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Report finds Coal-to-Liquids and Oil Shale pose significant financial and environmental risks to investors

19 December 2010

Ceres recently released a new report concluding that coal-to-liquid (CTL) and oil shale technologies face significant environmental and financial obstacles—from water constraints, to technological uncertainties to regulatory and market risks—that pose substantial financial risks for investors involved in such projects.

Ceres is a national network of investors, environmental organizations and other public interest groups working with companies and investors to address sustainability challenges such as global climate change.

Authored by David Gardiner and Associates, the Ceres-commissioned report recommends that investors closely scrutinize their portfolios for exposure to these projects and press companies leading the ventures to provide better disclosure on wide-ranging risks and steps for managing such risks. The report comes as oil majors like ExxonMobil, Chevron and Shell, and other companies, are developing at least a couple dozen oil shale and CTL projects, including 12 CTL facilities projected to produce 170 million barrels of liquid fuels per year at a cost of $2 billion to $7 billion per plant.

An increased focus on energy security and dwindling petroleum reserves are driving development of unconventional liquid fuel sources in the US. The Obama Administration’s recent extension of the offshore oil-drilling moratorium through 2011 has also renewed investor interest in on-shore oil reserves.

More than 25 companies are involved in oil shale development. With technologically recoverable reserves estimated at about 800 billion barrels in the US—three times the size of Saudi Arabia’s proved reserves—oil shale offers vast development potential. Shell’s recent agreement to develop oil shale in Jordan at a projected cost of $20 billion illustrates the potential cost of these projects. (Earlier post.)

CTL production is projected to rise in the US from virtually no production today to about 91 million barrels per year by 2035, according to the Energy Information Administration. Major companies involved in CTL development include Shell, Rentech, Baard and DKRW.

Investors with holdings in companies involved in coal-to-liquids and oil shale projects should ask these companies to open their books and explain their strategies for managing these risky projects. The energy- and water-intensive nature of both coal-to-liquids and oil shale, combined with technological uncertainties and state and federal requirements for low carbon fuels spell diminishing returns for investors.<

—Mindy Lubber, president of Ceres and director of the $9 trillion Investor Network on Climate Risk
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The Energy Independence and Security Act of 2007 prohibits federal agencies—including the Department of Defense and the Air Force—from procuring alternative or synthetic fuels, unless contract provisions stipulate that life-cycle greenhouse gas emissions do not exceed equivalent conventional fuel emissions produced from conventional petroleum sources.

Among the report’s key findings:

  • Water constraints: Oil shale and CTL development may be constrained by each technology’s need for large amounts of water. Oil shale production requires 1.5 to 5 barrels of water for every barrel produced while CTL requires 5 to 7 barrels of water for every barrel of produce produced. Water constraints are especially problematic for oil shale production, because the reserves are located in the water-stressed states of Colorado, Wyoming and Utah.

  • Regulatory Risks: Current and potential regulations seeking to limit carbon dioxide emissions such as low carbon fuel standards and lifecycle emissions requirements pose potentially serious risks to carbon-intensive oil shale and CTL. EPA’s proposed Tailoring Rule regulating GHG emissions from new sources will also likely apply to CTL facilities.

  • Core Technological Uncertainty: Oil shale technology is still in the early stages of development, particularly processes that involve heating the oil shale in place and extracting it from the ground. CTL technologies are further along but combining the various technologies into a commercially viable plan still faces operational and technical challenges.

  • Carbon Capture and Sequestration (CCS) Uncertainty: Given their carbon intensity, oil shale and CTL will be dependent on CCS if they are to survive as low carbon fuel standards and other carbon-reducing regulations take hold. CCS still faces great uncertainty, however, regarding its commercial viability, public financing levels, enabling policies and potential markets for captured CO2.

  • Market Risks: The economic competitiveness of oil shale and CTL is contingent on high oil prices. Studies show that CTL is viable as a fuel when the price of oil exceeds $40-55 a barrel. Oil shale may not be profitable unless oil prices are in the $70-95 per barrel range. Neither of these estimates takes into account potential carbon prices, or CCS costs, which are very expensive and would raise the price-per-barrel competitiveness level.

The report calls on investors to give careful thought to these wide-ranging risks and engage with oil companies, CTL developers and end-users such as airlines to further understand the risks that companies are assuming. Investors are also encouraged to evaluate the potential risks in their fixed-income portfolios from state and municipal bonds that are supporting development of these projects.

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Comments

Thanks Ceres, but guess what, investors, not politicians, will decide if they want to take the risk.

And it will be with their money not ours, and mostly without political grants.

Good work on all your biotechnology to dedicated energy crops (they are our salvation, maybe, by 2050+), but don’t expect the new congress to continue to cripple our near term domestic petroleum industry.

5.44 million barrels per day U.S. production and with the new Congress the next two years, can we expect that to be much higher? We can not drill our way out of importing more than 50% of our oil.

"We can not drill our way out of importing more than 50% of our oil."

but we can definitely CTL our way out of importing oil if it is truly competitive at $40-55 a barrel. Site the CTL plant at a present coal burning utility generator and make use of the available coal transportation infrastructure, and the free process heat available.

Obama is trying to kill the domestic oil production industry.. best thing for electric cars but consumers will pay for it at the pump.. no big deal, if you cant afford gasoline, ride the bus..keep gasoline for those who can afford it.

“We can not drill our way out of importing more than 50% of our oil.”

Mayby so, maybe no.

We CAN certainly, greatly aggravate the “importing more than 50% of our oil” by opposing drilling and CTL.

It is not just that such policies senselessly create higher prices, it is that much more money goes to our enemies
(I mean the enemies in the Mideast, not the anti-amnesty ones in the Midwest).

"It is not just that such policies senselessly create higher prices, it is that much more money goes to our enemies"

Since when is Israel selling us oil?

Absolutely! It's madness to pay our enemies to destroy our agriculture and drown our coastal cities through global warming, when, merely by investing a few hundred billions in CTL technology, we can do it ourselves.

Somebody (oil people/lobbies) should pay an Expert Panel to paint a rosy picture, as was recently done for Alberta Tar Sands, and investment would be poring in.

It's madness to pay our enemies for oil when, merely by drilling and investing in CTL technology, we can retain this wealth and with it, some hope of reducing or capturing our own CO2.

It's madness to think that sending hundreds of billions to the Mideast will save our agriculture or our coastal cities or reduce global warming.

Guess what - it isn't our CO2 that threatens our agriculture and our coastal cities, it's CO2 released by anyone and everyone; that's why it's called GLOBAL.

"recoverable reserves estimated at about 800 billion barrels in the US"

Recoverable is the key word, I have not heard of anyone recovering anything in any quantity for more than 30 years.

but we can definitely CTL our way out of importing oil if it is truly competitive at $40-55 a barrel.
Reality check:
  1. Net US imports for 2009 ran about 9.7 million bbl/day.
  2. At 6.1 GJ/bbl this is 21.6 EJ (20.5 quads) per year.
  3. If refineries convert crude to product at 90% and CTL operates at 45% efficiency, it would take 43.2 EJ (41.0 quads) per year of coal to replace oil imports.
  4. The USA only produced 19.8 quads of coal in 2009.
Using CTL to replace oil imports would require more than tripling coal production. Not. Gonna. Happen. PEVs can happen, and we should make them happen just as fast as we humanly can.

Even doubling the coal production probably will not happen. If we converted coal plants to combined cycle natural gas we are just trading one for another. Since they are cleaner and more efficient, it might be worth the effort however.

We would have to double our oil production from 5 million to 10 million barrels per day to get to 50% imported oil. I know of no one that thinks ANWR nor the Gulf deep water will ever bring in that amount of oil.

It is a very large and important issue, we use one heck of a lot of oil so technology efficiency, production, substitution and every other idea we can think of has to be used to make much progress any time soon.

China is already using coal to make chemicals in large amounts because oil is too expensive. It does not need to take any water at all to extract hydrocarbons from oil shale, but some is always available at a cost far lower than the cost of imported crude. And processes are available for using sewage or seawater for making fuels out of coal. Syntheses gases CO and H2 can be made from coal without any water at all as has been done for over a hundred years.

The figures of water usage for manufacturing liquid fuels are far too high and are not true and are invented and propagated by persons funded directly or indirectly by oil speculators as is the anti coal-to-liquids and anti coal lobbies. The use of crude oil derived fuels in automobiles puts far more CO2 into the air than would the use of electric automobiles powered from coal fired generating power plants. Getting a million calories from diesel might even put more CO2 in the air than getting a million calories from coal at a power plant because the diesel must be refined and much oil is lost in spills and much natural gas is flared in the production of crude oil and then the crude oil must be refined into diesel with much additional CO2 loss.

Even if burning diesel and gasoline produces less CO2 per calorie, burning coal might even be more energy and CO2 efficient, alone, because of the need to refine the crude oil without considering the other losses. Coal can be ten to twenty times cheaper than crude oil per calorie. I use the calorie unit of energy because people do not understand the difference between kilowatt-hour, kWh and kilowatt, kW(1.36 PS or hp), and certainly do not know what a Joule is which is a watt-second.

Water can be made from coal or oil shale if absolutely needed. There are projects funded to extract it from the exhaust of military vehicles. ..HG..

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