Depressed prices and the abundance of natural gas supplies has led to substantial interest in developing technologies and business models which facilitate movement away from traditional petroleum toward greater use of natural gas as a feedstock. To learn about how Siluria Technologies, Inc., a San Francisco based firm is presently working to convert natural gas into an economically-superior alternative to making plastics, chemicals and fuels, KWR International speaks with Siluria President Alex Takchenko.

This interview was originally prepared by KWR International for the Japan External Trade Organization's Green Innovations Program and is published with its permission.

Interview with Dr. Alex Tkachenko, President of Siluria Technologies, Inc.

Interview by Keith W. Rabin

Thank you Alex for agreeing to speak with us today. Before we begin can you tell us a bit about your background and Siluria's work in utilizing natural gas to make plastics and other packaging material?

Thank you for the opportunity to speak with you about Siluria. I joined the company in 2008, the year it was founded, and currently serve as the company's President. We are developing a technology to replace oil with natural gas as the fundamental feedstock for the petrochemical industry. This is not possible today because there is no viable technology for direct conversion of gas into anything useful other than heat or electricity; our catalyst technology, which originated from MIT, solves this challenge.

The economics of our approach are highly attractive. That is because our success will allow us and our partners to produce billions of dollars of commodity chemicals and fuels from less expensive feedstock at lower costs.

According to some media accounts your technology will help to create "greener building blocks" and use of natural gas will certainly help to reduce the need for crude oil which is traditionally used as a feedstock for these materials though one might ask whether the primary advantage is one of cost and lower reliance on these products or it is truly a greener technology. How does your technology compare to use of crude oil as a feedstock in efficiency, cost and carbon and other byproducts?

The principal driver of our work is superior economics. The technology for direct coupling of methane to ethylene ("OCM") will allow us and our partners to take advantage of the gas/oil price parity discount, historically in the 60-70% range in markets with access to both feedstocks. Over the long term, the economic benefits of a global feedstock switch from oil to natural gas can be as profound as the consequences of the feedstock switch from wood to coal in the 19th century, and from coal to oil in the 20th century.

Our technology will also have significant environmental benefits for the following reasons:

• The incumbent technology, steam cracking, is highly endothermic. While highly optimized over the last 70 years, steam cracking requires a lot of energy and produces 1.5-2 lb CO2 per pound of product, for a total of ~200 million tons of CO2 per year globally. Most of this CO2 is the result of burning fuel (natural gas) to heat the cracking furnace
• In contrast, our technology is exothermic. It produces energy rather than requiring it, and this energy can be used elsewhere in the plant, thus reducing the overall energy budget.
• In addition to the above, our process uses natural gas instead of oil, and the overall environmental footprint of natural gas production is lower than that of oil.
• Other likely process differences in favor of Siluria's approach include reduction in emissions of nitric oxide, heavy metals and sulfur.

Many or most alternative energy technologies are reliant on incentives and subsidies, which are used to finance start-up costs and experimentation with the promise of cost competitive products only to be realized once capacity reaches a scale that will allow larger-scale commercial production. Is that also the case with your technology? Are you utilizing incentives and subsidies to get started? At one point does your technology become commercially competitive with traditional production processes?

Our work is driven by the significant and sustainable price advantage of natural gas over oil as a more abundant, widely distributed feedstock. Today this has limited utility due to a lack of technologies for converting it to higher value products such as commodity chemicals and fuels. We do not rely on government subsidies.

Your technology was developed at the MIT laboratory of Angela Belcher, who is working on using engineered viruses to create all kinds of materials for, say, better batteries and solar cells. Can you tell us about how Siluria came to access this technology and the process by which you were able to obtain the rights to utilize it for commercial purposes?

We hold an exclusive license from MIT for the use of Dr. Angela Belcher's breakthrough technology, which was the first to apply biosynthetic approaches to the production of inorganic materials for industrial needs. Siluria has extended Dr. Belcher's pioneering work in the industrial setting, with particular focus on the synthesis of heterogeneous catalysts with improved performance in structure-sensitive reactions. We are developing catalysts that are robust, stable at high temperatures, and compatible with the existing infrastructure of the petrochemical industry.

We talk with many emerging companies who are seeking to develop a range of alternative energy technologies, many of which appear quite promising, both in terms of their technologies as well as the credentials of their management team, yet venture and private equity capital is proving quite difficult to access in the current environment. Siluria, however, has been able to obtain the backing of Kleiner Perkins among other prominent funds. Why were you successful when so many others have had so much trouble? Can you tell us about how this capital was raised and how you will utilize the $13.3 million financing that was recently raised?

Our investors recognize Siluria's unique value proposition: the ability to create cost-advantaged chemicals directly from methane, the world's most abundant feedstock. Factoring in the differences between the price of methane and ethylene (EIA), Siluria's technology represents an upgrade opportunity in tens of billions dollars per year. Both fossil- and biomass-derived natural gas can serve as the feedstock, providing manufacturers with feedstock flexibility. Additionally, the technology is directly compatible with existing infrastructure and will extend the useful life of existing CapEx investments.

Our approach provides an opportunity for natural gas producers, too. The natural gas leaders of the clean energy economy will diversify their product applications beyond electricity and vehicles, opening new markets for their resources. For owners of remote natural gas assets, the ability to convert natural gas into transportable liquids or solids, while also upgrading its value, is particularly attractive.

Your investors include Alloy Ventures, ARCH Venture Partners, Kleiner Perkins Caufield & Byers, Altitude Life Sciences Ventures, Lux Capital and Presidio Ventures which is part of Sumitomo Corp. which seems like a lot given you have only raised $13.3 million. Why have you approached so many initial investors? What do they offer Siluria aside from the capital itself? How do you coordinate and satisfy the demands of so many entities?

The great advantage of working with sophisticated venture capital firms is their experience and expertise in helping companies grow from an exciting technology startup to a sustainable, highly valuable business enterprise. We are fortunate to be able to take advantage of the wisdom, experience and connections of our investors.

You have been quoted as stating the market for ethylene-based products is worth approximately $160 billion a year. How much of this market do you think you will be able to penetrate and over what time frame? Additionally, how much additional capital will you need to go into full-scale production and what type of infrastructure and scale will you need to fully compete in this market? What is the anticipated size of production facilities?

The opportunity for adopting the Siluria OCM platform is not only with the growth of the market but also via replacement of the technology practiced at existing capacity. This is feasible anywhere in the world. Any ethylene plant that utilizes "generic feedstock" and is close to a source of natural gas is a candidate for this kind of retrofit. This approach can add decades to the economic life of existing assets by significantly improving their cost competitiveness via feedstock substitution in whole or in part.

As far as growth, world demand is growing a few percent per year off of a large base, so 3 to 5 million tons/year of new demand is added every year, and the OCM platform is in a very strong position to compete for much of this. For Siluria itself as a potential partner with gas suppliers, petrochemical producers or petrochemical end users we could envision adding ownership interest in 1 to 2 world-scale capacity equivalents per decade, via retrofit of existing capacity and addition of capacity to fill growing demand. However, in addition to Siluria's potential investments with partners, many existing producers of ethylene who do not currently have access to advantaged feedstock are potential adopters of the OCM platform. The technology will also be available for license from Siluria in partnership with well-known ethylene technology licensor/engineering companies.

It should be noted that important co-products of ethylene, C3's and C4's, can be easily produced from low cost OCM ethylene, and in the amounts needed by the market.

Production facilities may have the same ethylene capacity as existing facilities but due to the simpler technology, the Siluria OCM platform may be economically viable at scales much smaller that steam crackers and thus can be adopted in areas with access to natural gas but with relatively small demand for petrochemicals and plastic.

The market for ethylene is a global one and much of the manufacturing that utilizes, and demand for these products is in Asia and other emerging markets rather than the US. How do you intend to implement a global expansion strategy? Are you planning to first set up a pilot or other production plant in the US and then expand into other markets either by exporting product or opening additional plants? If so, is your intention to open, finance and manage these yourself or to enter into partnership and licensing arrangements?

We will continue our R&D, scale-up and engineering development in the US, using the existing Siluria team and facilities. The first large scale deployment of the technology, which will be a small, but-commercial-size demonstration system in an existing ethylene plant, can be done anywhere in the world where there is an appropriate facility, access to natural gas and a partner anxious to take the lead in bringing the technology to commercial readiness. We have started the process of exploring such joint developments with well-known industry participants. The nature of the Siluria OCM platform and its use of natural gas as a raw material opens up several business models. For example large, export oriented facilities are practical as are smaller scale, local-market oriented sites. Siluria along with its partners, as well as unaffiliated investors and licensors of the technology will have a number of business model opportunities.

I notice that one of your investors is Presidio Ventures is part of Sumitomo Corp. Given that this interview is being done for a newsletter that will be distributed to Japanese firms seeking to expand their presence in the alternative energy sector I wonder if you can tell us about this relationship, why and how it was developed, and what are your expectations as well as Sumitomo's moving forward? How does it differ working with a Japanese investor than the other firms that have invested into your firm?

Asian markets represent a significant opportunity for Siluria, and we are fortunate to have Presidio as one of our venture investors.

Thank you Alex for your time and attention. Before we conclude do you have any final words to leave with our readers?

I would like to thank your readers, wish them a happy and productive 2011, and close with the mention of another aspect of our technology. As we discussed, our goal with Siluria's catalyst synthesis technology is to grow inorganic materials in the same way nature makes them: with a bottom-up strategy, as opposed to a more conventional, top-down synthetic approach. This synthetic approach offers improved ways to manipulate catalyst surfaces. Novel surfaces have the potential for improving catalyst performance in commercially attractive and technically challenging reactions, such as selective oxidations of light alkanes to olefins and oxygenates. While we are focused on the commercialization of OCM, we also welcome opportunities for strategic R&D collaborations with chemical companies. Specifically, we are interested in exploring processes where our unique synthetic chemistry and proprietary high-throughput screening offer an advantage.

Dr. Tkachenko joined Siluria in 2008 at its founding. Prior to Siluria, Dr. Tkachenko was Vice President, Corporate Development and Strategic Planning of Hana Biosciences, Inc (NASDAQ: HNAB), a biopharmaceutical company focused on acquiring, developing, and commercializing innovative products to advance cancer care. Prior to joining Hana, Dr. Tkachenko was employed by Genentech, Inc., most recently as an Associate Director in its development organization, where he led the Companion Diagnostics initiative to maximize clinical benefit from Genentech's therapeutics by improving patient selection and trial design. Dr. Tkachenko earned a Ph.D. in Molecular Biology from the University of Medicine and Dentistry of New Jersey and an MBA from Harvard Business School. Earlier, Dr. Tkachenko served as a squad leader in the Soviet Army and completed a tour of combat duty in Afghanistan.