States Vary Coal-Based Fuel Offers
By Williams, Walt
Government officials in states across the nation believe that the path to a country that relies less on foreign oil rests in the coal beneath their feet, and many of them are scrambling to make that future happen as soon as possible.
Last month, Gov. Joe Manchin and the state’s congressional delegation announced that two companies — CONSOL Energy and Synthesis Energy Systems — plan to build the nation’s first modern coal-to-liquids plant in Marshall County. Once completed, the plant will produce about 720,000 metric tons of methanol a year, which can be converted into 100 million gallons of 87 octane gasoline.
What state officials didn’t say at the time was that to entice the two companies to build in West Virginia, the state’s Economic Development Office offered the companies roughly $200 million in tax breaks and infrastructure improvements.
None of the tax breaks are guaranteed and none of them apply specifically to coal-to-liquid projects. Other companies have applied for and received the same tax incentives in the past. And West Virginia’s incentives pale in comparison to what some other states have done in what has become a race to build the nation’s first coal-to-liquids plant.
Ohio, for example, pledged up to $4 billion in general obligation bonds to build a coal-to-liquids plant in Wellsville, which is in Columbiana County, across the Ohio River from Newell. Officials in Mississippi, North Dakota and Pennsylvania each pledged millions of dollars to projects in their states. And Montana, where as many as four plants have been proposed, offers reduced property taxes on any equipment and pipelines used to make and transport coal-based fuels and carbon dioxide to be buried in the ground.
Coal-to-liquid technology has been around since before World War II, but the comparatively cheap cost of oil kept the technology from being developed in the United States. It has only been in recent times with the price of oil rising to well above $100 a barrel that the technology has become cost competitive.
Still, the novelty of coal-based fuels makes investors wary.
“If you go to Wall Street, you are going to ask for a lot of money and you are going to ask for something that has never been done before,” said Corey Henry, vice president of industry communications for the National Mining Association. “…You are looking to give bankers and the market some assurance (the projects) have backing, that they have some support.”
The tax incentives are that assurance, he explained.
“At the state level, and at the federal level, you are looking for a swift kick to get the industry going,” Henry said.
Old Is New Again
Mass production of coal-based liquid fuels has been used effectively by other nations, but never when they had the option to do otherwise.
Nazi Germany used the process to fuel their vehicles when it was cut off from oil supplies during World War II. South Africa also used the process to ease the sting of international embargoes over its former policy of apartheid, and the country still has plants producing the fuels.
At least 11 coal-to-liquid plants are in the planning stages in states across the nation, according to Henry. Most will make diesel fuel. Three plants, including the one in West Virginia, plan to produce gasoline.
There are two parts to the cost of making fuels from coal, Henry explained. The first is production cost, which will vary from plant to plant, but a typical estimate is about $40 a barrel. The second is the cost of sequestering the CO2 the plant will produce, which may add another $10 to $15 per barrel. So the cost of coal-based fuels could run $60 or more a barrel — a bargain when compared to oil, which is currently running more than $120 a barrel.
The sequestration part is vital because the production of coal- based fuels creates roughly twice the amount of CO2 than the production for fuels from oil. In fact, one coal-to-liquid plant in South Africa is the world’s largest single source of the greenhouse gas, according to Princeton University’s Carbon Mitigation Initiative.
Sequestration is the technology used to bury CO2 in the ground, where it won’t contribute to global warming. The problem is it may be years or even decades before the technology is cost effective, if it works at all.
The solution for many coal-to-liquid projects is enhanced oil recovery, in which CO2 is pumped into oil fields to squeeze as much oil out of the ground as possible, Henry said. Enhanced oil recovery is considered a bridge technology until true sequestration can be achieved, and it has the benefit that the producers of the CO2 are paid by the owners of the oil field for their waste product.
Such technology is already in use. One gasification plant in North Dakota currently pumps thousands of tons of CO2 into an oil field in Canada, which is being used as a test site to see if the CO2 will stay in the ground.
However, environmentalists and some energy experts point out that even if the CO2 is pumped into the ground, coal-to-liquid fuels still release more of the gas into the atmosphere than conventional fuels. After all, the fuels are burned in vehicles, and those emissions aren’t sequestered. They instead suggest states could do more to invest in renewable energy, such as solar and wind power.
“It is something we tried before and it didn’t work out,” Virginia Cramer, associate press secretary for the Sierra Club, said about coal-to-liquid technology. “Let’s start something new.”
Cashing In On Coal
While wind and solar power is cleaner than energy from coal, government officials in coal-producing states see coal-based fuels as a way to wean the country off its dependency on foreign oil while at the same time producing jobs and investment in their own states. Some are doing as much as possible to push the technology along.
“We’re certainly excited about energy projects,” said Melissa Melody, director of marketing and communications for the Mississippi Development Authority. “We’re creative in what we have to offer to encourage them.”
The Mississippi State Legislature has approved $15 million in funding for a proposed plant in Natchez that may make anywhere from 15,000 to 50,000 barrels of coal-based fuels a day.
Other states are offering similar incentives. North Dakota has approved a $10 million grant for a proposed plant that will produce 35,000 barrels per day, or bpd. Pennsylvania has pledged $47 million for a 5,000 bpd plant there, which is being coupled with $100 million U.S. Department of Energy grant. The Ohio Air Quality Development Authority has pledged up to $4 billion in bonds for a 35,000 to 50,000 bpd plant in Wellsville.
Montana took a different route. There, Gov. Brian Schweitzer convinced lawmakers to pass his “Clean and Green” energy initiative. Among its incentives are 50 percent property tax abatements on equipment used for the production of coal-based fuels and for carbon sequestration. The same tax incentives are available for renewable energy production and research.
The $200 million in incentives West Virginia officials offered to the owners of the Marshall County plant are different from what the other states have done in that none of them are specifically targeted at coal-to-liquid production.
Among them is a tax increment financing plan valued at $35 million. A TIF plan essentially freezes property taxes for a defined geographic area for a certain period of time. However, it is not a state incentive, instead needing to be approved by the local county commission.
State officials also offered money for employee training and help with infrastructure, but by far the largest incentives was a potential $160 million in economic opportunity tax credits for the owners of the projects.
The economic opportunity credit was created by the state Legislature in 2003 and is offered only to certain industries, such as manufacturing, for opening new facilities in the state. The credit is determined by the cost of the project and the number of jobs it will create. Given that proposed coal-to-liquid plant will create 60 jobs, it would receive a 20 percent credit on the estimated $800 million cost of the project, which comes to $160 million.
A total of 20 projects have received the credit since 2003, coming to about $225 million in credits collectively, according to state officials.
“The truth is this is a marketing tool that the development office uses for any project,” Department of Commerce Secretary Kelley Goes said.
Of course, that credit may be combined with federal tax incentives West Virginia’s delegation and lawmakers from other coal- producing have proposed in Congress. And there is no telling what state lawmakers may do when the Legislature meets again in 2009. Manchin’s spokeswoman Lara Ramsburg said she knew of no plans by the administration to propose new tax incentives for coal-to-liquid fuels during the next legislative session.
Copyright State Journal Corporation Aug 22, 2008
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