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Genoil is presenting the world with a
means of achieving energy independence from the Middle East with their technology for
converting bitumen, heavy oil and refinery residue into synthetic light oil
Industrial Machinery
Oil & Gas
(GNO - TSXV)
Genoil Inc.
Suite 640, 101 – 6th Avenue S.W.
Calgary AB Canada T2P 3P4
Phone: 403-750-3450
David K. Lifschultz
Chairman and
Chief Executive Officer
Interview conducted by:
Lynn Fosse
Senior Editor
CEOCFOinterviews.com
November 2004
BIO:
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 Terminal Leasing Inc., a holding and investment company that allocates capital
for alternative energy technologies and energy technologies that create greater
efficiencies. He has been an investor in the oil and energy industry for the past 20 years
with consistent annual returns on capital. He has a vast portfolio of oil and energy
related companies including a 4.8% stake in NYSE Callon Petroleum (CPE).
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. He also supervised the flagship company Lifschultz
Fast Freight, and 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 is the
largest shareholder and sits on the Board of Directors of Worldwater Inc., a solar power
company. He is the largest and controlling shareholder of Genoil, and has invested
millions of dollars in the company to develop its upgrading technology.
Company Profile:
GENOIL is a technology development company based in Alberta, Canada, which provides
solutions to the oil and gas industry through the use of proprietary
technologies. The company has designed and developed a number of important
technological innovations, which represent significant breakthroughs in each of their
specific commercial applications. With the GHU (Genoil Hydroconversion Upgrader), for
example, a process has been devised which increases productivity and saves costs on a
scale, which has not been seen in the oil industry for a generation. The GHU is an
upgrading solution which targets conversions of low value heavy oil, bitumen or refinery
residue into light synthetic oil high in distillates yields for transport fuels.
Through this process the majority of contaminants like Sulfur and Nitrogen are also
removed. These benefits are achieved at relatively low capital and operating cost.
CEOCFOinterviews: Mr.
Lifshultz, how did you get involved with Genoil, and where are you today?
Mr. Lifschultz:
“Genoil was a subsidiary of a company that I had a major investment in called Beau
Canada. Beau Canada was an oil and natural gas exploration company in Canada that had a
lot of heavy oil, so they went around the world using a former executive of Suncor to try
to find a technology that could convert the heavy oil into light and thereby sell it at a
much higher price. So they looked and looked until they found this technology, which they
put into a company called Genoil that they owned and had been drilling in Cuba. The Cuba
drills didn’t work out, so they proceeded with the cooperation of Gulf Canada, to
move towards a test with Gulf Canada to prove the technology. We saw that and it was very
interesting to us; A catalyst fund then took over Beau Canada and in the process of
selling it to Murphy’s Oil Corporation (NYSE: MUR), Murphy did not want the
technology company, so they spun it off, canceling about $20 million worth of debt to the
parent at a $1.00 per share, but leaving it with external debt of a Genoil subsidiary of
20 million dollars . That debt caused its subsidiary, CE-3 Technology, to go
bankrupt, where the technology rights were located. .
It went into bankruptcy and Gulf Canada and our group, the Lifschultz Family group with
others, brought the technology out of bankruptcy. Genoil had not gone bankrupt but its
subsidiary, so we put it into Genoil; then Gulf Canada proceeded to test the technology
and proved that it worked using our pilot Upgrader at 10 barrels a day, which paid for all
of the expenses. It’s now about $2 million that they have put into the company and
Gulf Canada in the mean time became ConocoPhillips (NYSE: COP). As I saw this developing
and even though the technology proved out the stock did not really perform; I continued to
accumulate a position as an investment until I had control. At that point, being
experienced in running technology companies and other kind of companies; as well as
experience in marketing and sales, since there was a weakness in marketing and sales, I
took over as chief executive officer. I would say that about $70 million has been invested
in the company and research and development to develop its technology, the GHU (Genoil
Hydroconversion Upgrader). The company now is at the stage where we’ve proven the
technology and now we are moving to market and sell it to the industry and in that line we
have signed our first contract to Silver Eagle Refining-Woods Cross Inc., near Salt Lake
City, Utah.”
CEOCFOinterviews: What does the Upgrader do that hasn’t
been done before?
Mr. Lifschultz: “The Upgrader doesn’t actually do
anything that hasn’t been done before; the concept was proven about fifty years ago
that you could combine hydrogen with carbon and lighten the oil, making it more valuable.
However, fifty years ago it wasn’t commercially viable; processes now are out there
that are said to be commercially viable and are, but are much more expensive than ours.
Genoil converted the heavy oil into light by combining hydrogen with carbon at a much more
efficient and lower cost method; we believe our process achieves a high level of
conversion at a substantial discount to our competitors. Costs here are very critical
because refineries cost $9 billion to refine 200,000 barrels of oil in Canada. So if you
use the Genoil technology for processing residues, costs can be reduced substantially;
this technology creates a superior mass transfer, it lowers the temperature and pressure
necessary to make to convert low value, heavily contaminated refinery residues into a
light sweet synthetic oil through the combination of hydrogen and carbon. The low pressure
enables you to reduce the size of the walls in your reactors and the size of the vessels
necessary, thereby increasing the capability for a refiner to produce high quality
transport fuels by using the synthetic crude while offering a very cheap residue
processing scheme for the refinery. More than that Genoil can retrofit existing capacity
in the industry for 80 million barrels a day, which is a 13 million barrels a day residual
market of oil that is very, very heavy and is used for heating oil. It is a by-product of
the refining process that refines the oil to create gasoline, jet fuel and diesel. That
market we think is worth 13 million barrels of heavy residual oil that can be converted
into light oil at a much more commercial level and at a much more lower cost than anybody
else. In our first commercial installation we believe we can achieve about a $10 a barrel
improvement of value for each barrel processed. In addition there is at present a
growing differential between heavy oil and $52.00 WTI light oil. We can convert that
production into a premium quality light oil and save $130 million a day to the industry
and that is better than anyone else and a much lower cost than anybody else.”
CEOCFOinterviews: How do equipment costs fit into the cost
structure?
Mr. Lifschultz: “If you build a $9 billion refinery,
part of the refining process that we revolutionized is the reactor, which is about 5% of
the refining cost and that is about $450 million. We can substantially reduce that as far
as the residual oil is concerned, when we do a retrofit of the refinery and we are not
really changing the whole refinery. We tie into the existing infrastructure of processing
units and hydrogen supply. It’s not the same with gas to liquid where you take
natural gas and convert it to synthetic petroleum and you have to build a $7 or $8 billion
refinery to get 200,000 barrels a day of product. With us, in many cases, all you have to
do is use our process and modify the reactor, which is a small portion of the refinery and
you can make that refinery much more productive. So at Silver Eagle, our first commercial
retrofit, we are taking a 12 thousand barrel a day refinery, which has 1,200 barrels a day
of Heavy Vacuum Gas Oil (HVGO) and we are converting that 1,200 barrels a day of HVGO from
heavier contaminated oil into lighter sweet oil and saving them probably $10.00 a barrel
now based on the gap between the feed and the produced light synthetic oil. So that’s
how the process works; you don’t have to build a giant refinery, just take an
existing refinery and modify it to work better.”
CEOCFOinterviews: Can you tell us about the challenge your
face in bringing your concept to the market?
Mr. Lifschultz: “Converting natural gas to liquid is
something that goes back to World War II in Germany, where they took coal and converted it
to synthetic petroleum to run their tanks. They didn’t care about the costs.
It’s a process that has been around for a long time and it’s having a hard time
breaking in; event though they’ve got the cost down to $12 or $13.00 a barrel,
against a WTI (West Texas Intermediate Crude Oil), but actually the cost of their
synthetic petroleum is worth a lot more than the WTI at $52.00. It’s hard for them to
get in, but they are gradually starting to break-in. I thought when I went into this that
it would be easier to break in as the cost to retrofit is a fraction of the 7 billion
dollar cost for GTL, LNG for each 200,000 barrels a day than with our retrofit costing
maybe $150 million or less as an example; I thought that the kind of retrofit cost that we
had would create less resistance to change and I think that it will. Now we have to go out
and we have to sell it, so our first sale is to Silver Eagle and we are talking to seven
others some of whom are major companies. I would say this, that at the particular time
that we do a major strategic relationship with a large company that does say 2 million
barrels a day of oil refining and we are successful in scaling up, which is an issue that
we think that we are going to do rather easily, but that’s still an issue and we have
to prove our process at large quantities. Engineers that look at us think that it’s
scalable up to 400,000 barrels a day, but once we show that, I think that everybody is
going to start running towards us. The initial breaking in of a say a Microsoft takes
time; there’s a lot of sales resistance and if Microsoft didn’t have IBM to use
as a platform they may never have gotten started. So our goal is to go out there and find
a strategic relationship with a large refining operation as a platform, much like what
Microsoft did with IBM and get us as a standard in the industry. So, yes, I think that
like Microsoft became the standard for the world that is what we want to be for the oil
refining retrofit business.”
CEOCFOinterviews: How do you decide whom to target?
Mr. Lifschultz: “We have brilliant marketing research
people, one is a consultant that formerly worked at Exxon Mobil Corporation (NYSE: XOM).
We also look at the market and define what the market is, which we say is 13 million
barrels a day of residual. Everyone says that they are going to be developing bitumen
deposits for oil conversion in the Orinoco in Venezuela or in the oil sands in Canada;
those are our markets and oil conversion is our business. We then look at the refineries
that can be most cheaply adapted; those refineries that have sufficient hydrogen, because
hydrogen is part of our process on site. Those are going to be much more cheaply
retrofitted than refineries that we analyze and does not have the hydrogen, because then
you would have to build a hydrogen unit. In that they use what they call steam reform,
where you take natural gas and you convert a portion of that natural gas into hydrogen for
use in the hydrocracking, which is what our process is. If they don’t have that unit
and that’s a very expensive unit, then the sales resistance our process is going to
be greater than one that has the hydrogen available. Having said that, current
environmental legislations are forcing refiners to use greater amounts of hydrogen as a
means of removing impurities from there products. The timing could not be better for
Genoil. We are trying to pick those that would be easiest and once we get going then the
refineries that don’t have the hydrogen will have to convert if they want to be
competitive with the refineries that do have the hydrogen. When you are trying to analyze
your market you are picking those customers that are most susceptible to change and most
require the change. The other aspect is that we are very green; we de-sulfurize the oil so
at Silver Eagle we will be taking 99% of the sulfur contaminant out of the oil. That is
very green and it’s very important for the compliance with environmental regulations,
so we will also be looking for refineries that have compliance problems. We can point out
to them that not only will they get greater productivity using our technology, but they
can also solve their compliance problems, because we will de-sulfurize and take other
contaminants out at the same time.” New environmental standards for sulfur limits
will even force some refiners out of business unless they invest in a process like the
GHU.
CEOCFOinterviews: Do you have other products as well?
Mr. Lifschultz: “We are basically focusing on the
Upgrading and we are focusing on oil water separating technology, which is upstream.
Upstream is next to the well and downstream is the refining. We are approaching companies
such as ARAMCOs in Saudi Arabia, companies in South America and around the world with
another revolutionary technique that we have for separating the water from the oil. The
Saudi Arabian company is up to a 90% cut; they pump water into older more mature fields as
a means of getting more oil out of the well, which otherwise they couldn’t retrieve.
As the well gets older the cut may rise to 50% water oil to 90%water oil. Our technology
is also innovative and we separate the water from the oil in superior manor. We are
marketing that technology now around the world also. Those are the key technologies that
we have, but we do have other technologies that work with hydrogen.
We’ve created the world’s fastest centrifuge, experimenting with centrifugal
electrolysis, where we thought that we would be able to separate the hydrogen and oxygen
in water, thereby creating a commercial hydrogen for fuel cell, solving the distribution
problem using water, because that’s everywhere on earth. We worked on that, but we
have put that on the shelf because we are focusing on market ready technology only and we
are not going to develop and spend money on research and development until we have a
profit stream in the company. We can’t do everything at once and force ourselves to
dilute the stock unnecessarily for raising the funds, because we live on private
placement. We are focusing totally on the water oil separation technology and the
Upgrader. The oil water separation technology we thought might be a technology that we
could use to fund our other technologies, but we found the same resistance to change with
that technology as we did the Upgrader. So it took time to move it through other
corporations, but we are working on it; working with a number of companies and hoping to
create relationships with them in the near future.”
CEOCFOinterviews: The price of oil at record levels; does
that affect the interest levels of companies?
Mr. Lifschultz: “I think it creates more interest, I
also think it creates more interest in the investment community at the same time. This is
because you have a heavy oil, which is a growing surplus and the reason why Saudi Arabia
is offering their heavy oil at $13.00 a barrel and you have West Texas Intermediate at
over $53.00 a barrel and I think it will be over $60.00 by the end of the year, based on
the 4 million barrels a day of increased cyclical demand during the winter. There is a
shortage of the light oil that you need to make gasoline and an abundance of heavy and
that’s our market. We are coming in to provide a solution, to take that heavy oil and
make it light; then supply the shortage. In addition to which, the Saudi oil that is
coming out is heavy, but they probably have 7 or 8 million barrels a day of light oil
that’s coming out of there and if it were disrupted it would be a severe blow to the
western economy. That blow could be practically settled by using a technology like ours to
convert the heavy oil into light, of those 13 million barrels a day of residual oil. We
could then replace the Saudi oil off the residual oil that is presently being used as
heavy oil for heating. The heavy oil would have to be replaced by clean burning coal,
which we have domestically, or nuclear power. So there is a means of achieving energy
independence from the Middle East, through our technology. We are very excited about that
and when we make presentations at energy technology conferences we get a lot of
interest.”
CEOCFOinterviews: The general public would certainly welcome
technology that would reduce dependence on Mid East oil!
Mr. Lifschultz: “Business Week thought so also and they
covered us on August 2nd (2004). Hydrocarbon Processing also covered us in
September, and they are one of the most prestigious magazines for engineers to read on
refining technologies. So we are getting a lot of major coverage. I’ve been CEO for
about a year and a half and I’ve done a number of things that include creating an
international marketing organization on commission; my burn rate was only $250 thousand
Canadian last quarter, which shows how tightly we run it with a company of this potential.
On the other side we have agents from Spain, Russia, Great Britain, the Middle East, we
are negotiating with their group for North Africa, China, Korea, and we are negotiating
with agencies in Malaysia, Bangladesh, India, Pakistan and Japan. So we are working on
covering the entire world, wherever the refineries are and those agents are on commission;
many of those agents are spending a lot of time and effort because they believe in the
technology. One of the agents is a billionaire in one of these countries, he doesn’t
like us to use his name, but he’s 83 years old and he’s excited about it because
he think that this is world changing. Ordinarily he would not get involved with something
like this, but he knows the oil companies in his country where he is a representative and
he’s working on it. We are getting a lot of people who are very accomplished, very
solid in their areas like 20 years in the Middle East or South America and they are
working very hard for us.”
CEOCFOinterviews: In closing, could you pull it all together
for potential investors? Why should they be interested and what should they realize that
they my miss when just looking on the surface?
Mr. Lifschultz: “Pulling it all together it’s very
simple. Why did I find this company when I have many technologies to look for? I was an
oil investor for the last four years, foreseeing the shortage of oil also there is great
instability in the shortage of oil, where there is Nigerian strikes or the Middle East
where the oil may be disrupted. Therefore, technologies that can help solve the dependency
on oil from the Middle East or energy sources in West Africa, which are also not very
stable countries; the next step with the investing in oil, which we have large investments
in oil, is to find a technology that can alleviate the situation. I would say that the
higher the oil price goes the more frantic the effort to find and alternative or
technologies that would improve the productivity and the production of oil that is
presently there would be. We went and looked around, looked at GTL (Gas-to-liquid), which
is a great technology, but it costs $7 or $8 million per 200,000 barrels. We looked at
liquid natural gas, but we see the fears in Boston port harbor and other areas, of an
explosion based on an accident or a terrorist attack that present huge damage to Boston
harbor. So we thought that there were drawbacks to that and that is also very expensive to
develop. We looked at the oil sands, but it costs $9 billion for 200,000 barrels a day, so
that is not going to solve the oil shortage in the short term.
We were looking for technologies that could economically retrofit existing refineries like
Genoil, so we went into Genoil as an investor and eventually we took it over because we
are operating people at the same time and we know how to run companies. So we said to
ourselves that the next big push on Wall Street as the oil price rises and I think that it
is going to continue to rise with Middle Eastern instability, growing demand in China,
India and emerging countries; with more cars on the road within the next ten years, where
is the oil going to come from. It’s going to be very tight and the supply is not
coming greatly into the market and that new supply is heavy oil which has a very high
residual ratio—39% for API 20 versus 9% for API 40. Consequently, we are now trading
on the OTC: Bulletin Board in New York City, with a technology that solves these problems
and therefore we are at the right place at the right time. We are also in the right area,
trying to alleviate a major problem, just like Microsoft came on to create tremendous
efficiencies in data processing and communication with emails and the internet and
computers. We are coming into the market at a time where there are extreme problems in
energy and we intend to solve it on a very economical basis. As an investor there were
other choices, but we thought that this was the best and we think that we are bringing a
technology that solves an immediate problem in shortages of gasoline by converting heavy
oil, bitumen or refinery residue into synthetic light oil, providing an answer to Middle
East oil developments. So we think that we have the right answer and the right time at the
right place.”
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