February 20. 2012

The Wall Street Journal

Bluer Skies For Shanghai? U.S. Start-Up Strikes $1.25 Billion Deal To Turn Chinese Coal Into Natural Gas

A small Massachusetts start-up has signed a landmark agreement to do a big job in China—it will take already mined coal from the Gobi desert, convert it into natural gas, and transport the gas to the country’s rapidly expanding urban centers. The effort can help China slake its insatiable thirst for energy without exacerbating air pollution.
 
Associated Press
Investors also say it’s the kind of massive clean-tech project that couldn’t have been developed or financed in the U.S.
 
GreatPoint Energy on Friday announced its $1.25 billion partnership with industrial conglomerate China Wanxiang Holdings to build a large-scale plant that should produce about 0.5% of China’s projected energy needs by 2015, according to the companies.
 
The $1.25 billion deal includes an equity investment of $420 million, the largest ever by a Chinese corporation into a venture-capital-funded U.S. company, according to industry tracker VentureSource.
 
The deal with Wanxiang comes despite a general distaste among North American investors for major clean-technology project financings, in the wake of the 2008 financial meltdown and the resulting credit crunch.
 
Adding to the general sense that major clean-tech projects were sinkholes to be avoided at all costs was the example of Solyndra, which collapsed last September after it had received a government loan of more than half a billion dollars while it developed its solar panel technology, not to mention about a billion dollars in venture financing.
 
GreatPoint hasn’t taken any government loans, though, and it had previously received a relatively modest $150 million in venture financing. Its coal-conversion technology was demonstrated well enough to persuade China Wanxiang to invest, however.
 
According to documents viewed by The Wall Street Journal, Wanxiang and GreatPoint also enlisted China’s largest energy company, Sinopec, to build the pipeline infrastructure that will deliver the natural gas from the western deserts to the eastern, urban and industrial regions of China where it is needed most.
 
“It comes down to the economics of natural gas pricing in the U.S. and China,” says the company’s first venture investor, Bill Wiberg of Advanced Technology Ventures. “Wanxiang…[is] willing to step up in a significant way, financially, to help the company bring this tech to realization, because in China, the all-in cost of natural gas produced using GreatPoint [technology] will be substantially lower than if you were to build for the same capacity, using other gasification plant technology, or natural gas imports.”
 
Ray Lane, a managing partner with Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers and a GreatPoint board member, says the deal could lead to a shift in the way major energy projects are developed and financed.
 
“I don’t think (GreatPoint’s) technology would get built into a plant in the U.S. right now,” Lane said. “Maybe 10 years ago, maybe 10 years from now, yes, but not now from lack of funding. The banks here wouldn’t do it. It’s more affordable to develop it in China and Russia…Our role will be to make the technology work at large scale there. If you make one work, I guarantee there will be thirty more in the world in the next decade, and banks will line up to fund them all.”
 
Shanghai-based China Wanxiang Holdings, which produces about one-third of the world’s auto parts, gains about 20% of its revenue from energy-related business today. Wanxiang also owns large swathes of land that are rich in coal but short on water in China’s Western desert region.
 
GreatPoint Energy has invented a way convert coal into natural gas using a metal-based catalyst and water in a single-step process. The company will use its new financing to build the first large-scale plant in China to convert coal into natural gas using this approach, called hydromethanation.
 
CEO Andrew Perlman said GreatPoint’s technology allows the gasification process to work at lower temperatures and using less pressure than required by other coal gasification systems: “It’s a one-step process where others have two steps. That has an impact on capital cost and the environment, both.”
 
GreatPoint’s plant is expected to produce 30 billion cubic feet of natural gas annually by 2015, and one trillion cubic feet of natural gas annually when it is fully up and running.
 
GreatPoint Energy President Daniel Goldman said he expected the deal to generate 2,000 full-time equivalent jobs in the U.S. by the time the project is completed. The company directly employs 30 people today.
 
The energy deal comes amid growing efforts by the Chinese government to control the pollution resulting from the unprecedented growth of its economy. China has set a target to cut its carbon intensity, or the carbon-dioxide emissions needed for each unit of economic growth, by about 17% from 2011 through 2015.
 
A new report from researchers at MIT Joint Program on the Science and Policy of Global Change estimates that labor and health-care costs related to air pollution cost the Chinese economy $112 billion in 2005, compared with $22 billion in damages in 1975.
 
Perlman notes that his company’s coal-gasification plants don’t require the vast quantities of water and chemicals used in hydrofracking, a popular commercial method to extract natural gas from shale, nor do they produce the air pollution, solid and liquid waste associated with coal-combustion power plants.
 
GreatPoint’s technology captures carbon dioxide that might otherwise be released into the air during conversion of coal into natural gas. The company then sells it to oil businesses, which use it to improve the yield of already drilled wells.
 
Wanxiang’s president, Dr. Gu Jun Yuan, said GreatPoint’s systems use one-third of the water required by any other coal-gasification plants that his team could find in a world-wide search—an important factor to consider when setting up a gas plant in the desert.
 
Previously, GreatPoint Energy raised $150 million from U.S.-based venture funds and strategic partners, including Advanced Technology Ventures, Kleiner Perkins Caufield & Byers, Khosla Ventures, Draper Fisher Jurvetson, AES, Dow Chemical, Citi Sustainable and Peabody.