COAL TO LIQUID – SHOULD INDIA GO FOR IT?

Gas prices are soaring, as anyone with a car well knows. But, though US$100 a barrel prices are hurting wallets, economists argue that the situation has the beneficial effect of encouraging countries to look at alternative energy sources with greater urgency. Amidst continuing violence in the Middle East and political turmoil in some other major oil-producing countries the issue of energy security is again on the front burner. With oil price rising, there is evidence that a new approach using existing resources and technology can provide alternative energy to many countries. It is in this current world scenario of limited resources, soaring oil prices, and an ever-increasing concern for energy security that the world is witnessing a renewed interest in CTL technology. But the question is: Is CTL the answer everyone has been looking for?



The most troubling aspect of CTL is that its production will roughly double climate-changing greenhouse gas emissions. That's because liquefying coal releases huge amounts of carbon dioxide into the atmosphere. Proponents of CTL say that could be remedied by capturing and storing the carbon underground. But little is known of the actual consequences of such hypothesis. The new technology is so untested on a large scale that the US Senate energy bill seeks to conduct demonstration projects across the country to answer some vital questions, before they take the plunge. Should India start allotting coal blocks for generating CTL – a product the Americans are hesitant to manufacture in their own country?

Also questions such as whether the carbon dioxide, once stored in a variety of geological settings, will remain there have to be addressed. And once past these production questions, there's another obstacle: Tailpipe emissions from cars using CTL would be only slightly better than that from gasoline. Though scientists are divided about whether or not it will be as bad, the general opinion is that it will definitely not be any good.

And certainly not financially. CTL is prohibitively costly to set up. In the late '70s, assuming high oil prices, the US invested in six CTL projects. But by the early '80s, all its products became unviable due to a sustained drop in oil prices. These were terminated in 1985. Hence, companies are demanding government subsidies and incentives to maintain commercial viability. No wonder that the US Senator Jon Tester proposed an amendment to the Senate bill that would provide loans and other incentives to companies to build plants that would turn coal into liquid fuel while capturing and sequestering the greenhouse gases they emit. But large-scale and premature subsidies for the untested and environmentally risky technology may amount to nothing more than a big giveaway to American Big Coal. For India the big corporate houses planning to enter CTL, too, will demand various sops. Once New Delhi embarks on the CTL route, it might be too late to withstand the pressure from early entrants to the CTL manufacturing.


When in July 2007 the coal ministry of India in a notification permitted allotment of coal blocks to companies planning to set up coal gasification and coal lequification projects several CTL projects came on the drawing board. The state-owned Coal India Ltd and Oil India Ltd plan a $2.5-billion project based on direct liquefaction of 3.5 million tonne of low-ash, high-sulphur Assam coal to produce about 2 million barrels of diesel and naphtha. The Tatas and Sasol of South Africa are promoting a large $8-billion indirect liquefaction project using Sasol's gasification technology to convert high-ash, open-cast mined coal into 80,000 barrels per day (bpd) of liquid products, which can then be refined to produce diesel, naphtha, jet fuel, LPG and base oils (lubricants). About 1-1.4 billion tonnes (bt) of extractable open cast coal mining reserves will be needed to produce the annual coal requirement of 28-31 mt. The project reportedly has the endorsement of the finance ministry's investment commission,

Reliance Industries has also put forward an $8-billion proposal for an indirect liquefaction pithead plant using Mahanadi coal to produce 80,000 bpd of synthetic oil products. Reliance plans to use US technology, and has requested the allocation of three coal blocks with 1.6 bt of reserves in the Talcher region.

Important point to note is that all these coal blocks otherwise would supply coal to the existing and the proposed thermal power plants. If the blocks are allotted for CTL the thermal power plants already suffering from coal shortages will suffer further. If RIL has its way, for example, the allotment of the block will lead to sacrifice of 5000 mw of thermal power. Can India afford this?

While CTL projects may make commercial sense given current high oil prices, there are some concerns about the benefits of converting a solid primary fuel, which is the dominant source of electricity production, into a liquid primary energy resource. As the Sankar Committee and the integrated energy policy reports point out, India does not have surplus coal to meet the demand for power generation and the fact that India only has an estimated 56-71 bt of reserves, out of 250 bt in resources. Under these conditions, investing in CTL might compromise the ability to meet electricity demand using domestic coal. So, large CTL plants will exacerbate coal import dependence and could threaten India's energy security.


South Africa’s Sasol is, however, not the only one company using CTL technology. When US experimented with CTL in 1979, it created the SFC (Synthetic Fuels Corporation), assuming that oil prices would rise in the 1980s. Although the SFC invested in six CTL projects, its products became unviable due to a sustained drop in oil prices in the 1980s. The SFC was terminated in 1985. However companies like Rentech and Syntroleum have been pursuing research, though no large-scale commercial plant has been built in the US since the failed experiment.

Syntroleum, that originated as an R&D group through the US Department of Energy is today working with a company in Australia. While Shell GTL, an oil company that has a GTL (gas-to-liquids) plant in Malaysia, is working with companies in China to similar ends. In early 2006, Bumi, Indonesia’s largest private energy company announced its plans to build a major CTL facility in South Sumatra. Curiously even oil-producing Indonesia is looking into a coal-to-liquids plant as it now imports oil. In Germany, a study of feasibility is being undertaken for a facility at Spreetal. There is some new found enthusiasm for CTL in all parts of the world.

The governments of these countries are tilting towards CTL for the sake of energy security. They are winking at the major implications of CTL Production on the environment and on the health of communities that will live in the vicinity of the production and mining areas of CTL plants. Some governments of major coal-producing countries are more than eager to join hands with Sasol and other companies. China, for instance, is building a multi-billion¬ dollar CTL plant in Inner Mongolia. Like the US Department of Defence, other countries in the world too are looking at CTL technology as a means of reducing dependence on foreign oil. The National Coal Council, an American pressure group, is asking the government for subsidies that would help the domestic coal industry generate enough liquid fuel to satisfy 10% of America's expected oil demand in 2025.

China has signed an agreement with a South African energy and chemicals firm to build two coal-to-liquid fuel plants. These plants will jointly produce 440 million barrels of oil a year at the small price of $15 a barrel. It makes sense to point out that the costs of operating the South African company's plants are far less than those that current American technology allows.



However, the prospect of coal-to-oil conversion will add to the already surging demand for coal, which, according to the World Bank, now accounts for nearly 80% of electricity generation in China, up from 71 % in 1990 and 68% in India, up from 65% in 1990. In the United States, where coal-fired power plants account for about 31% of the country's carbon dioxide emissions, coal is the source for nearly 40% of the total electricity produced.

Coal is a highly polluting fuel. Therefore coal as a solution to energy demand is far from perfect, economists like Dapice concedes. Low price of coal would undermine the profits earned from oil production. Thus, he argues that “the coal-to-liquids technology must be only one element of an integrated program that is needed to deal with fuel security, local pollution, and global warming issues.” This program must combine a variety of new technologies with higher emissions standards. The result, if successful, could overhaul geopolitical competition and conflict over oil, and may move in the direction of investment and efficiency. Indeed this appears a welcome development, provided it is technically feasible and is not a stand alone solution.


The real question is if these plants can be built and reliably produce fuels for less than $20 a barrel. SASOL already produces 150,000 barrels a day from coal. (Conversion from natural gas is cheaper and SASOL is in the process of switching its feedstock to gas in South Africa.) Each of the Chinese plants would be four times as large as the existing SASOL plant, and scaling up can involve difficulties. If SASOL can make these larger plants work at the publicized costs, this technology could be used by many other nations – rich and poor – who are willing to forego periods of very cheap oil for more security. This technology also works in converting coal to natural gas at a cost of $3 to $3.50 per million BTU. Since current free market natural gas prices in India ( marketed by Petronet LNG and Shell) are roughly double that, it would appear that coal to gas is also an economically viable technology.


Is there a downside to rapidly adopting these technologies? Yes, from a global welfare perspective. Now, onshore oil production costs are around $5 a barrel, offshore is costlier. If prices are higher, somebody (the country owning the oil or the company producing it) gets the difference between the price and the cost. If we switch to $15-$20 costs from these other technologies, then there is no surplus of price over cost, or a much smaller one. To use an economic phrase, the “rent” on oil production is destroyed in a quest for self-sufficiency. While it is true, the instability in oil prices – as well as the threat of terrorist disruptions to supply, are reasons why many nations might be happy and even keen to use their own resources to produce this vital input. They are no worse off if oil can be produced at $20 a barrel, unless the price temporarily plunges below that level as it did in the late 1990’s. A stable price and supply prevents very expensive disruptions.

None of this answers critics who are intensely concerned with global warming. Subsidies to hybrid or other highly efficient vehicles are probably needed to reduce emissions from increasingly popular personal transportation. Higher efficiency standards in buildings and appliances are an alternative to politically difficult carbon taxes. In the longer term, fuel cells burning hydrogen and producing only water as a waste product are promising – but still is far from economic feasibility. Even solar energy could become competitive soon in producing electricity.

A rapidly growing economy, India's thirst for oil is rising in 2005/06, it consumed 120 million tonnes, increase of almost 6% from 2004/05. And since nearly 72% of its crude oil requirement is currently imported, India is looking for technological solutions that can reduce these imports, while still meeting the increasing demand.

CTL is particularly attractive because India has significant coal resources. Sasol has shown interest in bringing their technology to India and is willing to invest around $6 billion in an Indian coal liquefaction project. This essentially means that in a world threatened by depleting fossil fuels, India plans to invest in a technology that is not only expensive but, many argue, is also highly polluting.

The devastation caused by mining alone is pretty disturbing, and now with CTL combined with India's abysmal record of pollution control enforcement, the economical, social, and environmental costs will be tremendous. CTL is particularly attractive because India has significant coal resources. But the question is : Who would bear the cost of environmental damage?

There are also economic issues. After enjoying tax incentives in apartheid-ridden South Africa, Sasol is demanding the same in India. While considering the provision of incentives, it is important to recognize that CTL is economically viable only in a world of high oil prices. If oil price remains at US $ 100 a barrel CTL may prove to be an economic option.

No wonder therefore the Indian private sector giant Reliance has shown keen interest in CTL. Mukesh Ambani’s RIL, which is building the world's largest oil refining complex at Jamnagar in Gujarat, had sought mining acreage from the government for setting up a coal-to-liquid project with a capacity to synthesize 80,000 barrels of oil per day. The company has projected requirement of 30 million tons of coal a year. It has sought mines with total reserves of 1,500 million tons for the project. Not to be left behind his younger brother Anil Ambani, too, has placed demand for captive coal blocks to turn coal into liquid fuel/gas. Is such competitive rush for untested CTL advisable?

Although CTL might be an important technology for enhancing energy security, the question remains as to whether the governments have fully considered all its other impacts. If CTL plants do not have carbon sequestration as a part of their operations for instance they will emit millions of tonnes of CO2 into the atmosphere annually. Furthermore, with the looming challenge of mitigating global warming, it is important for nations not to invest in high carbon emission technologies, especially one that requires huge quantum of coal, high investment, substantial reservoir of precious water and high safety standards. If China and USA are still debating over the issue should New Delhi plunge into CTL headlong?