Defying Conventional Wisdom, TransGas May Have First CTL Plant
TransGas Development Systems of New York broke ground May 9 on the
Adams Fork facility it has been preparing to build in Mingo County
since December 2008.
The State Journal
25 May 2011
By Pam Kasey
Back in 2007 and 2008, conventional wisdom said investors needed two
conditions to feel comfortable backing the conversion of coal to liquid
transportation fuels in the U.S.
First, a sustained high price for oil -- above, say, $50/barrel. The
price was that high at the time and, after a big dip during the
recession, is that high again.
That dip underscores the second, more fundamental condition: Assurance
that, if the price of oil drops below a threshold, there still will be
a market for the more expensive coal-to-liquid, or CTL, fuels.
A favorite approach to that assurance was long-term purchase
commitments by the Department of Defense -- an arrangement that would
both establish a large market for the nascent industry and forestall
any OPEC price manipulation to nip the industry in the bud.
DoD commitments have not materialized. Nor have any other large
institutional purchase commitments. Nor has a single commercial-scale
CTL plant.
Yet, TransGas Development Systems LLC of New York, the only company
still in the running among several that have proposed CTL plants in
West Virginia, broke ground May 9 on the Adams Fork facility it has
been preparing to build in Mingo County since December 2008.
What makes TransGas think they can make a go of it?
Difficult Conditions
The CTL industry in the U.S. has been trying to get its start under
difficult conditions, according to Julie Dawoodjee, a spokeswoman for
synthetic fuels developer Rentech Inc. In 2006, Rentech proposed the
first CTL project in West Virginia. Since then, it has shelved that
project but has other synthetic fuels projects under way.
Oil price volatility challenges both investors and potential customers,
she said.
"Whenever crude reaches a high, suddenly everyone's interested in
alternative energy. But then it's too late -- it's a four-to-five-year
plan to get a plant producing," she said. "When crude comes down,
everyone forgets, and that's when you should be building."
Also making developers think twice is environmental interests' track
record at holding up or stopping projects that have a coal component,
she said.
And, yes, government support has been lacking, she added, including
long-term DoD contracts.
However, Dawoodjee did say DoD contracts are not the only route to
viability.
"It would be very helpful if the government was interested and had the
ability to sign these long-term off-take agreements," she said. "But
there are other customers interested in long-term purchases."
TransGas' Business Model
"I've always taken issue with the people that were looking to get
projects financed through an off-take agreement -- by getting a
long-term contract with, say, the Defense Department," said TransGas
Manager Adam Victor.
It's an old model, he said, typical for building a power plant: Buy,
for example, natural gas under long-term contracts at a certain price,
and secure long-term power purchase agreements to sell it as
electricity for, maybe, twice that price.
"But in coal-to-liquids, the commodity price that you pay for coal is
significantly less as a percentage of the revenue that you get from
gasoline than what it would be when you buy natural gas and sell it as
electricity," he said.
There's plenty of cushion, he seems to feel.
"The break-even price of oil for this project is between $45 and $50"
per barrel, he said -- half of today's price, and a price that oil has
dipped below for only about a month in the past six years. "That's when
you're buying coal in the ground at today's current price of about
$50/ton delivered."
Victor expects to sell the fuel on the spot market and do a
"back-to-back hedge," he said.
"It's like if you have a floating rate on your mortgage but you don't
want a floating rate, you go and enter into a hedge, a long-term swap
and you get a fixed rate on your mortgage," he explained. "Same
concept, but with fuel."
Financing
Victor's confidence seems to have convinced investors, in spite of last
year's bankruptcy of an energy company he developed.
Although he does not give out specifics, he said TransGas has received
commitments for a first portion of financing through private placement
-- sale to one or a few large institutional investors -- and it's
enough to begin construction by mid-summer.
To simplify the financing, the state Economic Development Authority in
April authorized the potential issuance of up to $3 billion in
industrial revenue bonds, or IRBs.
The bonds are not tax exempt and will not implicate the EDA or any
state body in the event of default, according to Brian Helmick, a
lawyer with Spilman, Thomas & Battle, which serves as TransGas's
bond counsel to the EDA.
But the bonds simplify financing in that, while no single lender or
investor would put up $3 billion, Helmick said, TransGas could, say,
find five banks willing to lend.
"Instead of doing five loan agreements, they could do it through one
IRB structure, and each bank would buy a bond that represents its
portion of the debt -- that's a simpler way to put the debt together,"
he explained.
The bonds can be issued to bondholders at different times.
In the event of default, Helmick said, the bondholders are liable or,
if the bonds are insured, the insurer. Typically, although details
haven't been worked out, title is pledged to the bondholders, who could
take the project over just as a bank forecloses when a mortgage goes
into arrears.
DoD, Climate Change and Deficit
Congress is considering legislation now that would extended the DoD's
multi-year contract authority, according to Carol Raulston, spokeswoman
for the National Mining Association.
However, as currently configured, the Adams Fork plant would not be
able to sell to the DoD.
The 2007 energy bill prevents the government from purchasing motor
fuels that will contribute more to climate change than do conventional
motor fuels. CTL produces more greenhouse gases than petroleum-based
fuels, and this plant will not store its carbon dioxide emissions.
Victor said he believes storing CO2 underground is dangerous, citing a
1987 mudslide in Cameroon that released volcanically generated CO2 that
suffocated 1,700 people.
If the government requires the CO2 to be stored away, he said, he would
most like to send it to the Gulf of Mexico for enhanced oil recovery,
to help increase oil well yields. But, he said, he will follow the law
and the cost will not hurt his competitiveness because capturing the
CO2 is an integral part of his process, whereas crude oil refineries
will need large capital investments to make that capture.
TransGas's output would represent slightly more than 2 percent of
imported gasoline, according to Victor, and enough similar plants could
make the country a gasoline exporter and pay down the trade deficit.
"I think this is a game changer and important for people to rally
around, for us to show it can be done here in West Virginia and then
throughout the country," he said.