Roger Williams’ eight-year path to his dream — a $3.5 billion plant to make ultra-clean diesel near the banks of the Arkansas River — is intersecting with a quite literal road, perhaps the state’s sturdiest.
One detail in Williams’ design for Arkansas’ largest ever economic development project is a super road engineered to bear the weight of twin 3,000-ton chemical reaction chambers over 4 miles from a planned river dock to Energy Security Partners’ 1,100-acre construction site in Jefferson County.
Williams, ESP’s chief executive, gave Arkansas Business an update on the project’s progress this month. COVID-19 has slowed but not stopped the gargantuan and oft-doubted project, a behemoth that would turn inexpensive natural gas into 33,000 barrels a day of liquid fuel.
A multimillion-dollar contract for site work, including land clearance, leveling and road-building, awaits approval from the Army Corps of Engineers.
“We’ve put together a bid package on the site development work, and we’ve qualified contractors that can meet our requirements,” Williams said. “We simply are waiting for our Corps of Engineers Section 404 permit,” Williams said, referring to a Clean Water Act requirement. “We filed our application in December 2018, but it’s a long, tedious process.”
He hopes the permit will come sometime in the third quarter of this year. The team had hoped to break ground on the plant in early 2022, but virus slowdowns and petroleum market turmoil haven’t helped. “We could be 18 to 21 months from actual construction beginning,” Williams said.
The GTL project would bring 2,500 construction jobs to the depressed Arkansas Delta, company officials say, and offer more than 200 permanent plant jobs “at excellent wages.”
“We need to level the site, build roads and complete a dock facility to bring heavy equipment in by river,” Williams said. “This equipment will be offloaded from barges, because river transport is the only option for objects this size. The road will be a very, very heavy-duty special purpose road because the loads are so great.”
The largest components of the gas-to-liquid plant will be two Fischer-Tropsch processing vessels, each weighing about 3,000 metric tons. The vessels are key to the chemical processes that convert the natural gas into liquid hydrocarbons.
“You couldn’t put that kind of load on any road; the road would be crushed,” Williams said.
Project Financing
Travel restrictions slowed front-end engineering design, Williams said, but it proceeds along with ESP’s strategy of project finance, which uses steady cash flows from major projects to repay debt.
“With New York, Europe and most of the world shut down, transacting business is not as efficient,” said Williams, a lawyer and former Exxon executive whose directors in the GTL project include former U.S. Transportation Secretary Rodney Slater and Gen. Wesley K. Clark, the former presidential candidate, both of whom serve on ESP’s board.
“Engineering design work is hampered when we can’t be in the same location as our contractors and consultants,” Williams added. “Trying to read and discuss large, detailed engineering drawings via videoconference is suboptimal.”
Most of the bankers and financial professionals Williams deals with are in New York, and some have no plans to reopen before Labor Day, he said. “Bottom line is we continue to make progress although at a slower pace than we’d like.”
Arkansas Commerce Secretary Mike Preston said he’s pleased that ESP is overcoming COVID hurdles and building financial support. “Pine Bluff, Jefferson County, and the entire state are excited to see this project move forward, we all hope to see construction begin sometime in the near future,” Preston said.
The chaotic petroleum market, which had some futures investors paying $40 a barrel for oil to be taken off their hands 10 weeks ago, has stabilized at prices above $40 a barrel. But the price swing underlines the fact that the GTL business model “depends on the relative difference between the price of natural gas, which is our feedstock, and the price of our product, which isn’t crude oil but a very premium product, ultra-clean diesel,” Williams said.
“When the oil price is very, very low, our margin gets squeezed a bit, but when it’s very high our margin doesn’t expand much. I don’t want to say the price of oil is negligible, but it is not as critical as people think. This project works fine at prices of $30-$35 a barrel.”
Energy Security Partners expects to have long-term contracts to buy natural gas at set prices and to sell its liquid fuel at prices guaranteeing a certain cash flow. That cash flow will guarantee loans in the company’s project finance plan. Up to 30% of the project cost will come through equity investment.
Professor Tomas Jandik, the Dillard’s Chair in Corporate Finance at the University of Arkansas, describes project finance as the “financing of stable projects with a lot of tangible assets and predictable cash flows” through substantial bank loans. “Deals are financed by loans up to 80% of the deal value,” Jandik told Arkansas Business. “Compare that to a typical corporation which on average would be financed by about 25% of the company’s value with loans. For comparison, Walmart’s debt proportion is consistently below 20%.”
The project owner “carves out the project as a self-standing entity, and the loan is strictly applied to assets of that entity,” Jandik said. Typical projects are “power stations, oil and gas facilities, pipelines and toll roads,” he said. “The assets are well defined, and you can’t pack them up and sell them off.”
Jandik said that in 2018, global volume of project finance developments totaled around $300 billion, with about $60 billion of that in the United States. A $3.5 billion project like the one in Jefferson County would “most likely be one of the top 15 global project finance deals” in a typical recent year, he said, but the pandemic has made 2020 like no other.
In the case of Pearl GTL, the largest global GTL operation and a partnership between Shell Global and Qatar Petroleum, Shell funded the entire $18 billion cost, expecting to recover the investment and share in ongoing profits.
Retired Teachers Have Stake
A $30 million commitment to the GTL project by the Arkansas Teacher Retirement System financed engineering design work. Williams described the ATRS as the project’s “co-lead equity investor,” second only to a group he didn’t name. “We’re very pleased that four commercial banks have given us tentative commitments to underwrite the full amount of our project debt.”
Williams said the retirement system’s leaders “clearly know the capital markets globally,” keeping the system “consistently in the top 5% if not the top 1% of performance” for public pension funds.
Arkansas was always ideal for the GTL project, Williams said. “It has all the factors, from river access to rail, highway transportation, gas pipelines — everything that we needed to make this project successful.”
Williams said he’s enjoyed introducing financiers to “the key people here in Arkansas,” as well as to investors. “I think people have finally realized, oh, this is real.”
