Big Coal Tries to Recruit Mil­i­tary to Kin­dle a Mar­ket Use as Liq­uid Fuel Is an Aim, but Cost, Pol­lu­tion Are Issues

by Matthew Dal­ton
WSJ

The coal indus­try wants the U.S. mil­i­tary to jump-start a major new mar­ket for its prod­uct: liq­uid trans­porta­tion fuels derived from coal.

The effort, how­ever, faces skep­tics who say the Pen­ta­gon shouldn’t be sub­si­diz­ing the high cost and poten­tial envi­ron­men­tal harm of what is known as coal-to-liquids technology.

The debate, unfold­ing in Wash­ing­ton, under­scores the dif­fi­culty of find­ing alter­na­tives to oil in a time of global sup­ply con­cerns. Uncon­ven­tional sources — from Canada’s vast tar sands, to natural-gas liq­uids, to ethanol — promise to sup­ple­ment sup­plies of crude from difficult-to-reach or polit­i­cally unsta­ble regions. Yet these sources face their own chal­lenges, with cost often a major stum­bling block.

Expand­ing coal demand beyond the tra­di­tional uses of gen­er­at­ing elec­tric­ity and mak­ing steel could lead to big prof­its for both coal min­ers and com­pa­nies that develop coal-to-liquids tech­nol­ogy. Greg Boyce, chief exec­u­tive of major coal miner Peabody Energy Corp. of St. Louis, said at a con­fer­ence last week that using coal to make trans­porta­tion fuel could increase annual U.S. coal demand by one bil­lion tons by 2030, com­pared with demand of 1.2 bil­lion tons in 2006.

The prob­lem is the plants that do the job are expen­sive to build and are prof­itable only if the price of crude oil stays well above $40 per bar­rel, accord­ing to indus­try esti­mates. Bench­mark light, sweet crude is cur­rently trad­ing above $70 a bar­rel on New York futures mar­kets, but the oil mar­kets over the long term have proven sus­cep­ti­ble to spikes and drops.

Yes­ter­day on the New York Mer­can­tile Exchange, crude for Octo­ber deliv­ery rose 1% to set­tle at $77.49 a barrel.

The plants, there­fore, need mil­i­tary sup­port to get built, Mr. Boyce said. “Lin­ing up the $8 bil­lion worth of cap­i­tal with­out base­load off-take agree­ments is a chal­lenge today.”

A com­mit­ment from the Defense Depart­ment to buy fuel above the break-even pro­duc­tion cost could ease doubts about the tech­nol­ogy. That would require a change to fed­eral pro­cure­ment laws, an effort backed by the coal indus­try and some Pen­ta­gon offi­cials, but chal­lenged by skep­tics and some lawmakers.

The indus­try says the value of a nat­ural fuel resource in the U.S., home to some of the world’s largest coal reserves, should be worth the higher cost of fuel made from coal. Polit­i­cal insta­bil­ity in the Mid­dle East, along with declin­ing global oil reserves, will pose more seri­ous threats to the military’s fuel sup­ply over the next two decades, the indus­try argues.

“Com­pe­ti­tion for global oil is only going to get more intense and more pricey,” said Corey Henry, spokesman for the Coal to Liq­uids Coali­tion, a group rep­re­sent­ing min­ers and coal-to-liquids tech­nol­ogy companies.

The coal-to-liquids process, known as Fischer-Tropsch, is a proven tech­nol­ogy, pro­po­nents say. Nazi Ger­many derived about half the mil­i­tary fuel it used in World War II from the Fischer-Tropsch process. South Africa relied heav­ily on the process because of inter­na­tional sanc­tions in the apartheid era that lim­ited the country’s abil­ity to import oil.
[Coal]

Oth­ers are skep­ti­cal. They say the armed forces buy and con­sume a large per­cent­age of fuel over­seas, mak­ing it less use­ful to rely on fuels pro­duced domes­ti­cally. If the mil­i­tary wants to develop an assured sup­ply of domes­ti­cally avail­able fuel, one option would be to cre­ate a mil­i­tary petro­leum reserve that could be tapped in a crisis.

“Right now, coal-to-liquids looks to me to be pretty darn low on the rea­son­able list of alter­na­tives,” said James Woolsey, for­mer direc­tor of the Cen­tral Intel­li­gence Agency. Mr. Woolsey is par­tic­i­pat­ing in a report being pre­pared by the Defense Sci­ence Board, which advises the Pen­ta­gon, on the military’s energy policy.

Joseph Romm, a senior fel­low at the Cen­ter for Amer­i­can Progress, a left-leaning think tank, who is also par­tic­i­pat­ing in the Defense Sci­ence Board’s report, said the mil­i­tary doesn’t need its own ded­i­cated fuel supply.

“The notion that the Pen­ta­gon has to spend all this money to give itself assured sup­ply is kind of a con­trived argu­ment,” Mr. Romm said. “The con­sen­sus of just about every­body on the panel was it didn’t make sense.”

A major prob­lem con­fronting the coal-to-liquids indus­try is global warm­ing. The Fischer-Tropsch process pro­duces more than twice as much car­bon diox­ide, the main global-warming gas, as refin­ing fuel from petroleum.

Pro­po­nents say coal-to-liquids plants can be out­fit­ted to cap­ture car­bon diox­ide and store it in under­ground cav­erns. It can even be piped to oil fields and pumped under­ground to help retrieve oil. But adding this capa­bil­ity also adds hun­dreds of mil­lions of dol­lars to the cost of each plant.

A coal-to-liquids plant that doesn’t cap­ture car­bon diox­ide can turn a profit with oil at $40 per bar­rel, but a plant with this capa­bil­ity can be prof­itable only when oil trades above $50 to $55 a bar­rel. The indus­try esti­mates that build­ing an 80,000-barrel-per-day coal-to-liquids refin­ery would cost $7 bil­lion to $9 bil­lion, com­pared with less than $2 bil­lion to build a similar-size petro­leum refinery.

There are other envi­ron­men­tal prob­lems with coal-to-liquids plants, skep­tics say. The Fischer-Tropsch process also uses five to seven gal­lons of water for each gal­lon of fuel pro­duced, accord­ing to a 2006 Energy Depart­ment report. “Many of the places they talk about putting these plants, like the West, don’t have this type of water to waste,” Mr. Romm said.

This prob­lem recently led China to scale back major invest­ments it was mak­ing into coal-to-liquids plants. In July, China’s National Devel­op­ment and Reform Com­mis­sion, the state’s indus­trial watch­dog, restricted approval for coal-to-liquids plants, accord­ing to the Xin­hua News Agency.

The effort nev­er­the­less has some back­ers at the Pen­ta­gon. The Air Force, which con­sumes the most fuel of the mil­i­tary ser­vices, sup­ports using coal-to-liquids fuel. It recently cer­ti­fied the B-52 bomber to run on a blend of Fischer-Tropsch fuel and nor­mal fuel. The Air Force plans to do the same for its entire fleet by 2011. The Air Force intends to buy about 400 mil­lion gal­lons annu­ally by 2016. The ser­vice sup­ports leg­is­la­tion that would allow it to sign 25 year con­tracts for sup­ply, even at his­tor­i­cally high prices above $50 per bar­rel, said William Ander­son, assis­tant sec­re­tary of the Air Force for instal­la­tions, envi­ron­ment and logistics.

“If the leg­is­la­tion helps spur on a mar­ket that is nec­es­sary, we believe, to ensure our long term national secu­rity, we believe it’s some­thing that has a lot of merit,” Mr. Ander­son said.

The mil­i­tary faces a five-year limit on how long it can sign con­tracts for sup­plies. With­out the cer­tainty that the mil­i­tary will be there to buy this prod­uct, regard­less of what hap­pens to oil prices, investors are unlikely to back coal-to-liquids plants.

The Coal To Liq­uids Coali­tion hopes to extend the con­tract­ing author­ity to 25 years. Ear­lier this year, the House rejected sev­eral pro­vi­sions that would pro­vide loan guar­an­tees and tax breaks for coal-to-liquids plants as part of com­pre­hen­sive energy leg­is­la­tion mov­ing through Con­gress. Chang­ing the military’s con­tract­ing author­ity is now prob­a­bly the coal industry’s best chance of receiv­ing fed­eral support.

A spokesman for Sen­a­tor Carl Levin, chair­man of the Sen­ate Armed Ser­vices Com­mit­tee, declined to com­ment. A spokesman for the House Armed Ser­vices Com­mit­tee didn’t respond to calls seek­ing comment.