Item 1. Business
ITEM
1. Business.
Unless
the context otherwise requires, all references in this Item 1 to “Company,” “we,” “us” or “our”
refer to Verde Clean Fuels refer to Intermediate and its subsidiaries prior to the Closing and Verde Clean Fuels and its subsidiaries
following the Closing.
Overview
During
the year ended December 31, 2022 and prior to the Business Combination, CENAQ was a blank check company incorporated for the purpose
of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or
more businesses. For more information on the Business Combination, see the section entitled “Explanatory Note” elsewhere
in this Report.
Following
the Business Combination, Verde Clean Fuels is a renewable energy company specializing in the conversion of synthesis gas, or syngas,
derived from diverse feedstocks, such as biomass, municipal solid waste (“MSW”) and mixed plastics, as well as natural gas
(including synthetic natural gas) and other feedstocks, into liquid hydrocarbons that can be used as gasoline through an innovative and
proprietary liquid fuels technology, the STG+® process. Through our STG+® process, we convert syngas into Reformulated Blend-stock for
Oxygenate Blending (“RBOB”) gasoline. We are focused on the development of technology and commercial facilities aimed at
turning waste and other bio-feedstocks into a usable stream of syngas which is then transformed into a single finished fuel, such as
gasoline, without any additional refining steps. The availability of biogenic MSW and the economic and environmental drivers that divert
these materials from landfills will enable us to utilize these waste streams to produce renewable gasoline from modular production facilities
with expected capacity to produce between approximately seven million to 30 million gallons of renewable gasoline per year.
We
are redefining liquid fuels technology through our proprietary and innovative STG+® process to deliver scalable and cost-effective
renewable gasoline. We acquired our STG+® technology from Primus Green Energy (“Primus”), a company established in 2007
that developed the patented STG+® technology to convert syngas into gasoline or methanol. Since acquiring the technology, we have
adapted the application of our STG+® technology to focus on the renewable energy industry. This adaptation requires a third-party
gasification system to produce acceptable synthesis gas from these renewable feedstocks. Our proprietary STG+® system converts the
syngas into gasoline.
We have made significant progress towards commercializing
the first STG+® based commercial production facility in the United States. Our first commercial production facility, which we expect
to be operational by the first half of 2025, will be in Maricopa, Arizona. In the first phase we expect this facility to produce approximately
7 million gallons of renewable gasoline in the first full year of operations. In the second phase, which we expect to be operational in
2026, we anticipate producing approximately 30 million gallons per year of renewable gasoline. Additionally, we have several additional
renewable gasoline projects, and flare mitigating natural gas to gasoline project, in various early stages of development.
Over $110 million has been invested in our technology, including our
demonstration facility in New Jersey, which has completed over 10,500 hours of operation producing gasoline or methanol. Our demonstration
facility represents the scalable nature of our operational modular commercial design which has fully integrated reactors and recycle lines
and is designed with key variables, like gas velocity and catalyst bed length, at a 1-to-1 scale with our commercial design. We have also
participated in carbon lifecycle studies to validate the CI score and reduced lifecycle emissions of our renewable gasoline as well as
fuel, blending and engine testing to validate the specification and performance of our gasoline product. We believe our renewable gasoline
exhibits a significant lifecycle carbon emissions reduction compared to traditional petroleum-based gasoline. As a result, we believe
our gasoline produced from renewable feedstock, such as biomass, will qualify under the federal renewable fuel standard (“RFS”)
program for the D3 renewable identification number (“RIN”) (a carbon credit), which can have significant value. Similarly,
gasoline produced from our process may also qualify for various state carbon programs, including California’s Low Carbon Fuel Standard
(“LCFS”). Unlike many other gas-to-liquids technologies, not only can our STG+® process produce renewable gasoline from
syngas, but we expect it will be able to be applied at other production facilities to produce other end products including methanol. In
addition to our initial focus on the production of renewable gasoline, there is opportunity to continue to develop additional process
technology to produce middle distillates including sustainable diesel and sustainable aviation fuel. As of December 31, 2022, the Company
has not derived revenue from its principal business activities. The Company is managed as an integrated business and consequently, there
is only one reportable segment. However, as with other government programs, the use requirements of the RFS program and other similar
state-level programs are subject to change, which could materially harm our ability to operate profitably.
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Our
Growth Strategy
We
intend to grow our business by leveraging our competitive advantages in the design and implementation of small-scale modular facilities
that can be situated in proximity to renewable feedstock sources. We believe we have a number of avenues to achieve our growth objectives:
Construction
and Development of Commercial Production Facilities
A
critical step in our success will be the successful construction and operation of the first commercial production facility using our
STG+® technology. In April 2022, we commenced a pre-FEED study for our first commercial production facility in Maricopa, Arizona,
and we are actively engaged in activities associated with securing the location, feedstock, utility interconnections and front-end gasification
for our first commercial facility. We believe our commercialization activities are being completed at a pace that can support initial
commercial production of renewable gasoline as early as the first half of 2025.
We
plan to grow our business by building and operating a portfolio of commercial production facilities. Currently, we have three additional
production facilities planned and four potential production facility development opportunities identified. We also expect there to be
expansion opportunities at the approximately 700 landfills across the United States that intake sufficient volumes of MSW to supply one
of our facilities as well as numerous additional locations using other renewable feedstocks. We believe the number of identified and
planned potential production facilities bode well for our potential future success. We plan to commence pre-FEED studies on these three
additional production facilities in 2023 and complete two of the facilities in 2025 and the remaining facility in 2026. We expect the
total capital expenditures for these additional production facilities to be approximately $900 million, and we expect to fund these projects
with equity and project-related debt.
Expansion
of Commercial Operations and Customer Base
We
also expect to achieve growth through the expansion of our in-process projects as the facilities are expanded or otherwise begin to produce
renewable gasoline. We also intend to license our technology in places where we do not anticipate deploying our own capital. Additionally,
we intend to expand internationally to regions interested in our middle distillates process, like the United Kingdom, and may enter relationships
with other businesses to expand our operations and to create service networks to support our production and delivery of renewable gasoline.
Establishing
and Maintaining Relationships with Key Strategic Partners
We
have established, maintained and managed strategic relationships with Waste Management, InEnTec and EcoStrat, who devote the resources
to promote mutually beneficial business relationships and grow our business. To expand our business, we will continue to identify and
evaluate development and partnership opportunities and other suitable and scalable business relationships.
Developing
and Advancing Technology
Just
as we refocused the use and application of our STG+® technology from using natural gas as a feedstock to using renewable biomass,
MSW and other feedstocks, our R&D team is continuously researching and developing ways to improve our technology and meet our customers’
energy needs. Using our innovative technology platform and robust intellectual property portfolio, we are well-positioned to continue
making technology advancements over time. Additionally, we intend to develop or acquire additional intellectual property, such as processes
for sustainable diesel and aviation fuel, as well as other complementary technologies.
Formation,
Business Combination and Related Transactions
Intermediate was formed in July 2020 in
connection with its acquisition of our demonstration facility, laboratory, office space and intellectual property, including our patented
STG+® process technology from Primus. In connection with the Closing of the Business Combination, Holdings contributed to OpCo 100%
of the issued and outstanding limited liability company interests of Intermediate in exchange for 22,500,000 Class C OpCo Units and 22,500,000
shares of Class C Common Stock of Verde Clean Fuels. In connection with the Closing of the Business Combination, we completed a
private placement of 3,200,000 shares of Class A Common Stock for gross proceeds of $32.0 million.
Verde
Clean Fuels has retained its “up-C” structure, whereby all of the equity interests in Intermediate are directly held by OpCo
and the Company’s sole assets are its equity interests in OpCo.
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The
up-C structure allows Holdings to retain its equity ownership through Opco, an entity that is classified as a partnership for U.S. federal
income tax purposes, in the form of Class C Opco Units, and provides potential future tax benefits for Verde Clean Fuels when the holders
of Class C Opco Units ultimately exchange their Class C Opco Units and shares of the Company’s Class C Common Stock for shares
of Class A Common Stock in the Company. The Company is the sole managing member of Opco. As such, the Company consolidates Opco,
and the unitholders that hold economic interests directly in Opco are presented as redeemable noncontrolling interests in the Company’s
financial statements.
Holders
of Class C Opco Units, other than Verde Clean Fuels, have the right (a “redemption right”), subject to certain limitations,
to exchange all or a portion of its Class C Opco Units and a corresponding number of shares of Class C Common Stock for, at Opco’s
election, (i) shares of Class A Common Stock on a one-for-one basis, subject to adjustment for stock splits, stock dividends, reorganizations,
recapitalizations and the like, or (ii) a equivalent amount of cash.
CENAQ
Sponsor and Holdings are each subject to a lock-up period that expires on the earlier of (A) six months following Closing or (B) subsequent
to Closing, (x) if the last sale price of the Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits,
stock dividends, reorganizations, recapitalizations and the like) for any twenty (20) trading days within any thirty (30) consecutive
trading day period commencing at least seventy-five (75) days after Closing or (y) the date on which Verde Clean Fuels completes a liquidation,
merger, capital stock exchange, reorganization or other similar transaction that results in all of Verde Clean Fuels’ stockholders
having the right to exchange their shares of Class A Common Stock for cash, securities or other property.
Our
Facilities and Projects
We
own a demonstration facility and office space in Hillsborough, New Jersey. Our first commercial production facility, which we expect
to be operational by the first half of 2025, will be in Maricopa, Arizona.
Our
Intellectual Property and Technology
As
of December 31, 2022, Intermediate had been issued 28 patents globally, including 8 patents in the U.S., and had 3 pending patent applications
globally. These patents, filed across 14 jurisdictions, including the U.S., protect key aspects of our technology, including the STG+®
process, our proprietary method for converting syngas into gasoline. We believe our intellectual property rights are important assets
for our success, providing a significant competitive advantage, and we aggressively protect these rights to maintain our competitive
advantage in the market. Our U.S. patents expire on dates ranging from 2032 through 2039. We regularly review our development efforts
to assess the existence and patentability of new technology and inventions, and we are prepared to file additional patent applications
when we determine it would benefit our business to do so.
We
own or have adequate rights to use the intellectual property associated with the STG+® technology. Approximately 17 patents or patent
applications in our patent portfolio support and protect our ability to produce commodity-grade gasoline from syngas, 14 patents or patent
applications relate to the specific fuel composition produced by our proprietary systems and certain claims of our patents relate potential
future enhancements to our technology. We manage our patent portfolio to maximize the lifecycle of protecting our intellectual property
and various components and aspects of our system are protected by patents that will expire at staggered times.
Strategic
Relationships
InEnTec
Inc.
We
have selected InEnTec as a strategic partner for the buildout of our first commercial production facility in Maricopa, Arizona, which
we expect to be operational by the first half of 2025. InEnTec will provide gasification services in connection with the project. We
anticipate that InEnTec will be an integral member in the success of our first commercial production facility as production of renewable
gasoline is dependent upon the combination of InEnTec’s existing third-party gasification technology with our STG+® process.
InEnTec is also an important strategic relationship of ours because, as an active product developer, InEnTec has a portfolio of projects
in which we may have an opportunity to participate in the future.
Waste
Management, Inc.
Waste
Management is a strategic partner for the buildout of our first planned commercial production facility in Maricopa, Arizona. Under our
current plans, Waste Management would provide site and feedstock logistics in connection with the project, which we expect to require
approximately 150,000 tons of feedstock per year for the first phase.
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Other
Important Relationships
EcoStrat
is a service provider we use to assist us in finding locations for our commercial production facilities, as well as securing volume commitments
once our commercial production facilities are completed and operations have commenced.
IHI
E&C International Corporation (“IHI”) is our primary contractor for front-end engineering and design services (“FEED”)
and is expected to perform Engineering, Procurement and Construction (“EPC”) services. We are a party to agreements with
IHI and/or its subcontractors for the various aspects of FEED and EPC services needs.
Koch
Modular Process Systems, LLC (“KMPS”) is an important subcontractor of IHI and provides technical information to IHI and/or
its subcontractors for FEED execution.
Market
Opportunity
Demand
for Renewable Gasoline
Energy markets are undergoing dramatic changes
as they shift from fossil fuels to carbon-reduced and carbon-free sources. A series of technological, economic, regulatory, social and
investor pressures are leading the drive to decarbonize energy and other sectors, such as transportation.
According to the U.S. Energy Information Administration’s
(the “EIA”) “2022 Annual Energy Outlook” and “U.S. Energy-Related Carbon Dioxide Emissions, 2020,”
gasoline accounts for more than 20% of the U.S.’s energy-related Carbon Dioxide (“CO2”) emissions and overall, transportation
represents approximately 37% of total U.S. energy-related CO2 emissions (or 1,903 million tons of CO2). Within the 37% of total U.S. energy-related
CO2 emissions that is caused by the transportation sector, in 2019, gasoline represented approximately 56% of the total transportation
emissions (or 1,086 million tons of CO2) and produced over twice as much emissions than diesel, which produced approximately 468 million
tons of CO2) and over four times more emissions than aviation fuel, which produced approximately 261 million tons of CO2). Uptake on competing
emissions-reduction technologies, such as electric vehicles, is growing, but, according to BloombergNEF, is only expected to reach 24%
of the projected 2035 total vehicle fleet in the U.S. As a result, the EIA predicts 2035 gasoline demand to be at 92-102% of 2022 levels.
According to the EIA’s “2022 Annual Energy Outlook,” petroleum and natural gas are projected to remain as the most-consumed
source of energy in the U.S. through 2050, and motor gasoline is projected to be the most commonly-used transportation fuel despite electric
vehicles gaining market share.
Renewable gasoline reduces lifecycle emissions
by over 60% compared to traditional fossil fuel-based gasoline based on GREET-style CI analysis. Further, according to the U.S. Environmental
Protection Agency’s (“EPA”) “National Overview: Facts and Figures on Materials, Wastes and Recycling and Landfill
Methane Outreach Program,” approximately 292 million tons of MSW is generated annually, which consists of about 60% cellulosic material
that can be utilized as feedstock, which can create an estimated 25 billion gallons of renewable gasoline based on the assumption that
one ton of MSW can generate 140 gallons of renewable gasoline using our STG+® process. Achieving production of 25 billion gallons
of renewable gasoline could meet approximately 19% of estimated 2022 gasoline demand of 132 billion gallons according to the EIA. Renewable
gasoline can be utilized within the existing 268 million internal combustion engine (“ICE”) vehicles in the U.S. without vehicle
modification. Additionally, according to the National Association of Convenience Stores’ “The US Petroleum Industry Statistics
Definitions,” there are over 145 thousand gas stations nationwide. Our renewable gasoline will be able to utilize essentially all
of the existing fossil fuel gasoline distribution and retailing infrastructure, making our renewable gasoline a drop-in solution that
does not require a change in consumer behavior.
Based
on the Fuel Institute’s “Life Cycle Analysis Comparison, 2022,” a single conventional ICE vehicle is accountable for
66 tons of CO2 over a 200,000-mile life, which includes 5 tons of CO2 generated from the manufacturing process, 12 tons of CO2 generated
from the production and processing of the oil and gasoline fuel used in the vehicle and 48 tons of CO2 generated from vehicle emissions.
Intermediate estimates that an ICE vehicle utilizing renewable gasoline would be accountable for 28 tons of CO2 over a 200,000-mile life,
which includes five tons of CO2 generated from the manufacturing process, negative 25 tons of CO2 from the production of the renewable
gasoline fuel used in the vehicle and 48 tons of CO2 generated from vehicle emissions. As a result, an ICE vehicle running on renewable
gasoline is projected to emit approximately 57% less CO2 than the same vehicle running on traditional hydrocarbon-based gasoline.
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Competition
Our
traditional competitors in the renewable fuel market include companies in the incumbent petroleum-based industry, as well as those in
the emerging renewable fuels industry and others selling carbon credits as a commodity. Our direct competitors are limited. There are
only two other companies of which we are aware that also have their own technology to convert syngas into renewable gasoline: ExxonMobil
Corporation (“Exxon”) and Haldor Topsoe (“Topsoe”). Although Exxon’s chemistry process is similar to Intermediate’s,
Exxon has historically focused on larger scale projects and markets. Topsoe, though larger than Intermediate, only licenses its technology
and processes to others and does not produce renewable liquid hydrocarbons.
We
believe our technology, scale, and development capabilities are the competitive strengths that differentiate us from our competition.
Utilizing biomass through a gasifier to produce syngas, our proprietary STG+® process can efficiently and economically convert syngas
to gasoline. Intermediate plans to design its facilities to use modular construction and to operate at a scale that makes the use of
renewable feedstocks viable. We believe that when using biomass as a feedstock, our ability to design facilities on a smaller scale gives
us a competitive advantage, because we are able to deploy equipment to the feedstock rather than being required to build a large central
facility. The economies of scale that may benefit a larger facility we believe are lost with the increased logistics and materials handling
costs that come with the larger supply radius required to feed a large-scale facility. Intermediate’s process remains in a vapor
phase throughout resulting in a lower piece-count and, therefore, lower capital cost.
Research
& Development
Primus
invested over $110 million in developing and patenting its technology and conducted over 10,500 hours of testing at our Hillsborough,
New Jersey demonstration facility. Since we acquired Primus’ assets, our team has invested approximately $5 million to design the
chemical processes and systems required to produce an acceptable synthesis gas from renewable feedstocks and plans to invest $3 million
to engage a new FEED study, which is expected to take approximately eight months to complete. Any future FEED studies we intend to commence
we anticipate will focus on the conversion of waste, biomass and other biogenic-feedstocks for future facilities we believe could require
an estimated $100 to $200 million of additional capital expenditures per facility and take 18 to 24 months to construct. Our R&D
team is also in the process of developing additional process technology to produce middle distillates, including diesel.
Raw
Materials and Suppliers
We
plan to use renewable feedstocks, such as biomass and MSW, as well as natural gas (including synthetic natural gas) and other feedstocks
to produce our renewable gasoline. We plan on contracting with various suppliers for renewable feedstocks, and intend to work with other
commercial waste companies, agricultural industry participants and landowners to source our renewable feedstocks and maintain an established
supply of product inputs. Additionally, to lower feedstock costs and maximize the ease of access to sufficient feedstock volumes for
commercial production, we intend to develop future commercial production facilities in locations near biomass and MSW, natural gas or
other feedstock sources. We do not expect to be dependent on sole source or limited source suppliers for any of our raw materials or
chemicals. Additionally, we expect to rely on various suppliers for the catalysts we use in our STG+® process. We do not expect to
be dependent on a sole source for our supply of catalysts.
Human
Capital Resources
As
of December 31, 2022, we had five full-time employees, engaged six consultants on a part-time basis and one consultant on a full-time
basis. Our workforce is mostly concentrated in the Texas and New Jersey regions. We have a seasoned leadership team with over 100 years
of cumulative experience in the renewables or a functionally equivalent industry. Our management team places significant focus and attention
on matters concerning our human capital assets, and is focused on expanding our diversity, enhancing capability development and succession
planning. Accordingly, we regularly review employee development and succession plans for each of our functions to identify and develop
our pipeline of talent. To date, we have not experienced any work stoppages and consider our relationship with our employees to be in
good standing.
Customers
With
RBOB as our product, we are able to sell to a broad range of potential counterparties including refiners and importers of gasoline, distributors,
blenders, retailers and trading organizations, among others. We intend to enter into offtake agreements with creditworthy counterparties
with terms that are acceptable to lenders and us as support for our project financing.
Renewable
gasoline. We transitioned into the renewable energy industry after applying our STG+® technology to focus on renewable inputs,
expanding our potential customer base beyond the natural gas sector and traditional gasoline consumers in this space. Our potential customers
will generally include companies obligated to purchase physical volumes of renewable fuel under the RFS program, such as refiners, blenders,
fuel distributors and retailers and marketers, as well as trading shops.
Carbon
credits. Expanding the application of our STG+® technology will also expand how we can create revenue. The value of our operations
will include carbon credits derived from converting waste and other bio-feedstocks into a single, finished fuel, which can have significant
value. For example, certain gasoline produced from renewable feedstock, such as biomass, qualifies under the RFS for the D3 RIN (a carbon
credit). Similarly, we expect that gasoline produced in this fashion will also qualify for various state carbon programs including California’s
LCFS. We anticipate that we will produce 1.5 RINs per gallon of gasoline, which can be sold alongside each gallon of renewable gasoline
as a separate commodity to customers who can sell the RINs later or sole into forward or futures markets.
However, as with other government programs the use requirements of
the RFS program and similar state-level programs are subject to change, which could materially harm our ability to operate profitably.
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Regulatory Environment
Demand for renewable fuel has grown significantly
over the past several years and is expected to continue to grow due in part to federal requirements for cellulosic biofuel volume obligations
through programs such as the RFS program, which was created under the Energy Policy Act of 2005 (the “Energy Act”), which
amended the Clean Air Act (“CAA”) and expanded through the Energy Independence and Security Act of 2007 (the “EISA”).
The EISA requires the use of specific volumes of biofuel in the U.S. and is aimed at (i) increasing energy security by reducing U.S. dependence
on foreign oil and establishing domestic green fuel related industries and (ii) improving the environment through the reduction of greenhouse
gas (“GHG”) emissions. Under the RFS program, transportation fuel sold in the U.S. must contain a certain minimum volume of
renewable fuel. See “Business — Regulatory Mandates and Governmental Funding” for more information. However, as stated
above, the RFS program is subject to change, including by modification or repeal by Congressional action or action by the EPA or the EPA
administrator. Similarly, state-level programs like California’s LCFS are also subject to change.
Social and Environmental Preferences and Investor
Pressures
The effects of climate change, including extreme
weather events and rising temperature and the increased health and socio-economic stability of at-risk populations, have emphasized the
need to reduce greenhouse gases and move toward reduced carbon energy solutions. Because of this, environmentally-conscious policies,
initiatives and businesses are growing in value and preference.
ESG investing has accelerated as institutional
investors shift their portfolios away from carbon-intensive assets. This shift in investor sentiment has caused many large integrated
energy companies to set decarbonization strategies and diversify into different forms of carbon-free and carbon-reduced energy.
Governmental Regulations
Our future operations are subject to stringent
and complex laws and regulations governing environmental protection and human health and safety. Compliance with such laws and regulations
can be costly, and noncompliance can result in substantial penalties. Laws and regulations that may have an impact on our business include:
●
The federal Comprehensive Environmental Response, Compensation and Liability Act (or “CERCLA”) and analogous state laws, impose joint and several liability, without regard to fault or the legality of the original act, on certain classes of persons that contributed to the release of a hazardous substance into the environment. These persons include the owner and operator of the site where the release occurred, past owners and operators of the site, and companies that disposed of or arranged for the disposal of hazardous substances found at the site. Responsible parties under CERCLA may be liable for the costs of cleaning up hazardous substances that have been released into the environment and for damages to natural resources. Additionally, it is not uncommon for third parties to assert claims for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants into the environment.
●
The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act (or “RCRA”), is the principal federal statute governing the management of wastes, including the treatment, storage and disposal of hazardous wastes. RCRA imposes stringent operating requirements and liability for failure to meet such requirements, on a person who is either a generator or transporter of hazardous waste or an owner or operator of a hazardous waste treatment, storage, or disposal facility. We anticipate that many wastes generated by our manufacturing facility or process will be governed by RCRA.
●
The federal Water Pollution Control Act (also referred to as the “Clean Water Act”) imposes restrictions and controls on the discharge of pollutants into navigable waters. These controls have become more stringent over the years, and it is possible that additional restrictions may be imposed in the future. Permits must be obtained to discharge pollutants into state and federal waters. The Clean Water Act provides for civil, criminal and administrative penalties for discharges of oil and other pollutants and imposes liability on parties responsible for those discharges for the costs of cleaning up any environmental damage caused by the release and for natural resource damages resulting from the release. Comparable state statutes impose liability and authorize penalties in the case of an unauthorized discharge of petroleum or its derivatives or other pollutants into state waters.
●
The CAA and associated state laws and regulations restrict the emission of air pollutants from many sources, including facilities involved in manufacturing biofuels. New facilities are generally required to obtain permits before operations can commence, and new or existing facilities may be required to incur certain capital expenditures to install air pollution control equipment in connection with obtaining and maintaining operating permits and approvals. Federal and state regulatory agencies can impose administrative, civil, and criminal penalties for non-compliance with permits or other requirements of the CAA and associated state laws and regulations.
●
The federal Endangered Species Act, the federal Marine Mammal Protection Act and similar federal and state wildlife protection laws prohibit or restrict activities that could adversely impact protected plant and animal species or habitats. Construction of facilities could be prohibited or delayed in areas where such protected species or habitats may be located, or mitigation may be required to accommodate such activities.
●
The IR Act provides for, among other things, a new clean hydrogen production tax credit, a new credit for sustainable aviation fuel, credits for the production and purchase of electric vehicles, expanding eligibility for and increasing the value of the carbon capture and sequestration credit, extending the biodiesel, renewable diesel and alternative fuels tax credit, funding biofuel refueling infrastructure and additional funding for working lands conservation programs for farmers. The IR Act could have many potential impacts on our business that we are continuing to evaluate, including new opportunities to access production tax credits, carbon sequestration credits, and other benefits, which could result in changes in the configuration of the plant, and could slightly delay commercial operation.
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We may be required to obtain certain permits to
construct and operate our facilities, including those related to air emissions, solid and hazardous waste management and water quality.
These permits can be difficult and expensive to obtain and maintain. Our ability to obtain these permits could be impacted by opposition
from various stakeholders. Once operational, our facilities will also need to maintain compliance with these permits.
In additional to compliance with environmental
regulations, we expect that our future operations will be subject to federal RFS program regulations. The EPA administers the RFS program
with volume requirements for several categories of renewable fuels. The EPA calculates a blending standard annually based on estimates
of gasoline usage from the EIA. Different quotas and blending requirements are determined for cellulosic biofuels, biomass-based diesel,
advanced biofuels and total renewable fuel. RINs are used to ensure that the prescribed levels of blending are met. The Energy Act’s
RFS regulations establish rules for fuel supplied and administer the RIN system for compliance, trading credits and rules for waivers.
We anticipate that our renewable gasoline and other future products will benefit from the RFS program. However, as stated above, the
use requirements of the RFS program or state programs could change, which may impact our products and harm our ability to operate profitably.
See “Business— Regulatory Mandates and Government Funding” for more information.
Regulatory
Mandates and Government Funding
Strong
increases in the federal requirement of cellulosic biofuel volume obligations position us to benefit as a producer of renewable gasoline.
The
RFS program was created under the Energy Act, which amended the CAA. The EISA further amended the CAA by expanding the RFS program. The
EPA implements the RFS program under the guidance of the U.S. Department of Agriculture and the Department of Energy.
The
RFS program is a federal policy that requires a certain volume of renewable fuel to replace or reduce the quantity of petroleum-based
transportation fuel, heating oil or aviation fuel. The four renewable fuel categories under the RFS are:
● biomass-based
diesel;
● cellulosic
biofuel;
● advanced
biofuel; and
● total
renewable fuel.
We
believe our renewable gasoline will qualify under the cellulosic biofuel category, which qualifies for D3 RINs.
The
2007 enactment of EISA significantly increased the size of the program and included key changes, including:
● boosting
the long-term goals to 36 billion gallons of renewable fuel;
● extending
yearly volume requirements out to 2022;
● adding
explicit definitions for renewable fuels to qualify (e.g., renewable biomass, GHG emissions);
● creating
grandfathering allowances for volumes from certain existing facilities; and
● including
specific types of waiver authorities.
The
CAA provides the EPA with the authority to adjust cellulosic, advanced and total volumes set by Congress as part of the annual rule process.
The
statute also contains a general waiver authority that allows the Administrator to waive the RFS volumes, in whole or in part, based on
a determination that implementation of the program is causing severe economic or environmental harm, or based on inadequate domestic
supply.
For
a fuel to qualify as a renewable fuel under the RFS program, the EPA must determine that the fuel qualifies under the statute and regulations.
Among other requirements, fuels must achieve a reduction in GHG emissions as compared to a 2005 petroleum baseline.
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The
EPA has approved fuel pathways under the RFS program under all four categories of renewable fuel. Advanced pathways already approved
include ethanol made from sugarcane, jet fuel made from camelina, cellulosic ethanol made from corn stover, compressed natural gas from
municipal wastewater treatment facility digesters and others. Additional requirements of the RFS program include:
● biomass-based
diesel must meet a 50% lifecycle GHG reduction;
● cellulosic
biofuel must be produced from cellulose, hemicellulose or lignin and must meet a 60% lifecycle
GHG reduction;
● advanced
biofuel can be produced from qualifying renewable biomass (except corn starch) and must meet
a 50% GHG reduction; and
● renewable
(or conventional) fuel typically refers to ethanol derived from corn starch and must meet
a 20% lifecycle GHG reduction threshold.
Lifecycle
GHG reduction comparisons are based on a 2005 petroleum baseline as mandated by EISA. Biofuel facilities (domestic and foreign) that
were producing fuel prior to enactment of EISA in 2007 are “grandfathered” under the statute, meaning these facilities are
not required to meet the GHG reductions.
The
EPA continues to review and approve new pathways, including for fuels made with advanced technologies or with new feedstocks. Certain
biofuels, such as our renewable gasoline, are similar enough to gasoline or diesel that they do not have to be blended, but can be simply
“dropped in” to existing petroleum-based fuels. These drop-in biofuels directly replace petroleum-based fuels and hold particular
promise for the future.
Obligated
Parties under the RFS program are refiners or importers of gasoline or diesel fuel. Compliance is achieved by blending renewable fuels
into transportation fuel, or by obtaining credits, RINs, to meet an EPA-specified Renewable Volume Obligation (“RVO”).
The
EPA calculates and establishes RVOs every year through rulemaking, based on the CAA volume requirements and projections of gasoline and
diesel production for the coming year. The standards are converted into a percentage and Obligated Parties must demonstrate compliance
annually.
Each
fuel type is assigned a “D-code” — a code that identifies the renewable fuel type — based on the feedstock used,
fuel type produced, energy inputs and GHG reduction thresholds, among other requirements. The four categories of renewable fuel have
the following assigned D-codes:
● Cellulosic
biofuel is assigned a D-code of 3 (e.g., cellulosic biofuel) or D-code of 7 (cellulosic diesel);
● Biomass-based
diesel is assigned a D-code of 4;
● Advanced
biofuel is assigned a D-code of 5;
● Renewable
fuel (non-advanced/conventional biofuel) is assigned a D-code of 6 (grandfathered fuels are
also assigned a D-code of 6); and
● The
production of our renewable gasoline is expected to qualify for a D-code of 3.
Obligated
Parties use RINs to demonstrate compliance with the standard. These parties must obtain sufficient RINs for each category in order to
demonstrate compliance with the annual standard. Some of the regulations regarding RINs include the following:
● RINs
are generated when a producer makes a gallon of renewable fuel.
● At
the end of the compliance year, Obligated Parties use RINs to demonstrate compliance.
● RINs
can be traded between parties.
● Obligated
Parties can buy gallons of renewable fuel with RINs attached. They can also buy RINs on the
open market.
● Obligated
Parties can carry over unused RINs between compliance years. They may carry a compliance
deficit into the next year. This deficit must be made up the following year.
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The RFS program’s four renewable fuel standards
are nested within each other. This means the fuel with a higher GHG reduction threshold can be used to meet the standards for a lower
GHG reduction threshold. For example, fuels or RINs for advanced biofuel (i.e., cellulosic, biodiesel or sugarcane ethanol) can be used
to meet the total renewable fuel standards (i.e., corn ethanol).
For cellulosic standards, an additional flexibility
is provided. Cellulosic waiver credits (“CWCs”) are offered by the Energy Act at a price determined by a formula in the statute.
Obligated Parties have the option of purchasing CWCs plus an advanced RIN in lieu of blending cellulosic biofuel or obtaining a cellulosic
RIN.
On November 15, 2021, the U.S. Infrastructure
Investment and JOBS Act was signed into law that includes $65 billion in funding for power and grid investments. This includes investments
in grid reliability and resiliency as well as clean energy technologies such as carbon capture, hydrogen and advanced nuclear, including
small modular reactors. Additionally, on December 8, 2021, President Biden signed an executive order mandating all electricity procured
by the government be 100% carbon pollution-free by 2030, including at least 50% from around-the-clock dispatchable generation sources.
The order also requires that federally owned buildings produce no net emissions by 2045 and that each federal agency achieve 100% zero-emission
vehicle acquisitions by 2035.
At the international level, the United States
joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change
in Paris, France, which resulted in an agreement intended to nationally determine their contributions and set GHG emission reduction goals
every five years beginning in 2020. In November 2019, plans were formally announced for the U.S. to withdraw from the Paris Agreement
with an effective exit date in November 2020. In February 2021, the current administration announced reentry of the U.S. into the Paris
Agreement along with a new “nationally determined contribution” for U.S. GHG emissions that would achieve emissions reductions
of at least 50% relative to 2005 levels by 2030. In addition, in 2021, President Biden publicly announced the Global Methane Pledge, a
pact that aims to reduce global methane emissions at least 30% below 2020 levels by 2030, including “all feasible reductions”
in the energy sector. Since its formal launch at the United Nations Climate Change Conference, over 100 countries have joined the pledge.
Recent Developments
The Business Combination closed on February 15,
2023. At the effective time of the Business Combination, among other things, each share of Class B common stock of CENAQ automatically
converted into shares of Class A Common Stock on a one for one basis, resulting in the issuance of 825,000 shares of Class A Common Stock
in the aggregate. In connection with the Closing of the business combination, we completed a private placement of 3,200,000 shares of
Class A Common Stock for gross proceeds of $32.0 million.
As of the Closing Date and following the completion
of the Business Combination, the Company had 9,358,620 shares of Class A Common Stock issued and outstanding held of record by approximately
28 holders, 22,500,000 shares of Class C Common Stock issued and outstanding held of record by 1 holder, and 15,412,479 warrants (consisting
of (i) 12,937,479 shares underlying CENAQ’s public warrants and (ii) 2,475,000 shares underlying CENAQ’s private placement
warrants) outstanding held of record by approximately 2 holders.
In connection with the consummation of the Business
Combination, CENAQ changed its name to “Verde Clean Fuels, Inc.” Our Common Stock is now listed on the Nasdaq Capital Market
(“Nasdaq”) under the symbol “VGAS” and public warrants to purchase the Common Stock at an exercise price of $11.50
per share are listed on the Nasdaq under the symbol “VGASW.”
Corporate Information
We were originally known as CENAQ Energy Corp.
On February 15, 2023, Intermediate, CENAQ and OpCo consummated the Business Combination, following the approval at the special meeting
of the stockholders of CENAQ held on January 4, 2023. In connection with the Business Combination, we changed our name from CENAQ Energy
Corp. to Verde Clean Fuels, Inc.
Our principal executive offices are located at
600 Travis Street, Suite 5050, Houston, Texas 77002. Our website is located at www.verdecleanfuels.com.
We furnish or file with the SEC our Annual Reports
on Form 10-K, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K. We make these documents available free of charge
at www.verdecleanfuels.com under the “Investors” tab as soon as reasonably practicable after they are filed or furnished
with the SEC. In addition, corporate governance information, including our corporate governance guidelines and code of ethics, is also
available on our investor relations website under the heading “Governance Documents.” Information on our website is
not incorporated by reference into this Annual Report on Form 10-K or any of our other filings with the SEC. The SEC also maintains
an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with
the SEC. The address of that website is www.sec.gov.
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