ALTERNATIVE FUELS

Coal-to-liquids' prospects dim, but boosters won't say die

WHARNCLIFFE, W.Va. -- It's been two years since Sen. Joe Manchin (D) and other West Virginia politicians gathered near here to break ground for and sing the praises of what they said would be the first U.S. plant to turn coal into gasoline -- and create hundreds of jobs on a former strip mine near the Kentucky line.

Engineering and site preparation followed the pep rally, but there's not much to show for the effort here in Mingo County. Developers haven't yet locked up financing for a $3 billion plant they say won't be up and running until at least 2016.

"The details are much more time-consuming that we anticipated," said Randall Harris, technical director for TransGas Development Systems LLC's Adams Fork Energy project. "But we have so far not hit a roadblock."

The Adams Fork site is located on a former strip mine along a winding, hilly road deep inside Mingo County, near the border with Kentucky and within 100 miles of more than 100 coal mines. This is ground zero of the Appalachian coal fields.

But many question whether the coal-to-liquids effort is even on the road. The West Virginia project is one of several CTL proposals around the country struggling in the face of expanded stores of cheap domestic petroleum, heightened environmental scrutiny and increased focus on renewable sources of energy.

"The big problem is the large front-end cost to build the plant," said Burt Davis, associate director for clean fuels and chemicals at the University of Kentucky's Center for Applied Energy Research. "And the only way you can see building the plant is that you're going to have 20 to 30 years to pay for it, and nobody has been willing to take that risk in North America."

Another problem for CTL boosters -- who have for decades been pressing to expand uses for U.S. coal -- is the new abundance of cheap natural gas, which has encouraged some companies to switch their focus from turning coal into gasoline to turning gas into liquid transportation fuel.

TransGas' Harris, once a National Energy Technology Laboratory senior engineer, who is working to develop two other CTL sites in Kentucky, says that if more people knew more about coal-to-liquids technology, they would back the effort.

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"We are now focusing on the last of the detailed engineering in advance of placing fabrication orders," he said in a telephone interview. "We are talking with several international as well as domestic fabricators."

Money is an issue, he conceded.

"Financing of large projects is always challenging," he said. "The nailing creditable values of the three main factors -- feedstock, construction cost and off-take -- take the most time."

Harris' boss, TransGas CEO Adam Victor, started the company in 2005 but is a longtime energy entrepreneur based in New York City. In a previous life, he was a gold mine engineer in Africa.

Victor is also known for fighting with New York officials over wanting to build a power plant in Brooklyn. In 2005, he told New York magazine he was worth $100 million.

Along with the planned Mingo County plant, Houston-based DKRW Advanced Fuels LLC's Medicine Bow project in Wyoming's Carbon County is also among the most prominent CTL efforts.

Last year the company announced it had entered a construction contract with Chinese Sinopec Engineering Group. DKRW said the facility would produce more than 11,000 barrels of low-sulfur gasoline every day and create 400 full-time jobs.

"This project not only creates a bigger market for Wyoming coal," Sen. Mike Enzi (R-Wyo.) said last year, "it helps develop its most abundant energy source -- coal."

But early this year, the company saw its fortunes turn as repeated construction delays jeopardized a key permit from the Wyoming Department of Environmental Quality's industrial siting office. One Wyoming news outlet put that news under the headline "Hammer drops on DKRW."

"The division has sent DKRW a letter that they're not in compliance with their permit," Luke Esch, the state agency's siting administrator, said in a recent interview. "They disagree with us that they're out of compliance."

Esch said DKRW began construction for a short time in 2010 and again last year. He gave it until June 19 to submit updated construction-related documents.

"We required DKRW to submit an updated socioeconomic report to see how the local communities would be affected by this change in schedule," Esch said. "I've had no indication from DKRW that they don't intend to proceed."

DKRW did not respond to repeated requests for comment on its project.

Also failing to respond was Waste Management & Processors Inc., run by Schuylkill County, Pa., coal magnate John Rich Jr., who has been trying to built a Pennsylvania CTL plant for at least a decade (Greenwire, Sept. 3, 2008).

At one point the company, hoping to get funding from the Department of Energy, backed by Pennsylvania politicians from both sides of the aisle, said construction would begin in 2006. Last year the company said it sued critics who called the project a failure.

"As our company continues to obtain necessary commitments for this project, we can not allow our name to be slandered in a political smear campaign," Rich said in a statement.

'It's a big carbon dioxide factory'

Despite the trouble getting CTL off the ground in the United States, the technology has been used abroad since Nazi Germany deployed it during World War II to make up for petroleum fuel shortages. The Germans used coal for 90 percent of their jet fuel and 50 percent of their diesel.

South Africa is now the leader in coal-to-liquids production, with energy and chemicals giant Sasol Ltd. producing fuel from coal at its Secunda plant, known as the largest such facility on the planet.

With the United States' status as the world's second largest coal producer coupled with its long-term dependence on foreign sources of energy, many companies and politicians have for decades wanted to capitalize on CTL here.

The late Sen. Robert Byrd (D-W.Va.) used his clout as an appropriator to secure funds for CTL development in his home state. His push for CTL began during the Kennedy administration, and he continued to champion the effort until his death in 2010, historian and former Byrd staffer David Corbin writes in a new biography, "The Last Great Senator: Robert C. Byrd's Encounters with Eleven U.S. Presidents."

More recent CTL backers include President Obama, who introduced legislation as an Illinois senator along with retired Kentucky Republican Sen. Jim Bunning (Greenwire, April 10, 2007).

In 2011 Manchin and Wyoming Republican Sen. John Barrasso introduced the "American Alternative Fuels Act," which included a measure to promote coal use by the military.

Theirs and other related bills have faced skeptical lawmakers who worry about spending money on a potentially losing proposition.

And the Obama administration has sought to cut funding for CTL technology to focus on carbon capture efforts, coal gasification and making power plants more efficient.

Current federal spending levels for coal and coal biomass to liquids are under $5 million a year. Obama's latest budget request says, "This area of research is a low priority relative to other activities which are expected to yield greater public benefits."

But Department of Energy researchers say they haven't given up on the technology.

Jenny Tennant, a gasification leader for DOE's National Energy Technology Laboratory, said ongoing research on gasification can benefit CTL, too.

That's because while there is a way of turning coal directly into liquid fuel, under the more popular Fischer-Tropsch process, companies must first turn coal into synthetic gas or syngas.

Grim predictions

Even with federal, state and private efforts, the U.S. Energy Information Administration said late last year that it projected the startup of the first CTL plants in the United States to be in 2023, "with penetration of the technology far more modest" when compared with previous estimates.

A peer-reviewed study by Sweden's Uppsala University senior lecturer Mikael Hook questioned the prospects of CTL around the world, and particularly in the United States.

"The economic analysis shows that many CTL studies assume conditions that are optimistic at best. In addition, the strong risk for a CTL plant to become a financial black hole is highlighted," he wrote in a paper presented last fall at the Pittsburgh Coal Conference.

"It is unrealistic to claim that CTL provides a feasible solution to liquid fuels shortages created by peak oil," Hook added. "At best, it can be only a minor contributor and must be combined with other strategies to ensure future liquid fuel supply."

The International Energy Agency in its most recent coal market report noted that China has several CTL projects in various stages of development. Sasol is involved in CTL projects there and in India.

"China has actively pursued coal liquefaction technology since the 1950s," said the report. "Throughout this time, China has treated coal-to-liquids as a research and development topic, yet this mindset has changed over the last two decades as CTL moved from laboratories to large-scale demonstration projects."

However, the IEA report also said that China's National Development and Reform Commission had told local governments to hold off on approving CTL projects, especially smaller ones.

During a recent briefing in Washington, D.C., IEA analyst Laszlo Varro was pessimistic about CTL. "Essentially, energy policy needs to replicate a war blockade," he said. "The only country that has meaningful investments in coal to liquids is China."

Varro added, "It's a big carbon dioxide factory."

Coal against petroleum

Among the major impediments to CTL efforts in the United States are development costs, intense water need and emissions of heat-trapping greenhouse gases.

The question has been whether getting liquid fuel from coal creates fewer emissions than through drilling oil.

CTL boosters say that with carbon capture and sequestration technologies, a CTL plant can meet or outperform petroleum as a raw material for liquid transportation fuel. Adding biomass to the process, they say, can make it more environmentally friendly.

"It was found that diesel fuel can be produced from coal that has a lower life cycle greenhouse gas emissions profile than conventional petroleum-derived diesel fuel on a well-to-wheels basis," DOE said in a 2011 report.

The report adds, "This requires the sequestration of carbon dioxide produced at the facility, and methane mitigation practices may be required in the case of certain bituminous coals which are particularly high in methane content."

TransGas Development's Harris brags about emission controls at the proposed Mingo County plant. "Our technology," he said, "captures all the CO2 because you have to remove it before it gets to the catalyst."

Using stored CO2 for enhanced oil recovery can help make the process more economical. And with a barrel of crude oil hovering at around $95 on the world market, Harris said, "Oil prices are still in the sweet spot for CTL."

But carbon capture and sequestration (CCS), and the use of CO2 enhanced oil recovery (EOR), has yet to prove itself on a significant commercial scale.

Harris says that while the EOR market has yet to develop here in the Appalachians, he envisions TransGas becoming the top supplier of CO2 for increasing the region's oil production, which he said holds significant potential.

"To create a gallon of gasoline from the typical U.S. basket of crude creates more regulated emissions than a gallon from CTL as we do it," Harris said. "CCS for the sake of disposing of CO2 is doable but not viable. EOR is viable."

Environmentalists are not convinced. They see CTL with the same skepticism that they view "clean coal" projects overall. Plus, the technology means continued reliance on mining and fossil fuels that many don't even want to consider.

"Relying on liquid coal as an alternative fuel could nearly double carbon pollution per gallon of transportation fuels, and increase the devastating effects of coal mining felt by communities and ecosystems stretching from Appalachia to the Rocky Mountains," the Natural Resources Defense Council says in a 2011 fact sheet.

NRDC adds, "If the vast majority of the CO2 from liquid coal plants is captured instead of released into the atmosphere, then well-to-wheels emissions would be reduced some, but certainly not eliminated."

Such arguments don't hold much sway with Steve Jenkins, gasification services vice president at CH2M Hill Inc., a major engineering and construction firm. "I can never explain for the environmentalists," he said.

With the continued demand for oil coupled with coal's abundance and high petroleum prices, Jenkins sees a market for the CTL technology.

"And so we are seeing foreign investors that want to get into the U.S. because they see that we are not reducing our use of gasoline," he said in a recent interview.

"Particularly when you site the plant [near the mine], you have eliminated a large portion of the feedstock, which is transportation," Jenkins added. "Your economics show that today and in the future, coal to liquids plants make economic sense."

Jenkins takes aim at the Obama administration's increased oversight of industrial emissions and greenhouse gases. He said it is making it harder to develop CTL projects, which can run $3 billion or $4 billion in development costs.

"All of those regulations, whether it be for air, water use or coal-based facilities," he said, "are all targeted to make it much more difficult to do what TransGas wants to do in Kentucky and West Virginia."

Shale revolution

Natural gas and oil production from hydraulic fracturing has changed the American and global energy landscape, and with that also the outlook for CTL.

EIA said last month that crude oil production had been increasing since 2008. Last year the United States drilled roughly 6.5 million barrels a day. And the agency said the U.S. could become a net exporter of liquid fuel.

Low gas prices have spurred a shift of many power plants away from coal. They have also made the prospect of gas-to-liquids efforts more attractive.

Royal Dutch Shell PLC is working on what it calls the world's largest gas-to-liquids plant. Sasol, the South African CTL leader, is developing GTL projects in Nigeria, Uzbekistan -- and Louisiana.

Late last year, Louisiana Gov. Bobby Jindal (R) welcomed Sasol's plan to invest between $16 billion and $21 billion in the facility, which will also include other natural gas chemical processing.

"We are working very hard to bring the capital down. It is a big number, and we'd obviously like to optimize on that number. But we have a team on the ground in Houston working very hard," Sasol executive André de Ruyter told E&E TV in an interview earlier this year.

"We have a site identified. We have got the land acquired. And we're working very hard in Washington with the various regulatory authorities to make sure that we don't drop a catch on any of the permitting procedures," he said.

In December Jindal said the facility, expected to produce 96,000 barrels of fuel per day, represented "one of the most exciting announcements in the history of southwest Louisiana."

EIA's latest numbers predict an increase in transportation fuels from coal, gas and biomass from 2 million barrels per day in 2011 to almost 6 million barrels per day in 2040. The magnitude will depend on international prices.

"In North America, the shale gas phenomenon presents exciting opportunities for GTL," Sasol boasts. "As improved technology practices continue to drive down the cost of extracting shale, the price differential between natural gas and oil has widened considerably."

CTL v. GTL

But EIA forecasts have CTL playing a more prominent role than GTL. And there is a lively debate over which technology makes the most economic and environmental sense.

"It's cheaper to make syngas out of gas than it is out of coal," the University of Kentucky's Davis said. "You make a lot less carbon dioxide with natural gas than you do with coal. And so natural gas has an advantage."

In a follow-up email, Davis explained that "more of the carbon in coal must be used to generate hydrogen than is the case for natural gas. The generation of hydrogen produces carbon dioxide so that for a barrel of oil, coal will generate more carbon dioxide than natural gas will."

Jenkins echoed Davis in saying that converting gas to liquids required "significantly less capital equipment." He added, "GTL would not have the emissions from the gasification plant, and could be cleaner."

In contrast, the Mingo County CTL project booster, Harris, said it was more difficult to control emissions from GTL sites, particularly because of the need to "burn" the natural gas to convert it into syngas before liquefaction. With coal, he said, the gasification process is heat producing rather than heat consuming.

Davis has his doubts about Harris' claim. "I am not aware of any reason why coal is more environmentally friendly than GTL," he said. "I wish for Kentucky's sake that what you were told was true, but I know of no reason that it would be."

Harris also cited volatile natural gas prices and competition for supply, which could make it more expensive for GTL facilities. Plus, he said the shale boom actually helps the prospects for TransGas.

"[The] natural gas surplus has made obtaining long-term stable coal prices much easier with multiple options presented," Harris said.

"We are cobbling together [funding] from private folks who believe in us," he said. "If we didn't believe that, we would have quit a long time ago."

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