Coskata switches focus from biomass to natural gas; to raise $100M in natgas-oriented private placement

July 20, 2012 |

Coskata, looking at CAPEX opportunities, political uncertainty, and the investor climate — switches to an “all natural gas” feedstock strategy.

Initiates a $100M private placement, puts Alabama project on hold. In today’s Digest, we look at the rationale, the impact and the way forward.

“In North America there’s a golden opportunity,” Coskata CEO Bill Roe says, in bringing the Digest up to speed with changes at Coskata. “The sea of natural gas is almost a problem, leading to historic price dislocation, and a level of availability that has not been seen for a long time. With our technology, it will give us a lower ethanol cost on a per gallon basis, and a remarkably lower capital cost because the kit that one needs to aggregate and gasify biomass, and then condition the syngas, is appreciably more than reforming natural gas.”

Accordingly, the company now plans to utilize natural gas as its exclusive feedstock for its first several commercial-scale projects. Now – keep in mind, Coskata was already utilizing natural gas for around one-third of its feedstock needs in its previously planned first commercial project in Alabama. What is notable here is the switch to an all-gas strategy.

“What we are not saying is that we are breaking ranks and abandoning feedstock flexibility,” reflected Coskata CEO Bill Roe, in discussing the directional shift with the Digest. Rich Troyer, Coskata’s chief business officer, echoes that “Coskata is not losing focus on biomass; it is still in our future.”

“What we are saying, Roe continues, “is that natural gas has moved to the front, as the first and most obvious feedstock that we can utilize for our commercialization strategy.”

“With our Alabama project being always 1/3 natural gas,” he added, “we began to get a schooling on natural gas availability. At the same time, across the board, that conventional wisdom that low gas prices would kill exploration and drilling began to change. The lifting cost in these formations began to be understood from the impact of horizontal drilling and fracking. Now, we understand it better, that there will be exploration opportunities that make sense even at $3 gas or just above that.”

Coskata’s $100M capital raise

While not expressly confirming that they have abandoned their IPO, the company has launched a $100 million , bank-led private placement, with international dimensions, specifically aimed towards strategic investors and especially those with positions relating to natural gas.

With respect to the company’s IPO, Roe commented: “The track record thus far is not inspiring – what’s happened out there. A lot of us in the queue ready to go – cooling our jets. Right now, you would only go if you are absolutely desperate, because outcomes will not be not satisfying. For sure, new issuers are struggling across the board, and especially those with new technologies and those that will be waiting for several years to have meaningful EBITDA. Meanwhile, natural gas is attracting a whole new cadre of potential investors, though we still think there is a point in time when the window will reopen, maybe 2014.

First commercial project

Our first project will be based on 100 percent natural gas, and will produce 17 million gallons of ethanol. The financing package is something they expect to be able to wrap in Q4, that will lead to ground-breaking on their first commercial project in Q1 2013 and a first commercial completion in late 2014 after a 20-month construction timeline.

Roe commented: “This is still liquid processing where we are processing syngas to fuel grade ethanol, and it is nearly identical to the design for our biomass conversion. We are simply changing the front end of the plant.”

With respect to site selection, the company will only note right now that “the natural gas opportunity abounds in different states and geographies. With individual states, some are extremely aggressive, some don’t have the budgets to do things like attractive incentives. But there’s a strategic element to this, going back to a whole host of interested parties.

“For those investors, this is no longer about renewable fuels, but about the arbitrage that will take place between the cost of natural gas and cost of petroleum.

The natural gas opportunity

Let’s look at that in the context of US natural gas production. Specifically, let’s look at the example of North Dakota, where a whole bunch of oil is being pumped out of the Bakken formation, and right now there is a level of coproduction of natural gas that does not have a home. They flare most of it because they are unable to get it into the grid. You see that also in parts of Appalachia, where natural gas has been found but the infrastructure is not yet available to get it into the power pool.

Here’s the opportunity: it’s simply the arbitrage of lifting natural gas, now available at the Henry Hub at $2 and change per million BTUs, into the fuel markets where the prices are more like $28 per million BTUs for finished fuels.

“Even if gas settles into the $4-$6 range,” Roe observed, “as many observers now predict they will in the US for a decade or two, these economics are extraordinary. We don’t understand the tiger we have by the tail.”

The capex and project size sea change

The Coskata project always had a natural gas component, so in dropping the biomass component there is a lot of cost that just falls away. Material handling, chipping, sizing, drying, gasification, gas clean up – all those unit costs come out.

The impact for Coskata? A 130 million gallon natural gas project costs the same as a 65 million gallon woody biomass project.

But there’s more, as they used to say in selling Ginzu knives. There are the economies of scale, once the limiting factor of the transportation of biomass is removed. “In processing biomass,” Roe noted, “we are limit to a maximum of 100-150 million gallons, about the size of a big ethanol plant. With a natural gas feed, much larger plants can be built.”

The company has plans on the drawing board, for example, for a 270 million gallon project, although economies of scale are reached with natural gas in the 130 million gallon range.

“The bioreactor portion is the same, just more trains with our NG2 and NG3 project; the scaling risk has essentially been eliminated, there are just more reformers and multiples of the same size bioreactors.”

The Alabama project and the company’s USDA conditional loan guarantee commitment

The fate of the company’s Alabama project? Though an optimal location for a woody biomass focus, “Boligee will not be the site of our first project,” Roe confirmed to the Digest.

Now, a couple of weeks ago, the USDA extended a conditional loan guarantee for $89 million related to the project, based on the Alabama location. “We’ll keep the project alive with conditional loan guarantee commitment; as we don’t expect to look to USDA to allow us to use this for a different purpose. We’ll see if there is a change to the RFS or not.”

The impact of policy uncertainty

Which brings us to the impact of policy uncertainty on Coskata’s decision.For sure, an impact there was.

“We are not of the belief we know more than anyone else about the future of RFS,” Roe commented, “but the drumbeat we continue to pick up in DC does not inspire confidence. It’s a sad commentary, as the debate over RFS2 is completely political at this time, leaving us unprepared to take the risk to sink major capital at this time in a project, and see RFS2 change markedly right in the middle of construction.”

Offtake impact

Where’s the ethanol going to go – especially if, produced from natural gas, it finds itself outside of the RFS2 scheme because it does not produce sufficient emissions improvement compared to conventional fuels.

“Right now – based on our discussions with obligated parties and big ethanol marketers, we do not see restrictions in entering into the same markets today. For those looking at ethanol in terms of the RFS2 compliance structure, they can buy a 2 cent corn RIN to match up with the natural gas product. This pathway will not attract a RIN, but the cost point is so low.”

Yields – natural gas vs biomass

Here, Coskata is more cagey, except to say that the same attributes that caused the company to have transformatively low fuel production costs with woody biomass, with yields of over 100 gallons per ton, apply to natural gas as well.

“At our demonstration project, we learned a lot about reforming natural gas as well as woody biomass,” said Roe. “The amount of data accumulated at demonstration emboldened us , and others will have to learn in the university of hard knocks, as we learned by building a $30 million demonstration.”

Australia and other international opportunities

Now, Coskata has been investigating an Australian project for some time, based on woody biomass gasification. What’s the fate of their international ambitions? For now, no changes in plans, but for sure there are going to be different opportunities based on a changed strategic investor group, and there are plenty of strategic investors in, Asia. Not to mention Russia.

Aviation and other fuel markets

There been a lot of activity of late in the alcohol to jet area – no obligated parties, no RINs there, just pure economic opportunity. What are the opportunities for Coskata?

“We certainly are aware of the ATJ developments,” Roe said. “Overall, we see the opportunity but it is not a cakewalk to get there. I am not exactly sure that we are convinced that ethanol as the base material is the best way to go. There are other alcohol products that could be better feedstock materials, and though we have initially focused on C2, we have work going on with C3 (propanol), C4 (butanol) and another higher alcohol. We are 18-24 months away from a C4 butanol.”

Coskata – still a biofuels company?

For sure, and on two counts. First, Coskata is not abandoning biomass just yet, though putting it squarely in the back seat for now. But more importantly, it continues to use microbiology to perform its ferment syngas into its target fuels and chemicals.

“The longer I am at this,” commented Coskata’s Roe, “I believe now more than ever that microbiology as the conversion process is much more efficient than catalytic technologies.”

Others in the queue that may switch to natural gas

Well, in recent months, there’s been Sundrop Fuels, and Primus Green Energy – with Coskata we now have three, and that makes a trend.

Who’s next? Siluria has been focused on natural gas for quite some time. Accelergy has been pursuing a combination of coal and biomass in China within an overall XTL focus, and let’s see how their project opportunities change.

Others that may see striking opportunities with natural gas reformation, to create their syngas for catalytic conversion?

Clearly, LanzaTech and INEOS Bio have to be considered to be in that mix – given that they also have technologies that offer biobased fermentation of syngas to produce biofuels and chemicals.

Then, there are a group of companies that are working on gasifying MSW and using inorganic catalysts. Like Fulcrum and Enerkem. A number of them stranded in their capital raise, as Sundrop, Primus and Coskata were, to varying degrees.

The Bottom Line

This is a change induced by the capital formation challenge facing advanced biofuels – and particularly the smaller project developers (as opposed to the bigger balance sheets).

There is the problem of the closed IPO window, the lack of sufficient strategic investors, in the face of the policy uncertainty, for biomass pure plays.

For Coskata, there is the capex opportunity to, as they say, construct a 130 million gallon project for the same price as a 65 million gallon project.

As we wrote in “Syngas and the front-end problem of biofuels” in April:

“Why is there not a rush to embrace technologies such as Enerkem, Terrabon, Coskata, Fulcrum Bioenergy or others that can convert MSW into liquid fuels?

The bumps in the road are three. One, the technology is expensive over the generally small radius in which MSW can be profitably aggregated. Two, the technologies themselves are just reaching commercial demonstration scale. Three, they all could use a more affordable stream of optimized syngas.

Syngas, keep an eye on it. We have found more profitable, breakthrough ways to use it, than make it. Getting the right syngas at the right price. Well, that’s been an area where a lot of companies have been working.”

For now, this is an opportunity generally limited to the United States and Canada, where the technologies are being deployed to liberate vast quantities of natural gas. Longer term, we look to Russia as a future leader, as well.

Stay tuned, there will be more. From Coskata and, we suspect, from other biobased developers that are compelled by the same economics.

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