ESG Focus | May 27 2020
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Licella, an Australian company taking on the world
Australian company Licella, is an interesting case study in plastic-recycling disruption. FNArena examines the way in which disruptive companies in this sector are forcing a foot in the door of a tightly held industry.
By Sarah Mills
“A bridge to a lower carbon future” -Licella website
I precis this article with Licella’s tagline as a reminder of the vagaries of disruption. The company acknowledges that this is just a bridging technology – that there is more to come.
From an ESG perspective, Licella (unlisted) appears an interesting case study in the strategic approach small potentially disruptive companies might adopt to succeed in industries dominated by heavyweights such as Big Oil and Big Plastic.
Licella’s management was unavailable for comment so the information in this article is based on published data.
Licella’s website says it is the global leader in hydrothermal upgrading (or hydrothermal liquefaction) technology.
Its Cat-HTR technology converts chemical polymers, biomass and bioplastics into fuel, which can then be used to create virgin plastic or provide energy for the process. Its biomass fuels can be mixed with petroleum fuels in the one facility.
It differs from chemical pyrolysis (which also turns plastic into fuel) in that it uses hydrothermal upgrading using supercritical water combined with a chemical catalyst to break down the polymers.
Pyrolysis is more expensive and cannot include as many plastic types, or biomass, in the one stream.
Hydrothermal upgrading is potentially disruptive in that it solves many of the problems that have stymied plastic recyclers for decades – sharply cutting recycling sorting and processing costs, increasing the competitiveness of recycled plastic, providing a circular solution for end-of-life plastics, and paving the way for the growth of bioplastics.
Licella can recycle more than 85% of plastics previously considered non-recyclable, including mixed plastic and multilayer plastic.
Given that roughly half the amount of oil that is used to create plastic is used to fire the process, the technology is not 100% “plastic circular” in that it releases half of the emissions that were previously locked in the plastic into the atmosphere (although they would have been released in the production of virgin plastic regardless).
In contrast, mechanical recycling turns plastic back into plastic, using lower emissions, but the quality of plastic degrades with each mechanical recycle. So the value of hydrothermal liquefaction for providing a circular solution for plastics when they are no longer recyclable is high.
Australia’s Prime Minister Scott Morrison has publicly supported the technology in both domestic and international forums; executives of consumer goods and plastics packaging companies are observing the company’s progress with interested eyes, and so is Big Plastic.
Green investors would prioritise mechanical recycling over plasticrude options but recognise the pressing nature of the plastic problem.
Director of Energy Finance Studies at IIEFA, Tim Buckley, while not effusive about the emissions arising from plastic-to-fuel technologies, said that those that made a significant contribution to solving the urgent global plastic problem could not be dismissed.
Summary of Licella’s functionality
Licella’s Cat-HTR technology bypasses the necessity to separate polymer families, such as PET and PVC in the sorting process, and, more importantly, allows for the recycling of both chemical polymers and bioplastics (plastics made totally from renewable, plant-based sources), resolving many of the barriers to bioplastics in the recycling market.
A caveat on this is that large amounts of bioplastic cannot be processed in the same stream as chemical plastic, but Cat-HTR can process the amounts that are typically sourced from material recovery facilities.
This is an important development for the bioplastic industry which was threatened (and still is to a lesser degree) with bans given its potential to contaminate the more ubiquitous chemical polymer waste streams, inhibiting recycling.
At present, the majority of plastic recyclers in Australia use petroleum-based plastics given bioplastics have not been recyclable in the same stream, and are often difficult to detect.
Frequency-based detection may solve this problem but the technology is not quite there yet and its cost competitiveness with a single waste stream seems dubious.
The Licella technology has been extensively tested at its pilot plant at Somersby on the NSW Central Coast and the company says it is now ready for commercialisation.
The process produces a high yield of oil – 85% – and the balance as gas that can be reprocessed. The synthetic oil produced is the chemical equivalent to conventional crude oil and can be dropped into conventional crude oil infrastructure.
It can be used to convert biomass residues and resins, end-of-life plastic, construction and demolition wood waste, and end-of-life tyres into fuels and chemicals.
Licella says it can create sustainable biocrude oil from renewable sources in 20-30 minutes. The product is stable and can be easily shipped.
However, the recent expose of biomass crude in the documentary Planet of the Humans, may affect the prospects for biocrude, amplifying the company’s need to focus on plastic. It is important to note that Licella’s biocrudes are obtained from the residue of paper and pulp mills (only 30% of a tree is used to produce paper), rather than the separate sacrifice of trees and arable land.
Back to plastic, the technology still requires a low level of sorting to ensure that waste is at least plastic and uncontaminated – but this is a challenge shared by all of its competitors, which require even higher sorting standards.
Once sorting and collection are in place, the Cat-HTR process claims to produce higher quality products of higher value than its competitors.
One assumes that it is also a lower-cost option when produced at scale.
Generally, hydrothermal upgrading is competitive with oil at US$50/bbl based on $100 per ton of biomass, according to bio-economy consulting group Lee Enterprises. This roughly compares with a similar US$50/bbl for chemical pyrolysis.
Licella’s technology offers double the energy density of pyrolysis oil and is less corrosive.
Licella’s website says it has a lower carbon footprint than pyrolysis or gasification due to a lower reaction temperature, and low-cost catalyst is used. There is no need to add external hydrogen – cutting plant costs and complexity. It is tolerant to mixed feeds and reactions are easily controlled.
On the vertical integration front (a key ESG and 4IR theme), Licella says its platform can be fully integrated within its partners’ facilities to provide a new revenue stream to industries such as pulp and paper and resource recovery.
By aggregating feedstocks, the technology claims to cut transportation costs and lowers the company’s carbon footprint, potentially making a green and blue ESG investment opportunity.
As an aside, Licella’s application in the fuel industry is also interesting. According to the EU’s Renewable Energy Directive II, 0.5% of transport fuels must be advanced biofuels by 2021, increasing to 3.5% in 2030, equating to 126m barrels of advanced biofuels by 2021 and 882m barrels by 2030, requiring 882 commercial-scale Licella biocrude plants by 2030 in the EU alone. Licella is joint venturing with North American paper and pulp giant Canfor Pulp to produce biofuels from residue streams.
Licella’s plastic-neutral pitch to Australia
Licella’s Professor Thomas Maschmeyer also estimates that, for a cost of about $1bn, Australia could be 50% plastic neutral. Plastic neutral means having a net zero plastic footprint, in that the amount of plastic produced is fully offset either by recycling or through plastic credits.
Professor Maschmeyer adds that the investment would generate a strong financial return of $500m a year – a respectable return on investment that would simultaneously solve the problem of Australia’s proliferating mountains of plastic waste.
Half of Australia’s annual plastic waste is 1.5m tonnes. If processed using Cat-HTR, it would conservatively produce 1.2m tonnes of oil, or 8.3m barrels.
Australia consumed about 401.5m barrels of oil in 2018 (1.094m barrels a day) according to Statistica, and Australia imports roughly 90% of its fuel. Plastic production typically represents 9% of global oil supply.
Australia imports much of its plastic. Plastic imports totalled US$5.85bn in 2018 (AUD$9.2bn), according to United Nations COMTRADE figures. Plastic was Australia’s eighth largest import industry in 2018.
So plastic recycling offers a chance to improve Australia’s balance of payments, and to establish a manufacturing base in the country.
The oil-plastic link suggests potential for arbitrage between carbon and plastic credit markets, and opens the possibility for producers to switch from fuel to plastic, depending on spot prices for each commodity.
For now, however, the recent plunge in the oil price appears to remove plasticrude as a competitive fuel source.
Low oil prices also increase the competitiveness of virgin plastic – not such a problem for plastic recyclers in countries such as Europe, where regulations on recycled content exist, but a serious problem in Australia where Prime Minister Scott Morrison recently ruled out taxes and regulations. They certainly up the ante for a case in favour of regulation.
Threat to Big Oil and Big-Oil Plastic
But this article is not really about the Licella technology but about how disruption may play out in such powerful industries as oil and plastic, that are already facing intense regulatory pressure.
It is important to note that Licella’s main aim does not appear to be disruption, but is more commercial. Its directors have worked on a range of projects that vary in their green credentials and the company’s past suggest it is likely to work with the flow rather than against it. It has a history of winning grants and appears well connected politically.
Nevertheless, Licella remains an interesting case example of a small company with a moderately disruptive technology. At this stage, it has no plans to list, so who will buy this technology? And where will the capital come from to fund the expansion? If it succeeds, will the strategy prove a template for other disruptors?
Licella has entered agreements with small energy-poor sovereign nations, not-for-profits, related companies in the global recycling space, and bioplastic companies.
It is also seeking private ESG impact investing equity and investment from larger sovereign nations, including Australia, by way of grants and subsidies.
This is likely to form the strategic template for other disruptors in the plastic recycling space.
The partnering with small sovereign nations battling plastic waste and emissions issues is particularly interesting given disruptors may find such countries more receptive than the big plastic incumbents that are being regulated into compliance.
This is the pointy end of the disruption stick, the point at which the effects of disruption on Big Oil and Big Plastic become most apparent. Many sovereign nations would jump at an opportunity to reduce oil imports and improve their balance of payments.
But it’s early days. Australian consumer goods companies are largely partnering with proven traditional recyclers to date, signing a variety of long-term monomer and mechanical recycling memorandums of understanding; and Australian plastics and packaging companies have yet to announce any interest in the technology, although it is understood the industry is under pressure to adopt plastic-to-fuel options, even though it is more emissions intensive than mechanical recycling.
But if you talk to senior industry members privately, Licella is deemed “very interesting”.
Licella’s global expansion
Following are a list of Licella’s key collaborations. The majority are with companies with related board members.
Armstrong Energy UK
Licella has formed a joint venture with Armstrong Energy (UK), described by Sydney University as Britain’s leading renewable energy company, to build the world’s first commercial-scale hydrothermal upgrading plant for end-of-life plastic (ELP) into chemicals at the Wilton International site in Teesside, through a company called ReNew ELP.
The plant started construction in 2019 and will recycle 20,000 tonnes of plastic a year and has planning consent for three more.
To put this in perspective, the world produces about 300m tonnes of plastic a year, of which 150m tonnes is single use, according to the www.plasticoceans.org
In Britain, plastic waste levies prove a strong incentive for the adoption of Licella’s technology for end-of-life plastic, and it may be Licella finds its feet internationally before Australia, given Scott Morrison declared at the Australia Plastics Summit that Australia would not regulate or tax plastic producers.
In hindsight, this may have proven an error of policymakers that may need to be corrected in light of the crash in the oil price.
Armstrong is a specialist sustainable infrastructure asset management company, owns the licence for the Cat-HTR technology and is leading financing for the project.
Meanwhile, on the same project, the world’s largest producer of renewable diesel is joining forces with ReNew ELP (which also shares directors with Licella and Armstrong Energy) and Licella to explore the potential of using mixed-waste plastic as a raw material for fuels, chemicals, and new plastics.
The JV will earn a licence fee and royalties from the projects and the venture plans a global roll out.
They are also collaborating on facilitating regulatory acceptance for chemical recycling.
Neste is the world’s largest producer of renewable oil refined from waste and residues. The collaboration is one of the steps towards Neste’s goal to introduce liquefied waste plastic as a future raw material to fossil-fuel refining, with a target to process annually more than 1m tons of waste plastic by 2030.
The interesting thing about Neste, is that it is one of the world’s leading corporate eco-warriors.
It is owned 50.1% by Finnish governmental institutions and, as of 2017, employs more than 5,000 people and is listed on the Helsinki stock exchange.
In 2019, Neste again placed third on the Corporate Knights’ Global 100 list of the world’s most sustainable corporations, its third time.
It also marks the company’s 14th consecutive inclusion on the Global 100 list. Neste has been included on the list continuously for longer than any other energy company in the world.
Neste is a clear contender for the trillions of ESG investment dollars circling the globe.
Meanwhile, Licella has signed an agreement with Japanese company Mura to take the technology to China.
Mura is another joint venture between Licella and the UK’s Armstrong Energy.
Licella’s Len Humphreys is also a director of Mura, as is Professor Maschmeyer, and chief executive officer Dr Steve Mahon, who is also the co-founder and chief executive operator of Armstrong Capital.
The interconnection of boards appears to feature strongly in Licella’s expansion.
Mura has committed to help establish Cat-HTR in the small energy-poor country of Timor Leste via a new not-for-profit organisation RESPECT at no cost.
The government of Timor-Leste has signed a memorandum of understanding with Mura Technology (‘Mura’) for the development of a US$40m Catalytic Hydrothermal Reactor that will allow it to become the first plastic neutral country in the world.
It will enable Timor Leste to solve its plastic issues, helping it become carbon neutral and plastic neutral, positioning it well should sovereign penalties ever be applied for carbon emissions and plastic pollution.
All financial surpluses will be returned to support local community initiatives.
The voluntary support to small nations may also work in Licella’s favour. Free distribution proved the most successful growth, penetration and brand-building strategy for web-based platform disruptors such as Facebook and Skype. Ironically, Licella describes itself as a platform.
Voluntary support to small countries is not just commercially interesting. Taking Licella’s technology (and upcoming rivals and descendants) to its logical conclusion, and assuming continued innovation in this field, it has the potential to loosen Big Oil’s grip on the global economy.
As small companies and countries and even homes recycle their plastic or bioplastic into energy, they can become masters of their own destiny. Interestingly though, the fossil-fuel focus of plasticrude will eventually have green-investing ramifications. Green investors favour solar and other renewables over all carbon-based technologies.
The move by Saudi Arabia to crash the oil price, and the global economy, may change the economics for this, but right now the Saudi move underscores MSCI’s suggestion that plastic production plants may become stranded assets.
The CAT is already out of the bag, excuse the pun.
Licella has recently announced a venture with small potentially disruptive US bioplastics producer BioLogiQ, with whom there appears to be less cross pollination of boards.
BioLogiQ’s visions is “A world free of pollution caused by the accumulation of plastic in the environment.”
Its mission is to make and sell plastic made from renewable resources.
It has developed a thermoplastic plant-based resin called NuPlastiQ, a 100% natural renewably sourced plant-based polymer that allows plastic manufacturers to use existing equipment to make a wide variety of sustainable products.
This is potentially game-changing technology in that it solves many of the compatibility issues that have dogged bioplastics.
It has demonstrated compatibility with mechanical recycling systems, and by partnering with Licella and Mura it hopes to provide efficient and cost-effective hydrothermal liquefaction of bioplastics.
The company says high-performance resins for packaging will maintain or even increase the overall strength of plastics such as polyethylene, polypropylene, or polystyrene that can reduce material use, energy consumption, fossil-fuel-based plastics usage, and greenhouse generation by up to 30%.
Should this prove a fruitful venture, then BioLogiQ, might also benefit from both green and blue ESG private equity investment, and end users of its products may be able to claim best-in-class ESG points given the plastic is carbon neutral.
Teaming up with not-for-profits
Mura Technology, ReNew ELP and Armstrong Capital Management have announced a partnership with Plastic Oceans UK, to share research, findings and technology in a bid to create a plastic neutral society.
Plastic Oceans’ documentary “A Plastic Ocean” was recognised as “one of the most important films of our time” by Sir David Attenborough.
One would imagine not-for-profit support would be a key element in any company expansion strategy in this space, although, as the recent controversial Planet of the Humans documentary, despite its flaws, points out, not-for-profit support is no guarantee for bona-fide green credentials.
Licella and Australia
Letsrecyle.com says Renew ELP stated that Licella received $75m in Australian government funding to develop its technology. The Australian government also recently awarded a $1m grant to Licella to support commercialisation of its Cat-HTR solution for end of life plastics in Australia
Licella says that Australia can support 20-30 Cat-HTR plants.
Prime Minister Morrison has promoted the company both internationally and domestically.
In March, Mr Morrison made special mention of Licella in his speech to the AustralianPlastic Summit, suggesting the technology is a prime candidate for the impending government subsidies to be announced in the October budget, assuming the funding goes ahead after coronavirus disaster relief.
Mr Morrison’s speech was based on pre oil-crash assumptions, and the oil price would need to recover substantially to ensure subsidies have a strong economic foundation.
In Australia, Licella has formed a privately owned recycling company, IQRenew, thanks to a grant from the Australian government. IQRenew has merged with StopWaste, giving it a pathway to 32% of the business, and access to waste plastic and other materials.
IQRenew now owns and operates the portfolio of StopWaste’s Material Recovery Facilities (MRF) across the east coast of Australia, and its secondary processing facilities on NSW’s Central Coast. It includes two facilities for primary recycling (sorting) and two for secondary recycling (processing single streams for remanufacture).
Combined, they process more than 100,000 tonnes a year of recovered resources, collected by kerbside councils. It is a cash-flow positive business.
The company has exclusive access to Cat-HTR for processing end-of-life plastics and end-of-life tyres and has committed to being the first company in Australia to combine physical and chemical recycling of plastic by commercialising the Cat-HTRTM chemical recycling solution.
It has also signed a memorandum of understanding with pulp paper packing business NZ Oji fibre solutions. Its Tokyo parent Oji Group is the world’s fifth largest pulp and paper group in the world. This adds to the biodiesel arm mentioned above with the joint venture with Canfor Pulp.
Licella’s strategy appears to be to partner with sustainable feedstock providers – such as BioLogiQ – and to sort mixed recycling from IQRenew into its various streams before being processed, as sources of raw material.
One of IQRenew’s facilities sorts 30 tonnes of recyclable waste per hour, rescuing 105,000 cubic metres of landfill a year. This equates to 20,000 tonnes of greenhouse gases being reduced a year, the equivalent of removing 4,582 cars from the road.
Partnership with consumer goods giant Nestle
IQ Renew and Nestle are partnering in a soft-plastic recycling venture – a resource recovery trial – which aims to collect soft plastics from more than 100,000 homes through kerbside recycling and diverted from landfill.
Now that the threat of regulation of single-use plastics has created a disconnect between consumer goods companies and plastic producers, the Nestle partnership suggests that Licella appears to have a tacit nod of support from the industry.
The problem remains with downstream markets for the product and with oil prices continuing to plunge the viability of recycled plastics is seriously undermined, as it substantially increases the percentage of government and charitable support required.
Hence, regardless of Mr Morrison’s announcement not to regulate recycled plastic content, regulation is a must, particularly if it is offering industry subsidies.
Licella says it has no plans to list at this point and is accepting investments of more than $1m. It would make a strong candidate for impact investing from ESG private equity, as well as being a recipient of global government recycling subsidies.
However, it will need to deliver on the promise of its technology within the next 18 months.
For the bulk of its life, Licella has been run by co-founders University of Sydney Professor Thomas Maschmeyer and Len Humphreys.
The pair started developing the Cat-HTR technology in 2005, to convert edible oils into biodiesel, but encountered opposition as concerns arose about competition for agricultural land.
They sought an alternative non-edible, abundant feedstock and applied the technology to lignite (brown coal). Then in 2007, the company modified the process to use pulp and paper residues and formed the Licella company, previously Ignite Energy Resources.
Ignite Energy Resources had applied and received substantial government grants from the Liberal Victorian Government in 2009 to develop its technology to unlock the state’s brown coal reserves.
However, Licella, along with other recipients of funding, pulled out and Victoria never achieved its brown coal boom, amid criticism from environmentalists.
As a result, Licella will soon need to prove its credentials and justify its pitch as a grant recipient, and the plastic problem may prove its chance.
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