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    Coal players cooking with gas
    Wednesday, 22 October 2008
    David Upton

    CONVERTING gas to methanol can commercialise stranded gas fields, including fields with high CO2 content, while also providing relatively clean fuels.

    Some ideas seem too good to be true.

    Perhaps that’s why the idea of producing premium diesel and jet fuels from low-grade coal in the Australian outback, in some cases without even digging up the coal, has taken a while to register with investors.

    But the business of converting stranded coal deposits into liquid fuels is about to explode on the local energy scene if companies such as Linc Energy, Altona Resources and Strike Oil continue their rapid development pace.

    These three companies are among the leaders in coal-to-liquids projects. Linc is taking innovation a step further by including underground coal gasification (UCG) as part of its business model.

    This means it would not even dig up the coal to convert it into electricity or liquid fuels.
    Linc is combining two proven technologies – UCG and gas-to-liquids (GTL) – to create a unique business model.

    Sasol of South Africa refined GTL technology decades ago when the country was economically and politically isolated by its apartheid policy.

    Half a world away, Russia was building industrial-scale projects for underground conversion of coal to gas. But many of these shut down after the discovery of vast natural gas reserves in Siberia in the 1960s.
    However, just as low energy prices almost killed off UCG in the 1960s, today’s high crude oil prices have made a compelling business base for deploying the technology on Australia’s vast low-grade coal reserves in conjunction with gas-to-liquids.

    Acceptance of Linc’s combination of technologies is also taking off, six years after the company first began converting underground coal to gas at its flagship project at Chinchilla, Queensland.

    The company’s share price has increased tenfold in the past year, lifting Linc into the top 100 Australian Securities Exchange companies.

    Coal resources that have been stranded because of their long distances from markets now have the potential to be converted into premium-priced, low-sulfur diesel fuel and economically transported to domestic and export markets. Syngas can also be used to fuel gas turbine power stations, which could be connected to extensions of the national grid or to major resource projects.

    The capital investments required are big – in the order of $1 billion for a plant producing 20,000 barrels of liquid fuel a day. But the economics are impressive. Linc Energy estimates that production costs could be as low as $US28 a barrel.

    On these figures, there is a real chance that multi-billion dollar clusters of UCG/GTL plants will dot the Australian outback in the next few years.

    Linc gained a technology advantage when it acquired Yerostigaz in Uzbekistan, which is the world’s only commercial UCG plant.

    It has started liquids production from its demonstration plant at Chinchilla. The company recently commissioned at Chinchilla its third UCG gas field, which Linc says is capable of producing more than 250,000 cubic metres of syngas per day in its initial stage.

    The company has expanded its drilling program at Chinchilla with the aim of upgrading an estimated 1-1.5 billion tonne coal field into a Joint Ore Resources Committee-compliant inferred resource by the end of this year.

    However, Linc’s first commercial UCG/CTL plant could be in South Australia on acreage following its $104 million takeover of SAPEX on October 15.

    SAPEX holds seven petroleum exploration licences covering about 65,000 square kilometres in the underexplored Arckaringa Basin in central South Australia. Linc regards this area as having outstanding potential for UCG/GTL and recently said South Australia could become the “coal-to-liquids capital of the world”.

    In Linc’s newly released 2008 annual report, managing director Peter Bond said the company had a number of options for the next step in commercialising its UCG/GTL technology.

    “Linc is currently assessing these options to determine the first and best commercial project,” he said. “This may be Chinchilla in Queensland, but could just as well be the SAPEX area in South Australia.”

    The Arckaringa is also a focus of development activity for Australia-based Altona Resources, although its business model is based on surface mining of coal, not UCG.

    Already listed on the Alternative Investment Market in London, Altona is planning an ASX listing in the final quarter of this year.

    In September, the company announced a JORC-compliant coal resource estimate of 1.287 billion tonnes at its Wintinna deposit in the northern Arckaringa. Altona also states its total acreage contains more than 7.5 billion tonnes of coal, based on pre-JORC standards, making its Arckaringa coal deposits “effectively one of the world’s largest undeveloped energy banks, capable of conversion into clean liquid fuels, low-cost power, and high-value industrial feedstocks”.

    Altona is finalising a bankable feasibility study for the development of UCG/GTL plant with a capacity of 10 million barrels a year and a 560-megawatt power station. The capital cost is expected to be more than $3 billion.

    The company has recently attracted some heavyweight partners. Earlier this month it signed a memorandum of understanding with China’s state-owned oil giant China National Offshore Oil Corporation (CNOOC) to evaluate technology, offtake, financing and construction opportunities. Altona also entered a similar agreement with BP that runs until the middle of next year.

    Lignite to liquids

    Meanwhile, elsewhere in South Australia, Hybrid Energy, an unlisted subsidiary of Strike Oil, is also developing a coal-to-liquids, or rather a brown coal-to-liquids, project.

    The company recently outlined plans to complete a bankable feasibility study by the end of 2012 for the project near Kingston in southern South Australia.

    Hybrid aims to use the lignite (brown coal) deposit to produce 10,000 barrels of diesel per day by 2016. It also aims to build a 40MW power station. Carbon capture and storage will be a component of the development.

    The company is conducting a feasibility study with the University of Adelaide on gasification of Kingston’s lignite. The deposit will be surface mined to extract 3-3.5 million tonnes per year.
    Another ASX-listed oil and gas player, GulfX, is planning a South Australian lignite-to-liquids project, this time focusing on brown coal deposits about 100km north of Adelaide. GulfX aims to develop a plant capable of producing 15,000-30,000 barrels of premium diesel per day.

    Going underground

    While Altona, Hybrid Energy and GulfX are planning to surface mine their coal resources, Linc is not alone in pursuing UCG to generate feedstock for power generation and liquids projects.

    ASX-listed Carbon Energy (formerly Metex Resources) is close to beginning a commercial-scale trial of UCG at Bloodwood Creek in the Surat Basin, where it has a JORC-compliant inferred resource of 100 million tonnes of coal.

    The company plans to demonstrate commercial gas supply as early as next month. This is a key step in a partnership with Incitec Pivot, which has an offtake agreement to underpin the development of a world-scale ammonia plant at Bloodwood Creek.
    Incitec also has a 10% equity interest in Carbon Energy, which is beginning to attract interest from other investors and recently climbed into the ASX 300 index.

    Carbon Energy’s UCG technology was developed by the CSIRO and the company also claims proprietary technology that gives it an advantage in modelling the best designs for UCG projects.

    Elsewhere in south Queensland, ASX-listed Cougar Energy is planning to develop a 400MW power station near Kingaroy, using UCG feedstock from its nearby coal resource. Cougar’s technology provider is Ergo Exergy Technologies of Canada, which conducted its own trials of UCG in Australia earlier this decade.
    In August, Cougar began drilling for coal samples to help design its UCG process. It is also raising funds for a bankable feasibility study.

    Tackling emissions

    But CTL is not just about converting stranded coal into economically viable forms of energy. It also has the potential to solve coal-fired power generation’s carbon dioxide emission problems.

    The search for CTL alternatives for Victoria’s vast reserves of brown coal has intensified in recent years as the idea of a carbon tax or emissions trading scheme began to loom.

    Monash Energy, a joint venture between Shell and Anglo American, has been working since 2006 on CTL based on lignite reserves in Victoria’s Latrobe Valley.

    The project involves gasifying Anglo American’s brown coal using Shell’s proprietary process, then converting it into liquid fuels such as premium diesel.

    Monash is scoping a project to produce 70,000 barrels per day, equivalent to more than half the production level of Mobil’s Geelong refinery. This would require mining and gasification of 30 million tonnes of lignite per annum.

    The viability of the project depends on finding a solution for storing the estimated 15 million tonnes of CO2 that would be captured every year. Monash’s hopes are centred on underground storage in depleted Gippsland Basin gas fields.

    But Linc Energy maintains that any CTL scheme should be able to store some carbon dioxide.

    Chief executive Peter Bond says Linc can strip out CO2 early in the fuel production process and store it in coal seams. The question is whether governments would make it commercially attractive to do so.

    Monash Energy and other CTL projects around the country are gaining strong support from the federal government because it believes CTL has a large role to play in creating energy security for Australia.
    With the economics now firmly in its favour, CTL with and without UCG is set to become a much larger part of Australia’s energy sector.
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