Fairbanks looks at CTL to lower costs

Alaska’s second largest city is pursuing a project to turn nearby coal into liquid fuel, hoping to get Air Force on board as buyer

Eric Lidji

Petroleum News

Around the turn of the 19th century, cities on the East Coast put away their lanterns and began lighting homes and factories with “town gas,” a synthetic fuel made from coal.

Today, the city of Fairbanks hopes to do something similar.

For more than a year, a public-private coalition in Alaska’s second largest city has been looking at ways to turn an abundant nearby coal source into synthetic gas and diesel to heat and light buildings in a place with some of the coldest and longest winters on earth.

The goal is to cut the historically expensive energy costs in Fairbanks by getting the city off heating oil. Currently, a gallon of heating oil in Fairbanks costs around $4.50, while a kilowatt-hour of electricity made from diesel costs around 11 cents.

But just 100 miles south of Fairbanks are prolific coalfields in Healy. Fairbanks Economic Development Corp. believes a company can easily gasify that coal and convert it into liquids using the Fischer-Tropsch process developed in Germany in the 1920s.

Because Fairbanks only uses around 5,000 barrels of fuel oil per day, an amount considered technically sufficient for a coal-to-liquids facility, but probably not economically sufficient, local leaders want to get a large user like the Air Force on board to justify a facility capable of producing between 20,000 and 40,000 barrels per day.

That idea grew from a yearlong series of meetings held by a broad spectrum of business and community leaders in Fairbanks. Earlier this year, FEDC hired Hatch Ltd out of Toronto to prepare a business plan that could be taken to the private sector. Hatch expects to finish the project by this fall.

Two main steps to production

Combining coal, air and water in a chamber, and subjecting the mixture to extremely high temperatures and pressure, creates a gas made of carbon monoxide and hydrogen.

The Fischer-Tropsch process works by feeding that synthesis gas through a second chamber, where a catalyst like iron or cobalt speeds up the chemical reaction from a gas to a petroleum-like liquid product. The process can be used to create many different products by changing the catalyst, the gas and the conditions in the chamber.

The Fairbanks project under consideration would primarily produce jet fuel and smaller amounts of diesel, naphtha and liquefied petroleum gas. Because the gasification and Fischer-Tropsch process can be adapted to other feedstock, the community is also looking at ways to make fuel from biomass.

CTL history based on oil

The two biggest moves for coal-to-liquids came from unfortunate sources: the Nazi regime in Germany and apartheid in South Africa.

The Germans and the British both used Fischer-Tropsch to make transportation fuels during World War II, and the United States began exploring the technology during the late 1940s and early 1950s, according to Dan Cicero with the National Energy Technology Laboratory, a branch of the U.S. Department of Energy.

But as the United States began importing crude oil from overseas, the federal government discontinued coal-to-liquid research, Cicero said.

During the 1960s and 1970s, South Africa picked up on the technology as a way to become energy independent in the face of economic sanctions surrounding apartheid. The country now produces more than 150,000 barrels per day at several plants, supplying around 30 to 40 percent of liquid fuel demand in the country.

Oil prices make CTL look good

The dramatic run up in crude oil prices over the past few years has made coal-to-liquid more economic than it has been for decades.

A year and a half ago, the NETL estimated crude oil prices would need to be $61 a barrel for a coal-to-liquid plant to break even. With the increase in commodities prices since then, Cicero estimated the break-even point is now closer to $75 per barrel. Today, crude oil costs around $115 per barrel, although down from record highs earlier this summer.

“A lot of companies can see a profit incentive there,” Cicero said.

The NETL counts 17 projects in various stages of development in coal producing regions across the country, like Ohio and Mississippi, and new projects pop up “almost every month or so,” Cicero said. The proposals range from 5,000-bpd to 100,000-bpd plants.

Of the projects under development, five have already reached the point of spending tens of millions of dollars on front-end design work.

But despite the general lack of concern about commodities prices, economics have still challenged recent efforts at introducing pieces of the coal-to-liquids process in Alaska.

After a three-year study, Agrium announced earlier this year that it wouldn’t pursue a coal gasification facility to supply fuel for its mothballed fertilizer plant on the Kenai Peninsula. The project, called Blue Sky, was simply uneconomic, the company said.

Still, uneconomic means different things to different entities.

The group in Fairbanks hopes to create a public-private energy corporation capable of delivering fuel as cheaply as possible while still returning a profit for the company willing to operate the facility, according to Jim Dodson, president and CEO of FEDC.

Looking for cash, commitments

Cicero said entrepreneurs have two other large concerns: uncertainty about financing and uncertainty about a national carbon policy.

To get around the financing concern, many companies have begun building plants incrementally as funding becomes available. Each expansion increases the total price of the project, but lowers the cost of producing an individual barrel of synthetic fuel.

Cicero said each barrel of fuel produced at a 10,000 bpd facility could cost 25 percent more than a barrel from a 50,000 bpd facility.

Using a similar range of cost estimates, Dodson said the Fairbanks plant could run from $1.7 billion to $6.4 billion, depending on the ultimate size of the facility.

Hoping to increase interest in the project, FEDC hosted an energy summit in Fairbanks in July where members of the Alaska Congressional delegation, federal energy secretaries and military officials heard details about the project.

Dodson said Sen. Ted Stevens (R-Alaska) pledged to seek $10 million in federal funding, and that the project has state support from Gov. Sarah Palin and her new energy coordinator Steve Haagenson, although no state funding has yet been allocated.

FEDC and the Fairbanks North Star Borough hope to get the nearby Eielson Air Force base to commit to buy fuel from the facility. That would provide a much-needed industrial anchor to improve the economics of the project.

The Air Force is the largest user of energy in the U.S. Department of Defense, spending almost $6 billion on jet fuel alone last year, and over the past year, fuel costs at Eielson have nearly doubled, according to U.S. Air Force Gen. Carroll Chandler, Commander of the Pacific Air Forces.

“We’re very, very interested in new ideas,” Chandler said at the energy summit.

Carbon still a talking point

Although coal-to-liquids technology is cleaner than traditional coal fired power plants, many still worry about initiating any new coal-based facility. The project advocates have said the worries are unfounded.

“If we can’t reduce the life-cycle carbon footprint, then the project doesn’t go forward,” Fairbanks North Star Borough Mayor Jim Whitaker told the Fairbanks Daily News-Miner in July. “That’s the deal.”

The project will likely come of age in a new carbon era: both Sens. John McCain and Barack Obama, the presumptive Republican and Democratic presidential nominees, have proposed new national carbon policies.