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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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2 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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4 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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6 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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8 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.