Unlimited energy at less than $100 per barrel? John Kemp

-- John Kemp is a Reuters columnist. The views expressed are his own --

By John Kemp

LONDON (Reuters) - Goldman Sachs has warned supply constraints in oil and other commodities would re-emerge as soon as the end of 2010, pushing prices sharply higher to create demand destruction, in a re-run of the events of 2008. The bank's analysts predict prices will remain high "with each subsequent spike higher than the last".

But at least for energy, the idea that supply constraints will push prices ever-higher is wrong. While another spike remains possible, it would reflect short-term errors in monetary policy, as policymakers try to run the global economy too fast. Longer term, there is an almost unlimited supply of energy at moderate prices, available by harnessing coal and other hydrocarbon reserves using existing technology.

Over the next decade four technologies (coal gasification, Fischer-Tropsch liquefaction, combined-cycle power generation, and carbon dioxide sequestration) will become increasingly important for both electricity generation and production of liquid transportation fuels. All these technologies are already in use and could deliver substantial quantities of additional power and transport fuel at prices well below $100 per barrel.

GASIFICATION

Technology to produce cleaner-burning gas from coal and other solid hydrocarbons has existed for more than 200 years.

By heating coal or other solid fuels under pressure, in conditions of restricted oxygen, it is possible to partially oxidize rather than combust (burn) them. The reaction produces synthesis gas (syngas), a mixture of carbon monoxide (CO), carbon dioxide (CO2), hydrogen (H2) and methane (CH4) in varying amounts, as well as a char residue.

Most of these products are usable and can be burned for power generation, or processed further to produce diesel and gasoline. Methane is the main component of natural gas. Both carbon monoxide and hydrogen can be burned in a gas turbine, or processed to produce liquid fuels through the Fischer-Tropsch process.

Partial oxidation is a very old technology. It is essentially the same process used for hundreds of years to produce charcoal, and has been used to produce coal gas for lighting since the 1790s. In 1816 Baltimore, Maryland, became the first U.S. city to light it streets with town gas.

Town gas production declined from the early 20th century, displaced by electric lighting and cheap crude oil and natural gas. But syngas production enabled Germany to produce as much as 600,000 tonnes (4 million barrels) per year of petroleum liquids during World War Two. South Africa's Sasol used it in the apartheid era to reduce the country's dependence on oil imports.

Sasol's (SOLJ.J) technology has been licensed to build up to 10 plants in China, though some have been postponed [ID:nPEK68307]. Besides Sasol, four major engineering companies have developed gasifiers that are already in use and licensable -- GE Energy (bought from Texaco), Shell, Siemens and ConocoPhillips (E-Gas). The point is that this is a well-established and mature technology.

FISCHER-TROPSCH

The Fischer-Tropsch process was developed in the 1920s at Germany's Kaiser-Wilhelm Institute for Coal Research amid concerns about a peak in global oil production (forecast for 1930) and to make better use of the country's massive coal reserves to eliminate its strategic dependence on imported crude oil (proving that history rhymes if it does not repeat).

The process uses carbon monoxide and hydrogen from syngas and reacts them in the presence of a catalyst to produce liquid fuels. While the exact slate of products can be varied, it generally produces more middle distillates (diesel and heating oil) and fewer naphtha fractions and gasolines than conventional light crude refining.

Once again, the process is well established. A study for the U.S. Department of Energy (DOE)'s National Energy Technology Laboratory (NETL) published in 2007 looked at the feasibility of a gasification and Fischer-Tropsch liquids facility. It would use 50,000 short tons per day of Illinois No.6 coal to produce 22,000 barrels per day of naphtha components and 28,000 barrels of diesel components.

The NETL study concluded the plant would cost $3.65 billion to build (rising to $4.53 billion once financing and start-up costs were included). Products would be competitive with naphthas and diesel from crude oil streams at crude prices of $37 per barrel (assuming a required return on investment of 10 percent).

The NETL study made no provision for CO2 storage and sequestration facilities, which would impose a significant energy penalty on the plant's efficiency and build in more cost. But even making a generous allowance for a 25 percent energy loss and commensurate cost increase, products should be competitive at prices of only $60-70 per barrel. Crucially, Fischer-Tropsch liquids could utilize the existing pipeline and distribution infrastructure for petroleum products, making for significant efficiency savings.

COMBINED CYCLE

In a typical coal-fired power plant, only about a third of the energy in the coal is actually turned into electricity, with most of the rest lost as friction or as waste heat. But combined-cycle gas systems (a gas turbine followed by a steam boiler using the hot exhaust gases to power a second generator) can achieve much higher thermal efficiencies of 50 percent (and there are hopes that it could be raised toward 60 percent).

As a result, gasifying coal and then running the methane, hydrogen and carbon monoxide through a gas combined-cycle system is much more efficient than simply burning the coal in a conventional power station and watching the waste heat disappear up the chimney. The ultimate objective is an integrated gasification-combined cycle (IGCC) power plant that unites a gasifier with a combined cycle system.

According to NETL, IGCC plants can achieve a net efficiency of 38-41 percent, lower than a combined cycle plant run on natural gas (50 percent) but slightly ahead of a conventional coal-fired plant (37-39 percent) and with substantial room for process improvement. The main problem is that IGCC plants cost $1841 per kilowatt (kW) of generating capacity, about three times as much as a combined cycle gas plant ($554) though only slightly more than a pulverized coal one ($1562).

CO2 SEQUESTRATION

The huge advantage of gasification is the carbon dioxide produced is relatively easy to capture and sequestrate. Again carbon sequestration is an established technology, though not on anything like the required scale.

The petroleum industry already transports CO2 via pipeline in liquid form, for injecting into depleted oilfields as part of Enhanced Oil Recovery (EOR) programs. As conventional oil supplies deplete, EOR is likely to become increasingly important, providing increased demand for CO2 injection.

The main problem is there are not enough depleted oilfields in the right places to absorb all the CO2 potentially produced. FutureGen, a partnership between the DOE and private energy and coal companies, is trying to develop a demonstration IGCC plant at commercial scale in Illinois that would inject CO2 into a saline aquifer.

CO2 sequestration is expensive in terms of both capital funding and energy lost. NETL studies show the energy penalty for sequestration is about 10 percent for a thermal coal plant (lowering thermal efficiency from 35 percent to just 25 percent). But it is feasible.

None of this is meant to suggest that gasification, liquefaction, and CO2 sequestration for solid fuels is easy or cheap. But the technologies are tested and available, and they could provide a substantial source of energy within a decade if necessary.

The higher and more volatile oil and energy prices become, the faster these technologies are likely to be deployed. Even on a conservative scenario, they could start to provide substantial quantities of replacement energy at less than $100 per barrel within a decade.

(Edited by David Evans)