Fuel cells can make electricity from hydrogen and oxygen, and the only emissions are harmless water vapours. Well, not quite. Here in British Columbia, these machines have another byproduct: self-congratulatory speeches.
On a sunny Monday morning in late April, it’s the launch of Hydrogen & Fuel Cells 2007, a three-day conference and trade show at the Vancouver Convention & Exhibition Centre. Premier Gordon Campbell is welcoming several hundred delegates from more than 30 nations with a pitch for hydrogen as the clean energy of tomorrow. Among the dignitaries onstage with Campbell is federal Environment Minister John Baird, a surprise guest, here to promote the Tory climate-change plan. The premier flags his government’s efforts to help the province’s hydrogen and fuel-cell sector raise its international profile. He highlights the BC Hydrogen Highway project, which will include 20 fuel-cell-powered buses in Whistler before the 2010 Winter Olympics. Campbell also takes a swipe at skeptics, reminding the crowd that people had similar doubts about the rise of the automobile. “As we look to a future that is dependent on hydrogen and we can take full advantage of the opportunities that a hydrogen economy can present, we’re looking at a future that improves the entire world,” he says. Outside the trade show, young men in white hard hats hand out BC Hydrogen Highway “passports.” Although the conference features demonstration fuel-cell cars from DaimlerChrysler AG, Ford Motor Co. and three other automakers, its dozens of exhibitor booths reveal a bigger picture. Local industry stalwart Ballard Power Systems Inc. shows off its fuel-cell stacks, one of which can power forklifts. Angstrom Power Inc. of North Vancouver makes tiny hydrogen fuel cells for hand-held devices such as flashlights and cellphones. Dusseldorf, Germany-based Masterflex AG has brought along the Cargobike, a three-wheeled hydrogen-electric hybrid. From its own pavilion, the government of Denmark spells out its new hydrogen and fuel-cell strategy. Away from industry shindigs like this one, however, some critics say a broad-based hydrogen economy is a dream that may never come true. After all, 2005 was supposed to have been the year that Burnaby-based Ballard, DaimlerChrysler and Ford put 100,000 fuel-cell cars on the road. For proof that this goal is still a ways off, you need only look at the companies that develop hydrogen and fuel-cell technology. In an effort to make a profit today rather than whenever, they’re turning to less sexy short-term applications. One local firm at the trade show, QuestAir Technologies Inc., has veered so far off the hydrogen highway that it’s now chasing deals with oil refineries. Brian Piccioni, an analyst with BMO Nesbitt Burns Inc., caused an uproar in 2004 when he published a report arguing that hydrogen was unlikely to become a major energy carrier within the next 25 years. According to Piccioni, who has a biology degree and used to design computers, one of the biggest problems with hydrogen is that processing and transporting it takes more energy than is available to the end user. “The hydrogen highway is this grand vision of us driving around in George Jetson cars,” he says from Toronto. “I think it’s quite clear that there’s no real solution there. You would have to have society deciding to do a really dumb thing from a financial and environmental perspective because it seemed like a good idea at the time.” That said, Piccioni stresses that there are viable uses for fuel-cell technology today. He cites Ballard’s forklift stack, which is less dangerous and cumbersome than a traditional lead-acid battery. John Tak, president and CEO of national industry group Hydrogen and Fuel Cells Canada, explains that the sector is now pursuing three markets: transportation; stationary power, including backup for telecoms and data centres; and portable micro fuel cells. Held back by cost, performance demands and a lack of fueling infrastructure, hydrogen-powered cars will take a while to hit freeways everywhere, Tak concedes. “We’re where you were with the internal-combustion engine 100 years ago,” he says from his Vancouver office. “And they’re still doing R&D on the internal-combustion engine.” Cars or no cars, PricewaterhouseCoopers’s (PWC) 2006 global survey of 23 public hydrogen and fuel-cell companies reveals how tough it is make a buck in this business. In 2005 the survey group saw a net loss of US$365 million. Still, that was a 19-per-cent improvement over 2004, when the 20 firms polled were US$450 million in the red. It also reversed four years of mounting losses. PWC notes that besides trimming research and other costs, the sector was starting to focus on marketable products that can actually deliver returns for investors. The B.C. hydrogen and fuel-cell cluster, Canada’s largest, has long carried the burden of great expectations. At the turn of last decade, it looked like it could do no wrong. “There is a chance that B.C. could become the Detroit of fuel cells,” crowed a 1998 briefing paper by Canada’s National Research Council. “Ballard is to the fuel-cell industry what Intel is to the computer industry,” David Berkowitz, then a senior associate at Vancouver-based venture-capital firm Ventures West Management Inc., told Business in Vancouver in 1999. “Will Ballard be our Microsoft?” asked Vancouver magazine in early 2001, several months after the company’s shares peaked at $210 on the Toronto Stock Exchange (TSX). Founded as a private firm in 1996, Burnaby-based QuestAir has been around since those heady days. In the beginning, the company focused on purifying hydrogen for fuel-cell-powered vehicles. It developed its own spin on a 50-year-old technology called pressure swing adsorption (PSA), which purges contaminants such as carbon monoxide from hydrogen and other gases. Today, with about 70 employees, QuestAir mostly sells PSA systems to industrial customers in the U.S., Asia and Europe. But its flagship project is a partnership with ExxonMobil Research and Engineering Co., a division of Exxon Mobil Corp. Last May, QuestAir struck a deal with Exxon’s research and engineering division to market large-scale hydrogen purifiers to the oil-refining industry. In the QuestAir boardroom, president and CEO Jonathan Wilkinson explains how and why his company changed course. A Rhodes Scholar, the Saskatchewan native studied politics, philosophy and economics at Oxford before earning an MA in international relations from McGill University. Wilkinson began his career in government, becoming an adviser to former Saskatchewan Premier Roy Romanow. He then moved over to the private sector, recasting himself as a business consultant at the Toronto offices of Bain & Company Inc. QuestAir hired him away as its VP of business development in July 1999. Wilkinson came on board to find takers for the company’s PSA technology, and soon QuestAir was working on fuel-cell platforms with General Motors Corp., DaimlerChrysler and Ballard. (The latter bought a chunk of QuestAir in 2000 but has since sold its stake.) “There was a lot of money going into investment in that technology and a huge amount of optimism in terms of the breadth of the opportunity,” Wilkinson recalls of the automotive-fuel-cell space. “Everybody drank the bathwater, right?” As a result of that thirst, QuestAir’s payroll swelled from 25 to 125 inside of a year. Within months of Wilkinson’s arrival, The Goldman Sachs Group Inc., Morgan Stanley and the other big New York investment banks came calling. The venture capitalists funding the company had pegged its worth at about $20 million when Wilkinson showed up, but there was talk of a NASDAQ IPO with pre-money valuations as high as US$500 million. “You look back on that and you say, ‘How can that possibly be the case?’” Wilkinson says. “But at that time, it was considered quite normal in the context of what was happening in the market.” [pagebreak]
With the bursting of the tech bubble in early 2000, though, QuestAir and its peers went into a tailspin from which they have yet to recover. (At press time, Ballard stock was trading around $5 on the TSX.) Although QuestAir raised more than $60 million in private capital between 1997 and 2003, work became scarce after the Ballard program was put on hold. When Wilkinson took over as CEO in 2002, he saw the mass commercialization of fuel-cell vehicles receding into the distance and investors’ patience running out. At a two-day management retreat, QuestAir shifted its focus to existing industrial markets that require hydrogen purification and recovery, such as steel plants and oil refineries. “It doesn’t mean we’ve abandoned the hydrogen economy, but we see that as a much longer-term opportunity,” Wilkinson says. QuestAir is certainly keeping its options open. Since 2002 Shell Hydrogen, which is still pursuing PSA systems that produce hydrogen from natural gas, has been a major stakeholder in QuestAir. If fuel-cell cars ever do arrive in numbers, these units could become part of the refuelling infrastructure. Also in 2002, Exxon Mobil approached QuestAir during a search for gas-purification and gas-separation technologies, which could become part of its core business. The two companies signed their first agreement in 2004, the same year that QuestAir went public on the TSX and on the London Stock Exchange Alternative Investment Market (AIM). Since then QuestAir’s development team has worked with Exxon’s research and engineering staff in New Jersey and Virginia to create a large-scale hydrogen purifier called the H-6200. (The two partners are also collaborating on an on-board hydrogen generator for industrial and military vehicles.) On June1, QuestAir announced that it had shipped its first purifier to an Exxon refinery in France, where the prototype will be tested. Like competing products from companies such as Germany’s Linde AG, the QuestAir system purifies hydrogen by pressurizing and depressurizing it in a series of chambers. But Wilkinson says it’s much faster than conventional PSA devices and its compact size makes it cheaper and easier to install. QuestAir PSA units typically sell for $500,000 to $1 million, but the bigger refinery version will fetch between $2 million and $5 million. The oil business has a vast appetite for hydrogen and for the equipment that purifies and captures it. As Wilkinson notes, refineries must use the gas to extract sulfur from crude oil, in compliance with stricter environmental rules. They also need it to satisfy the insatiable demand for fuel from China, India and other fast-growing economies. At the same time, Wilkinson says, worldwide depletion of lighter crude has producers knee-deep in sources like the Alberta tar sands. “Refineries are seeing more and more heavy crude and high-sulfur-content crude, and, to process those, you need more hydrogen.” According to QuestAir’s 2006 annual report, the oil industry could drop US$10 billion on hydrogen-generation gear between 2005 and 2015. Given the hoped-for environmental benefits of fuel cells, Wilkinson admits it’s ironic that QuestAir is making it easier for oil companies to turn a profit. But he points out that PSA technology cuts emissions by recovering hydrogen that refineries can reuse. As well, removing sulfur and other impurities from oil reduces local air pollution. And in between courting Big Oil, QuestAir has also entered the renewable biogas market by selling methane-purification systems. Last fall one of its M-3200 units was installed at a Michigan dairy farm as part of a plant that converts manure into pipeline-grade methane and electrical power. Then in January, QuestAir sold its first M-3200 in Europe. “There’s still a thread of the environmental piece that all the work we’re doing hangs around,” Wilkinson says. Norma McDonald is operating manager of Cincinnati, Ohio-based Phase 3 Developments & Investments LLC, which bought the Michigan system from QuestAir. By giving farmers a market for methane, McDonald says, the M-3200 stems greenhouse-gas emissions. “Otherwise all that methane would be vented to the atmosphere,” she explains, noting that this gas has more than 20 times the global-warming potential of carbon dioxide. In April Phase 3 was planning to purchase M-3200s for four more projects. From black gold to cow patties, these deals are improving QuestAir’s financial position. In 2006 the company posted a net loss of $10.2 million, compared to $9.5 million in 2005, but revenues grew 20 per cent to $7.6 million. QuestAir netted $18.4 million from a public-equity offering last May. And as of this March, its sales-order backlog was $7.5 million, up from $5.8 million last December. According to Wilkinson, the company’s investment in its technology will soon start paying off. “Once the refinery product is actually up and being sold on a commercial basis, it doesn’t take very many of those sales in a given year to be able to turn you into a profitable company,” he says. Still, in May QuestAir scaled back its projected 2007 revenues to between $7 million and $8 million, a big drop from earlier guidance of $9 million to $10 million. But along with that news, management announced the appointment of Terry Blaney, who joins QuestAir from an international career with the Shell Group. As a non-executive director, Blaney will help grow the refinery business. To show that it’s serious about making money, QuestAir also cut research-and-development costs, eliminating 12 full-time jobs. As for QuestAir stock, it doesn’t appear to be in any immediate danger of matching Ballard at its peak. But it has had its ups and downs on the Toronto and London exchanges. In early May, QuestAir’s TSX shares stood at about $1.20, after hitting a 12-month high and low of $1.75 and $0.85. The AIM stock was trading at roughly £0.60 ($1.30), with a 12-month high and low of £0.87 ($1.99) and £0.48 ($1.10). Brock Winterton, an analyst with Toronto-based Clarus Securities Inc., initiated coverage of QuestAir in fall 2005. In April this year, he rated the stock as a speculative buy, with a 12-month target price of $2.50. Winterton, whose company trades QuestAir, agrees that its TSX performance has been volatile recently. He adds that, although QuestAir’s technology is useful in a wide variety of industrial markets, the Exxon deal is key. When the refinery prototype is up and running, Wilkinson and his team will have to move fast. “It’s really a matter of how quickly they can ramp up the sales,” Winterton says. Across the Atlantic, Mark Thompson is director of equity research at the London office of Vancouver-based Canaccord Adams Inc., which also trades QuestAir. According to Thompson, the company has been so well-received in Europe that the bulk of the cash for its IPO and subsequent 2006 funding round came from there. Thompson expects large-scale PSA systems to drive QuestAir’s value over the next three to five years. News that the company has shipped its oft-delayed Exxon prototype gave anxious investors some relief, he says, but surprise expenses in the latest financial statements are causing some unease. Thompson rated QuestAir a buy in April with a value of £1.96 ($4.32). In London during the past two years, Thompson has seen a flurry of IPOs by other fuel-cell firms such as Ceres Power Ltd. and Ceramic Fuel Cells Ltd. Unlike QuestAir, Ballard and others of the first generation, he says, they’re busy spending money on the assumption that the hydrogen economy will arrive in about 2012. “With some of the recent pure-play fuel-cell companies, you’re having to make some fairly brave assumptions on timing,” Thompson observes. Meanwhile, QuestAir has a core business that will keep it going regardless of what the future holds for hydrogen power. “With QuestAir you effectively get exposure to the hydrogen economy for free,” he says. So Jonathan Wilkinson and QuestAir have spared Thompson from giving investors a date for the dawning of the Hydrogen Age. But his fellow stock analyst Brian Piccioni prefers not to reserve judgment. “There’s still the zealots out there who talk about the hydrogen economy,” Piccioni says, “And I figure that’ll continue until the politicians realize it’s not worth the photo op, and then they’ll move on to something else like biofuels or solar.” For QuestAir, at least, seeing past the hydrogen hype has left it with its sights set on profit in the oil patch.