The Inherent Nature of Research and Development Leading to Big ProfitsIt is true that Evergreen is far behind schedule achieving their goals, but if you look at the big picture, the situation still looks very promising. First, consider the original motivation behind K-fuel: to remove the heavy moisture inherent in raw PRB coal. Each railcar of K-fuel can hold roughly 30% more BTUs than raw PRB coal, making those BTUs much more economical to transport. Transport costs to eastern utilities can more than double the ultimate price of PRB coal, and those costs are going up dramatically as locomotive diesel prices surge. Quite simply, the more it costs to transport coal, the higher the price Evergreen can command for K-fuel.
Another undeniable fact is that coal prices are soaring, roughly twice the price they were at the beginning of this year. Production and refining costs have also increased considerably (i.e., natural gas), but not nearly at the rate of coal prices. That so called increasing “crack spread” still represents opportunity for Evergreen. (Though Evergreen has recently and prudently chosen to idle the Ft. Union plant, and invest more of their resources into building up Buckeye coal production, given the relatively quick return on investment.)
Though Evergreen has had serious problems developing their K-fuel production capabilities, don’t forget that K-fuel is NOT some kind of brand new fuel that revolutionizes the entire power production business; it is really nothing more than cleaner burning coal that can extend the useful life of existing power plants. As such, it still retains some of the inherent characteristics of the underlying feedstock. For example, raw PRB coal has always been challenging to store and transport, and raw K-fuel is little different, though most of the K-fuel problems have since been overcome with a new surfactant application process. I’ll never forget when Manny Ascencio, the famous Evergreen short seller, told the whole world that K-fuel could never be safely transported. Where is this guy now, two years after more than 100 loads of K-fuel have been shipped to customers all over the world, by truck, rail, and water? Numerous customers claim the product performs as advertised, yet you’ll never hear anything about this from the Evergreen bashers.
Evergreen built the largest storage silo in the Powder River Basin, and that by itself was new territory in the tricky area of PRB coal storage. (though a couple of other big PRB silos have been built elsewhere since.) Regardless of whether or not PRB coal has been refined, storage has always been a problem. To be most efficient you want to dig it out of the ground, load it on a train, and burn it at the power plant ASAP. Special handling has always been required for raw PRB coal, especially in the summer months. (wind shields, tight packing, heat monitoring, etc.) Leave it in an open air pile for too long, on a hot summer day, and many PRB coal piles will start to warm up when the first breeze comes along. Leaving it sit for an extended period of time only increases your odds of having a problem. Such storage and transport problems have given rise to the concept of many efficient mine-mouth power plants in the Powder River Basin, where transportation and storage requirements are considerably less.
Dust has also always been a problem for PRB coal. Sometimes the fugitive coal dust coming off moving rail cars builds up so much beneath the rail tracks that it seriously limits rain drainage, and rail tracks are more susceptible to washouts after major storms. Again, dusting is another problem inherent with raw PRB coal, and is not unique to the K-fuel refining process.
Evergreen obviously doesn’t want any unique shipping or storage problems with their K-fuel product, especially since it is relatively new on the market. However, determining exactly what constitutes a “safe product” is more of an art than a science. Evergreen’s primary method of reducing dust and warming problems is through the simple application of surfactant. It’s sort of like coating the coal with a thin molasses, to minimize oxygen infiltration and to reduce dust. (Although K-fuel is partly and naturally sealed during the refining process when some of the extracted goop coats the coal’s surface micro-cracks as it dries.)
Needless to say, surfactant application isn’t free, which explains why the majority of PRB coal producers chose not to use it. A while ago I heard it cost roughly 50 cents per ton to use this stuff, but Evergreen judged it to be worth the money for the extra margin of safety. On the other hand Evergreen certainly didn’t want to increase their production costs any more than absolutely necessary. To that end they tried a lot of experiments with various surfactants, application methods, storage tests in open piles and closed silos, etc. Not all of those experiments went smoothly, but they did provide important data for the overall surfactant process development. They even hired a qualified quality control engineer just for this function. I haven’t heard any news lately, but what I last heard them considering was both application of surfactant to the raw PRB K-fuel, AND topping the individual rail cars with some kind of cheap polymer coating. The extra blanket is similar to giving the rail cars a “Saran Wrap”, designed to keep the air out. Again though, the exact packing and shipping preparation method varies greatly depending on expected weather, storage requirements, en-route transloading , etc.
It is also true that water treatment at Ft. Union has been a major challenge, but treating the toxic coal juice sure beats trying to scrub the fumes after it has been burned in a power plant. Evergreen originally installed some kind of vibrating membrane reverse osmosis system to clean their wastewater, but as Sexton openly discussed during an early 2006 conference call, the system purified the water more than required, and overall capacity was insufficient. They also had some problems with the injection wells (needed to open a new one, increase operating pressure, etc.)
Taking Bechtel’s advice, Evergreen eventually settled on the idea of using conventional water treatment methods, instead of depending on injection wells. This costs more money, but it’s also more deterministic to build, and easier to permit than injection wells. (Remember, the new Bechtel design must be easily adapted to any location in the world, regardless of subsurface geology.) You can’t blame Evergreen for screwing up on the Ft. Union water treatment process because during the design process nobody knew for sure exactly how much wastewater would be produced, or the exact content of that wastewater. Again, this is a BIG R&D effort with lots of new variables, and some trial-and-error was inevitable.
Again, Evergreen discussed all these problems, as well as others, during past conference calls. These were large complex industrial scale problems to solve, with no easy fixes. For example, you can’t just go to your local Walmart and buy a water treatment plant off the shelf. First, you have to figure out exactly what you need, and opinions from various experts in the water treatment business contradicted each other. So, Evergreen had to make the best decisions possible at the time, and move forward. While waiting for new equipment other problems arose that also required attention, and that often changed priorities for this first of its kind project.
New industrial scale development is never cheap or fast, but the huge barriers to entry in this coal refining business have also greatly discouraged competition and investment from elsewhere. When the first new Bechtel plant starts delivering K-fuel a couple years from now, it will take MANY years before anybody else can hope to catch up. The ultimate value proposition for the K-fuel process has never looked better. Anybody who invests in this company now can leverage the huge amounts of past R&D dollars that previous impatient investors have walked away from.
Another important fact to consider is that the Ft. Union plant processed more than 100 different types of coals and lignites from all around the world. One of the more profitable lessons they learned from all this was the unusual value proposition the K-fuel process provides for otherwise unmarketable lignite. Nobody can deny that the K-fuel process turns low grade lignite into useful power plant fuel.
Evergreen has also learned that these big utilities are less than enthusiastic about getting into the coal refining business than originally believed. This has shifted Evergreen’s business development focus back toward the concept of stand-alone refineries. That minimizes risks for the utilities, who would much prefer to write purchase orders for their K-fuel than build their own refineries. (Though K-Direct will most likely get more attention after stand-alone K-fuel plants prove themselves.)
It’s amazing how the shorts constantly emphasize all the production problems this company has had, but you seldom hear them discussing this company’s strengths. For example, they complain about the water treatment system, but you won’t hear them praise Evergreen’s decision to buy Buckeye Industrial Mining, which is now paying great dividends. I think you’ll also be hearing a similar, if not bigger success story coming out of C-Lock, most likely in the very near future.
Have a great holiday weekend everybody