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March 22, 2008

AIR FORCE WANTS COAL AS KING OF FLEET'S FUEL

The military branch is pushing the development of a coal-to-liquids
network.

By Matthew Brown, Associated Press

Malmstrom Air Force Base, Montana -- On a wind-swept air base near the
Missouri River, the Air Force has launched an ambitious plan to wean
itself from foreign oil by turning to a new and unlikely source: coal.

The Air Force wants to build at its Malmstrom base in central Montana
the first piece of what it hopes will be a nationwide network of
facilities that would convert domestic coal into cleaner-burning
synthetic fuel.

Air Force officials said the plants could help neutralize a national
security threat by tapping into the country's abundant coal reserves.
And by offering itself as a partner in the Malmstrom plant, the Air
Force hopes to prod Wall Street investors -- nervous over coal's role
in climate change -- to sink money into similar plants nationwide.

"We're going to be burning fossil fuels for a long time, and there's
three times as much coal in the ground as there are oil reserves,"
said Air Force Assistant Secretary William Anderson. "Guess what?
We're going to burn coal."

Tempering that vision, analysts say, is the astronomical cost of coal-
to-liquids plants. Their high price tag, up to $5 billion apiece,
would be hard to justify if oil prices were to drop. In addition, coal
has drawn wide opposition on Capitol Hill, where some leading
lawmakers reject claims it can be transformed into a clean fuel.
Without emissions controls, experts say coal-to-liquids plants could
churn out double the greenhouse gases as oil.

"We don't want new sources of energy that are going to make the
greenhouse gas problem even worse," House Oversight Committee Chairman
Henry Waxman, D-Calif., said in a recent interview.

The Air Force would not finance, construct or operate the coal plant.
Instead, it has offered private developers a 700-acre site on the base
and a promise that it would be a ready customer as the government's
largest fuel consumer.

Bids on the project are due in May. Construction is expected to take
four years once the Air Force selects a developer.

Anderson said the Air Force plans to fuel half its North American
fleet with a synthetic-fuel blend by 2016. To do so, it would need 400
million gallons of coal-based fuel annually.

With the Air Force paving the way, Anderson said the private sector
would follow -- from commercial air fleets to long-haul trucking
companies.

"Because of our size, we can move the market along," he said. "Whether
it's (coal-based) diesel that goes into Wal-Mart trucks or jet fuel
that goes into our fighters, all that will reduce our dependence on
foreign oil, which is the endgame."

Coal producers have been unsuccessful in prior efforts to cultivate
such a market. Cli mate change worries prompted Congress last year to
turn back an attempt to mandate the use of coal-based synthetic fuels.

The Air Force's involvement comes at a critical time for the industry.
Coal's biggest customers, electric utilities, have scrapped at least
four dozen proposed coal-fired power plants over rising costs and the
uncertainties of climate change.

That would change quickly if coal-to-liquids plants gained political
and economic traction under the Air Force's plan.

"This is a change agent for the entire industry," said John Baardson,
CEO of Baard Energy in Vancouver, Wash., which is awaiting permits on
a proposed $5 billion coal-based synthetic fuels plant in Ohio. "There
would be a number of plants that would be needed just to support (the
Air Force's) needs alone."

owrapscan Only about 15 percent of the 25,000 barrels of synthetic
fuel that would be produced daily at the Malmstrom plant would be
suitable for jet fuel. The remainder would be lower-grade diesel for
vehicles, trains or trucks and naphtha, a material used in the
chemical industry.

That means the Air Force would need at least seven plants of the same
size to meet its 2016 goal, said Col. Bobbie "Griff" Griffin, senior
assistant to Anderson.

Coal producers have their sights set even higher.

A 2006 report from the National Coal Council said a fully mature coal-
to-liquids industry serving the commercial sector could produce 2.6
million barrels of fuel a day by 2025. Such an industry would more
than double the nation's coal production, according to the industry-
backed Coal-to-Liquids Coalition.

On Wall Street, however, skepticism lingers.

"Is it a viable technology? Certainly it is. The challenge seems to be
getting the first couple (of plants) done," said industry analyst
Gordon Howald with Calyon Securities. "For a company to commit to this
and then five years later oil is back at $60 -- this becomes the worst
idea that ever happened."

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