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Coal Future With Coal-to-Liquid (CTL) Fuels Initiatives

|Includes:ARCH, ARLP, CLD, CNX

This article intends to highlight recent developments and opportunities in coal mining sector due to coal-to-liquid initiatives. In recent months, stocks of coal mining companies have suffered even though various stock indexes have reached multi-year highs. Root causes are cyclical oversupply of coal, global slowdown, artificially low natural gas prices, and EPA enforced regulations in USA (few removed via Federal court citing EPA overstepped its authority). In spite of growing revenue in billions, coal producers struggled to report profit. Until spot price improves, coal will continue to suffer. Spot prices have already bottomed and rebounded after coal stocks reached all time lows. Low coal spot price in steady state, its abundance and stable supply, and higher price of crude oil and other petroleum products prompted many coal-to-liquid initiatives.

Why Coal-to-Liquid Now?

Recently, China is leading efforts in this direction. CTL was used in past. Germany had 9 indirect and 18 direct liquefaction plants at the end of WWII. They produced 4 MMT/yr fuels; meeting 90% of its needs during WWII. South Africa which has abundance of coal reserves had 3 CTL facilities. It produced 10 MMT/yr fuels at peak; meeting 60% of nation's needs. It still produces 150,000 barrels a day of gasoline and 50,000 of diesel each day. Primary reasons why CTL initiative is getting importance in recent years are:

Nearly 100% Profit Margin: Based on initial estimate from TransGas, cost of gasoline production from coal is just below $2. Along with other products resulting from CTL technique, this could result in more than 100% profit margin.

Uncertainty in Oil Rich Nations: Due to uncertainty of the future of the world oil market, nations such as China and India have begun investing seriously in synthetic fuel production. With abundant coal in USA, CTL holds the promise of an American energy source, produced on American soil by American workers. It is also an economic boon for USA. US coal deposits contain 12 times energy compared to all known oil in Saudi Arabia (800 billion barrels of oil equivalent).

Polygeneration plants most beneficial: Coal liquefaction becomes sustainable if world oil price remains above $25 per barrel. Since 2008 crash where it reached $30, it has rebounded significantly for CTL to be profitable. This is assuming polygeneration plant (produces liquids and electricity). EPA enforced regulations are more likely to result in more polygeneration power plants. Reason being such plants are more environmental friendly (capture and sell carbon).

Economic viability of oil at $30 per barrel: DOE studies estimate cost of producing coal liquids at $30 per barrel. In recent years, oil price is steadily growing while coal price is growing is much slower rate.

800 billion barrels of oil equivalent: USA still has a little more than twice the recoverable Coal reserves as does China. Abundant domestic reserves with relatively low, stable prices. It amounts to 800 billion barrels of oil equivalent.

Degrading Quality of Coal Over Time: Quality of coal all over globe is degrading over time. CTL is highly useful in processing low grade coal which is otherwise worthless for utilities and many other industries.

Given large funding injection into clean coal research, this could in turn help economy and add to GDP by billions a year, and step towards energy independence. Contrary to more than 90B invested in solar companies under President Obama; which become burden on tax-payers. Half of those companies receiving those funds are in financial distress condition and many of those already filed bankruptcy. Recently, company executive of Shenhua Group, China's largest coal producer, mentioned that it has made huge profits from its pilot coal-to-liquid (NYSE:CTL) project in north China in the first three months of this year. Zhang Yuzhuo, general manager of Shenhua Group, said at a forum held in east China's Anhui Province that the group's CTL project in Inner Mongolia Autonomous Region brought more than 100 million yuan (15.38 million U.S. dollars) in profits.

Arch Coal Investor and Supplier for CTL Plant Build

Sinopec is building an advanced coal-to-gasoline plant near Medicine Bow, Wyoming. It is expected to produce 21,000 barrels a day of gasoline when it goes into service in 2014. The company that will own and operate the plant is DKRW Advanced Fuels, a privately held firm partially owned by Arch Coal Inc. which will supply coal to the project. This CTL plant is counting on capturing, liquefying, and selling its carbon dioxide emissions for use with enhanced oil recovery techniques in the states oil fields. The facility will convert one ton of coal into two barrels of traditionally oil based products, including gasoline, thus creating a 360 million barrel of oil equivalent reserve at the Medicine Bow site. It is co-located with the 180M ton Carbon Basin coal reserve owned by Arch Coal, also an equity investor in the project.

Initial commercial operation of up to 20,000-22,000 barrels per day project is expected to start in 2014. Other firms have been contracted to develop and enhance necessary infrastructure, including the construction of a roughly 100 mile pipeline from Medicine Bow to Cheyenne. The plant, once built, will be the first commercial scale project in the United States utilizing carbon capture and sequestration technology, and will use a fraction of the water needed by a pulverized coal facility of a similar size. This should highly benefit Arch coal; which is investor and coal supplier.

Alpha Natural Provider for Largest CTL Plant

TransGas with SK Engineering & Construction building first US coal-to-gasoline plant Adams Fork Energy to be located in Mingo County, West Virginia. This coal-to-liquids plant construction completion is expected in Q1 2013; costing $4B. The Adam's Fork Energy plant, the first of its type in the nation, will use about 7,500 tons of coal and convert it to 18,000 barrels per day or just under 1 million gallons a day of liquid fuels, mostly gasoline. When fully developed, the Adams Fork project will be the largest coal-to-gasoline project in the world. The coal will be supplied through an arrangement with Alpha Natural Resources. Some 7,500 tons of coal will be required daily or about 2.7 million tons of coal per year.

Six more of these are expected in Central Appalachia. They will all be exactly the same and this first plant is a reference plant. Permits have been filed including one in Pike County. If all six plants are built, coal demand will be over 16 million tons per annum. The Adam's Fork Energy plant will be the first that is actually making transportation fuel from coal comprising ultraclean premium grade gasoline and LPG.

The product will compete easily with gasoline from petroleum. Based on the company's calculations, plant's cost to produce gasoline at under $2 per gallon. Based on recent gasoline prices, it means 100% profit margin.


US mineable coal reserves contain nearly 12 times energy equivalent of all known oil in Saudi Arabia. It amounts to 800 billion barrels of oil equivalent. It is an economic gift for USA and employment. Further, CTL could be a life saver for coal industry which is currently on life support. In summary, it will result in:

Highly profitable CTL business: Based on initial estimate from TransGas building Adam's Fork project, plant's cost to produce gasoline is under $2 per gallon. Further, various by-products can also be sold. Shenhua Group already mentioned huge profits from its pilot coal-to-liquid (CTL) project in north China in the first three months of this year. This could result in a highly profitable sector based on CTL based industries. Various coal mining companies could be benefitted as well companies building and maintaining such plants. Sinopec is leader while many players such as TransGas are still private.

Increase in Coal Spot Price: This initiative of coal to liquid conversion could well indeed lead to re-birth of coal. CTL has already proved to highly profitable for Chinese manufacturers via its pilot projects. The large scale initiative such as one by TransGas to which ANR is expected to supply low grade coal will utilize unusable coal. More of such initiatives could lead of higher demand of coal. Further, such improvements in spot price is sustainable, unlike driven by natural calamity such as 2011 flood in Australia.

Reduce pollution and reduce EPA impact: CTL employs various carbon capture technologies and by-products are used by various industries. For example, Denbury Resources Inc. has agreed to purchase all of the carbon dioxide captured by the plant funded by ACI. Denbury plans to use the CO2 to recover significant amounts of otherwise stranded oil from existing oil fields in the Rocky Mountain region.

Utilization of Low Grade Coal: This will also address the issue of those mines where coal quality has degraded due to mining over long term. CTL indeed can use coal of any grade, especially for low grade thermal coal. The gasification process to be used in the new West Virginia CTL plant could cleanly utilize coals of any grade -- including the cheapest and dirtiest coal.

Reduce Primary Dependency on Utilities: The only sector which could suffer due to this initiative is utilities. Improvement is spot price could lead to higher utility price as well as shrinking margin for utilities. Utilities are already one of worst performing sector this year, down nearly 3%.

Growth of CTL Technology Manufacturer: Equipment manufacturer for CTL should also be immensely benefited. Many are still private and Sinopec is one the leader in this area.

In every sense, believing in CTL technology and its success, coal is a long term investment. With a long term investment plans in mind, coal stocks such as BTU, ANR, ACI could be a multi-fold gainer over time. But we should keep in mind that like any other commodity company, it goes through boom and bust cycle. It is due to fact that any demand and supply cycle has an oversupplied state; which coal went through recently. So, it is equally important as to sell at boom cycle when compared to buying at the bottom.

Disclosure: I am long ANR, ACI, BTU.