News 12 January 2009

First Oil Production from New Test Reactor

Spitfire Oil Limited (“Spitfire”or the “Company”) has produced the first oil from its new test reactor, designed to convert low grade coal to oil – a milestone for Western Australian (“WA”) technology development. This result brings one step closer the possibility of converting Spitfire’s current resource of 500 million tonnes of lignite at Salmon Gums into at least 200 million barrels of oil.

The Company expects to produce up to 20,000 barrels of oil per day from WA’s first low carbon footprint coal-to-liquids business, once the process technology is scaled to commercial levels.

“At 7.3 million barrels of oil per year, our proposed production facilities at Salmon Gums would make a significant contribution to Australia’s energy security and to employment and economic development in the Kalgoorlie-Esperance region,” said Spitfire’s Chairman Mr Mladen Ninkov. “At this rate, Spitfire will be producing over 150% of recent Western Australia onshore liquid hydrocarbon production and 6% of Western Australia’s total liquids production. The current resource of 500 million tonnes of lignite at Salmon Gums would also yield at least 200 million barrels of oil over its 25 year life, thereby increasing Western Australia’s current liquid hydrocarbon reserves by 20%.

“In addition to the energy security and trade benefits of substituting domestic for imported oil, Spitfire will be developing a home grown environmentally friendly Western Australian technology and knowhow, rather than purchasing technology licences from overseas. Ultimately, after having demonstrated the process in WA, we expect that subsequent overseas implementation of the technology would generate further benefit to the State.”

The Company has already invested nearly A$10 million in Western Australia through its technology development and drilling programs, including more than A$1 million spent on environmental studies.

“The common technology currently being used around the world to convert coal into oil is very energy intensive, producing very high levels of greenhouse gas emissions, and consuming large quantities of fresh water,” explains Spitfire’s CEO Mr Thyl Kint, referring to the method of gasifying coal and applying the Fischer-Tropsch process – best known for its application in South Africa.

“We have contracted with Curtin University of Technology in Western Australia to develop a pyrolysis process that operates at lower temperatures, resulting in a much lower carbon footprint.

“The pyrolysis process is not new, as it is a variation of the coal coking process which has been used for over 100 years and which is known to extract oils and gasses from coals,” Mr Kint said. “However, the major driver for further developing this technology for the purpose of producing oil from coal is to minimise the greenhouse gas emissions. We intend for our whole operation to be environmentally responsible. The technology we are developing will be compact with an environmental footprint that is much smaller than that of the much more complex conventional process. The low carbon emissions are a necessity as the Salmon Gums to Esperance region is geologically underlain by an extensive granite basement which precludes carbon sequestration.

“To place things in perspective, production of a barrel of useable fuel by the conventional gasification plus Fisher-Tropsch process would generate emissions four times higher than our pyrolysis process. In the context of the proposed Australian carbon Emissions Trading Scheme, at a price of A$25 per tonne of CO2, our process would incur a cost of about A$4.1 per barrel of produced oil whilst the more conventional process would incur a cost in excess of A$16.6 per barrel. In the absence of a nearby sequestration site, the scale of the greenhouse gas emissions from the conventional process also means that other offsets, such as tree planting, would be impractical.

“Further problems with the conventional gasification and Fischer-Tropsch process are its requirements for large quantities of fresh water not available in the region and the high temperatures of the process which are usually incompatible with the hyper-saline water which saturates the lignite available from the region.

“Because our process is less technologically complex and less energy intensive, both the projected capital and operational expenditures per barrel of oil will be significantly lower than for the gasification plus Fischer-Tropsch process.”
Mr Kint said the Company is close to completing an extensive year-long test drilling program at its tenements near Salmon Gums, which are located about 100 km north of Esperance. After recent relinquishments, Spitfire holds exploration licences over 368 square kilometres and in June 2008 applied for two mining leases covering 9,855 hectares. The tenements contain a large lignite (brown coal) deposit with an Inferred Resource calculated to the JORC code of 500 million tonnes of lignite which will soon be enhanced and brought to Indicated status.

Spitfire raised funds in July 2007. The Company estimates capital expenditure on the project up to fully operational capacity at around $1.3 billion (in 2008 dollar value). Its projected operational expenditure is $18/bbl of oil produced, with a breakeven oil price (generating a 9% return on capital) of $40/bbl.

Spitfire has had a laboratory built at Curtin University which houses a new test reactor, developed to assist the research required to scale the conversion process up to commercial quantities. Curtin University’s biomass conversion laboratories are also performing tests for the program whilst further test reactors and laboratory equipment are being considered.
“The research program must deal with a range of issues including materials handling, lignite de-watering (as it contains 55% water), process optimisation for most efficient outputs, and how to upgrade the oil generated by the process for use as fuel or feedstock,” Mr Kint said.

“We are pleased that Curtin University has secured Professor Chun-Zhu Li to lead the research. Professor Li, who recently joined the Curtin faculty from Monash University where he spent years studying Victoria Brown Coal, has carried out extensive fundamental research in various areas of energy science and engineering including coal pyrolysis. He is currently also leading a large project on biomass utilisation involving researchers in Australia, China, Korea and Japan as a part of the Asia-Pacific Partnership on Clean Development and Climate. In addition, with the input from Professor Li, it may be possible to design a process where a fraction of the process feed would be biomass in addition to the coal which would give the project a renewable dimension.”