Can Coal Be a Clean Transportation Fuel?

MM: What led you to switch your career from hedge fund manager to financing a clean coal plant?

SJ: Probably one of the biggest factors was my increasing awareness of the large upcoming supply-side constraints on the conventional oil supply. We have not been discovering more conventional oil than we have been producing since 1981, and we are now refining and consuming six times more oil per year than we are discovering. This is the underlying driver of the peak oil thesis.

Beyond some well-educated guesses, we will not know exactly when an ultimate peak in global oil production will occur until after we are already there. What too many people lose sight of is that the precise year peak oil happens doesn’t matter. What matters is that we are not discovering sufficient reserves to replace what we are pulling out of the ground.

Our entire economy is currently based on the underlying assumption of continuing plentiful supplies of cheap and (relatively) clean oil-based transportation fuels. If that assumption is not accurate, we have little choice but to start working now on developing large-scale alternatives.

Looking at it from a hedge fund manager's view, it is very difficult to effectively play the market over the long-term when such a fundamental economic assumption comes into question. Given oil's pervasive impact on the market, it will create shocks, ripples, and discontinuities in ways that are very difficult to predict and hedge against or benefit from. Certainly it will result in dramatically higher prices for oil, and consequently for everything else, but this is not a condition that our economy is accustomed to dealing with for long periods of time.

When the global peak oil hits, it will be a much tougher to bring on new alternatives, and unless somebody gets moving on it, we will find ourselves in a very tough spot economically. At the time I made the switch from focusing on the fund to founding ACCF, I did not see sufficient additional supplies being developed to meet or bridge the impending demand gap and I knew that I could help to do something about it.

Professionally, I thought it was a much better bet to be on the front-lines of bringing new alternative supplies to market than it would be to try and ride out the myriad market consequences of high and extremely volatile oil prices. On a personal level, it seemed that it was simply the right thing to do given the dependence that we have on energy for our health, safety, and quality of life.

MM: Tell us about your coal processing project. How will it work, and what will it produce?

SJ: The project is a coal-to-liquids plant and associated coal mine to be constructed in central-eastern Illinois. The facility will convert approximately 4.3 million tons of Illinois coal per year into approximately 385 million gallons per year of ultra-clean biodegradable synthetic diesel fuel and jet fuel. The plant is based on two core technologies: coal gasification and Fischer-Tropsch (FT) conversion.

Gasification breaks the coal into its molecular components (primarily hydrogen and carbon monoxide). Undesirable elements such as sulfur and mercury are captured and sold as products as opposed to emitted as pollutants as with conventional facilities. The cleaned-up syngas is then reacted with a catalyst in FT conversion, which converts the gas to a mix of diesel fuel and jet fuel.

We are sourcing our coal from an association of landowners, primarily corn and soybean farmers who have banded together to produce coal resources large enough to be marketable, and to ensure that their interests are carefully protected during and after mining.

The potential customers include commercial and military aviation, trucking, rail, barge lines, port operations in environmental "non-attainment" areas (that would benefit from the low emissions these fuels produce), as well as first-responders and military users that may derive extra benefits from the unique long-term storability characteristics of the produced fuels.

MM: What is unique about the coal-to-liquids fuel business opportunity that makes it a smarter investment than other alternative fuels?

SJ: Like all alternative fuel sources, this method of producing non oil-based transportation fuels has its plusses and its minuses. I would not classify it necessarily as a smarter investment, but instead as a key cornerstone of a portfolio solution.

It is important that people realize that there will not be any single silver bullet solution to either oil supply limitations or the problem of climate change. There are, however, a lot of silver "BBs." We need all of the sources of clean alternative fuels that we can get.

Using coal as a feedstock is inherently not a renewable source of energy. Therefore, CTL is not a permanent fix but a bridge solution to help us cleanly (in both the economic and environmental sense of the term) manage the economic transition off of oil and other non-renewable energy sources.

However, the same CTL process can use biomass as a feedstock if the economics can be made to work. Ultimately the goal must be renewable carbon-neutral transportation fuel sources. The hard part is affecting this transition.

The best estimations of future energy requirements indicate that based on our current global reserves, more than half what is currently produced must be replaced by a combination of demand reductions and new alternative sources within the next 30 years. That is an incredible volume to try to make up in a very short period of time, and with existing renewable fuels technologies you start getting into the food vs. fuel problem in a big way before you even get close to filling that gap. When you also consider preserving the overall integrity of the economy and global environment, you then begin to get a better picture of where coal to liquids (CTL) comes into play.

Chief among the advantages of CTL technology are commercial availability, scalability, and cleanliness. CTL plants can be built rapidly (meaning 5-7 years for the energy industry) using proven commercial off-the-shelf technology, and to a very large size compared to most other alternative fuel sources. For instance, when our first plant comes on-line, it will have an annual production capacity approximately 5 times greater than the entire output of the domestic biodiesel industry of last year.

With this scale comes efficiencies that keep our costs of production low and our process very clean. I believe CTL to be the lowest-cost source of new clean alternative transportation fuel. CTL fuels are --to my knowledge -- the only alternative fuels that can be reliably used for aviation, as they have excellent low-temperature performance characteristics, and none of the cold-flow or cloud point issues of biodiesel.

CTL plants may also eventually be able to economically accept a major biomass component to their feedstock as you can gasify biomass just as you can coal. This helps ensure that the large capital investment made in these facilities will not be made entirely obsolete by stricter carbon or ultimately renewable feedstock regulations that could be imposed in the future.

The barriers to biomass-to-liquids (BTL) plants are more in the economic realm than the technological. Biomass today is very expensive as a feedstock, and until there is a cap on carbon emissions most likely it simply will not be competitive with coal or petcoke feedstock.

When compared to conventional oil production and refining, CTL technology has a lower unit cost of production and is cleaner in all regulated emissions and CO2 (when carbon capture and sequestration is applied) emissions.

MM: Why is it a better economic and environmental decision to convert coal into in a transportation fuel rather than using it to generate electricity?

SJ: The key energy problem facing us today is a transportation fuels, not electricity. We have a lot of technologies already at our disposal with which we can generate electricity both cleanly and renewably, and in a carbon-neutral manner. Transportation fuels represent a much tougher technical challenge, particularly if you aim to do it cleanly and without causing supply shortages or major price consequences for food.

There are those in the utility industry that might argue passionately against my viewpoint on this, but I believe that our limited remaining endowment of coal ought to be used to provide high-value bridge solutions in the areas where we face the biggest technical hurdles, primarily transportation fuels, chemicals, plastics, and fertilizers, as opposed to electricity generation where we have competitive alternative technologies already available.

You may have heard the statistic quoted that we have a 250 year supply of coal available. But when you begin to seriously switch the nation’s transportation fleets and chemical industries over to coal feedstock, that number will drop fast.

MM: Why commit the substantial resources to create this type of a facility when crude oil prices are so volatile?

SJ: CTL needs the price of oil to be at $40 per barrel or above to be a viable proposition. The future oil supply and demand projections make it clear that oil is likely to remain high and go higher through the foreseeable future. The other ways we offset these risks is with a dedicated reserve base for our coal supply and long-term contracts for the fuels we will produce. This helps to fix our costs and control our exposure to market volatility for fuels.

Also, the Department of Defense has publicly stated an intention to become a large buyer of a substantial volume of jet fuel and diesel sourced from domestic CTL plants. Much of the government support for buying coal-based fuels are already provided for in the Energy Policy Act of 2005.

MM: Is carbon sequestration necessary for a coal processing plant to be considered clean, and can the additional work required pay for itself?

SJ: I believe that CO2 sequestration is necessary for a CTL plant or any coal-fired facility to be considered truly clean. But we as an industry also need to get to a point where the financial community is sufficiently comfortable with the process before throwing CO2 sequestration into the mix, which in many locations could at a minimum provide a drag on the plant’s economics and in many cases might represent a pure cost-center.

For most plants, particularly on the power generation side, CO2 sequestration would make projects uncompetitive with far dirtier and older technologies that use less of the energy contained in a given ton of coal, and not only release more CO2, but also do far worse on emitting sulfur oxides and nitric oxides. This is a very new industry with a very new combination of technologies.

The coming generation of CTL plants will be -- by measure of all conventional regulated pollutants -- behind only the FutureGen (a government sponsored clean coal initiative) plants as probably THE cleanest coal-fueled plants in history. It is not optional for us, as sulfur is a catalyst poison for the FT fuels process, so we have no choice but to clean it up to a very tight specification.

CTL developers have a responsibility to consider the availability of nearby depleted oil fields in their site location considerations as the CO2 can be injected to enhance oil recovery. Every coal gasification-based facility needs at a minimum to be "Carbon Capture Ready," allowing places in the plant layout for the equipment needed to sequester carbon.

In some of these cases, it may be possible to develop a Carbon Capture and Sequestration for Enhanced Oil Recovery (EOR) system, and the revenue generated by this enhanced oil recovery will then offset the cost of the carbon capture. The rub is that nobody has really done it yet on a commercial basis from a gasification facility (Great Plains in North Dakota is the exception, but that was heavily government funded), and therefore the pioneers need to literally invent the business model from scratch.

We view carbon capture as a major opportunity, and are working hard to integrate this into our development plans, but until we are further into the development process and have a better sense of all of the costs involved, it is impossible to commit to sequestration because of its potential economic impact.

A time will come where it will be necessary and appropriate to require carbon capture on any new plant. However, I do not think making it obligatory for the first generation of plants or until a comprehensive nationwide CO2 regulation system can be put in place serves anyone’s best interest.

MM: How do you incorporate sustainability into your company's mission statement?

SJ: Our mission statement reads: "The mission of American Clean Coal Fuels is to cleanly develop the bridge fuel sources required to bring our economy to a sustainable energy future."

We recognize that coal is inherently not a renewable resource, and that the ultimate direction we should all be striving towards is meeting the energy needs of our economy through renewable, sustainable, and hopefully carbon-neutral means.

While we as a society clearly must do everything we can to cut our consumption, cut our carbon footprint, and to live more sustainably, we must also realize that the economy needs to continue to get energy to function. My biggest fear is that if peak oil happens and we have not yet developed large-scale alternatives our leaders will be pressured into allowing dirty forms of alternative fuels to be developed.

There are other far less clean and responsible ways to turn coal into transportation fuels. There is a process called direct coal liquefaction that can produce fuels far more cheaply than what we are proposing, but with all of the environmental problems that come to mind when one thinks about coal.

As cleaner and better technologies become available, where possible we will implement them and work to support the development of new cleaner and renewable fuels sources. One way we are doing this already is by looking to blend our fuels with biodiesel for lubricity. We could do this with a petroleum-based additive, and it would probably be cheaper and easier, but the biodiesel route supports the development of new alternative supplies, and thereby fits with our mission.