Distillate fuels from coal-to-liquids processing

Numerous factors affect CTL economics and the technology for converting different qualities of coal into transportation fuels, chemicals and intermediates. Potential yields are based on

future market conditions relative to crude prices and conventional refinery operations

The historical premise that coal is a dirty fuel is being countered with the continued development and

operation of technology to significantly reduce the environmental footprint of coal-sourced energy. The hidden benefit of coal is its versatility. Technology is available that can turn coal and petroleum coke into synthetic natural gas, transportation fuels, chemicals and intermediates, and even hydrogen.

Can coal-derived transportation fuels make a significant contribution to the distillate pool over the long term or will financial, technical, environmental or other challenges limit their potential? Today, the US generates more than 50% of its electrical supply from coal. A viable coal-to-liquids (CTL) industry in a major market such as the US might supply high-quality middle distillates, in particular diesel fuel, jet kerosene and middle distillate blendstock. In this case, CTL economics, the potential role of the government and how large-scale development of this industry might impact refineries needs to be analysed. The US market is examined in this case study due to its coal-based resources.

Coal reserves and qualityThe US has been called the Middle East of coal with approximately 270 billion tons of estimated recoverable coal reserves, comprising almost 27% of the world’s total, according to a report by the National Coal Council. At the current consumption of 1.1 billion tons of coal annually, there are enough reserves to last for another 250 years. The top three states ranked in terms of recoverable coal reserves — Illinois, Montana and Wyoming — account for 57% of the total reserves. US coal production for 2005 was about 1131 million tons, with Wyoming accounting for 36% (404 million tons).

This coal reserve base is generally classified by region and type of coal. Higher-quality coals, typically found in the Eastern reserves, contain less water and therefore have a higher Btu/lb content. The majority of the coal reserves

are located in the western US, either as lignite (lowest quality) or sub-bituminous (medium quality) coal. One ton of sub-bituminous coal can be converted to approximately 1.75 barrels of CTL fuels. Therefore, in “diesel” terms, current coal production, if converted to liquids, is equivalent to about 5.3 million bpd, or approximately 90% of the total US distillate fuel demand.

The US currently imports over 60% of the crude oil and products it consumes. This percentage will continue to increase as demand outpaces growth in both domestic crude oil production and refinery capacity. High oil prices have renewed interest in gasification and CTL projects. In particular, the spike in prices during 2006, when the NYMEX oil futures contract peaked at a record of almost $78 per barrel in July, accelerated interest in CTL fuels among many large end users of transportation fuels.

CTL process descriptionCTL can be characterised as the conversion of syngas generated from coal via gasification to a slate of hydrocarbon products. In the simplest terms, CTL is a process whereby coal or petroleum coke is converted first to a stream rich in carbon monoxide (CO) and hydrogen (syngas). The syngas is then treated for removal of impurities, before being fed to a Fischer-Tropsch (FT) catalytic

conversion reactor (gas synthesis). The raw product slate from the synthesis process unit ranges from a tail gas suitable as a fuel to waxy products that are solids at ambient conditions. Once syngas is generated and cleaned, it can be utilised to produce power, hydrogen, steam or hydrocarbon liquids. Captured CO2 could be utilised for enhanced oil-recovery applications or sequestered.

The overall product distribution from a CTL plant depends upon the type of catalyst utilised, reactor technology and overall operating conditions. With additional processing, a variety of end products such as liquefied petroleum gases (LPG), paraffinic naphtha, middle distillates, synthetic waxes and lubricating base oils can be produced. Due to the size of the market, high-quality transportation fuels in the middle distillate range are the preferred output. A typical configuration for a CTL plant (Figure 1) designed for the production of middle distillates (diesel and jet fuel blendstocks) consists of six sections:— Coal handling and preparation— Coal gasification— Gas cleaning and CO2 removal— Fisher-Tropsch synthesis— Product recovery— Power generation.

For maximum production of CTL diesel fuel, a low-temperature gas synthesis process is desired. The finished

J Mark Landrum and Jon WarzelBaker & O’Brien Inc

www.eptq.com PTQ Q3 2007 127

Coal*handling

preparation

Gascleaning

Feedcoal

Air

Rawsynthesis

gas

Fisher-Tropschsynthesis

Productrecovery

Powergeneration

block Liquidfuels

Gascleaning

Oxygen

Nitrogen

Sulphur CO2 H2

Gasification

Figure 1 Simplified CTL block flow diagram

diesel fuel from the product-recovery section is colourless, has a cetane number of 70+, and is virtually free of sulphur and aromatics. FT diesel fuel meets all current ASTM specifications, meets or exceeds the quality specifications for California Air Resources Board (CARB) diesel, and does not require any segregated transportation infrastructure. If required, commercially available additives can be utilised to improve lubricity. The product-recovery section could also produce a jet fuel, but currently FT jet fuel (neat or blends) is not certified for use in the US by either commercial or military entities.

CTL plant costMost of the capital cost for a CTL plant is associated with the production of the syngas (including gasification, clean-up and the air-separation units to supply oxygen) and the generation of electricity for plant operations. The total installed

capital cost (TIC) also depends on the remoteness of the proposed site, availability of water resources and existing infrastructure, and proximity to end-user fuel markets. Estimates of TIC range from $70 000–100 000 per bpd of capacity for larger-scale plants. A typical breakdown of Capex associated with a CTL plant is shown in Figure 2.

Potential product yieldsThe liquid volume yield from a CTL plant is determined in part by the marketplace economics associated with co-production of electricity/hydrogen and/or CO2 separation for enhanced oil recovery. Typical yields range from 1.5–2.1 barrels of liquid fuels per ton of coal input, depending on coal quality and the co-production of power or hydrogen. Thus, the potential liquid hydrocarbon reserves available in the three largest coal states alone amounts to 230–322 billion

barrels. Higher-quality coals such as bituminous coals found in the Central Interior and Appalachia basins provide product yields in the upper range.

Yields for finished No. 2 diesel usually range from 65–75% of the total liquid volume, depending upon process configuration, FT technology and catalyst type, as well as plant operating conditions. The balance of the liquid fuel products comprises LPG (5–10%) and synthetic naphtha (20–30%). The highly paraffinic naphtha makes an ideal cracker feedstock for ethylene/propylene production, or has the potential for blending with heavy Canadian bitumen to improve pipeline flow.

The CTL process can also be configured and operated to produce primarily distillate blendstocks. Producing a diesel or jet fuel blendstock allows for greater product yields and potentially improved project economics. The CTL plant operator could, for example, produce a diesel blendstock with a low cloud point for use in blending a winter-grade diesel fuel. Emphasis on the production of a diesel blendstock could result in CTL plant distillate fuel yield rising to 80–85%.

The price of FT diesel from a CTL plant will likely range between ultra-low-sulphur diesel (ULSD) at the US Gulf Coast (USGC) refining centre and CARB diesel, depending on plant location, access to common carrier or dedicated pipeline facilities, seasonal market supply/demand variations, and overall blending economics utilising these high-quality fuels. Platt’s historical pricing, as shown in Figure 3, indicates that a diesel price in the range of WTI crude oil multiplied by a factor of 1.2–1.3 is reasonable for economic consideration.

CTL breakeven economicsBaker & O’Brien Inc analysis indicates that CTL-produced diesel fuels would have been competitive with 2006 market conditions. As the CTL industry develops, advancements in technology or potential reductions in capital cost per barrel ($/bbl) should provide a platform to improve project economics. A key consideration for the location of a CTL plant is the availability and longevity of the coal reserve. Many of the western coal basins within the Powder River Basin (PRB) of Montana and Wyoming contain in excess of a billion tons of recoverable reserves at a single site. A billion ton coal reserve is sufficient to keep a 60 000 bpd CTL plant operating in excess of 60 years, assuming a conservative yield of 1.5 bbls/ton. The crude oil breakeven economics and sensitivity to select variables for a 60 000 bpd mine-mouth plant in the PRB are presented in the following analysis and Figure 4.

Platt’s Q406 average pricing for USGC

128 PTQ Q3 2007 www.eptq.com

Gasification27%

Productrecoveryand other

5%Coalhandling/prep

9%

Air separation9%

Gas cleaningand conditioning

20%

Powergeneration

block18%

Fischer-Tropschsynthesis

12%

1.05

1.00

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

Year

2000 2001 2002 2003 2004 2005 2006

oitar edurc lesei

D

Source: Platt’s Oilgram price reportNote: Pricing data from

January 2000 to November 2006

LA carb diesel as % of WTILA no. 2 as % of WTIUSGC no. 2 as % of WTI

Figure 2 Capital cost breakdown

Figure 3 Historical diesel prices since year 2000

No. 2 FO (0.05% S) and WTI (Cushing spot) of $73.48 and $59.94 per barrel respectively yields a diesel-to-crude ratio of 1.22. With a Energy Information Agency (EIA) reported PRB coal price of $10/ton for Q406 and, assuming a capital cost of $85 000/bbl, operating costs of $15/bbl and a liquid yield of 1.9 bbls/ton of coal, a crude oil price of $48 or higher is needed to achieve a competitive after-tax return of at least 12%.

An economic trade-off of feedstock price versus yield is involved such that the price per ton of higher-quality coals historically has been four to seven times the value of lower-rank PRB sub-bituminous coals. PRB coals offer a feedstock cost ranging from $7–10/bbl of CTL liquid product.

Government’s role in CTLThe pace of development of coal and/or petroleum coke gasification projects has increased substantially since 2005. Concern over increased energy prices led

to support for certain provisions enacted in the Energy Policy Act of 2005 and subsequent legislative proposals in the 109th and 110th sessions of Congress. Significant events include:— The Department of Defense (DOD), under the direction of the Office of Secretary of Defense and leadership by the Secretary of the Air Force, has initiated a programme (Total Energy Development) focusing on the certification of FT jet fuel including a B-52 flight test— The Energy Policy Act of 2005 provides investment tax credits and loan guarantees for eligible gasification projects— The US Internal Revenue Service and US Department of Energy announced the first round of projects eligible for investment tax credits— The Safe, Accountable, Flexible, Efficient Transportation Equity Act of 2005 provided for a $0.50 per gallon excise tax credit for coal-based FT transportation fuels

The government is proposing additional financial incentives for the development and construction of CTL plants. Federal and state leaders from coal-producing states, project developers, technology licensors and coal resource owners are working to supplement the transportation fuels market using domestic coal resources. Legislation reintroduced in the 110th Congress may help create the infrastructure needed for commercial-scale production of CTL fuels. The extension of the Fuel Excise Tax credits and funding of a key DOD initiative to integrate CTL fuels into the military would support investments in CTL technology.

Potential CTL developmentSmaller-scale CTL projects (below 20 000 bpd) are under consideration east of the Mississippi River in Illinois, Pennsylvania, West Virginia and Mississippi. However, larger CTL plants, with capacities in excess of 40 000 bpd, are more likely to be built in the western US. Limited electrical transmission infrastructure to wheel power long distances, as well as the restrictions on longer-term electricity purchases from fossil energy sources by California utilities, cast doubt on the widespread adoption of integrated gasification combined cycle (IGCC) in western coal fields.

Western US CTL plants would produce distillate fuels capable of meeting the specifications on common carrier pipelines moving petroleum products in PADD 2 and PADD 4. Such production could result in a shift in regional refining distribution patterns for jet fuel and diesel fuel blendstocks.

Given the current interest in CTL, higher crude oil prices and continued government support, it is feasible that four to six large-scale western CTL plants could be on-stream within the next 10–

Oil yield, bblLiquid/ton coal

Diesel price,% of crude

Feedstock cost,$/ton

Operating costs,$/bbl

Capital investment,$/bpd of liquids

Breakeven crude oil price (WTI) to generate 12% after-tax IRR

44 46 48

100K70K

$20$10

$15$5

$115$125

2.1 1.5

50 52 54 5642

Note: Economics based on 100% equity and do notassume any favourable tax incentives or other subsidies

Decrease in variableIncrease in variable

Figure 4 Crude oil breakeven sensitivity analysis

130 PTQ Q3 2007 www.eptq.com

15 years. In this scenario, CTL production of middle distillate blendstocks could account for up 20% of the current PADD 2 demand of approximately 1.25 million bpd, or exceed the current PADD 4 demand of approximately 180 000 bpd.

Advantages and barriers to CTL developmentThe advantages of using commercially available and proven CTL technology to convert coal into transportation fuels are:— Coal represents a large percentage of fossil energy reserves in some countries (eg, nearly 90% of fossil energy reserves in the US)— Lower-quality coals such as sub-bituminous and lignite can be economically converted to liquid products at current prices— CTL plants could enjoy less expensive feedstock costs, perhaps one-fifth of those of an oil refinery— The liquid product composition can be adjusted to a significant degree to meet market requirements— Transportation fuels from CTL plants could be compatible with the existing pipeline and distribution infrastructure— CTL plants could come online with the advent of non-road diesel fuel standards for the locomotive markets in 2012— Beneficial environmental impacts result when CTL fuels are used in compression ignition engines. The final liquid product has a high cetane number, is virtually free of sulphur and nitrogen, and exhibits better efficiency than transportation gasoline.

However, there are a number of hurdles to overcome before a commercially viable CTL industry can be established:— The capital cost per barrel ($/bbl) of daily production is high for CTL plants compared to grassroots petroleum refining capacity or incremental expansion of existing refineries— The plant configurations are complex, with challenges for integrating the different technologies— Terminal access for neat CTL distribution or new blending and storage facilities for CTL blendstocks could be required— Location of coal reserves does not allow easy access to distillate markets or ethylene/propylene crackers.

ConclusionsBased on current technologies and capital costs, CTL processing in the case of the US market appears to be competitive at about $48/bbl. CTL plants will likely be geared towards production of high-quality middle distillate fuels and blendstocks. Eastern US coal appears more applicable for use in IGCC facilities for power generation. CTL plants are more likely to be built in the western part of the country due to lower feedstock costs and long-life coal reserves.

If there are larger-scale (40 000 bpd and larger) CTL plants built, regional supply/demand balances and product movements between PADDs could be impacted and refineries may need to make changes in historical distribution patterns. CTL plants are likely to be constructed primarily in PADD 4 (generally Rocky Mountain region), a region that has a relatively low demand for jet fuel and diesel. Refiners in PADDs 2, 3 and 4 should consider whether CTL diesel represents a potential opportunity to create additional value from blending operations. CTL jet fuel will require certification and is not currently a viable production option for the US market.

This article is based on a presentation (paper # AM-07-27) from the March 2007 NPRA Annual Meeting in San Antonio, Texas, USA.

J Mark Landrum is senior consultant with Baker & O’Brien Inc in Dallas, Texas, USA. Email: jml@bakerobrien.com Jon Warzel is senior consultant with Baker & O’Brien Inc in Dallas, Texas, USA. Email: jw@bakerobrien.com

www.eptq.com PTQ Q3 2007 131