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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-19260
RENTECH, INC.
(Name of small business issuer in its charter)
Colorado 84-0957421
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1331 17th Street, Suite 720
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (303) 298-8008
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of voting and non-voting common equity held
by nonaffiliates of the registrant as of November 1, 2000 was $80,997,699 based
upon the price of the stock on that date.
The number of shares outstanding of the issuer's common stock as of
November 30, 2000 was 63,232,199.
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS........................................................................................3
ITEM 2. PROPERTIES.....................................................................................43
ITEM 3. LEGAL PROCEEDINGS..............................................................................44
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........................................44
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS....................................................................44
ITEM 6. SELECTED FINANCIAL DATA........................................................................46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................................47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................................64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS...............................................................64
ITEM 11. EXECUTIVE COMPENSATION.........................................................................69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................................................72
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................73
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.......................................................................................73
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
the federal securities laws, as well as historical and current facts. These
forward-looking statements include those relating to the Rentech GTL Technology;
the continued development of the Rentech GTL Technology to increase its economic
efficiency and use; market acceptance of the technology; ability to obtain
financing for plants using the Rentech GTL Technology; ability to economically
construct or retrofit these plants; the timing by which plants may be
constructed and begin production; ability to obtain low-cost feedstocks and to
economically operate the plants; successful operation of the plants; the market
value and acceptance of the liquid hydrocarbon products; revenues from the
Rentech GTL Technology; market acceptance of and the anticipated revenues from
the stains and sealers produced by OKON, Inc.; the market demand and anticipated
revenues from the mud logging services provided by Petroleum Mud Logging, Inc.;
ability to obtain needed capital; and statements about business strategies,
future growth, operations and financial results. These statements often can be
identified by the use of terms such as "may," "will," "should," "expect,"
"believe," "anticipate," "estimate," "intend," "plan," "project," "approximate"
or "continue," or the negative thereof. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, we
caution readers not to place undue reliance on any forward-looking statements.
Those statements represent our best judgment as to what may occur in the future.
Forward-looking statements, however, are subject to risks, uncertainties and
important factors beyond our control that could cause actual results and events
to differ materially from historical results of operations and events and those
presently anticipated or projected. Important factors that could cause actual
results to differ from those reflected in the forward-looking statements include
the risks of overruns in costs of constructing, retrofitting and operating
commercial plants using the Rentech GTL Technology, problems with mechanical
systems in the plants that are not directly related to the Rentech GTL
Technology, dangers associated with construction and operation of gas processing
plants like those using the Rentech GTL Technology, risks inherent in making
investments and conducting business in foreign countries, protection of
intellectual property rights, competition, difficulties in implementing our
business strategies, and other risks described in this report.
As used in this Annual Report on Form 10-K, the terms "we," "our" and
"us" mean Rentech, Inc., a Colorado corporation and its subsidiaries, unless the
context indicates otherwise.
PART I
ITEM 1. BUSINESS
OVERVIEW
Rentech, Inc. is a Colorado corporation organized in 1981 and based in
Denver. We have developed and own a proprietary and patented gas-to-liquids
(GTL) process that converts carbon bearing gases, liquids and solids into
valuable liquid hydrocarbon products (the Rentech GTL Technology). The
technology works with various feedstocks, including natural gas and industrial
off-gas, heavy crude oil and refinery byproducts, and coal and petroleum coke,
among other carbon-bearing materials. Our technology produces a wide range of
products, including clean burning diesel fuel, naphthas, and speciality products
such as waxes, petrochemical feedstocks, fuel cell feedstocks and synthetic
lubricant base stock.
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We believe there is the potential around the world for a significant
number of plants that would use Rentech GTL Technology. This opportunity stems
from the growing, worldwide demand for energy, especially environmentally clean
energy.
Our primary business is licensing the Rentech GTL Technology to oil and
gas companies, operators of industrial gas plants, and other members of the
energy industry. Licenses are granted in exchange for license fees and ongoing
royalties to be charged for each barrel of liquid hydrocarbons produced by
process plants that use the Rentech GTL Technology. After we grant a license,
our licensees are responsible for financing, constructing and operating their
own plants to use the licensed technology. They must also acquire their own
feedstock and sell the products their plants produce.
In October 1998, we granted an exclusive license to Texaco Energy
Systems, Inc. (Texaco), a division of Texaco, Inc., to use the Rentech GTL
Technology in plants where solid and liquid hydrocarbons are used as feedstock.
Texaco also has the right to grant sublicenses for this use. We retained rights
to grant licensees to others for natural gas feedstocks, which includes
industrial off-gases. Examples of the types of solids and liquid feedstocks that
Texaco could process under our license are liquids such as heavy crude oil and
refinery byproducts and solids like coal and petroleum coke. In addition, we
granted Texaco a non-exclusive license, but not the right to sublicense the
technology in plants which use natural gas as feedstock.
In connection with the Rentech GTL Technology, we are also providing
engineering designs and technical services, under contract, for Texaco and some
of our other licensees and potential licensees. They are using this information
to consider the feasibility of constructing one or more plants to use our
technology.
We intend to continue providing engineering design and technical
services for our licensees when they design and construct their plants. To
assist our licensees, we may also contract to provide our operational support
services during startup of licensed plants. In addition, we may reserve the
right to contract for the engineering and supply of the synthesis gas conversion
reactors that are essential for use of the Rentech GTL Technology. The reactors
must be specially configured for each plant according to the composition of the
synthesis gas to be converted and the throughput desired. When plants are
constructed and in operation, we will sell our patented catalyst, which is a
necessary component of our conversion process, to our licensees.
In some instances, we may invest with others to acquire equity
interests in plants that would use our technology. We hope to acquire interests
in one or more existing industrial plants, particularly existing underutilized
methanol plants, that may be converted to use the Rentech GTL Technology to
produce liquid hydrocarbons.
We have granted several licenses in exchange for license fees. Our
licensees are in various stages of evaluating the Rentech GTL Technology,
seeking financing, and planning how to proceed. We are receiving advance royalty
payments from Texaco as required by our license to it. However, there are no
process plants now in operation that use the Rentech GTL Technology.
Consequently, we are not receiving royalties from production of liquid
hydrocarbons or revenues from sales of our catalyst.
The emergence of gas-to-liquids technology, as developed by us and a
few others, has been cited by the Battelle Memorial Institute to be one of the
ten most economically important energy innovations by the year 2010. This
conclusion was reached by a panel of energy experts from Battelle and the
national laboratories that it co-manages for the U.S. Department of Energy, and
reported by Energy User News,
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September 2000. The labs include the Brookhaven National Laboratory, National
Renewable Energy Laboratory, Oak Ridge National Laboratory, and Pacific
Northwest National Laboratory.
We operate two separate businesses, not related to gas-to-liquids,
through two wholly-owned subsidiary corporations. One of these is OKON, Inc.,
which manufactures and sells environmentally clean stains, sealers and coatings.
The other is Petroleum Mud Logging, Inc., which provides well logging services
to the oil and gas industry. We also lease office and warehouse space located in
our research and development facility to third parties. We are engaged in these
businesses and others we may acquire to produce revenues and cash flow to
support our core business related to the Rentech GTL Technology until commercial
use is realized. We have also acquired interests from ITN Energy Systems, Inc.,
a privately held high technology and development company located in Wheat Ridge,
Colorado. These interests are described subsequently in this item under the
heading "Other Businesses." Financial information about our business segments is
given in note 11 of our financial statements attached to this report.
FISCHER-TROPSCH TECHNOLOGY
The Rentech GTL Technology is based upon the Fischer-Tropsch conversion
process that was originally developed in Germany during the 1920s to create
synthetic transportation fuels. The Fischer-Tropsch (F-T) process was then used
by several German companies in commercial-scale industrial plants constructed
with government funding. These plants first manufactured synthesis gas, a
mixture of hydrogen and carbon monoxide, from coal. That gas was converted
through the Fischer-Tropsch process into liquid hydrocarbons, principally diesel
fuel. German production of diesel fuel by this method peaked at about 16,000
barrels per day in 1944, but it was not cost competitive with conventional motor
fuels. After the end of World War II, the German companies discontinued active
production. Soon after the war, the South African government started work on
Fischer-Tropsch development. That effort led to the F-T process now owned by
South African Synthetic Oil, Ltd. (Sasol), which is presently used in four
plants in South Africa. Those plants produce approximately 160 thousand barrels
per day of liquid hydrocarbons.
After World War II, the U.S. Bureau of Mines and several U.S. companies
conducted research and development on Fischer-Tropsch processes. All of those
U.S. efforts were ultimately abandoned because domestic and imported oil and
conventionally refined liquid hydrocarbons were available in the United States
at costs lower than those for the Fischer-Tropsch synthetic fuels. As petroleum
imports became readily available after World War II, Fischer-Tropsch research
went into decline.
The Arab oil embargo of 1973 created fuel shortages, and that crisis
renewed interest by several companies in Fischer-Tropsch technology. This
stimulated new research, principally in the United States. The principal goal of
the research was to develop Fischer-Tropsch processes that produced synthetic
diesel fuel at costs competitive with conventional diesel fuel. Several
companies, including ours, began work then, or by the early 1980s, to develop
proprietary F-T processes. The other companies include Exxon, the Royal
Dutch/Shell group, BP/Amoco, all of which are major oil companies, and
Syntroleum Corp, among others. Sasol continues to operate three of its F-T
plants in South Africa and to license its technology for use in that country in
a fourth GTL facility, the Mossgas plant. Each of these companies, except Sasol,
uses a cobalt catalyst for its own proprietary F-T process.
Dr. Charles B. Benham, a founder of Rentech, started to conduct
research on F-T processes at the Naval Weapons Center in China Lake, California,
starting in 1973. He continued similar research later at the Solar Energy
Research Institute in Golden, Colorado. Dr. Mark S. Bohn, another founder of
Rentech,
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participated in Dr. Benham's F-T research at the Solar Energy Research
Institute. Based on the pioneering work of Dr. Benham and Dr. Bohn, we developed
our own Fischer-Tropsch technology in the early 1980s. Like Sasol's, our F-T
process uses an iron-based catalyst.
The Fischer-Tropsch process is a chemical process by which
carbon-bearing materials are converted into synthetic liquid hydrocarbons. In
the process, hydrocarbon feedstocks are first reformed by one of several
commercially available processes into synthesis gas, a mixture of hydrogen and
carbon monoxide. The synthesis gas, sometimes called syngas, is then converted
through the F-T process into a slate of several liquid products in a reactor
vessel that contains the catalyst. The process includes three stages:
o The Syngas Step (sometimes called the front end process)--the
carbon-bearing material is converted into synthesis gas, a
mixture of hydrogen and carbon monoxide. Oxygen must be added
for the conversion of any solid or liquid feedstock. Oxygen
may also be necessary for gaseous feedstocks, depending on the
gasification technology selected.
o The Fischer-Tropsch Step (sometimes called the back end
process)--the synthesis gas is fed through a F-T reactor and
chemically altered in the presence of a catalyst, to form
synthetic liquid hydrocarbon products.
o The Upgrading Step--the synthetic hydrocarbon products are
upgraded by distillation or other conventional processing
steps in the same plant to the specifications required for the
target market.
DEVELOPMENT OF THE RENTECH GTL TECHNOLOGY
The ability of the Rentech GTL Technology to convert carbon-bearing
gases into valuable liquid hydrocarbons was first established in our initial
pilot plant. This was a small, skid-mounted system operated periodically between
1982 and 1985. This capability was again demonstrated in our second and larger
pilot plant operated during 1989. Additional confirmation of several significant
aspects of the Rentech GTL Technology was obtained from tests conducted between
1991 and 1998 in a third pilot plant. We continue to use our third pilot plant
at our F-T testing laboratory to further advance the development of the Rentech
GTL Technology and to develop F-T data in response to inquiries from our
licensees and prospective licensees.
Use of the Rentech GTL Technology in a commercial-scale GTL plant was
successfully demonstrated in 1992 and 1993. This plant, the Synhytech plant
located at Pueblo, Colorado, had a designed capacity of 235 barrels of liquid
hydrocarbons per day. Our licensee, Fuel Resources Development Company (Fuelco),
had full control of the source of feedstock gas and the construction and
operation of the plant. We designed the F-T reactors and provided our catalyst
for use in the F-T reactors. Fuelco decided to construct the plant at the Pueblo
municipal landfill. Fuelco selected that location to allow it to use, at minimal
cost, the methane in the landfill gas that was generated each day from the
decomposition of the landfill material, and also to take advantage of tax
credits then available for preventing release of these carbon-bearing gases into
the atmosphere. When Fuelco started the plant, Fuelco determined that the volume
of landfill gas captured was inadequate to operate the plant on an economic
basis. An additional problem was that the energy content of the gas that Fuelco
did collect had only approximately one-twelfth of the energy content that Fuelco
had initially projected. In January 1992, despite the insufficiency of the
feedstock, Fuelco operated the plant at its reduced capacity and produced liquid
hydrocarbons through use of our technology.
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The Rentech GTL Technology, including the F-T reactors and catalyst, performed
as expected. In mid-1992, due to the lack of adequate feedstock from the
landfill, inability to obtain low-cost pipeline gas as an alternative feedstock,
and a desire of Fuelco's parent, Public Service Company of Colorado (PSCo), to
return to its core business, Fuelco closed the plant.
By the terms of a negotiated settlement between PSCo and us, ownership
and control of the Synhytech plant, plus cash, was then transferred to us. In
order to further evaluate performance of the Rentech GTL Technology at a
commercial-scale, we decided to operate the plant for a short period of time. We
made extensive modifications to improve the safety and reliability of several
mechanical systems of the plant that did not involve Rentech GTL Technology. We
decoupled the landfill gas source from the plant, and added a temporary supply
of natural gas supplied by pipeline. In July and August 1993, we operated the
plant continuously for three weeks. The results confirmed that the Rentech GTL
Technology operated successfully. This demonstration confirmed several factors
that are key to the use of the technology. These were control of the reactor
temperature and its hydrodynamics, the amount of feedstock that was converted to
liquid hydrocarbons and the ability to produce the desired products.
We decided to close the Synhytech plant at the end of 1993 because no
cost-efficient source of permanent feedstock was available. In 1995, we sold the
plant to Donyi Polo Petrochemicals Pty, our licensee for India. Donyi Polo
dismantled the plant in 1996 and shipped the components to India for possible
reassembly and reuse.
The use of the Rentech GTL Technology in the Synhytech plant at Pueblo
demonstrated that the technology can be successfully used in commercial-scale
plants to produce the desired products. Because of the lack of low-cost gas
feedstock for the plant, the economic feasibility of the Rentech GTL Technology
was not established by those operations.
FEATURES OF THE RENTECH GTL TECHNOLOGY
We believe that the Rentech GTL Technology represents a significant
enhancement of the Fischer-Tropsch process developed in Germany. Our technology
is based on the original Fischer-Tropsch technology, with special developments
which make it unique. Key aspects of our technology are the formulation of the
catalyst, deployment of the catalyst in the synthesis gas reactor, design of the
reactor and configuration of the process. These features are proprietary to us,
and some of them are patented by us.
Perhaps the most important feature of any gas-to-liquids technology is
the cost of each barrel of liquid hydrocarbons produced by plants using the
technology. For widespread acceptance of any GTL technology, we anticipate that
the cost per barrel probably must be not much more than the cost of similar,
conventionally refined oil and gas products. While we believe the Rentech GTL
Technology can be cost-effective, we do not have definitive cost figures for
our liquid hydrocarbons. Those costs will not be reliably established until a
commercial-scale plant using the technology is in production.
One of our potential licensees has had an independent study made of the
capital cost of plants that might be constructed for it to use Rentech GTL
Technology. Based on this independent cost estimate and additional studies of
our technology by other independent third parties, we anticipate that our
technology is not significantly more costly, and may be no more expensive, than
the GTL technology offered by the most cost effective of the other GTL
processes. These independent cost estimates also indicate that the Rentech
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GTL Technology would be cost-competitive with conventional fuels at crude oil
prices in the range of $25 per barrel for plants with capacities of 10,000
barrels per day of production.
Our liquid hydrocarbon products are similar to analogous products
derived from crude oil refining, but have environmental benefits that
traditional refinery products do not possess. Because of the way they are
produced, GTL products are less polluting, and the products are substantially
free of contaminants usually found in crude oil, such as sulphur, aromatics,
nitrogen and heavy metals. The absence of these contaminants substantially
reduces harmful air emissions from vehicles that use these products.
Vehicle engine tests of our synthetic diesel product conducted by
independent labs show it is clean-burning. GTL products are free of sulfur,
eliminating the release into the atmosphere of harmful sulfurous oxide (SO), and
are free of chemical compounds known as aromatics, which are believed to be
carcinogenic.
Our diesel fuel can be used directly or as a blending component with
conventionally refined petroleum diesel to reduce harmful emissions. Moreover,
we believe our diesel can be used in currently available diesel engines without
any modifications. The environmental benefits may lead to sales of our diesel
fuel at a premium, over conventional diesel fuel.
The Rentech GTL Technology uses an iron-based catalyst. An important
aspect of our catalyst is that it operates on feedstock having wide ranges of
hydrogen-to-carbon ratios. This enables our technology to work with most
carbon-bearing materials. We believe that cobalt catalysts can only be used
efficiently to convert so-called sweet (sulphur-free) natural gas to liquid
hydrocarbons. The capabilities of our iron-based catalyst, which to our
knowledge is shared only by Sasol, enable the Rentech GTL Technology to convert
either gases, liquids or solids that contain carbon materials into liquid
hydrocarbons.
We believe the Rentech GTL Technology has unique and favorable
qualities when compared to the other GTL technologies. Many of these
advantageous properties result from the fact that our catalyst is iron-based,
rather than being derived from cobalt, as are all the other catalysts except the
iron catalyst used by Sasol. Compared to cobalt-based catalysts, we believe our
iron-based catalyst:
o Is less expensive because the raw materials for the catalyst are
readily available.
o Works with gas, liquid and solid feedstocks because it can convert
synthesis gas with a wide range of hydrogen-to-carbon monoxide ratios.
o Is more tolerant of sulphur contained in the feedstock, which makes it
perhaps the only feasible catalyst for industrial off-gases, natural
gas reserves with excessive amounts of carbon dioxide, nitrogen or
other diluents, and with refinery residues.
o Does not generate a hazardous waste.
o Produces more olefinic products, which may create better fuels and
petrochemical feedstocks.
o Has the disadvantage of a shorter catalyst life, which is offset by the
lower cost of the catalyst.
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Another advantage of the Rentech GTL Technology is use of the slurry
reactor for the key F-T conversion step. We believe that a slurry reactor,
unlike the fixed bed and fluidized bed reactors used by most of our competitors,
offer the following advantages:
o Lower capital cost.
o Lower operating cost.
o Lower pressure drop from the inlet to the outlet of the F-T reactor,
under some design conditions.
o On-line catalyst replacement.
o No anticipated patent infringement when used with our iron-based
catalyst.
SOURCES OF FEEDSTOCKS FOR THE RENTECH GTL TECHNOLOGY
Economic use of the Rentech GTL Technology requires substantial
quantities of inexpensive carbon-bearing gases, liquids or solids that can be
economically converted into feedstock gases. The licensees of our technology are
responsible for obtaining their own supplies of carbon-bearing feedstock.
Many types of carbon-bearing materials are suitable sources of
feedstock for the Rentech GTL Technology. Several of these materials are in
abundant supply worldwide.
Natural gas is one of the most important feedstocks for the Rentech GTL
Technology, and there are vast worldwide sources of this gas. The U.S.
Department of Energy has reported that there are estimated worldwide gas
reserves in excess of 5,000 trillion cubic feet as of January 1, 1999. Industry
participants have estimated, according to the Oil & Gas Journal, Special Report,
December 6, 1999, that approximately half of the world's natural gas reserves
may not be marketable in the near future because they are stranded in remote
locations.
The Rentech GTL Technology may provide a means of utilizing
carbon-bearing resources that are currently unmarketable for several reasons.
Many large, known natural gas reservoirs around the world are presently
uneconomic to develop because they are stranded in remote locations too far from
markets for economic transportation in the gaseous state or because of diluents.
Stranded gas refers to gas in identified reservoirs for which there is no
profitable market because the gas cannot be economically transported, usually
because of the costs of transportation over a great distance, to the market
where it might be used.
The stranded reserves may be suitable sources of low-cost feedstock for
plants using our technology that may be constructed near the reserves. After
conversion of the natural gas or other feedstock into liquid hydrocarbons, the
liquid products can be transported in trucks, tankers and pipelines like
conventional liquid hydrocarbons.
Other natural gas produced in association with oil fields may be vented
or flared into the atmosphere or reinjected into the oil field because of its
lack of value due to its remote location. The fact that they are stranded makes
them potential sources of inexpensive feedstock for the Rentech GTL Technology.
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Still other natural gas reserves are unmarketable due to the presence
of diluents, including carbon dioxide or nitrogen. These low-energy content
gases may be suitable feedstock for the Rentech GTL Technology because our
iron-based catalyst can use a wide variety of feedstocks.
Potential feedstocks of growing significance for the Rentech GTL
Technology are the heavy high-sulphur residual fuels provided at crude oil
refineries. These materials are commonly referred to as refinery residues or
refinery bottoms. Some refinery residues, unless they are treated at
considerable expense, must be disposed of as hazardous materials. By
incorporating the Rentech GTL Technology into the refinery, the residues can be
gasified, that is, transformed into synthesis gas, and converted into valuable
end products. Based on predictions of industry analysts, we believe that within
the next ten years, a surplus of high-sulphur residues will be accumulated at
refineries in amounts that cannot be absorbed by the market. The synthesis gas
resulting from refinery residues is characterized by a low hydrogen-to-carbon
monoxide ratio. That makes it an excellent feedstock source for conversion into
liquid hydrocarbons by the application of our iron-based Rentech GTL Technology.
Other important sources of feedstock are coal, coalbed methane gas, and
industrial waste gases. Some low grade coal deposits and high sulphur coal
deposits that are uneconomic for coal mining may also be economic for use as
feedstock for the Rentech GTL Technology.
APPLICATIONS OF THE RENTECH GTL TECHNOLOGY
The Rentech GTL Technology can convert a broad range of feedstocks,
whether they are gases, liquid, or solids, that are carbon bearing, into liquid
hydrocarbon products. The gas feedstocks include natural gas and industrial
off-gases. The liquid feedstocks include heavy crude oil and refinery
byproducts. The solid feedstocks include coal and petroleum coke.
The Rentech GTL Technology can be applied in both new and existing
petrochemical and industrial plants. For example, our technology would enable
refineries to more fully utilize heavier crude oil and refinery bottoms to
produce an improved slate of high-value products. Potential benefits to the
refiner include co-production of gas-to-liquids products, steam and electrical
power; a reduction in waste disposal costs; and as a result, increased profit
margins on operations of the refinery.
Currently, many methanol production plants are uneconomic, and several
are closed. This is due to a worldwide oversupply of methanol as well as low
prices. The oversupply may worsen in the future as use of the gasoline additive
MTBE, the largest end-market for methanol, is phased out of many markets,
including the large market in California. We believe that some of these plants,
particularly those with larger production capacities, can be converted to use
our technology and operate profitably to produce GTL products.
A high priority for the Rentech GTL Technology includes remote or
stranded reserves of natural gas as well as natural gases associated with
producing crude oil fields that are currently being flared, re-injected into the
reservoir or merely left in the ground unproduced. We believe that increasing
environmental and regulatory pressures to reduce the wasteful flaring of natural
gas, the economic attractiveness of monetizing stranded assets, and the growing
need for cleaner fuels will lead to increased interest of oil and gas producers
in this application. Our technology makes feasible on-site conversion of these
resources into liquid hydrocarbons that can be more easily and cost-effectively
transported to market.
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We believe that the Rentech GTL Technology could provide significant
benefits to consumers and businesses around the world in a variety of ways. The
potential benefits of the Rentech GTL Technology include:
o Improving transportation fuels, through blending with conventional
diesel, to reduce the sulfur content which produces harmful air
emissions. It can also reduce the aromatics released into the
atmosphere, which are believed to be carcinogenic.
o Improving refinery economics through more efficient use of heavy and
sour crude oil and refinery residues.
o Enhancing the value of uneconomic methanol or other industrial plants
that have costly gas reforming systems in place that can be
alternatively used to make synthesis gas for the production of GTL
products.
o Allowing natural gas producers to economically develop and produce
remote and substandard gas resources, thus increasing their proved
reserves and revenues.
o Facilitating efficient co-production of electricity and GTL products
from coal and other feedstocks while significantly reducing harmful
emissions.
o Broadening available supplies of clean energy and transportation fuel
to help meet the rapidly growing worldwide demand.
o Producing high-value, high-purity specialty products to meet
increasingly stringent environmental standards and product
specifications.
o Enhancing U.S. energy security by facilitating expanded use of
relatively abundant coal and natural gas resources for needs
traditionally met by increasing amounts of imported crude oil and fully
refined products.
BUSINESS STRATEGY FOR THE RENTECH GTL TECHNOLOGY
Our business strategy is to achieve commercial use of our technology in
commercial gas-to-liquids projects. That commercial use would expand our revenue
and earnings through increased license fees and engineering contracts, as well
as royalties on production of liquid hydrocarbons and revenues from sales of our
catalyst.
Our business goal is to achieve successful use of the Rentech GTL
Technology in a commercial-scale GTL plant as soon as practical. We believe the
results will demonstrate economic use of the technology. Economic operation of a
plant would likely encourage others to build commercial plants using the Rentech
GTL Technology, and the commercialization of the Rentech GTL Technology would
probably be accelerated.
We are seeking to implement our goal of bringing one commercial-scale
plant into operation through two principal means. These are to retrofit an
existing industrial gas plant to use the Rentech GTL Technology, and to
encourage at least one licensee to start construction of a new plant.
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o RETROFITTING EXISTING INDUSTRIAL GAS PLANTS
We believe that retrofitting one or more existing industrial gas plants
would enable us to commercialize our technology more quickly than would building
a new plant. To further this strategy, we are studying the feasibility of
converting one of several methanol plants, ammonia plants or other industrial
gas plants to use our technology.
We believe that our concept of retrofitting existing industrial gas
plants to use the Rentech GTL Technology may be a cost effective method for
producing GTL products. Some industrial gas plants have the front-end equipment
in place to prepare synthesis gas. That equipment can be used to manufacture
synthesis gas for the Rentech GTL Technology. In addition, these established
plants have other facilities that could be used as they are, such as boiler feed
water systems, control rooms, fire protection, product transportation
facilities, security fencing and permits. To retrofit a plant, we would add our
synthesis gas conversion reactors to the existing front-end system.
Successful conversion of an existing industrial plant would provide
several benefits to us. We might receive fees for granting licenses for use of
the Rentech GTL Technology, contract payments for our engineering services,
payments for our catalyst, and royalties on the products. If we succeed in
owning an equity interest in a plant, sale of the products would provide new
revenue streams to us, assuming the retrofitting project is economically
successful and sales are made at a profit.
We are targeting two types of industrial gas plants for our studies on
the feasibility of converting them to use the Rentech GTL Technology. One type
is mothballed plants that have been closed because they no longer economically
produce methanol, ammonia or other products, or are operating only at marginally
economic rates. The feedstock for our technology would be obtained from the
natural gas pipeline that already runs to the site.
We are also studying the economic feasibility of converting several
industrial gas plants that presently are operating and producing industrial
off-gases to use the Rentech GTL Technology. These plants would use the
off-gases as feedstock. We are studying both the cost of adding equipment and
systems to apply our technology to the industrial off-gas as well as the market
for the liquid hydrocarbon products.
While we preliminarily estimate that some industrial plants could be
retrofitted to use our technology at significantly less expense than
constructing a new plant to use the Rentech GTL Technology, we have not
completed feasibility studies on the costs of the retrofits or the full impact
of these costs on the economics of the production.
In order to improve the economics of retrofitting an existing
industrial gas plant, we may consider entering into a joint venture with the
plant owner. We might consider making a capital investment or contributing use
of our technology to acquire an ownership interest. We do not have adequate
capital to make this type of capital contribution. In other situations, if
project financing is available, we may be able to earn a part ownership interest
in a retrofitted plant through contribution of some aspect of our technology.
Our business strategy also includes planning for the Sand Creek
methanol plant in the Denver area. We own a 50% interest in this plant, which is
currently mothballed. We have completed the basic engineering and design work
required to convert this plant from a methanol facility to a GTL facility that
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uses the Rentech GTL Technology. While our studies are not complete, we are
considering converting the plant into a pilot plant for making further
improvements to our technology.
o CONSTRUCTION OF NEW PLANTS TO USE THE RENTECH GTL TECHNOLOGY
Our business strategy also includes selling licenses to oil and gas
companies and other providers of energy. These licenses would construct their
own new plants.
We believe that there are substantial numbers of potential users of the
Rentech GTL Technology who could benefit from its use, particularly because of
several trends impacting the energy, transportation and environmental
industries. These factors include:
o Increasingly stringent requirements to reduce tailpipe
emissions and strengthen clean-air standards.
o The contradictory need of refiners to cost-effectively produce
cleaner fuel from increasingly poor quality crude oils.
o The regulatory curtailment of natural gas flaring.
o Economic incentives to profitably develop vast, remote
resources of natural gas.
o Steadily increasing power demand around the world.
o A need to utilize coal to generate power without the emissions
generated at coal-fired power plants.
o The search for a practical fuel source for fuel cells that
would produce electricity.
For new plants, we intend to pursue small to medium-sized projects,
ranging from 500 to 20,000 barrels per day of GTL products. While our technology
would enable us to pursue larger projects, we believe that small to medium size
projects are economic and represent a substantial portion of the near-term GTL
market.
MARKETING
We market licenses of the Rentech GTL Technology for use to owners of
natural gas feedstock who would construct, finance, and own their plants. To
facilitate business development, we often meet with oil and gas companies,
refiners, owners of fossil fuel resources, and others involved in the energy
industry. Our senior officers are frequent participants and speakers at
gas-to-liquids seminars and energy conferences. We employ one person whose
primary duties are marketing. The features of the Rentech GTL Technology have
become generally known to major oil and gas companies and others throughout the
energy industry.
We are presently engaged in exploratory discussions with several
potential licensees. The sources of feedstock that they own vary from several
types of stranded natural gas to differing sources of industrial
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off-gas. The projects would be located at sites scattered around the world. The
plants being discussed would range in production capacity from about 2,000 to
50,000 barrels per day of liquid hydrocarbons. None of these possibilities have
developed into specific proposals or license negotiations. We have contracted to
perform studies on the feasibility of the proposals for a few of these potential
licensees. It is too early in the study process for us to know whether one or
more of these proposals will result in a license followed by construction of a
plant to use the Rentech GTL Technology.
In order to increase our marketing capability, we have formed strategic
alliances with four significant engineering firms. Each of these firms has an
international presence and has experience in fields related to the Rentech GTL
Technology. Each of them is seeking situations where our technology could be
used in GTL plants and they could obtain contracts to provide their respective
engineering services.
o BC PROJECTOS, LTD.
We have designated BC Projectos, Ltd., a Brazilian engineering firm, as
our exclusive engineering representative in Brazil. BC Projectos is one of
Brazil's foremost engineering firms in the field of cogeneration plants,
thermoelectric power generation and energy optimization studies. Its staff has
designed Brazil's first combined cycle plant (a highly efficient electric plant
powered by natural gas and steam). It has also designed more than 70% of
Brazil's capacity of thermoelectric plants using gas turbines. BC Projectos has
provided services to Amoco, Consolidated Natural Gas, Enron, Shell, Total, Union
Carbide, Petrobas, the national oil and gas company of Brazil, and numerous
other South American customers.
Together with BC Projectos, we intend to jointly identify projects for
use of the Rentech GTL Technology, especially in Brazil. We will conduct
feasibility studies, identify potential joint venture parties and financing, and
cooperatively provide detailed engineering support for the projects.
o DRESSER ENGINEERING
We have an arrangement with Dresser Engineering Company of Dallas,
Texas, for joint marketing of our technology with the engineering services of
Dresser Engineering. Since 1926 Dresser Engineering has been providing
engineering, procurement and construction management services to the gas
processing and refining industries. The marketing arrangement allows our two
companies to take advantage of each other's strengths for marketing the Rentech
GTL Technology on a worldwide basis. Dresser Engineers is in the process of
beginning feasibility studies and preliminary engineering for three
gas-to-liquids projects located in Africa. We expect that any of these projects
that proceed would use the Rentech GTL Technology.
In 1999, Dresser Engineering's parent company, Dresser Engineers &
Constructors, Inc., and we exchanged ownership of minority blocks of our shares
on a tax-free exchange basis. Dresser Engineers & Constructors acquired 7.5% of
our common stock outstanding as of September 30, 1999, and we acquired 5% of the
common stock of privately held Dresser Engineers & Constructors, Inc. For
additional consideration, we later acquired another 5%, for a total of 10% of
its common stock.
In 2000, Dresser prepared a preliminary cost study of the feasibility
of converting the Sand Creek methanol plant into a GTL plant using our
technology. We capitalized these costs as capitalized software.
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We are using this software program as a generic model for conducting feasibility
studies and providing data for our engineering designs for plants. We own a 50%
interest in the Sand Creek plant.
o JACOBS ENGINEERING UK
In February 2000 we signed an agreement with Jacobs Engineering UK
Limited for joint marketing of the Rentech GTL Technology and Jacobs'
engineering services. We are marketing our combined capabilities to potential
customers in several locations throughout the world.
We are targeting customers who would use our joint services in new
natural gas plants as well as in existing industrial gas plants that would be
retrofitted for our technology.
The Jacobs Engineering Group, headquartered in Pasadena, California, is
the parent company. It is an international engineering and construction company
with approximately 23,000 employees and annual revenues of U.S.$3 billion. It
has offices located throughout the world.
Jacobs is experienced in engineering for gas synthesis technology. It
provides a full range of consulting and construction engineering services from
inception of a project through construction, start-up, operations and
maintenance.
o COMART
In November 2000 we granted rights to COMART, an Italian engineering
firm located in Livorno, Italy, to market our Rentech GTL Technology for use
with natural gas feedstock. COMART is authorized to license our technology
worldwide, excluding India, on a non-exclusive basis. We also granted COMART the
exclusive right to market our technology to ENI SpA, Italy's largest oil and gas
company, and Edison SpA, Italy's largest private producer of electric energy,
for projects using natural gas, worldwide, under the same terms.
COMART has 800 employees. It is a consortium created by two of Italy's
leading energy design and construction companies. These are Calderia
Construzioni Termo-meccaniche S.r.l. (CCT), a subsidiary of the Gruppo
Marcegaglia, an Italian conglomerate with 3,600 employees and over US$1.5
billion in revenue, and Tozzi Sud S.p.A. (Tozzi).
CCT, founded in 1955, designs and markets steam generators and boilers.
It also designs, constructs and assembles environmentally friendly power plants.
Tozzi, with 40 years of experience, is one of Italy's leading designers
and producers of electric switchboards and electro-instrumentation plants.
Additionally, Tozzi Engineering and Development (Ted) a division of Tozzi,
offers complete turnkey engineering and construction services, mainly to the
oil, gas, and chemical industries.
COMART holds the exclusive worldwide rights to license four gas
processing technologies owned by Gas Conditioners International Co. (GCI) a U.S.
company. One of these processing technologies is the "Coldfinger" process.
Coldfinger is an exhauster for removing trace quantities of water from glycol
solutions. It is used by such COMART clients as Amereda Hess, BP Amoco, Chevron,
Exxon/Mobil,
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Texaco, and Valero Energy, among others. Coldfinger, along with the three other
GCI technologies, conditions gas in over 100 facilities around the world.
o POTENTIAL CUSTOMERS AND MARKETS
The potential customers and markets for our Rentech GTL Technology are
diversified and worldwide. Industries and other business segments most likely to
use the Rentech GTL Technology include the following:
o Existing industrial plants, such as underutilized methanol or
ammonia plants that are now uneconomical because of low market
prices for the present product.
o Owners of stranded natural gas seeking an economical way to
develop and transport these resources to market.
o Owners of offshore natural gas with no access to pipelines,
which desire to convert the gas into transportable liquid
hydrocarbons through plants mounted on barges that use the
Rentech GTL Technology.
o Owners of substandard natural gas that is not useable through
traditional means because it contains excessive amounts of
carbon dioxide, nitrogen or other diluents.
o Owners of oil fields where flaring of natural gas is outlawed
or penalized, or where natural gas is reinjected into oil
wells but interferes with oil production from the wells.
o Municipalities that are required by clean air laws to operate
fleets of cleaner buses and other vehicles.
o TEXACO ENERGY SYSTEMS, INC. LICENSE FOR LIQUIDS AND SOLIDS
Texaco Energy Systems, Inc. (Texaco) is our exclusive licensee for
liquid and solid carbon-bearing feedstocks. The liquid materials include heavy
crude oil and refinery byproducts such as the so-called refinery bottoms. The
solid materials are such hydrocarbons as coal and petroleum coke. The
prospective users of a sublicense from Texaco include the following:
o Owners of refineries, whose efficiency and profits might be
increased by adding the Rentech GTL Technology to better
utilize an increasingly heavier crude oil supply and growing
inventory of refinery bottoms as feedstock.
o Owners of coal resources, including low grade and high sulfur
coal deposits.
o Owners of heavy oil and tar sands properties.
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LICENSES, CONTRACTS AND JOINT VENTURES FOR THE RENTECH GTL TECHNOLOGY
We have granted licenses to several companies to use the Rentech GTL
Technology. They are presently developing their own plans on how to proceed. To
accelerate our efforts and leverage our technology, we have also formed several
strategic relationships with owners of complementary technologies, engineering
capabilities, financial strength and potential projects. These relationships are
designed to broaden application of our technology and accelerate its deployment
in commercial GTL facilities.
We exploit the Rentech GTL Technology by granting licenses for its use.
License agreements are generally granted in exchange for license fees,
engineering design fees, and production royalties. The royalties are based upon
a percentage of gross proceeds from sales of the liquid hydrocarbons produced
through use of the Rentech GTL Technology or upon some other measure of product
value. Licenses may be granted either exclusive or non-exclusive rights to use
the Rentech GTL Technology in identified countries or other geographic areas.
The license fees and terms are individually negotiated and may vary.
Plants are generally constructed and owned by licensees at no cost to
us. We may also provide contract engineering, operational and other technical
services to licensees during construction and startup phases of a new plant. In
the future, we may supplement our licensing fees and royalties with direct
investments in gas-to-liquids plants and facilities. Our licenses provide that
we are entitled to revenues from sales of our catalyst whenever Rentech GTL
Technology is used, whether in plants licensed directly by us or sublicensed by
our licensees.
We have granted Texaco an exclusive, worldwide license (except in
India, for which Donyi Polo Petrochemicals Ltd. holds an exclusive license), to
use and sublicense Rentech GTL Technology for conversion of solid and liquid
feedstocks in plants where a gasification process is used. We are to share in
revenues received by Texaco from its exclusive license to use the Rentech GTL
Technology in projects where solids and liquids are used as feedstock.
We retain rights to license the Rentech GTL Technology in the entire
range of use for natural gas conversion projects. We are, for our own account,
actively marketing licenses of our technology for use in plants using natural
gas.
Our licensees are responsible for financing, constructing and operating
their own conversion plants that use the Rentech GTL Technology, including our
catalyst. Licensees will also be required to pay for our synthesis gas reactor
modules that may be supplied by us or our fabricator to meet the special design
specifications required for each plant. It is the licensee's obligation to
obtain the feedstock material, either carbon bearing solids, liquids or gases,
to be fed into the licensee's plant. Each licensee is also responsible for
marketing the liquid hydrocarbon products produced from its licensed plant.
The successful use of the Rentech GTL Technology by licensees largely
depends upon their ability to design, construct and operate commercial scale
plants using the technology. Their ability to obtain low-cost feedstock is
essential. They must obtain adequate financing, construct plants specifically
designed for the chemical composition of the feedstock, and assure that the
plant equipment and machinery is mechanically adequate. Licensees are also
responsible for obtaining governmental permits. In remote locations, licensees
may be required to add supporting infrastructure such as roads and utilities.
Our belief that our technology can be cost effective and that
full-scale conversion plants using the technology can be profitably operated
depends upon several factors, including the availability of low cost
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feedstock, the economic efficiency of the technology, and market demand for the
end products at profitable prices.
Conversion plants that use the Rentech GTL Technology may be designed
to produce from several thousand up to 50,000 or more barrels per day of
product. The smaller plants are expected to be assembled from modular systems
that are trucked into remote locations where inexpensive sources of feedstock
may be available. Plants with the largest production capabilities may have to be
constructed directly at the sites where they are to be operated. The cost of
constructing conversion plants will vary depending upon production capacity;
available infrastructure such as electrical power, water supplies, roads, gas
pipelines and the like; location; cost of financing; whether the feedstock is a
gas or carbon-bearing solid that must first be converted to synthesis gas, and
other factors.
The designs of plants for use of Rentech GTL Technology are complex.
Each design must be developed to fit the chemical composition of the feedstock
and also tailored to produce the desired products. Business dealings in foreign
countries, the ability of licensees to obtain financing for construction of
plants, and the complexity of design are factors that may result in delays in
schedules for financing, design, construction and startup of operations of a
plant following the initial decision to proceed with construction.
Revenues related to the Rentech GTL Technology represented
approximately 20%, 19% and 0% of our revenues during the fiscal years ended
September 30, 2000, 1999 and 1998, respectively.
o TEXACO ENERGY SYSTEMS, INC. LICENSE
In October 1998, we granted an exclusive technology license to Texaco
Natural Gas, Inc. (now Texaco Energy Systems, Inc., a division of Texaco, Inc.)
to use and sublicense the Rentech GTL Technology in projects where solid and
liquid hydrocarbons are used as feedstock. The license also granted Texaco a
non-exclusive license for conversion of natural gas to liquids.
Under the license, Texaco can use Rentech GTL Technology in combination
with Texaco's proprietary gasification technology to produce liquid hydrocarbon
products such as transportation diesel fuel, naphtha, and specialty products.
The Texaco gasification process is a proprietary technology for producing
synthesis gas from a broad range of feedstocks such as coal, petroleum coke,
residual oils, and byproducts generated in refineries and chemical plants.
Worldwide there are 68 Texaco-owned or licensed gasification plants operating or
under construction. Texaco may also sublicense the Rentech GTL Technology to
third parties that may use Texaco's gasification technology or similar gasifiers
provided by third parties such as Lurgi, Royal Dutch/Shell and others.
Under the terms of the agreement, Texaco has an exclusive, worldwide
license, except in India, to use for its own account, and sublicense the Rentech
GTL Technology to third parties in projects where solid and liquid hydrocarbons
(non-gaseous materials) are used as feedstocks for the generation of synthesis
gas in a gasification process such as the proprietary Texaco gasification
process. Additionally, we granted Texaco a non-exclusive license to use Rentech
GTL Technology anywhere in the world except India, for its own account with 100%
natural gas feedstock. Texaco does not have the right to sublicense to third
parties the Rentech GTL Technology for natural gas. We retain the right to
license to others the entire range of our technology for use with natural gas.
We received a license fee for granting the Texaco license. Texaco is also paying
us advance royalty fees. These advance fees are not recoverable by Texaco except
as offsets against 50% of the production royalties and catalyst payments that
Texaco may owe in the future for use of
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the technology for production of liquid hydrocarbons. Texaco is to pay for all
costs of further developing, marketing and deploying its use of the Rentech GTL
Technology. Texaco and we will share revenues from plants licensed under the
Texaco license agreement. The license to Texaco enables it to terminate the
agreement upon certain payments to us.
o TEXACO ENERGY SYSTEMS, INC. TECHNICAL SERVICES AGREEMENT.
On June 15, 1999, Texaco entered into a technical services agreement
with us to follow up our 1998 licensing agreement. Under the 1999 contract, we
are undertaking the necessary tasks required for the integration of the Rentech
GTL Technology with Texaco's gasification process. The combination of these
technologies will allow for the use of a broad range of feedstocks such as coal,
petroleum coke, residual oils and byproducts generated in refineries and
chemical plants.
The 1999 agreement provides that we will perform technical and
development work at our development and testing laboratory in Denver. Our work
is being conducted in cooperation with Texaco's personnel. Texaco is paying us
for its technical services and costs. Based on the tasks to be performed, we
estimate that these payments will, over a period of several years, approximate
$2 million.
o EARLY ENTRANCE COPRODUCTION PLANT.
In August 1999, we, as part of a team led by Texaco, were selected by
the U.S. Department of Energy (DOE) to develop the data and designs for what the
DOE calls a coproduction facility, or more specifically, an "Early Entrance
Coproduction Plant". Texaco plans to combine its gasification technology with
the Rentech GTL Technology to enable it to produce both high quality
transportation fuels and electricity from coal and petroleum coke at a
coproduction plant.
The Texaco proposal was one of three proposals selected by the DOE in
August 1999 to proceed on this program. The DOE's contract is intended to
encourage private industry to develop a set of entirely new multi-purpose energy
plants that combine several energy processes into a single facility. The DOE
contract requires designs that enable highly efficient conversion of the energy
in fossil fuels into electricity or heat as well as transportation fuels and
chemicals.
The DOE is making a contract award of approximately $8 million to
Texaco's project team. The work is anticipated to continue for several years.
The team members will use Texaco's gasification technology, the Rentech GTL
Technology, General Electric's power generation design, Praxair's oxygen plant
design and Kellogg, Brown and Root's engineering capabilities. After a
feasibility study and successful completion of an integrated design, the team
will develop an engineering design package for a fossil fuel plant to use the
combined technology.
We have completed our part of the first phase of the DOE contract. Our
work to date consisted primarily of preparing a preliminary engineering design
for the plant that would use the Rentech GTL Technology. As part of this effort,
we participated in November 2000 in a privately funded program to demonstrate
use of the Rentech GTL Technology. The program was carried out at the U.S.
Department of Energy's slurry reactor facility in La Porte, Texas. Our
preliminary review of the test data confirms the expected performance of our
patented and proprietary Fischer-Tropsch catalyst. Key reactor operating
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parameters were also demonstrated. The preliminary data indicated that the
technology for separating waxes and catalyst met expectations. We collected
representative products for use in the next phase of work on the Early Entrance
Coproduction Plant project, for which we are contributing our technology.
We consider the DOE contract award to be an important recognition of
the significance of utilizing the Rentech GTL Technology with Texaco's
gasification process to produce synthetic liquid hydrocarbons from non-gaseous
fossil fuels. We believe the DOE contract will help lead to commercial use of
the Rentech GTL Technology, not only with this type of feedstock, but also with
other potential feedstocks.
o IMPORTANCE OF OUR TEXACO AGREEMENTS
Our agreements with Texaco Energy Systems, Inc. are important to us in
several ways. Revenues from Texaco provided 20% and 19% of our total revenues
for the years ended September 30, 2000 and 1999. Texaco's decision to study use
of the Rentech GTL Technology also has the potential to lead to additional
revenues for us in the future.
o We are presently receiving revenues from Texaco as minimum
payments for continuing our technology license and providing
our technical services.
o We anticipate receiving new revenues from our participation
with Texaco as part of the team it has organized to work on
the DOE contract to develop an early entrance coproduction
plant. If this development work results in an engineering
design package that can be used in coproduction plants, it
could lead to use of our technology in plants of this type.
o We expect that commercial use of our technology in the
announced DOE project might encourage other members of the
energy industry to use our technology.
o Texaco's license of our technology and its contract for us to
provide technical services related to Texaco's potential use
of our technology provides us a degree of credibility in the
energy industry and financial markets. This imprimatur may
encourage other energy companies to license our technology. It
could also make it easier for us to raise capital from
investors.
If Texaco should decide to terminate its various agreements with us, we
would lose revenues that we are presently receiving from it, potential future
revenues from projects with which we are associated with it, and credibility in
the energy industry and financial market. Loss of this customer could have a
material adverse impact upon our revenues and our future prospects.
o OROBOROS AB LICENSE
We entered into a letter of intent in October 1999 to grant a license
to Oroboros AB, a Swedish corporation headquartered in Gateborg, Sweden. The
license would allow Oroboros to use the Rentech GTL Technology for the
industrial off-gas produced by Oroboros's steel plant located at Oxelosund,
Sweden, or other steel mills.
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The Oxelosund steel plant currently generates approximately 140 million
normal cubic meters per year of off-gases. These industrial off-gases are now
flared into the atmosphere. The flaring, which occurs daily, produces about
100,000 tons of carbon dioxide, which is a greenhouse gas, and 20,000 tons of
de- ionized water per year. By using the Rentech GTL Technology, these
industrial off-gases, a mixture of hydrogen and carbon monoxide, can be
converted into clean burning, synthetic fuels and other useful products rather
than polluting the atmosphere. Oroboros has estimated that use of our technology
in this one steel plant could reduce carbon dioxide emissions in Sweden by
100,000 tons per year or the equivalent of one-quarter of 1% of the total annual
carbon dioxide emissions in Sweden.
Oroboros plans to produce what it refers to as eco-paraffin, sometimes
called ecodiesel. According to an assessment by Oroboros, the cost of producing
eco-paraffin will be lower than for other alternative fuels, such as
reformulated diesel fuel, currently available in Sweden. Additionally, Oroboros
has stated that no engine modifications are necessary for vehicles that use
eco-paraffin.
The proposed license agreement has not yet been signed by the parties.
No schedules have been announced for beginning construction, completing
construction, or start up of operations of a proposed GTL plant for Oroboros.
o PERTAMINA FEASIBILITY STUDY
We reached an agreement in December 2000 to conduct a feasibility study
with Pertamina, the Indonesian state oil and gas company. This joint study will
evaluate the cost, feasibility and potential markets for products that could be
realized by a small gas-to-liquids plant located in Indonesia. The plant under
study would have a design capacity ranging from 5,000 to 15,000 barrels per day
of liquid hydrocarbons. We anticipate that the study would take four to six
months. If it indicates that the project would be feasible, we anticipate
negotiating a license agreement with Pertamina. Pertamina is one of the world's
largest oil companies with approximately 30,000 employees. Through Indonesia's
Production Sharing Contract, Pertamina holds a substantial interest in the
country's daily production of 1.6 million barrels of oil and 8.7 billion cubic
feet of gas. The production is generated by 35 operators from fields all over
Indonesia, both onshore and offshore.
o OTHER OPPORTUNITIES FOR THE RENTECH GTL TECHNOLOGY
We are discussing several other proposals for use of the Rentech GTL
Technology. We are participating in some feasibility studies with other
companies who intend to provide their engineering services or financing
capabilities to the proposed projects. Some of these talks are directly with
owners of natural gas resources. These discussions are in preliminary stages,
and no plans to proceed have been made at this time.
One of the proposals is to construct a floating gas-to-liquids plant
for use offshore to process natural gas that is now flared from offshore oil
wells now in production. This type of gas resource is now stranded because there
are no current means to bring it to market. We are cooperating with GTL
Resources PLC and Worley Engineers Ltd in studying the capital costs and
operating costs and overall economic feasibility of developing floating GTL
plants designed for use of our technology.
Several other discussions involve deposits of natural gas or existing
industrial gas plants. The sites where these possibilities exist are located
around the world, and include most of the continents.
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o THERMAL CONVERSION CORPORATION
In August 1998, we entered into a research and development venture with
Thermal Conversion Corporation (TCC) whose offices are located in central
Washington. In August 2000, TCC became a wholly-owned subsidiary of Nuvotec,
Inc. of Richland, Washington. Nuvotec is a privately held company engaged in
developing clean energy systems. Among other technologies, TCC is developing and
marketing its patented technology for reforming natural gas into synthesis gas
to be used as feedstock for Fischer-Tropsch plants.
TCC's technology creates an electrically generated high-power electric
current inside a high temperature reactor to convert carbon bearing gases
induced into the reactor into synthesis gas. The TCC technology is a thermal and
chemical process referred to as plasma technology. Tests have been conducted by
TCC to determine whether TCC's plasma technology, when used with our catalyst,
economically converts natural gas into synthesis gases of predetermined
compositions. If so, the synthesis gases produced by this process could be
suitable for use in plants that use the Rentech GTL Technology, avoiding the
expense of an oxygen unit to prepare the synthesis gas. Successful combination
of TCC's plasma technology with the Rentech GTL Technology would enable users of
our technology to use smaller scale and less expensive gas conversion plants
than are now required. This could provide a cost-effective solution to the need
for conversion plants that are small enough to be mounted and economically used
on barges for production of liquid hydrocarbons from offshore natural gas wells.
The initial demonstration of using our catalyst with TCC's plasma
technology has yielded positive results. The energy lost in the conversion of
methane to synthesis gas was as low as 1%. Syngas mixtures were controlled close
to the compositions predicted by chemical equilibrium calculations. Carbon
deposition (or soot), a wasteful byproduct of syngas produced by other thermal
methods, was controlled to insignificant levels. Continuing tests are now needed
to focus on optimizing the process for energy efficiency and cost.
The U.S. Department of Energy made a $175,000 grant in July 1999 to
support the Rentech-TCC demonstration project. The DOE's grant funds were used
to test whether introducing steam to natural gas feedstocks of various
compositions increases the energy efficiency and cost effectiveness of the
combined Rentech-TCC technologies. We expect to meet with TCC's officers in the
next few months to design a joint plan for further efforts to combine the
Rentech GTL Technology with TCC's plasma technology.
If this joint venture is successful, we will be entitled to a
nonexclusive license to use the TCC plasma technology with the Rentech GTL
Technology. We are also to receive, for 10 years, 5% of any future license fees,
royalties or other payments in lieu thereof that are received by TCC for use of
its plasma technology in any other Fischer-Tropsch projects. To date no revenues
have been earned related to this license.
o DONYI POLO PETROCHEMICALS
In September 1992, we granted exclusive rights to ITN, Inc., a Colorado
corporation, to market the Rentech GTL Technology in India. ITN, Inc. is owned
by Dr. Mohan S. Misra, who also owns a majority of ITN Energy Systems, Inc. See
"ADVANCED TECHNOLOGIES--ITN Energy Systems, Inc. (ITN/ES). ITN, Inc. is
entitled to 20% of our royalty, license fee or other revenues from plants in
India.
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Through the efforts of ITN, Inc., we granted a license to Donyi Polo
Petrochemicals Ltd. for a plant in India using the Rentech GTL Technology. The
proposed plant is to be a 360 barrel per day plant, designed to use flared gas
in the state of Arunachal Pradesh in northeastern India. Gas feedstock that is
presently flared from oil wells has been allocated to this project by the state
government of Arunachal Pradesh. We completed a $300,000 contract for the basic
design of the plant in 1995. Also in 1995, Donyi Polo purchased our Synhytech
plant in Pueblo, Colorado. In 1996, it moved the components to India for
reassembly. In addition to a $250,000 contract for preliminary engineering
services awarded to us, Donyi Polo Petrochemicals contracted with Humphries &
Glasgow, Mumbai, India, for the prime engineering contract. In 1998, the
detailed engineering design of the plant was completed by Humphries & Glasgow.
We have earned $120,000 as payments due toward our license fee. The license
agreement provides for royalty payments to us for seven years after commencement
of production from the plant. The licensee is to construct and operate its own
manufacturing plant, using our patents, to produce catalyst for its plant.
Donyi Polo has not announced a decision to proceed with completion of
the Indian plant. We do not expect additional engineering design contracts,
license fees or other revenues from it in the foreseeable future.
PRODUCTS AND MARKETS FOR GTL PRODUCTS
Plants using the Rentech GTL Technology can be designed and configured
to produce a variety of liquid hydrocarbon products. The principal products of
the Rentech GTL Technology process are:
o Clean-burning and premium-grade diesel fuel.
o Naphthas useful as a feedstock for chemical processing and for
refining into varnishes and mineral spirits.
o Specialty products such as waxes useful in hot-melt adhesives,
inks and coatings.
o Base oil for lube oils.
o Normal paraffins.
o A variety of other wax-based products.
Our sulfur-free diesel fuel and naphthas might be good feedstocks for
fuel cells when those potential new products are ready for the market. This is
not expected to occur in the next few years.
The products resulting from use of the Rentech GTL Technology will
compete with traditional petroleum products and synthetic liquid hydrocarbon
products produced by other F-T technologies. To a great extent, competition will
be based upon price, and the price at which liquid hydrocarbons can be produced
by use of the Rentech GTL Technology has not yet been established. Experience
with F-T technology by others since its development in the 1920s has indicated
that earlier versions of the technology could not economically produce synthetic
fuels. We believe that our enhancements and variations of the basic F-T
technology allow the Rentech GTL Technology to be cost-effective in some
situations.
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Products resulting from the Rentech GTL Technology, like other F-T
processes, are environmentally benign relative to analogous products produced
from crude oil refining. GTL products are free of the sulphur, aromatics,
nitrogen and heavy metals that are typically found in crude oil. For example,
our clean burning diesel fuel has excellent combustion qualities and can help
reduce harmful exhaust emissions. Likely uses of our diesel include use as a
blending stock to improve the quality of commonly available diesel fuel and as a
blending component for upgrading low quality stock that would otherwise be used
in lower value fuel oil.
Rentech Diesel Fuel
Laboratory tests made to determine the properties of the diesel
produced by the Rentech GTL Technology have been conducted by independent
testing agencies. These tests indicate that our diesel fuel is a high-grade
diesel fuel with environmental advantages compared to diesel fuel derived from
crude oil. Compared to Commercial No. 2 diesel fuel, our diesel fuel has four
properties that make it less polluting. These are an absence of sulphur, zero
percent aromatics by volume, a higher cetane number, and a lower 90%
distillation temperature. Emissions of hydrocarbons, carbon monoxide, oxides of
nitrogen, and particulate matter seem to be reduced by the reduction in fuel
aromatics. Higher cetane numbers were also found to reduce hydrocarbon and
carbon monoxide emissions. Lowering the sulphur content of diesel fuel helps
reduce particulate matter emissions.
Independent third-party tests of our diesel fuel, both in vehicles and
engine test stands, were completed by the High Altitude Research Center, Denver,
Colorado (under high altitude conditions), and by Detroit Diesel, Michigan, and
the California Air Resources Board, (under low altitude conditions). Our diesel
fuel demonstrated significant reductions in harmful exhaust gas emissions and
improved combustion characteristics as measured by its higher cetane value.
Extensive testing by others indicates that GTL fuels reduce overall
emissions by a minimum of 25%. The reductions include 50% less carbon monoxide,
six times less hydrocarbons, 66% less particulate matter without traps, and
approximately 50% less nitrogen oxide without traps.
We believe our clean burning diesel fuel could help users meet the
increasingly stringent requirements for cleaner fuels. A series of federal
statutes known as the Clean Air Act Amendments of 1990 and the Energy Policy Act
of 1992 and related executive orders have established benchmarks for reductions
in harmful exhaust emissions within the United States. We believe our diesel
fuel exceeds all current and proposed state and federal diesel emissions
requirements. This includes the stringent requirements adopted by the California
Air Resources Board, as well as new requirements proposed or adopted by the U.S.
Environmental Protection Agency.
The state of California, and several other state and local governments,
have adopted legislation establishing allowable levels of exhaust emissions for
vehicles and businesses. Limits adopted by the California Air Resources Board
include 0.05% sulphur weight maximum and lowering aromatics content to a maximum
of 10% by volume.
In December 2000 the EPA adopted a requirement that oil refineries in
the U.S. must reduce the sulfur content of their diesel fuel by 97% by mid-2006.
This emission standard would reduce the sulfur content of diesel from 500 parts
per million to 15 parts per million by mid-2006, a 97% reduction. The EPA said
the proposal would reduce harmful air emissions from tractor-trailers, buses and
other heavy trucks by more than 90%. According to the EPA, the result would be
significantly healthier air for all persons in the
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United States, with less sooty, thin particular matter that causes respiratory
illness. We believe this requirement may provide two core reasons for owners of
domestic refineries to add our technology to their refinery processes. Our
technology can convert refinery bottoms into a clean-burning diesel, and it can
produce sulfur-free diesel that meets the new-low-sulfur requirement. The
refinery could directly market our clean diesel or, more likely, use it to
upgrade conventional diesel.
The diesel fuel fraction produced by use of the Rentech GTL Technology
is an excellent blending stock to upgrade non-specification fuels or to improve
the quality of the commercial diesel currently being produced in refineries.
Blending with our diesel fuel lowers the aromatic and sulphur content and
increases the cetane index of commercial diesel. We have patented the blending
of our F-T diesel with conventional diesel to reduce harmful emissions.
From 1993 to 1997, several California refiners used the Fischer-Tropsch
fuel produced by Shell at its plant in Malaysia to blend with conventional
diesel. The blend reduced the percentage of aromatics in the fuel. These sales
ended because of an explosion in December 1997 at the plant in the air
processing unit.
Unlike alternative fuels such as methanol and compressed natural gas,
we believe GTL diesel fuel can be used in conventional compression ignition
engines without any engine or vehicle modification. Fuel mileage may be slightly
decreased, although minor engine adjustments are expected to increase the fuel
mileage to the level provided by conventional diesel fuel. Before our diesel
could be said to be a practical alternative to conventional diesel fuel,
long-term wear tests on engines fueled by the diesel are necessary. GTL diesel
fuel can be manufactured and distributed through the nation's existing refining
and transportation infrastructures.
Most of the diesel fuel produced throughout the world is refined from
crude oil. As of 1996, the total worldwide demand for diesel fuel was estimated
at 18.5 million barrels per day, according to the U.S. Department of Energy. The
DOE also forecast growth in demand at an average rate of 2% per year. The
largest market is in the U.S., where in 1996 the demand was approximately 3.4
million barrels per day. The demand for diesel vastly exceeds the potential
volume of GTL diesel that could be produced by all the Fischer-Tropsch
technologies. Thus, the comparatively small amount of GTL diesel that may be
produced by us and others will have no impact on prices for conventionally
produced diesel. This means that GTL diesel will have to compete with the
prevailing diesel price in the future. We do, however, anticipate that our GTL
diesel may command a premium, as Shell's GTL diesel did when purchased by the
California refineries during the 1993 to 1997 period.
We have no arrangements by which vehicle manufacturers have approved
the use of our fuel and no arrangements for the sale of our products. We are not
aware of any reason why our fuel would not be readily saleable, especially for
use as a blending stock for conventional diesel.
We petitioned the U.S. Department of Energy in July 1999 to designate
our diesel as an alternative fuel under the Energy Policy Act of 1992. An
alternative fuel, under that act, is one that is substantially not petroleum and
would yield benefits in energy security and environmental protection. United
States agencies are required by the act to promote the use of alternative fuels.
They are to do this by educating the public about alternative fuels, and,
beginning in 1997, by using alternative fuels in increasing proportions in their
government vehicle fleets. The act specifies that 75% of all federal and state
government-purchased vehicles for major urban areas must be alternative fuel
vehicles. The DOE has determined that these mandates are not being met.
Designation by the DOE of the fuel produced by the Rentech GTL Technology as
alternative fuel could create a demand for our diesel by government and state
customers.
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In an alternative action, the U.S. Congress adopted legislation in
December 2000 designating domestically produced gas-to-liquids fuels made from
natural gas as an alternative fuel as defined by the Energy Policy Act of 1992.
We anticipate that the designation of GTL fuels as alternative fuels might lead
to the reduction or elimination of federal excise and road taxes on GTL fuels.
This would provide an incentive for users of conventional diesel fuel to switch
to GTL diesel fuel. Other inducements to use the GTL fuels instead of
conventional fuels result from its clean-burning characteristics, the ability
they provide for catalytic converters to trap more harmful emissions, and their
ability to extend the useful and effective life of proposed particulate traps
that would be required to meet increasingly restrictive emissions standards.
Naphtha
Naphthas are liquid hydrocarbon products that are lighter than diesel
fuel. The use of naphthas as a feedstock for petrochemicals is growing, and at a
more rapid rate than its demand for use in fuels. Naphthas are used extensively
in manufacturing processes for products as diverse as paint, printing ink,
polish, adhesives, perfumes, glues and fats. Naphthas produced at conversion
plants using the Rentech GTL Technology are expected to be in demand due to
their lower toxicity and lower aromatic content compared to other naphthas. The
U.S. market for the type of naphtha produced using the Rentech GTL Technology is
estimated at a minimum of 60,000 barrels per day.
Wax Products
The waxes produced by Rentech GTL Technology are useful in hot-melt
adhesives, inks, coatings and several other wax-based products. The market
prices for these waxes is high, but demand is limited. The wax market could
easily become saturated when more GTL processes start commercial production. As
an alternative, the waxes produced can also be thermally or hydro cracked to
yield additional naphtha, diesel fuel, kerosene, jet fuel, solvents and
specialty products. Another option is the hydrosomerization of the wax to
produce base oil used for lubricating oils.
Light Crude Oil
If required, the conversion process in plants using the Rentech GTL
Technology can be easily modified to produce a light crude oil for sale to
refineries. The Rentech GTL Technology produces a high-grade crude oil, already
partially refined that we believe could be inexpensively refined in existing
refineries into end products.
Normal Paraffins
Normal paraffins are saturated linear hydrocarbons with molecular
ranges between 9 and 15 carbon atoms. They are primarily used in the production
of laundry detergent, cosmetics, pharmaceuticals, paints, stains, ink oils,
aluminum rolling oils and lamp oils. Paraffins produced by the Rentech GTL
Technology are free of sulfur, a requirement for many of these products.
Synthetic Lube Base Oil
We anticipate that specifications for motor oil will become more
stringent in the future as automobile manufacturers respond to tightening
emissions requirements. This could result in increased demand for high quality
base oils as blending stock for manufacture of premium lubricating oils. The
hydrocarbons with
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molecular ranges between 20 and 50 carbon atoms that are produced by the Rentech
GTL Technology would provide excellent blending material for production of
synthetic lube oil.
Synthetic Drilling Fluid
The hydrocarbons produced by the Rentech GTL Technology with a
molecular range from 17 to 22 carbon atoms would be a potential base material
for synthetic drilling fluids. Drilling fluids are used in the drilling of oil
and gas wells as a coolant and lubricant for the drill bit. In off-shore
operations, oil based fluids, which have been used historically, degrade slowly
and can suffocate aquatic plant and animal life. In response to increased
environmental pressures, synthetic drilling fluids have been developed and used
in the Gulf of Mexico and other offshore locations. The key advantage of
synthetic drilling fluids is that cuttings associated with use of these fluids
appear to be environmentally acceptable in regard to crude contamination and
toxicity and therefore can be discharged in many Gulf locations instead of being
barged to shore for disposal. This yields considerable cost savings to drillers.
As defined by the U.S. Environmental Protection Agency, materials falling under
the synthetic category include linear alpha olefins and synthetic paraffins,
such as those produced by the Rentech GTL Technology.
RESEARCH AND DEVELOPMENT
We own a development and testing laboratory located in Denver. Our
pilot plant, consisting of a bubble column slurry reactor, is located at this
site. The laboratory contains state-of-the-art equipment and support facilities
for development of Fischer-Tropsch technology. Our laboratory staff now consists
of 12 employees. We believe that this facility provides us with a resource for
development and testing that is unmatched in the field of gas-to-liquids
technology.
Two of our founders, Dr. Charles Benham and Dr. Mark Bohn, are directly
responsible for development of the Rentech GTL Technology. These two scientists
and our research and development engineers and technicians continue to work
toward improving our technology and developing new applications.
Our principal efforts at the laboratory are now focused on integration
of Texaco's gasification technology with our GTL technology. We are also
developing additional catalysts and attempting to increase the amount of the
feedstock that is converted into liquid hydrocarbons.
We have also joined with Texaco Energy Systems, Inc., our licensee, to
demonstrate use of our technology at the La Porte plant in Texas. Texaco leased
the use of this plant from the U.S. Department of Energy on a short-term basis
in late 2000 to conduct a joint demonstration with us of the results of using
the Rentech GTL Technology. The plant is a pilot plant, with a capacity of four
barrels of product per day. The results were successful.
During the fiscal years ended September 30, 2000, 1999 and 1998, we
spent amounts of $515,261, $195,466 and $60,225, respectively, on research and
development activities on the Rentech GTL Technology. During each of the same
fiscal years, we estimate that revenues received from third parties for research
and development activities on the technology were $751,166, $211,246, and $0,
respectively.
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RISKS RELATING TO THE RENTECH GTL TECHNOLOGY
o OUR ABILITY TO CONTINUE TO BENEFIT FROM THE RENTECH GTL TECHNOLOGY
DEPENDS UPON PROPER CONSTRUCTION AND OPERATION OF PLANTS THAT USE THE TECHNOLOGY
ON A COMMERCIAL SCALE.
Our business strategy calls for our licensees to construct and operate
plants that use the Rentech GTL Technology on a commercial scale. These plants
will rely on complex mechanical equipment and gas processing systems We expect
most plants to be owned, constructed, and operated by our licensees, but we may
retrofit and operate some plants in which we obtain an ownership interest.
Whether our licensees, and in a few instances, we, can properly design,
construct and operate plants depends upon a number of factors. These include
constructing plants that are properly designed by a licensee for the chemical
composition of the feedstock obtained for the plant; the amount and quantity of
the feedstock; design of the plant and its systems; mechanical adequacy of the
plant equipment and machinery, whether related or unrelated to the Rentech GTL
Technology; availability and adequacy of roads, utilities, worker housing and
other infrastructure at the plant site; the plant operator's management and
skills; and proper operating circumstances.
o OUR ABILITY TO CONTINUE TO BENEFIT FROM THE RENTECH GTL TECHNOLOGY
DEPENDS UPON ECONOMIC OPERATION OF PLANTS THAT USE THE TECHNOLOGY ON A
COMMERCIAL SCALE.
Whether the Rentech GTL Technoloy can be cost effective so that
commercial-scale plants using the technology can be profitably operated depends
upon several factors. The principal conditions include adequate quantities of
low-cost feedstock, the availability and cost of construction financing, the
economic efficiency of the technology, and the market demand for the end
products at profitable prices. Those qualities, especially the economic
performance of the technology, have not yet been established. Poor economic
results at plants using the Rentech GTL Technology would adversely impact our
operating results and financial condition by depressing or eliminating our
potential income from the technology.
o CONSTRUCTION AND OPERATION OF COMMERCIAL-SCALE PLANTS THAT USE THE
RENTECH GTL TECHNOLOGY REQUIRE LARGE AMOUNTS OF CAPITAL. FINANCING IN SUCH
AMOUNTS MAY NOT BE AVAILABLE TO OUR LICENSEES OR TO US.
Many of our licensees and potential licensees may not be able to obtain
the large amounts of capital or financing that will be required to construct and
operate commercial-scale plants that use the Rentech GTL Technology. We believe
this situation has slowed and, in some instances, will continue to delay use of
the Rentech GTL Technology. Significant delays may occur before we realize
substantial revenues, if any, from operating plants.
o OUR ABILITY TO CONTINUE TO MARKET THE RENTECH GTL TECHNOLOGY, TO
IMPROVE IT, AND TO ASSIST OUR LICENSEES AND POTENTIAL LICENSEES IN IMPLEMENTING
USE OF THE TECHNOLOGY REQUIRE SIGNIFICANT AMOUNTS OF CAPITAL OR FINANCING THAT
MAY NOT BE AVAILABLE TO US.
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In addition to the funds Texaco is currently providing for our
technical services, we have expended and will continue to expend substantial
funds to research and develop our technologies and business, especially the
Rentech GTL Technology. If adequate funds are not available, our marketing and
licensing efforts would be materially hampered. We might have to delay or to
eliminate expenditures for certain of our capital projects or to license to
third parties the rights to commercialize aspects of technologies that we would
otherwise seek to exploit ourselves.
o OUR ABILITY TO CONTINUE TO BENEFIT FROM THE RENTECH GTL TECHNOLOGY
DEPENDS UPON THE EFFORTS OF LICENSEES OF THE TECHNOLOGY. WE DO NOT CONTROL THEIR
ACTIONS.
Except to the extent that we convert existing industrial gas plants, we
do not intend, and do not have adequate capital, to finance, construct and
operate our own commercial-scale plants. At this time, we do not have adequate
capital or financing to retrofit an existing industrial gas plant. Successful
use of the Rentech GTL Technology therefore depends upon our licensees. We will
receive royalties and other revenues from operations only from plants that
operate successfully and economically. Under our present and proposed license
agreements, it is a licensee's responsibility to obtain sources of feedstock
that provide adequate supplies at inexpensive rates, conduct feasibility
studies, recruit personnel who are skilled in designing, constructing and
operating gas processing plants, obtain governmental approvals and permits,
obtain sufficient financing on favorable terms for the large capital
expenditures required, possibly construct infrastructure if not otherwise
available at the plant site, market the products, and perform other significant
tasks. Several licensees have allowed their licenses to expire because of their
inability to meet one or more of these conditions for a plant. The ability of
any licensee to accomplish these requirements, and the efforts, resources and
timing schedules to be applied by a licensee, will be controlled by it.
o USE OF THE RENTECH GTL TECHNOLOGY BY LICENSEES DEPENDS UPON
EVALUATIONS OF IT MADE BY THE FIRST INFLUENTIAL LICENSEES AS WELL AS SUCCESSFUL
APPLICATIONS OF THE TECHNOLOGY IN THE FIRST SEVERAL COMMERCIAL-SCALE PLANTS.
If any influential licensee such as Texaco terminates its license or
does not proceed to use the Rentech GTL technology, potential licensees are not
likely to use the technology. If the first few plants to next use the Rentech
GTL Technology are not commercially successful, we may be unable to obtain other
licensees in the future. If licensees do not proceed with plants using the
Rentech GTL Technology or do not successfully operate plants, our operating
results and financial condition would be adversely affected.
o THE RENTECH GTL TECHNOLOGY MAY NOT COMPETE FAVORABLY WITH OTHER GTL
TECHNOLOGIES. THAT WOULD LIMIT OUR ABILITY TO OBTAIN LICENSEES, AND WOULD
SEVERELY REDUCE OUR REVENUES FROM THE TECHNOLOGY.
Because of increasing worldwide demand for fuels in general, and for
the clean burning products of GTL technology in particular, as well as the large
quantities of carbon-bearing gas, liquid and solid materials available as
feedstock, there are economic incentives for businesses to develop and achieve
significant market penetration for successful Fischer-Tropsch technology.
Several major integrated oil companies, including ExxonMobil Corporation, Royal
Dutch/Shell and Sasol Ltd., as well as Syntroleum Corporation and several
smaller companies, have developed or are developing competing technologies. Most
of these
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companies, especially the major oil companies, have significantly more financial
and other resources than we do to spend on developing, promoting and using their
technology. The U.S. Department of Energy has also sponsored a number of
research programs in Fischer-Tropsch technology, some of which might potentially
lower the cost of processes that compete with the Rentech GTL Technology. These
companies, the Department of Energy, or others may develop technologies that
will be more commercially successful or better accepted in the industry than our
technology. This could render our technology obsolete. It would also have a
material adverse effect on our results of operations and financial condition.
o OUR ABILITY TO IMPLEMENT OUR BUSINESS STRATEGY DEPENDS UPON OUR
EXECUTIVE OFFICERS, AND THE CONTINUED IMPROVEMENT OF THE RENTECH GTL TECHNOLOGY
DEPENDS UPON OUR SCIENTIFIC PERSONNEL. LOSS OF ONE OR MORE OF OUR KEY EMPLOYEES
WOULD SUBSTANTIALLY HINDER OUR ABILITY TO EXPLOIT THE RENTECH GTL TECHNOLOGY.
Our success with our technology is substantially dependent upon the
contributions of our executive officers and key scientific and technical
employees. We believe that the management skills and industry relationships of
our executive officers are important to implement our business strategy. At this
stage of our development, economic success of the Rentech GTL Technology depends
upon continued improvements to the technology, marketing and proper design of
conversion plants and their startup in such a manner that achieves optimal plant
operations. These efforts require knowledge, skills, and relationships unique to
our key personnel. Moreover, to successfully compete through the Rentech GTL
Technology, we will be required to engage in continuous research and development
regarding processes, products, markets and costs. Loss of the services of our
executive officers, our scientists or other key employees could have a material
adverse effect on our business, financing, operating results and financial
condition.
o WE MUST CONTINUALLY DEVELOP IMPROVEMENTS TO OUR TECHNOLOGY AND MAKE
ADVANCES AS COMPETING TECHNOLOGIES ARE IMPROVED AND THE MARKET CHANGES.
The market for advanced technology products is characterized by rapidly
changing technology, new legislation and regulations, and evolving industry
standards. The introduction of products embodying new technology, the adoption
of new legislation or regulations, or the emergence of new environmental and
industry standards could render our technology and future uses, if any, obsolete
and unmarketable. Our success and growth will depend, in part, upon our ability
to anticipate changes in technology, market needs, law, regulations, and
industry standards; to continue to attract, retain and motivate qualified
personnel; and to successfully develop and introduce new and enhanced advances
to our technology on a timely basis. We will need to devote a substantial amount
of our efforts to research and development as well as to sales and marketing. If
we do not perform well to meet these requirements, our business operating
results and financial condition would be adversely affected.
o WE EXPECT THAT A LARGE PORTION OF OUR LICENSEES WILL USE THE RENTECH
GTL TECHNOLOGY IN FOREIGN COUNTRIES. THAT WILL SUBJECT US TO THE UNCERTAINTIES
AND RISKS THAT SOMETIMES AFFECT OPERATIONS IN THOSE LOCATIONS.
We expect that licensees of the Rentech GTL Technology will construct
plants in foreign countries where our licensees' conduct of business and
profitability of operations are at risk. The additional risks
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include rapid changes in political and economic climates; changes in foreign and
domestic taxation; lack of stable systems of law; susceptibility to loss of
protection of patent rights and other intellectual property rights; expatriation
laws adversely affecting removal of funds; fluctuations of currency exchange
rates; contract rights; labor disputes; the nationalization or appropriation of
property without fair compensation; civil disturbances; and war. International
operations and investments may also be negatively affected by laws and policies
of the United States affecting foreign trade, investment and taxation. Any of
these events could adversely impact our licensees and thereby adversely affect
our operating results and financial condition.
PROPRIETARY DESIGNS, INTELLECTUAL PROPERTY AND PATENTS
We own intellectual property rights consisting of proprietary designs
for our synthesis gas reactors and other key aspects of the Rentech GTL
Technology. We also own confidential information and trade secrets that are
essential to maintain our proprietary ownership of the technology. We seek to
protect our intellectual property rights through patents and trade secret
agreements, including confidentiality agreements with our licensees, employees
and consultants.
Use of the Rentech GTL Technology requires use of our patented
catalyst. The license arrangements with both Texaco and Donyi Polo
Petrochemicals Ltd. authorize them to manufacture our catalyst for their
respective conversion plants or to have the catalyst made for them by a
manufacturer of their choice. We have no present plans to manufacture our own
catalyst. We expect ultimately to grant a license, for which we would receive a
license fee and royalties, to an independent catalyst manufacturer for
manufacture and delivery of catalyst, or to grant a license to individual
licensees of the technology to manufacture catalyst for their own use.
We have been granted ten United States patents related to the Rentech
GTL Technology. These patents apply to our processes, applications of the
process, products produced, and materials used as part of the Rentech GTL
Technology. The patents include a method for cracking produced waxes; a method
of making and activating a promoted iron catalyst for use in slurry synthesis
reactors; production of a synthetic oxygenated diesel fuel; the overall
gas-to-liquids conversion process; and use of our oxygenated, sulphur and
aromatic-free diesel fuel as an additive to conventional diesel fuel.
Two of our patents include key elements of a process that enables our
iron-based catalyst to compete with cobalt-based catalysts used by other F-T
processes. These patents protect process steps that improve the carbon
conversion efficiency of the Rentech GTL Technology by over 30%. We believe
these procedures make our process cost-effective for converting gases to
liquids.
We have filed additional U.S. patent applications. One Australian
patent has been issued. Several foreign patent applications based on one or more
of the United States patents are pending.
Our first patent for the Rentech GTL Technology is based upon an
application filed in 1992. The patent was issued by the U.S. Patent and
Trademark Office in 1994. Patents have a term of 20 years from the date of
filing the application. Subsequent patents that we have been issued or may
obtain in the future for improvements and additions to the technology may have
the effect of extending our period of exclusive rights to use and license the
technology.
OKON's formulas for the manufacture of its stains, sealers and coatings
are proprietary. They are maintained as trade secrets, and OKON has no patents.
We rely upon confidentiality agreements with our
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employees and manufacturers of key components of our stains, sealers and
coatings to protect these trade secrets.
Petroleum Mud Logging provides its services based upon an integrated
system of computer software, skilled computer analysts who interpret the data
and communications devices to readily transmit the information to the mineral
owner. The essential elements of these programs and devices are proprietary.
They are maintained as trade secrets, and PML has no patents. We rely upon
confidentiality agreements to protect these trade secrets.
OUR ABILITY TO EXPLOIT OUR VARIOUS TECHNOLOGIES DEPENDS UPON PROTECTING
AND ENFORCING OUR INTELLECTUAL PROPERTY RIGHTS. OUR ABILITY TO DO SO INVOLVES
COMPLEX LEGAL, SCIENTIFIC AND FACTUAL ISSUES AND UNCERTAINTIES.
The Rentech GTL Technology and our businesses conducted by OKON and
Petroleum Mud Logging are based upon patents and trade secrets. We rely upon a
combination of patent, trade secret, copyright and trademark law, nondisclosure
agreements and technical security measures to protect our intellectual property
rights in our several lines of business. Our success in technologies that are
based on intellectual property depends on our ability to establish, protect and
enforce intellectual property rights with respect to our technologies and to
successfully defend against any alleged infringement or related claims.
Protecting and enforcing our intellectual property position involves
complex legal, scientific and factual questions and uncertainties. This may be
especially true in foreign countries, which might become important users of the
Rentech GTL Technology, but which generally do not provide as much protection of
intellectual property rights as the United States. The lack of stable systems of
law in some foreign countries could lead to rapid changes in political and
economic climates, civil disturbances and other disruptions that affect
operations. Our ability to protect and enforce our intellectual property
position requires diligent actions by us to strictly maintain the
confidentiality of our trade secrets and to protect our patents. If we do not,
the value of our technologies that are affected would be severely limited.
COMPETITION IN GTL TECHNOLOGY
Based on information from public announcements made by other companies
and from other published information, our competitors in the gas-to-liquids
field include several of the major oil and gas companies as well as a few
smaller companies. All of the competing processes are based on Fischer-Tropsch
technology. The fundamental differences between the various technologies are the
catalyst and the synthesis gas reactors where the synthesis gas reacts with the
catalyst.
Our principal competitors are companies that have developed their own
Fischer-Tropsch technology and have operated full scale plants, or at least
pilot plants, and who are actively seeking customers to license their technology
or to use it on some shared basis. These other arrangements include use of the
technology by a joint venture between the owner of the technology and the owner
of a source of feedstock.
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Additional competitors in the field are those who are developing
Fischer-Tropsch technology, but who have not yet completed their research or
tested their technology in an operating pilot plant. Those other competitors
include several major oil and gas companies.
We believe that owners of competing GTL technologies which have
demonstrated use of their technology have spent many years and large sums of
money developing their technologies. We expect that others who may hope to
develop new, competing GTL technologies will face similar requirements of time
and money, to enter the field. We anticipate that these factors and the patents
that have been issued to us will make it difficult for others to enter the field
using an iron-based catalyst.
Several major oil companies are involved in large-scale synthetic fuel
development. These competitors include Royal Dutch/Shell, Exxon, and Sasol.
Syntroleum Corporation, a smaller public company, offers its Fischer-Tropsch
technology to licensees and joint ventures in which it has a part interest.
Exxon has operated a 200 barrel per day plant in Baton Rouge,
Louisiana, to demonstrate its process. While the plant was operated for several
years, it is not now being operated.
Shell operated a 12,500 barrel per day plant in Bintulu, Malaysia from
1993 through 1997 that produced diesel fuel and other products from natural gas.
The diesel fuel was sold to two refineries located in California and used for
blending stock with commercial diesel. This Fischer-Tropsch plant was shut down
in December 1997 because of an explosion in the air separation unit, which is
not a part of the Fischer-Tropsch reactor. Shell's plant came on-line again in
2000 with increased production capacity.
Sasol currently operates three Fischer-Tropsch plants that produce
about 160,000 barrels per day of liquid hydrocarbons. The feedstock is synthesis
gas produced from coal. Mossgas also uses Sasol's technology in South Africa to
produce in excess of 20,000 barrels per day of synthetic oil from natural gas.
In June 1999, Sasol and Chevron signed a memorandum of understanding for the
creation of a new global alliance to implement ventures based on Sasol's
gas-to-liquids technology.
In July 1999, Syntroleum announced the commencement of operations at
its 70 barrel per day pilot plant owned with ARCO at ARCO's Cherry Point
refinery in the state of Washington. Syntroleum Corporation previously reported
that it has operated a pilot plant with a nominal production capacity of two
barrels per day. Syntroleum has reported that its pilot plants have successfully
demonstrated certain elements and variations of Syntroleum's Fischer-Tropsch
process.
Unlike iron-based Fischer-Tropsch technologies, the cobalt-based
Fischer-Tropsch technologies are currently only used for the conversion of
synthesis gas produced from natural gas. Cobalt-based technologies can be used
to convert synthesis gas from liquids and solids, but such a plant requires the
addition of expensive equipment that would likely cause reduced product yields
and increased capital and operating costs.
The Rentech GTL Technology uses an iron-based catalyst, as does Sasol.
No claims of patent infringement have been made against us, and none, to our
knowledge, have been made against Sasol. Sasol has announced business
arrangements with Chevron that indicate Sasol currently intends to only license
its technology for conversion of natural gas to companies with sources of the
feedstock who enter a joint venture arrangement with Sasol and Chevron to
jointly share profits.
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We believe our Fischer-Tropsch technology can successfully compete
against the technology of the others who are engaged in the same business. We,
Exxon, Shell, Sasol and now Syntroleum are the only companies in the world that
have operated a Fischer-Tropsch plant at larger than laboratory scale.
Syntroleum actively markets license for use of its technology. At this time the
others only use their technology for their own account or for projects in which
they acquire an equity interest.
We believe that our patents protect several unique features of the
Rentech GTL Technology, including our catalyst, that give us competitive
advantages in costs and product yields over those of our competitors. See
"Proprietary Designs, Intellectual Property and Patents." Several properties of
iron-based catalysts provide them significant advantages over cobalt catalysts.
Our catalyst is less expensive than cobalt catalysts, and unlike them, the
residue is not a hazardous waste. Our catalyst also works with feedstocks
containing sulfur, which we think makes it the only feasible catalyst for
industrial off-gases and substandard natural gas. Our iron-based catalyst has a
broad range of application because it can convert synthesis gas from gas, liquid
and solid feedstocks, unlike cobalt catalysts that do not work well with liquids
and solids. We also believe that the conversion rate, that is, the amount of the
feedstock that is converted into valuable liquid hydrocarbons, is as high for
our patented catalyst as it is for cobalt catalysts.
GOVERNMENTAL REGULATION OF THE RENTECH GTL TECHNOLOGY
Conversion plants using the Rentech GTL Technology and plants
manufacturing our proprietary catalyst are subject to extensive federal, state
and local laws, rules and regulations relating to protection of the environment
and employee health and safety. Plants using our technology in foreign countries
will be subject to the environmental and health and safety laws and regulations
of those nations. Violations of these laws and regulations may subject violators
to substantial government fines and criminal penalties as well as legal
liabilities to third parties. Violators may be required to reduce the level of
operations of their plants or to retrofit plants to lessen the environmental
impact. Those changes could be costly. In the most extreme situations, the costs
of environmental compliance could be prohibitively expensive.
Local and sometimes federal governments, typically require that plant
operators obtain a variety of governmental permits before construction and
operation of the plants. These requirements will usually include permits
regulating location of industrial plants, construction, air and water emissions,
and disposal of byproducts. Obtaining the required permits could increase the
costs of designing, constructing and operating plants using the Rentech GTL
Technology. Obtaining the permits could also delay these activities. That would
have the effect of increasing the overall costs of these plants.
OPERATING HAZARDS OF PLANTS USING THE RENTECH GTL TECHNOLOGY
Plants that use the Rentech GTL Technology process carbon bearing
materials, including natural gas, into synthesis gas. Some plants will require
the use of oxygen producing systems to convert the feedstock into synthesis gas.
These gases, especially oxygen, are highly flammable and explosive. Severe
personal injuries and material property damage may result. If such accidents did
occur, we could have substantial liabilities and costs. We are not insured for
these risks. Furthermore, accidents of this type would likely adversely affect
operation of existing as well as proposed plants by increasing costs for safety
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