Statement of Clarence L. Miller
Director
Office of Sequestration, Hydrogen, & Clean Coal Fuels
Office of Fossil Energy
U.S. Department of Energy
to the
Committee on Energy and Natural Resources
United States Senate
April 24, 2006

Summary:

The United States’ future economic security will remain linked to an efficient transportation system of air, rail, and highway vehicles that depend on a continuous supply of affordable liquid fuels with characteristics enabling vehicle manufacturers to meet increasingly stringent environmental regulations. In the current supply/demand situation, the Nation’s transportation fuel requirements are met in part by crude oil and refined products from unstable regions of the world. Crude oil delivery and refining in the Untied States is concentrated in the Gulf Coast region, which presents concerns regarding destructive weather conditions. Additional challenges, including urban and regional air pollution, greenhouse gas emissions, and the availability and cost of transportation fuels, present unique issues that must be addressed to safeguard economic growth, social stability and public health.
Technology is now in hand for producing synthetic oil, and oil products from coal. Liquid fuels from coal are clean, refined products requiring little if any additional refinery processing, are fungible with petroleum products and, therefore, can use the existing fuels distribution and end-use infrastructure. There are preliminary analyses [Mitretek Technical Report 2005-08, “A Technoeconomic Analysis of a Wyoming Located Coal-To-Liquids Plan”] that indicate synthetic oil costs may drop into the $35 per barrel range after several initial higher cost plants are built. This estimate assumes near-zero atmospheric emissions of criteria pollutants, assumes reduced water use through air coolers instead of water cooling, and assumes carbon capture and sequestration. However, no commercial U.S. plants have been built. The primary barrier to commercial introduction of the technology has been the volatility and uncertainty of world oil prices. The private sector financial markets are best positioned to evaluate whether, when, and how to build coal to liquids plants given this market uncertainty.

The Resource

Coal is the most abundant fossil fuel resource in the United States. Recoverable coal reserves are estimated (as of January1, 2005) at 267 billion tons. As coal mining technology improves and additional geological information becomes available, this reserve estimate will grow, since it is based on current mining methods and the measured and indicated reserves within a total U. S. coal resource base estimated at nearly 4 trillion
tons. These coal resources are widely distributed throughout the United States with recoverable reserves located in 33 states.
Based on current annual production of nearly 1.1 billion short tons, the United States has an approximate 250-year supply. However, this estimate needs to be placed within the context of the projected use of domestic coal in the United States and how coal reserves and resources are defined and quantified. To the first point, the Energy Information Administration (EIA) projects a steady rise in coal consumption to 1.78 billion short tons by 2030 in its reference case forecast. The increase is largely due to the projected increase in new coal-fired power generating capacity, projected to increase at 1.7% per year through 2030. To the second point, the EIA estimates the "demonstrated coal reserve base" at 494 billion short tons. With anticipated advances in mining technology, there is the potential to access a significant portion of the reserve base, and support some degree of increased production of coal for a coal-to-liquids industry.

Background: Coal to Liquids Production

Production of liquid fuels from coal has a long history, and the significant advances made in technology over the past two decades make it a potential component of a strategy to increase domestic production of liquid fuels. In the early 1900’s coal was first reacted with hydrogen and process solvent at high temperature and pressure, and produced a coal-derived liquid or synthetic crude oil. This direct liquefaction approach was later improved and used by Germany in the second world war to fuel the Luftwaffe with high octane aviation gasoline. In the 1920’s two German scientists, Fischer and Tropsch, passed synthesis gas – consisting of carbon monoxide and hydrogen – over metallic catalysts and produced pure hydrocarbons. These hydrocarbons produced by the Fischer-Tropsch (FT) process proved to be excellent transportation fuels. This overall coal-to-liquids process, known as indirect liquefaction because it first involves complete breakdown of the coal to synthesis gas, was used commercially in the 1950’s by the South African Synthetic Oil Corporation (SASOL) to produce transportation fuels (gasoline and diesel) using synthesis gas produced by the gasification of coal. Since then, SASOL has built two large facilities that produce over 150,000 barrels per day of transportation fuels. The South African government enabled these plants to be built by providing a price floor safety net for SASOL’s coal liquids. In both cases, Nazi Germany and Apartheid South Africa, the primary motivation for government support of coal liquids was that the countries were not able to access world oil markets.

Technology Status

The U.S. Government – directly and through industrial partnerships and international cooperation – has for over 30 years supported R&D on both direct and indirect technology. The Government programs resulted in improved processes, catalysts and reactors. These indirect liquefaction of coal processes produce clean, zero sulfur liquid
fuels that are cleaner than required under the EPA Tier II fuel regulations. These fuels are compatible with petroleum fuels and can utilize the same distribution infrastructure. Because these fuels are essentially refined products, very little if any additional refinery capacity would be needed for their upgrading. Indirect liquefaction technology has a proven track record and is technically viable. Although SASOL has successful commercial plants in operation, the integration of modern entrained-flow coal gasification with advanced slurry-phase FT synthesis has not yet been demonstrated. Preliminary studies [Mitretek Technical Report 2005-08] indicate that first plant costs would have products in the $45 per barrel range, but no commercial U.S. plants have been built, making cost estimates difficult. Still more difficult to estimate is the cost of production for subsequent plants, but these studies indicate that coal liquids might eventually be produced in the $35 per barrel range if domestic construction experience is gained. However the principal market barrier discussed would remain. China, with an increasingly large appetite for liquid fuels, scarce supply of domestic petroleum and large coal resources, is reportedly moving toward commercialization of coal-to-liquids technologies. In the U.S. demonstration plant to produce liquid transportation fuels from anthracite waste was competitively selected in January 2003 under DOE’s Clean Coal Power Initiative. However, the project has been unable to obtain financing for the private sector cost share.

Opportunities and Impediments

As noted, the U.S. is endowed with over 267 billion tons of recoverable coal reserves, equivalent to 250 years supply at current usage rates. The opportunity exists to use coal-to-liquids (CTL) technologies to produce clean transportation fuels that could supplement petroleum supply if world petroleum prices remained elevated over the approximately 30-year time horizon required to pay back the significant initial capital investment.
Despite current world oil prices, there are significant existing impediments to deploying CTL technologies: first and foremost, the uncertainty and volatility of the world oil price; high capital investment for the plants; technical and economic risks associated with first-of-a-kind plants; environmental concerns associated with increase coal production and the coal to liquids industrial process; public attitude to increased coal use; siting and “not in my backyard” issues for new plants; and increasing the supply of coal given a supply chain that is already stretched to capacity. Over the long term, the capital cost of the plants could be reduced by the experience gained in the actual construction and operation of commercial facilities. It is well documented that first-of-a-kind plants are always significantly more costly than subsequent or Nth plants. While coal liquids technology is proven, the domestic construction industry has an opportunity to reduce its costs with increased experience. Environmental concerns can be addressed by using clean coal technologies to reduce emissions of criteria pollutants, and in the future to capture and sequester carbon dioxide to limit greenhouse gas emissions. Siting issues can be mitigated by maximizing retrofit opportunities at existing coal-fired power plants.

Environmental Issues

The technology that underlies CTL fuel production offers the potential for low emissions of criteria and toxic air pollutants, water quality, and solid wastes. Nonetheless, this promise of high performance needs to be verified during the design and initial operations of first-of-a-kind CTL plants and costs may be prohibitively expensive. Significant water demand will remain a constraint on CTL fuel production, particularly in regions with limited water resources. Other key environmental issues are the impacts on land, land use and watersheds caused by coal mining and the traffic and local development associated with CTL plant construction and operations. These considerations may prevent the construction of CTL plants in particular areas. However, coal resources suitable for CTL fuel production are widely distributed throughout the United States. The impact of site-specific environmental constraints on the development of a
strategically significant CTL industry will depend in part on how environmental regulations are applied on local, regional, and national levels. Permitting delays should be anticipated, especially in view of the large size of and lack of experience in operating CTL plants. Even if the environmental risks are addressed, there is a very good possibility of public reluctance to accept the need for large new industrial facilities, particularly those using coal.
At present, no requirements exist in the United States to manage carbon emissions from fossil fuel sources. However, in full recognition of the importance of carbon management an extensive research and development program is underway to develop technology, processes and systems to capture and store the carbon dioxide produced during the conversion process. The carbon dioxide could be stored in deep saline formations or sold for use in enhanced oil recovery operations. It is possible that CTL plant emissions and the emissions from utilization of CTL products would be comparable to those associated with the production and consumption of petroleum-based fuels.

Next Steps

The greatest market barrier for CTL is the volatility and uncertainty of future world oil prices. The private sector is best positioned to evaluate market or oil price risk and respond accordingly with an appropriate deployment strategy.
Although past department efforts and some Congressionally directed funding has focused on production of liquid fuels from coal, the FY 2007 Budget does not support these activities. Coal to liquids is a mature technology receiving funding from the private sector for evolutionary advances and incremental improvements and therefore not consistent with the Administration’s Research and Development Investment Criteria. Although the FY 2007 Budget does not directly support CTL technology, there are some overlapping activities directed at electricity and hydrogen generation that the private sector could apply to reducing production costs and technical risks, and improving environmental performance of coal to liquids plants. The FY 2007 Budget supports production of hydrogen from coal and some funding will be used for development of liquids that while not applicable for conventional internal combustion engines because their hydrogen content is too high, could be an efficient way to move fuel for hydrogen
applications through existing infrastructure. The FY 2007 Budget promotes the goal of reducing dependence on foreign sources of oil through development of technologies consistent with the Research and Development Investment Criteria, such as cellulosic ethanol, battery technology, and hydrogen, among others. Over the mid to long term, these technologies could reduce demand for conventional sources of petroleum and ease pressures on world oil prices.
The resource exists, current technology is available and it is possible that continued evolutionary R&D will produce advanced processes that will continue to modify the private sector’s analysis of whether the economic and environmental performance of the processes used in the implementation of a coal-to-liquids industry for the production of alternate fuels justify plant construction, in tandem with the primary consideration of petroleum market risk.
If economic, these fuels could contribute to reducing our dependence on oil imports and significantly contribute to the Nation’s energy security.
This completes my testimony, and I would be pleased to respond to your questions.

Senate Committee on Energy and Natural Resources

Testimony by Dr. Arie Geertsema

Director University of Kentucky Center for Applied Energy Research (CAER)

April 24, 2006.

Mr. Chairman and Members,

Thank you for the invitation to contribute to the discussion about gasification and coal to liquids (CTL) in the context of the Energy Policy Act of 2005.

By way of introduction, I present some of my background.  I was with the South African company Sasol, the world’s only commercial coal-to-liquids company, for 20 years. I was the Works Manager at the original Sasol One plant for three years and then led the corporate R&D of Sasol for a decade until the end of 1997. Then followed a period in Australia working on natural gas conversion to liquid fuels (GTL) before I joined the CAER in the beginning of 2001. I am therefore very familiar with both the theory and practice of CTL and gasification technologies.

In this testimony I wish to share with you some of my views regarding the greater deployment of CTL technology and, more importantly, suggestions on how progress can be made to establish a viable and sustainable CTL industry in the USA. I do this on behalf of the CAER and also wish to note that I am a member of the executive panel for the Southern States Energy Board’s “The American Energy Security Study” where I am the representative of the Kentucky Office of Energy Policy, a co-sponsor of the study. I am also representing the University of Kentucky in the three-university “Coal Fuel Alliance”. I’ll later comment on both these activities.

I shall not dwell on the by now well-known compelling statistics regarding liquid fuels supply and projected demand coupled with strategic and security of supply considerations. I’d rather focus on CTL and gasification from a technology development and project execution perspective.  I shall deal with CTL with emphasis on indirect (Fischer-Tropsch) rather than direct liquefaction.
 
In Attachment A, I present a brief review of aspects of the Sasol developments from which some pointers can be taken which have contributed to their known commercial success.  Some of these aspects from especially the Sasol Two and Three experiences include:
- A national will to reduce the import of crude oil for transportation fuels existed
- The projects showed financial viability when started
- Government loan guarantees were provided
- A floor price mechanism (fuel prices are regulated in South Africa) was established
- Timing, in retrospect, was ideal
- Rapid repayment of loans occurred and the company has long been functioning financially independently in the private sector and there are and were very significant macro-economic benefits to the establishment of this industry
- Subsequent internationalization of the business and diversification strengthened profitability
- Many further growth opportunities were implemented, and a 34,000 bbl/d  Gas-to-Liquids plant in Qatar is due to be inaugurated early in June 2006
- Ongoing significant investments in R&D are made and technology developments improved profitability. ($60 million for additional FT pilot units was announced this year.)

Reflecting on the above considerations, one notices that the Energy Policy Act of 2005 provides a framework for establishing conditions which reflect some of the mentioned Sasol success factors, such as loan guarantees and tax credits which will ease the financing of projects. The President clearly stated that the USA should move to a greater self-sufficiency regarding transportation fuels, with specific reference to coal derived fuels. Thus the strategic intent to promote CTL in the US is developing and is set to gain further momentum as is reflected by legislation introduced by various senators since the enactment of the Energy Policy Bill of 2005.

The latest DOE Fossil Energy budget contains some components for funding CTL related activities, like gasification, gas clean-up and CO2 capture with sequestration.  However, CTL as such does not currently feature as a separate program. Although there are now commercial FT units, it is, in my opinion, justifiable to put CTL RD&D back into the DOE portfolio. The geopolitical and commercial circumstances now justify such a step. An increased level of funding at all levels of RD&D will greatly enhance future success, as will be discussed below.  There has been support for projects of Syntroleum, Headwaters and WMPI (the latter two through the Clean Coal Power Initiative), some of which are still in negotiation.  Demonstrations of this kind are appropriate but I believe a more broad-based program with a balance between enabling research, pilot units and demonstration facilities should be supported. 

In the deployment of CTL there is often an urge to deal with a perceived lack of commercial progress by promoting more Research and Development. Any technology can be improved by doing more R&D, as has been proven.  In this case, I believe the short term thrust should be to get facilities built and to establish an experience base for the production of products and to simultaneously embark on a more aggressive R&D program. There is much to be gained by establishing an active FT CTL program in the US again.  There will be several substantial benefits from doing this:

- Currently the local human resources in this area, as in coal technology in general, are scarce.  By encouraging industrial and DOE sponsored research, new human resources will be cultivated at undergraduate and graduate level.  Prototype pilot plants can serve as valuable training grounds for operators and technicians and can also be used for component level development.

- The results from such R&D could be closely coupled to operating facilities to ensure relevance to optimize processes and products further.

- Studies to improve product performance can be done much more cheaply at a small pilot scale which needs to be a “proof of concept” type facility where products of different specifications could be produced for engine and turbine testing. Especially with the great interest from the DOD in “single battlefield” fuels, this could be an important asset. 
The Energy Policy Act of 2005, Section 417, authorized $85 million for the universities of Purdue, Southern Illinois and Kentucky to pursue the development of FT CTL based on Illinois basin coal.

- These universities entered into a Memorandum of Understanding in October 2005 and have started collaborating with seed funds made available by the respective state governments. The name Coal Fuel Alliance (CFA) was chosen. A request for the appropriation of funds for the first year was submitted in March 2006 to the House Energy and Water Appropriations Subcommittee. Attachment B is a copy of this request. It outlines the rationale for the initiative with emphasis on the first year’s activities. A request of $14.5 million, which will be leveraged by contributions from the universities and states to make $18.1 million available, was submitted.  The first step will be to establish a ½ bbl/d FT facility at CAER with a “mini-refinery” to produce products for engine testing.  This is on the critical path to generate samples of different grades and qualities so that later, larger facilities can be designed more specifically to meet targeted specifications. These products will be tested in the engine testing facilities at Purdue. Collaboration with the DOD to make products in the “mini refinery” for their applications is envisaged.

- The CFA wishes to carry on “open” research, such as the CAER has done over many years.  This implies not being locked in to a single technology or having constraining IP limitations, but rather to be available as a test bed for various technologies and companies.

- The CFA has been in discussions with DOE NETL officers to keep them informed of its plans. The CFA accepts that within the current NETL programs and budget there is not provision for the CFA activities but a profitable collaboration is foreseen in the near future as appropriations might be made to the CFA.

- The plans for the next few years have started to take shape although the CFA has not yet decided on details for the “test facility” as foreshadowed in the Act.

There are existing commercial technologies which could produce transportation fuels by using CTL. (This argument has been used in the past to terminate the DOE funded FT catalysis work.)  However, FT technologies and applicable commercial experience are not necessarily readily available to all industrialists who wish to practice CTL. There are commercial reasons for this situation, which I do not want to go into now.  I suggest that there will be great value in supporting a range of technological options for the various processes involved in CTL.  For instance, various gasifier developments have been and are being supported.  The same approach can be applied to CTL. By creating more options at the enabling, pilot and demonstration level, the market place and commercial realities can take implementation forward. Several factors are of importance and supported development of different approaches could help to address these matters:

- A CTL plant is comprised of a very complex integration of a number of major process blocks such as coal gasification, air separation (when an oxygen-blown gasifier is used), gas cleaning, FT synthesis and FT product refining to final products.  There are also numerous infrastructural, environmental control, ash handling and steam/power system facilities which are essential.  The full commercial integration of these process steps for CTL has so far only been done by Sasol. Building blocks at various levels of operational readiness are offered commercially but more experience with integrated facilities is needed to provide comfort to financiers. A so-called “wrap-around” package from a reputable company will greatly improve the bank-ability of CTL projects. In this phase of uncertainty, support and encouragement measures will be helpful.

- Recent estimates by the DOE, various consultants and Sasol indicate that the capital outlay for a CTL facility could be $60,000 per daily barrel or more provided it is of a meaningful size, preferably about 50,000 bbl/d or larger to get good economy of scale.  These numbers are only indicative and the actual cost will vary with the location, site-specific conditions and other factors.  This means that a 50,000bbl/d facility will cost at least $3 billion. It should however, be noted that there are cases when smaller plants would suit the needs of project developers or site specific circumstances better. By accepting a certain “dis-economy” of scale, (a higher capital cost per installed capacity), the overall project economics might still be attractive. There could for instance, be a justification for facilities of 5,000 to 10,000 bbl/d to produce products for certification by the military for special grades of fuel. There might also be developers who prefer modular decentralized facilities rather than large units.

- There are options for lowering the capital cost, such as using a brown field site or co-locating with facilities and sharing common infrastructure.  Such cases are site specific and generic economic numbers can be misleading and should be avoided.

- The yield of liquid products in a CTL facility will depend on the quality of the coal and also how much coal will be used in a facility to co-produce the needed power for the plant, or to produce additional power for export.   A typical figure is about 2 barrels per ton of coal.  This implies that for a 100,000 bbl/d facility about 50,000 tons/day coal is required or about 18.3 million tons per year.

- It seems on paper that a combination of CTL with IGCC (co-production) can be more attractive than only CTL.  A few considerations: Both CTL and IGCC plants should preferably be running at high stable production levels and are not easily and profitably suitable for short term “peaking” or load following adjustments.  For IGCC the profitability is very dependent on the competitive price of power at the location of the plant. From an operational perspective, this adds one more level of complexity. However, for a CTL plant there is a substantial amount of power required within the plant and normally there will be on-site power generation using energy resources from the process. Therefore, expanding such power generation to a full-fledged IGCC facility should be considered on a case-by-case basis. Synergies could well make this more viable, albeit at a higher capital outlay. 

- If one wishes to make a strategic impact, I consider about 1 million barrels/day as a meaningful initial target. (That is less than 5% of the current 21 million barrels of oil and fuel used in the US daily).  For this the coal supply would require about a 20% increase above current coal consumption.  The impact of such a growth in coal production has to be considered together with the ongoing projected growth in coal demand for electric power generation.

- Reliable production cost figures are hard to come by since such numbers are usually not provided in detail by operating companies and are very specific to a chosen set of circumstances.  However, numbers recently made available by Sasol indicate a direct operating cost of $10/barrel. If a coal cost of $30/ton is added, that adds another $15/barrel.  To this amount the financing costs need to be added, which depends very much on the particular project structure and financial arrangements.  It is clear that this provides a wide margin to establish a feasible project, and viability is likely even at crude oil prices as low as $45-$50/barrel. 

Environmental considerations favor FT CTL. It can be stated that CTL can truly be a Clean Coal Technology when modern commercially available processes are implemented. Furthermore:

- FT diesel is a premium product; even better in environmental performance that CARB diesel and it can sustainably demand a substantially higher price (conservatively about $8/barrel) than crude oil. This differential between CTL diesel and regular diesel above crude oil prices should be calculated into viability analyses.  The product qualities of FT diesel are well known. The FT process requires total sulfur removal from syngas (the sulfur is taken out of the process as elemental sulfur, as sulfuric acid or as fertilizer grade ammonium sulphate) and therefore the diesel is essentially sulfur free. 

- The CO2 produced in a CTL plant can be readily captured for sequestration (as is done in the Great Plains synthetic natural gas facility in North Dakota).

- FT CTL diesel is compatible with current diesels and can readily be blended into the existing infrastructure.  For niche applications, like for special military fuels, certification would be required which could require hundreds of thousands of gallons of products.

A recent project has been initiated through the Southern States Energy Board (SSEB). It is called “The American Energy Security Study”. This study has the support from the member states of the SSEB together with a number of other stakeholders. It will deal with strategic matters and present a plan to establish energy security and independence through the production of liquid fuels from various resources, including CTL. It will indicate measures for the rapid deployment of selected options to provide indigenous fuel supplies. Policy issues will be considered with macro-economic impact analyses.  An analysis of the relative economics of CTL facilities as a function of the capacity of plants will be presented. The report is due to be available by the middle of the year. It is anticipated that this study will be a powerful tool to help shaping the path forward to greater fuel self-sufficiency.

Numerous design case studies have been performed over the years to evaluate the viability of CTL technologies. With no CTL facilities erected after the Sasol Three in the early 1980’s, these estimates are often on the basis of expected performance rather than on proven performance. This can be overcome by involving reputable engineering companies with relevant experience in the field to do a detailed level design to form the basis for a definitive cost and economic evaluation.  Such studies can cost tens of million of dollars, depending on the size and scope of the project.  These costs will come down in due time as more plants will be built and initial support from governments would assist in expediting earlier deployment of CTL.

Establishing a major project requires getting appropriate partners together. This typically takes a long time for large projects. The team could typically include the owner of the coal resources, the company which has the ability to operate the facility (preferably an owner-operator), a reputable engineering contractor and certainly a strong input to deal with financial, legal and permitting aspects at all levels of government.  In this regard the government can and does facilitate some of these steps, but in practice it does not (normally) erect or own such a commercial facility.  Under the current circumstances I would expect that such teams will start forming soon to take CTL forward. Indications from the DOD that they might provide product off-take agreements will assist in this process.

In conclusion I observe the following:
1. At current crude oil prices and even if prices drop by as much as $20/bbl, I believe that large CTL plants can be economically viable propositions in the US.
2. The basic diesel fuels from CTL are fungible and should be able to be introduced into the market without disruptions.
3. The initiatives created by the Energy Policy Act of 2005 set the stage for encouraging CTL and gasification deployment and the momentum to firm up the support mechanisms for potential such projects should be maintained.
4. Close collaboration between DOD and DOE to establish facilities for producing fuels of different grades for testing and certification should be encouraged and initial smaller plants could be supported to get the quantities needed for certifying, for instance, jet fuels.
5. The DOE budget should be strengthened to again support aspects of FT CTL technology development in parallel with the current gasification developments.
6. CTL has been done and can be done in the US.

 
Attachment A: Aspects of the Sasol History

Sasol is a private sector company which is very profitable and has produced over 1.5 billion barrels of fuel from coal, as well as more than 200 chemical products marketed internationally since its inception in 1950. Its shares are traded at various stock exchanges including the NYSE.

At the outset it is useful to give some background to the technology loosely called CTL (Coal to Liquids).  Recovering liquids from coal dates back to the mid 1850’s when coal was heated and the vapors released from such heating were collected and used as the basic building blocks for chemical products. There was also early work to directly produce liquids from coal in high pressure equipment with the addition of hydrogen in the presence of a catalyst.  This technology became known as the Direct Liquefaction or Direct Hydrogenation of coal.  It was used before and during WW II in Germany and produced the largest part of the liquid fuels produced in Germany at that time.  This technology experienced resurgence in the post 1973 “Energy Crisis” years and in the US a number of facilities at the pilot level were built and operated. One was the H-Coal plant, for which the initial R&D work was done at CAER.  Also in many other countries there was interest in this route, but as oil prices dropped, the momentum was lost.  The overall conclusion for this technology is still that it is a very expensive and mechanically complex way of making fuels from coal. China is currently the only country pushing this route by constructing a 20,000 barrel/day facility.

A second way of producing fuels and chemicals from coal is called Indirect Liquefaction. This starts by gasifying coal which involves reacting coal with steam and oxygen under pressure to produce a mixture of gases called synthesis gas or syngas, which is composed mainly of carbon monoxide and hydrogen.  It was established in the 1920’s that syngas can be converted to a range of liquids and this process is named the Fischer-Tropsch (FT) process after its inventors.  Thus in this two-step process of gasification followed by FT synthesis, one can get good yields of liquids from coal.  This is the technology practiced by Sasol and is currently considered to be the most viable approach to produce liquid fuels from coal.  The fuels from this process can be fully compatible with oil derived fuels (South African motorists do not notice any difference whether they use FT fuels or crude oil derived fuels and some of the fuels used at Johannesburg International Airport are 50/50 crude/FT blends).

The Sasol story started long before the UN imposed sanctions on South Africa and Sasol started production already in 1955.  The Sasol Two facility was initiated on economic considerations after energy prices increased in 1974 and Sasol Three was started as a twin plant to Sasol Two when the flow of oil from Iran was disrupted. This was a strategic supply consideration. When these two plants were commissioned in the early 1980’s, crude oil prices were at record levels and the capital repayment was thus accelerated with a favorable effect on interest payments. At that time the liquid synfuels contributed about 40% of South Africa’s domestic consumption of gasoline and diesel.  That figure has by now decreased as a percentage to about 28%, due to the market growth and due to the fact that a large number of chemicals are taken from the fuel streams to be sold profitably as high purity chemicals.

 The original nameplate capacity for each of Sasol Two and Three was 50,000 barrels per day and the combined production is now about 150,000 barrels per day, based on ongoing process improvements and optimization. The invested capital for the two plants was about $6 billion in dollars of the day in about 1980. It was the largest construction project in the world at that time on one site and it was completed on schedule and on budget with Fluor out of Irvine, CA as the managing engineering contractor. The national interest and support for the Sasol project was significant.  When Sasol shares were issued in 1979 and the shares listed on the Johannesburg stock exchange to draw capital from the stock market to contribute to the financing of the projects, the share issue was over-subscribed by 31 times, mostly by South African investors.

The South African Government, which facilitated the establishment of Sasol through the Industrial Development Corporation, provided loan guarantees and a floor price mechanism, was put in place which also required that Sasol repaid the government if crude oil prices exceeded a pre-determined level.  All government loans and support were fully repaid in due time and there was no net cost to the taxpayer. No support has been in place for a long time. The economic benefits and multiplier effect of having such facilities are obvious and the savings in foreign exchange was and is a great benefit to the economy.

Another important factor was the favorable exchange rate at that time as well as the fact that internationally construction was in a lull, which led to favorable contract prices.  The fact that Sasol Three was a replicate of Sasol Two saved $500 million in having the same design and letting the same crews do the job twice.

A factor in Sasol’s favor is that it owns large amounts of coal (relatively high ash sub-bituminous coal) and the facilities are located directly adjacent to the coal fields. At the current exchange rate the coal is supplied to the CTL plants at commercially comparable rates of about $22/ton.

There were many factors that contributed to this success story.  It is not possible to schedule such circumstances but under the current and projected high oil prices the stage, also in the US, is set for learning from these experiences and establishing CTL facilities based on numerous improvements which were made over the years.
 
Attachment B
 

Testimony to the House Committee on Appropriations
Subcommittee on Energy and Water Development Appropriations
United States House of Representatives

Submitted on behalf of the Coal Fuel Alliance by:
University of Kentucky (Dr. Ari Geertsema, Director, Center for Applied Energy Research), Southern Illinois University Carbondale (Dr. John Mead, Director, Coal Research Center), and Purdue University (Dr. Tom Sparrow, Director, Coal Transformation Laboratory, The Energy Center)

March 16, 2006

This testimony is provided on behalf of the member universities of the Coal Fuel Alliance –University of Kentucky, Purdue University and Southern Illinois University.  The universities’ combined testimony is provided in response to Section 417 of the 2005 Energy Policy Act, which requested the US Department of Energy to pursue, in collaboration with our institutions, technologies for the conversion of Illinois Basin coals to transportation fuels.  Section 417 authorized an amount of $85 million over a four-year period to carry out the principal aim of the Act – to produce test quantities of synthetic fuels for evaluation in civilian and military applications.  We are requesting that $14.5 million be appropriated for the first year’s activities to kick-start the establishment and expansion of capabilities at the participating universities. 

Our request is supported by the Governors, the state legislatures, and the congressional delegations of the states of Illinois, Indiana, and Kentucky.  Together, the states have provided $400K in funding to initiate the work pending congressional action on this request.  Senior officers at DOE’s National Energy Technology Laboratory have been provided information on CFA’s planned activities for carrying out Congress’ intent in passing Section 417 of the Act.

Facts and Rationale
The rationale for supporting the expanded use of coal as a means to replace crude oil for transportation fuels is well known.  America does not have an energy shortage so much as a shortage of liquid fuels.  The nation is becoming increasingly dependent on imported oil, now at 60% of requirements, and taken principally from unstable regions of the world.  The conversion of coal to liquid fuels will lead to greater energy independence, contribute to the nation’s security, allow for the development of new industries, and provide new incentives for coal mining.  The DOD has a keen interest in securing alternatives to petroleum for reliable supplies of battlefield fuels, and this effort is well aligned with that objective.  Also, the fuels produced by Fischer-Tropsch coal-to-liquids (CTL) technology are environmentally superior, such as ultra-clean diesel and jet fuel of interest to the aviation, heavy equipment and trucking industries. 
. 
The geological deposit known as the “Illinois Coal Basin” (Illinois, Indiana and Kentucky) has more untapped energy potential than the combined oil reserves of Saudi Arabia and Kuwait.  These coals are suitable feed stocks for the production of transportation fuels.

Barriers to Deployment

While the prospect of CTL technologies is alluring, the deployment of pioneering technologies bring with them financial, construction, operating and technical risks not normally associated with proven technologies.  Risk can be reduced and deployment stimulated by providing price supports, product take-off agreements, tax breaks, and financing incentives for early adopters.  Risk can also be reduced by making “learning investments” for research, development and demonstration (RD+D) to reduce the technical hurdles of new energy technologies.

It is for this latter purpose that the Coal Fuel Alliance members entered into a Memorandum of Understanding in November 2005 – to provide a base of “enabling research” and development (RD), and to support demonstrations and deployment (+D) of the technology at commercially-meaningful scale.  It is an accepted premise that with successive deployments of a new technology there comes with it learning. Described as learning-by-doing (for producers) and learning-by-using (for product users), the assumption is that experience leads to reductions in cost or other improvements.  There are a number of technical issues which, if addressed in creative ways, can alleviate some of the risks associated with the adoption of CTL technology.

Deliverables

The universities will expand existing and establish new capabilities in the area of CTL, including improvements in facilities and development of human capital.  The universities intend to collaboratively concentrate resources, create a critical mass of expertise, and provide a focal point for RD+D on fuels derived from Illinois Basin coals.  The effort will address unmet needs for CTL, emphasizing carefully applied and developmental needs.  The effort will provide open-access facilities for scientific and engineering development, and for producing test quantities of fuel products for evaluation by Alliance members as well as military and industrial partners.  An organizational and programmatic structure will be put in place to minimize duplication, exploit the capabilities of each university, and coordinate the effort to maximize synergies.

The Universities will work together to build up human capital – the future generation of skilled energy technologists, engineers and operating personnel – that  will be needed to sustain a CTL industry.  Due to the cyclical interest in CTL, the scientific and engineering capabilities previously devoted to energy programs of the 1980’s and 90’s have dissipated.  A new generation of technologists needs to be nurtured.  One of the best ways of creating this skills base is to stimulate and fund RD+D at appropriate institutions which have the facilities to teach and train students in the practical applications. The relevance of training can thus be assured while the stimulus of a creative environment will lead to further technological innovations.
Project Thrusts

The three universities have excellent and complementary capabilities, and the division of labor between them will be highly integrated.  While all tasks will be carried out by interdisciplinary teams of researchers, each university brings special competencies to the effort. UK has a long and proven track record in Fischer-Tropsch synfuels catalysis, Purdue in engine testing, and SIU in advanced coal technologies.  SIU intends to construct/operate bench and process development units for gas cleanup and conditioning.  They also will develop a modular, bench-scale fast-screening experimental facility – the so-called “Innovations Lab” - for studies of gas conversion.  UK intends to build/operate a larger, continuous and integrated pilot plant for syngas conversion and product workup.  The facility will produce larger quantities of refined products for testing and evaluation (up to ½ barrel, about 20 gallons per day).  The know-how, show-how associated with these facilities at SIU and UK is expected to be a key benefit in that they can be used as test beds for new concepts at a level of expenditure that is affordable.  Purdue will develop advanced fuel characterization, process simulation and quantitative modeling capabilities related to syngas conversion and product work-up. The work will also involve the substantive capabilities of Purdue’s engine test facilities - supported by Cummins, Rolls Royce and Caterpillar.  Their role will be critical in testing, validating and improving fuel quality, performance and acceptability for end-users.  Purdue, SIU and UK will also contribute to environmental, economic and policy analyses as related to CTL. 

Facilities

Section 417 of the 2005 EPAct provides for the improvement of CTL facilities at the universities and development and operation of a demonstration-scale Products Test Facility – both directed at producing test quantities of fuel products for evaluation by the military, and the auto, trucking and aviation industries.  Funding in the early years is requested to pursue development of capabilities at the universities.  These include: 1. an integrated F-T and mini-refinery for product work-up to finished fuels (diesel, jet fuel, etc.); 2. advanced characterization facilities for analysis of interim F-T products and finished fuels; 3. engine testing and fuel evaluation capabilities for fuels specification and certification; and 4. “open-access” facilities which are not reliant on the proprietary technologies of current vendors.

CFA has reserved budget resources for the larger Products Test Facility.  Details of that facility will be determined as the project progresses.  CFA, however, is cognizant that there are efforts by DOD and DOE to construct alternate CTL demonstration facilities.  It is not the Alliance’s intention to duplicate such facilities should they come to fruition earlier.  Instead, we emphasize that our initial efforts will be complementary to and supportive of these alternatives, and will provide capabilities the other projects can’t provide. 

Funding Request

The Year 1 request is for an amount of $14.5M to be leveraged by the universities and states by an additional 20 percent cost share for a total combined year-1 effort of $18.1M.