Genoil Inc. (GNO-TSXV)

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January 30, 2009 Issue

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Genoil Is Well Positioned Having Just Announced A Manufacturing Agreement In South Korea For Their Crystal Sea™ Bilge Cleaner And The Roll Out Of Their GHU® Technology That Converts Heavy Oil Into Light Oil

Company Profile:

Genoil is an international engineering technology development company based in Alberta, Canada, that develops innovative hydrocarbon, oil and water separation, and marine technologies for the oil and gas and commercial marine industries.

Focusing on “engineering technology for the future”, Genoil has designed and developed a number of important technological innovations, including the Genoil Hydroconversion Upgrader (GHU®), which economically upgrades and significantly increases the yields of heavy crude oils and heavy refinery feedstocks into light, clean transportation fuels; and the Crystal Sea^TM Separator, a revolutionary bilge water treatment system which has  successfully met or exceeded the highest guidelines and standards of the United States Coast Guard and the International Maritime Organization’s MEPC Resolution  107 (49) MEP for pollution prevention equipment for ship bilges.

David Lifschultz - Chairman of the Board, CEO

David Lifschultz has a long and successful career in directing companies in the fields of technology, transportation and energy. He is the President and Chief Executive Officer of Lifschultz Investments, a family office as well as Lifschultz Terminal Leasing Inc., a holding and investment company that allocates capital for alternative energy technologies and energy technologies that create greater efficiencies.

From 1980-1991, Mr. Lifschultz was President and Chief Executive Officer of Lifschultz Fast Freight, a surface transportation company with 2000 employees and revenues of approximately $100 million per annum and he also supervised Trans Air Freight Systems, which he sold to Air Express International (AEI). In addition, he supervised Ocean Freight Forwarder, Wolf and Gerber and brokerage clearing house, Loretz & Co. Mr. Lifschultz created the first integrated surface air transportation system.

For 10 years, Mr. Lifschultz was President and CEO of Lifschultz Industries Inc, a high tech precision heat measuring company that measured heat to the nano degree, which was sold to Danaher in 2001. Mr. Lifschultz built the Company up from $1.50 stock value and $2 million in sales with no profits and sold it 8 years later for $33 million ($22.80 per share) to Danaher (DHR). Family transportation interests date back to 1899. He owns approximately 20% of Genoil's common shares, and has invested millions of his family money with Genoil.

Oil and Gas
Oil and Gas Field Services
(GNO-TSXV, GNOLF-OTC: BB)

Genoil Inc.
Suite 2020, 633-6^th Avenue S.W.
Calgary AB Canada T2P 2Y5
Phone: 403-750-3450

Interview conducted by: Lynn Fosse, Senior Editor, CEOCFOinterviews.com, Published – January 30, 2009

CEOCFO: Mr. Lifschultz, what was your vision when you became CEO?
Mr. Lifschultz: “Our vision was to roll out the Genoil Hydroconversion Upgrader (GHU®) technology that converts heavy oil into light oil, which could alleviate the shortages in energy that we predict will occur in the future.”

CEOCFO: Where are you in the process today?
Mr. Lifschultz: “In the early days the profitability of the models was nowhere near as great as they became through greater efficiencies that we achieved as we progressed with the technology. In addition, the price of oil was low when we came in; about $10.00 a barrel and the cost in the early stage was about $12.00 a barrel. Therefore, we were developing for the future, which made it difficult to sign up people when there was no profitability, so we did it with our own pilot unit. However, today the profit model in China is around an internal rate-of-return of 68%, but the Chinese models are subject to price controls, so those models are higher in China right now than the rest of the world. The rest of the world, despite the 71% decline in the price of oil, our internal rate-of-return on projects we estimate is around 30%.”

CEOCFO: That is still very good!
Mr. Lifschultz: “Yes it is! That was on December 8, 2008, and we are taking models when WTI was around $42 or $43.00. On October 28^th, which I think was more realistic for next year. It was $68 WTI and our models were 57%.”

CEOCFO: Could you give us a closer look at your technology and what sets it apart?

Mr. Lifschultz: “We bring a superior form of the hydroconversion, which gets greater yields of the oil for the purpose of utilizing the heavy oil. There are two gigantic facts that have to be faced in the oil world today and will be faced again, because right now you have a recession and in a recession your oil demand obviously falls. When it falls in a cyclical economic situation it is temporary, and will probably adversely affect the supply of oil in the long-term because the oil drilling will stop. If the economy snaps back we will have less production and higher oil prices in three or four years; much higher oil prices than we had at our peek of about $148.00. The technology converts heavy oil to light oil. The giant factor in the market is that there are 400 billion barrels of proven lighter oil reserves that produce 76 million barrels of light oil per day and 900 billion barrels per day of heavy oil proven, producing 9 million barrels a day. Some of which has sulfur, which contaminates the atmosphere. The technology that we have can access that 900 billion barrels and convert it to 60, 80 million barrels a day. Each million barrels a day takes about $10 billion of infrastructure cost, but it is the only solution to the rising oil price, which will access the heavy oil to meet the demand probably for the next thirty or forty years. The so-called peak oil is really not peaked at the moment as it appears, because it is peaked in the light oil but it hasn’t peaked in the heavy oil. If we didn’t have any heavy oil reserves at all and we could not convert them, we would then have peaked at 400 million barrels and would have started declining. We would probably be wiped out as a reserve in oil in about 20 to 30 years and then we would have zero oil. So the heavy oil we can call on longer if you convert it. Our technology enables the world to access that oil economically and efficiently right now with a rate of return that I already outlined.”

CEOCFO: Would you please tell us more about the conversion industry and Genoil’s technique?
Mr. Lifschultz: “For the most part heavy oil conversion was restricted to what they call the refinery bottoms. When you take an API-40-WTI, which is over 40 API, which is a light oil and you run it through standard refinery, you have around 8% of your oil as a heavy residue and that can be used for asphalt, or you can take a hydroconversion unit of our competitor who basically designed their process for refinery bottoms. They convert into light oil so you don’t lose that 8%. They get around a 65% conversion rate. However, we get up to a 90% conversion. The oil fields themselves, when those refinery hydroconversion technologies were applied to the oil fields, even if they were designed for the refinery, were not able to do the job that well, but the Genoil technology, which was designed essentially for the oil fields, was able to do the job much better than our competitors. We get a conversion rate from their 65% up to our 90%. We had a significantly higher conversion rate. As the oil industry evolved and as we went into the market we found that the hydrogen that is used in the hydroconversion process was not available in many countries. Oil is a hydrocarbon, when the oil has a high hydrogen percentage it is called light oil and if it has a high carbon percentage it is called heavy oil. There is another way of treating that other than hydroconversion, that is what they call coking. When you reject the carbon in order to lighten the oil you reject about 30% of your oil and you lose it. Whereas with our process we do the reverse, because we don’t reject the carbon; we add hydrogen so we come in around 104% product. In order to do hydroconversion you have to have hydrogen to add to it. The hydrogen that you add in the standard way comes from the cheapest form of obtaining the hydrogen, which is the steam methane form of extracting the hydrogen from natural gas. However when we went to a lot of the national oil companies, who control 80% to 90% of the oil, they would not use natural gas to furnish the hydrogen.

In the Middle-East there are national oil companies that control most of the oil in the world. They can’t make a pipeline in the Iran to Europe, so the only way you can get that natural gas to Europe is turning it into liquid natural gas, which essentially freezes it or you convert it through GTL which is a process that converts natural gas by changing its molecular structure. Those are the only two ways of transporting it; otherwise, it is very low value. They lack value in the countries where they are because they don’t have sufficient demand for it. The goals of these oil producing countries was not to use their natural gas for upgrading oil, but to use the natural gas for making fertilizer and other products. What we had to do was redesign the process, which Genoil did based on the demand for our product and based on how the demand was evolving. We had to lower the conversion rate, let’s say to 84% and use 16% of that residue for extracting the hydrogen and then also use the balance of the residue to burn as fuel to run the conversion process. We developed a zero-waste process, which is what we are marketing now. It is zero-waste in that every part of the oil, even the sulfur is used for fertilizer. We have a zero-waste process and that is what we are marketing around the world today. We have one major project going in China; we have an Haiyitong Inc. (“HYT”) project, which is a private project in China. It is 19,000 barrels a day; the cost is $170 million dollars. You have to understand that we are a Nasdaq company, a penny stock and we have raised non-diluted to our stock $105 million so far. In that conversion we are finding zero-waste models, which is unbeatable and it will be our model for that, so we are very enthusiastic. We also are confident that the greater return on investment is something like 68%. It is such an unusually high rate of return that institutional investors or other oil companies should have an interest in investing in the $65 million. They also will be doing it for their own curiosity, because if it works out they will want to use it in their countries. For investors they will want to be part of our system in rolling it out around the world to hit those huge returns.”

CEOCFO: How did you get the people in China to sign on?

Mr. Lifschultz: “We were introduced to a group known as HYT Refinery, which is a private company. Everybody knows that China is the most aggressive technologically in the world, and that is why they are growing so much. They were very interested in new technologies. We find that in the core economies like the US, the institutional bias against change is massive. In emerging countries where they already have oil, they are very aggressive. They are looking for new ideas. In Canada for example we approached the oil-sands operators and we wanted to do joint development of the product and experimentation and so far one of them told us that they have zero amount of money for research and development, which we never heard of in our lives. That may have occurred in the 1930’s in the depression. One of those for example rejects 30% of the oil, because they are still using coking, and they return the coke as contaminated waste to the oil-sands site from which it was taken. But ours would have a zero-waste product for them. So they would make a lot more money. We have not seen the interest there that we see in emerging countries in the Middle East. In Russia we have interest and have had a lot of interest, in China and Venezuela.”

CEOCFO: What about working with the environmental organizations?

Mr. Lifschultz: “There are different ways of expending energies and time in trying to market a product, and we tried going to the market itself where we can obtain the business, rather than lobby with government agencies for litigation to mandate innovations like the Genoil GHU Upgrader. A small company like ours can’t really get involved in trying to get into a lobbying effort. It is just not something that I can see as productive; so why should I do that? I went to the large international oil companies, I reached the board of directors in one of them and one of those giants had an emerging technology section, which loved our technology, which was turned down by their higher executives. So why should I expend my resources there, where if I go to China everybody is interested or if I go to the Middle-East, everybody is interested.”

CEOCFO: What is the timetable going forward?

Mr. Lifschultz: “What we have to do is get the $65 million for that project in China and then in two years we will have our model up and running and making money for which we will make 10% of spread. So if the spread before the oil crash was $40.00, but basically after two years, hopefully it will be something like $30.00, we will make $3 a barrel. With about 20 barrels a day, we will make $60,000 a day times 365, approximately because there will be some downtime for maintenance, but if we were using 365 days times $60,000 a day, it should be something like $18 or $20 million, which is fine. What would it be if there were 30 to 40 million barrels a day that are eventually converted? 30 million barrels a day, if your spread is $30 you are making 900 million a day. I think that the oil prices will go high enough next time around to over $200 a barrel. I look at this as potentially the largest future technology development in the world. It is even a larger development than Microsoft because Microsoft, which has 80% of its market, makes $11 or $12 billion a year. That is with 80% of your software market. That was once the most valuable company in the world, so you can just imagine what it could become in this industry if you are talking about a $100.00 spread eventually. Right now you might be talking about a $30.00 spread.”

CEOCFO: You have other technologies as well?

Mr. Lifschultz: “We just announced that we did an agreement with DongHwa Entec Co., to manufacture our Crystal Sea™ bilge cleaner. This manufacturer in South Korea controls 70% of the shipbuilding market for heat exchangers in Japan; 70% in China and about 60% in South Korea. Their intention is to sell into the shipbuilders for the ships that they build. They are also manufacturing for us in China and is a low cost producer; it is very economic in selling them to other ships, and also for utilization in the ports. Our goal is to create a model where we will manage the bilge cleaning for ports. We won’t sell it, but we will manage the cleaning up of all of the bilges of all the ships that go into major Asian ports is our goal. This will end oil contamination in the ports.

We have had our bilge cleaner tested by the U.S. Coast Guard successfully that it reduces the contamination level to five parts per million sufficient for all inland waterways, lakes and ports in the United States. It is a tremendous technology; we are the low-cost producer in the technology, and the best. We intend to roll out to all of the ports in the world, or every port that we can sell, so we are in the roll-out now of our technology. That is a technology that has been scaled, it has been working for ten years in different countries on a very large scale, but it has been miniaturized for the ships at the request of one of the shipping lines. They looked at us and said, ‘why don’t you miniaturize it and it will be superior to everything else that is out there’. So we did and there is ten years of flawless production, and the US armed forces have two of them in the United States. They are also in Australia, Romania and around the world with the large units and now we are going to be selling the miniaturized units and using relatively larger units for the ports to clean their bilges. So it is a very exciting development and it will make us profitable very quickly. We will be a research and development company turned into a manufacturing concern. We would like to farm out the manufacturing to others and we will do the ports, otherwise will sell the equipment to different ships to clean their own bilges.”

CEOCFO: What are some of the challenges working with Asian companies, and how do you make it mesh?

Mr. Lifschultz: “Asian companies are very disciplined. They are like the United States in 1900 you might say. They are very cost-conscious; they work hard to reduce cost. In Asian countries like China, Japan or South Korea, you have to have the best quality and the lowest prices. Even with the best quality if the prices are not the lowest you make no sales; they are very disciplined, they want low prices. We thought that we would market a little higher than everyone else, because the operational costs were lower, but we found we couldn’t penetrate the Asian market with a premium even though we thought that in six months to a year the premium would have been earned. We found that we had to reduce prices in a very disciplined way and searching around the world for components that were the same in lower prices. We had to get those prices to meet the market; not above it. As soon as that price point was equal or below, the whole market opened up to us. Every single door swung open in Asia with that price point. It was equal or lower to everybody else; then the quality meant a lot. It was a very disciplined price point. If you are a low-cost producer and you have the best quality, the sale is going to go through.”

CEOCFO: In closing, Genoil has a very disciplined, very well thought out approach and a great technology; why should potential investors pay attention today?
Mr. Lifschultz: “You might think if you look at exploration companies or the oil sands operators in Canada, most of the profits have been wiped out. What is quite miraculous about Genoil is that we are very profitable despite 71% decline in oil, which most people don’t think is going to go down much further. It demonstrates the resiliency of the cost model. It is an interesting cost model because it is based on the spread which means the price of the feedstock, the operating costs subtracted from the finished product. When we say finished product we are not strictly speaking the price of WTI (West Texas Intermediate) light oil, which is around $38.00 today, against the heavy oil feedstock. It is really different; we get the feedstock or the oil sands or the heavy oil and we convert it to a product slate that is higher in value than the WTI. Therefore, people are going to say, ‘The WTI is such and such price, and your heavy oil is such and such price, how can you make these spreads?’ That is not what we do. What we do is take the feedstock and convert it to a much higher value product than has WTI. Therefore, if the oil price is falling, we found that heavy oil is falling any time the light oil is falling. Our spreads, we went from $149.00 to $68.00, they were about the same because the proportional falls were similar, which is really quite miraculous. With $68 we are doing great. We were thinking that if the economy had not contracted, then we would start blowing out on the upside. Eventually if you were to reduce your light oil to $10.00 a barrel then at that very low level you would find that, just like we start blowing out at profitability at $200 a barrel, then we would start becoming uneconomical at $10.00. If you get too low, you are going to see your margins start to fall. In order to get oil to $5.00 or $10.00 a barrel you will have to have 40% unemployment in the world economy, which nobody really thinks is happening based on the measures of the Federal Reserve.

Here is an opportunity to invest in the oil industry in a technology that can be rolled out right now. Oil companies don’t have to be afraid that they are going to be investing in a losing proposition. Almost all of the refineries are being deferred. Almost all drilling is not being drilled unless they can say that the field at $40 or $60 oil is profitable, otherwise all development of that field is going to stop, because they may not even be able to meet their costs. Here we have an opportunity, a technology in the oil industry that is profitable now so the oil companies can use it and develop it for the time when most people believe the world economy will grow out of this, and this is a temporary operation. When it does start rising again, then we are going to explode in profitability. I think it is an ideal investment. It opens up a source of energy that is relatively untapped.”

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“What is quite miraculous about Genoil is that we are very profitable despite 71% decline in oil, which most people don’t think is going to go down much further. It demonstrates the resiliency of the cost model. It is an interesting cost model because it is based on the spread which means the price of the feedstock, the operating costs subtracted from the finished product.” - David K. Lifschultz