Jack B. Holmes and Greg Jenkins
Syntroleum Corp.
Tulsa, Okla.
The economic promise of the gas-to-liquids (GTL) market has long been clear. There are approximately 3,000 tcf of stranded natural gas worldwide - gas that is too remote or uneconomical to bring to market using conventional methods.
At a time of increasing demand for clean, reliable energy supplies, GTL technology could convert that stranded gas to roughly 300 billion barrels of ultra-clean fuels - an amount that far exceeds the oil reserves of Saudi Arabia.
Based on the Fischer-Tropsch chemistry first developed in the 1920s to convert coal to fuels, GTL today can convert natural gas to a clear diesel fuel and other products, such as lubricants, that are virtually free of the pollutants found in conventional diesel, such as aromatics, sulfur, and metals.
These fuels meet all current and proposed US and European environmental regulations. They can be used either as pure fuels or as a premium blending stock. And, unlike other alternative fuels, GTL fuels are fully compatible with today’s engines, filling stations, and distribution infrastructure (including trucks, trains, and liquid fuel pipelines).
One of the most innovative aspects of GTL technology is that it can help energy companies unlock crude oil reserves trapped underneath natural gas. In the past, companies would simply flare off the gas, but increasingly, government-mandated environmental regulations prevent flaring. Without a solution to this “gas problem,” energy companies are prevented not only from exploiting the crude oil but also from even booking it as a reserve.
With rising oil prices and tightening environmental regulations, the urgency for GTL is increasing.
Financing = commercial success
Despite its potential, GTL’s high capital costs and difficult financing structure have, until now, prevented this promising technology from achieving commercial success.
For the past 20 years, Syntroleum Corp. has worked to hone GTL technology with the goal of commercial viability. Currently, the company has 116 US and foreign patents pending and issued on its proprietary Syntroleum® Process, which uses a unique air-based system (rather than pure oxygen).
The use of air enables a fuels facility with a smaller footprint - including a mobile version that can be based on a barge or an integrated oil/GTL floating production, storage, and offloading vessel (FPSO).
The ability to create a mobile and easily transportable facility is essential to reach many of the world’s remote (or offshore) stranded gas deposits. As a result, Syntroleum’s technology can efficiently target gas reserves in the range of 1-3 TCF - reserves that are too small for LNG projects or world-scale GTL projects.
Re-focused business strategy
Bolstered by the performance of the 70-b/d fuels plant Syntroleum built at Catoosa, Okla., and as a result of the successful tests of its S-2 ultra-clean diesel fuel in Washington, DC city buses and National Park Service vehicles in Denali, Ala., the company has re-focused its business strategy.
Syntroleum intends to use its technology to acquire equity in oil and gas development projects where GTL can be critical to a project’s success. At this point, the company has identified more than 20 potential projects globally.
Perhaps the first and best commercial opportunity to employ the GTL barge and FPSO technology is the Aje Field project, an oil and gas accumulation off the coast of Nigeria. The discovery could contain as much as 200 million barrels of recoverable crude oil and 1.5 tcf of liquid-rich natural gas. Syntroleum and a team of partners acquired the rights to the Aje Field and received administrative approvals to spud their first appraisal well there by the fall of this year.
Obviously this places several capital demands on the company in short order, including the need to fund:
• The company’s share of costs to drill two wells at Aje;
• Acquisition of interests in, and drilling wells on, other projects;
• Additional engineering work on its barge initiative;
• Ongoing R&D to enhance its proprietary technology; and
• General corporate purposes.
Having gone to the capital markets in both 2000 and late 2003, in early 2005 Syntroleum needed to consider the most efficient way to finance these diverse needs.
Three-prong financing strategy
The company settled on a three-prong financing strategy, including: 1) recruiting a team of partners with both technical and financial capabilities to advance the Aje project; 2) a private placement to fund the company’s liquidity needs for the next couple of years; and 3) the creation of a “stranded gas venture” to seize on the momentum in the world energy and capital markets, as well as its own operational successes.
First, at Aje, Syntroleum initially acquired 100 percent working interest in the field in September 2004 and developed the integrated field development concept. By January 2005, Syntroleum recruited a team of partners from around the globe, ranging from the Swedish oil and gas company Lundin Petroleum to Challenger Minerals Inc. in the US.
As part of the development plan, the participant group farmed in and pays 90 percent of the first two wells’ cost to earn a 67.5 percent working interest. Syntroleum will pay 10 percent of the cost for the first two wells and holds a 32.5 percent working interest in the project.
Moreover, the plan includes payments to Syntroleum from the partnership group upon achievement of significant project and operational milestones. For example, when the Nigerian government approved the project’s drilling permits, Syntroleum earned a cash payment of $5.7 million - funds that will essentially cover Syntroleum’s share of costs for drilling the first well, and much of the second.
Upon first commercial production from the project, Syntroleum will earn another $2.8 million cash bonus. In addition, with crude oil production expected to begin as soon as early 2007, early oil revenue from the project could provide substantial revenues to fund the GTL plant.
In March, the company sold $70 million in shares directly to Legg Mason Opportunity Trust, a series of Legg Mason Investment Trust Inc. With this transaction, Syntroleum fulfilled its liquidity needs through 2007.
However, eager to seize on the momentum in the world markets, as well as its own operational successes, Syntroleum announced a creative $50 million transaction, including a venture to accelerate its acquisition of rights to some previously identified stranded gas fields around the world.
In April, Syntroleum formed a stranded gas venture to fund the acquisition of rights to additional stranded gas fields beyond Aje. Under terms of the agreement, which included an initial $50 million funding commitment, it will fund 100 percent of the costs to acquire the rights to the stranded gas fields.
In return, fund participants will receive 20 percent of the interest acquired by Syntroleum in any such project. Under the agreement, participants will receive preferential distribution of proceeds from the projects. Moreover, funds provided by the venture are project development funds and are non-recourse to Syntroleum and non-dilutive to the company’s share capital.
Specifically, Syntroleum will use the funds from the venture to pay for its costs of evaluation and acquisition of rights to stranded gas and liquids reserves. These include such costs as conducting geologic and other analysis of investment opportunities, oil and gas project development activities, and acquiring interests in oil and gas properties - including projects that involve traditional methods of production and processing, as well as projects that may later include the use of Syntroleum’s GTL technologies.
In addition, the company continues to pursue new projects around the world. Syntroleum is working with many companies that have stranded oil and gas assets to provide solutions that will allow development of the fields.
Conclusion
With its economic advantages, rapidly advancing technology, real-world successes and, now, new financing techniques, Syntroleum’s GTL is one step away from achieving its full commercial potential. OGFJ
The authors
John B. (Jack) Holmes Jr. is president and CEO of Tulsa-based Syntroleum Corp. A 33-year veteran of the petroleum industry, Holmes joined Syntroleum in 2002. He began his career with Humble Oil & Refining Co. (now ExxonMobil). He later worked at two independent oil and gas companies, then joined Texas International Co. to serve as senior vice president in charge of its international operations. Holmes then joined Zilkha Energy Co. as its president and COO. When Zilkha was acquired by Sonat Inc., Holmes became senior vice president of Sonat and president and CEO of its exploration subsidiary. After Sonat was acquired by El Paso Energy Co. in 1999, Holmes became president of oil and gas operations for that group. In 2001, El Paso Energy merged with The Coastal Co., and Holmes took the position of COO for petroleum assets. He has a BS degree in chemical engineering from the University of Mississippi.
Greg Jenkins is executive vice president of finance and business development and CFO of Syntroleum. He has international and domestic experience across the energy industry, ranging from oil and gas production to LNG project development. In January of 2005 Jenkins joined Syntroleum in his current position. Prior to this, he served in several executive roles at El Paso Corp., including as president, global petroleum and LNG; president, El Paso Merchant Energy; and president, El Paso Global Networks. Previously, he was president of Entergy Power; president and CEO of Hadson Corp.; and he has served in various senior management positions at Santa Fe Energy Co.
