Oil's Holy Grail

Diane Francis Financial Post column Friday April 28:


NEW YORK CITY - Two Canadian chemical engineers working in the forestry sector have invented what may become the oil industry's "holy grail".

At least that is what the TSE's Ivanhoe Energy Inc. is betting on, as are the world's three biggest oil corporations.

The inventors are Dr. Robert Graham and Barry Freel, two Ottawa-based chemical engineers, who founded Ensyn Group Inc. of Ottawa. They have devised a process that converts wood into fuels and chemical feedstocks which is now being applied to upgrading heavy oil into valuable light crude at a reduced cost of US$12 to US$20-a-barrel. Ivanhoe paid $100 million to buy its technology for use in the oil business worldwide.

The first commercial plant to demonstrate this technology began operation in January. The facility can convert up to 1,000 barrels a day of heavy into light crude and is located in a large California oil field owned by a partnership between ExxonMobil Corp. and Royal Dutch Shell.

"I came across the Ensyn technology while running a UK investment bank specializing in environmental technology," said Ian Barnett, Vice President Corporate Development for Ivanhoe Energy in a recent interview. "They had found the only commercial way to convert woods to fuel. We bought it in 1996 and in April 2005 Ivanhoe bought the rights for the oil application."

Ensyn's technology will be the industry's "holy grail" because it promises to eliminate the need for natural gas as a fuel and the high cost of carbon waste disposal, thus reducing oil sands and heavy oil upgrading costs by US$12 to US$20 a barrel.

In other words, if Ensyn's technology works on a commercial scale, it will change the economics of oil production around the world.

"Applied to the oil industry it means upgrading without using natural gas, creating waste products or emissions," said Mr. Barnett. "The heavy oil is vaporized by a blast of hot sand and separates carbon and hydrogen molecules. There are too many carbons in heavy oil."

The excess carbon is transferred to a re-heater where it is burned off, the heat recaptured and used as a fuel source.

"We turn a low value byproduct into high value energy," he said. "We produce two products - light crude liquids and onsite energy that replaces natural gas as a fuel. And it's a self perpetuating process."

"Current methods involve big upgraders, solvents, gasifying, emissions, burial of waste," said Mr. Barnett. "We are using the bottom of the barrel as fuel."

That's why Ivanhoe has gotten the attention of the world's biggest oil companies. Besides ExxonMobil and Shell, Conoco-Phillips has licensed from Ivanhoe rights to the process in Canada until 2010.

What's also important to oil producers is that the Ivanhoe-Ensyn process can upgrade oil on-site, or in the field. "We have mini upgraders at or near the wellhead," he said. "These are turnkey and transferable to other locations."

This portability and localization eliminates the transportation costs incurred by oil producers now who must bring raw materials and fuels to their upgrader sites at great expense. Likewise, today's upgraders also must transport and dispose of bulky waste products. The California site can produce 1,000 barrels daily.

Another huge potential advantage derived from this process (trademarked "RTP" for "Rapid Thermal Processing") is that production continues 24-7. By contrast, traditional upgrading is in batches, requiring that equipment be shut down, carbon waste be removed from the upgraders and huge amounts of energy be deployed to re-start then use the process.

The California project is the first commercialized application of the Ivanhoe-Ensyn technology. The first pilot plant, producing only 1,000 barrels per day, was built in Ottawa in 1998 by Gulf Canada Resources and Ensyn Group.
While definitive results from the commercial plant may be two years away, the technology is exciting the industry worldwide.

If it proves to be effective, the process will liberate billions of barrels of oil for production around the world.

"This will allow companies to book stranded assets that are too expensive to upgrade," said Mr. Barnett.
Even more fascinating is Ivanhoe's business plan. It will only license the process to oil producers in return for a piece of the action. This makes it the world's first "technological farm-in".