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.
CONSOL Energy Inc (CNX.N), a big coal producer, and Synthesis Energy Technologies recently announced plans to explore building such a plant in West Virginia.
Proponents say coal-to-liquid fuel can compete with crude oil on the basis of cost, especially if low-grade coal is used, as most plans envision.
At $75 a barrel, oil is worth about $14 per million BTUs (a unit of heat), while low-grade coal is $1 or less.
Like oil, coal costs have soared recently, but not that of lower grades, which still sell for about $10 a short ton. Even adjusting for lower BTU content, coal is much cheaper as feedstock.
“We can produce and earn a competitive rate of return at today’s oil price,” Kelly said.
If oil prices decline to $40 or $50 a barrel, Kelly argues, that would reduce drilling and exploration for oil and gas, which would only create more demand for alternative fuels.
Building a new coal-fed refinery, however, costs about $1 billion per 10,000 barrels per day of capacity, said Corey Henry of the National Mining Association.
Analysts say that is three to four times as much as a similar oil refinery.
For reference, it would take 2,100 such CTL plants to meet the current U.S. oil demand of 21 million bpd, although advocates say the goal is not to replace but to supplement oil-based supplies.
“There aren’t too many companies that can do $3 billion, $4 billion projects,” said Kevin Book, senior analyst at Friedman, Billings, Ramsey and Co Inc.
Reporting by Bruce Nichols; Editing by Walter Bagley