CTL possibilities and barriers

Bryan Gundersen and Helen Sims, from Kensington Swan Lawyers, present both sides of the case for ‘coal to liquid’ technology in New Zealand.

A change in government has led to a shift in focus to ‘security of supply’ and therefore more interest in a diversity of fuel sources. On top of this, last year’s surge in oil prices, accompanied by the growth in demand for liquid fuels, and energy security concerns is leading to the development of coal to liquid (CTL) industries. There is currently a far more encouraging climate for this form of energy, but technological development is still needed.

The low price of coal compared to other fuels is a major driver of this technology and has generated significant interest in CTL fuels worldwide. Oil is a finite resource, and one that is not equitably spread around the globe. Although there is more stability in oil future prices, there is no sign of them returning to the prices of the 1990s – leading to interest in alternative forms of fuel. The development of the CTL industry can serve to hedge against oil-related energy security of supply risks.

The resource

CTL is particularly suited to countries that rely on oil imports and that have large domestic reserves of coal such as America, China and India. New Zealand has such a large domestic coal resource and a finite supply of natural gas.

South Africa has been producing coal-derived fuels since 1955 and has the only commercial CTL industry in operation today. The South African specialist CTL company, Sasol, has made incursions into the viability of CTL in Africa and Asia. There has been extensive development work in Japan and there is interest in countries as diverse as Australia, Botswana, Germany, Indonesia, Mongolia, the Philippines, and the UK, as well as in South Africa. New Zealand undertook some investigations via the Liquid Fuels Trust Board (LFTB) back in the late 1970s.

LFTB had a brief to show how to reduce imports of transport fuels, and examined the South Island lignite resources as an option. Mining feasibility studies were carried out in conjunction with geotechnical, hydrological and environmental investigations.

In-ground lignite resources of almost 12 billion tonnes were established. The LFTB mining studies confirmed the feasibility of mining South Island lignite by bucket wheel excavators at annual production levels up to 20 million tonnes. All nine lignite deposits of the Eastern Southland and Central Otago lignite resources were judged to be technically mine-able, but would only be economic if conducted on a large scale. Over seven billion tonnes were assessed as being economically recoverable.

The discovery of such huge quantities of potentially opencast-able resources had significant ramifications for energy planning at the time, giving some confidence that a large energy backstop to Maui gas was available in the event that the ‘Energy Crisis’ of the 1970s deteriorated to the extent that the country was deprived of liquid fuels imports.

South Island lignite is an important long-term strategic energy resource for New Zealand.

In August 2007, L&M Petroleum and Solid Energy announced that they were developing the significant coal resource in Southland, including a CTL plant. Over the next 40 years, the plant could produce up to 50,000 barrels of diesel a day using 18 million tonnes a year of lignite. Two years had been spent scoping the project and the plant would take a minimum of five years to commission. Sites for storing the carbon dioxide underground were also being investigated. It has been estimated that the returns from the CTL project could be bigger than a find of oil in the Great South Basin.

Main issues for NZ CTL projects

The likely project structure is one where the coal resource owner enters into a joint venture with the CTL technology provider, the joint venture owns the plant, the technology provider is responsible for the design and construction of the plant, and processes coal into merchantable liquid fuels under a tolling agreement, and the joint venture markets the liquid fuels.

There are no legal barriers to a project of this type; indeed, the gas to gasoline joint venture between the government and Mobil back in the early 1980s provides some precedent.

The main barrier stems from the environmental effects of the amount of carbon dioxide released in the extraction process. Given the country’s resource management legislation and the recent adoption of an emissions trading scheme, the political reception and comparative economics of CTL projects are the main barriers to its development in New Zealand.

Politically, the Green Party in particular was in staunch opposition to the development of CTL technology in New Zealand, and the form of the Emissions Trading Scheme under Labour would have both banned the development of the CTL plant as a non-renewable source of energy and made it prohibitively costly due to the amount of carbon emitted.

The former Minister of Energy under the labour Government, David Parker, claimed at the 2008 New Zealand Petroleum Conference that the potential for clean coal technology was exaggerated. The current Energy Minister, Gerry Brownlee, claimed that this view was ‘Dickensian’, and indicated a far more positive reception under a National led Government. Given the current government’s re-focusing of New Zealand’s energy strategy to prioritise security of supply and a promise to support energy investment, the political barriers to CTL development are lower than they have in the past decade.

However, economic barriers still remain. According to the World Coal Institute, a CTL plant is cheaper to build than most other alternative fuel plants but more costly than a conventional oil refinery. In addition, the accompanying carbon capture and storage technology needed to offset carbon emission is still expensive and relatively untested. The capital cost of CTL plants is expected to decrease through the ongoing development of technology. Additionally, if the price surges as it did in 2008 then the comparative economics of CTL technology will become increasingly neutral. Using domestic coal reserves, or accessing the relatively stable international coal market, can allow countries to minimise their exposure to oil price volatility while providing the liquid fuels needed for economic growth.

Because of the high costs involved, and the environmental implications, CTL processes will still only be used in the long term where there is substantial government support for strategic reasons, and where the extra carbon dioxide produced can be effectively stored.

In New Zealand further complementary development of carbon capture technology is required, but CTL represents an interesting possibility for New Zealand given our large coal lignite resources.