The Story of Ethylene… now starring natural gas

It’s a $160 billion a year market you’ve probably never heard of.

Ethylene, the intermediary chemical compound from which popular plastics and many other high value products are derived, has traditionally been made in the petroleum industry via steam cracking, an energy- and carbon-intensive process. It’s the most produced organic compound in the world; annual global production is in the hundreds of millions of tons. To meet ever-increasing demand, production facilities are being added globally, particularly in the Persian Gulf and China.

The problem is, it’s complicated and expensive to make ethylene. And, or course, petroleum reserves are waning.

For decades, chemical engineers have been pursuing cost effective ways to make this key industrial compound from other things. Now, a handful of companies think they’re honing in on ways to make ethylene from the methane in natural gas with commercially viable processes.

If making ethylene from methane turns out to be possible at scale, it could be a watershed for the chemical and petroleum industries. Ethylene from methane could potentially be much less expensive, given that natural gas is one-fifth the price of oil. And its supply could be more sustainable, given the massive and growing size of natural gas reserves.

The methane conversion space is more crowded than one might expect. Kachan & Co. recently performed a consulting project for a client that uncovered and profiled 24 announced and stealth mode startups in this space, along with 19 blue chip companies and 6 universities and government labs. The project involved interviews with company and research personnel, a review of venture investment data, interviews with investors and trade organizations, an intellectual property patent search and a literature review that included media and scientific sources.

Here are some of the more interesting of the 24 small organizations we found at the forefront of methane-to-ethylene commercialization today:

Co. Name HQ Website Type Dev. Stage Tech Description Partners or Alliances Investors
Carbon Sciences Santa Barbara, California Public Experimental phase Reforming methane to syngas to fuel using advanced catalysts. Emerging Fuels Technology (EFT) & University of Saskatchewan N.A.
Fertilizer Research Institute Pulawy, Poland  Polish national research lab Unknown Currently operating a pilot methane to ethylene facility based on oxidative coupling of methane (OCM). Governmental facility N.A.
LanzaTech Auckland, New Zealand Private Prototyping, commercialization in 2013 Gas fermentation process that produces both fuels and high-value chemicals from low-cost resources such as steam-reformed methane. N.A. Series A investment from an investor consortium led by Khosla Ventures; Series B financing led by Qiming Ventures.
Quantiam Technologies Alberta, Canada Private Research & development  Working on a feasibility study on a novel catalyst for methane conversion. BASF, IRAP BASF ($3M), Ursataur Capital Management ($3M), Small investors ($2.3M)
Siluria Technologies San Francisco, California Private Research & development A “revolutionary approach combining the latest developments in nanomaterial science, biotechnology and chemical engineering.” New type of oxidative coupling of methane (OCM) process. None disclosed Wellcome Trust, Alloy Ventures, ARCH Venture Partners, Kleiner Perkins Caufield & Byers, Altitude Life Science Ventures, Lux Capital, Presidio Ventures. $13.3M Series A. $20M Series B.

Excerpt from private Kachan & Co. study of 24 methane to ethylene companies, October 2011

The companies we found worldwide pursing methane-to-ethylene arranged themselves into rough groupings by type:

  • IP Provider: Develops IP related to methane-to-ethylene, does not go beyond IP phase
  • Technology Provider: Developed a technology and a prototype, intend to license to other companies (e.g. Carbon Sciences)
  • Application Provider: Developed a technology, and sells engineering services to build facilities (e.g. BCCK) or manufacture technology (e.g. Rentech)
  • Technology Operator: Goes beyond the licensing and directly operates facilities (e.g. CompactGTL)

Global oil and gas majors have been working on the challenge of methane to ethylene for years themselves, with dozens of patents issued. But none have cracked the code of profitable commercial scale production.

Global oil majors and number of patents in converting methane to ethylene

Chevron 80
Exxon Mobil 72
Shell 54
BP 29
Nippon Oil 14
Innospec 10
Lubrizol 9
Celanese 7
Saudi Basic Industries Corporation 5
Total Raffinage 5
General Electric 5
Honeywell 3
Cosmo Oil 3
Eni S.p.A. 3

Source: IP Checkups, October 2011

High value chemicals like ethylene from natural gas would be even more compelling if the gas was derived from renewable, biological sources, and not from conventional reserves or fracking, as today. Small volumes of renewable methane are available today from anaerobic digestion and landfill gas. But large volumes are promised by a new wave of companies commercializing thermal gasification and other approaches to creating bio natural gas from wood waste and other widely available feedstocks (see the Kachan report The Bio Natural Gas Opportunity).

Complicated science aside, it won’t be easy for companies to bring methane to ethylene innovations to scale. Ethylene and other high value chemicals today are an oligopoly, a market hard to crack. Any new process will likely need to be championed by one of today’s 5 big suppliers as a partner to enter the market. Then there’s the culture clash between small, fast-moving venture backed companies seeking quick exists and the notoriously slow, conservative petroleum and chemical industries.

But those challenges are likely surmountable, according to the bets that are being made by name brand cleantech venture backers of the companies in this space.

Originally published here. Reproduced by permission.

A Holy Moly Gutsy Week in Cleantech

Reading cleantech news and SEC filings this last couple of weeks makes for a holy moly OMG damn that takes guts set of moments. Well, the cleantech sector is nothing if not entertaining.  I’m obviously going to have to up my game and find more entertaining deals.


Total buys controlling stake in Sunpower. Sunpower was certainly a pioneer, and really kicked off vertical integration in photovoltaics with its acquisition of Powerlight in 2006. $2.3 Billion equity valuation? 46% share price acquisition premium? Wow. No guts, no glory. But at something like a little south of a PE of 30 on the 2011 earnings guidance as well as 2011 year over year revenue growth forecast of close to 30%, probably not too far out of line. And they didn’t even have to buy the whole thing!

Sunpower has had a hell of a run, but basically every solar analyst on the planet has been crowing that its core strategic advantages have seriously eroded. And maybe they have. We shall see. But growth is growth, and high performance panels are high performance panels. With another $1 billion in letter of credit from Total to backstop it, I think this is a gutsy, but strong move. If I’m Sunpower, I needed to do something. And with my stock price at not much over 10% of my high? This is a deal I’ll take. And if I’m Total, buy control of Sunpower for a 7th of it’s price peak and a PEG of around 1 to get a Tier 1 position in solar and stacks of growth potential I can pour cash into? Or build another offshore platform? Hmmmmmmh. I think I’d actually like the solar play this time. And take the margin risk.


KiOR files for IPO. Um, wow. Fascinating technology, though still a lot of scale-up to be done. We know for sure that Vinod Khosla has a cast iron stomach and more guts than me. I read the S-1 cover to cover last night. S-1s are notoriously messy reading and tricky to decipher how the venture rounds were done, but here’s what it looks like at first read:

July 07 Khosla invests $2.5 mm in a milestone deal of $1.4 and $1.1 for c. 50% of the stock excl option plan, a c. $2.5-3 mm pre money/ $5-6 mm post.  Great, nice cheap deal.
Mid 08 Artis (who was also heavy into Solyndra) and Alberta Investment pump in another c. $12 mm for c. 55% excl option plan, about a 1x uptick c. $10-12 mm pre-money.  CEO comes in here.  Price and capital in still within normalcy, but rolling almost as fast as we did our Zenergy deal in superconductors a few years back. But then it gets really gutsy.
Aug 09 Khosla $15 mm bridges a conv note, and gets paid handsomely when in
mid 2010 Khosla puts in another $80-90 mm in addition to the prior Convertible note for 35% of the Company, but all of the voting control.

Somewhere in there the state of Mississippi gives them $75 mm in no interest loans kicking in this last quarter (which sounds like it goes into default if KiOR doesn’t invest $500 mm into the state of Mississppi by 2015).

They then file for an IPO with Credit Suisse, UBS, and Goldman. All with like just a 15 barrel of oil equivalent per day pilot plant, planning to scale to a still miniscule 800 BOEPD with the couple of hundred million dollar investment from Mississippi and Khosla.

This isn’t just Khosla priming the pump and dumping on the rest of the venture world.  This is money where your mouth is.  This is make ’em pay to play style Texas Hold’em.  Pushing all in on a pair of queens with a straight flush showing on the flop.  Figuring pot odds be damned, the pair of queens is worth a shot if we can push half the table in with us, and we’ll just buy back in and do it again  if it doesn’t work out.  Damn. No guts no glory.


And of course, for BrightSource, one IPO filing and more “tortoise troubles”. Basically the regulators now think there are more endangered desert tortoises getting moved or killed than they had permitted Brightsource at Ivanpah.   The week after you file for an IPO and Google gives you money? 😉

And phase II and III are on ice or partial ice. I asked my wife how exactly it happens that they miss this badly on the number of tortoises (she’s been doing environmental risk assessments in the SoCal desert her whole career).  Her answer, usually means somebody on one side or the other doesn’t understand statistics.

This is already a very tight deal. And I was never sure exactly what a measely $250 mm in IPO money was going to do to help, when each project costs $2 billion, and takes fifty to a hundred million and years to develop. I’m thinking they need some real Total style money in this one to win.  But at this time in my reading, I’m beginning to think I have no guts.

Time to think about upping my game again.  My partners will be glad to hear that.  They think I’ve gotten a little risk averse.