 Coal Liquefaction Plants Spark Hope - By Ken Silverstein Daily IssueAlert 11/1/2004 Free Copyright 2004. All rights reserved. China and South Africa have signed a deal that could affect the rest of the planet. The two will work to establish a couple of so-called coal liquefaction facilities that take coal and turn it into fuel oil. Not only is the technology one tool to fight the high cost of oil but it also helps purify the energy combustion process. The major obstacle is economics. If the technology is to be financially feasible, the price of oil must remain at least above $32 a barrel. While the current price is $50 a barrel, debate is now fierce among analysts as to whether it will stay that high or fall back to traditional levels, oftentimes around $20 a barrel. The good news for those who are making investments in coal-to-liquid technologies is that the NYMEX futures index for oil is above the break-even point for 60 months into the future. “Certainly, this is something that will have to happen,” says Randy Harris, an ex-official with the National Energy Technology Laboratory in Pittsburgh. “If oil was not so unstable, it would have happened by now. We have not been able to make the economics work because oil prices are so often below $32 a barrel. So, we can't get the investment needed to build plants. It's not that the technology isn't there. It is. It's just been that the economics have not worked.” Coal liquefaction is a technology that takes a solid such as coal and breaks it down to form a fuel oil. To do so, it removes all the toxins such as mercury, sulfur and heavy metals. But, the process does nothing to reduce carbon dioxide, the emission that is thought to cause global warming. And in a typical coal-to-liquids plant, about 40 percent of the energy is lost in the conversion process. Currently, South Africa's Sasol Co. is the only group with commercially available technologies on the market. 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. The new Chinese plants would have a total annual production capacity of 60 millions tons of oil, dwarfing that of Sasol's plants in South Africa. Within a year, if the deal goes as planned, the first plant in Mongolia could begin producing 1 million tons of gasoline and diesel annually. The second, also in Mongolia, would come on line around 2010. The $6 billion investment on China's mainland, which would have two Chinese business partners, is urgent: China's oil imports have risen by 37.4 percent in one year, Chinese government statistics say, adding that the country spends $100 billion a year importing oil. That makes it the second biggest consumer and importer of oil in the world; the United States is first. For every dollar increase in the price of oil, China's total import bill rises by $1.6 billion annually, say economists. “This marks China's strengthened efforts in finding substitute energy and its attempt to counteract price fluctuations in the global crude oil market,” says Zheng Xinli, deputy in the government's policy research office, as quoted in Xinhua, the national newspaper. Even low-level production of coal-to-liquids could affect world oil prices, he adds, noting that China has an abundant supply of coal and is eager to apply new technologies that would cleanse the burning process. “We expect that these same factors will make future coal-to-liquids projects attractive not only in Asia but potentially in North America as well,” adds Kirk Benson, CEO of Utah-based Headwaters that also converts fossil fuels into alternative energy products. Not Cheap To be sure, it's not cheap to take coal and turn it into oil. The cost on the front end is high. That's because all the contaminants must be cleansed from the solid product before it can be gasified and converted to oil. The process of turning natural gas into liquids is a possible competitor to turning coal into liquids. Not only is gas-to-liquids a cleaner process but is also less capital intensive. But, with natural gas prices so much higher than the multiples for coal, the added upfront cost in coal-to-liquids can sometimes be justified—not to mention that some regions of the world don't have access to natural gas. Clearly, the high price of oil along with tougher environmental regulations applied worldwide has forced developers to look for alternative ways to run power plants and to move cars, trucks and buses. The analyses break down this way: One school of thought predicts that the price of oil will drop to traditional levels at around $20 barrel, noting that the primary reason for the current increase is the war in the Middle East and the present imbalances in refining capacity. Another side says that refineries worldwide are pretty much operating at a capacity and eventually the supply of oil will diminish to the point that alternatives would not be a luxury but a necessity. When it comes to applying such thoughts to whether coal-to-liquids is a good investment, the key question becomes, “Who in the financial markets will place a bet that oil prices will stay at $40 a barrel or higher to finance the expensive coal liquefaction plants being discussed?” So asks Paul Grimmer, an alternative fuels expert formerly with Conoco. It will take five to eight years to build out a plant and to help pay the debt down, he says, noting that the price of oil has to stay high for years to come. “Have we reached a new threshold in crude oil pricing?” asks Grimmer. “Are we really running out of oil? The moon, stars and planets have to line up just right for coal liquefaction to go.” His thinking is that oil prices will come down. He notes that a 150-year look into how such prices have developed forces one to conclude that the real price of oil after inflation is less today than what it has been in the past. That said, global pressures to curb global warming are forcing industries to pursue cleaner burning energy alternatives—ones that could impede oil consumption. New technologies are always a risk. But the rewards for pursuing such ventures can be enormous. Certainly, some companies such as Sasol have shown not only that the technology can work but that it also can be profitable. The answer as to whether the process can be economically viable in other parts of the world, however, remains unknown. Still, the wheels of progress are turning and the alternatives to traditional energy usage are getting more and more respect. UtiliPoint's IssueAlerts are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2004. UtiliPoint International, Inc. All rights reserved. |
