Coal-to-liquid fuel offers answer to energy woes

Jul 19, 2004 02:00 AM

by David Dapice

Amid continuing violence in the Middle East, the issue of energy security is again on the front burner. With oil prices rising to a peak of $ 40 a barrel, countries have been looking at alternative energy with a greater urgency.
This heightened sense of urgency, fortunately, has come at a time when there is evidence that a new approach using existing resources and technology can provide alternative energy to many countries.

A glimmer of good news recently appeared: China signed an agreement with Sasol, a South African energy and chemicals firm, to build two coal-to-liquid fuel plants in China. These plants, costing $ 3 bn each, are reported to jointly produce 60 mm tons of liquid fuel (440 mm barrels) a year. Since China imported 100 mm tons of oil last year, these plants would give China much control over its domestic energy situation, though its demand is growing fast. The raw material and capital costs of a barrel of fuel would fall under $ 10 and other costs would not bring total costs over $ 15.
Coal resources of 1 tn tons are widely distributed around the world. Many countries, including China, India, Russia, Ukraine, Germany, Poland, South Africa, the United States and Australia have extensive coal deposits that would last 100 years or more at current rates of exploitation. But coal is a highly polluting fuel when burned directly and also emits a lot of global-warming carbon dioxide.

The Sasol technology, a third-generation Fischer-Tropsch process, was developed in Germany and used in World War II, and later in South Africa. (Steam and oxygen are passed over coke at high temperatures and pressures; hydrogen and carbon monoxide are produced and then reassembled into liquid fuels.)
It has long been too expensive to compete with standard crude oil. On the plus side, sulphur and other pollutants such as ash and mercury are removed -- the sulphur can be sold as a by-product -- and carbon dioxide is segregated and can be injected underground. If hydrogen is needed for fuel cells, these plants can also provide it. In the near term, the petrol and diesel produced are high grade and clean, meeting even future '”lean diesel” requirements of the United States.

The real question is if these plants can be built and reliably produce fuels for less than $ 20 a barrel. Sasol already produces 150,000 bpd from coal. (Conversion from natural gas is cheaper and Sasol is in the process of switching its feedstock to gas in South Africa.)
Each of the Chinese plants would be four times as large as the existing Sasol plant, and scaling up can involve difficulties. If Sasol can make these larger plants work at the publicised costs, this technology could be used by many other nations -- rich and poor -- who are willing to forego periods of very cheap oil for more security. (Indeed, even oil-producing Indonesia is looking into a coal-to-liquids plant as it now imports oil.)
This technology also works in converting coal to natural gas at a cost of $ 3 to $ 3.50 per mm Btu. Since current natural-gas prices in the US are roughly double that, it would appear that coal-to-gas is also an economically viable technology.

The coal-to-liquid technology would compete with the evolving tar-sands technology being expanded in Canada. This technology involves the production, either by mining or extracting with steam, of heavy oil trapped in sand. The heavy oil is then massaged into more valuable fuels. This source already accounts for a quarter of Canada's 3.2 mm bpd output. It requires natural gas to heat the tar and is energy intensive, but still has production costs of under $ 20 a barrel.
Tar-sand reserves are estimated at over 250 bn barrels. These and similar technologies would allow much more plentiful isolated natural-gas reserves, coal and tar sand to be converted into liquid fuels. The long-predicted decline in petroleum production could be delayed for decades or more, and the geopolitics of energy would be rewritten at something close to or below current crude-oil costs.

Is there a downside to rapidly adopting these technologies? Yes, from a global welfare perspective. Now, onshore oil-production costs are usually under $ 5 a barrel. If prices are higher, somebody (the country owning the oil or the company producing it) gets the difference between the price and the cost. If we switch to $ 15-$ 20 costs from these other technologies, then there is no surplus of price over cost, or a much smaller one.
To use an economic phrase, the “rent” on oil production is destroyed in a quest for self-sufficiency. While true, the instability in oil prices -- as well as the threat of terrorist disruptions to supply -- are such that many nations might be happy to use their own resources to produce this vital input. They are no worse off if oil can be produced at $ 20 a barrel, unless the price temporarily plunges below that level as it did in the late 1990s. A stable price and supply prevents very expensive disruptions.

None of this answers critics who are properly concerned with global warming. Subsidies to hybrid or other highly efficient vehicles are probably needed to reduce emissions. In the longer term, fuel cells burning hydrogen and producing only water as a waste product are promising, but still far from being economically feasible.
Overall, the coal-to-liquid technology is only one element of an integrated programme that is needed to deal with fuel security, local pollution and global-warming issues. But, even alone, it could bring an element of stability to world oil prices and thus also to the global economy. In addition, if it redirects efforts from geopolitical competition and even conflict to investment and efficiency, it is a welcome development.

The writer is an associate professor of economics at Tufts University.

Source: Straits Times
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