Applications years away: Oil industry watches developments in leading-edge field

Ian McKinnon
Financial Post

CALGARY - The foundation of a potentially multi-billion industry looks like rubberized plastic and feels something like a computer mouse pad.

In a small room at the back of a brick building in an industrial park in southeast Calgary, white lab-coated technicians wearing gas masks pour a slurry of grey material onto a table and spread it into a thin film that will be baked, placed in metal frames and bolted together to form the heart of a solid oxide fuel cell.

The plant, owned by Global Thermoelectric Inc., is part of an evolving industry long on both potential and uncertainty as it targets two of the biggest sectors of the economy - transportation and electrical power generation.

"Fuel cells as a mainstream technology are not going to have much impact until the end of the decade and that's when you get into the market potential of tens of billions," said Peter Tertzakian, a stock analyst who specializes in alternative energy. "From milliwatts to megawatts, one of the beauties of fuel cells is that they are fully scalable."

Led by Vancouver-based Ballard Power Systems Inc., Canadian firms such as Global Thermoelectric and Westport Innovations Inc., another Vancouver company, are in the vanguard of fuel cell development.

Government funding, experience with the energy industry and a vast and challenging physical landscape underly the emergence of a cluster of Canadian firms at the forefront of the technology.

There are several types of fuel cells grabbing headlines for their potential use in everything from mobile phones to powering automobiles. The dreams are still years away from commercial realization, but that hasn't stopped investors and companies from pouring billions into the non-polluting energy source.

Fuel cells generate electricity by combining hydrogen from a fuel and oxygen from the air. The byproducts of the chemical reaction, known for more than 150 years, are water and heat.

Commercial use of fuel cells for power generation in remote areas will likely hit the market within two years, followed in another couple of years by home heating.

The application generating the most buzz among consumers and investors, providing clean power for automobiles, is not likely to reach the market until 2004.

Even though it is years away from making a market-ready product, Ballard Power is the giant of the industry and a global leader in the race to turn what was once tomorrow's promise into today's reality. The firm, partly owned by Ford Motor Co. and DaimlerChrysler AG, is trying to perfect a proton exchange membrane to produce a fuel cell for cars and light trucks, a lucrative market estimated by one analyst to be worth more than US$325-billion over 20 years. A senior executive of DaimlerChrysler will be speaking today at the World Petroleum Congress in Calgary.

Standing in the shadow of Ballard has advantages and disadvantages for players such as Global Thermoelectric, which is following a different path by focusing on solid oxide fuel cells.

Mark Kryzan, an official with the firm, said Ballard's success in finding major partners and the dizzying rise in its stock price, which peaked at more than $210 per share in March before sliding to about $120, have opened doors for smaller firms.

"We like the way fuel cells in the last few years have become a very visible technology," he said. "If it weren't for that, we wouldn't be where we are today. But we're the dark horse and we have a very different take on how to create energy."

Global raised $25-million last November and the money is funding a new plant in Calgary that will allow the firm to begin commercial production, reducing the cost of its cells and making them more competitive with existing power sources.

Competition is fierce. Mr. Tertzakian, an analyst with Goepel McDermid Inc., estimated more than 650 firms, organizations and research centres are working on the non-traditional energy source.

The ability to scale the technology, by adding or subtracting stacks of fuel cells, gives it a broad range of applications. High oil prices and skyrocketing natural gas prices, pushing energy costs to their highest levels in 16 years, are also spurring developments.

"People are looking for the next big thing. I believe the changes in the energy world are going to be a big thing going forward," Mr. Tertzakian said. "If the energy prices stay as high as they are, they will accelerate the agenda towards alternate fuel solutions."

The future appears bright but numerous challenges remain. The biggest obstacle is price, with fuel cells costing about 10 times that of some existing power sources. The hurdle is expected to drop as mass markets develop, as has happened for computers, video machines and CD players.

Wayne Hartford, president of Houston-based Energy Ventures Inc., said researchers, appliance manufacturers and marketers need to work with consumers to ensure opportunities are not squandered because of competitive considerations or professional jealousy.

"Most of the major groups are very competitive with each other and they won't share," he said. "We believe that consortia, which the automobile industry is starting to understand, are going to be the things that bring us forward."

Integrated home co-generation units, where the heat from the fuel cells is used to heat water, means changes to the electrical grid system. Developing an infrastructure to distribute pure hydrogen, which would minimize greenhouse gas emissions and other pollutants, would cost hundreds of billions.

The question of government subsidies, either direct or indirect through tax incentives or procurement policies, has environmentalists watching closely. Robert Hornung, director of climate change for the Pembina Institute in Ottawa, said fuel cells can play an important role in Canada's efforts to reduce emissions believed to be contributing to global warming.

"Governments need to take a much broader perspective when they're talking about fuel cells than they are currently doing. They have to recognize that fuel cells by themselves are not necessarily a panacea and you have to look at the question of feedstocks," he said. "They have to make sure they're looking at the total life-cycle impacts of these systems."

The huge price tag for a pure hydrogen infrastructure is the reason many firms and individuals are betting that gasoline or methanol, derived from natural gas, will serve as a bridge fuel over the medium term.

It makes sense, therefore, for delegates at World Petroleum Congress to focus some attention on fuel cells, since the technology could greatly affect their future.

But investors should not worry that producers, refiners and marketers will soon be out of business, Mr. Tertzakian said.

"Is it going to affect the traditional hydrocarbon business any time soon? The answer is: 'No, it's not,' because one of the principal reasons is that the adoption of fuel cells will generally be dragged out over several decades."