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Big Coal Tries to Recruit Military to Kindle a Market

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

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.

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.


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