Liquid Coal a Slippery Business

Did you know that there is more potential fuel in U.S. coal than Saudi Arabian oil? The coal industry does, and it is throwing all of its political weight behind making Coal-to-Liquid technology (CTL) the belle of this year's energy bill, which arrived on the floor of the Senate this week.

From Washington to Beijing, governments are debating whether to include CTL in their national energy strategies. Its supporters trumpet energy security and the prospect of petrodollars flowing to the Midwest instead of the Middle East. But that independence comes at a cost, environmentalists warn -- CTL's "lifecycle" of greenhouse gas emissions is twice that of oil diesel.

These trade-offs between economics, security and the environment will play out in the political arena and present the shrewd pundit with an array of investment opportunities.

Old Technology, New Opportunity

The energy in worldwide coal reserves dwarfs that of oil -- and it lies in the right places. The U.S. is the Saudi Arabia of coal, with 26% of proven world reserves (enough to power the country for over 200 years at current consumption rates), and the energy-hungry economies of Asia lie close to huge deposits in the former Soviet Union (23% of world reserves) and China (12% of world reserves).

However, CTL plants are expensive and production costs run higher than historical oil prices. A typical CTL plant costs $3 billion to $5 billion and can produce 50,000 to 150,000 barrels a day from coal feedstock. Its product is price competitive with oil-based diesel between $40 to $50 per-barrel, according to a recent U.S. Department of Energy report. This compares to an $18.43 per-barrel (in 2006 dollars) median price for crude since World War II.

Consequently, oil price volatility has inhibited investment in CTL. For a venture to be attractive, the producer would have to be confident that the price of oil would remain above the CTL-equivalent price point for many years -- a decidedly optimistic bet given that average annual crude prices have not exceeded $40 per-barrel for more than six consecutive years since World War II.

It should come as little surprise, therefore, that the only countries to develop CTL at an industrial scale -- Germany during World War II and South Africa under apartheid -- were those excluded from oil markets by embargo.

But times have changed. With rising Asian energy demand, political instability in producer nations and tight upstream capacity, oil futures are trading over $66 per-barrel through at least December 2015. Around the globe, coal-region politicians, industry lobbyists and energy nationalists are arguing that CTL's time has come.

Energy Independence vs. Environment

CTL-advocates march under the banner of energy independence. By converting a portion of their vast coal reserves into diesel, countries like the U.S. and China could reduce their dependence on volatile oil markets and hostile producers while developing a domestic production cushion in the event of a major oil market disruption. Unlike most other alternative fuels, CTL is:

1) Proven technology on an industrial scale that
2) Draws upon a well-developed and resilient feedstock supply chain, and
3) Produces a product that can be distributed through existing petro-infrastructure and burned in conventional engines.