Arconchemicals, Inc.
Octant for the 21st Century
Arcon Chemicals, Inc. is a diversified energy company involved in Development and Production of what we expect to be the World's best ethanol octane enhancer and the downstream segments of the oil and gas industry. The management team of ACI includes industry professionals with in-depth experience in corporate finance, marketing, accounting, engineering, refining, and legal. The corporate headquarters are based in Dallas, Texas with project and field offices in Houston, Texas. Arcon Chemicals, Inc. is organized in two separate but interrelated divisions:
High Octane Division
Gasoline Blending Division
HIGH OCTANE BLENDING DIVISION
The ACI Dynamic Fuels 144 (DF-144) is a positive environmental additive that blends with gasoline components at levels as high as 165 octane. This high octane additive is in direct competition to Methyl tertiary butyl ether ("MTBE"), a fuel octane enhancer/oxygenator. MTBE, although still marketed under existing law, has come under attack by the Environmental Protection Agency (EPA) and is currently under ban in a growing number of states. The ACI DF-144 can be blended with gasolines worldwide including many aviation and high performance racing fuels. The United States current gasoline consumption is $450 million in sales per day and approximately 332,000,000 gallons of gas.
To accommodate international and domestic demand, Arcon Chemicals, Inc. has embarked on a major program for the installation of plants to produce its high octane enhancement technology worldwide. Initial business plans are based on the domestic installation of 8 ACI DF-144 processor plants involving multiple Texas and California oil and gas companies. This represents less than 3% of the U.S. Market. In addition, several units are being negotiated at designated locations in Canada and Europe.
Arcon Chemicals, Inc. has formed a partnership agreement for the production and distribution of the DF-144 fuel additive with Industry Partners in Ft. Worth Texas. Initially, four high octane enhancer plants will be producing additive and blended gasoline for contract delivery throughout Central, Southern and the Southwestern United States. Additional ACI plants are planned for California and the Northeastern United States in the next two years.
The Process takes an input stream of ethanol, butane and natural gasoline and produces a product with octane as high as 144.5 - this product is known as Dynamic Fuel-144 (DF-144). DF-144 is sold to refiners to add to their average 65 octane material thereby producing a blended gasoline of 87 to 93 octane. Used in this manner, the product is a direct competitor to methyl tertiary butyl ether (MTBE) which is the primary component currently being used as a blending agent with gasoline.
Methyl tertiary butyl ether (MTBE) is under great attack as an environmental hazard. MTBE has been found in the drinking water supply wells for the city of Santa Monica, California. The city has had to shut down its wells and is currently trucking in fresh water from Los Angeles. MTBE is also showing up in other municipal supply wells, irrigation wells and ground water monitoring wells. A recent open file report by the U.S. Geological Survey noted detectable MTBE concentrations in 27% of shallow wells sampled in 8 urban areas around the country. MTBE has also been found in drinking water systems in 10 northern states where MTBE has been used as either an octane booster or an oxygenate in gasoline. As more sampling of drinking water supplies and ground water monitoring wells is done specifically for MTBE and as its use in oxygenated fuels increases, its occurrence in ground water will probably be found to be more widespread.
ACI's product produced by the processing plant utilizes ethanol that is made from renewable sources such as corn, wheat and sugar cane. In comparison to our competitor product, MTBE is made from methanol, which is produced by fossil fuels derived from coal, petroleum and natural gas.
When methanol is incompletely combusted, it forms formaldehyde - a cancer causing chemical used in embalming fluid. Under the same conditions ethanol yields a relatively benign chemical which also occurs when alcohol is metabolized in the human body.
The U.S. government is on record as being pro-ethanol and encourages continued development of ethanol projects through excise tax reductions or income tax credits in cases where ethanol is used to produce a material substantially like gasoline for use in vehicles. The following benefits will accrue to refiners and blenders purchasing ACI DF-144:
DF-144 has the highest octane value of all acceptable octane enhancers produced to 165 octane.
DF-144 is a scientifically "friendly" product using components which are widely accepted by environmental groups throughout the world.
DF-144 is a cost effective material which can be added to many different hydrocarbon streams in refineries.
When DF-144 is used, no additional capital investment by refiners will be required to conform to the new regulations of the clean air act which becomes effective in July 1997, which should be a minimum $30MM per refinery.
DF-144 provides up to 17% oxygenates thus burning cleaner with fewer emissions than competitors products.
DF-144 has a higher research octane and BTU content than its competitors thereby increasing gas mileage.
MTBE today, is banned in many cities and several states throughout the United States and totally in Canada.
Our extensive testing of this processor and its capabilities has been done by a chemical engineering consulting firm located in Texas and laboratories worldwide. DF-144 is considered by many to be the premier energy product helping environmentally and economically the marketing, operations, development and feasibility of ethanol refinery projects globally.
CORPORATE POLICY
ACI has elected to commence operation using the Octane Processors under the following strategic business policies:
(1) The company shall own and operate all Octane Processors either through limited partnerships or other entity structures as necessary.
(2) All units will be installed on property owned or rented by the company inside of or adjacent to blender and refiners.
(3) Access to the equipment by others shall be on a limited basis.
(4) Plants will be installed only when orders for product equal at least ninety percent of production capacity.
ACI targets markets where MTBE is either in short supply, is banned, or where MTBE is under attack as an environmental risk.
MARKETING STRATEGY
At the outset, ACI will focus its marketing efforts on the octane enhancer additive sold to major refineries and produced by the octane processor. This product, trade marked as Dynamic Fuels 144 (DF-144), is a direct competitor to MTBE providing oxygenates and octane enhancement when blended with naphtha, reformate, and other petroleum products. As the business matures, additional products as well as custom processing will enhance the profitability of the company.
The first targeted market for the octane enhancer is the large volume of reformate produced by refineries requiring octane enhancement to produce motor gasoline. An estimate of the market for reformate blending alone has been developed for the Continental U.S. and is presented in the attached tabulation. As is illustrated, the market naturally stratifies into regions represented by refinery output volumes. The market for DF-144 when blended with reformate is estimated to be 350,421 barrels per day in the Continental U.S. The Houston, Texas region produces over 530,000 barrels per day of reformate which when blended with 10% DF-144 yields a market for the octane enhancer of 53,000 barrels per day and the Dallas Metroplex is about half of the Houston market. ACI will locate processing plants in various locations to serve the regional markets.
While orders are being negotiated, ACI will build its first processing plant in the Dallas, Texas area. The plant will be capable of producing 100,000 gallons per day of octane enhancer supplying the Dallas regional market. The market in the U.S. alone is 332,000,000 gallons of gas per day.
Our two year objective calls for adding seven more plants starting in Spring of 1998 through 2000. These plants will add capacity of approximately 2,450,000 gallons of DF-144 production per day.
OCTANE PROCESSOR CAPABILITY
By varying the composition of the feed, the Octane Processor can produce many products. In all cases, however, ethanol must be one of the feed components. Some of the various feed and the resulting products are:
Ethanol % Other Feeds Product
1.) 38% 38% Natural Gasoline 134 to 143 Octane
24% Butane (Octane Enhancer)
115% 165 Ethanol
The octane processor is capable of producing high octane aviation fuel as well as high octane designer motor fuels for racing and high performance. Over 200 tests using different feed stocks have proven the process can produce products with octane as high as 165 for refinery additives, high octane gasoline for aviation and marine and high grade gasoline.
ECONOMICS
MTBE has a blending value of 108 octane and sells for a contract price of approximately $1.30 per gallon. The typical octane blend value for high-grade ethanol is 113-115%. We have developed a process through our worldwide patented plants to take standard ethanol and increase its octane blend value up to 165%. This is a 52 point increase or almost 60%. Ethanol costs $1.20 per gallon with 115% blend value. We plan to sell out DF-144 at $1.28 per gallon. It's easy to figure the cost savings at 10 cents more per gallon for 60% more high octane or use 60% less of our material for the same octane rating.
The real optimum savings begin when you use 60% of DF-144 and 40% natural gas which cost 45 cents per gallon as a substitute for $1.20 per gallon ethanol and reach an ethanol blend level of 115%. A typical refinery would use on a daily basis, the following DF-144 additive amounts:
A small refiner - 100,000 gallons of per day.
A medium refiner - 400,000 - 800,000 gallons per day.
A large refiner - 1,000,000 - 1,500,000 gallons per day.
Our cost is approximately .88 cents per gallon, our selling price is $1.20. The use of DF-144 by refiners and gasoline blenders offers better price performance than MTBE reducing the environmental hazards.
Our projections indicate that gross annual sales for each larger plant should be approximately $150,000,000 with a gross margin of $32,000,000 and net before taxes approximately $20,000,000. The detail projections and assumptions are located in the economic section of this report.
All plants will operate as separate profit centers. Continuous expansion will occur in an orderly fashion as market penetration increases and new markets are developed. We plan for 4 plants in 1998 and 4 in 1999 however, some regional expansion areas such as California could require up to 15 large plants to satisfy the market.
With the World rights and patents for DF-144 we have the potential to reach 1 billion in sales by the year 2000 with only two percent of the market. U.S. demand alone for gasoline is 332 million gallons per day (gpd). A typical blended gasoline will be comprised of 12 to 24% DF-144, representing an impressive potential market. Based on ACI planed growth to 8 units over the next two years, with each unit capable of producing 350,000 (plus) gallons per day of additive, still
134 countries and 48 states for economic growth. Revenues generated from the U.S. and international markets clearly suggest a billion dollar a year company by the year 2000. |
