Coal: The New Black Gold

Sasol is not a household name, but maybe it should be, as India and other countries increasingly look at alternative sources to quench their thirst for oil. Every day, this South African company churns out 160,000 barrels of gasoline, diesel fuel and jet fuel without using a single drop of crude oil—the pricey raw material that is getting pricier by the day. Instead of crude, Sasol uses coal as the raw material to meet about 30% of South Africa’s energy needs.

Sasol has been converting coal to oil since 1956. When it started doing so, the only company and country in the world to do so at any scale, it didn’t have a choice. An economic embargo on South Africa, brought on by apartheid, meant it couldn’t import crude. So, it looked elsewhere, and found coal and a technology called the Fischer-Tropsch process, perfected by the Germans in the Second World War, to convert it into oil.

The cost-benefit wasn’t favourable back then, but it is today. So much so, that even the US, China and India—three of the world’s top four coal producers and massive oil importers—think this could be their breakthrough for increasing oil self-sufficiency. All three countries are working on mainstreaming this alternative method of oil production, even courting Sasol.

Tata Power has tied up with Sasol for a $8 billion coal-to-oil project. Apparently, the company has sought access to 30 million tonnes (MT) of coal per year to produce 21 MT of oil per year and 1,500 MW of power. Elsewhere, Reliance Industries has asked the Centre for coal mines to synthesise about 30 MT of oil a year. As has the Anil Dhirubhai Ambani Group and IOC, and a few more. The potential of those numbers is mind-boggling. An output of 51 MT per year —what Tata and Reliance are said to be looking at—is 33% of India’s total oil production of 151 MT in 2006-07.

The economics

It’s simple economics. The capital cost of a coal-based refinery—it first converts the coal to gas (synthetic gas, or syngas), which is then converted to oil—is about three times the cost of a conventional, crude-based one. That’s obviously unfavourable. But it becomes favourable if the coal-based refinery can earn a greater margin on sales on a sustained basis. It couldn’t till 2003. It can now.

If crude is above $50 a barrel, the coal-based producer is in business. Today, when crude is above $100 a barrel, Sasol is making an insane margin, prompting some South African policymakers to call for a windfall tax on it! Oil-based refineries, on the other hand, will always buy crude at market rates, unless they are also crude producers.

Even for crude producers, it’s getting difficult. A recent CLSA report says that the age of “peak oil” is over. Oil on the surface is drying up, and companies have to dig deeper, which means higher drilling costs. “Only if crude is above $55 to $65 a barrel does it make sense for them to drill.” When this is read along with the ever-increasing demand for oil, one thing is clear: oil will stay on the boil. The longer it stays so, the greater will be the urgency to look for alternatives. And today, the input with the maximum output potential is coal.

In China, the Shenhua Group will start producing oil from coal in August 2008 in inner Mongolia using Sasol technology, with production projected to increase to 4 MT by 2010 and 50 MT by 2020. China has several more such projects in the works. In the US, coal-rich Pennsylvania has started a pilot project worth $625 million to make diesel from waste coal using Sasol and Shell technology.

The issues

At present, only two companies in the world, Sasol and Shell, have mastered the technology to convert coal to oil. Fischer-Tropsch synthesis is restrictive, and not given on third-party licence. That means companies have little choice but to enter into a joint venture either with Sasol or Shell.

Compared to crude refining, the production range of the Fischer-Tropsch method is limited—75-80% high quality diesel, 15-20% naphtha and 2-3% liquefied petroleum only. That’s obviously a limitation, but not that much with such high crude prices.

It takes about five years to set up a coal-to-oil refinery (three years for conventional projects). Says BM Bansal, Director (Planning and Business Development), IOC: “A coal-to-fuel project aiming to produce two million metric tons of diesel per annum will require an investment of $6-8 billion and around 4 million metric tonnes of coal per annum.

That’s a lot of coal. While the Planning Commission estimates that India’s coal reserves can last 100 years, others are not so sure. Leena Srivastava, Executive Director, The Energy and Resources Institute (TERI) puts it at 40 years. “Coal should be used to produce electricity for the masses, not fuel,” she says. There is an environmental issue also, as coal is polluting. However, Sasol and Shell have shown that the waste can be dealt with. The ash can be used in cement production and the carbon dioxide can be captured and pumped into offshore and onshore oil and gas fields.

Another advantage for Indian companies is the flexibility to use gas. In the coal-to-oil process, the first step is conversion of coal to gas. Given our increasing gas reserves, they can even bypass the coal stage. In the emerging energy scenario, India has the raw materials to increase its energy self-sufficiency—and reduce its dependence on an unstable world.

Source: Outlook Business


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