Industrial Scale Ethanol

After my recent posting on resurgent food vs. fuel competition from expanding corn ethanol production, one of my contacts called to ask if I was familiar with an industrial process developed by Celanese Corporation for producing ethanol from a variety of feedstocks, including natural gas, coal, and potentially cellulosic biomass. My initial reaction to him was based on my knowledge that such processes have been around for decades, and that until the policy-inspired growth of the corn ethanol industry, much of the ethanol for industrial use was produced in that fashion. However, I was unaware of plans to deploy this technology on a truly massive scale, in the form of a pair of 400,000 ton-per-year coal-to-ethanol plants in China. I consider this a really interesting development on several levels.

The attraction of producing ethanol for industrial or fuel use from indigenous non-food raw materials in China seems obvious. It enhances the country's food and energy security by avoiding imports of both. As I delved into the technology involved, I realized it starts with gasification, a process that my former employer, Texaco Inc., licensed to numerous facilities in China, going back to the 1980s. So China has deep experience with gasification as an effective and reliable way to turn feedstocks as diverse as waste oil, petroleum coke, low-value coal, and even natural gas into syngas, or synthesis gas, a mixture of carbon monoxide and hydrogen from which all sorts of useful organic chemicals can be produced. One of those is acetic acid (the acid in vinegar.) It turns out that Celanese's new ethanol process is an offshoot of the company's well-established "acetyl platform" for making acetic acid in plants like this one in Singapore.

It's noteworthy that the first ethanol plants Celanese is building are so large. 400,000 metric tons per year equates to 134 million gallons per year, larger than all but a couple of the corn-based ethanol plants in the US. I've also seen hints that these facilities could be expanded to 1 million tons/yr, which would put their output in the same league as the gasoline yield of the smallest oil refineries. That would be truly industrial scale fuel production that conventional or advanced biofuels can't yet match and may never do, because of their much more complex supply chain considerations. That also explains why Celanese could consider building a 40,000 ton ethanol plant in Texas based on natural gas. The supply chain isn't an issue when it's just an existing pipeline. In any case, large scale and low feedstock cost should result in ethanol output that's more than competitive with ethanol from biomass. US biofuel producers eyeing export markets ought to be concerned about the potential competition from Celanese, even if the federal Renewable Fuels Standard (RFS) guarantees them a market here.

My other instant reaction when I heard about this process focused on the potential environmental consequences of producing ethanol from coal. However, as I thought about it more carefully, it occurred to me that processing coal into ethanol using the extremely clean gasification process, which allows for sulfur and other contaminants to be easily and safely collected and disposed of, is probably a lot more benign than burning the same coal to produce electricity, particularly in power plants without state-of-the-art pollution equipment. Assessing the greenhouse gas impact of coal-to-ethanol requires a thorough lifecycle analysis that I have not yet found.

At the same time, it's clear that the environmental comparison to biofuels like corn-based ethanol isn't nearly as bad as suggested by an erroneous comment in a Business Week article on the subject last November, which stated that corn ethanol production "doesn't use a fossil fuel as a raw material." In fact, analysis by the Argonne National Laboratory of the US Department of Energy found that 78% of the energy in a typical gallon of corn ethanol comes from fossil fuels, including coal, diesel fuel, and natural gas. That's why the emissions from corn ethanol aren't much lower than from gasoline, after factoring in the natural-gas derived fertilizer used in growing the corn, the diesel fuel required for cultivation, harvesting and transportation, and the coal and natural gas used to generate electricity and process heat for the fermentation and distillations steps. Ethanol from coal might emit incrementally more greenhouse gases than food-crop based ethanol, but not orders of magnitude more. And I'd bet that a gas-to-ethanol plant would match or beat the emissions from a standard corn-based biorefinery, based on avoiding the need to separate the alcohol product from water. Distillation requires lots of energy.

It's getting harder to draw meaningful distinctions between conventional fuels and alternatives when we can make ethanol efficiently from fossil fuels and produce "drop-in" fuels--synthetic gasoline, diesel or jet fuel--from biomass like sugar cane or algae. I haven't seen how the detailed economics and energy balance of the Celanese ethanol process compare to traditional and advanced processes for producing ethanol from biomass, but I think we're going to be hearing a lot more about this option in the future. I was surprised to see that it even garnered a mention in the White House press release for the President's visit to China earlier this year.

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A Self-Fulfilling Bet on Biofuels?

An article in today's Financial Times (registration required) raises a worrying possibility concerning the plans of the US and other oil-consuming countries to rely on biofuels for an increasing fraction of future fuel needs. What if oil-producing countries took those plans seriously and reduced their investment in new oil capacity, on the assumption that it wouldn't be needed? In some respects, that's exactly what we have in mind. However, if biofuels then failed to materialize in sufficient quantities to fill the gap between oil supply and total fuel demand, or proved to be economically or environmentally unsustainable, then we might inadvertently create precisely the sort of crisis these efforts were intended to avert. It would be easy to dismiss this argument as OPEC-inspired propaganda, if global oil production didn't require enormous ongoing investments to counteract the natural decline rates of producing fields, and if producing-country governments weren't already under internal pressure to spend their oil profits on programs other than reinvesting in future production.

The good news here is that biofuels have reached a scale at which they actually matter in the global oil supply and demand balance. That wasn't the case during the oil crises of the 1970s, and they were still only a marginal factor when oil prices last peaked in 2008. The latest publicly-available issue of the International Energy Agency's Oil Market Report indicates that biofuels now contribute the equivalent of 400,000 barrels per day (bpd) of oil, before including US and Brazilian ethanol volumes that together equate to another 650,000, bringing the global total to just over a million bpd. That might not sound like a large share of a total market of 85 million bpd, but it's enough to influence the global price of oil, which is set at the margin. Doubling or tripling biofuel output would certainly cost oil producers money, if they ignored this factor in their capacity planning.

So far, this is only a problem for oil producers. It becomes a problem for the rest of us when the biofuel plans and targets of consuming countries are based on unproven technology that may not be able to deliver in time, or possibly at all. Unfortunately, that's the position in which we find ourselves. Consider the Renewable Fuel Standard (RFS) enacted by the Congress in 2007 and refined in new regulations issued by the Environmental Protection Agency. Out of the 36 billion gallon per year target for 2022, only around 16 billion gallons is accounted for by corn-based ethanol and first-generation biodiesel--both of which have been amply proven, however much they depend on generous subsidies to remain competitive. 20 billion gallons per year must come from cellulosic ethanol and other advanced biofuels, none of which are in truly commercial production today, in spite of the hype that has been generated by a handful of "demonstration facilities."

One indication of just how unrealistic these targets might be is that EPA was forced to reduce the cellulosic biofuel target it will enforce for 2010 from 100 million gallons to 6.5 million gal.--the equivalent of just over 400 barrels per day of oil--due to lack of supply. And while the agency attributes that shortfall to delays in starting up new facilities using a variety of new technologies, a careful reading of their analysis suggests the problem might be more serious than that. Two firms account for nearly a third of the 694 million gallons of cellulosic biofuel capacity they expect will be in operation by 2014, Cello Energy and Range Fuels. Unfortunately, last year Cello was ordered by a federal court to pay $10 million for defrauding investors concerning its technology claims. Meanwhile blogger Robert Rapier has documented the problems that Range Fuels has experienced in scaling up its process for producing ethanol from gasified biomass. Until both of these firms have demonstrated they can actually do what they claim, at full scale, it's not prudent to bet the ranch on their production forecasts.

Problems such as this are probably just the tip of the iceberg when it comes to scaling up a myriad of new processes for producing motor fuels from non-food biomass, not because it's impossible or because the firms involved don't have sufficient smarts--though one or both of those factors will turn out to apply in at least a few cases--but because it is intrinsically hard. Scientists have been working on cellulosic biofuels and biomass-to-liquids processes for decades, yet the sum total of all that work, up until this point, has only yielded enough fuel production to cover the annual consumption of about 13,000 average American cars. That doesn't mean that companies and investors are foolish to pursue these technologies, or that ExxonMobil is wrong about the potential they apparently see in algae-based fuels, another hot biofuels sector. What it does mean, however, is that when dealing with technologies that can't be made to appear on command and are subject to a number of serious, unresolved technical and logistical challenges, neither consumers nor our governments should base their plans for the future on the assumption they will mostly succeed on schedule.

How realistic is it that the oil-producing countries that control access to the vast majority of the world's oil reserves would be so convinced by our rhetoric concerning biofuels replacing oil, that they will cut back their investments in new capacity? Part of the answer lies in the narrative of Peak Oil that generated headlines when oil prices were spiking a couple of years ago, involving the high decline rates of mature oil fields and the relatively low investment rates of many producing countries. When the government of Venezuela must borrow money from China despite $80 oil, that's one signpost that they might not have enough to reinvest in exploration and production. We can argue about the likely date of a peak in global oil output, but anything that provides governments an excuse to spend less sustaining their oil industries brings that date closer--and that's equally true for a US administration that appears so confident of the success of its biofuels and fuel economy programs that it can allow the timing of the next offshore oil leasing cycle to slip further and further.

Oil is still the lifeblood of our industrial civilization, but it's also a business requiring enormous investments premised on the likelihood of future demand. That doesn't mean we must remain helpless hostages to foreign oil suppliers; fuel efficiency and biofuels are both sensible--even necessary--strategies for us to pursue. But we have an even larger stake in ensuring that the biofuel goals and plans we communicate, not just among ourselves but simultaneously to our oil suppliers, are based on reality. If both we and they are betting on supplies of advanced biofuels that could well fall significantly short of our expectations, then it is we who will suffer the consequences at the gas pump.

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Climate Change and Unconventional Oil

While Americans are focused on the debate over expanded oil drilling, which might eventually add up to a million barrels per day of incremental oil production, a much larger expansion is underway north of the border, tapping Canada's oil sands reserves. Today's Financial Times (subscription required for full access) reports that environmentalists and socially-responsible investment funds are meeting today with Shell and BP, concerning the environmental and financial risks of the greenhouse gas emissions inherent in oil sands production. This has important implications for future oil supplies, particularly with oil prices falling to a level that might threaten further investment in oil sands, even without considering the cost of mitigating or offsetting the sector's CO2 emissions.

Worries about the greenhouse gas (GHG) emissions from oil sands operations are not new. Ten years ago my former company approached one of the large Canadian producers about employing Texaco's (now GE's) gasification technology to turn byproduct petroleum coke into gas to fuel the oil sands extraction process, incidentally creating an option for the CO2 to be sequestered in depleted oil and gas reservoirs. Neither the economics nor the consensus for action on climate change was sufficient to move ahead, at the time. But with Canada imposing stricter rules for industrial sources of CO2, and with a new global agreement on climate change in prospect at the end of 2009, that perspective may be shifting.

According to the FT, the groups in today's meeting in London are focused on the financial risks associated with emissions from oil sands--emissions that are several times larger than those from conventional oil production. Some are calling for a moratorium on new oil sands and oil shale projects. If oil were still over $120/bbl, that argument would carry little weight. Even if the most extreme estimate provided by Greenpeace were correct, suggesting that oil sands extraction emits 100kg more CO2 per barrel than conventional oil production, that would equate to under $4/bbl of extra cost, based on the price of 2012 emissions credits on the European Climate Exchange at current exchange rates.

Two factors render that figure more significant than it might appear. Falling oil prices are pushing new oil sands projects close to their breakeven point, according to Total, hampering the industry's ability to mitigate emissions. At the same time, the sheer magnitude of the oil sands expansion makes these emissions too large to ignore. The latest forecast from the Canadian Association of Petroleum Producers indicates that oil sands output should increase from 1.2 million barrels per day (MBD) last year to 2.8 MBD in 2015 and 3.5 MBD in 2020. Without making expensive changes in operations to reduce emissions and capture and store CO2, or buying emissions offsets, oil sands operations could increase Canada's current GHG emissions by as much as 10%. As a signatory to the Kyoto Protocol, the Canadian government cannot just look the other way, while these emissions mount.

There are many areas in which the goal of improving energy security aligns with reducing GHG emissions, including improved efficiency and more use of renewable energy. But oil sands--and by extension oil shale--represents a clear conflict between our desire to reduce our dependence on Middle Eastern oil and the need to halt the accumulation of greenhouse gases in the atmosphere. And with oil nearing $90/bbl, a $4 increase in production costs to manage CO2 could stall new development and reduce future oil output by enough to tip the global supply and demand balance even further in favor of OPEC and Russia. Unless the next administration is willing to sit down with our NAFTA partners to discuss a comprehensive North American approach to both energy and emissions, this matter will ultimately be settled in Ottowa, where neither the US Congress nor President can offer more than friendly advice.

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Alternative Energy for Shipping

Last Sunday's New York Times carried an interesting article on the implications of high energy prices for the sustained globalization of supply chains. The reporter described how rising shipping costs were forcing manufacturers and retailers to rethink fundamental aspects of their business models, ultimately threatening the continuing expansion of world trade. Higher oil prices are responsible for much of the rise in freight rates, particularly for products carried by sea and air. Marine and aviation fuels are taxed very lightly, so they are more sensitive to changes in oil prices than motor fuels. But while airlines are hoping--perhaps in vain--for long-term fuel price relief from biofuels, cargo ship operators are likely to experience more competition from other uses for bunker fuel, and may need to seek solutions involving more exotic energy sources.

Earlier this year, I mentioned an idea for deploying small, high-tech sails to reduce the fuel consumption of cargo ships. But if world oil supplies fall seriously short of meeting potential demand in the years ahead--an easy prospect to imagine, given the rate at which Chinese and Indian consumers are buying automobiles--ocean freight lines may need to look elsewhere for their primary energy source, not just for ways to supplement it. In 2004, the residual fuel burned by ships and power plants accounted for 1 out of every 8 barrels of global oil demand. If competition for crude oil increases, refiners may be more interested in turning the long, complex molecules in fuel oil into higher-value products such as diesel and jet fuel, rather than selling them as-is. Thanks to heavy investment in upgrading hardware, US refineries produce less than a quarter of the "resid" volumes they did in the late 1970s, and their scope for further "resid destruction" is limited. Globally, however, upgrading 10 million barrels per day of resid output could ultimately prove more attractive than producing the same quantity of hydrocarbons from oil sands, shale, or coal-to-liquids. Where would that leave the shipping industry?

Two large-scale alternatives come to mind, assuming that biofuels will remain focused on the highest-value fuels segments, substituting for gasoline, diesel and jet fuel. Between the late 1970s and early 1990s, nuclear power and coal displaced most petroleum liquids from the US power generation sector. Either could provide a long-term substitute for residual fuel in ocean-going vessels. Nuclear power has obvious advantages in terms of its low emissions and extensive experience in naval fleets, plus a few civilian icebreakers. Unfortunately, the disadvantages will appear equally obvious to nuclear critics, in terms of the risks of proliferation and terrorism, which at sea may be less manageable than onshore. However, if it proved cost-effective, this is one way that nuclear power could directly displace more oil, and it might be achieved faster than we could build a new generation of land-based nuclear power plants.

A return to coal for ships' fuel might seem an odd and untimely suggestion, in light of concerns about greenhouse gases and the other emissions from burning coal. However, if this were done using small onboard gasification units fueling efficient gas turbines, rather than coal-fired boilers, the CO2 output from such a system might be no worse than from today's ships. And with the right equipment, sulfate and nitrate emissions that contribute significantly to urban air pollution in busy ports could also be scrubbed, at least for limited durations. The practicality of such an approach would have to be demonstrated, but the underlying driving force is clear. Despite the recent spike in coal prices, the BTUs in thermal coal still cost less than half as much as those in bunker fuel, at current prices.

A global retrenchment in trade due to the impact of high energy costs on freight rates would affect shipowners as much as their customers. A generation ago, the world's cargo fleets converted from steam turbines burning the lowest-quality bunker fuel available to the powerful, reliable marine diesel engines that dominate today's commercial shipping. The cost of operating these engines--and thus global shipping rates--depends on the price of the heavy fuel oils they consume. Although shipping firms lack a practical alternative fuel today, there's no reason the next generation of ships couldn't be built around entirely different energy sources. That would be on a par with the shift from coal to oil early last century, and far less dramatic than the switch from sail to steam.

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