New Markets for Coal

November 16, 2009

Ken Silverstein, EnergyBiz Insider
Editor-in-Chief

It's a revolution that began in South Africa and which has spread to China. Now, it's come to the United States where coal-rich states are trying to find new markets for their product and namely in the transportation sector.

Coal liquefaction has the potential to replace some oil imports. But the technologies to perform that transformation are expensive. Some enterprises have sputtered. Others, though, are getting their legs. Despite the struggles, the ideas are valid ones and are winning respect.

The science is in fact running headfirst into economic and the ecological barriers. The concept is to take coal and turn it into gasoline -- a proposition that experts say will pay off if the price of a barrel of oil remains relatively high. But the repeated price fluctuations serve to unnerve investors who don't want to lose money on capital intensive projects which can cost as much as $1 billion a plant.

Environmental worries are also a part of the equation. While the United States is seeking to wean itself off of foreign oil supplies, it is also trying to cut its carbon emissions. The conversion process whereby coal is transformed into gasoline is a double-whammy: During the alteration, greenhouse gases are produced and then again after the newly-formed gas is burned. And in a typical coal-to-liquids plant, about 40 percent of the energy is lost in the conversion process.

Smaller states such as West Virginia hope to learn a thing or two from China, which is also dependent on coal and which is the world's second biggest emitter of greenhouse gases after this country. China has said it expects to meet one-tenth of its transportation needs by 2020 from converting coal to gas. Its largest coal producer, the Shenhua Group, has said it will expand one of its facilities from 13,000 barrels a day to 240,000. Another producer there, Yitai Group, says that it has successfully tested a major plant.

Like other places, China's aggressive pursuit of the technology has been hampered by a global credit crunch and falling oil prices, from around $140 a barrel more than two years ago to about $70 today. Those economic fundamentals forced West Virginia to cancel a highly touted $800 million coal-to-liquids plant in the state. But now another firm called TransGas Development says that it wants to build a $3 billion coal liquefaction plant there that would convert daily 8,500 tons of coal to 18,000 barrels of gas.

West Virginia University, furthermore, has been working with the Chinese government since 2003 to learn how to build a commercial-scale coal liquefaction facility. Those efforts stalled because of the economic downturn and the issue of how to mitigate the carbon emissions. But a federal allocation has since revived the project.

This "very real technology exists to convert our abundant coal, cleanly, efficiently and profitably, into liquid fuels," says the West Virginia Coal Association. "And, coal will keep our lights on for us while it keeps our cars rolling."

New Investment

To be sure, turning coal into gasoline is costly. Beyond the high capital cost to build a plant, all the contaminants must be cleansed from the solid product before it can be liquefied and transformed. Add to that the fluctuations in oil prices and it's easy to see why investors can become skittish.

The marketplace is replete with disappointments. Louisiana-based Verenium, Ottawa-based Iogen and Florida-based Alico are all reported to be having trouble taking their ideas from the conceptual stages to the commercial realm.

South Africa's Sasol Co. is the only group with commercially available technologies on the market today. Its plants have been around since 1955 and now produce as much as 150,000 barrels a day of oil from coal. This technology came of age during the apartheid era when the world had embargoed South Africa and it was forced to come up with new methods to replenish its oil needs. Sasol's three plants meet 40 percent of the oil demand in the country.

In this country, there is a movement afoot to convert coal to diesel fuel. DKRW Energy, for example, says that it is working on such a facility that would start up by year-end 2010. It also says that carbon dioxide from the coal can be dried, liquefied and shipped via pipeline so as to enhance oil recovery in Wyoming and the Powder River Basin. Once the project is complete, it says that the Sinclair Oil Corp. will market the fuel in the Rocky Mountain Region.

Another company, Denver-based Rentech, says that is in the process of building a $450 million coal-to-liquids plant near Natchez, Miss. If it is successful, the enterprise says that it could begin producing 1,600 barrels a day by 2011 -- a figure that would ultimately reach 30,000 barrels a day.

"With more than a million barrels per day of refined diesel products imported into the U.S., record prices at the pumps, new air-quality regulations and diesel becoming the fastest-growing transport fuel in the world over the next 20 years, environmental and market forces favor new investment in U.S. diesel production," says Bob Kelly, chairman of DKRW Advanced Fuels.

Technology is risky business. But the dynamics are in place to bring new products to market that could help replace oil. While coal liquefaction has potential, it must still battle the elements that include uncertain oil prices and iffy credit markets. It has worked elsewhere in the world but it is still unclear as to whether it is practical here.