November 19, 2008

Good ole ingenuity will eventually lift the world economy. It's the same entrepreneurial spirit that will also advance the work being done to diversify transportation fuels.

Any material that contains the critical chemical compounds can be converted to motor fuel. The technologies are promising and can use agricultural, municipal or industrial waste as well as coal or natural gas. But the key unknowns are what the actual costs of such endeavors will be along with where commodity prices will head over time.

Some projects are ramping up both in the United States and abroad. One such foray is being undertaken by InEnTec and Fulcrum BioEnergy, which will convert municipal solid waste to ethanol for cars and trucks in a commercial-scale production facility to be located in Nevada. The plant will recycle 90,000 tons of household garbage to make 10.5 million gallons of ethanol each year by 2010.

"The fact is that there is enough waste material to produce 60 billion gallons of liquid transportation fuel annually," says Jeff Surma, chief executive of Bend, Ore.-based InEnTec. "That's more than we import from the Middle East. If oil is less than $60 a barrel, the cost of the technology may be too expensive. But if it is more than this, then the cynics will be proven wrong. This type of technology will be more than economic."

A few dozen plants that take materials comprised of hydrogen, oxygen and carbon and turn that composite into a transportation fuel are in various stages of planning, construction and demonstration. In South Africa, coal is being converted to motor fuel and supplies 40 percent of the oil demand of that country.

U.S. government policy is supporting this evolution with both subsidies and regulations: In the case of ethanol, the federal mandate says that the nation must expand domestic production from 6 billion gallons in 2007 to 36 billion gallons by 2022. After 2015, the emphasis will change from using food stocks to using cellulosic ethanol such as wood chips.

Ethanol may be blended with gasoline. But other options allow the end product that is "syngas" to run through a reactive process to create crude. Coal liquefaction, for example, removes all the toxins such as mercury, sulfur and heavy metals. But the process by itself does nothing to reduce carbon dioxide. And in a typical coal-to-liquids plant, about 40 percent of the energy is lost in the conversion process.

Currently, South Africa's Sasol Co. has commercially available technologies on the market. Its plants have been around since 1955 and now produce as much as 150,000 barrels a day of oil from coal. This technology came of age during the apartheid era when the world had embargoed South Africa and it was forced to come up with new methods to replenish its oil needs.

Risky Proposition

To be sure, it's expensive to convert coal to liquids or cellulosic materials to ethanol. The cost can run from hundreds of millions to $1 billion or more for a commercial-scale facility. That's a big tab for emerging companies. Any cost over-runs or operational inefficiencies would be on the backs of their financiers.

Investors are understandably fearful of risking their money if the price of gasoline would fall to less than $60 a barrel and stay there. The marketplace is strewn with disappointments. Louisiana-based Verenium, Ottawa-based Iogen and Florida-based Alico are all reported to be having trouble taking their ideas from the conceptual stages to the commercial realm.

"While the technologies have been proven to work they still have had their share of challenges such as proving their cost-effectiveness on a commercial scale," says Robert Bellemare, chief executive of consulting firm UtiliPoint. "To be cost effective, these projects would likely carry a heavy debt load. If commodity prices were to drop, the businesses would still be required to make their debt payments. Given the volatility of energy commodity prices, this is a real concern for equity investors."

China, for instance, has been pursuing several coal-to-liquids projects. But it recently called off all but two of them, citing the "high business risk" associated with the billions in capital necessary to make it all real. It also said the country lacks both the talent and the equipment. Many of the smaller projects, meanwhile, would use bank loans and put the nation's depositors at peril.

Its largest coal producer, Shenhua Group, had said that it would begin producing motor fuel from coal beginning this year, in partnership with South Africa's Sasol. But it has since stepped back from that pronouncement, noting that oil prices have fallen from of a high of $140 a barrel to $55 a barrel. The Chinese government, however, will allow Shenhua to keep its two prospective coal liquefaction projects on the table.

Despite the risks, venture capitalists see the promise of fuel conversion processes. And so do some major U.S. corporations. DuPont, for example, will invest $140 million in Denmark-based Genencor. The second-generation ethanol venture expects its first pilot plant to be operational in the United States in 2009 and its first commercial-scale demonstration facility to be operational within the next three years. The enterprise will then license its technology package directly to ethanol producers.

And while China has forsaken most of its planned coal liquefaction plants, it is creating a synthetic fuel called dimethyl ether, or DME, to be used to power buses. DME, which is clean burning, can be made from coal, natural gas or bio-mass.

The technologies to create blended supplements or to replace oil are promising. But they are also expensive. While some endeavors have struggled, others that are smarter and better financed are stepping up. The wheels of progress are indeed turning and the alternatives to traditional energy usage are getting increased respect.

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Ken Silverstein EnergyBiz Insider Editor-in-Chief
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