Post by warriorwitch on Apr 25, 2006 13:55:59 GMT
The Oil Rush
How high-tech prospectors are trying to squeeze fuel--and fat profits--out of the earth while transforming the petroleum market
By Marianne Lavelle
U.S.News & World Report
Rising Price of Crude (PDF)
Much as the storied forty-niners trekked west in their covered wagons to seek a golden future, today a small army of workers boards a fleet of jets each week in Edmonton, Canada, and ventures north into a frozen frontier rich with promise. These latter-day pioneers don't have campfires, but they do have camps--comfortable dormitories with Internet kiosks, catered steak dinners, fitness centers, and satellite TV in every room. The creature comforts come courtesy of Canadian Natural Resources Ltd., one of a dozen companies that have descended upon the wilds of Alberta. The company is spending a fortune to build an enormous workforce in the far north, but it's a pittance compared with the profit it expects to pull out of the frozen ground. As long as the high price of oil continues to fatten corporate coffers, the rush will be on for a black gold called oil sands.
The Canadian sands yield fossil fuels nearly identical to those hidden below the drifting sands of the Middle East. But this mother lode lies in a unique geological formation just 500 miles north of the U.S. border, and it won't surrender its treasure without a lot of labor, vast amounts of energy, and oceans of water. It costs more to wrest a barrel of oil from the ground here than virtually anywhere else in the world.
What's happening in Canada today may be just the start of a new chapter in the world's long love affair with oil. Global demand, particularly in China and India, is outstripping supply--an imbalance that has been painfully evident as pump prices climb toward $3 a gallon (box, Page 50). Even the optimists agree that the era of "easy oil" is over. Political risk hovers over most conventional reserves, held by the Organization of Petroleum Exporting Countries (including trouble spots like Nigeria and Venezuela) and Russia. So the United States is turning to new possibilities--the largely untapped resource of "unconventional oil" in North America.
Oh, Canada. Three technologies promise to unlock much of these reserves. It has long been known that crude could be boiled from the oil sands of Canada or from the oil shale locked in the 16,000-square-mile Green River Formation in Colorado, Utah, and Wyoming. It has also been clear for decades that synthetic oil could be created from coal--the most abundant fuel resource in the United States. To attempt to slake the nation's seemingly insatiable thirst for oil with any of these would have been madness until recently because of their astronomical cost. Today, however, with the market barely blinking at $70-a-barrel crude, high-tech prospecting doesn't seem quite so crazy.
Within a decade, all unconventional sources will account for some 35 percent of world oil supply, up from 10 percent in 1990, say oil consultants at Cambridge Energy Research Associates. Clearly, the biggest play in the unconventional reclamation game is in Canada. Oil sands production is over 1.2 million barrels per day, nearly double the output of four years ago. That has secured Canada's spot as No. 1 supplier to the No. 1 oil consumer, the United States, even though its conventional oil production is falling rapidly. Oil sands production (together with similar unconventional sources in Venezuela) will grow more than 170 percent by 2015, the Cambridge consultants say. By then, Canada anticipates rising from No. 8 to become the world's fifth-largest oil producer.
Its oil sands give Canada greater oil reserves than any nation but Saudi Arabia. No one expects oil sands to reduce the political clout of the Middle East, when governments like Iran and Saudi Arabia can produce huge quantities of oil cheaply and manipulate a tight world market. Yet Canada's growing petropolitical importance became apparent when China moved last year to grab a slice of the oil sands business.
Treasure in Sand
Despite all the excitement, it's no easy thing to get the oil locked in Canada's oil sands to market. Attracting workers to Alberta's far frozen north is a major obstacle. In the nearest town, Fort McMurray, housing is scarce, and "people are living in illegal basement apartments, renting couches at $500 a month," says Steven Paget, an analyst at FirstEnergy Capital Research in Calgary. Canadian Natural Resources Ltd. aims to more than quadruple its workforce, to 6,500, by next year to tackle the huge $10.8 billion construction job underway at its massive Horizon project, which is slated to begin producing oil in 2008. Edmonton is a six-hour drive, so Calgary-based CNRL shortened the commute by opening its own airstrip in September. The company flies workers in and out. They work 10 days on, four days off. The financial lure is strong: Skilled workers command an average salary of $100,000 a year.
Getting the oil that's trapped in the sands is no easy deal, either. First, bitumen, the thick, sticky form of crude found in the earth here, must be extracted from a complex mix of sand, water, and clay. The heavy syrup is either drawn out with heat or mined with machinery and then heated to transform it into usable oil. The production cost per barrel, $10 to $20, makes it competitive with conventional oil in the United States.
The oil sands didn't yield their treasure overnight. Suncor Energy of Calgary, the first company to begin such operations, in 1967, embarked on a major expansion in 1998, when the worldwide price of oil had plummeted to around $10 per barrel and the cost of producing from oil sands was still well over $20 per barrel. "It did take a lot of nerve," Chief Executive Officer Rick George recalls. The company continues to absorb risks. Early last year, a major fire cut Suncor's daily output for 2005 by 22 percent. Even so--in a measure of just how profitable this business is--Suncor saw a 14 percent increase in net income.
Exploiting oil sands clearly makes economic sense, but the cost is high. Houston investment banker Matthew Simmons winces at the water loss (about a barrel for every barrel of oil produced) and the huge volumes of natural gas burned to separate oil from sand. "I call it making gold into lead," Simmons says.
The industry is well aware of the energy issues--indeed, nuclear power plants have been proposed to fuel operations--but FirstEnergy Capital's Paget thinks companies will invest in technology that creates natural gas out of the bitumen. Gasification would add another expensive step, but it may be affordable if energy prices stay high.
The Shale Solution
Industry and policymakers are looking anew at an even more challenging source of unconventional oil hundreds of miles to the south. Colorado, Utah, and Wyoming harbor a store equivalent to 2 trillion barrels of oil--more than all the crude that has been produced worldwide since the petroleum age began. Even if only 800 billion barrels is recoverable, as a Rand study estimated recently, that would be more than triple the proven reserves of Saudi Arabia and could fuel 25 percent of current U.S. demand for oil for another 400 years. So why aren't companies pumping that oil? Simple: It is locked deep in layers of sedimentary rock called oil shale.
No end of adventurers have tried to tap oil shale over the past century. The oil crises of the 1970s spurred Exxon to embark on a $5 billion effort in which 2,200 workers descended on the rural ranch land. The region readied itself for boom times, but Exxon bled money to bake each barrel out of the shale. Once oil prices fell, the company knew it could never recover its costs. On May 2, 1982, still remembered in northwestern Colorado as Black Sunday, Exxon pulled the plug. Property values plummeted, local businesses went bankrupt as suddenly as they had sprung up, and a new skepticism was born in this mineral country. "Imagine a town of 300 ... invaded by 3,000 men," says John Loschke, former mayor of Parachute, Colo. "They're sleeping under bridges and in the street. They're making real good money and not answerable to their wives, and have nothing to do in their spare time but recreate." Today, he says, he can exercise "perfect hindsight" and call Exxon's departure a blessing, even though he and his partners lost their pub business. Loschke would welcome new efforts to exploit oil shale, he says, to help reduce America's dependence on foreign oil--as long as the oil industry treats small communities like his right this time. "We were run over by big oil companies in the early '80s," he says, "and it wasn't pretty."
The company now making the most promising stab at oil shale--Shell--is well aware of the history. "The irrational exuberance and failure of oil shale development a generation ago still loom large in people's minds," says Terry O'Connor, a vice president for Shell Unconventional Resources. The company is being careful not to raise expectations. Shell won't decide whether to proceed with commercial development until 2010, O'Connor says. But after 24 years of research and tens of millions of dollars, the company has developed a method that could make sense even when oil companies can command $20 to $30 a barrel--far less than the market price they're raking in today.
Mining was the old approach to oil shale. Yet with oil shale some 2,000 feet thick in some places and buried beneath 1,000 feet of earth, the excavation would be incredible--comparable to the largest open-pit mines in the world. Shell expects to process the oil shale in place, using otherworldly techniques that sound like something out of a sci-fi novel. The oil giant would plunge heaters underground to bring the rock to extremely high temperatures for three to four years. That's not so long, considering that the compound found here, kerogen, is a primitive precursor that wouldn't have morphed into usable crude for tens of millions of years if left to nature. Shell would also freeze the ground around the site's perimeter--making an ice wall to keep water out and seal contaminants in. Less environmentally disruptive than the mining process Exxon tried, Shell's process also should recover 10 times the oil.
As with oil sands, enormous amounts of energy would be needed for both the heating and freezing processes. Rand estimates that a single 100,000-barrel-a-day operation would require a dedicated 1.2-gigawatt electricity generating station--a size that would be comparable to one of the nation's largest power plants, like the New Hampshire nuclear giant, Seabrook, which serves 900,000 customers.
Tapped out? Electricity use is a challenge, O'Connor admits, but Shell estimates that its process would produce 3.5 units of energy for every one it uses. That balance isn't great compared with that of conventional oil reclamation efforts (estimated at 20 to 1 today and perhaps 100 to 1 in the 1930s). But O'Connor says the new ratio makes sense because the easiest fuels to recover on the planet have already been tapped: "We're all looking at technologies that are going to be more expensive and resources that are going to be more difficult to access and recover."
Randy Udall, director of the nonprofit Community Office for Resource Efficiency in Aspen, Colo., calls Shell's experiment "fascinating," but he adds, "I've been wondering whether it is an act of inspiration or an act of desperation." The new attention to oil shale underscores how poor other global exploration possibilities are, Udall says. "Thermodynamically, there is an insanity to what they're proposing," he says. "Now, it still may [make economic sense] if oil prices are high enough."
The economics have policymakers' rapt attention. Because the federal government owns 80 percent of the oil shale land in the tri-state area, Congress last year ordered the Bureau of Land Management to accelerate leasing for research and development. Shell is in the running for three of seven 160-acre leases the BLM is considering for approval by this summer. If follow-up experiments succeed, they could be converted to a commercial plot of 9 square miles. The BLM also is conducting an environmental assessment and weighing how much of a royalty break to give early developers.
The Coal Play
Another unconventional fuel may be closer at hand--again, with federal government help. John Rich Jr., whose family name is synonymous with the coal business in eastern Pennsylvania, aims to break ground this summer on the nation's first commercial plant for turning coal into diesel fuel. First, the coal would be turned into a gas by exposure to oxygen and steam at up to 2,500 degrees Fahrenheit. Then, through a 1920s chemical process known as Fischer-Tropsch synthesis, the gas would be reduced into a paraffin wax. It could then be refined into diesel fuel, kerosene, or other synthetic petroleum products. The method is so expensive that in the decades since its discovery it has been used only by countries that had no choice, such as Nazi Germany and apartheid South Africa.
Now, the United States is prepared to turn to the technology. The U.S. Energy Information Administration estimates that Fischer-Tropsch would become economically viable with oil selling at $45 per barrel and above, and it projects that high oil prices will spur development of 800,000 barrels a day of liquid fuel from coal by 2030. That would represent nearly 10 percent of current U.S. oil production.
Coal feedstock needs to be cheap and plentiful, which is why in an old mining region 100 miles northwest of Philadelphia, Rich feels his company is well suited to pioneer. "People say, 'You're at the right place at the right time,'" he says. "But we've been at the right place all of the time." Rich first became intrigued a decade ago, when he learned of a new gasification technology that allowed extremely small particles of coal to be used. The Rich family's company had literally tons of such material--waste coal, or culm--sitting in piles where it is viewed as one of Pennsylvania's most intractable pollution problems. Indeed, at least 200 million tons of culm mar some 8,500 acres of the Keystone State. Rich partnered with Sasol, which still produces liquids from coal in South Africa, and others to draw up plans for a plant to process 4,700 tons of culm into more than 5,000 barrels per day of diesel fuel.
Reception to his idea was lukewarm--until oil prices began to rise. Then the government got onboard in a big, bipartisan way. The proposal first won a $100 million Department of Energy grant and $47 million in Penn-sylvania state tax credits. Then, last August, Congress made Rich's $612 million plant eligible for about $490 million in federal loan guarantees--an assurance sought by Wall Street banks lining up private financing for the first-of-its-kind facility. Finally, Pennsylvania's Democratic governor, Ed Rendell, put together a public-private consortium to buy nearly all the diesel fuel Rich produces. So, much of the risk has been stripped away from the project, except for one that consumers would welcome but the unconventional oil business dreads: a big drop in oil prices.
Like oil sands and oil shale, coal-to-oil raises environmental issues, and the project is undergoing federal review. Rich and his allies in government tout the resulting product as "ultraclean fuel" because sulfur and other pollutants are stripped out in the process. Rich says he will aim to market the sulfur and other manufacturing byproducts. But critics say those plans are not assured, and for other contaminants, like mercury, there is no easy answer. "If they had the magic technology to take the waste coal piles and make them vanish from the Earth, that would be great," says Mike Ewall, director of the Philadelphia-based Energy Justice Network. "But that's not possible."
Carbonated. Perhaps the biggest environmental issue for all unconventional oils is that they would be likely to cause a spike in greenhouse gas emissions just as climate change is becoming a more pressing political issue. The National Energy Technology Laboratory estimates, for instance, that from manufacturing process through tailpipe, diesel from coal would produce twice the carbon emissions of conventional diesel. Yet it would be easier to capture the nearly pure carbon dioxide emissions produced by such a high-tech plant than the air-diluted gases put out by old-fashioned coal power plants. Rich says he plans to sell part of his plant's CO2 emissions to the carbonated beverage industry.
Energy companies already make use of pure CO2, injecting it into declining wells to stimulate more oil production. That can be pricey, and there's an obvious irony: Unconventional oil would then be used to help produce conventional oil. That leaves some environmentalists scratching their heads. "We're fundamentally scraping the bottom of the oil barrel," says Philip Clapp, president of the National Environmental Trust, who advocates conservation. "Every dollar we put into recovering more oil weds our economy more and more firmly to oil as an energy resource and actually makes us more dependent on the Middle East."
Without some fundamental changes, of course, the world's 80 million-barrel-a-day oil habit will only get worse. If current trends hold, between now and the time a child born today turns 25, the world will need to match the oil output of the past 150 years. The only way to get there will be producing oil in new ways--ones that are difficult, dirty, and expensive.
How high-tech prospectors are trying to squeeze fuel--and fat profits--out of the earth while transforming the petroleum market
By Marianne Lavelle
U.S.News & World Report
Rising Price of Crude (PDF)
Much as the storied forty-niners trekked west in their covered wagons to seek a golden future, today a small army of workers boards a fleet of jets each week in Edmonton, Canada, and ventures north into a frozen frontier rich with promise. These latter-day pioneers don't have campfires, but they do have camps--comfortable dormitories with Internet kiosks, catered steak dinners, fitness centers, and satellite TV in every room. The creature comforts come courtesy of Canadian Natural Resources Ltd., one of a dozen companies that have descended upon the wilds of Alberta. The company is spending a fortune to build an enormous workforce in the far north, but it's a pittance compared with the profit it expects to pull out of the frozen ground. As long as the high price of oil continues to fatten corporate coffers, the rush will be on for a black gold called oil sands.
The Canadian sands yield fossil fuels nearly identical to those hidden below the drifting sands of the Middle East. But this mother lode lies in a unique geological formation just 500 miles north of the U.S. border, and it won't surrender its treasure without a lot of labor, vast amounts of energy, and oceans of water. It costs more to wrest a barrel of oil from the ground here than virtually anywhere else in the world.
What's happening in Canada today may be just the start of a new chapter in the world's long love affair with oil. Global demand, particularly in China and India, is outstripping supply--an imbalance that has been painfully evident as pump prices climb toward $3 a gallon (box, Page 50). Even the optimists agree that the era of "easy oil" is over. Political risk hovers over most conventional reserves, held by the Organization of Petroleum Exporting Countries (including trouble spots like Nigeria and Venezuela) and Russia. So the United States is turning to new possibilities--the largely untapped resource of "unconventional oil" in North America.
Oh, Canada. Three technologies promise to unlock much of these reserves. It has long been known that crude could be boiled from the oil sands of Canada or from the oil shale locked in the 16,000-square-mile Green River Formation in Colorado, Utah, and Wyoming. It has also been clear for decades that synthetic oil could be created from coal--the most abundant fuel resource in the United States. To attempt to slake the nation's seemingly insatiable thirst for oil with any of these would have been madness until recently because of their astronomical cost. Today, however, with the market barely blinking at $70-a-barrel crude, high-tech prospecting doesn't seem quite so crazy.
Within a decade, all unconventional sources will account for some 35 percent of world oil supply, up from 10 percent in 1990, say oil consultants at Cambridge Energy Research Associates. Clearly, the biggest play in the unconventional reclamation game is in Canada. Oil sands production is over 1.2 million barrels per day, nearly double the output of four years ago. That has secured Canada's spot as No. 1 supplier to the No. 1 oil consumer, the United States, even though its conventional oil production is falling rapidly. Oil sands production (together with similar unconventional sources in Venezuela) will grow more than 170 percent by 2015, the Cambridge consultants say. By then, Canada anticipates rising from No. 8 to become the world's fifth-largest oil producer.
Its oil sands give Canada greater oil reserves than any nation but Saudi Arabia. No one expects oil sands to reduce the political clout of the Middle East, when governments like Iran and Saudi Arabia can produce huge quantities of oil cheaply and manipulate a tight world market. Yet Canada's growing petropolitical importance became apparent when China moved last year to grab a slice of the oil sands business.
Treasure in Sand
Despite all the excitement, it's no easy thing to get the oil locked in Canada's oil sands to market. Attracting workers to Alberta's far frozen north is a major obstacle. In the nearest town, Fort McMurray, housing is scarce, and "people are living in illegal basement apartments, renting couches at $500 a month," says Steven Paget, an analyst at FirstEnergy Capital Research in Calgary. Canadian Natural Resources Ltd. aims to more than quadruple its workforce, to 6,500, by next year to tackle the huge $10.8 billion construction job underway at its massive Horizon project, which is slated to begin producing oil in 2008. Edmonton is a six-hour drive, so Calgary-based CNRL shortened the commute by opening its own airstrip in September. The company flies workers in and out. They work 10 days on, four days off. The financial lure is strong: Skilled workers command an average salary of $100,000 a year.
Getting the oil that's trapped in the sands is no easy deal, either. First, bitumen, the thick, sticky form of crude found in the earth here, must be extracted from a complex mix of sand, water, and clay. The heavy syrup is either drawn out with heat or mined with machinery and then heated to transform it into usable oil. The production cost per barrel, $10 to $20, makes it competitive with conventional oil in the United States.
The oil sands didn't yield their treasure overnight. Suncor Energy of Calgary, the first company to begin such operations, in 1967, embarked on a major expansion in 1998, when the worldwide price of oil had plummeted to around $10 per barrel and the cost of producing from oil sands was still well over $20 per barrel. "It did take a lot of nerve," Chief Executive Officer Rick George recalls. The company continues to absorb risks. Early last year, a major fire cut Suncor's daily output for 2005 by 22 percent. Even so--in a measure of just how profitable this business is--Suncor saw a 14 percent increase in net income.
Exploiting oil sands clearly makes economic sense, but the cost is high. Houston investment banker Matthew Simmons winces at the water loss (about a barrel for every barrel of oil produced) and the huge volumes of natural gas burned to separate oil from sand. "I call it making gold into lead," Simmons says.
The industry is well aware of the energy issues--indeed, nuclear power plants have been proposed to fuel operations--but FirstEnergy Capital's Paget thinks companies will invest in technology that creates natural gas out of the bitumen. Gasification would add another expensive step, but it may be affordable if energy prices stay high.
The Shale Solution
Industry and policymakers are looking anew at an even more challenging source of unconventional oil hundreds of miles to the south. Colorado, Utah, and Wyoming harbor a store equivalent to 2 trillion barrels of oil--more than all the crude that has been produced worldwide since the petroleum age began. Even if only 800 billion barrels is recoverable, as a Rand study estimated recently, that would be more than triple the proven reserves of Saudi Arabia and could fuel 25 percent of current U.S. demand for oil for another 400 years. So why aren't companies pumping that oil? Simple: It is locked deep in layers of sedimentary rock called oil shale.
No end of adventurers have tried to tap oil shale over the past century. The oil crises of the 1970s spurred Exxon to embark on a $5 billion effort in which 2,200 workers descended on the rural ranch land. The region readied itself for boom times, but Exxon bled money to bake each barrel out of the shale. Once oil prices fell, the company knew it could never recover its costs. On May 2, 1982, still remembered in northwestern Colorado as Black Sunday, Exxon pulled the plug. Property values plummeted, local businesses went bankrupt as suddenly as they had sprung up, and a new skepticism was born in this mineral country. "Imagine a town of 300 ... invaded by 3,000 men," says John Loschke, former mayor of Parachute, Colo. "They're sleeping under bridges and in the street. They're making real good money and not answerable to their wives, and have nothing to do in their spare time but recreate." Today, he says, he can exercise "perfect hindsight" and call Exxon's departure a blessing, even though he and his partners lost their pub business. Loschke would welcome new efforts to exploit oil shale, he says, to help reduce America's dependence on foreign oil--as long as the oil industry treats small communities like his right this time. "We were run over by big oil companies in the early '80s," he says, "and it wasn't pretty."
The company now making the most promising stab at oil shale--Shell--is well aware of the history. "The irrational exuberance and failure of oil shale development a generation ago still loom large in people's minds," says Terry O'Connor, a vice president for Shell Unconventional Resources. The company is being careful not to raise expectations. Shell won't decide whether to proceed with commercial development until 2010, O'Connor says. But after 24 years of research and tens of millions of dollars, the company has developed a method that could make sense even when oil companies can command $20 to $30 a barrel--far less than the market price they're raking in today.
Mining was the old approach to oil shale. Yet with oil shale some 2,000 feet thick in some places and buried beneath 1,000 feet of earth, the excavation would be incredible--comparable to the largest open-pit mines in the world. Shell expects to process the oil shale in place, using otherworldly techniques that sound like something out of a sci-fi novel. The oil giant would plunge heaters underground to bring the rock to extremely high temperatures for three to four years. That's not so long, considering that the compound found here, kerogen, is a primitive precursor that wouldn't have morphed into usable crude for tens of millions of years if left to nature. Shell would also freeze the ground around the site's perimeter--making an ice wall to keep water out and seal contaminants in. Less environmentally disruptive than the mining process Exxon tried, Shell's process also should recover 10 times the oil.
As with oil sands, enormous amounts of energy would be needed for both the heating and freezing processes. Rand estimates that a single 100,000-barrel-a-day operation would require a dedicated 1.2-gigawatt electricity generating station--a size that would be comparable to one of the nation's largest power plants, like the New Hampshire nuclear giant, Seabrook, which serves 900,000 customers.
Tapped out? Electricity use is a challenge, O'Connor admits, but Shell estimates that its process would produce 3.5 units of energy for every one it uses. That balance isn't great compared with that of conventional oil reclamation efforts (estimated at 20 to 1 today and perhaps 100 to 1 in the 1930s). But O'Connor says the new ratio makes sense because the easiest fuels to recover on the planet have already been tapped: "We're all looking at technologies that are going to be more expensive and resources that are going to be more difficult to access and recover."
Randy Udall, director of the nonprofit Community Office for Resource Efficiency in Aspen, Colo., calls Shell's experiment "fascinating," but he adds, "I've been wondering whether it is an act of inspiration or an act of desperation." The new attention to oil shale underscores how poor other global exploration possibilities are, Udall says. "Thermodynamically, there is an insanity to what they're proposing," he says. "Now, it still may [make economic sense] if oil prices are high enough."
The economics have policymakers' rapt attention. Because the federal government owns 80 percent of the oil shale land in the tri-state area, Congress last year ordered the Bureau of Land Management to accelerate leasing for research and development. Shell is in the running for three of seven 160-acre leases the BLM is considering for approval by this summer. If follow-up experiments succeed, they could be converted to a commercial plot of 9 square miles. The BLM also is conducting an environmental assessment and weighing how much of a royalty break to give early developers.
The Coal Play
Another unconventional fuel may be closer at hand--again, with federal government help. John Rich Jr., whose family name is synonymous with the coal business in eastern Pennsylvania, aims to break ground this summer on the nation's first commercial plant for turning coal into diesel fuel. First, the coal would be turned into a gas by exposure to oxygen and steam at up to 2,500 degrees Fahrenheit. Then, through a 1920s chemical process known as Fischer-Tropsch synthesis, the gas would be reduced into a paraffin wax. It could then be refined into diesel fuel, kerosene, or other synthetic petroleum products. The method is so expensive that in the decades since its discovery it has been used only by countries that had no choice, such as Nazi Germany and apartheid South Africa.
Now, the United States is prepared to turn to the technology. The U.S. Energy Information Administration estimates that Fischer-Tropsch would become economically viable with oil selling at $45 per barrel and above, and it projects that high oil prices will spur development of 800,000 barrels a day of liquid fuel from coal by 2030. That would represent nearly 10 percent of current U.S. oil production.
Coal feedstock needs to be cheap and plentiful, which is why in an old mining region 100 miles northwest of Philadelphia, Rich feels his company is well suited to pioneer. "People say, 'You're at the right place at the right time,'" he says. "But we've been at the right place all of the time." Rich first became intrigued a decade ago, when he learned of a new gasification technology that allowed extremely small particles of coal to be used. The Rich family's company had literally tons of such material--waste coal, or culm--sitting in piles where it is viewed as one of Pennsylvania's most intractable pollution problems. Indeed, at least 200 million tons of culm mar some 8,500 acres of the Keystone State. Rich partnered with Sasol, which still produces liquids from coal in South Africa, and others to draw up plans for a plant to process 4,700 tons of culm into more than 5,000 barrels per day of diesel fuel.
Reception to his idea was lukewarm--until oil prices began to rise. Then the government got onboard in a big, bipartisan way. The proposal first won a $100 million Department of Energy grant and $47 million in Penn-sylvania state tax credits. Then, last August, Congress made Rich's $612 million plant eligible for about $490 million in federal loan guarantees--an assurance sought by Wall Street banks lining up private financing for the first-of-its-kind facility. Finally, Pennsylvania's Democratic governor, Ed Rendell, put together a public-private consortium to buy nearly all the diesel fuel Rich produces. So, much of the risk has been stripped away from the project, except for one that consumers would welcome but the unconventional oil business dreads: a big drop in oil prices.
Like oil sands and oil shale, coal-to-oil raises environmental issues, and the project is undergoing federal review. Rich and his allies in government tout the resulting product as "ultraclean fuel" because sulfur and other pollutants are stripped out in the process. Rich says he will aim to market the sulfur and other manufacturing byproducts. But critics say those plans are not assured, and for other contaminants, like mercury, there is no easy answer. "If they had the magic technology to take the waste coal piles and make them vanish from the Earth, that would be great," says Mike Ewall, director of the Philadelphia-based Energy Justice Network. "But that's not possible."
Carbonated. Perhaps the biggest environmental issue for all unconventional oils is that they would be likely to cause a spike in greenhouse gas emissions just as climate change is becoming a more pressing political issue. The National Energy Technology Laboratory estimates, for instance, that from manufacturing process through tailpipe, diesel from coal would produce twice the carbon emissions of conventional diesel. Yet it would be easier to capture the nearly pure carbon dioxide emissions produced by such a high-tech plant than the air-diluted gases put out by old-fashioned coal power plants. Rich says he plans to sell part of his plant's CO2 emissions to the carbonated beverage industry.
Energy companies already make use of pure CO2, injecting it into declining wells to stimulate more oil production. That can be pricey, and there's an obvious irony: Unconventional oil would then be used to help produce conventional oil. That leaves some environmentalists scratching their heads. "We're fundamentally scraping the bottom of the oil barrel," says Philip Clapp, president of the National Environmental Trust, who advocates conservation. "Every dollar we put into recovering more oil weds our economy more and more firmly to oil as an energy resource and actually makes us more dependent on the Middle East."
Without some fundamental changes, of course, the world's 80 million-barrel-a-day oil habit will only get worse. If current trends hold, between now and the time a child born today turns 25, the world will need to match the oil output of the past 150 years. The only way to get there will be producing oil in new ways--ones that are difficult, dirty, and expensive.