Ken Silverstein EnergyBiz Insider Editor-in-Chief

While no commercial plants are currently on line, those in the business of converting coal into gas say that the reality of using the fuel source to motor cars, trucks and planes is just around the corner. It's a costly venture and the primary uncertainty is whether the price of oil will stay in the $60-$70 a barrel range. To take the sting out of the investment, the Energy Policy Act of 2005 encourages the development of these technologies through a new loan guarantee program.

"The United States is often called the Saudi Arabia of coal," says Senate Energy Chairman Pete Domenici, R-N.M. "Emerging coal technologies, along with hydrogen and biofuels technology, could sharply reduce our dependence on foreign oil over the next several years. All of these technologies need to be refined, of course, and coal technology, in particular, needs to be improved in the context of climate change issues."

High gas prices are pushing such technologies as the Fischer-Tropsch process into the limelight. Basically, that involves gasifying the coal and converting it to a liquid at high temperatures. General Electric, Rentech, DKRW Energy and Arch Coal are all combining their resources and knowledge to bring projects to market in the next few years. Those companies want to produce 11,000 barrels a day of low-sulfur diesel fuel out of coal mined in Wyoming.

When oil prices are "low," companies and consumers get complacent -- but not anymore. 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. Now, consumers are paying close to $3 a gallon for gas. Developers of coal-to-liquids say that their product is about $15 a barrel.

When coal liquefaction breaks down coal to form a fuel oil, it removes many of 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.

Beyond that, those plants are capital intensive and have lots of technical and economic risks associated with them. Developers generally have been reluctant to plunk down their cash; if oil prices should drop, the incentive to use alternative fuel forms goes way down. Over time and with more experience building such facilities, the risks will decrease.

"If economic, these fuels could contribute to reducing our dependence on oil imports and significantly contribute to the Nation's energy security," says Clarence Miller, director of clean coal fuels for the U.S. Department of Energy.

Environmentally Friendly

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. Even better for developers is the emphasis placed on cleaning the environment, particularly exhaust from transportation sources.

Coal-to-liquids is environmentally-friendly, says Rentech's chief Hunt Ramsbottom. In recent congressional testimony, he said that most of the harmful regulated pollutants are removed in the gasification stage. Sulfur and mercury come out as elements and do not go up the smoke stack, which eliminates 30 percent of harmful effects and all because of the Fischer-Tropsch process. The finished fuel can then be used in truck, bus or barge -- even an airplane -- and without any engine modifications.

The company has a project in East Dubuque, Illinois, which it expects to be the first commercial coal-to-liquids plant in the United States by 2010. Even before that, it expects to show the project is doable. A demo plant in Colorado will be producing 10 barrels of coal-based oil a day by the first quarter of 2007, says Ramsbottom.

"The future of coal-to-liquids in the United States is no longer a theoretical, what-if, conversation," says Ramsbottom. "We plan to have a fully commercial, fully operational coal-to-liquids plant up and running by 2010."

It's already real in South Africa, where Sasol Co. has prospered since 1955. It now produces 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.

China is also participating in the process. China, already one of the world's most voracious consumers 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.

The future price of oil is the key issue underlying the question of whether coal-to-liquids will fly. Alternative energy forms are looking better each day as long as there are sustained high prices and a strong desire to clamp down on dirty air pollutants. But, 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.

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