Coal-to-Liquids Economic Drivers


With oil prices at record high levels there is a growing interest in so-called “coal-to-liquids” or (CTL) technologies. CTL creates ultra-clean (zero or near zero sulfur) diesel and also modest amounts of naptha, liquefied petroleum gas (LPG) and other by-products. But press releases concerning the economics of CTL often quote a wide range of prices for the high-quality diesel fuel—as low as $30 per barrel, upwards to $60 per barrel. Here we examine some of the major drivers that are responsible for such a wide range of predicted results. A Little Bit of History The process for converting coal or natural gas into liquids was discovered in the 1920s by Franz Fischer and Hans Tropsch. Today's CTL technologies use variants of the so-called Fischer-Tropsch (FT) reactor at the core of their process. Before entering the FT reactor, the coal is gasified into a carbon monoxide and hydrogen rich gas. A chemical reaction typically involving an iron or cobalt based catalyst occurs within the FT reactor converting the gas into liquids such as diesel. The first commercial CTL plants were built in oil-poor but coal-rich Germany around 1936 and each plant produced about 1,500 barrels per day (bpd). During World War II thirteen CTL plants went into operations, with Germany producing about 16,000 bpd in 1944. Further development of the technology generally collapsed with the drop in oil prices in the 1950s. The process then saw a rebirth in South Africa where it was used to produce diesel when they were cut off from world supplies under Apartheid. The origins of CTL leader Sasol date back to the formation of the South African Coal Oil and Gas Corporation in 1950, and today the company reports it has a coal and gas to liquids production capacity of 160,000 bpd. Sasol has recently expanded it reach, commissioning its first international joint-venture gas-to-liquids (GTL) plant in Qatar in 2006 and a second GTL plant is under construction in Nigeria for planned commissioning in 2009. Sasol is not alone, however, in the CTL and GTL world. Rising stars include U.S.-based companies Syntroleum and Rentech as well as major oil companies such as Shell. Syntroleum this week announced a joint development agreement with Sustec Industries AG, a private company based in Switzerland. The companies plan to construct a 3,000 bpd CTL plant at Sustec's Schwarze Pumpe industrial facility at Spreetal, Germany. This joint project is the first phase of a possible 20,000 bpd project. According to Syntroleum, the project has been pre-qualified for financial support from the Saxony (Sachsen) State Government and is currently eligible for over a EUR 100 million ($128 million) grant. CTL Economics With the CTL technologies reasonably well-tested, why aren't new plants popping up around the globe, and why is there such a large range of estimates as to what it costs to produce a barrel of fuel? Let's start with the cost to construct a plant. The minimum size commercial plant that is commonly discussed would have a plant capacity of 10,000 bpd. Recently Sasol made a presentation in China where it said the capital cost to construct an 84,200 bpd plant would be in the range of $65,000 to $80,000 per bpd capacity. Building a 10,000 bpd plant within this cost range equates to a $650 to $800 million dollar project. Obviously, that is a large amount of money to raise for a speculative venture, and depending how that money is raised can significantly impact the overall economics. For instance, with government or other guarantees, the project could be financed with large amounts of debt, perhaps at around eight percent interest. Without guarantees the project would likely have to be financed with investors seeking greater returns, probably around 20 percent interest. The other issue is how long will the plant operate㬐 years, 30 years? And then there's the question of how much will the plant operate during a year on average𤼢 days (90 percent capacity factor), 275 days (75 percent capacity factor)? Working through the math of all these plausible scenarios there is a wide range of possible costs per barrel just to cover the financing costs for building the plant—as low as $17 per barrel to $40 per barrel or more. So the questions of, "What will it cost to finance the project, how long and how much will the plant produce?" are the most critical driver of economics. The next most important economic driver is the cost of the coal feedstock. Here we also have a wide range of possible conditions. Low quality coal has less BTU content (around 16 million BTUs per ton) whereas high quality coal has around 22 million BTUs per ton. And depending on where you are in the world the coal can cost from $10 to $50 per ton. During the CTL process about 40 percent or more of the energy is used to run the process itself. So to get one barrel of diesel, which has about 5.8 million BTUs, we need about a half ton or more of coal, which equates to anywhere from $5 to $25 per barrel depending on our resource. The final part of our economic picture is the “other” category. There are of course employees, maintenance, chemicals and the other things we need to do to run a business. Sasol estimated direct operating costs to be around $15 per barrel and I have seen similar estimates elsewhere. So, tallying up the “optimistic” scenarios puts the cost of CTL at $35 to $40 per barrel. On the high end we can see $80 per barrel. The hunt, therefore, is to find projects with the potential to produce on the low end of this range. Feasible projects will likely require some form of guarantee to lower the financing costs, combined t with a low cost source of coal. Keep your eye on the international scene where governments take a more active role in the energy business. Coal-rich and oil-poor countries such as South Africa and Germany led the development of CTL out of necessity. Similarly China is looking at plants as large as 800,000 bpd. And you can't count out the United States where we have ten times more BTUs in the ground in the form of coal than oil and gas combined.
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