Can This Tiny Energy Company Really Change The World? EMPTY THE LANDFILLS! TURN OLD TIRES INTO HOT COMMODITIES! ELIMINATE TOXIC WASTE! KEEP A LID ON MAD COW DISEASE! SAY HASTA LA VISTA TO OPEC! SAVE THE ALASKAN WILDERNESS! BUT WAIT, THERE'S MORE!
By Jon Birger

(MONEY Magazine) – The Next Big Thing? Please. The concept is so hackneyed that I couldn't help but groan a little when tech fund manager Steve Salopek embraced it at a press briefing I attended in April. I was struck--dumbstruck, in fact--by Salopek's unshakable faith that the Next Big Thing is out there. He had no idea what this paradigm-busting innovation would be, yet he was sure its arrival would breathe new life into the economy and the market.

Ever since Netscape went public in 1995, giddy entrepreneurs, soulless fraudsters and everyone in between have been trying to sell investors on the next new gadget, software program or online business model that will change everything. The problem is that for every Steve Jobs or Thomas Edison, there are a thousand wannabes touting high-tech novelties that have all the importance to humanity and our economy of the wrinkle-free shirt.

Which is pretty much what I was thinking that April afternoon as I got back to my desk, opened my e-mail and came face to face with the possibility that I owed Salopek an apology. I'd been sent a link to a Discover magazine story about a groundbreaking waste-to-oil technology called thermal depolymerization, or TDP for short. The 30-person company behind it, aptly named Changing World Technologies, said TDP could produce high-quality oil from almost any carbon-based waste product--discarded computers, infectious medical waste, mixed plastics, sewage, slaughterhouse refuse, tires and even chemical waste containing benzene, PCBs and other carcinogens. (Changing World believes TDP can render harmless any nonnuclear waste.) What's more, the technology was already economically viable. Changing World's first commercial plant will soon produce a heating oil-gasoline blend at a cost of $10 to $15 a barrel--about 50% below wholesale prices. Changing World thinks production costs could eventually fall to $6 to $8 a barrel.

Needless to say, the implications seemed astounding. If TDP was everything Changing World said it was--a big if, to be sure--it had the potential to end our dependence on foreign oil while simultaneously cleaning up the environment. "We'll be able to switch to a carbohydrate economy," TDP inventor Paul Baskis would later tell me. No more cozying up to Mideast dictators, no more hand-wringing over labor disputes in the Venezuelan oil fields, no more wild fluctuations in oil prices and no more thorny NIMBY disputes about what to do with trash and hazardous waste. Comerica Bank chief economist Dave Littman raised an even bolder possibility--no more OPEC.

It all sounded too good to be true, of course, which is probably why Internet weblogs were rife with speculation that the Discover article was some sort of hoax or maybe an outright fraud. Indeed, some readers were so convinced Changing World was a scam that they alerted the Securities and Exchange Commission, according to company officials. (The SEC declined comment.)

I was more sanguine: Discover was too reputable for the story to be a hoax, and there were too many serious people involved for TDP not to have some scientific basis. Changing World has received $12 million from the U.S. Department of Energy and the Environmental Protection Agency. It has raised another $30 million from outside investors, who include James Woolsey, the former CIA director; the Gas Technology Institute, the research arm of the natural gas industry; and Sterling Equities, the New York City real estate investment firm best known for owning the New York Mets. Separately, food giant Conagra has invested $20 million to build the first commercial TDP plant, located next to one of its Butterball factories in Carthage, Mo. Set to open in July, the plant will handle 200 tons of turkey waste a day, turning bones, skin and guts into 600 barrels of oil and 11 tons of minerals that can be sold as fertilizer.

In the course of a single day, I'd gone from unrepentant cynic to true-blue believer. Wall Streeters who read the article had largely the same reaction. "I don't think you could overestimate what this could do," says Michael Weiner, manager of the One Group Diversified Equity Fund. Adds Christopher Wolfe, U.S. equity strategist at J.P. Morgan Private Bank: "Personally, I think this has significant implications for the energy industry. This is a technology that's revolutionary without being disruptive"--which is Wolfe's way of saying you wouldn't need to buy a solar panel or drive an electric car to benefit.

I soon put a phone call in to Changing World CEO Brian Appel--a 44-year-old second-time entrepreneur who helped found Ticketmaster in the 1980s--asking whether he'd let MONEY tell his story. Appel made it clear that Changing World is privately held and not looking for additional investors. Nevertheless, he invited me to visit his plant in Philadelphia.

A WET SOLUTION Using heat and pressure to convert organic material into liquid petroleum is not some modern-day alchemistic scheme. The earth has been performing this feat for millions of years, turning the remains of prehistoric life forms into the crude oil we pump out of the ground today. Since the 1960s, scientists have been able to replicate the earth's magic by super-heating organic matter until it breaks down at the molecular level and changes from fiber, proteins and carbohydrates into the hydrocarbons that comprise oil. Before TDP, however, all such technologies (the best known of which makes ethanol from corn) consumed almost as much energy as they produced--if not more.

This has long been the Achilles' heel of renewable energy. Solar power, for example, costs twice as much money to produce as electricity generated by fossil fuels does. And while researchers have made huge strides in producing methane from biomass, they've yet to figure out how to transport it cost-efficiently. Inventor Baskis, 52, a biologist by training, was keenly aware of these challenges when he joined an Illinois renewable energy start-up 20 years ago. "The economics are the most important part of any process," he says. "What's physically possible isn't always economically feasible." In the waste-to-oil arena, the major stumbling block had been the high cost of removing water from the raw materials. Rather than evaporating the water, Baskis decided to use it to facilitate decomposition. With TDP, waste products and water are put into a grinder, and the resulting slurry is cooked under high pressures and temperatures. Not only was Baskis' process more energy-efficient--water conducts heat better than air does--but it also produced a higher-quality product. "Water provides hydrogen terminals that aid in the breakdown of organic material," he says. "You get nice, short hydrocarbon molecules instead of big macro molecules like coal or tar."

Perhaps because his use of water ran counter to the prevailing wisdom in petroleum chemistry, Baskis initially had a hard time attracting investors. As a scientist from the Gas Technology Institute would later tell Appel, "We just spent 100 years taking the water out of the oil, and now you want to put it back in to make a better product?" In 1997, Appel, a private investor at the time, learned of Baskis through a mutual acquaintance, and he was so impressed with TDP that he acquired the patents from Baskis (who retains a large equity stake in Changing World) and began tapping his contacts for the funding he'd need to build a prototype plant.

One of the first people Appel talked to was his friend David Katz, a partner at Sterling. "This is the holy grail when you look at the problems in this world," Katz remembers thinking. "Yeah, it seemed too good to be true, but I figured how could you not try?"

GARBAGE IN, OIL OUT Changing World's pilot plant is housed in an old boiler room at the Philadelphia Naval Yard. Appel had already raised $8 million and hired a dozen people by December 1999, when the plant was ready for its first test. "Was I anxious?" Appel asks. "Let's just say that the temperature and pressure that day weren't just in the reactor--they were in my body. I'd put a lot of my friends and family in my company."

That trial run did not go well. The TDP plant did transform food-processing waste into oil, but not the kind Appel was hoping to make. "It was a true crude oil, with all the bad actors like chlorine, ash and sulfur that you don't want," he says. In fact, the oil had so many impurities that its value was negligible. "So we went back to the drawing board and made some major retrofits and modifications."

What Appel describes as "the eureka moment" came toward the end of 2001, when Changing World developed a way to vent out most of the impurities. "The funny thing is, if you separate them from the oil, all those bad actors become good actors that have a real market value," Appel says. Eventually, Changing World's scientific team--led by Terry Adams, a mechanical engineer who joined the company following a long career in the paper industry, and Bill Lange, a jack-of-all-trades industrial-design specialist--were able to produce a low-sulfur light oil that is essentially a gasoline-heating oil blend. Even more impressive, the process turned out to be 85% energy efficient--in other words, for every 100 BTUs of energy in the waste that's used, only 15 are used to run the plant. (The Philadelphia test facility is powered entirely by the methane and other gases that are byproducts of TDP.)

News of their accomplishment has been met with skepticism. "They haven't published anything that can be verified," says Stefan Czernik, a researcher at the National Renewable Energy Lab in Colorado. "Frankly, I doubt it can be as economical as the company claims."

One of the few independent scientists who has studied TDP is Jeff Tester, a chemical engineering professor at the Massachusetts Institute of Technology. Tester visited the Philadelphia plant last year and came away impressed. "The evidence I saw was very reasonable," says Tester, director of the MIT Energy Lab. "What's so nice about it is you really don't have any gaseous emissions--you don't produce the dioxins which result from incineration." The big question in Tester's mind isn't whether the technology works, but how much oil it can produce. "The chemistry is there, but there is a very large scale-up from the pilot plant stage to what they ultimately hope to accomplish," he says.

GROWING PAINS Whether TDP turns out to be a niche technology or an actual solution to two of the world's greatest problems hinges almost entirely on its scalability. The first commercial TDP plant in Carthage will produce 600 barrels of oil daily, which barely qualifies as a drop in the bucket. Every day the U.S. imports some 12 million barrels of oil.

P.J. Samson, president of the Conagra-Changing World joint venture that owns global TDP rights for slaughterhouse and agricultural waste, says future plants will likely handle 10 times the volume of the Carthage facility. There's no shortage of potential raw materials, he says, especially now that concerns about Mad Cow disease have so many countries considering bans on animal feed made from rendered animal parts. Even so, Changing World and its licensees would probably need to build a thousand TDP plants to replace the amount of oil we now import.

Appel is under no illusions about how long it would take to end the country's dependency on imported oil. "That's 25 to 30 years away," he says. "What I tell everyone is that we're going to put up dozens over the next five years, then hundreds, then thousands. But you've got to start with one plant." The good news for his investors is that the company won't need to build a thousand plants to make money. Changing World's internal financials project approximately $10 million in annual after-tax income from a large TDP plant producing 1,800 barrels a day.

Of course, those are just projections. If cheap Iraqi oil were to flood the world market, Changing World's business plan would become more challenging. Then there's the issue of acquiring the raw materials for TDP. While there's certainly no shortage of old tires, agricultural waste and other garbage in this country, that junk is not all centrally located. "There are more logistical challenges than meet the eye," cautions J.P. Morgan's Wolfe.

THINK BIG Even so, after spending a couple of days with Appel and his team, I can't help but feel more optimistic. A child of the 1970s energy crisis, I remember all those warnings about how we'd run out of oil within 30 years. As wrong as those predictions turned out to be, oil remains a finite resource. "Right now there's an oil glut, but that will change as countries like China and India further develop their economies," says Milton Ezrati, senior economist at Lord Abbett funds. "If [TDP] really were a reliable and renewable source of oil, it would go a long way toward removing the threat" of future energy shortages. "It would," adds Comerica's Littman, "lower industrial costs, improve productivity, improve global living standards and probably raise real GDP growth rates globally by a full percentage point."

It's hard to imagine a Next Big Thing any bigger than that.