Fuel your car with coal? Less likely now

By Bruce Nichols - Analysis

HOUSTON (Reuters) - When crude oil was more than $145 a barrel and investors were flush with cash, building plants to turn coal into liquid fuel for cars and trucks looked like a winning bet.

But, as oil has fallen below $70 a barrel amid a looming global recession and slowing fuel demand, plans to convert plentiful U.S. coal supplies into liquid fuels look less certain.

"Things have tightened up," said Bob Kelly, chairman of DKRW Energy LLC, which is eyeing a so-called coal-to-liquids, or CTL, plant in Wyoming.

Despite opposition from environmental groups, who say the plants could exacerbate global warming, coal companies, including giant Peabody Energy (BTU.N), have been pushing CTL as a way out of the American addiction to oil.

Now, industry officials are going back to the drawing board, Kelly said. "Everybody's got to evaluate their positions," he said. "We have to wait to see how the capital markets evolve."

DKRW's Medicine Bow project is one of about a dozen that have been announced around the United States. DKRW's groundbreaking originally was targeted for late 2007 but is now set for early 2010.

The United States has vast coal reserves -- by some estimates up to a 250-year supply at current usage rates.

Advocates say greenhouse gas emissions can be controlled, but cost remains a stumbling block. A commercial-scale CTL plant would cost upwards of $4 billion.

With oil prices now half the record $147 a barrel set in July, CTL will have a harder time competing with traditional oil-derived fuels, analysts said.

The U.S. Air Force, which has tested coal-derived jet fuel and found it works well, remains a prime potential buyer of such fuels. U.S. national security experts have pressed for such fuels as a more secure, affordable source of fuel than oil, much of which is imported from the Middle East.

But U.S. private sector excitement appears to be fading. Analysts say coal fuels, though likely to enter the U.S. energy mix in the long term, will not soon slake Americans' thirst for transportation fuels -- which comprise about 60 percent of the nation's 21-million-barrel-per-day oil habit.

"Directionally, it's hard to see it having a material impact in the near to medium term," said Alan Gelder, an analyst at the Wood Mackenzie consulting firm.

Coal can be used to make diesel employing World War II-era technology perfected by German engineers. South Africa has been doing it for years.

It also can be used to make methanol, an alcohol similar to ethanol but made from coal rather than corn or sugar cane. Like ethanol, methanol is a well established fuel. China, with Peabody, and Japan are exploring the methanol option.

Finally, coal can be used to make gasoline. It requires an additional step in manufacturing, but advocates say it can be competitive and is the most compatible option for the existing U.S. vehicle fleet and fuel infrastructure.