Is UCG The Next CSM?

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By Greg Peel

“On reflection I really could have said that the UCG industry should be thanking the CSM industry for drawing the market's attention to alternative fossil fuels,” said Andrew Haythorpe, chairman and managing director of Liberty Resources ((LBY)).

Andrew was speaking last week at the end of a forum discussion organised and broadcast by Boardroom Radio and moderated by yours truly. Also joining the discussion were Len Walker, managing director of Cougar Energy ((CXY)) and Daryl Rattai, technical director of Linc Energy ((LNC)). The (loose) topic was as above: Is UCG the next CSM?

One might be forgiven for assuming the coal seam methane (CSM) industry suddenly sprung up in the world about two years ago, beginning with BG's failed attempt to acquire Origin Energy ((ORG)) and most recently evident as Royal Dutch Shell and PetroChina attempt to take over Arrow Energy ((AOE)). In each case, and all cases in between, the holy grail is CSM assets sufficient for conversion to liquid natural gas (LNG) for the purpose of export to Asia. But the reality is the BG bid was simply a wake-up call to the investment market. CSM has been recognised as a source of natural gas for a long time.

So too has underground coal gasification (UCG) been around a while as an alternative energy source option, since Hitler used the process to ultimately produce synthetic diesel in WWII. The Soviet Union went on to devote a lot of time developing UCG and gas to liquid (GTL) technology, and not to be outdone the US followed suit after the oil shocks of the seventies. But until the prices of oil and natural gas spiked in recent years, little progress had been made on commercialisation of UCG except in South Africa. A lack of oil resources initially and the imposition of sanctions in the eighties ultimately led South Africa to be world leaders in UCG and GTL development.

The participants in the Boardroom Radio forum represent a cross section of Australia's UCG industry players, in which there are around ten listed “juniors” notwithstanding any quiet development from the big boys. Liberty Resources holds extensive coal tenements in Queensland and is focused on the commercial development of UCG projects. Cougar Energy is further down the track and is planning the construction of a 400mw power station in Kingaroy, Queensland, fired by UCG. Linc Energy is already expanding its UCG facilities and is on track with development of its GTL prototype plant.

The participants don't see UCG as suddenly reaching commercial viability overnight, rather it is a gradual process that is now well underway. Big Oil might be concentrating on CSM LNG at present, but that doesn't mean the usual suspects haven't been sniffing around UCG as well. It is not unusual for the big players to sit back and let the entrepreneurial juniors move technology past the developmental stage before jumping in with much needed finance to support commercialisation.

And the local UCG industry is not basing its feasability studies on the expectation of government support, either directly or via mandated emissions trading. Such support would be a bonus, but UCG is an alternative and much cleaner fossil fuel source for either domestic power generation or, via GTL, export opportunities, and an alternative which is independently viable. Disappointment at Copenhagen has not slowed the UCG industry's progress.

Queensland, while being abundant with coal, is not the only location in Australia in which UCG developments are underway or planned. In South Australia's Cooper Basin for example, UCG is being developed as an alternative power source for the local resources industry. Indeed, Western Australia is also ready to get in on the act as remote mining sites look to ways to deliver much needed power.

And let's not forget New South Wales, which also has abundant coal resources. The Fairfax press has recently been investigating the impact of coal mining and subsequent coal-fired power generation in the Hunter Valley, both past and planned, with emphasis on environmental degradation and health issues. Were UCG employed as alternative to coal mining and coal burning, the Hunter would no longer face such problems.

But enough from me. Readers are invited to listen in to the forum's discussion at this link: http://www.brr.com.au/event/64850?popup=true

Thereafter I have included a republication of my article from December last year which more thoroughly discusses UCG and its uses. Readers can also learn more about Australian UCG companies both listed and unlisted at UCG-GTL.com.

Clean Coal: Myth, Misnomer Or Manifest Reality?

By Greg Peel

For a while there, as the GFC raged on, the problem of global warming, climate change, the greenhouse effect – call it what you will – slipped temporarily into the background. But with the global economy now showing signs of recovery, and the Copenhagen conference now upon us, the concept of mandated global carbon reductions have been once again thrust into the spotlight.

And no more so than in Australia, in which we have just witnessed the most unusual (at least in the modern age) spectacle of a political party being rent asunder on the basis of principle. Or at least the notion of principle. The truth is that the climate change debate has polarised politics, and not necessarily across traditional socialist-capitalist lines. However, we have still emerged with a government determined to introduce an Emissions Trading Scheme for the sake of all mankind, and an opposition challenging the science and railing against a potentially unnecessary and economically costly "tax".

The sceptic, on the other hand, might suggest the battle lines are drawn between one political party pandering to the two-thirds of the electorate that supports action on carbon reduction, and the other political party pandering to its traditional funding base of Big Business and Farmers. One thing we know for sure is that newly elected opposition leader Tony Abbott falls into the camp of "pandering to whoever will help me be prime minister", given one minute he was supporting former leader Malcolm Turnbull's ETS compromise and the next minute he was denouncing it as pure evil.

This article does not intend to take any political view, nor any view on whether global warming is real or not real, or if so a natural or man-made phenomenon. It is simply intended to inform.

To that end, let me begin with an excerpt from an article I wrote in July 2006, entitled Will Coal Replace Oil?:

One of the reasons Hitler lost the war is because he ran out of fuel. As Germany had not been bestowed with oil reserves, Hitler was aware of the important part oil would play in his plan for world domination. The eastern front was very much about securing Russia's oil supply.

In the end he failed, but not before exploiting new technology that had been pioneered by two scientists called Fischer and Tropsch in the 1920s. They were able to turn coal into diesel. Rumour has it that when Patton made the final push into Germany, he did so using syphoned-off Nazi synthetic fuel.

Not long after, the Middle Eastern oil fields were opened up. There was seemingly an endless supply. The concept of coal conversion became irrelevant. It remained irrelevant right up until recently when oil could be purchased for US$16/bbl.

Except in South Africa. During the 1980s when South Africa was under the rule of an apartheid regime, oil imports were subject to international sanction. In order to overcome a lack of fuel, one company, Sasol Ltd, took advantage of the country's vast coal reserves and revisited the earlier German technology.

It was a long road, but for the last seven years [before 2006] aircraft flying out of Johannesburg International Airport have used a blend of jet fuel containing 50% converted coal. After decades refining the technology, and in a new oil price regime where US$70/bbl is beginning to feel like the norm [that was prescient], Sasol is making windfall profits. It hopes to win approval for a 100% synthetic jet fuel this year [it did so in 2008].

Coal is converted into oil by first mixing it with oxygen and steam at high temperature and pressure to produce carbon monoxide and hydrogen. The second step – the Fischer-Tropsch synthesis – uses a catalyst to transform the gas into a liquid synthetic crude, which is further refined.

By-products are mercury, sulphur, ammonia and other compounds that can be sold. The other major by-product is carbon dioxide, and herein lies a problem.

[But wait…]

The actual diesel fuel, when used in a car for instance, has been shown to produce only 10% of the carbon monoxide and 70% of the particulate emissions of conventional sulphur-free diesel. Moreover, the South African experience has shown that oil can be produced from waste coal.

Returning to the present, the process described above can be defined by the all-encompassing acronym CTL, or "coal to liquid" conversion. Or it can be broken down into CTG (coal to gas) and GTL (gas to liquid), given CTL is a two-step process. The CTG part is most economically conducted in an underground coal mine, and thus attracts the acronym UCG, or "underground coal gasification". Adding the step of GTL to UCG can produce, as noted above, "cleaner" diesel.

Now – what image is conjured up when one talks of "clean coal"? It is important, because governments across the globe, including the relatively new Rudd government in Australia and the newer Obama Administration in the US, have pledged budget monies towards the development of this amazing thing known as clean coal. The simple concept is that coal is dirty, creating pollution when burned, so if we could clean it there would no longer be a problem.

Unfortunately however, this does not imply some process of washing the coal first, or somehow "cleaning" it. However pristine the coal is before it hits the furnace is irrelevant compared to the amount of carbon contained in that coal, and hence the carbon dioxide created as a by-product of extracting the energy from the fossil fuel for electricity generation. Coal is by its nature "dirty" in this sense. Thus clean coal is an expression which simply implies somehow dealing with the carbon dioxide created in the process so it is not just released into the atmosphere.

The man on the street has every right to be sceptical about the notion of clean coal, given so far politicians have only managed to assign funds towards something they themselves cannot really define. They might as well have a budget for "world peace", or for "no world hunger", or for searching for the allusive Easter Bunny. The assumption is simply that necessity is the mother of invention, and that enough money thrown at a project must eventually bring about success, so brilliant is the human mind. As to when success might be achievable, well no one's prepared much to be nailed down on that one.

And don't mention the common cold.

The reality is that in recent years the notion of clean coal has come closer to definition, giving politicians something to grasp on to. Clean coal has been closely linked with geosequestration – so closely linked, in fact, that when clean coal is mentioned, the average punter assumes geosequestration is specifically being referred to. Geosequestration is the process of pumping carbon dioxide into cracks deep under the ground and pretending it's not there. Or at least hoping that it will never find a way back out again. And thus, by very loose definition, this added process creates "clean coal".

Geosequestration of carbon dioxide is also called "carbon capture and storage" (CCS) just so that it, too, can have an acronym.

Geosequestration has never been intended to be a panacea. The reality is, however, that human beings have little choice but to continue burning coal at least until we are all swamped by oceans, if that is what is to happen. Therefore, if geosequestration is accepted by scientists as a viable solution, and that we won't be swamped by oceans as a result, then it's well worth the supposedly minimal risk.

Yet even geosequestration is little more than talk at this stage – little more than a pipedream to grasp. And on that basis, the sceptics laugh off clean coal as being either the figment of vivid imaginations or just a politician's unfulfillable promise designed to win an election.

The reality is, however, that geosequestration of carbon dioxide is not the only form of so-called "clean coal". The reader may have by now anticipated that given UCG converts coal to much cleaner diesel than the traditional process of refining crude oil does, UCG can also be considered a form of "clean coal" technology.

UCG has advantages, both clean and simply economical, that extend beyond just the ultimate production of a cleaner form of diesel fuel. For starters, let's just say firstly that as the process of gasification occurs within the underground coal mine itself, the carbon dioxide by-product can be contained within the coal mine before being dealt with. Your common or garden power station simply releases carbon dioxide into the atmosphere as coal is burned, meaning before you get to the geosequestration part, you have to actually convert power stations so they can first capture the CO2. Another cost.

Secondly, the gasification of coal does not require for the coal to first be "mined". The coal simply sits where it is – underground – and then the UCG process turns it into gas. The energy input to achieve this is thus far less than the energy input required to extract coal and send it off to a power station.

Thirdly, one need not discover new coal sources to which UCG can be applied. Like any metal or mineral, coal mines have a specific "mine life". Eventually the readily extractable coal runs out but there is always left behind an amount of coal that proved too costly to be bothered extracting. The abundance of coal on the planet has meant plenty of coal has been left behind in abandoned coal mines as the mining company has moved on to the next big seam. But UCG can still turn this coal into gas, and the cost factor is irrelevant because the coal is never extracted, just the gas. Thus old coal mines can be "rebirthed". It is estimated some 85% of the world's total coal resource has already been deemed "unmineable" by the old methods.

Fourthly, the traditional process of mining coal means great big dirty filthy holes in the ground, a local area continually covered with coal dust, and a resultant scar on the environment. UCG, on the other hand, requires only one innocuous little building to sit atop the earth as all the action happens in the controlled environment below it. If the gas-to-liquid process is also on-site, then that's two mostly innocuous buildings. All that is needed is for someone to come and pick up the diesel.

From all of the above factors, one can not only add up significant equivalent carbon reduction "points" (starting with less energy in all the way to less carbon out of the resultant fuel), one can also add up the ancillary green "points" from tapping into the coal resource we thought was uneconomical all the way to the simply aesthetic.

And let's keep rolling. I have constantly referred to diesel fuel production as the end result of UCG but only because that's where UCG started and where it is still being mostly applied today. Yet depending on location and circumstance, UCG can be adapted for use in industrial heating, or the manufacture of synthetic natural gas ("syngas") or hydrogen (a fuel of the future?), or for actual power generation. The by-products can be made into fertilisers and chemical feedstocks.

And while the Fischer-Tropsch method of GTL is still used today, the entire process has been made far more efficient and economical through refinement and new technologies in the period both since WWII and since South African apartheid.

"Ten years ago the term 'underground coal gasification' (UCG) was virtually unknown," explains the global UCG Partnership, "other than to a small circle of people involved in its operation and development. Now due to higher oil and gas prices, heavy use of coal in developing countries, and called for reduced air emissions, UCG presents an attractive and economic alternative, producing no sulphur oxide or nitrogen oxide, lower levels of mercury and particulates, and the ash stays underground.

"The technology is especially suitable for low-rank coals like lignites and sub-bituminous coal, which produce less heat when burned due to their high ash content, and are highly polluting. This is driving recent investigation in India where the coal is 35% to 50% ash."

The UCG Partnership (www.ucgp.com ) is a not-for-profit industry association which has established a global alliance of knowledge, expertise, training, networking and information to address the growing interest in UCG across the globe and the need for trained and experienced operatives. The UCG Partnership advises governments, regulatory bodies and the public.

A few weeks ago I met with Julie Lauder, marketing and membership manager for the UCG Partnership, at a presentation lunch attended mostly by stock analysts (and one journo). Ms Lauder – a Brit – was undertaking what is effectively an endless global tour to speak with government and industry at the highest level about the prospects for UCG. The interest, noted Ms Lauder, had been substantial, and there were literally very few countries on the planet, right down to the tiny, remote or hostile ones, Ms Lauder had not yet visited.

But she hadn't visited Australia, at least until that particular trip. What took Ms Lauder aback at the lunch was when she opened her presentation with the usual "does anybody here not understand what UCG is?" and got no response. That was the first time she'd ever had no response.

Australia has recently become the go-to place for another bunch of acronyms, including CSG (coal seam gas) or CSM (coal seam methane) which is the same thing. CSM is another "alternative" fuel gold mine, potentially, which has had Big Oil fighting over what projects it can get its hands on in an underfunded wide brown land. CSM to LNG (liquid natural gas) conversion has not yet been proven viable on a commercial scale in Australia, but clearly hopes are high. It is as yet a fledgling industry.

So too is UCG in this country, although UCG has not yet managed to draw quite as much attention as CSM. There is nevertheless a handful of listed junior UCG companies in Australia, including Carbon Energy ((CNX)) and Linc Energy ((LNC)). (See this link). In 2006 I wrote several articles on the progress of Linc Energy, beginning with Coal To Oil: Linc Energy Aspires To World Leadership.

It was with Linc Energy I first discussed the problem of the omnipresent CO2 which is still an inescapable by-product of UCG, despite UCG's green credentials. This is an extract from the above article:

"According to Keith Allaun, [then] General Manager (Human Resources) at Linc, the company's liquid fuel production process will be five times more energy efficient than a standard coal-burning power station. The process also allows for the carbon dioxide by-product to easily be captured in the UCG stage of production, and then be reformed into carbon monoxide and ultimately diesel. This technology is already commercially available and Linc has 'the world's best process engineers' consulting on the project."

Despite Allaun's excitement over ways to deal with CO2, the fact remains, at least according to Julie Lauder, that across the globe it is still intended the CO2 by-product from UCG be essentially captured and stored (ie geosequestered). However, if one still has a problem with this concept (as I did), Ms Lauder was able to throw up some interesting compromises.

The first is that because the UCG process (which occurs deep underground incidentally) initially traps the CO2 underground, one can simply leave it where it is. Or at least leave it in the general subterranean vicinity of cracks and fissures where the initial coal deposit lay. Not only does this concept remove the need to "capture" the CO2 and somehow transport it to another location to be stored, it effectively just converts coal into CO2 on-site having first extracted the available energy. There is a certain simplistic symmetry here.

The second compromise was far more interesting, and it involves Peak Oil. We will also not take sides here on the Peak Oil debate, but suffice to say there is growing support from respectable sources for the argument that the world's oil supply has already "peaked".

To quickly explain Peak Oil, consider that oil reserves exist under the earth and oceans under tremendous pressure. Thus when a well is first tapped, the oil comes gushing to the surface all by itself. It will continue to politely bring itself to the surface for several months, years or decades depending on just how vast the resource is and how many different holes have been drilled into it. Eventually however, the pressure in the well will equalise with the pressure on the surface and from then on the oil will have to be pumped out. The well has passed its "peak".

Soon even pumping the oil out will prove difficult, and the next step is to extract what remaining oil is available by pumping water into the well. As we know oil and water don't mix, so the water pushes the oil to the surface. All of this is expensive, and dependent on the prevailing price of oil as to whether it is even worthwhile going for the last of the resource. Given the price of oil these days however, and improvements in technological efficiencies, a lot more post-peak oil is commercially worth recovering.

But again we hit a problem. Water is no longer the abundant resource we always assumed it to be, and as such has become costly. Pumping water into an oil well and leaving there is already becoming economically touch-and-go. Of course, the right form of gas would achieve the same result, if only…

Ah hah! Did you get ahead of me? Carbon dioxide can indeed be pumped into oil wells to allow the extraction of more of the remaining resource. And we have plenty of that. Indeed, so much we're not sure what to do with it.

So now imagine that CCS was not a matter of finding the right underground caves in outback Australia, for example, but of simply filling ready-made and proven robust holes that were once full of oil. Between the CO2 producers who would pay for someone to take their CO2 away, and the oil producers who would pay for CO2 because water has become too expensive, we have a market.

Within this market, UCG operators already have their CO2 "captured" and ready to go.

Suffice to say, taking in all of the above UCG remains an exciting prospect. And if we throw in whatever world or national governments ultimately come up with in terms of carbon regulation, rebates, trading schemes, or funding for alternative energies, and particularly "clean coal", then UCG is worth pursuing.

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