Wall Street Journal (pg. A15)  [Printer-friendly version]
September 11, 2007


Use as Liquid Fuel Is an Aim, but Cost, Pollution Are Issues

By Matthew Dalton

The coal industry wants the U.S. military to jump-start a major new
market for its product: liquid transportation fuels derived from coal.

The effort, however, faces skeptics who say the Pentagon shouldn't be
subsidizing the high cost and potential environmental harm of what is
known as coal-to-liquids technology.

The debate, unfolding in Washington, underscores the difficulty of
finding alternatives to oil in a time of global supply concerns.
Unconventional sources -- from Canada's vast tar sands, to natural-gas
liquids, to ethanol -- promise to supplement supplies of crude from
difficult-to-reach or politically unstable regions. Yet these sources
face their own challenges, with cost often a major stumbling block.

Expanding coal demand beyond the traditional uses of generating
electricity and making steel could lead to big profits for both coal
miners and companies that develop coal-to-liquids technology. Greg
Boyce, chief executive of major coal miner Peabody Energy Corp. of St.
Louis, said at a conference last week that using coal to make
transportation fuel could increase annual U.S. coal demand by one
billion tons by 2030, compared with demand of 1.2 billion tons in

The problem is the plants that do the job are expensive to build and
are profitable only if the price of crude oil stays well above $40 per
barrel, according to industry estimates. Benchmark light, sweet crude
is currently trading above $70 a barrel on New York futures markets,
but the oil markets over the long term have proven susceptible to
spikes and drops.

Yesterday on the New York Mercantile Exchange, crude for October
delivery rose 1% to settle at $77.49 a barrel.

The plants, therefore, need military support to get built, Mr. Boyce
said. "Lining up the $8 billion worth of capital without baseload off-
take agreements is a challenge today."

A commitment from the Defense Department to buy fuel above the break-
even production cost could ease doubts about the technology. That
would require a change to federal procurement laws, an effort backed
by the coal industry and some Pentagon officials, but challenged by
skeptics and some lawmakers.

The industry says the value of a natural fuel resource in the U.S.,
home to some of the world's largest coal reserves, should be worth the
higher cost of fuel made from coal. Political instability in the
Middle East, along with declining global oil reserves, will pose more
serious threats to the military's fuel supply over the next two
decades, the industry argues.

"Competition for global oil is only going to get more intense and more
pricey," said Corey Henry, spokesman for the Coal to Liquids
Coalition, a group representing miners and coal-to-liquids technology

The coal-to-liquids process, known as Fischer-Tropsch, is a proven
technology, proponents say. Nazi Germany derived about half the
military fuel it used in World War II from the Fischer-Tropsch
process. South Africa relied heavily on the process because of
international sanctions in the apartheid era that limited the
country's ability to import oil.

Others are skeptical. They say the armed forces buy and consume a
large percentage of fuel overseas, making it less useful to rely on
fuels produced domestically. If the military wants to develop an
assured supply of domestically available fuel, one option would be to
create a military petroleum reserve that could be tapped in a crisis.

"Right now, coal-to-liquids looks to me to be pretty darn low on the
reasonable list of alternatives," said James Woolsey, former director
of the Central Intelligence Agency. Mr. Woolsey is participating in a
report being prepared by the Defense Science Board, which advises the
Pentagon, on the military's energy policy.

Joseph Romm, a senior fellow at the Center for American Progress, a
left-leaning think tank, who is also participating in the Defense
Science Board's report, said the military doesn't need its own
dedicated fuel supply.

"The notion that the Pentagon has to spend all this money to give
itself assured supply is kind of a contrived argument," Mr. Romm said.
"The consensus of just about everybody on the panel was it didn't make

A major problem confronting the coal-to-liquids industry is global
warming. The Fischer-Tropsch process produces more than twice as much
carbon dioxide, the main global-warming gas, as refining fuel from

Proponents say coal-to-liquids plants can be outfitted to capture
carbon dioxide and store it in underground caverns. It can even be
piped to oil fields and pumped underground to help retrieve oil. But
adding this capability also adds hundreds of millions of dollars to
the cost of each plant.

A coal-to-liquids plant that doesn't capture carbon dioxide can turn a
profit with oil at $40 per barrel, but a plant with this capability
can be profitable only when oil trades above $50 to $55 a barrel. The
industry estimates that building an 80,000-barrel-per-day coal-to-
liquids refinery would cost $7 billion to $9 billion, compared with
less than $2 billion to build a similar-size petroleum refinery.

There are other environmental problems with coal-to-liquids plants,
skeptics say. The Fischer-Tropsch process also uses five to seven
gallons of water for each gallon of fuel produced, according to a 2006
Energy Department report. "Many of the places they talk about putting
these plants, like the West, don't have this type of water to waste,"
Mr. Romm said.

This problem recently led China to scale back major investments it was
making into coal-to-liquids plants. In July, China's National
Development and Reform Commission, the state's industrial watchdog,
restricted approval for coal-to-liquids plants, according to the
Xinhua News Agency.

The effort nevertheless has some backers at the Pentagon. The Air
Force, which consumes the most fuel of the military services, supports
using coal-to-liquids fuel. It recently certified the B-52 bomber to
run on a blend of Fischer-Tropsch fuel and normal fuel. The Air Force
plans to do the same for its entire fleet by 2011. The Air Force
intends to buy about 400 million gallons annually by 2016. The service
supports legislation that would allow it to sign 25 year contracts for
supply, even at historically high prices above $50 per barrel, said
William Anderson, assistant secretary of the Air Force for
installations, environment and logistics.

"If the legislation helps spur on a market that is necessary, we
believe, to ensure our long term national security, we believe it's
something that has a lot of merit," Mr. Anderson said.

The military faces a five-year limit on how long it can sign contracts
for supplies. Without the certainty that the military will be there to
buy this product, regardless of what happens to oil prices, investors
are unlikely to back coal-to-liquids plants.

The Coal To Liquids Coalition hopes to extend the contracting
authority to 25 years. Earlier this year, the House rejected several
provisions that would provide loan guarantees and tax breaks for coal-
to-liquids plants as part of comprehensive energy legislation moving
through Congress. Changing the military's contracting authority is now
probably the coal industry's best chance of receiving federal support.

A spokesman for Senator Carl Levin, chairman of the Senate Armed
Services Committee, declined to comment. A spokesman for the House
Armed Services Committee didn't respond to calls seeking comment.

Write to Matthew Dalton at Matthew.Dalton@dowjones.com

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