be the “holy grail” of the alternative energy sector, is a planned processing and refining facility that would turn cheap natural gas into premium quality petroleum product such as diesel, gasoline and jet fuel using a proprietary technology first developed by the Nazi war machine in World War II.

ESP officials declined several opportunities for an in-depth interview with Talk Business & Politics, but the company’s website says the Little Rock partnership “is developing a world-scale gas-to-liquids (“GTL”) processing facility to produce premium quality clean diesel, motor gasoline and jet fuels from abundant natural gas in North America.”

BIG BUCKS
Such a project, according to Roy Lipski, CEO of Velocys plc, a publicly traded, United Kingdom-based firm that recently broke ground on a GTL project earlier this year and the pioneer of the “Syntroleum process” that developed synthetic jet fuel for an Air Force pilot program, would likely need a capital investment of between $3 billion to $10 billion to become fully operational.

William Carpenter, who is listed as senior vice president of Energy Security Partners, responded to an inquiry from Talk Business & Politics saying that ESP had been working on the GTL concept for several years, and “we realized that at some point news would begin to spread about a project that may have a big impact on Arkansas.”

“I’d rather you have the opportunity to get a few points from us directly. Obviously we have yet to formally announce any project because we are still evaluating some foundational aspects of developing a GTL plant,” Carpenter said. “However we are also headquartered in Arkansas and we believe Arkansas may be a unique place to consider building and operating such a facility that would produce clean-burning transportation fuels, create jobs, and enhance Arkansas’ economy.”

Since Carpenter’s note, ESP officials have declined to offer any additional comments to Talk Business and Politics about their plans. On the company website, Clark is listed as the non-executive chairman and co-founder of the company. The four star retired Army general, who served as the Supreme Allied Commander Europe of NATO from 1997 to 2000, is also now chairman and CEO of Wesley K. Clark & Associates in downtown Little Rock.

Mark Agee, former CEO of Syntroleum Corp. and current partner in the Emerging Fuels Technology consulting firm in Broken Arrow, Okla., said there has been much discussion of GTL projects in the U.S. and across the globe over the past few years, but the huge capital costs and fluctuating price of crude oil have prevented such projects from moving forward.

“In the case of what Energy Security Partners is proposing to do, when oil was around $100 and natural gas was in the range of two dollars, you can make that work in theory,” Agee said. “Whether or not they can get past the project finance hump has yet to be demonstrated as far as we know.”

THE ECONOMICS, THE CONNECTIONS
Today, not only would a gas-to-liquids facility cost billions to build, but the economic rationale for such a project would be difficult to reconcile with crude oil prices plunging below $50 a barrel and equity financing for such a project difficult to put together, Agee said. The economics are still driven by the ratio between the value of natural gas versus the value of oil and the finished product, he added.

Still, the former Syntroleum executive who left the now defunct Tulsa-based company in 2002, said he is impressed by the team of well-connected executives, power brokers and industry experts that ESP has been able to assemble. Besides Williams and Clark, former U.S. Transportation Chief Rodney Slater is listed as a company director. The ESP leadership roster includes some of the top GTL experts in the energy industry and several executives that have worked for energy giants such as Exxon, Arco, BP and Sasol.

Agee also said with former Clinton administration officials on the ESP team, the Little Rock based energy firm may be able to get government aid to help subsidize a GTL project, similar to how the renewable energy industry has previously received tax credits and subsidy assistance for approved projects.

“Because they have a lot of government connections, they may be able to find a way around the (capital costs),” Agee said. “Clearly, they have a well-connected group of people, if they wanted any kind of government support – they know which number to dial.”

In other countries where GTL projects have been developed, government subsidies have been crucial even when oil giants like Chevron and Shell are involved. “Government subsidies can change the rules. If the government gives you half the money … and interferes, it can change the economics,” said the Oklahoma GTL pioneer.

Velocys’ Lipski agrees. His company, which has offices in London and Houston, has been the talk of the GTL industry in the past year with announcements of four different projects in the pipeline. But, Velocys is focused on modular small-scale GTL projects that are less than 5,000 barrels a day (bbl/d) and able to convert unconventional, remote and untapped natural gas sources into valuable liquid fuels.

Both Lipski and Agee said that word has been out in the GTL community and energy sector that a group of investors led by Gen. Clark and Williams was involved in some type of “full-scale project,” meaning that it would be capable of at least 20,000 bbl/d of production.

In addition, a Houston based gas-to-liquids consultant who has seen parts of ESP’s plan, said Clark and co-founder Roger Williams have been making the rounds at renewable energy conferences and investor-related confabs to tout ESP’s top-notch team of experts and energy executives that are developing plans for the rare GTL processing facility in the U.S.

“They haven’t been extremely forthcoming about what their various projects are, but they are ‘working on it,’” Agee said. “Maybe they are waiting for the right time. Telling the world what you are doing too soon can work against you, rather than for you.”

COMPETITION
According to the U.S. Energy Information Administration (EIA), there are currently only six full-scale GTL plants operating globally, and they all are operated solely or jointly by global oil giants Shell and Chevron, and South Africa’s energy and chemical conglomerate Sasol.

Shell operates the Pearl GTL plant in Qatar, which is the largest gas-to-liquids processing plant in the world. The UK oil giant also operates two other GTL plants in Malaysia. Sasol operates one in South Africa, and the fifth is a joint venture between Sasol and Chevron in Qatar.

Another plant in Nigeria, developed by Chevron, Sasol and the Nigerian National Petroleum, just came online last summer after nearly 16 years of delays. That 39,000 bbl/d project near Lagos began development in 1998 at a cost of $1.9 billion, but ended up with a final price tag exceeding $10 billion.

In the U.S., there are three proposed GTL projects: in Lake Charles, Louisiana; Karns City, Pennsylvania; and Ashtabula, Ohio. The Lake Charles facility, also developed by GTL producer Sasol, is the only commercial-scale project on the drawing board, which would make it the first of its kind in the U.S.

However, Sasol announced in late January that the $14 billion, 96,000 bbl/d project was put on the backburner “to conserve cash in response to lower international oil prices.”

“Albeit at a much slower pace, we will continue to progress the U.S. GTL facility. This will allow us to evaluate the possibility of phasing in the project in the most pragmatic and effective manner. North America and our home base in Southern Africa remain strategic investment destinations for Sasol,” said David Constable, President and CEO of the South African energy giant.

The Sasol GTL plant is part of a larger $22 billion ethane cracker and derivatives complex in the Lake Charles area, which Louisiana economic development officials have called the largest foreign investment in the state’s history. Sasol officials said the GTL plant slowdown is part of the companywide cost-cutting program over the next 30 months.

The remaining projects in the U.S. are all tied to Lipski’s Velocys, which raised nearly $85 million in equity funding last year for GTL projects in Oklahoma, Oregon, Ohio and the Marcellus Shale in Pennsylvania.

“Our vision for bringing smaller scale GTL to the mainstream of the industry is fast becoming a commercial reality. Over the next 24 months, we will be focused on working with our partners to successfully deliver on a number of high profile commercial projects in our growing pipeline of opportunities,” Lipski said.

On May 15, a joint venture project headed by Velocys called Envia Energy LLC held a ground-breaking ceremony for its first gas-to-liquids plant in Oklahoma City. Besides Velocys, Envia’s other partners include Fortune 500 companies Waste Management and NRG Energy, and Ventech Engineers International, all based in the Houston area.

Lipski told Talk Business & Politics that when the project begins commercial production sometime in 2016 it will be a historic moment in the history of the GTL industry, and mark a turning point in the industry’s efforts to commercialize landfill gas.

“I believe this project will be a landmark event for the GTL industry because we will be the first,” he said.

Velocys and Calumet Specialty Products are also working on plans to expand a specialty products facility in Karns City, Pa., to include a GTL plant. Costs for that 1,100 bbl/d facility located in the Marcellus shale play is expected to top $1 billion, sources say.

Lipski said Velocys is also working on smaller scale GTL projects in Ohio and Oregon expected to come online in 2016.

COMPLEXITIES
Still, Lispki believes it will be difficult for any company or group of investors to complete the first full-scale GTL project in the U.S., mentioning the “large” Arkansas project and Sasol’s stalled, over-budget Louisiana processing facility in Louisiana.

“These (large) projects suffer from costs and schedule escalations,” Lipski said. “We saw this last year with the (Louisiana) megaproject that was 50% over budget and 50% over schedule. These large projects put huge strain on supply chains.”

The British GTL executive also said that the location of the ESP process facility would also be crucial. It would need to be near a readily available natural gas source and in a location that has access to rail, river, highway and other modes of transportation to get product to market.

Lipski and Agee agreed that if ESP is in the advanced stage of signing agreements to fund this project, they likely already have customers who have committed to buy their product. “You never start such a project without those commitments,” Lipski said.

Lipski said it still all comes back to capital costs. “A small project is so much more financeable,” he said. “Trying to find $3 billion to $10 billion to finance a large project is difficult in the marketplace.”

He continued: “If you are asking someone to bet a $100 million versus $2 billion or $3 billion on a new technology, obviously $100 million is a much easier ask.”

SUPERPROJECT POTENTIAL
Although Clark or company CEO and co-founder Rogers Williams declined Talk Business & Politics’ request for additional comments concerning the planned project, sources say a GTL plant on the drawing board would easily surpass the state’s requirement for a “superproject.”

Amendment 82 allows the state to issue bonds to pay for infrastructure improvements on projects that exceed $500 million in investment and create at least 500 jobs. Arkansas lawmakers recently held a special session and passed legislation that overwhelmingly approved an $87 million bond financing package for Lockheed Martin’s tactical vehicle production facility in East Camden.

Besides Clark, Williams, Carpenter and Slater, the ESP leadership roster includes several high-level energy industry executives and other managers who are recognized experts in the GTL sector. For example, ESP Chief Development Officer Leon Codron is former president of Arco Indonesia and has worked across the globe on difficult exploration and production projects.

ESP’s leadership team also includes several experts in Fischer Tropsch technology, which is hailed in the energy industry because of the near impossible process of turning cheap and stranded natural gas into a usable liquid such as gasoline, jet fuel or diesel.

It was first used by Germany during World War II to turn coal into synthetic fuels. In Africa, Sasol used the same technology to produce fuels to maintain that country’s economy and military during the Apartheid era. During his helm at Syntroleum in the 1990s, Agee and his brother, Ken, developed more than 180 patents to produce GTL fuels using the Fischer Tropsch technology.

Their so-called Syntroleum technology produces a synthetic diesel fuel which is sulfur and aromatic free, and was designed to reduce costs in critical, capital intensive areas while providing excellent product yields. Between 2000 and 2008, Syntroleum and other GTL companies worked with the Air Force to develop a so-called “syngas” to help lower the military’s costs for petroleum products and jet fuel.

Velocys’ technology, which has more than 900 proprietary patents, is specifically designed for smaller scale projects. In its current project, it is building a modular power plant at its operational base in Houston and will deliver the Fischer Tropsch fuel reactor to the planned site in Oklahoma City once completed.

Three weeks ago, Velocys’ stock received a big boost when Russian billionaire Roman Abramovich increased his holdings in the GTL development company by 14.3%. Abramovich – owner of the Chelsea soccer team in the English Premier League – now owns more than 13% of the British company that trades on the London stock exchange.