While energy shortages, pollution and high prices may seem never-ending, one thing may serve to facilitate new solutions: good-ole ingenuity and especially as it relates to alternative fuel development. The United States is increasing its dependence on foreign oil and all at a time when its own production is down sharply for the previous two decades by 40 percent.

Ken Silverstein EnergyBiz Insider Editor-in-Chief

To battle those elements, the big oil companies along with private developers are working on a series of technologies that turn coal to liquids. The idea is to take an abundant resource such as coal and gasify it -- a process that cleanses it of its impurities. That byproduct can then supplement the use of crude oil, which would lessen the country's dependence on foreign oil supplies and help ease prices. In fact, developers of the technology say that a barrel of coal-to-liquids is about $15 compared to a barrel of crude oil that now stands at $62.

"To do this, energy prices must be at a level where people are confident of making big investments that are as much as $1 billion per plant," says Mark Koenig, head of investor relations at Rentech in Denver. "The rollercoaster ride has kept people from committing. Now, people think oil prices won't fall below $40 a barrel."

Rentech is upbeat about its coal-to-liquids technology and its prospects: It has signed a handful of memorandum of understandings to develop such plants and it is working on six potential projects in the United States. Koenig says that some of the plants will be up and running in three years while some bigger projects such as one planned for Pennsylvania will be on line in five years. That plant, which is to be built by Waste Management Processors, would produce 5,000 barrels per day.

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.

South Africa's Sasol Co. is the world's forerunning when it comes to coal-to-liquids technology. 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. Sasol, meantime, licenses its technology to Mossgas, which takes natural gas and turns it into liquids -- all as a means to replace crude oil.

"The use of our domestic coal resources to produce synthetic refined petroleum products and electric power through indirect coal liquefaction will be a major new industry in the United States," says Robert Kelly, DKRW Energy managing partner.

The Houston-based firm is working with St. Louis-based Arch Coal to begin construction of a coal liquefaction plant that would produce 33,000 barrels per day of diesel fuel. Construction is expected to begin in 2006 and be completed in 2010. Once running, about 6 million tons of coal would be utilized to create not just diesel fuel but also for a 350 MW coal gasification power plant -- a separate technology to cleanse coal before it is burned and released through smokestacks.

Gaining Resonance

The idea is gaining resonance. China, which is fast becoming the world's most voracious consumer of coal, has signed two deals: One with Sasol Synfuels and the other with Royal Dutch/Shell Group to build coal-to-liquids plants in two separate Chinese provinces. The two projects would cost $7.2 billion. The combined output would be 130,000 barrels a day and be used to produce gasoline and other energy products.

China's need is urgent: Its oil imports have risen dramatically, at least by 37 percent over the last year. The Chinese government adds that the country spends $100 billion a year importing oil. For every dollar increase in the price of oil, China's total import bill rises by $1.6 billion annually, say economists.

"The country has no choice -- either source more supplies abroad or find oil substitutes," said Gideon Lo, an analyst with DBS Vickers Hong Kong Ltd, as quoted in Bloomberg.

To be sure, it's not cheap to take coal and turn it into oil. The front end costs are high 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.

According to the U.S. Energy Information Administration and other experts, coal-to-liquids' projects with present technologies can be competitive if oil prices don't fall below $30 a barrel. Indeed, it's the uncertainty of where oil prices might be headed that has deterred investment in alternative fuel technologies.

But, now there is a growing clamor to reduce emissions and especially those associated with exhaust from transportation sources. And that dynamic coupled with the price that people are paying at the pumps is helping developers come up with new technologies to address crude oil dependence.

"If we can get the ball rolling, there will be an avalanche," says Rentech's Koenig. "Coal is the only natural resource we have available that we have to meet our needs and it can be converted into a clean-burning fuel."

Coal-to-liquids is not a cure-all for the world's energy problems. It is, however, a potentially viable tool to deal with emissions, high prices and foreign oil dependence.