U.S., China: The Feasibility and Fate of Liquid Coal
Summary
Coal-to-liquid (CTL) technology has been sidelined for decades by exceedingly affordable oil. Today, with the price of oil at record highs, CTL is starting to look more appealing, though hurdles to its widespread use remain, particularly in the United States.
Analysis
Coal-to-liquid (CTL) technology essentially liquefies coal and allows it to be burned in conventional engines, mainly diesel and aviation engines. With the price of oil at record highs, we examine the status of CTL in the context of the United States and China — by far the world’s two heaviest producers and consumers of coal.
The Fischer-Tropsch process that converts coal to liquid actually dates back to 1920s Germany, where it was pursued to compensate for a lack of domestic petroleum resources. It would ultimately account for 90 percent of the Third Reich’s aviation fuel and half its total fuel consumption, playing a significant role for imperial Japan as well.
But though this process is well understood, it has languished for decades because of exceedingly affordable oil (although South Africa still uses the process). With oil prices now at record highs, that logic no longer holds: CTL is technically feasible and easily compatible with current infrastructure and diesel and aviation engines. It is generally thought to be financially feasible with oil at around $70 a barrel — which oil has held above for a year now. (Sustained prices at this level are an important prerequisite for investors in CTL, and it is not yet clear whether the current rise is irreversible.)
United States
But there are lingering problems with the technology. The problem for CTL in the United States is carbon emissions. The full cycle of coal liquefication, taken as a whole, emits more carbon than the full cycle of petroleum production does.
The key to reducing this footprint is known as carbon capture and sequestration (CCS), which essentially is the collection and storage of carbon emissions rather than the release of those emissions into the air. However, CCS is seven to 17 years from maturity, and doing it on a large scale is both complex and expensive — adding greatly to the cost of CTL. Bringing a CTL plant with CCS online can cost $5 billion to $10 billion — a huge investment by any measure and a significant risk, given the long-range uncertainty of oil prices.
The coal industry has pursued government subsidization and guaranteed contracts in order to help fund the expensive build-out of such plants. However, opposition to the expansion of coal use in general by environmental groups and sympathetic members of the U.S. House and Senate has led to a staunch campaign against CTL efforts. Activists helped develop a provision in the 2007 energy bill that legally restricts federal use of alternative fuels that have higher carbon emissions over their production life cycles (from extraction to refinement) than petroleum does. Despite the provision, Congress may still provide CTL a toehold in a defense appropriation bill that would allow the defense department to purchase a small amount of CTL fuel.
Meanwhile, the extraction of oil from tar sands (and to a lesser extent from oil shale) is gaining momentum. Refinery and pipeline infrastructure is being expanded to accommodate these efforts, and both Canada and the United States have large and promising reserves. Oil from tar sands and shale is the alternative more likely to make a significant dent in U.S. fuel needs. Tar sands, in other words, are already proven, while an environmentally friendly CTL remains mostly on the drawing board. Nor does it help the CTL cause that most of the pollution from tar sands remains in Canada, while CTL would bring its environmental issues to the United States.
As a result, CTL in the United States will remain mired in the regulatory realm over the short term. Until there is meaningful movement, such as a victory in the defense appropriation bill, few will be willing to invest the massive amounts of money required to make CTL a practical alternative.
China
Such prohibitive environmental and regulatory opposition is not a problem in China. Although it is beginning to recognize air quality as a legitimate concern, China has been studying CTL technology for years, and alternative clean-coal technologies remain a priority in the Chinese coal industry’s 11th five-year plan. This priority will receive a significant boost in late 2008, when a CTL plant in Inner Mongolia operated by the state-owned Shenhua Group, China’s largest coal mining company, starts converting more than 3.75 million tons of coal annually into just over 300 million gallons of diesel and other oil products — the equivalent of approximately 20,000 barrels a day. Beijing’s ambition is to turn this into 286,000 barrels a day (approximately 4 percent of China’s energy needs) by 2020.
Funding and expertise will not be a problem. A host of foreign firms such as Royal Dutch/Shell, Sasol, General Electric, ABB Group and Siemens are lining up to help China experiment in deriving crude oil from coal. After 2009, when the successor to the Kyoto Protocol will likely be adopted, these companies will have incentives to develop modern energy technologies such as CTL/CCS.
Still, even in China, CTL development faces a number of barriers. First, the size and complexity of the country’s energy bureaucracy has been a barrier to meaningful energy reform for a decade. And because energy reform has been so bureaucratically cumbersome, China remains heavily reliant on coal for power generation, and it is already coming up short in terms of coal supplies. Building out CTL infrastructure (which would require even more power) is not going to be considered an effective solution in the current crunch, and further use of coal for power generation may also take precedence over CTL.
The Chinese also do not use this coal efficiently by Western standards, and they have less spare capacity and are experiencing shortages in coal reserves (in April, reserves fell below a week’s supply in some provinces). Chinese coal producers are currently prohibited from raising prices until 15 days of reserves are re-established. While the Chinese generally mine enough coal to meet their needs, they occasionally are forced to import small amounts when demand exceeds expectations.
And another crucial resource — water — also is in short supply. CTL technology is water-intensive, and China’s ground-water levels are sinking, not rising. Worse yet, drinking-water shortages are an annual problem in some parts of the country. Shenhua intends to meet its annual water needs with nearly 9 million tons of ground water and by recycling water from the coal mines. Whether this will be enough remains to be seen.
Meanwhile, the Chinese have already prioritized natural gas, wind and hydroelectric generation as a stopgap until more nuclear plants can be built. Chinese efforts in Central Asia and Africa to lock down more petroleum sources also will offset some of this need.
For the long run, Beijing has consciously chosen to move away from coal as a fuel for generating power. Nevertheless, China’s coal resources may prove to be an attractive alternative to oil. China’s heavily industrialized economy is beginning to feel an acute pinch from increased fuel prices (much more so than more service-oriented economies), and petroleum fuel shortages are reaching a crisis point.
It remains to be seen whether efforts in Inner Mongolia ultimately prove to be an expensive experiment or the beginning of a significant CTL contribution to China’s ever-growing energy needs. In any event, Beijing is not likely to rule out CTL as a promising alternative.
