Quadrise Fuels International Plc, the emerging supplier of MSAR®, a low cost alternative to heavy fuel oil in the shipping, refining, and power generation markets, has confirmed in its half yearly report that Quadrise MSAR® technology is now approved for application in Saudi Aramco refineries and that 'key milestones' have been passed with the formulation and testing of Marine MSAR® 2 fuel, targeting the largest new generation marine propulsion engines.
In a statement,
Ian Williams, Executive Chairman, said: "The Company has passed several key milestones in our lead programmes since mid 2012. This, together with selective project additions and a successful share placing, has served to broaden the base and materially de-risk the business. Quadrise continues to benefit from the enthusiasm, commitment and support of our partners in all major programmes, many of whom are leading companies in their industries at a global level. We are very appreciative of this support and believe, as they do, that our combined efforts will be well rewarded in the future.
"Appreciation of the "Quadrise Proposition" continues to grow, evidenced by both direct enquiries and specialist and general media exposure. Increased awareness of the value-adding potential for refiners and the "green contribution" associated with production, distribution and combustion has become evident in our general business interactions.
"Quadrise is increasingly seen to be a 'game changer', displacing established practice in some large and complex industries. The same industries are also known for rapid adaptation when leading players adopt new technologies. The profile of our projects and partners would indicate that Quadrise shareholders could reasonably expect to benefit in such circumstances."
Please find below the company's latest business overview:
Business Overview -
Source: Quadrise Fuels International Plc.
This review prefaces the 2013 Interim Report and serves to update shareholders on material developments over the six months ended 31 December 2012 and post balance sheet events since the period end.
The Group interests which are directly managed by our 100% owned subsidiary, Quadrise International Limited ("QIL"), will again be the main focus of this review, as they continue to represent the most prospective, advanced and valuable programmes in the Group's portfolio. Recent developments have adversely affected our Canadian interests and the value of these investments has been revised at the half year. The background to these adjustments is provided in this review.
Directly Managed Interests
The QIL business offers an opportunity for consumers of heavy fuel oil to reduce their energy costs substantially by converting to Quadrise MSAR® emulsion fuels priced at a discount to the conventional alternative. In addition, in many applications, there are important environmental benefits to be gained relating to the nature of the fuel and its combustion characteristics.
The heavy fuel oil market, while in relative decline at a global level, is and will remain a very large market currently consuming in excess of 550 million tonnes per annum. At prices of around US$650 per tonne, annual sales values exceed US$350 billion.
The Quadrise value proposition is driven by a step-change in refining margins. This results from converting current practice in which heavy residues are diluted with high value distillates, to the production of Quadrise MSAR® where water and proprietary chemicals are used to dilute the heavy residue. The added value is realised from the "released" high value distillates and the price spread between crude oil, fuel oil and gas oil (diesel). Market fundamentals drive these spreads - especially the differential global demand growth between diesel fuel and heavy fuel oil.
The consensus among authoritative forecasters is that these price spreads will continue to widen in the medium and longer term - which should sustain and broaden the 'Quadrise Opportunity'. The prime causes are the burgeoning thirst for distillate transportation fuels in the developing economies, continuing bias towards diesel in Europe, continuing conversion to 'green energy' in mature economy power generation, and 'environment driven' fuel switching. These will further increase distillate demands on an already constrained refining industry.
During the period under review the fundamentals and market trends met the expectations of industry analysts resulting in a positive outlook for QFI at a macro level.
Important milestones were passed in several of our key programmes during the review period. In addition, QIL carefully extended its portfolio of prospects. In this regard, preliminary evaluations are progressing with a South American oil company and advanced joint scoping studies are underway with a global oil major. Associated QIL project definition and evaluation work will be largely funded by the client companies, and both opportunities have the potential to progress on a relatively fast track.
Notwithstanding advances achieved in core programmes and new additions, progress to assured fuel flows and associated revenues did not meet the objectives set out in 2011. The Company therefore required further funding to bridge the time to the delayed revenue phase, and the board elected to place 50 million new ordinary shares in October 2012. The shares were successfully placed at 7 pence per share, double the price at which funds had been raised in March 2011.
In combination, progress with our core programmes, the selective addition of new opportunities and the closing of a successful placing have served to materially de-risk the directly managed business portfolio.
Marine MSAR® Bunker Fuel
The Marine Fuels programme has been the focus of the technical development effort since mid 2012. The reformulated Marine MSAR® 2 fuel has set new standards in optimising both technical performance and formulation economics. This programme was informed by the results of the earlier Sorø Mærsk seaborne trial and the requirements of the most modern large scale marine propulsion engines for which the reformulated Marine MSAR® 2 fuel is designed.
As advised in a related RNS release in January 2013, the tests completed late 2012 at a leading engine manufacturer's state of the art test facility successfully demonstrated the general efficacy and performance of the fuel as intended.
Fuel trials at this stage of development become very exacting. The standard approach to pre-market testing of an "innovative fuel" targeting a major global market requires a wide variety of performance related aspects to be measured and assessed. This leads to a comprehensive report with associated recommendations. All parties involved were pleased with the Marine MSAR® 2 test results which represent a major milestone in the programme towards commercial operations. The report has usefully provided further understanding that will translate into operating practices and standards when Marine MSAR® 2 is in seaborne service, which in turn will make a valuable contribution to risk management in the early commercial phase.
The results achieved have served to underpin the confidence of all parties to the Joint Development Programme, and who have committed considerable effort and resources to progress to the stage now reached. Shipping operations are highly capital intensive and dependent on assured efficiency and reliability. Prudence clearly should prevail in the transition from development to early commercial introduction of our new proprietary Marine MSAR® 2 fuel.
Should the follow up programme advance as planned, the Company will be required to commit to production capacity by mid 2013, to assure supply to cover the early commercial volumes during the second half of the year. This is expected to be a progressive process which will be closely managed by Mærsk, QIL and the candidate oil refinery.
It is anticipated that an initial seaborne evaluation across a representative range of vessels and engines will be required prior to a full commercial roll-out. This programme is still subject to a number of third party approvals which are receiving attention. It will also require agreement to detailed plans, commercial terms and execution of associated contracts with the stakeholders in the period to mid 2013. QIL currently expects that the full commercial roll-out should start in earnest early in 2014.
At approximately 180 million tonnes per annum, the US$100 billion plus global marine bunker fuel oil market is large by any standard - both in volume and geographic spread. The Quadrise Marine MSAR® 2 market entry is expected to be assisted by the industry concentration and the dominance of the five major global bunker fuel "supply hubs", of which Singapore is the volume leader. Most major shipping companies lift their fuel at these hubs, which are also oil refining centres serving their respective supply envelopes. The principal implications of this are that QIL should be able to reach a very large sector of the global marine market through a highly rationalised supply infrastructure and selective relationships with key refining industry partners. Several global oil majors have their own or joint venture refining capacity in the top five bunker fuel supply hubs.
A number of developments in environmental standards affecting the marine market have gained momentum over the past year. The profile and intensity are expected to increase and lead to several new requirements impacting fuel quality and emissions standards. These developments are likely to favour the competitive position of Quadrise marine fuel as the combination of Marine MSAR® 2 together with the addition of 'emissions scrubbing' equipment on large ships should provide lowest cost compliance in both open ocean and Emission Control Area operations. In addition, superior mono-nitrogen oxide ("NOx") performance and particulate emissions ("Black Soot") would ensure further competitive advantage.
While there is some way yet to go, and prudence remains the watch word, the Company is cautiously confident that it is now on the cusp of commercial entry to this major global market. Quadrise has the product, partners and means to secure a material participation for Marine MSAR® 2 fuel, with the potential for continuous growth as our product proves its competitive advantage in commercial service.
QIL has been following the emergence of Liquefied Natural Gas ("LNG") as a possible marine fuel competitor. LNG has specialised storage and handing requirements which are expected to limit intrusion into mainstream shipping operations. In contrast Quadrise Marine MSAR® 2 has been formulated to replace marine fuel oil with no changes to the fuel handing systems other than segregation. It is, in all material respects, fully exchangeable with conventional bunker fuel oil in seaborne operational service.
Saudi Arabia
The Kingdom of Saudi Arabia ("KSA") was selected as a prime market for Quadrise technology several years ago as it is an oil-based economy. Crude oil and fuel oil will continue to be used for thermal power generation and as a prime energy source for water desalination and industrial steam generation. In addition, KSA has one of the highest growth rates in power consumption and per capita electricity demand.
Local demand growth for light petroleum products has led to a mismatch between the distillate fuels production from domestic refineries and the market requirements. This results in the KSA government having to deal with a large and growing net import requirement of high value diesel, petrol and kerosene, valued at around US$17 billion per annum.
Joint studies undertaken with Saudi Aramco specialists over an extended period of due diligence led, in 2012, to the approval of Quadrise MSAR® technology for application in Saudi Aramco refineries. A key result of the assessment has been the scope for increased local distillate production associated with transition from operating in "conventional fuel oil production mode", to operating in "Quadrise mode" in which heavy residues are converted into MSAR® power generation fuels. As an average total of 25 million tonnes of crude oil and fuel oil are consumed annually for thermal power generation, the business potential for Quadrise fuels is very large, and the benefit of associated distillate import substitution runs to billions of US dollars per annum.
Following the approval of our technology, QIL finalised contractual terms with our KSA partner, M/S Rafid Group for Trading and Contracting ("Rafid"). Rafid is a long established enterprise and provides a wide selection of energy related services to Saudi Aramco and other clients in association with its specialist partners. These range from seismic services to process plant fabrication, supply and installation and drilling rig supply and operations. Quadrise and Rafid are now working in very close association to progress an initial project which Saudi Aramco has advised should be sited in their largest refinery. The key to progress and priority for all stakeholders in the near term is to secure the commitment and participation of an identified large thermal power plant. This is a pre-requisite for final Saudi Aramco management approval. Progression to a substantial fully integrated KSA based project will become the focus of attention after the first process unit is installed and MSAR® fuel is produced to confirm the capabilities of the technology in service.
Past experience suggests it is unwise to be definitive on the timing of future programmes in development with very large oil companies - this is understandable, given the scale and complexity of their planning and development processes. However, in the KSA programme with Saudi Aramco, the direction has become clear and the requirements are now better defined. QIL and our partners are fully prepared to proceed quickly, and have offered an interim MSAR® fuel export alternative to enable a smaller scale fuel production programme to proceed pending agreement and preparations at the KSA based power plant. The timetable on which the project moves forward will clearly depend on the requirements and priorities of Saudi Aramco.
The next phase of the Saudi Aramco programme includes the preliminary scoping and detailed design and engineering work associated with the installation of the MSAR® process units and tie-ins to facilities and oil storage and movements systems. This should take place in parallel with the assessment and planning for any adaptations required in the power plant fuel supply systems. We now expect to finalise the terms on which Quadrise experts will assist Saudi Aramco project development specialists in this work during the second quarter of 2013.
Americas
PEMEX
The Group targeted Mexico as a key opportunity several years ago. This led to a series of reviews with PEMEX, the national oil company, to identify both Quadrise technology application opportunities in their refinery portfolio, and potential buyers for the associated MSAR® fuel production. There are many similarities with the Saudi Arabian circumstances, especially the relatively high level of Mexican distillate fuels demand which currently accounts for large volumes of imported products.
The joint evaluations indicated the scope for several profitable projects, but it was agreed that a 'single unit' demonstration plant should be installed at a selected refinery to start the programme. The associated contracts, setting the terms on which Quadrise will provide pre-production services, were negotiated with PEMEX and progressed to 'final draft' form in early 2012, but have not yet been executed. Being a state company, PEMEX is directly affected by changes in government policy and ministerial direction. It is expected that with the completion of the presidential elections, the associated appointments should have a positive effect on matters previously deferred - including the execution of the Quadrise agreements. Recent advice from senior executive level is that PEMEX remains supportive and wishes to proceed with the demonstration plant programme.
While the delays have been frustrating, the Company has not incurred any material cost on the Mexican programme over the past 18 months pending execution of contracts.
Central and South America
The Company reached agreement with Quadrise Canada Corporation in mid 2012 that QIL would take control of all MSAR® fuels business developments in Central and South America ("CSA"). An agreement was concluded with Nexidea Incorporated ("Nexidea") for the purpose of identifying and promoting project opportunities, with a view to the formation of related joint ventures to be led by QIL. Nexidea, a Dallas based company, specialises in refining process and logistics technologies and has long established consultancy relationships with the CSA refining industry which have greatly assisted direct access at senior level for the representation of Quadrise project proposals.
QIL and Nexidea ranked a limited number of opportunities, selecting the most prospective for early engagement. Having first executed a Non-Disclosure Agreement by year end 2012, the Company received and evaluated comprehensive live data on the refining operations of a large oil company. A high level feasibility assessment was then completed with their technical management and QIL was asked to provide a 'business case' for presentation to their management committee. The presentation was well received and is expected to progress to a joint project development assessment in which QIL and Nexidea will provide services on commercial terms. The assessment will also make recommendations regarding the form of the project. This could result in the first CSA joint venture extending from manufacturing to distribution and marketing along the lines of the model first envisaged by the QIL / Nexidea Agreement.
QIL and Nexidea will continue to investigate additional opportunities in CSA but until the Group has assured commercial traction in our core projects, further CSA developments may have to be postponed given the limits to Group resources.
Asia and Others
QIL continued to work with YTL PowerSeraya during 2012 under the renewed Memorandum of Understanding to establish a manufacturing source and supply chain of MSAR® fuel for their power plant on Jurong Island, Singapore. A range of sources has been reviewed and selective evaluations have been conducted with a number of refining companies. Joint refinery meetings will be continued in 2013 aimed at reaching an agreement for installation of a demonstration plant and subsequent fuels supplies.
The Company is also progressing an evaluation programme with an oil major, aimed at adding value to heavy residue streams associated with a proprietary process configuration. Development costs are largely being borne by the client. A positive outcome could lead to multiple opportunities across a number of similar refineries. The decision on a pilot installation or test may be taken during 2013.
Non - Managed Investments in Canada
The current investments share a common linkage and origin, all having been spawned from the initial participation in Quadrise Canada Corporation ("QCC"), originally formed for the purpose of creating and supplying a market for MSAR® fuels to substitute for high cost gas in steam generation boilers in the Alberta oil fields.
A number of recent North American energy related developments have adversely affected these investments. As these impacts are likely to persist beyond the medium term, QFI has carefully assessed the implications for the continuity and value of the companies concerned. An assessment conducted in the period under review with the management of the companies concerned has resulted in a more conservative approach than had previously been applied.
Quadrise Canada Corporation ("QCC") - 20.4% shareholding
Since inception, QCC pursued two parallel programmes:
1. a comprehensive Research and Development programme aimed at the creation and ownership of patented proprietary technologies associated with the core business of emulsion fuels; and
2. a technology services and MSAR® fuel marketing programme aimed at the substitution of gas in oil field steam generation - identified as a major Canadian energy growth opportunity in 2003-4.
By 2010, it became clear that the fundamentals leading to a collapse in the gas price were likely to endure and would effectively eliminate the oil field steam generation emulsion fuel opportunity in the medium, and possibly longer term.
QCC then researched other opportunities to exploit their specialised intellectual property and knowhow, and identified a number of potential new business prospects. The first of these involved the development of a novel Enhanced Oil Recovery ("EOR") technology. Various other specialised ventures have followed.
The EOR technology was 'spun off' and entities were created in which QFI was initially provided equity participation in proportion to its QCC interest at no cash cost. A merger with a junior oil production company followed leading to the present situation in which QFI holds 8.6% of Optimal Resources Inc. QFI also participated in an equity funding round in mid 2010 when the prospects of the EOR technology looked very promising.
During the QFI assessment of QCC, it became evident that QCC had very limited remaining resources and would be advised to focus exclusively on a few 'best ranked' possibilities. This led also to the changes in CSA described above.
The Company maintained a close liaison with QCC in the recent past to ensure an informed and realistic perspective on the prospects for the remaining active programmes. This has led to a decision to reduce the carried value of the QCC shares from C$0.96 to C$0.41 per share. Together with other minor adjustments this amounts to a write down of C$2 million, reducing the carry value to C$1.54 million as at 31 December 2012.
Optimal Resources Inc ("ORI") - 8.6% shareholding
ORI, as it had evolved by early 2012, became a combined:
· Junior oil exploration and production company with its own small oil field in Lloydminster, which straddles the provincial border between Alberta and Saskatchewan in Canada; and
· EOR company with cost competitive proprietary technology for application in its own operations and under contract in third party client oil production from clastic reservoirs.
ORI last raised funds in late 2011 and became reliant on oil sales revenues from previously abandoned wells in Lloydminster brought back into production with the EOR technology.
An independent review and report issued by incoming management mid 2012 set a new direction intended to progress both aspects of the business - production and client service. However, a series of setbacks has since led to a situation where the continuity of ORI could be at risk. These include:
· Failure of the production wells and loss of revenue through 'watering out';
· Severe winter conditions curtailing operations;
· A series of delays in permitting, delivery of equipment and chemicals; and
· Inability to secure client service contracts pending independent verification of the technology.
In addition, and more importantly, the sea-change in North American oil and gas production and related values over the past half year has adversely impacted the Canadian oil industry. Canadian producers are compelled to use the pipeline system to deliver their production to US based refiners. The incremental use of shale oils and light crude from additional US horizontal drilling programmes has produced a glut of availability in the USA closer to the refineries. The realised price has dropped from almost parity with WTI ("West Texas Intermediate" - the price reference crude) to a near 50% discount off WTI. Furthermore, it seems unlikely that the fundamentals will change even in the medium term. At these prices, there is hardly a market for conventional production and higher cost operations are the first to be shut down. This includes much of the "conventional EOR" operations which generally involve substantial additional cost. In such circumstances ORI will be unable to progress a client service business in North America in the foreseeable future.
While ORI management have a number of initiatives in hand which could extend the life of the company, QFI has decided that it would be prudent to write down the value of the holding to equate an estimated "risked liquidation value". This virtually eliminates all of the remaining carried value which is reduced from C$3.9 million to C$0.125 million as at 31 December 2012.
Paxton Corporation ("PC") - 3.8% shareholding
When PC was formed by the founding shareholders of Paramount Oil and Gas, QCC shareholders were invited to participate for up to 50% of the initial placing. QFI did subscribe on a proportionate basis to secure its present shareholding but has since been diluted.
PC's activities and prospects are covered at some length in the QFI 2012 Annual Report. PC is adequately funded to assure continuity pending commitment to its first major project - for which substantial additional equity funds will be required. Financial markets are presently considered to be largely unresponsive to new technology related risk, causing the intended placing to be deferred until markets are judged to be less risk-averse.
PC holds a 30% effective interest in Clean Energy Systems ("CES") which has promising technology now licensed to Mærsk Oil. Mærsk have since created a service business named TriGen Technology to offer associated high efficiency steam and power related services to industry.
The QFI interest in PC is considered to be carried at fair value and available for sale.
Financial Position
The Group held cash and cash equivalents of £1.65 million as at 30 June 2012. As advised above, it became evident early in the third quarter of 2012 that additional equity funds would be required to cover the core business programme through to assured revenues. This led to the successful placing of 50 million new ordinary shares in October 2012, raising £3.50 million before expenses, which has served to strengthen the financial base to allow the management to focus on driving the lead programmes forward as effectively as possible. The achievement of a placing price that was 100% higher than that applied in March 2011 was gratifying and reflective of the progress made in the key projects over the period. Since that time, the QFI share price has moved strongly and appears to have stabilised above 10 pence per share. The QFI share price performance was ranked 5th in a peer group of 106 junior energy sector companies over the 12 months to December 2012.
No exceptional expenditures were incurred during the period. Operating costs were generally held to planned levels, the majority being associated with staff, office and travel, and contracted services associated with project development programmes. No bonuses were paid to senior executives or executive directors during the period in review.
The Group held £4.02 million in cash and equivalents on 31 December 2012. A strategy review held in December 2012 found that this is expected to be sufficient to fund the Group through to the early revenue phase providing the core programmes are not unduly delayed. It is anticipated that most of the cost of pre-commercial development work in the coming 12 months will be recovered from clients thereby reducing the effective net cash burn of the Group.
The Group recorded a loss of £3.35 million for the 6 months period to 31 December 2012 (2011: £1.60 million), of which £1.82 million related to the impairment of the Canadian investments, a non-cash item. In addition, the Revaluation reserve was reduced by £1.87 million as at 31 December 2012 to eliminate part of the previous upward revaluation of the Canadian investments.
Outlook
The Company made good progress in 2012 and is well positioned to achieve several key breakthroughs in 2013.
Interactions with the institutional investment community indicate that Quadrise continues to gain recognition and is increasingly 'on the radar' in some sectors. We are certainly very aware and appreciative of support for the Company among a wide group of private shareholders who take a keen interest in our progress.
The Canadian developments are disappointing, and an unfortunate outcome for the Canadian management who have persevered for over a decade to create value for their shareholders. These interests have not been the focus of QFI's core activities and the Company's future prospects are not dependent on the Canadian investments or expertise. As a result, QFI should feel little practical impact from the present difficulties faced by QCC and ORI but remains available to advise and assist where this could help in preserving value.
The selective addition of two manageable QIL self-funding projects with potential for early development has served to broaden the opportunity base and de-risk the business.
Quadrise is increasingly referred to as a 'game changer' in some very large industries with long established practices. The same industries are, however, also renowned for rapid adaptation when lead players adopt new technologies to gain competitive advantage. The next two years may be seminal in determining the extent to which this will prove to be the case - as the 'game changing' becomes a reality.
