Friday, February 18, 2011

Coal-to-Liquids as a Case Study of How Excessive Optimism Is Our Enemy...

by Fabius Maximus

Summary: Confidence provides strengths for a society, but only when coupled with clear vision. Unfortunately modern America too-often sees the future only in terms of doomsters’ pessimism and advocates’ optimism. Here we have a case study of the latter.

In the run-up to the 2008 oil price spike optimists had extreme confidence in several advanced technologies as new energy sources. Some examples popular in 2006 were cellulosic ethanol (e.g., from algae or switchgrass), solar, wind, ocean waves, and converting coal to liquid fuels (CTL). This confidence short-circuited our natural fear of oil depletion, which otherwise might have sparked comprehensive efforts to prepare for an era of high oil prices. This is another contrast with China, which has a powerful and multifaceted long-term program to prepare for peak oil.
Several years later we can better assess the accuracy of these hopes. Here we look at CTL. The elements of the CTL story have proved to be either false or overstated.


1.CTL is an energy source! No, it’s not.
2.We have vast reserves of cheap coal, sufficient to last centuries. No we don’t.
3.We should imitate the big China CTL program. Except there is none.
4.Companies can run CTL plants as an economic alternative to oil at $60/barrel (nope).
6.For more information
Tomorrow’s post discusses the missing element in many optimistic reports about energy: time. Building new energy sources on a large scale (a serious fraction of total energy use) takes decades — after the successful lab work, pilot plants, and then demonstration plants.

(1) CTL is an energy source!

No it’s not. This is a common mistake of non-expert enthusiasts writing about energy. CTL refines a primary energy source (coal) into a liquid fuel — a clean fuel able to power existing vehicals (just as fuel cells convert hydrogen into electricity, natural gas being the usual energy source). The cost of CTL’s liquid fuel product consists of mining and transporting the coal plus the CTL refining process. These costs include:

•the capital costs of building the mines and refineries — plus the transportation connecting them (e.g., railroads or slurry pipelines); taking in to account their expected lifetimes;
•the cost of operating these facilities.
The mix of capital and operating costs makes it difficult to compare energy sources. Some have mostly capital costs (shallow land wells of light sweet oil, solar). Some have mostly operating costs (surface mined coal). Some have large costs for both (e.g., shale oil — aka kerogen). Advocates of CTL often misrepresent its cost by looking only at the capital costs (there is more information about CTL’s capital costs than its operating costs). This is especially misleading when comparing CTL to sources such as deepsea oil, which has relatively low operating costs.

(2) We have vast reserves of cheap coal, sufficient to last hundreds of years

Probably not. These estimates ignored the basic relationship of mineral deposits: the inverse relationship of ore quality and quantity. High quality ores are less plentiful than low grades (details here). In other words, there are vast reserves when measured in tons. But what of their energy content? We see this in the US mining of coal. Production of anthracite peaked in 1918; by 2118 we may mining coal with the BTU content of biodegradable Kittie Litter.

There have been several studies evaluating the actual extent of coal reserves in terms of their energy content (not volume or weight):

•“The Peak in U.S. Coal Production“, Gregson Vaux, 27 May 2004
•“Coal of the Future (Supply prospects for thermal coal by 2030-2050)“, Energy Edge Limited, Prepared for the European Commission – DG Joint Research Centre Institute for Energy (JRC IFE), February 2007
•“Coal: Resources and Future Production“, Energy Watch Group, March 2007 (47 pages, PDF)
•“Coal: Research and Development to Support National Energy Policy“, National Academies, June 2007
The major study showing reserves are overstated: “Coal: Research and Development to Support National Energy Policy“, National Academies, June 2007 — Key paragraph:

Present estimates of coal reserves – which take into account location, quality, recoverability, and transportation issues – are based upon methods that have not been updated since their inception in 1974, and much of the input data were compiled in the early 1970s. Recent programs to assess coal recoverability in limited areas using updated methods indicate that only a small fraction of previously estimated reserves are actually recoverable. Such findings emphasize the need for a reinvigorated coal reserve assessment program using modern methods and technologies.

What does this mean? Lower quality ore, thinner coal beds, at deeper depths = higher costs, affecting the economics of CTL.

(3) We should imitate the big China CTL program!

Not really. China planned by 2020 to build CTL plants producing one million barrels/day (for comparison, today the US imports roughly ten million barrels/day). In 2006 China had 27 CTL projects of varying sizes under construction or in planning totally 31 million tonnes/year (plus 30 coal to methanol plants and other coal-to-chemical plants). During the past years China slowed its program, fearing to overextend their coal and fresh water resources (5+ gallons per barrel output), plus environmental concerns (especially CTL waste products). For example, from Reuters, 28 August 2008:

China has ordered the suspension of all but two coal-to-oil projects in the country, said the Ningxia Development and Reform Commission, in northwest China’s Ningxia Autonomous Region. The exceptions to the suspension are a project due for launch in {Ordos} Inner Mongolia this year by Shenhua Group, China’s largest coal producer, and a second {in Ningxia} belonging to Shenhua’s Ningxia Coal Industry Group and South Africa’s Sasol Ltd (SOLJ.J), the commission said on its website.

The National Development and Reform Commission, China’s top economic planning agency, recently issued a circular asking local governments to tighten administration of coal-to-oil projects, it said. China should find the most suitable way of developing coal-to-oil operations via demonstration projects before moving on to the next step, the statement said.

On 4 February 2010 the second project was put on hold.

Many pilot plants and a few demonstration plants remain either under construction or in operation (see lists here and here). The situation is similar in the US. Work on small scale projects; talk about large projects for the future.

(4) Companies can run CTL plants as an economic alternative to oil at $60/barrel

Probably not. Comparing CTL to other energy sources — especially unconventionals (e.g., heavy oil or CTL) or alternatives (e.g., solar, wind) — is difficult due to their very different characteristics: capital costs, operating costs, lifespan of equipment, and performance (e.g., reliability, availability). Worse, most of the analysis tends to be by advocates — whose enthusiasm often trumps the need for accurate accounting. This is perhaps the primary reason energy research tends to be of such low utility, even when done by experts (and more so when by informed amateurs, such as David Archibald here).

The promise can be seen in this: “Baseline Technical and Economic Assessment of a. Commercial Scale Fischer- Tropsch Liquids Facility“, National Renewable Energy Laboratory, 9 April 2007. As usual, reality is disappointing compared to the dream.

In January Sasol cancelled a 2009 memorandum of intent to build a 80 thousand bpd CTL plant in Indonesia. It required oil prices of $90/bbl for a 10% return, and $110/bbl for a 15% return. The capital (construction cost) was $125 thousand per barrel-day (source: “CTL cancellation raises further strategy questions”, Merrill Lynch, 19 January 2011). We can compare this with two China’s CTL plants reviewed at the April 2010 World CTL Conference in Beijing.

•China’s largest CTL plant, in Ordos (Inner Mongolia), produces 25 thousand bpd. It started production in 2008, costing $3 billion ($150 thousand per barrel-day). The start-up ramp has been rough, running at 70% capacity in early 2010.
•Yitai Coal to Liquid Company has a 4 thousand bpd demonstration plant in Dalu (Inner Mongolia) started operation in 2009. It cost $300 million ($205 thousand per barrel-day).
The cost of building a CTL plant would, of course, be more in the US than in Indonesia or China. Higher labor costs, more environmental protection and safety equipment.

Operating costs for China plants are not publicly available (i.e., I’ve not found any), but their costs are (or were) subsidized. For example, low-interest loans, plus reduced rates for water, coal, and electricity.

Update: Canada Oil Sands Trust says that as of Q4 2010 their production cost is $37/barrel, plus another $7/barrel in royalties to the Crown and $10/barrel in non-production costs (including administration and interest) — for a total of $54/barrel in operating costs (not including the capital cost).


CTL has great promise to provide liquid fuels after conventional oil production peaks, allowing the world economy to grow. It will probably not comprise a large fraction of oil consumption. Construction of the required mines, transportation, and CTL refineries takes too long, and global coal reserves might not suffice by the time so many plants were built in 20-50 years.

Most importantly, it will not be cheap oil. It’s one part of the solution for the next several generations. Not the largest part, and certainly not a panacea.

(5) For more information

Studies and reports about coal and CTL:

1.NERL Worldwide Gasification Database , National Energy Technology Laboratory
2.“The Role of Synthetic Fuel In World War II Germany“, Peter W. Beckwe, Air University Review, July-August 1981
3.The first major study questioning the actual extent of coal reserves: “The Peak in U.S. Coal Production“, Gregson Vaux, 27 May 2004
4.“The Future of Coal“, B. Kavalov and S. D. Peteves, Prepared for European Commission DG Joint Research Centre Institute for Energy (JRC IFE), February 2007
5.More evidence that reserves are overstated: “COAL OF THE FUTURE (SUPPLY PROSPECTS FOR THERMAL COAL BY 2030-2050)“, Energy Edge Limited, Prepared for the European Commission – DG Joint Research Centre Institute for Energy (JRC IFE), February 2007
6.More evidence that reserves are overstated: “Coal: Resources and Future Production“, Energy Watch Group, March 2007 (47 pages, PDF)
7.“The Future of Coal – an interdisciplinary MIT study“, MIT, March 2007
8.The major study showing reserves are overstated: “Coal: Research and Development to Support National Energy Policy“, National Academies, June 2007
9.Coal-to-Liquids in the United States Status and Roadmap, National Energy Technology Laboratory, June 2008– 17 CTL plants in early stages (planning or engineering)

Friday, February 04, 2011

Two Pictures Show an Important Difference Between China and America...

Two Pictures Show an Important Difference Between China and America
Fabius Maximus Feb 3, 2011 7:21PM Summary: Americans tend to see the mote in China’s eye but not the beam in ours. We project our dark traits onto China, no matter how absurd. Today we see two pictures that provide a rebuttal to one common myth about China and America.

The French Marshall Louis Lyautey (1854-1934) told his gardner to plant a row of trees on his estate. “My Lord, they will take a century to reach full growth” said his groundskeeper. “Then we start plant them today” replied Lyautey.

The news media and its pet pedants tell us much about China. Such as tales about China’s rampant malinvestment, unlike America — where home of entrepreneurs, where free markets rule. Google shows 37 thousand hits to the words Chinese and malinvestment. While there is probably much malinvestment in China, America has a far more serious malinvestment problem.
That’s important because over time even small differences in relative performance can produce large differences in national power.

Malinvestment in China
A new train station in Wuhan (Central China), completed December 2009 (source: Financial Times). One of the thousands of new ports, stations, and airports being built or expanded. Two generations from now these will be considered far-sighted acts of genius, building infrastructure before its needed — contributing to its current growth, built cheaply while China is poor.

Malinvestment in the USA
Meanwhile the US has 18.8 million vacant homes (18.6% 14.6% of total units), up from 13.6 million (11.7%) a decade ago (Census data). The office vacancy rate is 17.7% (per Grubb & Ellis).

But that’s a small aspect of the problem. Our critical public infrastructure is decaying (for details see “The 2009 Report Card for American Infrastructure” of the the American Society of Civil Engineers (ASCE). And our private sector engines of innovation have atrophied. Overall levels of investment are low. The great private sector R&D centers have died, such as Bell Labs and the Palo Alto Research Center.

So where is America investing? Much of our research is done by the government. NIH, NSF, DOE, and DARPA. And what are we building to compare with China’s state of the art transportation and communication systems?

An interior view of one of the many new buildings, each roughly the size of the Pentagon, going up to house expansion of America’s intelligence agencies (official picture). Several house only computers, built near power plants because of their fantastic electricity usage. This is the new HQ of the National Geospatial-Intelligence Agency, costing $1.8 billion. It will be the third largest building in Washington. An interesting contrast with the cuts in capex of America’s already decrepit public infrastructure.

Update: another example of “excess” investment in China — “China is planning to create the world’s biggest mega city by merging nine cities to create a metropolis twice the size of Wales with a population of 42 million.“

Almost a trillion dollars per year, America’s blood, our surplus economic product generated from one hundred million families — goes into our military and intelligence services. We spend more than the rest of the world combined, ten-fold times every possible combination of enemies. This money could rebuild our infrastructure, be invested in education and research to build a powerful America for the 21st century. Instead it gets consumed without thought or plan. Spilled carelessly.

Defense analyst Chuck Spinner describes our past and present (until we go broke) in “The Domestic Roots of Perpetual War” in Challenge: The Magazine of Economic Affairs, January/February 2011.

Posts about China LINK...

1.Power shifts from West to East: the end of the post-WWII regime in the news, 20 December 2007
2.China becomes a super-power (geopolitical analysis need not be war-mongering), 9 July 2008
3.Words to fear in the 21st century: Lǎo hǔ, lǎo hǔ, Lǎo hǔ, 14 July 2008
4.A different perspective on the US and China, seen by an American living in Russia, 23 March 2009
5.China – the mysterious other pole of the world economy, 22 July 2009
6.Another big step for China on its road to becoming a great power, 27 July 2009
7.Will China collapse?, 5 August 2009
8.A revolution is not a dinner party. Thoughts about the future of China, 19 August 2009
9.Update about China: a new center of the world, 13 December 2009
10.Fertilizer overuse destroying Chinese soil, 18 February 2010
11.Rare earths – a hidden but strategic battleground between the US and China, 5 May 2010
12.Today’s example of the inscrutable mystery of China’s economic statistics, 13 May 2010
13.How China builds its commercial empire, 12 July 2010
14.The West has power, but often little self-insight, 19 September 2010
15.A look at the future (it’s already here, but it’s not in the USA), 29 September 2010
16.Why China will again rise to the top, and their most important advantage over America, 11 November 2010