Coal-to-Liquid Fuel Production Could Offer Major National Benefits

The federal government can spark the creation of a commercially competitive coal-to-liquids industry by fostering early development of plants that would produce transportation fuels from coal, according to a RAND Corporation study issued today.

The study finds that a commercially competitive U.S. coal-to-liquids industry could produce as much as three million barrels of high-quality liquid fuels per day by 2030, an amount equivalent to 15 percent of current U.S. oil demand. Moreover, U.S. coal resources are sufficient to sustain liquid fuel production for a century, if not longer.

At that level of production, a U.S. coal-to-liquids industry would benefit the nation by generating profits of between $20 billion and $60 billion per year. By reducing demand for conventional petroleum, that industry would also reduce global oil prices. The world oil price reduction would benefit the United States by an additional $6 billion to $25 billion per year, with the range dependent on how OPEC would respond to reduced demand for its products.

"Within a few years, CTL plants could begin to alleviate growing global dependence on conventional petroleum," said James Bartis, the report's lead author and senior policy researcher at RAND, a nonprofit research organization.

Despite its promise, private investment in a coal-to-liquids industry is being impeded by uncertainties about where oil prices are heading, what it actually costs to produce coal-derived fuels and how greenhouse gas emissions will be regulated. The last issue is especially important since without efforts to manage emissions, producing and using coal-derived liquids could roughly double the rate that carbon dioxide (CO₂) is released into the atmosphere.

The RAND study finds that technology for producing liquid fuels from coal is ready for initial commercial applications in the United States. The classic Fischer-Tropsch approach to produce diesel and jet fuels has advanced considerably since its introduction in Germany during the 1930s. There is also a newer methanol-to-gasoline approach developed by Mobil Oil (now ExxonMobil) and proven at the commercial scale in New Zealand.

Facilities that produce coal-derived liquids will be expensive. The report estimates that the investment required for a facility producing 40,000 barrels per day is between $4 billion and $5 billion. For coal-derived fuels to be competitive at such high investment levels, the selling price for crude oil -- averaged over the life of the plant -- needs to be at least $55 and possibly as high as $70 per barrel. The authors emphasize these are preliminary estimates.

"To some in the energy community, coal-to-liquids looked like a sure bet a few months ago, but many investors knew better," Bartis said. "Industrial development won't occur until investors gain a better understanding of production costs and see how world oil prices evolve."

The study finds that capturing greenhouse gas emissions, principally carbon dioxide, at a coal-to-liquids production plant is straightforward and inexpensive. If the plant-site greenhouse gas emissions can be captured and stored, then the overall impact of coal-derived fuels would be on par with conventional petroleum.

But opportunities to store large amounts of carbon dioxide are currently limited to enhancing the recovery of petroleum in partially depleted reservoirs. This would work for a few large coal-to-liquid plants, but other approaches involving geologic sequestration would be needed to support a large industry. To date, geologic sequestration of carbon dioxide is the focus of a global research effort. While research results are highly promising, the commercial viability of large-scale geological sequestration will remain uncertain until successfully demonstrated in the United States.

The RAND study also examines an approach that uses a mixture of coal and biomass -- such as forest waste, corn stover or prairie grasses -- combined with carbon dioxide capture and sequestration. This combined approach allows transportation fuel production at greenhouse gas emission levels that are well below those associated with the production and use of conventional petroleum fuels.

Researchers recommend that the federal government take an insurance-policy approach that recognizes current uncertainties and emphasizes future capabilities and the potential strategic benefits to the nation. The centerpiece would be federal incentives to reduce uncertainties through early commercial production experience with a limited number of first-of-a-kind coal-to-liquids or combined coal/biomass-to-liquids plants. Key to implementing this approach would be a government commitment to advance coal/biomass-to-liquids technology and to expand its ongoing carbon sequestration technology development program to include larger-scale and longer-duration demonstrations.

The analysis suggests that the preferred incentive package would consist of a minimum price guarantee and an investment incentive (e.g., an investment tax credit), combined with income sharing in the event that world oil prices turn out to be high. Researchers warn that the government should be cautious in employing loan guarantees to promote early production.

"The results of new technology are promising, indicating a high probability that we can enjoy the benefits of a coal-to-liquids industry without worsening, and possibly greatly reducing, greenhouse gas emission levels," Bartis said.

Other authors of the study are Frank Camm and David S. Ortiz of RAND. The report, "Producing Liquid Fuels from Coal: Prospects and Policy Issues," derives from research sponsored by the U.S. Air Force and the U.S. Department of Energy's National Energy Technology Laboratory and is available at www.rand.org.

The report was prepared by RAND Infrastructure, Safety and Environment and RAND Project AIR FORCE. RAND Infrastructure, Safety and Environment conducts research and analysis to improve the development, operation, use and protection of society's essential man-made and natural assets, and to enhance the safety and security of individuals in transit, at work and in their communities. RAND Project AIR FORCE is a federally funded research and development center for studies and analysis aimed at providing independent policy alternatives for the U.S. Air Force.