China in the Driver’s Seat on Direct Coal-to-Liquids Production

Coal is here to stay. More in some countries than others. In places like China, while coal is still king, its role appears to be slowly morphing to liquid fuels such as gasoline and diesel. With the world’s third largest reserves of coal after Russia and the U.S., China sees the future in coal-to-liquids (CTL) fuels in order to reduce dependence on foreign oil and to maintain robust domestic CTL production as an alternative to petroleum. Despite environmental and economic costs of producing liquid fuels from coal, China’s state-run Shenhua Group began profiting from its first direct coal-to-liquids (CTL) facility in Inner Mongolia Autonomous Region, China, and producing 216,000 tons of refined oil products in the first quarter of 2011. Although China wavered to use the CTL technology in 2008 due to high production costs and concerns with water use, its push forward resulted in stable production for the past nine months, bringing in 100 million yuan ($15.38 million) in earnings in the first quarter of 2011 to Shenhua.

Direct-liquefaction CTL, which converts coal to liquid fuels by way of heating finely ground coal above 400 degrees Celsius with hydrogen and a suitable catalyst and further processing to obtain naphtha and middle distillates, has not been widely used in the world yet. The reasons include high production costs, technical challenges, comparatively cheap global oil prices that make it difficult to invest in expensive CTL technology, as well as its carbon footprint, which would not be insignificant due to emissions from hydrogen production and thermal loss. There have been long-standing concerns with toxicity and carcinogenicity of liquids produced from direct CTL fuel production, which still warrant detailed studying. For these reasons, the CTL industry has not developed in the U.S., another country with vast coal supplies.

It is unlikely that CTL will gain much traction in the U.S. in the near term, particularly given its massive shale oil and gas production that have further displaced coal in its energy mix. But China’s continued experimentation with direct CTL production to make it economically viable and less taxing on the environment, or failure to do so, would be worth monitoring and taking a note. The true cost-benefit analysis of the direct CTL technology and any serious attempt to develop or invest in it in the U.S. might occur when domestic natural gas prices begin to rise from their current historic lows as well as sustained high crude oil prices.

The Elephant in the Room: Fuel Exports

Much has changed in the U.S. energy landscape that some of the unthinkable scenarios of the yesteryear might just be realistic these days. For example, the U.S. is beginning to flirt with the idea of potentially exporting natural gas, coal and maybe even crude oil.  At least in the words of the newly appointed head of the Energy Information Administration (EIA), Adam Sieminski, the U.S. should be open to crude oil exports to benefit its economy, particularly because the “selling the U.S. oil abroad could help provide a market for light sweet crude produced from shale formations in places like North Dakota, since the Gulf coast refining hub is more suited to process heavier crudes.” While Sieminski’s proposition on oil exports will need to overcome the U.S ban on selling most unrefined crude oil under the Mineral Leasing Act of 1920 and the Outer Continental Shelf Lands Act, which make oil exports nearly impossible, the possibility of exporting natural gas and, especially, coal appears to be less far-fetched, partly because they have created a huge glut in the country.

Proponents of the idea of exporting natural gas from shale formations, production of which increased from nearly nothing to 23 percent of all U.S. gas production in 2010 with prices hovering around $2.8 per million British thermal units, point out that prices and profits are likely to stay depressed for decades without alleviating the glut of natural gas. They have a point. Given that the surge in shale gas production began inevitably eating into the coal market in the U.S. with its record low prices and coal-to-gas switching, King Coal maybe looking at markets abroad as well, particularly since demand for coal is rising in Europe. Reportedly, U.S. coal companies “are spending at least $530 million to increase their coal-export capacity in order to meet high overseas demand.”

Exporting U.S. energy sources may not be swift, but it will be unavoidable provided that the gas glut and unused coal stay idle in the U.S. market. And too bad that it is not receiving as much attention in the government as it should. Even if opponents of natural gas exports argue that keeping gas prices low would be key to many industries, including domestic manufacturing and transportation sectors, few politicians on both sides of the aisle appear to be opposed to gas exports. But even fewer politicians openly state their support to exports lest should they be accused of causing domestic price hikes.  And even if there is an eventual agreement to export natural gas, it looks like there will be cap on the amount. As Cheniere Energy won the bid to build an LNG export terminal in Louisiana to begin operation in 2015, political will to agree on exporting fossil fuels in the U.S. may emerge by that time. Perhaps, it will be ushered in further with influential figures such as Sieminski. When that day comes, the ultimate question will be how much energy should be exported.