Long-delayed DKRW coal conversion plant still lacks complete financing

Eight years after it first announced the project, DKRW Advanced Fuels LLC still has not completed financing for its proposed $2 billion Medicine Bow Fuel & Power coal-to-gasoline project in Carbon County.

The company announced in March that it would yet again delay construction. DKRW blamed the delay on its lead construction engineer, Sinopec Engineering — a unit of state-owned China Petrochemical Corp. — which said it could not begin construction this year as planned.

Financial trade publications report that Sinopec Engineering delivered disappointing returns to Hong Kong equity banks. Market watchers expect an initial public offering for Sinopec this year to generate more cash.

DKRW, the Houston-based company headed by ex-Enron executives, is offering few specifics about its own current financing other than to say it is pursuing private investment on the international market, and that it still has a viable project in Wyoming.

But it’s been a rough year, so far, for DKRW’s ambitions in Wyoming. The company also hit a snag in permitting due to the delay in construction.

Sinopec announced the delay just weeks before DKRW was to appear before Wyoming’s Industrial Siting Council (ISC) on April 1 asking for approval of its revised socioeconomic report. Carbon County commissioners, upset at DKRW’s continued delays, urged the ISC to deny the company’s request for an extension.

Construction of the plant would bring an estimated 2,300 workers to the area — a boom in activity that local communities need to plan for carefully. The plant would also bring some 400 permanent jobs and much-needed revenue to small communities such as the towns of Medicine Bow and Elk Mountain.

“Medicine Bow, they’ve waited and they’ve been proactive in working with (DKRW) and it’s not fair to those people to string them on the line. There are way more questions than answers,” said Carbon County Commissioner Sue Jones, one of the majority of the five-member Carbon County Commission who objected to putting off DKRW’s hearing before the ISC.

Jones, who is just beginning her first term on the Carbon County Commission, said her county is trying to carefully plan for other major energy developments in addition to DKRW’s coal-to-gasoline project. Carbon County is ground-zero for the massive 1,000 wind turbine Chokecherry and Sierra Madre Wind Energy Project, as well as two major high voltage power line projects. The county will also see a lot of activity from the pending 8,900-well Creston Divide natural gas project.

“You kind of need to know if this (DKRW coal-to-liquids project) is a real thing coming down the road,” said Jones.

Subsequent to putting off its hearing before the ISC, DKRW withdrew its socioeconomic report, technically rendering DKRW out of compliance with its ISC permit, according to Industrial Siting Division administrator Luke Esch.

DKRW officials bristled at that declaration. K. Wade Cline told the Rawlins Times “we don’t agree with that premise at all.”

ISC officials say they’ve outlined terms that DKRW must meet by June 19 to come back into compliance. (The ISC did not discuss DKRW’s project at length when it met Monday April 1 in Casper.)

The ISC did discuss and approve a request by Two Elk Power Co. to modify its permit for a waste-coal-fired power plant in Campbell County first proposed in the mid-1990s, pushing the construction start date to January 2014.

DKRW’s Year in Review

When DKRW inked the construction engineering contract with Sinopec in August 2012, DKRW president Robert Kelly said it was a milestone that put the project on footing to pursue financing internationally. He said that DKRW would likely seek more than $1 billion in commercial financing for the $2 billion project.

“We’re going to focus on major commercial and equity financing, then make a determination of whether we want to put more Wyoming opportunities in it,” Kelly told the Casper Star-Tribune in September 2012.

By “Wyoming opportunities,” Kelly referred to the company’s $545 million bond package first proposed in 2011. It sought $300 million in state taxpayer-backed bonds that the Wyoming State Treasurer would buy using funds from Wyoming’s Permanent Mineral Trust. In a parallel deal, another $245 million in tax-exempt industrial revenue bonds would be sold on the market without any backing or liability incurred by Wyoming taxpayers.

Early in 2012, DKRW trimmed its $300 million taxpayer-backed bond request back to no more than $100 million, avoiding a requirement for legislative approval.

Both bond requests require approval by Carbon County and the state. Carbon County officials signed off on the bond package (now a total of $345 million). Although state officials are receptive to the bond requests, its approval comes under the condition of a technical and economic review by Idaho National Laboratory. That review is still on hold until DKRW determines whether it wants to follow through with the bond package. Therefore, Wyoming officials, and the public, have never seen a third-party analysis of DKRW’s economic case.

One of DKRW’s key contracts for the coal-to-gasoline refinery is with Vitol Inc., which would purchase and market 100 percent of the plant’s initial gasoline output of 11,686 barrels per day. Vitol has come under fire in recent years for allegedly skirting U.S. sanctions in its dealings with Iran (read this Reuters story from September 2012, and this U.S. Senate Committee on Energy and Natural Resources Committee press release from 2011 regarding the concerns of U.S. Sen. Murkowski [R-Alaska]).

Some skeptics of the DKRW project — and many of those skeptics want to see the plant built — see the project’s reliance on Vitol as a potential liability. Environmental groups that oppose the coal refinery question Vitol’s involvement as well.

“The assumption is that the primary point for building coal-to-gasoline is the sale of the gasoline. If your primary client is under scrutiny by the U.S. government for skirting U.S. sanctions, that’s a serious financial risk,” said Katharine Lu, sustainable finance coordinator for Friends of the Earth.

WyoFile sought comments from DKRW about its current financing efforts, and asked questions about its contract with Vitol, permitting and other matters. The company responded through Jackson, Wyo.-based PR consultant Liz Brimmer who said only, “DKRW’s comment would be that these questions have been answered throughly – many times.”

In the meantime, DKRW continues to try to convince the ultimate judge of the project’s viability: private investors.

DKRW’s Economic Case

DKRW officials have made the case that the economics of their proposal rests on the sustained higher price of oil combined with continued efficiencies in the coal-to-liquids refining process. The say the plant’s viability is further buttressed by the plant’s low-cost mine-mouth coal feedstock at the refinery site in Carbon County, as well as revenues from the sales of byproducts such as propane, and carbon dioxide (CO2) for enhanced oil recovery.

Last year, DKRW president Bob Kelly said the combined annual sales of all the products would add up to an estimated $450 million to $500 million.

Although the Medicine Bow Fuel & Power coal-to-gasoline plant would be the first of its kind at commercial scale in the United States, company officials say their blueprint combines proven off-the-shelf technologies that have been in use around the world for decades. Coal is first converted to “syngas” through a gasification process, then the syngas is converted to liquids, ultimately producing the main product: an ultra-compliant gasoline for the Denver market.

Many of the specifications of the Medicine Bow Fuel & Power plant have changed over the course of eight years. In its latest version (based on DKRW’s Industrial Siting Permit Socioeconomic Impact Analysis Report submitted to the Wyoming ISC in November 2012) the plant would produce 11,686 barrels of gasoline daily.

As refineries go, that’s a fairly small output — even compared to Wyoming’s small oil refineries. The Frontier Refinery in Cheyenne, for example, has a daily capacity of more than 50,000 barrels per day, and the Sinclair Refinery near Rawlins has a daily output capacity of about 80,000 barrels.

DKRW proposes to add multiple production units to the plant after initial construction and operation, envisioning ultimate capacity near 44,000 barrels per day. Yet at least $1 billion of the plant’s $2 billion price tag must still be justified by the initial output of 11,686 barrels per day, according past statements by DKRW officials.

In making its pitch to the investment community, DKRW’s touts its contract with a gasoline purchaser, Vitol, for 100 percent of the plant’s initial production. Other positives include having license agreements in place for technology used at the plant, and having contracts in place for the key components of the plant through head construction engineering company, Sinopec. DKRW also has a contract with Denbury Resources to purchase 100 percent of the CO2 captured from the process.

Denbury confirmed with WyoFile this week that it still plans to purchase about 100 million cubic feet (Mmcf) of CO2 per day from the Medicine Bow facility, and that it has ready buyers in Wyoming for enhanced oil recovery.

Another of DKRW’s main selling points is its domestic mine-mouth feedstock coal in Wyoming. Coal is abundant at the location, and DKRW is likely to lock in a stable price. The company noted in November 2012 that it was still “finalizing” a coal supply agreement with Arch Coal Sales, a subsidiary of Arch Coal, which holds 24 percent interest in DKRW.

But some who study these technologies and markets say that investors are particularly cautious of any coal-based project in the United States at the moment.

“I think from an investment standpoint there’s such an anti-coal sentiment from Washington D.C. with a tremendous push on environmental regulations for anything to do with coal. … Until those are really shaken out, I can see investors worry about ‘How much is this really going to cost me?’” said Don Collins, CEO of the Laramie-based Western Research Institute (WRI).

Markets and Environmental Limitations

Collins and the staff at WRI are familiar with both the technical and economic considerations surrounding conversions of coal and natural gas into liquid fuels. One of WRI’s most recent studies is “Distributed Production of Fuels & Chemicals from Stranded Natural Gas,” stemming from a $162,000 research grant from the Advanced Conversion Technology Research Account created by the Wyoming Legislature.

There are limits to both the size and economic viability of coal and natural gas conversions to liquid fuels in Wyoming, according to Collins.

“One key thing of any kind of fuel production plant in Wyoming is you have to be cognizant of the use of water,” Collins said. “Most biofuels, or coal to fuel, are large consumers of water, and that can economically limit the size of your plant.”

“That’s one of the things Wyoming has to balance, is the availability of water,” Collins added. “So we did the study of converting natural gas to fuel, and we determined that a smaller modular-scale plant is probably more viable because of the limited resources in Wyoming.”

Water availability and consumption is a major concern for Jay Lillegraven, one of the most outspoken critics of the DKRW plant. Lillegraven, a retired University of Wyoming professor and geologist intimately familiar with the eastern Carbon Basin, says the state hasn’t forced DKRW to adequately address questions about how much water is really available and what 30 years or more of industrial consumption might mean for the land, wildlife and agriculture community. (Read this related story.)

Regarding the Medicine Bow Fuel & Power project, Collins told WyoFile, “My view is that plant was going to be one of the cleanest energy plants in the world.” The catalyst that DKRW proposes to use in the conversion process requires that it strip out trace metals and other “poisons” from the coal — beyond most environmental regulations, said Collins. That, and the CO2 capture-and-sales component, would make the plant an exceptionally clean operation.

Environmental groups disagree with this narrative, pointing to the operation’s water consumption, related mining activity and ultimate combustion of gasoline as net contributors to pollution and greenhouse gas emissions. The Sierra Club challenged Wyoming’s air quality permit for the plant, claiming emission limits did not assure no serious degradation. It was rejected by a Wyoming court.

The U.S. Bureau of Land Management plans to launch a full-scale environmental impact statement (EIS) for DKRW Advanced Fuels’ coal-to-liquids project, a full eight years after the project was first announced. Wyoming BLM’s Rawlins Field Office manager, Dennis Carpenter, told WyoFile that the EIS will begin with a scoping notice “in a few months,” and said the EIS process will likely take a minimum of two years to complete.

An EIS was originally launched several years ago when DKRW considered a loan guarantee through the U.S. Department of Energy, but that effort stalled out. DKRW then asked Wyoming BLM to lead the environmental review — a requirement for the project because associated pipelines, power lines, water wells and other facilities cross federal lands in the region.

Typically, projects under an EIS review are not allowed to move forward until the review is complete. There may be an exception in the case of DKRW’s Medicine Bow Fuel & Power plant, however, according to Carpenter.

The coal refinery itself is located on private property — not federal lands. Carpenter said it may be possible for DKRW to commence construction of the plant facility itself on private property during the EIS process, as long as access is limited to a private road.

“They do have private access to the private piece of land, and it’s not their preferred access,” Carpenter told WyoFile.

Executive Summary of Wyoming House Bill 0121 on the Distributed Production of Fuels & Chemicals from Stranded Natural Gas

Final Report GTL Exec Summ DKRW Financing (Text)
— Dustin Bleizeffer is WyoFile editor-in-chief. Contact him at 307-577-6069 or dustin@wyofile.com. Follow Dustin on Twitter @DBleizeffer.

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