Perhaps a Little Too Much Gas in the Conoco Peabody SNG Proposal

Implications: The expensive and capital intensive parts of coal upgrading to cleaner and more flexible fuels are gasification followed by conversion to synthesis gas. Fuel generation from synthesis gas (whether to liquids or to methane) is straight forward by comparison. We should let the market place decide the optimum fuel product and encourage any needed government help to focus on the gasification section. Allowing political leverage and entrenched infrastructure interests to heavily influence the final fuel product will not produce the most effective fuel mix.

Analysis: The demands for transportation, power generation, chemical production and heating set different values for different fuel types. A BTU is not a BTU as some fuels are more valuable than others. Coal and residual oil have the lowest BTU value, since their use is limited to large installations. Liquid fuels for transportation and home heating have significantly higher BTU values because of their flexibility and unique suitability for transportation. Natural gas is typically somewhere in the middle, but tends to be more volatile due to storage constraints and variable seasonal demand. Growing LNG imports will tend to normalize natural gas price swings.

Coal gasification requires the bulk of the investment and operating cost, while conversion of synthesis gas to fuel is simple by comparison. The higher the product value (eg liquid diesel versus natural gas) the better the return on the project will be.

Coal gasification can be justifiably subsidized by government incentives and funded research since the lead times are long, the capital investment is very large, and ultimate fuel prices are uncertain.

However, a politically dominated process to select the final fuel will not produce the best economic result. There are many competing interests with varying degrees of leverage: coal producers, pipeline owners, LNG importers and liquid fuel refiners and distributors. As a metaphor consider subsidized ethanol. Is it the right energy choice or is it the product of farm belt political leverage?

Conoco and Peabody have announced a program to evaluate a project to produce pipeline gas from coal. The key word in the release is feasibility. It not clear if the project can stand by itself in the current energy cost environment. If it cannot, a subsidy request would be logical.

I don't believe continued congressional legislation on fuel subsidies will encourage the best economic choices. Allowing the market place to decide the best use for expensive and capital intensive synthesis gas is the best approach. The more domestic coal we use the better, however I would hate to have the end result be subsidized fuel gas when the liquid fuels might be able to stand on their own.