‘Coal-To-Liquids’ Promise Big Profits, But Obstacles Remain

Thanks to the rapid rise in the price of oil, projects to develop synthetic fuels have stopped waiting for U.S. government funding and are moving forward.

As the government’s largest consumer of fossil fuels, the Air Force announced its intent to increase the use of synthetic fuel, which is mainly made from coal. So far, however, the military’s coal-to-liquids efforts have slowed down. Congress failed to authorize much of the needed funds and the White House has yet to allow the Air Force to enter long-term contracts with synthetic fuel manufacturers.

Private industry, on the other hand, has made strides in launching coal-to-liquids projects and in capturing and recycling carbon dioxide.

Coal-based fuel entrepreneurs will still require governmental guidance, and will need to agree to invest in carbon capture technologies that will make the conversion of coal into liquids no more emitting in carbon than current oil refining processes.

Companies believe that the investment in carbon capture technology can be recouped by recycling the byproduct for downstream domestic industries. This is contrasted with the costly sequestering of carbon into the ground, an option that will be both economical and safe only for oil and gas drilling and coal mining operations.

Coal-to-liquids programs can serve as the best vehicle for accelerated development of carbon capture, storage and recycling technologies, even without a large Air Force contract as the main driver. A barrel of synthetic fuel can be made for about $40, and capture might add another $20.

Even after the price of a barrel of oil comes back down — Lehman Brothers is predicting about $95 by end of the year — synthetic fuels will remain a sound investment.

Energy entrepreneurs are now free to stop waiting for Congress and instead they are lining up billions of dollars in financing to build coal-to-liquids plants to supply the commercial market. And the Pentagon may soon be able to buy synthetic fuels this way.

Baard Energy announced earlier this year that it has raised private funds and won state assistance to build coal-to-liquids and biomass plants in Ohio. Baard was one of the companies maneuvering for an Air Force contract but lost patience with Washington. Another firm, DKRW, associated with Arch Coal, announced it will build a coal-to-liquids plant in Wyoming that will make gasoline and jet fuel.

The Crow Nation announced it is partnering with an outside investor to build a coal-to-liquids plant on its lands in Billings, Mont. Those three projects alone represent private investments of almost $15 billion. Other coal-to-liquids plants already have been announced for Canada, India and China. Royal Dutch Shell and the South African SASOL are behind many of the projects abroad.

Hawkins & Doyle, a venture capital firm, known for its “clean” technology research, reported this summer that even though coal is the largest source of carbon dioxide emissions, it will remain a key fuel for generating electricity.

As a result, a “massive investment opportunity” exists as new technology is developed and employed to make coal-fired power plants run cleaner, and as coal starts to be used to make liquid fuels in support of nations’ quest to be energy independent,” the company said. The firm foresees a $170 billion market for clean-coal utility plants and atmospheric control technology in the next two decades, and also predicts a $60 billion annual “unconventional” liquid fuels market, primarily from coal, developing by 2030.

Energy entrepreneurs with outside financing, as well as cash-flush energy companies that can self-finance, still face at least two major challenges. First, they will need to get their potential legal liabilities mapped out under a new regime that all of them recognize. Second, they will need to guarantee Washington that they can produce liquids from coal without emitting more CO2 than liquids from crude.

Some entrepreneurs and executives believe that growing worries about an economic downturn will force Congress to suspend environmental controls. That is not likely. Even with a severe economic downturn in part precipitated by high energy prices, Congress will still not throw all environmental prudence to the winds. The coal-to-liquids industry will have to promise to capture carbon so as to be no more emitting than the crude oil refining industry, in exchange for a new liability regime.

Coal-to-liquids promoters are adamant that Washington provide a safe harbor for any plant to be shielded from new environmental regulations or lawsuits. This would be the rough equivalent to what existing oil refineries have now — the last ones were built 30 years ago. Without such guarantees from the federal government, investors will balk.

Even if those liability issues are solved, the industry still faces other problems. One key question is which particular technology should be funded. Carbon technology companies’ stocks are currently undervalued because Wall Street analysts believe that under any “cap-and-trade” scheme Congress is likely to approve, CO2-emitting firms will opt first to use free carbon offset permits, and then buy them at auction, before they invest in carbon management technologies. Carbon permits will sooner or later get as expensive as carbon technology.

At that point, the next challenge will be what to do with all the captured carbon. Many in government and industry have assumed that storage in the ground will be the main, if not only, way to handle the mountains of carbon captured. The precedent comes from oil drillers’ recycling of CO2 released from wells. They re-inject the gas into wells in order to make the remaining oil more liquid and come up more easily. It’s also not as corrosive on the equipment as using seawater. But cost and safety reasons will prevent sequestration from serving as a solution for almost everyone else in the country, especially coal-burning utilities that are located near population centers. Not to mention that with the oil price spike, many companies that might have lent their retired oil fields are now re-exploiting them and turning away outside sequestration projects.

Sequestering CO2 is truly an ambitious task. The average 500 megawatt coal-burning utility emits hundreds of million pounds of CO2 a month. There are more than 600 such plants in the United States. If coal-to-liquids promoters expect the federal government to pay for all this, they are probably mistaken.

Earlier this year the Bush administration cut back on spending on the “FutureGen” program, which should be a warning to industry that government is not going to bank projects. And the same forces that succeeded last year in blocking much of the funding for coal-to-liquids research and development will have comparatively easy going convincing Congress that the hundreds of billions, if not maybe trillions of dollars needed to compress, cart and bury CO2 can be better spent on accelerating development of renewables such as solar and wind energy, and spending the rest on healthcare and paying down the national debt.

Even if sequestration gained support at the national level in Congress, it is  likely that many communities across the nation, as soon as they learn that their local geology has been identified as a place to bury millions of tons of CO2, will rise up and block the effort.

If the coal-burning and coal-transforming industries want a solution for the billions of tons of carbon they will have to capture, they should seek self-financing and safe technological solutions.
One option is to recycle the carbon for use by domestic industries. Perhaps the safest way to deal with captured CO2 gas will be to convert it into a solid. A solid will also not threaten communities when the first truck transporting carbon inevitably jack knifes and dumps its load. If it’s liquid CO2 under pressure, it will turn, probably explosively, into gas if the tank leaks, and people and animals close by will be asphyxiated. If it’s solid, it’ll only be an inert powder on the roadway.

One enterprising Texas utility has already invested in a small company, Skyonic, which makes a technology that mixes cheap and readily available sodium with CO2 to create sodium bicarbonate, or baking soda. In the Persian Gulf, a local company, Gulf Petrochemical Industries Co., has announced that Bahrain’s first fertilizer plant will capture carbon dioxide from flue gas and recycle the captured gas as feedstock in the production of urea and methanol. Another small U.S. company, Carbon Sciences, combines captured CO2 with cheap and readily available calcium to create calcium carbonate, a material used commonly in the construction industry.

The construction industry is one of the few industries whose appetite for materials is large enough to make a lot of the recycled carbon disappear.

The coal industry has a long history of providing fly ash to the cement industry — a form of recycling that involves electrostatic capture of dust in combustion gases and use of that dust in making cement bricks.

In theory, there are simply too many potential uses for recycled carbon. As transportation costs for raw materials mined outside the United States rise, industries that use some form of carbon as an input will be increasingly tempted to redirect their purchases to domestic carbon capture recyclers. The cheaper recyclers make their carbon products, the more business they’ll take from the raw material dealers.

One concern is whether carbon “cracking” — the process whereby heavy hydrocarbons are broken down into simpler molecules — and recycling will eat up more energy than capture by itself, or whether more fossil fuels will be burned in order to power the cracking. A solution to that would be the development of solar-powered cracking of carbon — or artificial photosynthesis.

CO2-free electricity from nuclear power can also be used to crack the CO2 and cover the shortfall as solar power is scaled up. Eventually solar-powered cracking of CO2 will neither reduce energy outputs at coal-burning plants, nor add to costs that might make coal-based fuels non-competitive with liquids from crude.

One major obstacle to the development of this carbon recycling industry is the emergence of laws that codify the social stigma of carbon. California workplace regulations already list CO2 as a “hazardous substance,” given the risks it poses to workers in confined spaces. The U.S. Supreme Court recently held that CO2 is a “pollutant” that can be regulated by the Environmental Protection Agency. 

If Congress ever tries to combine both findings and succeeds in designating carbon a hazardous waste, the carbon recycling industry will be doomed. Make carbon an official hazmat and the coal burning and transforming industries alone will need a new Yucca Mountain of their own every week. Carbon can be safely regulated as a pollutant without it being turned into a massive burden for society and the economy.

Even without an Air Force contract acting as the main stimulus, coal-to-liquids can lead the way for new carbon management technologies, given its promise of large profit margins.                                             

Michael G. Frodl, Esq. is co-founder and chairman of the Forum for Environmental Law, Science, Engineering and Finance (www.FELSEF.org).

Topics: Energy, Air Force News