Quadrise Fuels International — Key role in transitioning to net-zero

Our discussion of the MSAR production process notes that no distillate is used in the manufacture of either MSAR or bioMSAR. For an oil refiner, this means that all of its high-value middle distillate can be sold as transportation fuel, so it can offer MSAR at a discount to HFO and still improve its overall profitability. Being able to potentially purchase MSAR at a discount should encourage the refinery’s customers in industry and shipping to adopt the fuel if it was available. Quadrise has carried out extensive assessment work for a wide variety of refineries. This has included detailed front-end engineering design studies and determination of MSAR formulation costs for residues from individual refineries. It also has data from the installation, commissioning and operation of a 1,000t/d (6,000bpd) MSAR manufacturing unit at the Cepsa refinery in Gibraltar (see below and Exhibit 4).

The value generated by the refinery is not linked directly to the price of crude oil but is a function of the pricing spread between diesel and residue-based fuel oil. Based on the global marine fuel prices in October 2022 which indicates a MGO (marine gas oil)-HSFO spread of US$679/tonne, Quadrise calculates that if a 100kbpd semi-complex refinery producing 15kbpd of residue switched to MSAR production it would save 10kbpd of middle distillate and produce output c 22kbpd of MSAR, giving an additional gross profit of US$148m each year for the refinery.

The studies also show that a refinery can switch to MSAR relatively swiftly and inexpensively because the production technology is modular and can be integrated into an oil refinery’s existing operations in less than 12 months. Quadrise calculates that the total capital expenditure required for full conversion of the 100kbd refinery in the example above would be around $20m. The alternative approach for this type of refinery to achieve a comparable increase in crude ‘yield’ would be to undertake a substantial facility upgrade costing c $1.1bn and taking four to six years. In addition, MSAR is a low-viscosity liquid at room temperature so it can be stored and transported at ambient temperatures (c 20–30°C), while HFO must be heated to much higher temperatures (60–100°C). Consequently, less energy is required to handle and transport MSAR, generating further savings. The volume of greenhouse gases created during the extraction, refining and transportation of oil products has become an important metric now that companies have begun to prepare ESG reports that examine carbon emissions throughout their supply chains. The proportion emitted prior to use can be significant. For example a study by Chalmers University of Technology notes that the extraction, transport and refining of crude oil accounts for 15-40% of total greenhouse gas emissions from transport fuels such as gasoline and diesel.

Adoption in the shipping industry

Helping shipping lines meet carbon reduction targets

The IMO estimates that in 2018 global shipping emitted 1,076m tonnes of CO2, representing 2.9% of emissions caused by human activities. The organisation calculates that emissions could increase from about 90% of 2008 emissions in 2018 to 90-130% of 2008 emissions by 2050, undermining the objectives of the Paris Agreement (December 2015) which aims to limit global warming to well below 2°C. In support of the Paris Agreement, the IMO set out a policy framework in April 2018 that aims to cut greenhouse gas emissions from international shipping by at least half by 2050 compared with the level in 2008, and reduce the carbon intensity of international shipping by at least 40% by 2030 compared to 2008. (Carbon intensity is defined as either the amount of CO2 emitted per tonne of cargo transported a nautical mile or the amount emitted by a vessel in a year divided by its cargo-carrying capacity and the number of nautical miles travelled.) In June 2021, the IMO adopted some short-term measures aimed at achieving its target. These measures combine technical and operational approaches to improve the energy efficiency of ships and will require all ships to obtain a rating of their energy efficiency and ships over 5,000 gross tonnage to determine their annual operational carbon intensity indicator (CII) and CII rating. This is the first time the IMO has established a formal rating system for ships, sending a strong signal to the market. The IMO notes that shipping will need new technologies, new fuels and innovation to meet the greenhouse gas targets. In April 2022 the IMO brought forward the entry into effect date of certain specified improvements in energy efficiency from 2025 to 2022, for several ship types, including gas carriers, general cargo ships and liquid natural gas (LNG) carriers.

Alternative fuels are one approach to reducing CO2 emissions. A large vessel consuming 25,000 tonnes of HFO annually emits around 89,000 tonnes of CO2 annually on a ‘well-to-wake’ basis. Based on third party tests, Quadrise calculates that adoption of MSAR would reduce CO2 emissions by up to 5%, saving up to 4,000 tonnes of CO2 emissions annually. Adoption of bioMSAR could reduce emissions by up to 25%, saving up to 22,000 tonnes of CO2 emissions, which is equivalent to the annual emissions from 11,000 petrol cars. Adoption of bioMSAR or MSAR thus potentially presents a mechanism for shipping lines to reduce carbon dioxide emissions from existing vessels without incurring substantial investment in new vessels, propulsion systems, transportation and storage systems. Management estimates that a switch from a conventional biofuel to bioMSAR would also generate 10-15% cost-savings for the same CO2 reduction. For comparison, a switch to LNG, which is 85-95% methane, would cut emissions by 14% or 12,000 tons of CO2 each year, though there is a risk with low pressure engines that some of the methane, which is 28 times more potent a greenhouse gas than CO2, would not be combusted and thus be released into the atmosphere. In contrast to bioMSAR, LNG has specialised and expensive storage and handling requirements. While adoption of green methanol or ammonia would result in emissions reductions of 81% and 83% respectively, Quadrise notes that around 50MW of renewable generation capacity would be required per vessel, which is equivalent to 70-80 wind turbines or solar panels covering an area of around 4km2. There would therefore need to be substantial investment in additional renewable generation capacity for widespread adoption across the global shipping fleet to be viable.

On-vessel CO2 scrubbers are yet another option, giving a potential reduction in emissions of over 70%, but the technology is still under development and the containers for storing the carbon removed from flue gases would occupy space that could otherwise be used for cargo. In our opinion, it is likely that shipping lines will use a combination of approaches, including speed optimisation, route optimisation and improved hull and superstructure design as well as alternative fuels to reduce emissions.

MSAR proven for use in marine sector

Shipping giant Maersk invested seven years in a programme which conclusively proved that MSAR was a viable marine bunker fuel in both two- and four-stroke engines. The programme culminated in an operational trial during 2016 and 2017 on the Seago Istanbul container vessel. The vessel completed c 1,500 MSAR running hours following its normal route, using a total of 7,000 tonnes of MSAR produced at Cepsa’s Refinery Gibraltar-San Roque in Spain. The MSAR fuel performed well and feedback from engine manufacturer Wärtsilä and from Maersk was very positive. As a result, Quadrise received an interim letter of no objection (LONO) for MSAR for Wärtsilä RT-flex96C-B engines.

Despite this successful outcome, in 2017 Maersk decided not to adopt MSAR because the trial had been part of a programme in which Maersk was to meet tightened IMO regulations on sulphur emissions by installing scrubbers for removing sulphur oxides on the majority of its fleet. Maersk planned to offset the cost of installation (estimated at around $2m per large vessel) from the cost savings arising from replacing HFO with MSAR. Instead, Maersk decided to meet the IMO regulations by using very low sulphur fuel oil (VLSFO), which is more expensive than standard HFO. It is possible that the change in strategy was because the IMO had decided to bring forward implementation of the low sulphur legislation from 2025 to 2020, requiring a massive investment in scrubbers over a much-shortened timescale, requiring many vessels to be taken out of service simultaneously for scrubber fitting. More recently Maersk has changed its stance on scrubbers, with 35% of its fleet equipped with the technology according to a report from Alphaliner published in January 2022.

MSC decided to meet the IMO’s regulations on sulphur dioxide emissions by equipping its container ships with scrubbers so it could continue to burn high-sulphur fuel. The Alphaliner report cited above notes that almost half of MSC’s fleet is equipped with scrubbers. MSC was initially interested in using Quadrise’s MSAR to offset the costs of installing and operating scrubbers but soon widened the scope of its discussion to include bioMSAR as well (see below).

Adoption in industrial processes

As noted above, refineries can potentially offer MSAR at a discount to HFO, making it an attractive proposition for energy intensive industrial processes such as making cement. Based on the studies carried out for utility companies and using the spread value given above, Quadrise calculates that the cost of converting a 400MWe boiler to MSAR would be $2.5m, generating fuel savings of $34m/year compared with HFO costs of c $340m pa at current prices. This represents a payback time of only a few months. Converting from a biofuel to bioMSAR would potentially generate savings of c US$55m/year. Quadrise estimates that over 80% of the running costs for a boiler are related to fuel costs.

Adoption in the power industry

Similarly, since refineries can potentially offer MSAR at a discount to HFO, it is also an attractive proposition for power generation. This was proven commercially in 2008 when Quadrise successfully completed a commercial demonstration of MSAR as boiler fuel in Lithuania. Over 22,000 tonnes of MSAR were produced at ORLEN Lietuva’s 200,000bpd (10Mt/year) refinery from Urals crude-based residues. The MSAR was transported c 300km by rail to the 1,800MWe Elektrėnai power plant in Lithuania (Exhibit 5). This plant is operated by Lietuvos Elektrinė, a former Orimulsion customer, and is the primary source of Lithuania’s electrical power. Lietuvos Elektrinė concluded that the performance of MSAR was similar to or better than Orimulsion. The trial results were independently verified by consultants from the European Bank for Reconstruction and Development (EBRD), but the project did not proceed to commercialisation because of the financial crash in 2009. The project has not been revived since because Lithuania now has an LNG terminal at Klaipeda so security of fuel supply is less of an issue than when it was dependent on Russian gas.

Quadrise is currently engaged in three key trial programmes which, if successful, could potentially start to generate commercial revenues from the middle of CY23 onwards. The status of these is summarised in Exhibit 8.

Marine programme with MSC Shipmanagement

In January 2021 Quadrise announced a JDA with MSC Shipmanagement under which MSC was to carry out a LONO trial of MSAR and potentially bioMSAR, which had only recently been launched, on representative commercial vessels in its global fleet. These trials are essential preliminaries to Quadrise potentially supplying its proprietary fuels to MSC for use in its fleet, thus helping MSC to achieve its stated target of reaching net zero by 2050. In July 2022 Quadrise signed a framework agreement with MSC covering both proof-of-concept (POC) tests and subsequent LONO trials. The POC tests will take place on the MSC Leandra, which was previously named the Seago Istanbul and was used by Maersk for its successful demonstrations of MSAR noted above. A project team from Quadrise has already checked that the MSAR systems installed on the vessel for the Maersk tests are ready for fuel testing and commissioning tests are ongoing. The new LONO tests will require 25,000 tonnes each of bioMSAR and MSAR, which will be produced by Quadrise and sold to MSC. Management is in discussions with third parties regarding the production of fuel for the trials.

The POC tests will commence in H1 CY23 after the Leandra returns from its scheduled maintenance and regulatory class inspection in a dry dock. This is slightly later than the Q4 CY22 start shown in our March note because of the time taken to purchase the Leandra. Assuming that the results from the POC tests are positive, MSC will then finalise agreements with third parties for trial and commercial fuel supply and conduct lengthier trials (4,000 hours of operation) to provide commercial operating experience, potentially culminating in obtaining LONOs from the engine manufacturer, Wärtsilä. Management expects that the LONO trial will take around six to eight months to complete. As the trials progress, Quadrise, MSC and other key stakeholders such as refineries will hold discussions, which are likely to commence in CY H223, regarding the supply of bioMSAR and/or MSAR for use by MSC’s global fleet. A single vessel would consume 0.6kbpd of fuel.

Quadrise is also launching a "Blend-on-Board" solution for the production of MSAR or bioMSAR emulsions on vessels. This may be tested under the MSC agreement or with new marine clients that the company is approaching.

Industrial applications with partner in Morocco

Quadrise continues to work with a large industrial group headquartered in Morocco, which is considering using MSAR and bioMSAR as a substitute for HFO to generate power at some of its operations. Quadrise successfully completed a pilot trial at one of the partner’s sites (site A) in Morocco in October 2020. A follow-up industrial-scale trial at a different site (site B) owned by the same group was delayed from Q1 CY21 because of a combination of site access restrictions related to COVID-19 and an internal management reorganisation at the client, which held up the signing of a new material transfer and cooperation agreement until May 2022. Signature has cleared the way for the industrial-scale trial to be completed in December 2022, following a delay of a couple of months caused by global electronic component shortages which meant that a new MSAR manufacturing unit was not able to start producing fuel for the trial when scheduled. The fuel has now been manufactured and is in Morocco.

Once the trial has completed, Quadrise will provide the client with a written report on the efficacy of using MSAR and bioMSAR. Provided that the client’s stated parameters regarding MSAR performance and product quality are met, the parties will enter into discussions regarding potential commercial supply, with a view to signing a fuel supply agreement in CY Q123. An industrial demonstration test at site A, which will be covered by a further agreement, is contingent on the results of the tests at site B. The Moroccan group could potentially require 2–5kbpd of fuel, depending on how many of the group’s sites deploy MSR/bioMSAR. The requirement could be substantially higher if Quadrise’s fuel is used extensively across the group’s sites.

Converting oil from oil sands in Utah

In April 2022, Quadrise signed a phased commercial development agreement with energy services company Valkor Technologies to commercialise MSAR and bioMSAR technology at Valkor’s projects in Utah. Valkor has equity stakes in multiple heavy oil projects in Utah including Greenfield Energy, Petroteq Energy and Heavy Sweet Oil LLC. The agreement provides a framework for the potential delivery of commercial revenues from bioMSAR/MSAR manufactured using oil from one or more of these projects. As the Utah deposits are naturally low in sulphur, this bioMSAR/MSAR should be very attractive as a bunker fuel, assuming it can be transported from Utah to a suitable bunker hub. For several months ending August 2022, Valkor carried out an extensive core sampling programme to accurately define the recoverable reserves from surface oil sands and sub-surface heavy oil in Utah. It also worked with partners to optimise the solvent extraction process for extracting oil from the sand.

Valkor is now waiting for drilling permits for four pilot wells which it hopes will enable it to extract its first oil later in Q4 CY22. Some of this oil will then be used by Quadrise for on-site trials converting oil to bioMSAR and MSAR. We note that Quadrise has already demonstrated it can convert oil from this area into MSAR and bioMSAR, so this step should involve working out the optimal process for converting the oil rather than the overall viability of conversion. As a result of delays in securing drilling permits, this is later than the timescale outlined in our March note, when production drilling was expected to commence at a Utah site in the summer, resulting in oil being available for on-site trials converting oil to bioMSAR and MSAR during H2 CY22. In that note, we stated that Quadrise and Valkor would agree full commercial terms for an MSAR and/or bioMSAR licence and supply agreement by October 2022, potentially resulting in commercial sales by the end of CY22. The two parties now aim to conclude an agreement by the end of January 2023 for the licensed supply of a manufacturing unit to provide fuel for MSAR and bioMSAR trials as a precursor to commercial supply during CY 2023.

Power plant applications in the Americas

Quadrise is progressing discussions with candidate sites in Panama and Honduras to trial MSAR and bioMSAR at power plants in CY H123. This is a precursor to potential commercial supply agreements later in the year.

Quadrise’s management has the breadth and depth of experience required to commercialise the MSAR technology. CEO Jason Miles spent the first 12 years of his career developing emulsified fuel projects, initially as a process engineer for BP and subsequently as business development manager for PDVSA, where he implemented numerous Orimulsion power projects globally. He now has over 30 years’ technical and commercial experience in emulsion fuels. He joined Quadrise in 2006 and was promoted from COO to CEO in February 2020.

Executive chairman Michael Kirk retired at the group’s AGM in November 2021. Non-executive director Laurie Mutch took over as interim chairman until Andy Morrison became non-executive chairman in February 2022. Andy is a director of growth businesses with almost 40 years of experience encompassing major multi-national corporations and junior public companies. He began his career at Royal Dutch Shell, where he spent 17 years in its oil products (including bunker fuel), lubricants and speciality chemicals divisions. His roles there included VP positions in sales, marketing, trading and strategy, spanning several continents. After leaving Shell, Andy held senior positions at BG Group and BOC Group in corporate strategy and new business development respectively. Since 2007 Andy has led a number of junior listed companies in both the energy and ESG sectors, where he has significant experience covering restructuring, turnarounds, new listings and acquisitions. His former directorships include CEO of Xtract Energy and Silvermere Energy. He is currently non-executive director of Kanabo Group and Ondo InsurTech.

Following the resignation of former COO Mark Whittle in July 2021, Quadrise announced the appointment of Philip Hill to the position, which is a non-Board role, in January 2022. Philip is a Chartered Chemical Engineer with over 20 years of experience in fuels and chemicals manufacturing, sales and distribution for BP and INEOS. He has significant technical and commercial experience in production operations, technology licensing, asset optimisation, project development and strategic planning. Prior to joining INEOS, he managed and held directorships in a number of BP's joint ventures, where he worked to develop and license gas-to-liquids technology for downstream and synthetic biofuel applications, and to supply jet fuel to the airline industry.

Customer acceptance: Quadrise’s MSAR has been proven both in extensive marine trials with Maersk and in a commercial and technical demonstration in Lithuania. However, MSAR and bioMSAR still need to be adopted as marketable, environmentally friendly and economic substitutes for HFO by the power and marine bunker sectors. Moreover, unless refineries intend to use all of the MSAR/bioMSAR they produce within their own operations, there need to be enough customers using MSAR/bioMSAR for power generation, providing heat for industrial processes or marine transport for refineries to start manufacturing the fuel.

Fuel oil spreads: the refinery price ‘spread’ between diesel and HFO determines the economic attractiveness of a switch in converting heavy residue to MSAR/bioMSAR, rather than HFO, and thus the amount by which MSAR/bioMSAR may be discounted with respect to HFO. In addition, depressed oil prices tend to extend decision-making cycles.

Not applicable to all refineries: only one-third of refineries globally are suitable for producing MSAR/bioMSAR because some do not produce any liquid residue and some inland refineries would have logistics issues. However, this still offers substantial scope for MSAR/bioMSAR uptake.

Partner risk: Quadrise has been working with Nouryon since 2004. It currently has a contract with Nouryon for the exclusive global collaboration and supply of goods and services for future MSAR and bioMSAR projects which has recently been extended for a further three years to October 2025.

Financial: when the FY22 results were announced in October management estimated that the group had sufficient cash to reach commercial revenues in H1 CY23 and to cover project expenditure and fixed costs up to early H2 CY23, adding that additional funding would be required to bridge the gap to sustainable cash generation from H2 CY24 onwards. Clearly there is no certainty on whether sufficient funding will be secured.

Quadrise is still pre-revenue. Stripping out share option and exceptional charges, operating losses reduced by £0.1m year-on-year during FY22 to £2.8m, reflecting reduced professional advisor fees and lower office costs following the move from the company’s previous head office in February 2021. Free cash outflow increased by £0.2m to £2.6m as the prior year number was flattered by positive working capital movements. The group had £4.4m in cash and no debt or convertible securities at end FY22. With current expenditure, excluding project costs at £240k/month, management estimates the group has sufficient cash to reach commercial revenues in H1 CY23 and to cover project expenditure and fixed costs up to early H2 CY23. Additional funding will be required to bridge the gap to sustainable cash generation from H2 CY24 onwards.

As Quadrise has yet to generate commercial revenues, its value resides in the potential future cash flows generated from volume production of MSAR and bioMSAR. Since there is substantial uncertainty on when the various projects Quadrise is working on with its partners will progress to commercialisation, precluding the preparation of estimates, we present a high-level scenario analysis based on data from the company, which we understand is derived from the numerous detailed case studies it has carried out for prospective clients. This shows potential revenues, EBITDA and capex requirements attributable to projects for various levels of adoption by global refineries and penetration of MSC’s shipping fleet. We note that minimal capex is required for projects where MSAR technology is installed on a licensing basis, although the potential profit and risk is substantially less than if Quadrise were manufacturing fuel on a toll basis, ie charging a fee per tonne of MSAR and bioMSAR manufactured as it did for the production of fuel for the Maersk trials. We expect that Quadrise will form a separately financed JV with a partner for projects involving production on a tolling basis, thus avoiding substantial investment in capex and minimising shareholder dilution.

Adoption across only 8% of MSC’s global fleet of around 700 vessels including chartered ships could generate around $106m in licence revenues and $15.8m EBITDA and be transformational for Quadrise. The other two projects closest to commercialisation are smaller. Commercial adoption by the Moroccan partner would require the output from one MSAR manufacturing unit (MMU), ie c 2–5kbpd. This would be only part of the output from a single refinery such as the Cepsa site, which produced MSAR for the Maersk trial and has an output of 240kpd. The projected output from extraction of oil and oil sands in Utah is 3–10kbpd for each site. In our opinion, adoption of MSAR in any one of the projects closest to commercialisation would encourage multiple customers to use the fuel, which could potentially support profits beyond the upper range of our analysis.