'The new Kuwait'

Joe Morris
Business Editor
West Virginia Gazette-Mail
September 18, 2005

Could W.Va. be sitting on the answer to the energy crisis?

A major fuel reserve in West Virginia is capable of gushing the equivalent of half the oil under the ground in Iraq, but no one is yet willing to build the refinery that will get the stuff tank-ready. That's essentially what it would take to turn West Virginia, with its ample coal seams, into "the new Kuwait," according to energy experts at the Pentagon.

Speaking at a research forum in Roanoke last month, the Defense Department's William Harrison, a top adviser in the military's Clean Fuel Initiative, said the Pentagon is serious about partnering with energy companies to develop alternative fuels. And the most viable alternative, he said, appears to be diesel and other motor fuels produced by gasifying and then liquefying coal through a catalyzed chemical reaction known as the Fischer-Tropsch process.

"If you build it, we will come," Harrison told the Consortium for Fossil Fuel Science, a Department of Energy-funded research center. "With West Virginia's coal reserves equaling about 70 billion barrels of oil," he said, "perhaps West Virginia could be the new Kuwait."

Liquefying coal through Fischer-Tropsch "offers the promise of starting new industries in West Virginia that could also increase demand for West Virginia coal," said Richard Bajura, director of West Virginia University's National Research Center for Coal and Energy, who was also at the conference.

There have been some initial steps in West Virginia, but nothing definitive. Two years ago the state Development Office pledged itself to help a Pennsylvania company, WMPI Proprietary LLC, secure land in Logan County in order to build such a plant. More recently, the Mingo County Redevelopment Authority commissioned a feasibility study, also to look at the possibility of building such a plant.

WMPI hasn't followed up because it has been preoccupied with building its first Fischer-Tropsch plant in Pennsylvania. The Mingo study won't be out for probably two more months, according the agency's director, Mike Whitt. "But this thing looks like it makes sense," he said. In light of all the coal here and the large amount of diesel that the state uses, "it looks like a no-brainer."

Fischer-Tropsch, named after its German inventors, is neither new nor untested technology. Franz Fischer and Hans Tropsch, working in a government-funded science institute in Berlin, perfected the method in the 1920s, and the Nazis relied on it to feed their war machine.

"It has always been viable, and it almost seems to be exceptionally viable today," said Anthony Stranges, a professor of the history of science at Texas A&M University who concentrates in the history of energy development.
"The economics are very favorable for it."

Nevertheless, today the only company employing Fischer-Tropsch on a major scale is South Africa's government-affiliated Sasol Ltd., based in Johannesburg. Over the past 50 years, much of which while South Africa was shut out of the global economy because of its racial segregation policy, Sasol has produced nearly 1.5 billion barrels of synthetic fuel from coal, while on a daily basis it churns out 150,000 barrels, dispensed in filling stations across the country. Its coal refining supplies about 28 percent of South Africa's fuel needs, the company says, saving the country more than $5.1 billion annually in foreign exchange.

The Defense Department is suddenly interested in Fischer-Tropsch not only because it could help reduce U.S. dependence on foreign oil but also, as the existence of its Clean Fuel Initiative implies, because it's aiming to switch to environmentally friendlier energy sources in the wake of some costly cleanups. It has spent more than $60 million, for instance, in studying and remediating perchlorate, a constituent of its jet fuels that may pose a health danger to groundwater supplies near military bases. Fischer-Tropsch fuels strip out pollutants such as sulfur, mercury and arsenic. The Natural Resources Defense Council, one of the country's biggest environmental groups, estimates that such plants emit about 40 percent less carbon dioxide than conventional power plants.

On the other hand, demand for coal is pretty high as it is, and were West Virginia coal to become a viable substitute for oil, the result could be a mining frenzy the likes of which have never been seen.

"Clearly the technology works," said Richard Kassel, director of the NRDC's Clean Fuels and Vehicles Project in New York. But while the burning may be cleaner, "somebody needs to take a good hard look at what this means for the natural resources and beauty of the state."

What has held Fischer-Tropsch plants back, however, is not environmental concerns. Rather, it's the financial risk involved. Construction can cost several billion dollars, and if the fuel ends up costing more than gasoline and other oil products, there won't be any buyers. Even the Pentagon, for all its enthusiasm, has made it clear that it won't overpay.

"Our strategy is not to write big checks, but rather to bring the right mix of industries together to make processes commercially viable," Harrison said.

Fischer-Tropsch fuels would be a bargain next to oil even if the cost of crude were to plunge roughly 45 percent, to about $35 a barrel, but that is considered the cost-cutoff point. No one is predicting anything like such a decline, yet coal-liquefaction plants take years to build, and oil prices have proven highly volatile.

"Cost is a key consideration," Bajura said. "The fear is that the price of oil could drop below the Fischer-Tropsch fuels."

The last time investors started lining up money for Fischer-Tropsch plants, in the 1970s, the OPEC oil cartel opened up its spigots and pushed the price of crude down to $10 a barrel, and that was that. Even before that, there had been spurts of activity that eventually fizzled. During the 1950s, the federal government built Fischer-Tropsch demonstration plants in Bruceton, Pa., just across the West Virginia border, and in Louisiana, Mo. Over the years, the government has spent hundreds of millions for research into such fuel conversions, but nothing ever came of it because, according to Stranges, the investment never materialized.

"It didn't pay off and it wasn't worth doing," he said.

Don't count on such a scenario to repeat itself, said John Ward, a spokesman for Headwaters Inc., a South Jordan, Utah-based company that is now building coal-to-liquids plants abroad and advising companies on the technology in the United States.

"The question is, does OPEC or anyone else today still have the ability to lower the price [of crude] to $10?" Ward said. "There are several functional changes in the landscape that make that much less likely, especially the strong demand [for oil] from China."

To Stranges, who has studied the torturous path of Fischer-Tropsch research and development through the years, it's long past time to take the plunge. "Instead of going in circles, as we have been, why not just build it so we'll have it?" he said. "That way we can keep improving it."

That's what seems to be happening. But it's generally private companies, not the federal government, that are taking the initiative. For the most part, however, they've opted to do so abroad. Shell USA and ExxonMobil Corp. have coal-to-liquid projects underway in China and Qatar. Tulsa, Okla.-based Syntroleum Corp. recently signed an agreement to look into building a coal-to-liquids plant in Australia. And just last month, Headwaters signed deals to build two plants for coal liquefaction, a process similar to
Fischer-
Tropsch, in China. Similar efforts are in the works in India and the Philippines, Ward said.

The enthusiasm of China, in particular, to embrace Fischer-Tropsch and related coal-to-liquids projects comes down to the government's commitment, according to Ward. "They've simply got a government willing to invest." But the United States is starting to catch up.

DKRW Energy LLC of Houston intends to start building a coal-to-liquids plant in Wyoming next year, with operations scheduled to get underway between 2008 and 2010. Rentech Inc. in Denver and Clear Energy Inc. in Calgary, Alberta, have similar hopes.

Yet it is WMPI, of Gilberton, Pa., that appears to be the furthest along. It expects to start construction in April on a $112 million Fischer-Tropsch plant near Gilberton that would transform 1.4 million tons of waste coal a year into 60 million gallons of liquid fuel. It has agreements with Shell and Sasol for technical help and, more importantly, it secured federal loan guarantees in the energy bill just passed by Congress that should put it over the top on financing, said John Rich, WMPI's president. Eventually, Rich said, he sees the plant building out its capacity, requiring a $4.2 billion investment.

Once the Gilberton plant gets going, WMPI will start looking for second and third sites, Rich said, and the Logan location is still a possibility. A memorandum of understanding signed with the state Development Office in 2003 pledges the state to "exercise its best efforts within applicable laws to facilitate and assist WMPI in the location and development of WMPI's coal-to-oil project in West Virginia."

The property under consideration is owned by a private party whose identity WMPI wouldn't disclose. The Development Office official involved did not return calls for comment.

The Mingo feasibility study, meanwhile, is drawing on the expertise of Headwaters and nine other participants. They include WVU's Bajura and Christine Risch, an energy economist from Marshall University. There are also lawyers from Boston-based Cambridge Associates, Patton Boggs LLP in Washington and Jackson Kelly PLLC in Charleston, and executives from San Francisco-based URS Corp., a huge global engineering and construction firm; the energy consultancy UtiliPoint International Inc. of Albuquerque; and the engineering and technology consultant Augusta Systems Inc. in Morgantown. The study will come up with estimates of the overall cost of such a plant as well as the amounts and types of coal necessary and available, among other things, Whitt said. He estimates that a plant would need more than a million tons of coal a year.

Even if the study green-lights a Mingo plant, it would take probably four to five years to bring about, Whitt said. Investors would be the first thing needed, he said, adding that the plant wouldn't hinge on government support. "We don't like to look for the government to fund things for us," he said. "Someone has to be willing to take the risk and get egg on their face if it doesn't work out."

To contact staff writer Joe Morris, use e-mail or call 348-5179.

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