Nothing more than a pipedream for now

One result of the sharp increase in shale gas production in the US is the revival of plans to promote gas-to-liquids (GTL) processes to increase diesel and other products and lessen dependence on imported crude oil.

But coal-to-liquids (CTL) has sprung up as an immediate competitor for the very same reason, apart from the fact that coal is losing its market share in the power sector to natural gas.

Chemical transformation of coal or gas to liquid petroleum products is an old idea; coal was used in Germany to produce diesel and gasoline during the Second World War and later in South Africa during the oil embargo on that country in the days of apartheid. Gas-to-liquids is the less costly and easier process which has gained ground in the last two decades, especially in Qatar.

The transformation is based on the production of synthetic gas (hydrogen plus carbon monoxide) from gas or coal and then — by Fischer-Tropsch (FT) chemical reactions assisted by catalysts — heavier hydrocarbon molecules are produced and treated into final products.

The products of these processes are now well proven, whether they are used on their own or in blends with oil-derived ones. In fact in some respects, GTL and CTL products produce better qualities.

CTL capacity in the world is now close to 195 thousand barrels a day (kbd), mostly in South Africa and China, while that of GTL is 270-kbd, mostly in Qatar, including a project in Nigeria which is expected to come on stream this year. Therefore, their contribution to supplies is about half per cent even if they are working at full capacity, which is not the case.

Guaranteed coal supply

But these processes are complex and expensive and they need a high price of oil. There should also be long-term guaranteed supply of inexpensive gas or coal in addition to sorting out the fact that they produce more carbon dioxide emissions and its impact on climate.

However, the level of oil prices in the last few years has improved the economics of GTL and CTL, but the main driving force remains concerns about energy security as seen by some governments in today’s political climate.

In the US, GTL is considered an outlet for the surplus gas, and CTL is to boost demand for the much cheaper coal which is losing ground in power generation. Of course, both are promoted to reduce a dependence on imported oil.

But Victor Mallet of the Energy Collective said recently: “The economics of converting gas to liquid fuels does not point to massive replacement of imports.”

There are only tentative plans by Sasol of South Africa for a $14 billion (Dh51.4 billion) 96-kbd GTL plant in Louisiana. Sasol has announced it will wait until next year to make a final decision. Proponents and opponents alike remember that some GTL plants never reached their intended capacity and that in another instance, a project priced at $6 billion ran wild to about $20 billion before completion.

Talk more than action

Still, in the US, coal companies, technology suppliers and coal-related industry advocacy groups are supporting CTL projects even though talk is more than the action in spite of granted loan guarantees. There is a 20 per cent investment tax credit and $21 per barrel subsidy given since 2005 provided that carbon sequestration is part of the project.

The Energy Information Administration (EIA) in its reference case estimates that world CTL capacity is likely to be 2.4-mbd but could be higher or lower depending on policies and incentives. The International Energy Agency (IEA) estimates China’s CTL capacity at 0.75-mbd in 2035 and the US capacity at 0.4- to 2.6-mbd though more reasonable estimates see 0.25-mbd by 2020. CTL is now favoured due to the low cost of coal and its abundance though capital costs and environmental constraints are more.

These optimistic figures are unlikely to materialise except perhaps in China where coal is plentiful and money is no problem. Someone suggested that the US should convert all its current consumption of one billion tonnes of coal into liquid to cut oil imports to zero. Theoretically, this may be possible, but US environmental commitments will probably be ruined in addition to investing close to $1 trillion for a dubious aim.

This reminds me of a paper I reviewed for a competition in 2003, where the researcher kept increasing GTL capacity until no gas is left just to bring Opec production to zero. Unfortunately, the paper was from an Arab university but the good news is that GTL capacity has increased very little since then.

There is no doubt that CTL and GTL projects will contribute to future supplies of hydrocarbon liquids, but those who intend to scare oil producers with them will be disappointed.

— The writer is former head of the Energy Studies Department in Opec Secretariat in Vienna.