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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, 2002
[ ] 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.
(Exact name of registrant as specified in its charter)
Colorado 84-0957421
(State of Incorporation) (I.R.S. Employer Identification No.)
1331 17th Street, Suite 720
Denver, Colorado 80202
(Address of principal executive offices)
Telephone number: (303) 298-8008
Securities registered pursuant to Section 12(b) of the Act:
Title of Class: Name of Exchange on Which Registered:
Common stock, $0.01 par value The American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Purchase Rights
(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. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Aggregate market value of voting stock held by nonaffiliates at March
31, 2002: $37,348,773.
Common stock outstanding at December 17, 2002: 72,092,667
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. Business........................................................... 3
ITEM 2. Properties........................................................ 37
ITEM 3. Legal Proceedings................................................. 38
ITEM 4. Submission of Matters to a Vote of Securities Holders............. 38
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................ 38
ITEM 6. Selected Financial Data............................................ 42
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 42
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk......... 64
ITEM 8. Financial Statements and Supplementary Data........................ 64
ITEM 9. Changes in and Disagreements With Accountants On
Accounting and Financial Disclosure................................ 65
PART III
ITEM 10. Directors and Executive Officers of the Registrant................. 65
ITEM 11. Executive Compensation............................................. 71
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters..................... 74
ITEM 13. Certain Relationships and Related Transactions..................... 77
PART IV
ITEM 14 Controls and Procedures............................................ 77
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 77
2
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 new plants or retrofit existing gas 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
exploiting 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 oil and gas field services provided by
Petroleum Mud Logging, Inc.; the ability of REN Corporation to complete its
sales orders; 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," "might," "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
We are engaged in the gas-to-liquids (GTL) business, which is the
process of converting gases made from carbon-bearing materials into liquid
hydrocarbons. We have developed and own a patented and proprietary process for
the conversion of synthesis gas produced from natural gas, coal, refinery
bottoms, industrial off-gas and other hydrocarbon feedstocks into clean,
sulfur-free, and aromatic-free alternative fuels, naphthas and waxes. The
ability of our GTL technology (Rentech GTL Technology) to convert this broad
range of materials is one important advantage of our technology compared to
other GTL technologies. Our patented, iron-based catalyst provides several other
advantages that reduce the costs of Rentech GTL Technology. Based on successful
demonstrations of our technology, we believe it is ready for use on a commercial
basis in the proper circumstances. While there are no commercial-scale GTL
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process plants that use Rentech GTL Technology now in existence, we believe
there is the potential for the use of Rentech GTL Technology in a significant
number of plants around the world. This opportunity stems from the growing,
worldwide demand for energy, especially environmentally clean energy, combined
with large supplies of available feedstocks for our process.
The focus of our business is licensing the Rentech GTL Technology to
oil and gas companies, operators of industrial gas plants, owners of other
carbon-bearing feedstocks, and other members of the energy industry. In some
instances, we may invest with others to acquire equity interests in plants that
would use our technology. We might seek to acquire interests in one or more
existing industrial gas plants that are underutilized because of depressed
markets for their products or for other reasons. It might be feasible to convert
these plants to use Rentech GTL Technology to produce liquid hydrocarbons.
We grant licenses in exchange for license fees and ongoing royalties to
be charged for each barrel of liquid hydrocarbons produced by process plants
that use 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 that their plants produce.
In October 1998, we granted a license to Texaco Energy Systems, Inc.,
now a division of ChevronTexaco Corporation, for exclusive use of Rentech GTL
Technology in plants where solid and liquid hydrocarbons are used as feedstock.
Chevron Texaco Technology Ventures, formerly Texaco Energy Systems, Inc.
(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 to use the technology in plants that use
natural gas as feedstock. Texaco's non-exclusive license does not include the
right to grant sublicenses to third parties.
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.
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. Because there are no process
plants now in operation that use the Rentech GTL Technology, we are not
receiving royalties from production of liquid hydrocarbons or revenues from
sales of our catalyst. We are, however, receiving advance royalty payments from
Texaco as required by our license to it.
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An important part of our business strategy has been to acquire other
businesses to generate revenues. Our intent is to help support our core business
related to the Rentech GTL Technology during the period before its commercial
use is established. In pursuit of this strategy, we have acquired interests in
several other businesses that are not related to gas-to-liquids. OKON, Inc.,
based in the Denver metropolitan area, is our wholly-owned subsidiary. It
manufactures and sells environmentally clean stains, sealers and coatings that
are used on masonry, concrete and wood surfaces. Petroleum Mud Logging, Inc.,
located in Oklahoma City, Oklahoma, is another wholly-owned subsidiary. It
provides well logging services to the oil and gas industry. We acquired 56
percent of REN Corporation as of August 1, 2001. REN, based in Stillwater,
Oklahoma, manufactures computer-controlled testing equipment systems for
manufacturers of industrial products. We lease office and warehouse space
located in our research and development facility in Denver to a third party. We
also own interests in Inica Inc., formerly ITN Energy Systems, Inc., a privately
held high technology and development company located in the Denver metropolitan
area. All of these interests are described subsequently in this item under the
heading "Other Businesses."
FINANCIAL INFORMATION ABOUT OUR BUSINESS SEGMENTS
Financial information about our business segments is given in Note 16
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
subsequently 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. The
synthesis 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 180 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, primarily 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.
5
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, 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. The
first step in the process is to reform hydrocarbon feedstocks, 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 where the syngas reacts with 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
technology selected to reform the gaseous feedstocks into the
desired composition of synthesis gas.
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 original
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 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 supply 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
6
of landfill gas it 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 reduced capacity and produced liquid
hydrocarbons through use of our technology. 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 our success in
several areas that are key to the use of our technology. These were the ability
to control the reactor temperature and its hydrodynamics, the amount of
feedstock that was converted to liquid hydrocarbons, and our 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 first conceived and used in Germany.
Our technology is based on the original Fischer-Tropsch technology, with several
developments that make it unique. Special unique aspects of our technology are
the formulation of our catalyst, the method of 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. The cost per barrel includes the cost of the feedstock, the
amortized cost of the plant that uses Rentech GTL Technology, and the operating
cost of the plant. 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, the costs of our products will not
be reliably established until a commercial-scale plant using our technology is
in production.
7
Based on an independent study by Chem Systems, a division of IBM, 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. An abstract of the ChemSystems report is published at
WWW.CHEMSYSTEM.COM/STORE under methane refineries.
The Rentech GTL Technology uses an iron-based catalyst. While over 90%
of current GTL production depends on use of iron-based catalysts, as
demonstrated in Oil & Gas Investor, July 2002, our strongest competition now is
with owners of cobalt-based GTL technologies. We compete with them for contracts
with owners of feedstock who seek to evaluate the application of a particular
GTL technology with their source of feedstock. 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, including those that contain some sulphur. We believe
that cobalt catalysts, which are used in most other GTL processes, can only be
used efficiently to convert so-called sweet (sulphur-free) natural gas to liquid
hydrocarbons. The capabilities of our iron-based catalyst, enable the Rentech
GTL Technology to convert gases, liquids or solids that contain carbon materials
into liquid hydrocarbons. It is also less expensive than cobalt catalysts,
because the raw materials for the iron catalyst are readily available.
Our GTL technology uses a slurry reactor for the key Fischer-Tropsch
conversion step. A slurry reactor is less expensive to construct and operate
than the alternatives of fixed bed and fluidized bed reactors.
OUR GAS-TO-LIQUIDS PRODUCTS
Our synthetic 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 virtual absence of these contaminants
substantially reduces harmful air emissions from vehicles that use these
products. The environmental benefits may lead to sales of our diesel fuel at a
premium, compared to conventional diesel fuel.
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). Our
diesel product is also 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.
SOURCES OF FEEDSTOCKS FOR THE RENTECH GTL TECHNOLOGY
Economic use of 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.
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Natural gas is one of the most important feedstocks for the Rentech GTL
Technology. 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, 2000. Participants in the natural gas
industry 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.
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. 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 a market where it might be used.
As reported in the Oil & Gas Investor for July 2002, and many other
publications, GTL technologies may provide a means of utilizing carbon-bearing
resources that are currently unmarketable, either because they are stranded in
remote locations or flared from oil field wells.
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 flared
or vented into the atmosphere or re-injected into the oil field because the
natural gas lacks value due to its remote location. The fact that these
resources are stranded makes them potential sources of inexpensive feedstock for
Rentech GTL Technology.
Still other natural gas reserves are unmarketable due to the presence
of diluting gases, including carbon dioxide or nitrogen. These low-energy
content gases may be suitable feedstock for Rentech GTL Technology because our
iron-based catalyst can use a wide variety of feedstocks, including many of the
diluents.
Potential feedstocks for the Rentech GTL Technology include the heavy
high-sulphur residual fuels created at crude oil refineries. These petroleum
coke 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. If the residues are
gasified, that is, transformed into synthesis gas, they could be converted by
our process into GTL products. The synthesis gas resulting from refinery
residues is characterized by a low hydrogen-to-carbon monoxide ratio. That makes
it a suitable feedstock source for conversion into liquid hydrocarbons by the
application of our iron-based GTL technology.
Other important sources of feedstock for our process 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 be economic for
use as feedstock for the Rentech GTL Technology.
APPLICATIONS OF THE RENTECH GTL TECHNOLOGY
The Rentech GTL Technology can convert synthesis gas produced from a
broad range of carbon-bearing feedstocks, whether they are gases, liquid, or
solids, into liquid hydrocarbon products. The gas feedstocks include natural gas
9
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 higher-value products. Potential benefits to the refiner include
co-production of gas-to-liquids products, together with steam and electrical
power; and a reduction in waste disposal costs.
Some industrial gas plants are currently uneconomic. This is due, in
some situations, to an oversupply of the products or low prices for the
products. In other circumstances, the uneconomic conditions may result from the
impact of environmental regulations applicable to the original products. We
anticipate that some of these plants, particularly those with larger production
capacities, can be converted to use our technology 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 un-produced. 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.
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 providing royalties on production of liquid hydrocarbons and revenues from
sales of our catalyst.
Our business goal is to achieve successful use of 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 Rentech GTL
Technology, and the commercialization of the Rentech GTL Technology would
probably be accelerated.
We are seeking to implement our goal of bringing a 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.
For new plants, we intend to focus on small to medium-sized projects,
with production capacities 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.
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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 industrial gas plants to use our technology.
We believe that our concept of retrofitting existing industrial gas
plants to use 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. These include
boiler feed water systems, control rooms, fire protection, product
transportation facilities, security fencing and governmental permits. To
retrofit a plant, we would add our synthesis gas conversion reactors to the
existing front-end system, which would be much simpler than building a new
plant.
While some industrial plants cannot be economically converted, we
believe others could be retrofitted to use our technology at significantly less
expense than constructing a new plant to use Rentech GTL Technology. We are
studying the economic feasibility of converting an industrial plant for this
purpose.
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
acquiring 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 own a 50% interest in the Sand Creek methanol plant in the Denver
area. The plant is closed and not in operation. We completed a feasibility study
of the basic engineering and design work that would be required to convert this
plant from a methanol facility to a GTL facility that uses Rentech GTL
Technology. Considering the relatively high costs for natural gas that prevails
in the Denver area, the small size of the plant and the limited production it
would generate, we believe that the Sand Creek plant could not be economically
converted and used for commercial production of GTL products. We and our
co-owner are seeking a buyer for the plant.
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 licensees would construct their
own new plants for use with feedstocks that they own or acquire.
We believe that there are substantial numbers of potential users of
Rentech GTL Technology who could benefit from its use, particularly because of
several trends impacting the energy, transportation and environmental
industries. These factors include the following circumstances arising from
legislative and regulatory mandates and from changes in the energy arena:
o Increasingly stringent requirements to reduce tailpipe emissions and
strengthen clean-air standards.
11
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.
MARKETING
We market licenses of our Rentech GTL Technology for use to owners of
existing industrial gas plants as well as 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.
o PETRIE PARKMAN & CO.
In February 2001, we engaged Petrie Parkman & Co. to assist us as our
financial advisor in accelerating commercial use of Rentech GTL Technology.
Petrie Parkman is an investment banker in the oil and gas industry. The focus of
the engagement is to bring substantial capital and oil and gas industry
experience to bear on the commercialization of Rentech GTL Technology. Under
consideration are various options including formation of one or more joint
ventures with strategic industry partners, a merger, or a sale of all or part of
our assets.
We believe that the time when GTL technology will be used commercially
is approaching. Several major oil companies have announced that they intend to
construct GTL projects at various places around the world. Other significant
members of the energy industry have not announced efforts to apply GTL
technology. Some of them are undertaking research and development in the field
of gas to liquids technology. Many industry members have no GTL technology.
Those companies without the technology may not be able to license or develop a
competitive GTL process that does not infringe upon the patented technology of
others. We believe our patented technology is mature and offers these companies
an opportunity to apply GTL technology.
By September 30, 2001, Petrie Parkman had completed its study and
analysis of the field of GTL technology, including Rentech GTL Technology.
Petrie Parkman is now making contacts and continuing to assist us in advancing
our goal of realizing commercial use of Rentech GTL Technology. We have received
no revenues from this relationship.
Either on our own or through Petrie Parkman, 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 off-gas. The projects would be located at sites
scattered around the world. The plants being discussed would range in production
12
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 three 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.
In June 2001, we designated BC Projectos, Ltd., a Brazilian engineering
firm, as our exclusive engineering representative in Brazil. BC Projectos is a
large engineering firm with experience in the field of cogeneration plants,
thermoelectric power generation and energy optimization studies.
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. We have
received no revenues from this relationship.
o JACOBS ENGINEERING UK
In February 2000, we made an arrangement with Jacobs Engineering UK
Limited, an international engineering company, 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. We have received revenues totaling approximately
$61,148 as a result of feasibility studies we performed for potential licensees
introduced to us through Jacobs Engineering.
o POTENTIAL CUSTOMERS AND MARKETS
We are targeting customers and markets for our Rentech GTL Technology
that are diversified and worldwide. We have approached owners of energy sources
in the following industries:
o Existing industrial plants that are underutilized and 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.
13
o Owners of reservoirs 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 re-injected 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 SUBLICENSES FOR LIQUIDS AND SOLIDS
Texaco Energy Systems, Inc. (Texaco), now a division of ChevronTexaco
Corp., 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 as feedstock an increasingly heavier crude oil supply
and growing inventory of refinery bottoms.
o Owners of coal resources, including low grade and high sulfur
coal deposits.
o Owners of heavy oil and tar sands properties.
LICENSES, CONTRACTS AND JOINT VENTURES FOR THE RENTECH GTL TECHNOLOGY
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 Rentech GTL Technology or upon some other measure of product
value. Licenses may be granted either exclusive or non-exclusive rights to use
Rentech GTL Technology in identified countries or other geographic areas. The
license fees and terms are individually negotiated and may vary.
We expect that most plants that will use Rentech GTL Technology will be
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. 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 Energy Systems, Inc. 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.
14
We retain rights to license Rentech GTL Technology in the entire range
of use for natural gas conversion projects. We, and several engineering firms to
which we have granted marketing rights, are 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 successfully finance, design, construct and
operate commercial scale plants using the technology. Their ability to obtain
low-cost feedstock is essential to economical use of the technology. 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 and for successfully operating their plants. 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
commercial grade plants using the technology can be profitably operated depends
upon several key factors. These include the availability of low cost 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 other utilities; 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 must also be 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 30%, 20%, and 19% of our revenues during the fiscal years ended
September 30, 2001, 2000 and 1999, respectively.
o TEXACO ENERGY SYSTEMS, INC. LICENSE FOR LIQUIDS AND SOLIDS
In October 1998, we granted a technology license to Texaco Natural Gas,
Inc. (now Texaco Energy Systems, Inc., a division of ChevronTexaco Corporation)
to use and sublicense Rentech GTL Technology in projects where solid and liquid
hydrocarbons are used as feedstock. This license grants exclusive rights in this
15
particular field. The license also granted Texaco a non-exclusive license for
conversion of natural gas to liquids.
Under the license, Texaco Energy Systems, Inc. (Texaco or
ChevronTexaco) 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 including 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, including Lurgi and Royal Dutch/Shell, among others.
Under the terms of the agreement, Texaco has an exclusive, worldwide
license, except in India, to use for its own account, and sublicense 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 advanced royalty fees. Texaco is to pay for all costs of further developing,
marketing and deploying its use of the Rentech GTL Technology. We will share
with Texaco 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 like coal,
petroleum coke, residual oils and byproducts generated in refineries and
chemical plants.
We are performing technical and development work for Texaco at our
development and testing laboratory in Denver. Our work is being conducted in
cooperation with Texaco's personnel. Texaco is paying us for our technical
services and costs.
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 to develop the data and designs for what the DOE
calls a coproduction facility, or more specifically, an "Early Entrance
Coproduction Plant" (EECP). 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, and thus to
16
facilitate the early entry of this new technology into the commercial
marketplace. The DOE contract requires designs that enable highly efficient
conversion of the energy in fossil fuels into the coproduction of electricity or
heat as well as transportation fuels and chemicals.
The DOE is making an award of approximately $14 million to Texaco's
project team, payable over the lifetime of the contract. We are being paid by
Texaco through those contract funds that it receives from DOE. The team members
are using 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 feasibility studies 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.
In the proposed EECP, approximately 1,235 short tons per day (stpd)
petroleum coke is used to produce 55 megawatts of net electric power for export,
approximately 617 barrels per day of Fischer-Tropsch (FT) products (finished
high-melt wax, finished low-melt wax, FT diesel and FT naphtha), steam, and
approximately 89 stpd of sulfur. Additionally, the Air Separation Unit (ASU)
will produce nitrogen and oxygen for export.
The Phase I objective was to determine the feasibility and define the
concept for the EECP located at a specific site, develop a Research, Development
and Testing (RD&T) Plan and prepare a preliminary project financing plan. Phase
I was completed in December 2000, and the final Phase I concept report was
issued in May 2001. In Phase I, a typical refinery site, Motiva Port Arthur, was
identified as the potential EECP site. As a result of the merger between Texaco
and Chevron, Texaco was required to sell its interest in the Motiva Enterprises
LLC joint venture to Shell Oil Company and Saudi Refining Inc. In late 2002, the
team will evaluate the impact of moving the proposed EECP to a ChevronTexaco
refinery.
The Phase II objective is to conduct the research as outlined in Phase
I. It was originally scheduled for two calendar years, 2001 through 2002.
Schedule delays will extend Phase II into the first calendar quarter of year
2003.
We have completed our part of the first phase of the DOE contract. That
work consisted primarily of preparing a preliminary engineering design for the
plant that would use the Rentech GTL Technology. We are now working on Phase II.
This phase is focused on the development work that was identified during the
first phase.
o IMPORTANCE OF OUR TEXACO AGREEMENTS
Our agreements with Texaco are important to us in several ways.
Revenues from Texaco provided 20%, 21%, and 20% of our total revenues for the
years ended September 30, 2002, 2001, and 2000. 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 from several sources.
o We are presently receiving royalties from Texaco for our
technology license and other payments for providing our
technical services.
o We are also receiving revenues from our participation with
Texaco as part of the team it has organized to work on the DOE
17
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 the
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 Rentech GTL Technology.
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 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 that propose 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
production system 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 have
completed a pre-feasibility study for a company that is investigating use of a
floating GTL plant. The company is currently presenting the concept to
interested parties that have a need for such a facility.
o PERTAMINA
We have completed a study of the feasibility of a 15,000 barrel-per-day
GTL plant for Pertamina, the Indonesian state oil and gas mining company. The
plant would use Pertamina's stranded natural gas as feedstock. The intended
products would be synthetic diesel fuels, naphthas, and other high-value liquid
hydrocarbons. The results of the study have been accepted by Pertamina.
The 15,000 barrel GTL plant is projected to be the "cornerstone" for a
subsequent methane production complex to be built at the Matindok field located
on the island of Sulewasi. The business plan and execution plan for the project
have also been submitted and approved by Pertamina. Beginning in January 2003,
we expect that we will be seeking development funding for the next steps and
anticipate starting front-end engineering in late calendar year 2003. The
project is part of a novel approach involving the integration of the GTL plant
with other gas conversion technologies within the proposed methane complex. The
goal is to achieve synergies between our Fischer-Tropsch process and the other
processes being considered. We have received no revenues from this project.
o GTL BOLIVIA
GTL Bolivia, S.A. has secured funding for initial engineering efforts
for a 10,000 barrel-per-day Fischer-Tropsch facility designed to supply the
local Bolivian market with diesel fuel. GTL Bolivia has identified the gas
supply for the project and a site near Santa Cruz. In the event the project
appears to be technically and economically feasible, GTL Bolivia has stated its
intention to move quickly in further project development. This project has
become a high profile effort, and we anticipate starting engineering work for
18
the front end of the project in the first half of calendar year 2003. Major
hurdles in the development of this project will be the logistics of transporting
the large and heavy equipment to Bolivia.
o OROBOROS
We entered into a letter of intent in October 1999 to grant a license
to Oroboros AB, a Swedish corporation headquartered in Gateborg, Sweden. This
has enabled Oroboros to investigate the feasibility of using the Rentech GTL
Technology for the industrial off-gas produced by Oroboros's steel plant located
at Oxelosund, Sweden or other steel mills. If Oroboros decides its studies and
plans indicate the proposal likely would be feasible, we would expect it will
proceed with this project.
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.
Oroboros has applied to the Swedish government to designate the
eco-paraffin it would produce as a clean fuel that is entitled to tax credits in
Sweden. Tax credits are necessary to make the project economic. Oroboros has
stated it anticipates it will receive a tax credit equivalent to about $.60 a
gallon. Oroboros believes that cost advantage and a few other changes in
regulatory requirements will enable it to proceed to retrofit the plant to use
Rentech GTL Technology. If those changes are made, we anticipate that Oroboros
will proceed with its project. No schedules have been announced for beginning
construction, completing construction, or start up of operations of a proposed
GTL plant for Oroboros. We have received no revenues from this relationship.
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 Inica, Inc., formerly ITN
Energy Systems, Inc. See "ADVANCED TECHNOLOGIES-- Inica, Inc." ITN, Inc. is
entitled to 20% of our royalty, license fee or other revenues from plants in
India.
Through the efforts of ITN, Inc., we granted a license in 1994 to Donyi
Polo Petrochemicals Ltd., an Indian company, for a plant in India using Rentech
GTL Technology. Donyi Polo proposed to build a 360 barrel per day plant,
designed to use flared gas in the state of Arunachal Pradesh in northeastern
India. If a plant is constructed and operated, the license agreement provides
for royalty payments to us for seven years after commencement of production from
the plant. The licensee allows Donyi Polo to construct and operate its own
manufacturing plant, using our technology, 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.
19
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 synthetic products resulting from use of the Rentech GTL Technology
will compete with traditional petroleum products and synthetic liquid
hydrocarbon products produced by other Fischer-Tropsch 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 Fischer-Tropsch 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 Fischer-Tropsch technology allow the Rentech GTL
Technology to be cost-effective in some situations.
Products resulting from the Rentech GTL Technology, like other
Fischer-Tropsch 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.
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.
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
20
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 federal and state diesel emissions
requirements. This includes new requirements adopted by the U.S. Environmental
Protection Agency and those adopted by the California Air Resources Board.
In January 2001, the EPA adopted new rules to drastically reduce the
sulfur content in diesel fuel by 2007. The standards require reduction of the
sulfur content of diesel from the 2001 level of 500 parts per million to 15
parts per million by 2007, a 97% reduction. The EPA regulations also require
manufacturers of diesel engines to reduce harmful air emissions from diesel
engines used in tractor-trailers, buses and other heavy trucks by 95% over 2001
levels by 2007. According to the EPA, the result would be significantly
healthier air for all persons in the United States, with less sooty, thin
particular matter that causes respiratory illness.
Energy and transportation groups representing oil and gas refiners, oil
companies, trucking companies and others oppose the new EPA rule for diesel
fuel, arguing that it will be costly and require technology that may not be
available. We believe that the Rentech GTL Technology is ready for commercial
use and could help by providing clean burning diesel fuel.
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 our 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. Our 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.
21
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.
In 2000, Congress designated domestically produced GTL fuels made from
natural gas as an alternative fuel under the Energy Policy Act of 1992. The
designation of GTL fuels, such as those produced by use of our GTL technology,
could lead to reduction of the federal excise taxes and road taxes that apply to
conventional fuels. The designation could reduce costs of GTL fuels. That might
provide an incentive for users of diesel fuel to switch to cleaner burning GTL
fuels. It could also reduce the expensive capital costs that government agencies
must otherwise undertake to modify their vehicle fleets to meet the emission
goals of the Energy Policy Act.
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
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base oils as blending stock for manufacture of premium lubricating oils. The
hydrocarbons with 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 nine 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 increasing
the efficiency of our catalyst. We are also developing additional catalysts,
attempting to increase the amount of the feedstock that is converted into liquid
hydrocarbons, and working on other ways of reducing the cost of our process. The
lab work is concentrated on achieving commercial use of Rentech GTL Technology
with as many types of hydrocarbon feedstocks as are available.
We also joined with Texaco Energy Systems, Inc., a licensee, to
demonstrate use of our technology at the La Porte plant in Texas in 2000. Texaco
leased the use of this plant from the U.S. Department of Energy on a short-term
basis 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 from this use of our technology were
successful.
During the fiscal years ended September 30, 2002, 2001, and 2000, we
spent $701,201, $190,905 and $515,261, respectively, on research and development
activities on the Rentech GTL Technology. During each of the same fiscal years,
we received revenues from third parties for research and development activities
on the technology of $2,354,550, $2,212,432, and $751,166, respectively.
23
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 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 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 Rentech GTL Technology 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 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.
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
24
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 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
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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 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.
INTELLECTUAL PROPERTY AND PATENTS
Our intellectual property consists of three types of property. We own
twelve U.S. patents that protect the Rentech GTL Technology. We own various
trade secrets and confidential proprietary information that we use with our GTL
business, our stains and sealer business, our oil and gas well field services,
and our industrial automation products. We own U.S. trademarks that protect the
product names we use with sale of our stains and sealers.
The success of our core business of GTL technology, as well as each of
our subsidiary businesses, depends upon our intellectual property that we own
and use in the conduct of the particular business. Our intellectual property
gives us rights to exclusively exploit our technologies. If we lost rights to
exclusively exploit an item of intellectual property, the financial results of
the business involved, and our overall financial results, would be materially
harmed.
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Our patents are granted for terms of twenty years from the date of the
application to the U.S. Patent Office. Our first patent application was filed in
1992. Our latest application was filed this year. Our trade secrets and
confidential proprietary information will remain our property for as long as we
keep them secret and confidential. Our federal trademarks have initial terms of
six years. They can be renewed within ten years from the initial date of filing
and every ten years after that if we continue to use them with the sale of our
products.
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.
Our United States patents related to the Rentech GTL Technology apply
to our processes, applications of the process, products produced, and materials
used as part of the Rentech GTL Technology. The patents include the overall
gas-to-liquids conversion process; 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; use of our
oxygenated, sulphur and aromatic-free diesel fuel as an additive to conventional
diesel fuel; and control of the tail gas from our process to maximize either the
production of electricity from our tail gas, gas-to-liquids products, or a
near-pure form of carbon dioxide. This type of carbon dioxide can be more
readily sequestered, thereby reducing harmful emissions from electrical power
plants and transportation vehicles.
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%. Another patent
covers our method for using high power electrical arcs, also called a plasma
torch, to convert feedstock gas into synthesis gas. We believe the procedures
subject to these patents 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.
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 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.
REN Corporation's computer-controlled testing equipment depends upon
computer software programs and proprietary computer hardware devices. The
27
programs and hardware components are developed by REN's employees. This
proprietary information is maintained as trade secrets, and REN owns no patents.
REN relies upon confidentiality agreements to protect its proprietary interests.
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.
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.
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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.
Syntroleum has operated 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.
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. 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.
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
29
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 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.
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
features. Widespread market acceptance of the Rentech GTL Technology could be
delayed by this situation.
OPERATION OF GAS PLANTS THAT USE THE RENTECH GTL TECHNOLOGY INVOLVES
RISKS OF MECHANICAL FAILURES AND FIRES AND EXPLOSIONS. FREQUENT OR SEVERE
ACCIDENTS OF THIS TYPE AND THE RESULTING DAMAGES COULD MATERIALLY AND ADVERSELY
AFFECT OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION.
We expect that use of the Rentech GTL Technology in some conversion
plants will require oxygen producing systems to convert the feedstock into
synthesis gas. This is the first step of the Fischer-Tropsch process, and it
30
occurs before our GTL technology is applied. The oxygen producing systems, if
required, will involve risk of accidents. Personal injuries to workers at the
plant and property damage to the plant may result. The frequency and seriousness
of accidents, injuries and damages will impact the marketability of the Rentech
GTL Technology, and our licensees' operating costs and insurability. Significant
frequency or severity of such accidents could have a material adverse effect on
our business, operating results and financial condition.
Compliance with health and safety requirements is not expected to
require unusual capital expenditures by us or our licensees. Compliance with
governmental regulations is the responsibility of the owners and operators of
the plants, who will usually be our licensees. If we acquire a controlling
interest and operate a plant, we would have to comply with applicable
governmental regulations.
We believe that the Rentech GTL Technology does not present unusual
issues of environmental compliance. Because our iron-based catalyst is not a
hazardous or toxic material and is not regulated, we believe that the cost of
governmental compliance will not be significantly affected by regulations
governing hazardous materials. We also believe the non-hazardous nature of our
catalyst gives our technology some advantages over our competitors that use a
cobalt catalyst. To the extent that a cobalt catalyst is not reused and consumed
in the process, it is a regulated material.
OTHER BUSINESSES
o OKON, INC.
In March 1997, we entered into the business of manufacturing and
marketing water-based wood stains, concrete stains, block pluggers and other
water repellent sealers on a wholesale basis by purchasing the assets of OKON,
Inc. The coatings produced and sold by OKON are biodegradable and
environmentally clean.
OKON has been engaged in the business since 1973. OKON, located in
Denver, markets and sells its products nationwide through a variety of channels.
These include distribution through paint dealers, retailers who are primarily
not discount retailers, and mass merchandisers, industry users, and architects
and building contractors. The customers are primarily the construction industry
and architects who use the coatings on wood, concrete and masonry for their
construction projects. OKON has a one-person sales staff, but no distributors or
independent sales representatives. The brand names of the various products are
recognized throughout the industry. The formulas used by OKON for manufacturing
its products are proprietary.
In addition to its own trademarks, OKON also markets nearly one-half of
its products with the trademark of Goodyear Chemical. This company is a division
of Goodyear Tire and Rubber. Goodyear's trademark used by OKON shows OKON's
product is made with PLIOTEC(R) resins, and the mark also shows the Goodyear's
registered mark for its blimp. Goodyear supports OKON's marketing in this way
because these products use resins manufactured by Goodyear Chemical. We do not
pay Goodyear Chemical for use of its trademark. Goodyear Chemical does not
provide us any allowances, credits or pay us any consideration for this
arrangement.
Starting in 2001, OKON's products have been stocked in approximately
seven Home Depot stores. If this market test demonstrates that customers
purchase OKON's environmentally clean stains, sealers and coatings in a volume
that satisfies Home Depot, OKON expects to sell its products through more of
Home Depot's outlets. There are approximately 1,200 Home Depot stores.
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OKON primarily manufactures and markets standard products, but it also
prepares special products for large orders. OKON employs one person whose duties
are primarily related to marketing. Sales are generally made pursuant to
purchase orders, which are occasionally revised to reflect changes in the
customer's requirements or to establish special orders. Product deliveries are
scheduled upon OKON's receipt of purchase orders, and orders are typically
filled within one to two days. OKON had no significant backlog of orders.
Historically, sales of stains and sealers have been seasonal in nature. The
heaviest concentrations of sales have occurred in the spring and summer months.
Production schedules are timed to reflect these seasonal variations.
The coatings industry in which OKON conducts its business is highly
competitive and has historically been subject to intense price competition.
Other competitive factors in the coatings industry include the content of
volatile organic compounds (VOC) in the product, product quality, product
innovation, and distribution. There are five major competitors in this
nationwide market of environmentally sound paint products. Rentech believes that
OKON products are competitive. It bases this belief on the quality of OKON's
products and their unique properties, including reduced content of VOC
ingredients because the products are water-based and biodegradable.
The Environmental Protection Agency considers even small amounts of
VOCs to be harmful environmental contaminants. This is because many of them are
water soluble and persist in the environment. According to the EPA, ingestion of
VOCs over the lifetime of a person has been shown to cause adverse health
effects such as cancer, reproductive problems, and developmental effects. The
U.S. Geological Survey reported in 1999 that 47% of water wells in urban areas
contain VOCs, and 14% of water wells in rural areas produce water with VOCs. Of
these wells, the U.S. Geological Survey estimates that 2.5% of the urban wells
and 1.3% of the rural wells that provide drinking water have concentrations of
VOCs that exceed EPA standards for safe drinking water. VOCs also contribute to
ground-level ozone, according to the EPA, and irritate the lungs, eyes and
sinuses. The EPA believes VOCs also increase the risk of heart or respiratory
illnesses and aggravate asthma.
Unlike our products, the majority of wood stains, concrete stains and
concrete block pluggers currently on the market contain VOC levels that are
increasingly considered unacceptable in several regions of the United States.
State and federal government agencies have proposed further restrictions to
limit the levels of VOC contained in products. The restrictions have effectively
prohibited the sale and use of high VOC products in some states such as
California. The environmental advantages of the OKON products complement
Rentech's business philosophy of producing environmentally cleaner fuels and
products.
OKON's sales of products to some customers may constitute a significant
portion of our revenues. For the years ended September 30, 2002, 2001 and 2000,
one customer of OKON accounted for 10%, 12% and 16% of our total revenues.
LOSS OF OKON'S LARGEST CUSTOMERS WOULD MATERIALLY REDUCE OUR TOTAL
REVENUES.
OKON has provided material portions of our total revenues. Loss of a
customer of this size would have an adverse economic and business impact upon
all of our operations. OKON sells to over 200 customers, and we expect that this
broad customer base would help soften the impact of the loss of any single
customer.
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Revenues from our stains, sealers and coatings business segment
represented approximately 20%, 29%, and 41% of our revenues in the years ended
September 30, 2002, 2001, and 2000, respectively.
o PETROLEUM MUD LOGGING, INC.
In June 1999, we entered into the business of providing well logging
services to the oil and gas industry. This occurred through its purchase of the
assets of two established and related companies that have been providing
services in these fields since 1964. We are using the assets to continue these
businesses through our wholly-owned subsidiary, Petroleum Mud Logging, Inc.
(PML). The business is operated from Oklahoma City, Oklahoma. The services are
provided to customers located in Oklahoma, Texas, Kansas, Louisiana and Arkansas
and a few nearby states.
PML owns 35 mobile well logging units that are moved from well to well.
Through state of the art instruments, the logging equipment measures traces of
gases and water throughout the depth of a well hole by analyzing the drilling
mud recovered from the well as drilling progresses