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Velocys proves good things come in small packages as it looks to transform gas to liquids market

Last updated: 09:11 20 Dec 2013 EST, First published: 10:11 20 Dec 2013 EST

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The UK has become quite creative in the way that it recycles. In Glasgow we have buses that run on waste cooking oil, while there are plans underway to run British Airways jets with fuel made from household waste.

The latter relies on the potentially revolutionary technology of AIM-listed Velocys (LON:VLS) to perform this modern day version of alchemy.

And while the BA collaboration is quite a headline grabber it fails to fully sum up the huge potential of the company and the chemical and engineering breakthroughs it has made to date. 

Created from 15 years research and development, Velocys has perfected a system of micro-channel reactors and super-active catalysts that will form the basis of a new generation of  small-scale gas to liquid (GTL) plants.

The significance of being able to build modular GTL units is probably lost on most rank and file investors.

So here we go. Currently it costs the likes of Sasol of South Africa and Shell several billions pounds to build giant GTL plants that have the scale to make them economic.

So to be able to create something that might cost say US$250mln (for 2,500 barrel a day facility) is something of a landmark.

In fact, it is fair to say this could be transformational for certain segments of the hydrocarbons industry.

As most people know the US finds itself over-supplied with gas.

So a relatively low-cost plant that turns this surplus into a sought after oil-like product would be a huge boon for operators sitting on a surfeit of gas.

There are literally trillions of cubic feet elsewhere in the world that are either stranded, being flared, or are otherwise uneconomic to produce.

And in fact Velocys’ technology has the capacity to transform any carbon source, which is the reason BA is keen to use it to help convert biomass into jet fuel.

What’s created from the process may not look like oil - it is a white and clean product, business development director Dr Neville Hargreaves reveals. But on a chemical level it is very close.

So, it can be used as the basis for fuel and there is also the opportunity to create any of the speciality refined product that can be made from petroleum, Hargreaves points out.

“We are leaders in small-scale gas to liquids,” he explains.

“More generally we believe we are fundamentally changing the way that the chemicals industry and refining industry can work by taking something that traditionally only works on a large scale and turning it into something that works on a much smaller scale.

“The technology is the starting point but it is about creating the businesses that work on that scale.”

That technology, spun out of the University of Oxford and the Battelle Memorial Institute, has benefited from some US$300-$350mln-worth of investment and is protected by over 800 patents.

“It is the marriage of two different technologies: a catalyst technology and a processing equipment technology,” says Hargreaves. 

“Put the two together and you create the innate value.”

The company’s four major engineering partners– Petrofac, Toyo Engineering, Ventech and Hatch – haven’t been slow to spot its potential.

The same can be said of the “pipeline” of potential clients all at various stages in the process from the first planning phase to final investment decision.

In fact getting one of its projects over that final hurdle and into construction will be a major value accretive milestone for the group, analysts reckon.

The next big boost after that should come once the first plant is up and successfully running – it will prove the concept works.

We are probably 2-3 years from production, but that final investment decision for one of the planned plants is just over the horizon and could sensibly occur next year.

“The task now is to get the early adopters through to that point,” adds Hargreaves.

“We are really close to the first one or two getting over that hump, either from the ones that have been announced, or from the many that haven’t been.”

Earlier this year Velocys tied up a £30.6mln share placing that will allow it to more than meet its immediate funding needs. The hugely successful cash call also provided validation of the company’s strategy to monetise the technology.

This will involve charging a licence fee for the technology as well selling proprietary equipment such as the reactor and catalyst.

However there may be scope at a later date to become an investor at the project levels, says Hargreaves.

 “We think a project developer or a resource holder will put up the capital themselves,” he explained.

“On the other hand perhaps we might do better by helping to enable some of those projects.”

The share price, up around 12% in the last month to 140p, has barely begun to reflect the company’s huge potential.

The City broker Numis, which is predicting the company will move into profits in 2015, reckons Velocys is worth 177p.

However that valuation could start to look conservative as plants are rolled out. 

Hargreaves adds: “There are lots of people who are very interested in this and they all have to go through their processes of engineering and making the various commitments that are required. 

“I don’t think there are any shortages of opportunities here.”

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