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Will Coal Replace Oil?

Feature Stories | Jul 13 2006

By Greg Peel

One of the reasons Hitler lost the war is because he ran out of fuel. As Germany had not been bestowed with oil reserves, Hitler was aware of the important part oil would play in his plan for world domination. The eastern front was very much about securing Russia’s oil supply.

In the end he failed, but not before exploiting new technology that had been pioneered by two scientists called Fischer and Tropsch in the 1920s. They were able to turn coal into diesel. Rumour has it that when Patton made the final push into Germany, he did so using syphoned-off Nazi synthetic fuel.

Not long after, the Middle Eastern oil fields were opened up. There was seemingly an endless supply. The concept of coal conversion became irrelevant. It remained irrelevant right up until recently when oil could be purchased for US$16/bbl.

Except in South Africa. During the 1980s when South Africa was under the rule of an apartheid regime, oil imports were subject to international sanction. In order to overcome a lack of fuel, one company, Sasol Ltd, took advantage of the country’s vast coal reserves and revisited the earlier German technology.

It was a long road, but for the last seven years aircraft flying out of Johannesburg International Airport have used a blend of jet fuel containing 50% converted coal. After decades refining the technology, and in a new oil price regime where US$70/bbl is beginning to feel like the norm, Sasol is making windfall profits. It hopes to win approval for a 100% synthetic jet fuel this year.

Sasol has become the leading world expert in coal conversion, and the US is very interested. For one thing, the US is keen to reduce its reliance on Middle East crude. But with a focus that only an American could have, the real push is coming from the military. Rummy wants in.

More than half of the fuel consumed by the US government is used by the air force. About US$4.5 billion per year’s worth. The air force recently learnt its fuel bill would rise, as of June 1, by 57c per gallon. Last year it rose 40c.

While the military may be leading the charge, so to speak, commercial airlines are watching with acute interest. Rising jet fuel costs have threatened to all but cripple the global airline industry. The general thinking has always been that synthetic fuels, in various forms, only come under the radar when the oil price exceeds US$50/bbl. Any less and traditional jet fuel is the most economical. Will we see US$50/bbl again?

The US is, nevertheless, not without its coal conversion converts. One Pennsylvanian company, WMPI Pty Ltd, has been working on turning that state’s waste coal into zero-sulphur diesel or jet fuel and is commissioning a plant this year. It is doing so finally due to a big, fat grant from George Bush. There are other coal or gas conversion plans being rolled out in other US coal-producing states.

It makes sense. While the US is a net importer of oil, and it’s pretty light-on for gas as well, it boasts 27% of the world’s known coal reserves. Russia has 17%, China 13%, India 10%, Australia 9% and South Africa 5%.

Why, then, has the US been so slow to adapt coal conversion technology when the concept should have been banging successive governments over the head? The US is far and away, daylight second, the world’s biggest consumer of oil.

The answer lies largely in cost, as much as it might in a lack of foresight, or a blind belief in the God-given right to consume oil at will. Converted coal can produce oil at around US$35-40/bbl. Add in fixed costs and you reach the rough US$50/bbl figure for economic viability. Crude oil has never been higher than US$50/bbl until last year.

That’s in nominal terms of course. The 1980 previous oil price peak generated a similar wave of panicky interest in alternative fuel sources, with one of the most predominant being shale. Shale oil was going to be the West’s great saviour, and Sheik Yamani could go and stick it. The problem was, it was also expensive.

By the time anyone thought seriously about large-scale shale oil production, the oil price collapsed again when the OPEC supply-side shock was over. Shale oil became of minor historical interest.

When the oil price shot up again recently, one was hard pressed to find analysts who didn’t see it as a short term phenomenon. Sure, China was suddenly buying lots of oil, but at higher prices demand would fall and supply would increase and everything would revert to normal, except at maybe a slightly higher average.

When Goldman Sachs issued its infamous US$101/bbl prediction two years ago, most fellow analysts laughed. They’re not laughing anymore.

Governments, in the meantime, have relied on their respective energy agencies to keep them grossly misinformed. Only a year ago the US Energy Information Agency predicted crude would soon be back at US$30/bbl. The equally incompetent Australian agency, ABARE (Australian Bureau of Agriculture and Resource Economics), has said consistently in recent years that oil prices are about to fall.

"I have made the occasional mistake", said Dr Brian Fisher, executive director of ABARE, to a senate committee recently (source: Four Corners).

Coal is converted into oil by first mixing it with oxygen and steam at high temperature and pressure to produce carbon monoxide and hydrogen. The second step – the Fischer-Tropsch synthesis – uses a catalyst to transform the gas into a liquid synthetic crude, which is further refined.

By-products are mercury, sulphur, ammonia and other compounds that can be sold. The other major by-product is carbon dioxide, and herein lies a problem.

A coal-based power plant of equivalent size to WMPI’s conversion plant in Pennsylvania discharges about four million tons of carbon dioxide per year. As greenhouse gas emission controls come into play, at least in some countries, the additional burning of coal may not be viable, particularly if carbon emissions are monetarily quantified.

However, there are environmentally positive outcomes for coal-conversion as well. The actual diesel fuel, when used in a car for instance, has been shown to produce only 10% of the carbon monoxide and 70% of the particulate emissions of conventional sulphur-free diesel (source: Scientific American). Moreover, the South African experience has shown that oil can be produced from waste coal.

In Pennsylvania, as an example, for every two tons of coal extracted, one ton is low-energy, useless waste coal. This sits in a stockpile – 260 million tons of it at present – that is in itself an environmental hazard.

While South Africa has refined the technology, the fact remains work needs to be done to sell coal-conversion as a cleaner alternative to regular crude. It has even been suggested that electricity be produced during the conversion process, and that carbon dioxide emission be collected to be pumped down oil wells. At least they’re trying.

But when it comes to alternative non-renewable energy sources (ie other than wind, solar etc) pundits tend to overlook one thing. Nuclear energy might be clean, but uranium mining is far from clean. Coal-converted oil might be better than regular oil but coal mining is a very dirty business. The same can be applied to "clean coal" technologies.

What price might the earth pay to ultimately bring the oil price down?

There is little doubt that the demand side of the equation is what has been driving up the price of oil. No one quite anticipated just how much energy the world’s emerging economies would require. It hasn’t helped that geopolitical and religious conflict have further thrown supply into doubt. And supply itself has been a long time catching up to rising demand.

Could it be that China might be forced to utilise its extensive coal reserves for oil production?

The answer to this question might be, despite China’s already drastic pollution problems: it might have to. The world’s reserves of oil may indeed be dramatically low. If you believe some experts, we may have already reached "peak oil".

The question of peak oil has suddenly been a headline-grabber, even though scientists have been warning of the peak oil phenomenon for years. Peak oil may only be a decade away, or we may have passed it already.

What is peak oil?

When an oil reserve is first tapped, up from the ground comes a-bubbling crude. Or if you’re more of a Jimmy Dean fan, it spurts high into the air. This is because underground oil reserves are trapped under a lot of pressure.

When the first well is drilled, the oil delivers itself. Maybe hundreds of barrels a day. The next step is to see just what sort of area the reserve might cover by drilling a lot of new wells. Eventually, the one reserve may have been accessed by hundreds of wells, delivering thousands of barrels per day under its own pressure.

After a period of time, natural laws dictate that the pressure will begin to subside and eventually reach equilibrium. From this point on, the oil needs to be pumped out. As the level in the well starts dropping, it may be necessary to pump water in to get the oil out. This becomes more costly and does not produce the same barrel-per day volume. In order to cover the shortfall, more wells need to be drilled to keep production levels up.

Finally an oil reserve simply will not be able to produce the same volume per day and the cost of recovering the remaining oil will rise. The reserve has passed its peak. It’s now all down hill. After a period of time any remaining oil will not be able to be economically recovered. Game over.

The technology that allowed oil to be recovered from under the sea was a great leap forward for an oil-hungry world. Thanks to the North Sea, Britain became an oil exporter in 1981.

In 1999, production peaked at 4.5 million barrels per day. By 2005, it had slumped to 1.5 million. That was 14% less than 2004, and less than Britain’s daily consumption. (Four Corners)

The US Department of Energy’s stance on peak oil is that it’s "decades away". But then one wouldn’t want to start a panic. Because according to US oil company Chevron, in 33 of the world’s 48 most important oil producing countries production has already peaked. Australia’s peak was passed in 2000. (Four Corners)

The Association for the Study of Peak oil has visited every oil producing country and every well in the world and the downward trend is evident everywhere. One saviour may well be the next big oil discovery. When that happens we can all get some sleep.

The only problem is oil discovery has also been trending down – for the last 50 years in fact. Consumption has risen in the meantime, and it was in 1981 when the world last found more oil than it consumed. (Four Corners)

While the US doesn’t want you to think oil has peaked, the Middle East doesn’t either. Rather, the Middle East is gearing up its production capacity to be able to meet the needs of the emerging economies. Granted, it’s taking some time, but new wells are being drilled and we’ll get there eventually.

Middle Eastern oil reserves are one explanation offered by those who believe the oil price will eventually fall from its highs. Twenty years ago, Saudi Arabia claimed to have 260 billion barrels of oil under the ground. The Saudis produce over 9 million barrels per day, or 10% of world consumption.

No one is allowed in to assess Saudi’s oil reserves for themselves. It is a closely guarded secret. Having pumped 10% of the world’s oil needs for twenty years the Saudis now claim to have – 260 billion barrels of oil under the ground. That’s right, it hasn’t changed. (Four Corners)

Suspicious? I would be. If the Saudis still have that much oil then why is the oil price up here? Even US$40/bbl seemed exorbitant a couple of years ago. And it is definitely not in the interest of Saudi Arabia or any other Middle Eastern oil producer to allow the price to go so high. It is at this price that the world starts talking about moving away from oil.

If the oil is really there, then the most sensible course of action would be to let the world assess that for themselves. Okay, it might take some time yet to ramp up production, but knowing definitively that there’s nothing to ultimately worry about would ease pressure on the oil price. Yet the best the Saudis can come up with is a figure that never changes.

If the oil is not there, what happens next? There are the massive tar sands of Canada, but recovering oil from tar sand is expensive and environmentally unsound. There are reserves in the Arctic regions, and perhaps the Antarctic, but will that be a popular move?

If the world needs oil for its existence, then one possibility is clearly coal conversion. Coal is already used to produce electricity, and steel. Estimates suggest there is 200 years of known coal supply in the world, or 100 if it is used for conversion to oil.

From an environmental perspective, one would hope we can quickly move away from needing any form of oil. Realistically, the price of coal is not likely to drop much from here.

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