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Polygeneration From Coal

September 30, 2008

Nexant, Inc.

Ed Glatzer, +1-914-609-0325

eglatzer@nexant.com

www.chemsystems.com

Logo: http://www.nexant.com

A new ChemSystems(R) Special Report published by Nexant — Polygeneration from Coal: Integrated Power, Chemicals and Liquid Fuels — analyzes the technologies and economics of producing large capacity power and co-produced chemicals or liquid fuels from coal.

Advanced coal gasification technologies have raised the efficiency of coal conversion far above that of conventional coal combustion. As a result, these advanced technologies offer the promise of economically and environmentally acceptable uses of coal for chemicals and liquid fuels.

One of the more promising advanced development concepts is polygeneration from coal. Polygeneration involves the gasification (or conversion) of coal to produce synthesis gas (syngas) that can be simultaneously used for the generation of electricity and in the manufacture of chemicals and liquid fuels. This approach offers an integrated strategy for optimizing the value of coal.

In polygeneration from coal, electricity is produced in conventional integrated gasification/steam turbine combined cycle (IGCC) systems, while commodity chemicals (methanol, ammonia, and their derivatives such as olefins and acetic acid from methanol and fertilizers from ammonia) or liquid fuels (methanol, diesel, dimethyl ether (DME), and gasoline) are produced via state-of-the- art chemical processes.

Since 2006, the unprecedented rise in prices of crude oil and other forms/sources of energy, along with a range of technology advances, has resulted in a significant favorable change in coal’s potential investment economics. In the interim, despite price volatility, mid-2008 prices are still well above those in the first quarter of 2008. Thus, we observe that many petrochemicals can now be made very competitively on a full cost basis by using syngas made via polygeneration. Polygeneration-based syngas as a feedstock is demonstrating increasing competitiveness.

Background

The use of coal as a fuel and a feedstock in a technologically advanced facility represents a modern approach to maximizing coal’s potential, exceeding the capability of cogeneration (the previous best practice) which increased the value of low-grade fuel in refinery and chemical facilities in the 1980s and 1990s. Coal polygeneration provides highly flexible and efficient cross-sector design and implementation features with numerous benefits:

Nexant’s Findings

The concept of a world-scale polygeneration facility involves a large number of unit operations dealing with the gasification of coal, the IGCC production of power, and the conversion of syngas to chemicals or liquid fuels. The heart of the complex is a gasifier island, consisting of multiple coal gasifiers and auxiliary systems. For the world-scale capacity used in the Nexant study, the gasifier island consists of numerous trains producing a total of 1,015 MW of power plus 4,600 million NM3 per year of syngas for chemicals or liquid fuels production, based on commercially proven technologies.

In the study, Nexant developed regional economics for the U.S., China, and a typical Eastern European/Eurasian location — for historical 2007 as well as forecast 2010 and 2015 coal and feedstock prices — and for crude oil scenarios intended to account for the future uncertainty of oil availability and price. Based on the chosen facility configuration and a regional co-product credit for the net power produced, the economics for chemicals and liquid fuels show interesting and promising results. Several of the more interesting chemical and fuel analyses included in the study are highlighted below.

Technology for the production of olefins from coal has been highly researched in recent years. The production of methanol from syngas (from coal gasification), followed by the production of ethylene and propylene via methanol to olefins (MTO) technology has shown great promise in coal-rich countries, particularly China. Nexant analyzed these costs when produced along with export power and compared them to the production of ethylene from steam cracking of typical regional feedstocks. The investment and non-feedstock operating costs of polygeneration facilities are high when compared to conventional routes (pulverized coal combustion for power generation and conventional refining and chemical routes based on crude oil). Therefore, the economic advantage of polygeneration will generally increase substantially when one or more of the following conditions have occurred:

— Crude oil and natural gas prices are high relative to coal prices

— Conventional feedstocks (crude oil and natural gas) for chemicals and liquid fuels are inadequate to satisfy market demand

— A market exists such that there would be substantial carbon credits that would benefit the large concentrated stream of carbon dioxide from a polygeneration facility (to be used for sequestration or other use of carbon). Note: Nexant’s analysis in this study did not assume or make allowance for any carbon credits

Further, since many of the process steps in polygeneration represent fairly new or novel technologies, we believe that project sponsors and lenders will be seeking to limit their investments in these projects to opportunities in which the key operation bases of the project and expected future cash flows are fairly conservative. In that way, sponsors will limit their risk exposure. Given the key issue of prices for the commercial prospects for polygeneration, we believe that, to be developed, projects may need to exhibit strong expected future financial performance based on prices that are conservative relative to mid-2008 market prices in which petroleum prices rose to unprecedented highs.

To provide analyses of the downside risks that would be faced by polygeneration projects, the cost comparisons in this study are based on a combination of 2007 prices and relatively pessimistic forecasts of lower future prices, taking into consideration recent price volatility, but also acknowledging the long-term history of lower oil and gas prices. The analysis quantifies the risks to the competitiveness of polygeneration should energy prices trend downward toward figures consistent with long-term historical trends and historical cyclicality for oil and gas prices.

The prospects in the U.S. for the polygeneration route to ethylene are not encouraging under very pessimistic long-term petroleum price scenarios. So, while in 2007 the ethylene from syngas route is relatively competitive with ethylene from steam cracking of ethane, the syngas route is likely to become less competitive when considering the downturn in petrochemical feedstock and commodity chemical prices during the trough years of the petrochemical cycle (arguably in the 2010 and 2015 timeframes) under a very pessimistic oil price forecast.

On the other hand, the polygeneration route appears to be very competitive in Eastern Europe/Eurasia throughout the analysis period, primarily due to lower coal prices.

There is great potential for the production of liquid fuels from coal. In addition to methanol (as a potential fuel), coal can also be the raw material for diesel fuel (Fischer-Tropsch liquids), DME, and gasoline.

Nexant analyzed the production of diesel fuel via Fischer- Tropsch synthesis using syngas from polygeneration. Diesel production via polygeneration is comparable to diesel produced via Fischer-Tropsch synthesis of natural gas in the U.S., at least until the end of 2015, although neither route is considered competitive in the U.S. under the long-term pessimistic crude oil price scenario. In China, the cost of production from coal is — and will be — reasonably competitive with that from natural gas.

A very real potential for chemicals and liquid fuels is as export commodities from coal-rich regions. With a polygeneration complex also supplying a large amount of power locally, the co-produced chemicals or fuels can be exported to other global regions at realistic and profitable margins. As an example, gasoline produced from syngas (using the economics for the Haldor Topsoe TIGAS process) in either China or Eastern Europe/Eurasia will be very competitive in the U.S. market in the estimated 2010 scenario, even after accounting for shipping costs. Estimated margins are high and appear to offer excellent investment potential.

Conclusion

Polygeneration from coal offers excellent prospective investment potential in coal-rich regions. Nevertheless, although there are important issues to be addressed regarding downside scenario risks, there are potentially large returns to be made. Nexant’s study on Polygeneration from Coal addresses key techno-strategic issues such as the expected different competitive cost positions of such projects on a broad regional basis and for different products given two pessimistic downside oil price scenarios.

For more information on this ChemSystems Special Report, please visit www.chemsystems.com or contact: Ed Glatzer +1 914 609 0325 (e- mail: eglatzer@nexant.com).

About Nexant

Nexant, Inc. is a premier global provider of petrochemical, oil, gas, clean coal, biofuel, renewable energy, and intelligent grid solutions — developing and delivering strategic, technical, economic, financial, and master planning consulting services to chemical and petroleum majors, Fortune 500 companies, utilities, transmission and distribution system operators, financial institutions, government agencies, and development banks. Nexant(R) is a proprietary trademark of Nexant, Inc. The company is owned by a select group of investors and Nexant management and employees. Nexant(R) and ChemSystems(R) are proprietary trademarks of Nexant, Inc.

TABLE

— The gasifier upgrades coal or other heavy hydrocarbon source feedstock, with superior environmental performance

— Because the syngas produced in the gasification process can be shifted to/from power generation and chemicals/liquid fuels, it offers inherent peak period maximization capability for electric power and facility revenue optimization

— Sharing the coal handling and gasification facilities between power generation and chemicals/liquid fuels production provides both with improved scale and efficiency of the capital investment and operations support

— This integrated concept has beneficial economic potential since the syngas produced in the gasifier can have several applications:

— On-purpose production of commodity chemicals or valuable liquid fuels

— A concentrated carbon dioxide waste stream that can be used for a number of chemical applications or that can be sequestered

— Power for sale to the chemical complex, nearby power users, or a municipal power grid system

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