Rice Acquisition Corp II: A JV Aiming To Be The World's Largest Clean Energy Supplier

Sakorn Sukkasemsakorn

Rice Acquisition Corp II (RONI) is a joint venture between several world-class companies that see the opportunity to develop a new US technological innovation into the most important energy company in the world. The Rice Brothers are bringing together Baker Hughes (BKR), Occidental Petroleum (OXY) Constellation (CEG), and smaller partner 8 Rivers with a plan to replace the world's base energy generation with new zero-emission LNG fuelled power stations. They are targeting a market with more than $1 quadrillion of value and seem to believe they can win all of it.

The Rice brothers have a history of making big promises and delivering. They have repeatedly made significant returns for their investors. They have made a material difference to my wealth, including a 250% return last year on my investment in Rice Acquisition Corp I (Archae Energy which they sold to BP). Rice Acquisition Corp II is their second SPAC and follows their other ventures, Rice Energy, Rice Midstream partners, and EQT.

I wrote about RONI when the deal to merge with NET Power was announced, we have since had the pipe presentation, and I present a more detailed view of the company and its prospects in this article.

8 Rivers invented a utility-scale natural gas-powered electricity generator that has zero emissions and operates at a low cost. The intellectual property for this invention is the source of the value of RONI.

It is a closed-loop cycle involving seven steps. The diagram below from the PIPE presentation shows the entire process.

The NET Power system ( (PIPE presentation))

Firstly it separates pure oxygen from the air, a crucial step; it means that only natural gas and pure oxygen enter the closed loop. Combustion generates heat water and high-pressure CO2, which drives the turbo expander to generate electricity. After water separation, the pure CO2 goes through a compressor, meaning it can go directly into a high-pressure pipeline for storage or sale.

Nitrogen and Sulphur Oxides are produced and released in conventional LNG power stations as emissions during combustion. Traditional Natural Gas powered generation sites must use carbon capture technology to reduce emissions. Carbon capture is expensive and only 90% efficient at best.

The entire NET Power system is enclosed; nothing is released into the atmosphere. That is the USP and the value of the system.

The business plan is a licensee model. RONI will provide a license to use the patented intellectual property, design, and engineering support. Major shareholders Oxy, BH, CEG, and 8 Rivers will be preferred equipment suppliers and operators.

In return, RONI will receive license fees (detailed below) and expects every utility-scale project to deliver a total Net Present Value of $65 million. (PIPE)

RONI expects the following timeline for developing the average site and paying license fees.

Year 1:

2 months feasibility study

8 Months Front End Engineering Design (FEED) $5 million License fee due

2 Months Design and Procurement $5 million License fee due

Year 2:

6 Months of continued Design and Procurement

6 Months Construction $10 million License Fee due

Year 3:

6 Months of continued construction

3 Months of startup and testing

3 Months commissioning $10 million License fee due

Year 4- Year 30: Operational site $5 annual plant loyalty fee.

For the average site, RONI expects commissioning to be complete within months 32- 36. The Rice team has significant experience in building this type of facility, and it is my experience, as a long-term investor in their businesses, that they are accurate with their forecasts and often develop sites ahead of target time frames. (see this article Archae Energy: Grade A for execution)

This licensor business plan will be very asset-light. Margins will be very high. RONI has guided to annual costs of $50 million when fully scaled with minimal capex (PIPE).

If RONI can sell five licenses yearly for ten years, then year 10 EBITDA should come in at $300 million. 30 Licenses a year for ten years would lead to an EBITDA of $1.8 billion in year 10.

Danny Rice will take over as CEO; he was previously CEO of Rice Energy (sold to EQT for $8 billion) and a board member of Rice midstream partners (sold for $2 billion) and Archae Energy (sold for $4 billion). Every business he has been involved with has been a big win for shareholders. Kyle Derham, a partner in the Rice Investment Group, joins him. The senior managers from NET Power are all staying on after the business combination.

The team will be responsible for developing sales and coordinating with the other stakeholders.

OXY is one of the world's largest transporters and consumers of CO2; the division OLCV aims to deliver net zero oils, chemicals, and concrete by utilizing their existing CO2 infrastructure. They are developing techniques to remove CO2 emissions from the atmosphere and industrial settings. OXY is both storing CO2 underground as well as looking to utilize it to create products like low-carbon oil and ethylene.

The OXY website covers many of their initiatives and mentions the partnership with NET Power saying that they are involved in scaling this zero-emission technology.

In the latest annual report Oxy said:

Leveraging Occidental's carbon management expertise, OLCV primarily focuses on advancing carbon removal and CCUS projects, including developing and commercializing DAC technology. OLCV also invests in third-party entities that are developing technologies that advance other low-carbon initiatives, including NET Power, a clean energy technology company.

OXY was already a significant shareholder in NET Power and has provided $100 million of additional funding in this round, equalling the Rice family's investment. (PIPE)

OXY appears heavily committed to CO2 reduction. Their website landing page has a section called "Mileposts on our journey to net zero" it highlights three projects, all of which are a good fit for the RONI venture.

In the Q4 2022 earnings call, CEO Vicki Hollub discussed the company's deep inventory and low decline asset base. She talked about the progress the company was making to deliver a low-carbon future which she said was vital to the company's sustainability. In her opening remarks, she discussed the beginning of site development on the first DAC site. She said:

….executed several exciting agreements to sell carbon dioxide removal credits to prospective purchasers and industry -- diverse industry sectors. We also secured over quarter million acres of land or approximately 400 square miles to develop carbon sequestration hubs.

She continued with:

In December, Oxy participated in the recapitalization of NET Power. This is a technology that generates emission-free power generation and has the potential to accelerate emissions reduction efforts in our existing operations and to supply electricity to our direct air capture plants and sequestration hubs. Ultimately, NET power could be an important emission-free power generator anywhere that has access to natural gas.

Direct Air Capture: (DAC)

OXY has a subsidiary 1PointFive, focused on carbon capture along the Gulf Coast 1PointFive is building a facility that will capture greenhouse gasses emitted from refineries and chemical plants and plans to store 1.2 billion metric tons of carbon dioxide at the East Texas Hub. A pipe network will carry captured CO2 from emitters to the storage facility. The project is due online in 2026.

OXY hopes to build over a dozen DAC plants spending between $200 and $600 million on DAC projects. The first site is now due to open in Mid-2024. (q4 earnings)

The DAC sites will require substantial electricity, and it would be almost pointless to use CO2-emitting technology to do this. Without a reliable source of zero CO2 energy, the whole DAC project is nonsense. There are very few options for OXY to make this a success, and it appears they believe the NET Power solution is correct. They have committed significant resources and have given a lot of webspace/ management time, and earnings call time to discuss the project.

OXY will be responsible for CO2 offtake and infrastructure in the RONI venture. They will use generated electricity to power their Direct Air Capture plants and provide Natural Gas feedstock where they have the infrastructure in place.

BKR will act as an OEM to build the critical CO2 turboexpander and all necessary pumps and compressors. They will also offer maintenance and services to potential customers.

Baker Hughes invested cash and equity into NET Power in 2022. They have an installed base of over 13,000 gas turbines and compressors worldwide. They have signed an agreement to develop and deliver the commercial combustor and Turboexpanders (PIPE), crucial to the NET Power system, which should enter the development stage in 2023 and begin industrial-scale testing at the NET Power Sen 1 site in 2024.

Baker Hughes will be the preferred supplier for much of the mission-critical technology for the worldwide NET Power sites. Baker Hughes stands to gain 19.5 million shares as part of the joint development agreement and a further 2.1 million performance-based bonus shares.

From the earnings call Q4:

we continue to develop our portfolio of new energy technologies. We've been particularly active over the last few years acquiring and investing in multiple new technologies around Hydrogen, carbon capture, clean power and geothermal. We are now transitioning more towards the incubation of the existing portfolio. This will enable our new energy portfolio to achieve its full commercial potential with a particular focus on high impact technologies like NET Power and Mosaic.

Constellation is a major electricity generator owning around 15 Nuclear sites in the US as well as 12 oil-fired power stations and 10 Natural gas power stations. It also operates significant renewable energy plants, including the Antelope Valley solar farm, three hydro facilities, and 27 wind-powered projects-a rough count of 35,000 megawatts of power generation.

From the Constellation website:

Constellation is committed to achieving 100 percent carbon-free electricity and a 100 percent reduction of operations-driven emissions by 2040. We also plan to provide 100 percent of our large business customers with customized data this year to help them reduce their carbon footprints.

Constellation is pursuing this goal from more than one side. They operate Nuclear Power Generation sites and have recently started production of Hydrogen at a 1-megawatt Nuclear site. Joe Dominguez (president and CEO) said:

Hydrogen will be an indispensable tool in solving the climate crisis, and Nine Mile Point is going to show the world that nuclear power is the most efficient and cost-effective way to make it from a carbon-free resource,

The RONI venture is not as central to Constellation's plans as it is to the other partners. However, they will still likely be significant customers of RONI. Constellation owns and operates power stations. It will likely be far easier to obtain permission to build a zero-emission NET Power facility than to build a Nuclear power station. The economics of the NET Power station is far superior, especially if Natural gas and CO2 storage are already available in the vicinity.

Constellation will develop, build, and own power plants. They already operate the La Porte demonstration site and will offer operational services to new customers.

Constellation first invested in 2014 and has operated all test sites; they are investing a further $5 million in the PIPE.

This private company was the inventor of the Allam Cycle technology. It owns numerous patents on the technology available by following the link. They remain shareholders and will continue to develop adjacent technology to improve the NET Power offering broadening its market.

8 Rivers first invested in NET Power in 2010 and will invest an additional $5 million in the pipe.

The world's governments are making a concerted effort to reduce carbon emissions. Solar and wind energy produces zero-emission energy but not when it is stored in batteries before use. Solar and wind can never be relied upon for 100% of energy use. 24-hour reliable base load electricity production is needed everywhere. Electricity demand is growing, and the electrification of transport will only increase this. It is hard to see any circumstances under which the world will need less energy. Power stations have a limited life span; they all have to be retired at some stage, and government incentives plus public pressure is accelerating coal-fired stations' retirement.

The immediate opportunity for NET Power is to be the go-to replacement for coal and gas-powered stations as they are retired from service.

Utilities plan to shutter 51 GW of coal power from 2022 through 2027, according to S&P Global Market Intelligence analysis. But in 2028 alone, retirements will jump by 23 GW, and that doesn't include the retirements of the 1,700-MW Conemaugh and 1,700-MW Keystone coal-fired power plants in Pennsylvania that were reported by media.

Source More than 23 GW of coal capacity to retire in 2028 as plant closures accelerate

Each NET Power plant is 300 MW, so the US TAM to replace coal-fired stations in the next decade looks like (51,000+23,000+1,700+1,700)= 77,400 MW or 258 NET Power stations with a PV of $16.8 billion.

RONI gives a compelling case that the TAM is significantly larger than this. They believe all of the existing Gas and Coal power stations in the US will need to be replaced to meet the new environmental targets by 2050.

Although gas power stations are far cleaner than coal, they are not clean. Total emissions from the US natural gas power stations are now higher than those from coal-powered stations. The technology to sequester CO2 is expensive and not feasible in many respects. It does not capture 100% of the CO2, and these power stations emit NOX and SOX, which harm public health.

If RONI is correct and the entire US baseload electrical supply needs to be changed, then that would be equivalent to 1,338 NPWR plants giving $87 Billion of PV. (PIPE)

The current base load production worldwide is equivalent to 5860 Net power plants giving a TAM of $381 billion.

Consulting firm McKinsey expects electricity use to double by 2050. They believe renewables will take the lion's share of this increase as the world aims for zero emissions. However, the NET Power solution has zero emissions at a fraction of the cost. With the infrastructure already in place to provide Natural Gas for the next 75 years, the lower price and small footprint NET Power plant may have an advantage.

Adding all of these figures, the worldwide replacement of gas and coal-fired stations plus a doubling of demand gives a total TAM of $1 quadrillion (the first time I have ever written quadrillion. It stands for a thousand trillion in the US system). The RONI PIPE presentation (slide 26) came to the same conclusion. However, they used different sources to get all of their data.

The two risks are obvious:

We have a clear timeline for the next three years which will show us the truth.

(slide 30 PIPE) SN1 is a full-scale 300MW plant being developed by RONI and its shareholders. FEED will start in Q1 2023; construction will begin in Q3 2024, with commissioning targeted for Q3 2026. This first project will prove if the system works, how efficient it is, and how realistic the RONI timeline presented earlier is for developing these sites.

RONI has five more sites under development; three are in the US, one in the UK, and one in Germany.

The UK plant "Whitetail" has entered the FEED stage, is supported by the UK Government, and is being developed by 8 Rivers in collaboration with the Singapore-traded company Semcorp group. The development will be on an existing Semcorp site and store its CO2 under the sea.

The German plant will use two 300MW plants to provide clean energy to produce Hydrogen and supply local businesses in the port of Willhelmshaven. FEED should begin later this year, and energy production in late 2006. Engie (OTCPK:ENGIY) is involved with this sight and may be a source of significant future orders.

8 Rivers is developing the three US sites in cooperation with local agencies, they are covered on the 8 Rivers site but without specific dates.

These six sites will answer the does it work question, and we should have definitive proof sometime in 2006.

It is clear from the earlier discussion that OXY intends to buy to power their DAC sites; however, we need to see orders and license fees paid to have definitive proof here. The first license fee is due during the FEED stage, sometime between months three and eight after an agreement. Although RONI has not presented a timeline for the first income or given any details about ongoing negotiations, I hope to see the first income recorded in Q4 2023 or Q1 2024.

The quality and size of the companies involved in this venture and their obvious need for a low-emission solution to electricity generation led me to be slightly less cautious than usual. It is highly speculative, as with all these pre-revenue big idea plays. It could all come to nothing or be a long, painful ride like most other SPAC experiences. However, the Rice brothers have a strong history of making significant returns for their investors.

This could be a very profitable opportunity if they get it right again. The chance to get in at the beginning of this venture is not one I am going to miss.

It is still early, and the first utility-scale site will not be operational before 2026. We should see income well before then if RONI manages to sell any sites.

If you follow my work, you will already have seen that I have high-risk tolerance and look for outsize gains from these speculative plays.

I will update critical developments in the comments section as they arrive.

This article was written by

Analyst’s Disclosure: I/we have a beneficial long position in the shares of RONI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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