California eyeing coal-GTL opportunity to cut 'petroleum dependence,' boost clean-diesel fuel

Diesel Fuel News, Sept 15, 2003 by Jack Peckham

Coal-based gas-to-liquids (GTL) may experience a renaissance thanks to a combination of factors including high North American prices for natural gas and strong demand growth for ultra-clean, zero-sulfur distillate fuels.

California Energy Commission (CEC) expressed new interest in the concept at last month's CEC/California Air Resources Board (CARB) "alternative diesel fuels" workshop, with Commissioner James Boyd especially citing the idea as worthy of further investigation.

Spurring CEC's new interest was a presentation by Rentech CEO Dennis Yakobson, who outlined a GTL plant scheme tapping fairly inexpensive Wyoming Powder River Basin coal.

Powder River coal has been trading for the equivalent of around 50 cents/million Btu's for over a decade, while U.S. natural gas prices have soared to well over $3.50/Mmbtu. However, "greens" slam coal-fired electric generation for criteria emissions--sulfur oxides, nitrogen oxides, particulates, and heavy metals--and instead favor "clean" natural gas.

* C[O.sub.2] Sequestration Could Overcome Objections

But coal-gasification proponents contend they can match natural gas on ultra-low emissions especially if combined with C[O.sub.2] sequestration. What's more, coal-GTL doesn't necessarily have to rely on large-scale co-production of electricity, either, Rentech's Yakobson explains.

With current technology now available for coal-GTL plant greenhouse gas "sequestration"-C[O.sub.2] diverted underground to enhance coal-bed methane recovery--a coal-GTL scheme could win environmental kudos on several fronts, Yakobson contends.

A coal-FT plant with C[O.sub.2] sequestration would produce only one-tenth the C[O.sub.2] emissions of a conventional pulverized coal electricity plant, and about one-sixth the C[O.sub.2] of a coal-fired, integrated gasification combined cycle (IGCC) power plant, Yakobson showed CEC/CARB. Bonus: Nitrogen oxides (NOx) plant emissions would be extremely low--about 9 parts per million (one-fifteenth that of conventional coal plants). Sulfur recovery from coal gasification would exceed 99.9%, too, thanks to advanced gasification technologies.

With current coal gasification and Fischer-Tropsch (FT) conversion technologies, Rentech believes a Powder River Basin mine-mouth GTL plant (or a petroleum coke GTL plant near refineries with coking plants) could produce FT diesel for well under $1/gallon, plus about 8-20 cents/gallon transport cost to California (probably via railcar).

Given that CARB diesel wholesale prices recently have been hovering in the 90-cents to $1.00/gallon range, that would make Power River coal-GTL costs close to CARB diesel costs, once including crude refiner cost of desulfurization below 15-ppm for 2006 CARB diesel standards.

Still, potential investors can worry whether coal-GTL (or petcoke-GTL) projects can survive crude oil price volatility over the years, Yakobson concedes. Sasol--the world's only commercial coal-GTL fuels producer--enjoys a government-guaranteed price floor that minimizes such risk, which helps explain why Sasol has been successfully producing coal-GTL fuels for over 40 years.

While not specifically proposing a South African coal-GTL price-equalization-fund scheme for the U.S., Yakobson nevertheless says that getting coal-GTL off the ground would require some sort of initial government tax support. Example: It's possible that proposed clean-coal incentives in pending U.S. Congress energy bills could provide sufficient support. But this depends on what comes out of a pending House/Senate energy-bill conference committee, Yakobson told us.

Another fiscal scheme, such as giving coal-GTL tax parity with other "alternative fuels," could get a coal-GTL plant project moving, he said. Example: California today gives compressed natural gas (CNG) fuel tax subsidies equivalent to about 35 cents/gallon of diesel fuel -presumably plenty of room to make coal-GTL blendstock attractive to CARB diesel producers and end-users.

Besides some up-front tax support, a coal-GTL plant also would require a long-term coal supply at around 50 cents/Mmbtu (seen feasible for Powder River), plus a long-term product offtake agreement, presumably with a fuels refiner/marketer, he explained. The first GTL plant likely would start relatively small--about 5,000 barrels/day--then could scale-up to over 10,000 b/d, he showed.

Such a plant wouldn't have much price or supply impact on the U.S. distillate fuels market, but would help California meet its goal to slash "petroleum dependence" partly through schemes such as blends of up to 33% FT diesel in CARB diesel (see Diesel Fuel News 8/4/03, p4).

The next step in Rentech's new U.S. coal-GTL quest includes a thorough feasibility study that will cover detailed economic and environmental factors, Yakobson said. So, Rentech is now soliciting the views of California energy/environmental agencies and environmental advocates, to ensure that such a study covers the right issues.

While Powder River mining costs, gasification costs and upgrading costs are fairly well-defined, further studies will be required on coal-GTL FT conversion and greenhouse gas minimization.