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Executive Summary
This report of the National Research Council's (NRC's) Committee on
Production Technologies for Liquid Transportation Fuels addresses the prob-
lem of producing those fuels from domestic resources. Included in the
report are an economic analysis of the various technologies, an assessment
of their state of development, and suggested strategic directions for a 5-year
R&D program for producing liquid transportation fuels from plentiful do-
mestic resources (see Chapter 6 for a more detailed summary of the report).
In addition to conventional gasoline, diesel, and aviation fuels, there is
growing interest in alternatives such as methanol and compressed natural
gas. Concerted efforts are under way to understand better the consequences
to human health, air pollution, and the greenhouse effect from the use of
these fuels.
While this report concentrates on R&D important to fuels production
from domestic resources with priority given to lowest cost, it is recognized
that choice of fuels, the feedstock for their manufacture, and fuel composi-
tion will be strongly influenced by these additional considerations. Thus,
the R&D program should be flexible enough to anticipate and accommodate
changes that may be required for environmental and other reasons. This
viewpoint is reflected in the committee's recommendations.
Analysis of these problems, however, was severely limited by the time
constraint for completion of this study and by the study goals. It is con-
ceivable that increasing concerns about global climate change could affect
the balance of R&D expenditures on fossil vs. nonfossil energy technolo-
gies. Additional studies are needed and it is anticipated that the ongoing
NRC study by the Committee on Alternative Energy R&D Strategies will
make an important contribution to the development of federal energy R&D
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FUME TO DRIVE OUR FUTURE
programs with the goal of reducing greenhouse gas emissions in the produc-
tion and use of fuels and electricity.
In the 1970s increasing imports of petroleum to the United States and
rapidly rising oil prices stimulated U.S. public and private development of
domestic resources of oil and other fossil fuels as replacements for im-
ported petroleum. These efforts were sharply curtailed in the 1980s as a
result of falling international oil prices. U.S. petroleum exploration and
development are down substantially as are private R&D on oil recovery and
the conversion of such resources as coal, oil shale, and tar sands into liquid
transportation fuels or substitutes for petroleum. Domestic petroleum pro-
duction has been in decline the past few years, and petroleum imports reached
50 percent of total consumption in July 1989; imports of crude oil and
refined products are approaching 50 percent of consumption of hydrocarbon
liquids. Also, more rapid deterioration of domestic oil production is certain
under current conditions. Since fuels used for transportation in the United
States are derived almost entirely from crude oil and natural gas liquids,
any use of domestic resources for transportation fuels can help reduce pe-
troleum imports.
Some anticipation of future conditions is required to plan an R&D pro-
gram. The committee considered a number of scenarios to structure its
thinking concerning the U.S. Department of Energy's (DOE) future R&D
program for liquid transportation fuels. The economic scenarios considered
were: (I) oil prices stay at $20/barrel for the next 20 years; (II) oil prices
rise to about $30/barrel between 10 and 20 years from now; and (III) oil
prices rise to about $40/barrel or greater between 10 and 20 years from now
(all prices are in 1988 dollars). The committee believes that Scenario II is
the most probable, while Scenarios I and III are less probable but likely to
occur. In addition, the committee judges that the potential for continued
price volatility is high under any scenario.
Two basic environmental scenarios were considered: (IV) aside from
greenhouse gas emissions, increasingly stringent general emission, waste
disposal, and fuel composition regulations are established during the next
20 years; and (V) because of worldwide concerns about climatic changes,
policies to control U.S. greenhouse gas emissions are implemented. These
two scenarios are not mutually exclusive. Consideration was also given to
government policies that either encouraged domestic production or were
neutral.
Not only is U.S. petroleum production declining, but the industry's em-
phasis is changing. The major oil companies are increasingly investing
abroad, because costs are lower, the potential for successful large oil fields
is higher, and some developing countries are offering special incentives to
encourage development of their petroleum resources. In addition, small
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EXECUTIVE SUMMARY
3
independent companies and individuals in the United States have declined
in number and financial health.
The committee's economic and technical analysis of potential oil and gas
production shows that increased prices and advanced technologies from
expanded R&D can significantly increase U.S. reserves: Technology devel-
opment can also reduce costs (see Chapter 2, Table 2-1~. Such develop-
ments could allow the United States to partially offset current declining
domestic petroleum production trends for many decades. During this time
R&D on technologies for converting nonpetroleum resources into liquid
transportation fuels has the potential for significant cost reductions. How-
ever, under expected market conditions, stimulating U.S. oil and gas pro-
duction in the near term will require government incentives for investment
in as well as the support of R&D.
The committee also conducted a consistent economic analysis of tech-
nologies for converting domestic feedstocks other than petroleum (coal, oil
shale, tar sands, natural gas, and biomass) into transportation fuels (gaso-
line, diesel, aviation, alcohols, compressed natural gas). The entire fuel
cycle was considered, and alternative transportation fuels were compared to
gasoline on a cost per barrel of oil equivalent (costs that would make fuel
from the alternative resource just as expensive to the end user as gasoline
from crude oil). Natural gas and oil prices were assumed to be coupled (see
Appendix D for details) so that natural gas prices increased about 30 per-
cent as much as oil prices; some calculations decoupling natural gas prices
were also performed. All combinations of resources and conversion tech-
nologies considered are more costly than converting domestic petroleum, at
current world prices, into gasoline and diesel fuel (see Chapter 3, Figure 3-
2~. It was assumed that these conversion plants would be built under a
normal (not crash program) construction industry environment, and the costs
used were for second- or third-generation (not pioneer) plants.
Domestic heavy oil conversion, solvent extraction of tar sands, direct
liquefaction of coal, and compressed natural gas appeared to be the most
economically attractive, with estimated costs below $40/barrel (1988 dol-
lars, 10 percent real discount rate; all subsequent costs in this section are in
the same terms). Costs were also calculated for a 15 percent discount rate,
which increases costs by several dollars depending on the technology (see
Chapter 3 and Appendix D).
Gasoline and diesel fuel produced from domestic natural gas, oil shale
conversion, pyrolysis of most tar sands deposits, and methanol produced
from domestic natural gas and underground coal gasification have a higher
range of estimated costs. These different technologies are in different stages
of development, and some estimates are firmer than others. The costs of
methanol and liquids produced by indirect liquefaction are expected to be
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FUEL; TO DRIVE OUR FUTURE
comparable. However, the relatively low prices of natural gas overseas
ensure that the production of methanol or conventional fuels by indirect
liquefaction from natural gas would occur outside the United States, barring
government intervention.
Information available to the committee on the U.S. biomass resource
base and the costs of conversion to liquid fuels suggests that biomass-
derived fuels will cost more than those from fossil fuels. This information
was, however, inadequate to allow as detailed an assessment as was done
with coal and shale. Such an assessment should be undertaken by DOE
with updated information. That aside, it is the committee's view that bio-
mass could supply a substantial but limited fraction of the total require-
ments for liquid fuels, but that for some time to come, fossil fuels will
continue to be dominant in the transportation sector.
With developments in technology, these costs can change. For example,
over the past 10 years the estimated costs for direct liquefaction of coal
have been reduced substantially. The committee made estimates of the
potential for cost reduction if further development of these technologies
occurs. The committee believes that vigorous R&D efforts on coal lique-
faction and oil shale have potential to bring the costs down to the $30/barrel
range: this might begin to make these technologies competitive with petro-
leum within 20 years under the price trends prescribed in Scenarios II and
III. Developments in any of the conversion technologies could change the
relative economics among the different options.
Environmental considerations are also extremely important (as outlined
under Scenarios IV and V). Air and water quality can generally be con-
trolled at a cost that is very dependent on the degree of cleanup required. If
policies are implemented to restrict emissions of greenhouse gases, R&D
will be needed to address this problem. Use of natural gas as a fuel or
biomass (not using fossil fuel for its production and annually grown) as a
feedstock would result in lower CO2 emissions than coal combustion and
liquefaction. Improvements could also come from developing nonfossil
sources for the process heat used, for example, in the direct liquefaction of
coal. Improved fuel economy, although not a topic of the current study, can
have an important national impact by reducing imports and greenhouse gas
. .
emissions.
Also, hydrogen addition or carbon removal is needed to upgrade these
fossil sources from low hydrogen-to-carbon (H/C) ratios to higher H/C trans-
portation fuels. Hydrogen production from water is currently done by re-
jecting oxygen from water by reacting water with carbon-containing fuels.
To eliminate the resulting carbon dioxide, water would have to be split by
heat, electrolysis, or photolysis based on noncombustion sources of energy,
such as solar or nuclear energy. These are more expensive than production
of hydrogen or heat using fossil fuels with current technology.
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EXECUTIVE SUMMARY
s
In the United States there are a number of efforts under way to reduce
ozone formation and particulate concentrations in urban areas by reducing
vehicle emissions. Alternative fuels, such as methanol or compressed natu-
ral gas, may lead to ozone reductions relative to gasoline; however, the
environmental effects of methanol, compressed natural gas, and hydrogen
are uncertain. They also have different toxicity and safety issues associated
with them. Reformulated gasolines may also be helpful in reducing ozone,
as will improved engine design and vehicle emission controls. Environ-
mentally driven constraints on fuel composition could have an important
influence on the choice of conversion process and related R&D programs.
In general, increasing environmental regulations, such as under Scenarios
IV and V, will add to the costs of production and use of transportation
fuels. For example, if the aromatic content of gasoline is reduced, costs for
gasoline made from direct coal liquefaction could increase somewhat. Other
composition changes would be needed to maintain octane number.
R&D strategy should explicitly recognize the high degree of uncertainty
in the U.S. energy and environmental future. It is impossible to predict
petroleum prices. Accordingly, the extent of U.S. oil (and gas) resource
utilization will depend on prices, the nature of the resource, government
actions, and technical developments. If domestic production cannot be held
near current levels, U.S. dependence on petroleum imports will increase.
Even if petroleum prices reach levels that make conversion of nonpetroleum
resources competitive with crude oil, private investment may be slow to
occur because of the risks associated with new technology, concerns of
price volatility, and the residual effects of the twin oil price collapses of
1986 and 1988.
In the face of these energy, technical, and environmental uncertainties, a
diverse and substantial federal R&D program could provide multiple op-
tions and insurance for future domestic production.
RECOMMENDATIONS FOR LIQUID FUELS R&D
The committee has used four criteria for deciding on the appropriateness
of research areas in liquid transportation fuels for the DOE program. They
are: (1) the possible timing of commercial application, Scenario II being
considered the most probable course for oil prices; (2) potential size of the
resource and application; (3) potential for cost reduction and acceptable
environmental impact; and (4) the need for DOE participation, based on the
extent of private sector involvement. The committee divided the research
areas into those of major, medium, and modest funding: These categories
apply to the relevance of the activities to the development of domestic
production technologies for liquid transportation fuels. Some of these re-
search areas might have different funding levels for other applications of
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FUELS TO DRIVE OUR FUTURE
fossil resources such as electric power generation or industrial process heat
(see Chapter 6 for more details). The percentage of the total fossil fuel
budget for liquid fuels is about 25 percent; most of the remainder is related
to coal combustion with electric utility application. The ranking within
category areas is not in priority order.
Under Scenario II the premise that oil prices reach $30/barrel within 10
to 20 years conforms with a target of $30/barrel for coal and oil shale
through pilot projects and studies over the next 5 years. Under Scenario I
the pace of the program could be slowed in comparison with Scenario II,
whereas the more rapid price increase under Scenario III would call for a
more rapid pace. Increased emphasis on curtailing greenhouse gas emis-
sions would result in more emphasis on nonfossil sources of process heat
and hydrogen, whereas increasing environmental constraints would lead to
greater emphasis on environmentally related activities. The recommended
areas of research as proposed are diverse and provide options in the face of
the uncertainty that these scenarios encompass. If the economic and envi-
ronmental situation changes, the program would need to be adjusted.
Major Funding Areas
The resource areas for high funding are domestic oil and gas, coal, and
oil shale resources. These represent large domestic resources, with oil
R&D also providing a means of achieving a significant U.S. production
over a period of time when coal and oil shale technologies can be further
developed. The cost reduction potential for converting these resources into
liquid transportation fuels as well as the need for a DOE role also make
them important areas. The committee has not made a detailed analysis of
required federal funding for R&D activities for these resources. They are
generally of major importance, and this should be reflected in the relative
funding levels among these areas.
There is less need for DOE funding of R&D on conventional gas produc-
tion since activity outside DOE is expected to continue and possibly in-
crease, but DOE should continue its work on unconventional gas recovery.
Significant funding and attention are also recommended for research related
to fuel composition and its environmental and end-use consequences.
1. Participation in R&D and Technology Transfer for Oil and Gas
Production. Significant additions can be made to U.S. oil reserves with de-
velopment of advanced recovery technologies and greater understanding of
complex reservoirs. The DOE program should be in balance with other
energy R&D areas and pursued in coordination with industry, both inde-
pendents and major oil companies, preferably with direct industry participa-
tion. An effective program of information and technology dissemination is
needed.
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E:XECUTWE SUMMARY
2. Production from Coal and Western Oil Shale. These vast U.S. re-
sources have the potential to be converted into liquid fuels in the $30/barrel
of oil equivalent category. A goal should be established to reach this cost
while satisfying environmental requirements. For coal liquefactions, pilot
plant and engineering studies should be conducted during the next few
years to confirm that this goal can be achieved. If so confirmed, the DOE
should take the lead in working with industry to further develop the tech-
nology with the design of a larger pilot plant (500 to 1000 bbl/day). Initia-
tion of construction would depend on a new assessment of oil availability
and costs at that time.
The current shale program is too small compared with the coal liquefac-
tion program and should be expanded. A field pilot plant should be built
over the next 5 years to test advanced retorting technologies that can show
the potential for meeting environmental requirements and for achieving the
$30/barrel oil equivalent cost category.
Because manufacture of transportation fuels from both of these resources
produces more carbon dioxide than processes based on oil, natural gas, or
some biomass processes, a special effort should be made to identify pos-
sible opportunities, such as using nonfossil sources of energy (e.g., nuclear
or solar based) for process heat or hydrogen production, for reduction in
emissions of related greenhouse gases from the conversion of coal and oil
shale into liquid transportation fuels.
3. Environmental and End-Use Considerations. There are many un-
certainties remaining on the environmental and end-use impacts of using
alternative fuels such as methanol and compressed natural gas. The DOE,
other agencies, and the private sector should work together to develop a
better understanding of these impacts and characterize different fuel- engine-
emissions control combinations to provide guidance on emission goals, their
impact on vehicle performance and cost, and how they will affect fuel
formulation and fuel composition goals for R&D on production technologies.
Moderate Funding Areas
4. Coal-Oil Coprocessing. Coprocessing of heavy oils or residuum
with coal may offer an opportunity for the introduction of coal as a refinery
feedstock. It is expected to have rather limited application unless important
synergisms between coal and oil occur. Funding of basic bench-scale re-
search should be continued over the next 5 years to define the extent of
synergism when coal and residuum are processed together, followed by a
thorough economic analysis quantifying the impact of any synergism.
5. Tar Sands. The tar sands resource can potentially make an impor-
tant domestic contribution to liquid fuels production, and a large fraction is
government owned. Liquid transportation fuels can potentially be produced
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FUELS TO DRIVE OUR FUTURE
from a portion of this resource at $25 to $30/barrel oil equivalent with a
hydrocarbon extraction process. Further, there is little industry activity in
this area. Over the next 5 years candidate processes should be evaluated,
and, if promising, further development and demonstration in a field pilot
plant should be undertaken.
6. Petroleum Residuum, Heavy Oil, and Tar Conversion Processes.
The resource base is substantial, but these processes have been under inten-
sive development in both the domestic and foreign petroleum industries.
The DOE should support a laboratory program that provides basic informa-
tion at the molecular level to augment the private sector effort.
7. Biomass Utilization. Use of some biomass resources is one path-
way that can result in less net release of greenhouse gases than fossil fuels
contribute. Biomass supply constraints and costs will probably require con-
tinued use of fossil fuel resources. Use of biomass to produce liquid fuels
directly is of continuing interest; however, by integration of processing of
biomass and fossil resources (e.g., by generating process hydrogen from
biomass instead of coal), a greater reduction in CO2 from the combined
processes may be achievable (as suggested in recommendation 2~. There is
little industry activity in this area. It is, therefore, recommended that re-
search and systems studies be conducted on the optimum integration of
biomass with fossil fuel conversion processes as well as for stand-alone
. .
biomass conversion processes.
8. Coal Pyrolysis. The current DOE program is aimed at production
of pyrolysis liquids and metallurgical coke and does not have a high prior-
ity for liquid transportation fuels. Coal pyrolysis combined with production
of synthesis gas has the potential for increasing liquid yields in conversion
processes for liquid transportation fuels. Since there is little privately funded
R&D in this area, medium priority is placed on a program of basic pyrolysis
research. Systems studies should investigate integrating pyrolysis with di-
rect coal liquefaction.
Modest Funding Areas
9. Processes for Producing Methanol, Methanol-derived Fuels, or Fis-
cher-Tropsch Liquids from Synthesis Gas. Synthesis gas (carbon monoxide
plus hydrogen) can be made from such feedstocks as natural gas or coal and
subsequently converted into hydrocarbon liquids or methanol. Industry is
vigorously studying these processes, and production is expected to be out-
side the United States, where natural gas prices are low. These factors
discourage DOE work in this area beyond fundamental and exploratory
research.
10. Direct Methane Conversion. This process is being studied at the
bench scale at various institutions, but potentially significant cost reduc-
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E:XEf7UTIVE SUMMARY
9
lions have not been demonstrated. If breakthroughs are achieved, produc-
tion would occur in foreign locations. DOE work should be limited to
continuing fundamental research.
11. Eastern Oil Shale. Although widespread, most eastern oil shale is
low grade, occurs in thin seams, has a high stripping ratio for mining, and is
inherently more expensive than western shale. The committee judges that
the economic use of this resource will occur much later than coal or western
oil shale. Hence, no development is recommended at this time.
Representative terms from entire chapter:
transportation fuels
