Coal-to-liquids as a case study of how excessive optimism is our enemy

by Fabius Maximus


Summary: Confidence provides strengths for a society, but only when coupled with clear vision. Unfortunately modern America too-often sees the future only in terms of doomsters’ pessimism and advocates’ optimism. Here we have a case study of the latter.


In the run-up to the 2008 oil price spike optimists had extreme confidence in several advanced technologies as new energy sources. Some examples popular in 2006 were cellulosic ethanol (e.g., from algae or switchgrass), solar, wind, ocean waves, and converting coal to liquid fuels (CTL). This confidence short-circuited our natural fear of oil depletion, which otherwise might have sparked comprehensive efforts to prepare for an era of high oil prices. This is another contrast with China, which has a powerful and multifaceted long-term program to prepare for peak oil.

Several years later we can better assess the accuracy of these hopes. Here we look at CTL. The elements of the CTL story have proved to be either false or overstated.

Contents

1. CTL is an energy source! No, it’s not.
2. We have vast reserves of cheap coal, sufficient to last centuries. No we don’t.
3. We should imitate the big China CTL program. Except there is none.
4. Companies can run CTL plants as an economic alternative to oil at $60/barrel (nope).
5. Conclusions
6. For more information

Tomorrow’s post discusses the missing element in many optimistic reports about energy: time. Building new energy sources on a large scale (a serious fraction of total energy use) takes decades — after the successful lab work, pilot plants, and then demonstration plants.

(1) CTL is an energy source!

No it’s not. This is a common mistake of non-expert enthusiasts writing about energy. CTL refines a primary energy source (coal) into a liquid fuel — a clean fuel able to power existing vehicals (just as fuel cells convert hydrogen into electricity, natural gas being the usual energy source). The cost of CTL’s liquid fuel product consists of mining and transporting the coal plus the CTL refining process. These costs include:

* the capital costs of building the mines and refineries — plus the transportation connecting them (e.g., railroads or slurry pipelines); taking in to account their expected lifetimes;
* the cost of operating these facilities.

The mix of capital and operating costs makes it difficult to compare energy sources. Some have mostly capital costs (shallow land wells of light sweet oil, solar). Some have mostly operating costs (surface mined coal). Some have large costs for both (e.g., shale oil — aka kerogen). Advocates of CTL often misrepresent its cost by looking only at the capital costs (there is more information about CTL’s capital costs than its operating costs). This is especially misleading when comparing CTL to sources such as deepsea oil, which has relatively low operating costs.

(2) We have vast reserves of cheap coal, sufficient to last hundreds of years

Probably not. These estimates ignored the basic relationship of mineral deposits: the inverse relationship of ore quality and quantity. High quality ores are less plentiful than low grades (details here). In other words, there are vast reserves when measured in tons. But what of their energy content? We see this in the US mining of coal. Production of anthracite peaked in 1918; by 2118 we may mining coal with the BTU content of biodegradable Kittle Litter.

There have been several studies evaluating the actual extent of coal reserves in terms of their energy content (not volume or weight):

* “The Peak in U.S. Coal Production“, Gregson Vaux, 27 May 2004
* “Coal of the Future (Supply prospects for thermal coal by 2030-2050)“, Energy Edge Limited, Prepared for the European Commission – DG Joint Research Centre Institute for Energy (JRC IFE), February 2007
* “Coal: Resources and Future Production“, Energy Watch Group, March 2007 (47 pages, PDF)
* “Coal: Research and Development to Support National Energy Policy“, National Academies, June 2007

The major study showing reserves are overstated: “Coal: Research and Development to Support National Energy Policy“, National Academies, June 2007 — Key paragraph:

Present estimates of coal reserves – which take into account location, quality, recoverability, and transportation issues – are based upon methods that have not been updated since their inception in 1974, and much of the input data were compiled in the early 1970s. Recent programs to assess coal recoverability in limited areas using updated methods indicate that only a small fraction of previously estimated reserves are actually recoverable. Such findings emphasize the need for a reinvigorated coal reserve assessment program using modern methods and technologies.

What does this mean? Lower quality ore, thinner coal beds, at deeper depths = higher costs, affecting the economics of CTL.

(3) We should imitate the big China CTL program!

Not really. China planned by 2020 to build CTL plants producing one million barrels/day (for comparison, today the US imports roughly ten million barrels/day). In 2006 China had 27 CTL projects of varying sizes under construction or in planning totally 31 million tonnes/year (plus 30 coal to methanol plants and other coal-to-chemical plants). During the past years China slowed its program, fearing to overextend their coal and fresh water resources (5+ gallons per barrel output), plus environmental concerns (especially CTL waste products). For example, from Reuters, 28 August 2008:

China has ordered the suspension of all but two coal-to-oil projects in the country, said the Ningxia Development and Reform Commission, in northwest China’s Ningxia Autonomous Region. The exceptions to the suspension are a project due for launch in {Ordos} Inner Mongolia this year by Shenhua Group, China’s largest coal producer, and a second {in Ningxia} belonging to Shenhua’s Ningxia Coal Industry Group and South Africa’s Sasol Ltd (SOLJ.J), the commission said on its website.

The National Development and Reform Commission, China’s top economic planning agency, recently issued a circular asking local governments to tighten administration of coal-to-oil projects, it said. China should find the most suitable way of developing coal-to-oil operations via demonstration projects before moving on to the next step, the statement said.

On 4 February 2010 the second project was put on hold.

Many pilot plants and a few demonstration plants remain either under construction or in operation (see lists here and here). The situation is similar in the US. Work on small scale projects; talk about large projects for the future.

(4) Companies can run CTL plants as an economic alternative to oil at $60/barrel

Probably not. Comparing CTL to other energy sources — especially unconventionals (e.g., heavy oil or CTL) or alternatives (e.g., solar, wind) — is difficult due to their very different characteristics: capital costs, operating costs, lifespan of equipment, and performance (e.g., reliability, availability). Worse, most of the analysis tends to be by advocates — whose enthusiasm often trumps the need for accurate accounting. This is perhaps the primary reason energy research tends to be of such low utility, even when done by experts (and more so when by informed amateurs, such as David Archibald here).

The promise can be seen in this: “Baseline Technical and Economic Assessment of a. Commercial Scale Fischer- Tropsch Liquids Facility“, National Renewable Energy Laboratory, 9 April 2007. As usual, reality is disappointing compared to the dream.

In January Sasol cancelled a 2009 memorandum of intent to build a 80 thousand bpd CTL plant in Indonesia. It required oil prices of $90/bbl for a 10% return, and $110/bbl for a 15% return. The capital (construction cost) was $125 thousand per barrel-day (source: “CTL cancellation raises further strategy questions”, Merrill Lynch, 19 January 2011). We can compare this with two China’s CTL plants reviewed at the April 2010 World CTL Conference in Beijing.

* China’s largest CTL plant, in Ordos (Inner Mongolia), produces 25 thousand bpd. It started production in 2008, costing $3 billion ($150 thousand per barrel-day). The start-up ramp has been rough, running at 70% capacity in early 2010.
* Yitai Coal to Liquid Company has a 4 thousand bpd demonstration plant in Dalu (Inner Mongolia) started operation in 2009. It cost $300 million ($205 thousand per barrel-day).

The cost of building a CTL plant would, of course, be more in the US than in Indonesia or China. Higher labor costs, more environmental protection and safety equipment.

Operating costs for China plants are not publicly available (i.e., I’ve not found any), but their costs are (or were) subsidized. For example, low-interest loans, plus reduced rates for water, coal, and electricity.

Update: Canada Oil Sands Trust says that as of Q4 2010 their production cost is $37/barrel, plus another $7/barrel in royalties to the Crown and $10/barrel in non-production costs (including administration and interest) — for a total of $54/barrel in operating costs (not including the capital cost). The $60 number is only operating costs, not including capital costs.

Conclusions

CTL has great promise to provide liquid fuels after conventional oil production peaks, allowing the world economy to grow. It will probably not comprise a large fraction of oil consumption. Construction of the required mines, transportation, and CTL refineries takes too long, and global coal reserves might not suffice by the time so many plants were built in 20-50 years.

Most importantly, it will not be cheap oil. It’s one part of the solution for the next several generations. Not the largest part, and certainly not a panacea.