What future coal?

By Michael Akerib, Rusconsult

In the wake of today’s energy crisis, the number of solutions to reduce our dependence on oil and gas appear limited: alternative sources such as ethanol, wind or solar power; nuclear power or coal.

Coal appears to be a candidate of choice in view of its low price and its relative abundance in some of the OECD countries, but also in China, a country whose hunger for energy is growing exponentially.

In fact, the Middle East is the only zone where the sub-soil is wealthy in hydrocarbons but poor in coal.

At today’s prices, oil is seven times more expensive than coal on a thermal unit basis and this price difference explains the increase in global coal consumption of 35% over the last five years to account at present for 40% of electricity production.

Two-thirds of the world’s reserves are found in four countries: the USA, which holds 27% of the world’s reserves, Russia 17%, China 13% and India 10%. These countries, together, also represent two-thirds of global production.

The amount of reserves has, however, been put into question. The same tonnages have now been posted for several years, even in countries, such as China, Vietnam or the US, which have a high extraction rate.

The Energy Commission of the European Commission has strongly reduced the amount of reserves, from an initial figure expected to cover 277 years of usage, to 155 years. BP has an even more pessimistic outlook, with a forecast limiting the reserves to 144 years.

Germany and Poland have, of their own accord, and without providing any explanation, also drastically reviewed downward their reserves – Germany by 90% and Poland by 50%.

To confuse the issue even more, Australia and India revalued their own reserves….

Production in the countries of the European Union declined considerably. However, there are plans in France to rehabilitate certain mines and even to open new sites that were considered unprofitable until now. Such a move would enable Europe to be less dependent on Russian gas.

Only 20% of world production is exported, the market being essentially domestic. This, however, is set to change as previous self-sufficient countries are now becoming net importers.

Seventy per cent of the coal extracted is supplied to electricity producers, and 40% of the global electricity production is based on coal-burning technologies. Coal thus covers a quarter of the world’s energy needs.

Germany plans to close its mines by 2018 and would replace their production by the import of 50 million tons from Russia. Should such a contract be concluded, Russia would need to double its production. RWE, a major German utility, is planning to build three new coal-fired plants.

In Poland, 80% of the electricity produced is in coal-fired stations.

Italy is modifying some of its electricity plants that presently burn oil so as to function with coal.

In Britain, one third of the production of electricity is coal-based.

Russia is also increasingly looking at coal as an alternative to gas due both to poor planning, a shortage of production and an absence of investments in the required infrastructure. Russia’s coal production is presently 300 million tons and is forecast to reach 400 million tons by 2010. A five-year plan ending in 2011 should add 41 000 megawatts of new capacity at a cost of $ 130 billion.

Coal production decreased due to the restructuring of the industry, and Russia is the country with the highest dependency on oil and gas for electricity production. The present coal to gas ratio for electricity production is 26:71, and the objective is to change it to 31:65.

The mines in Eastern Siberia and the Pacific are economically viable, with an extraction cost of Rubles 35 to 100 per ton, or approximately, $ 1.5 to 3. The coal is particularly low in sulfur and it would be an attractive product to export, if it were not due to the distance between the mines and the ports, and the lack of a developed domestic transport infrastructure.

It is possible that Gazprom will acquire the coal monopoly, as well as its present near-monopoly on gas, the only obstacle being the Russian anti-trust agency.

India’s electricity production is very much coal dependent, as 80% of its electricity is generated by coal-fired plants. Tata Coal was awarded, in April 2008, a major credit line by the World Bank’s subsidiary International Finance Corporation, to build, in the state of Gujarat, their ‘Ultra-Mega’ plant which will burn coal to produce 4 billion watts per year as well as 23 million tons of CO2.

Coal production is the monopoly of Coal India which is unable to satisfy the rapidly increasing demand in spite of deposits of 100 billion tons. Thus, India’s coal imports should continue to rise and could even be higher than the country’s production of 400 million tons.

To maintain a steady flow of imported coal, however, major investments will be required in port and rail infrastructure.

An alternative to imports would be to abolish Coal India’s monopoly and allow private entrepreneurs to invest in coal production. There is little hope that this development will take place as the trade unions have indicated they would resist such a move.

China is a major user of coal since coal-fired plants are responsible – just like in Poland – for 80% of the country’s electricity production. On this basis, China uses annually 2% of its reserves and is now a net coal importer due, mostly, to the distance between the coal mine and the largest consumers of electricity, and hence of the power plants. The coal imports could reach 50 million tons per year. This would allow the country to treble its electricity production. It is believed that one new coal-fired plant is inaugurated every week. Precise figures are not available as a large number of these plants are operated illegally.

China Coal did a successful IPO on the Hong Kong stock market in 2006, and raised 1.7 billion dollars, thus enabling it to increase its production through the opening of new mines.

Another Chinese company, Shenha Energy, a producer of both coal and electricity, has a stock market value of $ 63 billion, which ranks it as the world’s most highly capitalized coal producer.

The renewed attraction of Chinese coal mining firms on the stock market is due to the partial liberalization of sales prices, with a maximum increase of 10% per year.

Electricity demand in China is driven not only by increased industrial output, but also by the increase in living standards and therefore an increased use of air conditioning systems.

In the US, 50% of the electricity production is coal-based and the country is a significant coal importer and the best quality deposits have been exhausted or nearly-exhausted.

There are plans to build up to 150 new plants, particularly to meet the growing energy requirements of the West Coast.

However, bankers and pension funds are extremely reluctant to fund these projects as they expect the Federal Government to pass very strict regulations in the near future.

The coal-miners lobby has been very active in clamoring for billions of dollars to allow electricity production from a mix of coal-based liquid products. A process of converting coal into gas, underground, could enable the country to reduce its oil imports by up to 30%.

Discussions are also under way with the US Air Force for a 25 year contract to supply a carbon-derived fuel, to partly replace the present consumption of 10 billion liters of jet fuel.

Producing fuel from coal, however, requires enormous quantities of water. Also, mining activity alters the scenery in a major way.

The total number of projects of coal-fired plants in the world add up to approximately 1 000 over the next five years. This would represent an increase in coal consumption of 3%per year until 2015 and of 2% per year from 2016 to 2030.

Coal generates 37% of the world’s CO2 emissions, but remains below the level of the emissions due to oil which represent 42%. It is, however, a worse emitter of carbon dioxide per ton. It also releases sulfur and some highly toxic pollutants not contained in oil, such as mercury.

The 600 tons of mercury released on an annual basis by China blow over Korea and Japan, the Russian Pacific and eventually reach California.

The damage caused by pollution has been estimated by the World Bank to cost China 10% of its GDP.

These problems have led to several projects to ‘clean’ coal.

The European Union’s CASTO (Capture to storage) program aims at reducing the cost of capturing CO2 by one third, as the present level of 60 Euros is considered uneconomical.

The storage would be done under the ocean floor, for instance in empty oil and gas wells. Initial experiments on land in the US and offshore in the North Sea have yielded positive results. There is nevertheless a risk difficult to asses in case of a major earthquake.

China produced 1.5 billion cubic meters of methane from its coal deposits. This figure represents 3% of its natural gas consumption. The 2010 target is to reach 10 billion cubic meters, representing 10% of the total consumption.

A gaseification process was developed in the US, based on the earlier Fischer-Tropsch process, to transform the hydrocarbons contained in coal into a hydrogen-rich mixture called ‘syngas’. This product burns as cleanly as natural gas and can also be converted into gasoline or diesel.

China invested $ 4.5 billion, two-thirds of which were raised on the stock market, to build two 2250 ton reactors to transform coal from the neighboring mines into gas. The process makes economic sense with a barrel of oil above $ 50.

The added value to US coal mines of such a process would be huge and Peabody Coal, the world’s largest producer with a turnover of $ 5.3 billion dollars, has calculated that it would reach $ 3 600 billion for this firm alone.

American Electric Power is working on a process called Integrated Gasification Combined-Cycle which would enable not only a gasification, but also the use of the gas to action a turbine. The CO2 could be collected relatively cheaply and buried or used to produce methanol.

The cost of building such a factory would only exceed by 15 – 20% the cost of a classic coal-fired plant.

In conclusion one can say that coal has a bright future, particularly if clean technologies could be developed to reduce the heavy pollution it causes and the anti-nuclear lobby is successful in blocking the building of new nuclear power plants.

It is therefore urgent to reassess reserves to limit the risk of building plants that would not be ensured of a continuous supply of raw materials.