Wasting Natural Gas

Last week, I wrote about Syntroleum Corp. (Nasdaq:SYNM) and its plans to build a commercial gas to liquid (GTL) plant. This operates exactly as it sounds: Using a patented synthesis process, the technology turns natural gas into liquid fuel.

GTL technology could help eliminate a lot of unnecessary wasting of natural gas across the globe. Many oil companies burn off unwanted natural gas in order to extract crude. The process is called flaring, and it’s a nuisance and an environmental concern. Natural gas is flared because there is a limited market for it in the warmer climates where it is found and it is difficult to ship overseas to viable markets.

To get a good look at flaring problems in Nigeria, you can check out a National Public Radio write-up at http://www.npr.org/templates/story/story.php?storyId=4797953

And Syntroleum has a stake in Nigerian oil as well. The company recently acquired two locations in Nigeria with discovered oil and gas reserves, and also claims to be in the process of buying more. Drilling of the first well will happen sometime around September.

And in November, the company signed two memorandums of understandings that will hopefully allow a GTL plant in Papua New Guinea. Syntroleum is looking to develop about 50,000 barrels per day GTL plant as part of an industrial complex dedicated to gas-based industries near Port Moresby.

Talks with Egyptian Natural Gas Holding through one of Syntroleum’s licensees to construct another GTL plant are also in the works. So, the company continues to seek out opportunities to commercially develop its technology.

There are two main reasons Syntroleum thinks it can succeed better than traditional GTL technology. The first is that its conversion process does not require pure oxygen, making it safer and more cost effective. This in turn helps to contribute to its second advantage: cheaper operating costs, opening the door for smaller plant sizes, including mobile plants that can be mounted on barges.

All of this hopefully ensures that Syntroleum’s commercial plant — which is designed to produce just 17,000 barrels a day — will be economically viable.

Coal

I also said that I would talk about coal to liquid (CTL) technology today since Syntroleum is also exploring ways to commercialize this process as well.  The company notes that the largest coal reserves in the world are located in the United States, Russia, India, China and Australia.

However, a lot of the coal in these reserves is expensive to get due to environmental concerns and how far some of the reserves are located from coal markets.

As I wrote last week, if the United States converted just 5% of its estimated recoverable coal reserves to liquid fuel, one company estimates this change would be equal to the 29 billion barrels of proven oil reserves in the U.S., thereby almost doubling America’s oil supplies without drilling another well or building a new refinery.

That’s a mighty big incentive to start figuring out how to convert coal to liquid fuels. And the impact it would have on oil independence from other hostile nations around the world. And although the company’s CTL program is not as close to commercialization as its GTL technology, it is making progress.

In November, Syntroleum signed an agreement to conduct laboratory-scale demonstration of its catalyst technology with coal. “This program is targeted at advancing early adoption of our proven FT technology in coal-to-liquids,” according to Syntroleum’s website.

And Syntroleum and Sustec AG, a private company based in Switzerland, have an agreement that provides for exclusive joint business development of projects integrating Sustec’s gasification technology with Syntroleum’s technology.

“The joint venture is aimed at converting coal and other carbonaceous materials such as petroleum-coke, residual fuel oil and biomass into ultra-clean fuels. Each company will own 50 percent of the joint venture,” announced Syntroleum. Jack Holmes, president and CEO of Syntroleum said, “We have long considered Sustec as the state-of-the-art leader in gasification technology. We believe this combination can now offer a truly unique and very compelling technology value proposition to the coal industry… Integration of coal gasification and FT technologies is increasingly being sought after in the United States, China, Australia and elsewhere. This joint venture presents a rare opportunity for companies pursuing investments in this important energy industry segment to access the complete technology package required to develop coal energy in an environmentally-friendly way.”

And Syntroleum throws some more convincing stats in the mix: According to a BP world energy review, the world’s 2004 coal reserves were estimated at more than 909,000 million tons. That’s a lot of coal that could be converted to clean fuels.

Analysis

Syntroleum is moving full steam ahead on its GTL projects, and coal shouldn’t be too far behind. It’s still a speculative pick, but the management is dedicated, the technology is in demand, and the price is right.

In its annual report, Syntroleum executives claim that its technologies can be cost effective assuming that oil prices prevail in the $35-$40 per barrel range, so with oil likely to remain much higher, the company should be able to adequately capitalize on its commercial efforts.

If you were to buy the stock between $6 and $8, you would need to buckle up for some price fluctuation for the next year or longer. I don’t think this is the kind of investment that is going to skyrocket in the next few months. However, through all the risks, Syntroleum could become a real player in the alternative fuel world if and when it starts turning a profit. (You can check out my previous column for a closer look at Syntroleum’s risks and financial condition.)

As always, I’ll keep an eye on it for you. Next week I’ll update you on another business I wrote about a few months ago…

Until then,

Gunner
May 15, 2006

Greg Guenthner

Greg Guenthner uses his experience as a former journalist to dig up the hard-to-find headlines that could lead to big gains for your micro-cap portfolio. Greg offers his readers the scoop on topics ranging from alternative energies to biotechnology, digging up the best penny stock opportunities before they’re discovered by the mainstream media. On top of contributing to Penny Sleuth, Greg also heads Penny Stock Fortunes and Bulletin Board Elite. Special Report: Imagine Getting Rich as Ignored Stocks Soar - You could turn $200 into $1.2 million!

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