Stranded assets are a company’s nightmare. Even more so when an asset, such as associated gas, prevents oil production due to flaring.

In an ideal world, pipeline coverage would take away gas and deliver it to consumers. However, this isn’t always possible.

But what if there was another way? Verde Clean Fuels offers a syngas-to-gasoline (STG) service that provides one option.

The company recently listed in the US. One equity investor is Diamondback Energy, a Texas-based upstream producer.

Earlier this year, the two companies struck a deal. Verde will build an STG plant in Martin County, Texas, in the Permian Basin.

“There is more natural gas production than there is takeaway in the Permian. Diamondback takes the position that that will always be the case,” Verde CEO Ernest Miller explained.

Negative-priced gas

The executive said Diamondback had 200-300 million cubic feet per day of gas trading on the Waha hub.

Unfortunately for Diamondback, Waha prices are depressed. According to the Energy Information Administration (EIA), prices have been below zero for 47% of the days since late July.

Diamondback closed its acquisition of Endeavor Energy Resources on September 10, bringing more stranded gas.

For Verde, this is an opportunity. The company’s plant – where it will have equity with Diamondback – will transform around 32 mmcf per day of gas into around 3,000 barrels per day of gasoline.

“What we provide, then, is the ability to take that natural gas, which has negative value and convert it into gasoline, which trades a whole lot more like WTI. They’re able to swap their commodity exposure from very undervalued cheap natural gas into a higher value, higher value commodity exposure,” Miller explained.

Verde will provide its STG plant to the upstream producer on a tolling basis. Diamondback will own the input gas and output gasoline.

“That makes financing on this plant much easier. Really what we’re financing now is Diamondback’s credit,” Miller said.

Unlocking oil

Diamondback will gain an additional commodity to sell, but capturing flared gas unlocks more oil production. The company has sustainability commitments, including eliminating routine flaring by 2025.

“The ability to build a facility upstream, towards the production, where you can actually alleviate some of that midstream constraint and free up the ability to produce more oil is a huge driver for these producers,” Miller said.

This ability to tackle flaring and unlock new production will resonate internationally. The World Bank is pushing for zero routine flaring by 2030 globally. Miller noted his previous experience in West Africa, where wasting gas in this way is rife.

Competitors have taken similar plans overseas. For example, UK-based CompactGTL recently struck a deal to work in Kazakhstan.

The small-scale Verde plant contrasts with larger Fischer-Tropsch plans, like Sasol’s.

Verde expects to take a final investment decision (FID) on the Texas plant in 2025. The company is working with an EPC contractor, Chemex Global, and will secure a lump-sum guaranteed price.

Miller said that navigating the inflationary environment “won’t be Verde’s risk”. Verde has a demonstration plant in New Jersey, with over 10,000 operational hours.

*Verde’s demonstration plant in New Jersey*

Renewable plans

Verde is not just transforming natural gas into gasoline. It is also working on renewable feedstocks.

“That syngas can come from methane but it can also come from renewable feedstocks, like biomass, agricultural waste, that kind of thing,” Miller said.

He continued by saying that renewable feedstocks had initially attracted attention. Verde went public in 2023 via a special purpose acquisition company (SPAC) transaction.

Miller said he teamed up with Dallas-based BlueScape Energy Partners in a management buyout. “We were really focused on the renewable side of the business, because we capture all these carbon credits,” he explained.

The focus on renewable feedstocks and credits drove the investment move. Diamondback joined as an investor at the “11th hour.”

Verde is working on a project at Carbon TerraVault, in Elk Hills, California.

“Working in California, we have a different project evolution. It’s a very difficult permitting environment and everything takes much, much longer.”

While the renewable STG plans are “still very much on the table”, building natural gas plants in Texas is “relatively speaking, easy to execute”.

Credit game

The commercial terms of the Diamondback plant are easier for financiers. “Everybody can get their head around what what a toll with Diamondback should look like. The renewable plants, they’re really interesting, there’s really three products from the plant.”

Miller explained the first is carbon-negative gasoline.

On top of that, there are federal carbon credits, D3 RINs, and California’s Low Carbon Fuel Standard (LCFS).

“We wind up with the physical gasoline, a federal carbon credit and a California state carbon credit.” Those revenues stack up at around $2.5 per gallon for the gasoline, $5 for the D3 RIN and another $1.5 for the LCFS.

“That’s $9 per gallon of revenue when you consider the credits. But, two thirds of that is credit related and those credits are very volatile. You can’t really hedge them,” he said, noting the forward market does not provide enough cover for a potential lender.

“So those renewable projects have some credit price exposure that makes them on the one hand riskier. But, on the other hand, there’s certainly much more upside potential.”

The Elk Hills project requires a gasoline offtaker and a credit offtaker.

The group is in talks with traders about providing certainty around offtaker, allowing project financing.

Finding balance

Miller explained that the two sides of the company posed challenges for some investors. “There are investors who say, ‘we love this renewable piece, but we can’t touch it as long as you’re doing natural gas work’,” he noted.

In the near term, the “opportunity is with natural gas and dealing with constrained producers, wherever they are”. It is not just the Permian Basin facing pipeline constraints. “This is a global opportunity.”

In the long term, the opportunity to tap renewable feedstocks has “tremendous upside, although there are risks associated with it”.

Regardless of the input, Verde’s gasoline provides carbon savings. At Elk Hills, the plant will sequester the carbon produced during processing.

In the natural gas case, “we are no worse than traditional gasoline, from crude oil. And when you can make a direct connection between a flare being eliminated and that natural gas that was being flared being turned into gasoline, that product is about 40% less carbon intensive than an ordinary gallon of gasoline, because of the elimination of the flare.”

Verde makes the case that lower-carbon gasoline will fuel the transition. The concept brings the idea of energy transition to consumers, rather than requiring them to shift.

Scaling up will be a challenge, with Verde’s technology working in 3,000 bpd increments. But it offers a way to tackle emissions in the near term, rather than defer action for later.

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