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1 Introduction OBJECTIVE OF THE STUDY The objective of this study is to outline for the U.S. Department of Energy (DOE) a broad S-year R&D program aimed at producing liquid transportation fuels from plentiful U.S. energy resources (see Statement of Task, Appendix A). In a 1988 conference report, Congress enunciated concerns about increasing U.S. dependence on imported petroleum and the expected predominance of petroleum-based liquid fuels in transportation for the foreseeable future; it was also noted that improvements in coal liquefac- tion technologies had reduced costs (U.S. Congress, 1988a). R&D for producing liquid transportation fuels should have several goals: greater use of domestic resources relative to crude oil imports; technologies that are viable in the face of changing conditions, such as environmental constraints; protecting the United States against the vagaries of the world oil market; and strengthening U.S. energy R&D and international competi- tiveness. The choice of liquid transportation fuels in the United States is relatively narrow: gasoline, diesel, methanol, ethanol, aviation fuels, and liquid pe- troleum gas; the committee also briefly addressed compressed natural gas. The environmental implications of transportation fuels are becoming in- creasingly important in the debate on urban air quality. The committee considered a variety of plentiful domestic resources that could serve as feedstocks for these fuels: crude petroleum amenable to advanced recov- ery, heavy oils, tar sands, oil shale, coal, natural gas, and biomass. In identifying R&D directions the committee addressed the relative costs of various conversion technologies and identified opportunities for cost reduc- tion through R&D. 10

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INTRODUCTION 11 The goals of reducing petroleum imports and using domestic resources for transportation fuels require consideration of broad public policies yet to be resolved, a subject outside the scope of the committee's charter. For example, the federal government could create financial incentives for greater investment in domestic exploration and production. Such issues are not addressed by this study. Recommendations are made without the benefit of a consistent and broad U.S. energy policy, of which the production of liquid transportation fuels is only one aspect. The committee addressed R&D for production technologies with the notion that the increased use of U.S. re- sources could make a major contribution toward limiting the growth of petroleum imports. U.S. R&D FOR LIQUID FUELS PRODUCTION FROM DOMESTIC RESOURCES The DOE's Office of Fossil Energy is the primary federal organization that sponsors R&D directed toward producing and using fossil fuels (Table 1-19. According to congressional testimony on the Office's 1990 fiscal year budget, about $110 million of the 1989 budget, or 29 percent, was related in some way to liquid fuels. The petroleum budget included R&D on petro- leum production as well as oil shale conversion. R&D on coal, however, involved coal combustion to a significant degree, although some of this research applied to producing liquid fuels. For example, developments in coal preparation can benefit coal liquefaction plants, and developments in coal gasification can be used in manufacturing hydrogen needed for direct or indirect liquefaction of coal. In addition to the above programs in the DOE's Office of Fossil Energy, the DOE's Office of Conservation and Renewable Energy sponsors a $13 million/year program on biofuels energy technology. A major part of this work is applicable to liquid transportation fuels production. The major oil companies continue to invest in the development of petro- leum resources, but the twin oil price collapses of 1986 and 1988 led to significant drops in domestic exploration and development (Megill, 1989; U.S. Congress, 1987~. In the past 5 to 7 years there has been a dramatic decline in industrial R&D on using domestic coal and oil shale for the production of liquid transportation fuels. Only a few companies now ap- pear to have active programs in this area, and some of them are subsidized by federal funds. These efforts include the following: Union Oil is operating a commercial demonstration of oil shale retort- ing technology with a federal subsidy. Exxon has announced that it is continuing to develop coal liquefaction and oil shale retorting technologies with its own funds.

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12 F[JEl~ TO DRIVE OUR FU7IJRE TABLE 1-1 DOE's Office of Fossil Energy R&D Program Budget (current dollars in millions) FY 1990 FY 1988 FY 1989 Appro- Appro- Senate priations priations Request House Panel Coal Budget Control technology arid coal preparation $43.62 $48.93 $32.26 $60.10 $53.13 Advanced technology R&D 24.94 25.56 25.54 26.18 29.32 Coal liquefaction 27.13 32.39 9.66 37.68 33.26 Combustion systems 25.17 26.70 15.77 35.27 30.17 Fuel cells 34.20 27.53 6.50 38.40 29.80 Heat engines 17.95 22.83 8.92 20.02 21.22 Underground gasification 2.78 1.37 0.43 0.43 0.83 Magnetohydrodynamics 35.00 37.00 0 42.90 37.00 Surface gasification 22.99 21.56 8.74 19.64 29.88 Total coal $233.78 $243.87 $107.82 $280.62 $264.61 Petroleum Budget Enhanced recovery $16.54 $23.58 $18.24 $27.59 $28.46 Advanced process technology 3.43 4.20 4.62 3.60 3.60 Oil shale 9.50 10.53 1.68 8.18 10.88 Total oil $29.47 $38.31 $24.54 $39.37 $42.94 Gas Budget Unconventional gas $10.53 $11.38 $4.07 $13.17 $15.82 Cooperative R&D Ventures $0 $0 $0 $4.80 $4.80 Total gas $10.53 $11.38 $4.07 $17.97 $20.62 Miscellaneousa $53.22 $88.03 $26.15 $84.72 $81.17 Total fossil R&D $327.00 $381.59 $162.58 $422.68 $409.34 aIncludes plant and capital equipment, program direction, envirorunental restora- tion, fuels conversion, and past year's offsets. Numbers may not add due to round- ~ng. SOURCE: July 31, 1989, Clean-CoaVSynfuels Letter.

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INTRODUCTION 13 Amoco and Kerr-McGee are participating in DOE's direct coal lique- faction program using the test facility at Wilsonville, Alabama. Occidental Petroleum is proposing a cooperative program with DOE to demonstrate a modified in situ oil shale retorting process. The New Paraho Shale Oil Company is continuing the development of Paraho retorting technology. Their initial product focus is an asphalt-pav- ing additive that may justify near-term commercialization. This product is being tested with government funds. Texaco and Dow Chemical have commercialized coal gasification tech- nologies, both with federal assistance. Shell Oil is operating a demonstra- tion unit using coal gasification technology. Although not the initial in- tended use, these technologies can be used as the first step of an indirect coal liquefaction facility and hydrogen generation for the production of liquid transportation fuels. If these coal and oil shale technologies need to be ready for commerciali- zation in the next 10 to 20 years, the federal government will be required to play a major role in furthering the RD&D efforts. . CURRENT CONCERNS ABOUT ENERGY AND THE U.S. TRANSPORTATION SYSTEM In 1988 the U.S. transportation sector accounted for 63 percent of total U.S. petroleum consumption and will depend almost completely for the foreseeable future on liquid fuels for spark ignition (7.26 MMbbl/day of gasoline) and diesel engines (1.26 MMbbVday of diesel fuel) and for air transport (1.04 MMbbl/day of jet fuel) but not for electric trains and some pipelines (EIA, 1989a). Although some efforts are under way to use com- pressed natural gas and electric vehicles in some urban areas, any transition from the use of liquid transportation fuels is likely to be slow. Dependence on Imported Petroleum There are concerns about the increasing U.S. dependence on imported petroleum, because the economy becomes more vulnerable to political events in oil-producing regions of the world and because the economic costs of these imports continue to increase. The desire for increased supply security has motivated military and political involvement in those regions of the world deemed vital to national security. However, sources of oil have diversified, and Saudi Arabian oil accounts for the maximum from a single country with 1.062 MMbbVday in 1988: Total Arab OPEC oil accounted for 1.828 MMbbVday. Establishment of the U.S. Strategic Petroleum Re- serve of about 550 MMbbl has also reduced this vulnerability. World oil prices rose substantially in the 1970s and early 1980s stimu-

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14 FUELS TO DRIVE OUR FEUD rating conservation and oil exploration and production worldwidebut world oil prices plummeted in 1986 and 1988. These drops in prices have led to a significant decline in exploration, development, and production in the United States. U.S. crude oil production has fallen rapidly in the last few years, with 8.68, 8.35, and 8.18 MMbbl/day in 1986, 1987, and 1988, respectively (EIA, 1989a). Total production of petroleum liquids has also fallen from 10.9 MMbbl/day in 1986 to 10.51 MMbbl/day in 1988, while crude oil imports have risen from 4.18 MMbbl/day to 5.12 MMbbl/day. At the same time total consumption of oil products has risen steadily, reaching about 17 MMbbl/day in 1988. In July 1989 imports of petroleum products were 8.6 MMbbl/day, while total demand was about 17 MMbbl/day; thus, imports represented more than 50 percent of total demand (API, 1989~. Annual net imports were also projected to increase in 1989. The Energy Information Administration (EIA) anticipates that these trends will continue at least through the year 2000 (EIA, 1989a). EIA's base case forecast, assuming rising petroleum prices in the year 2000 to $28/barrel (in 1988 dollars) and enhanced vehicle efficiency, indicates that net imports (10.2 MMbbl/day) will become 55 percent of total U.S. consumption (18.6 MMbbl/day) by the year 2000. This situation could be more extreme if world oil prices remain low, further reducing domestic production and in- creasing demand. U.S. proved petroleum reserves of about 27 billion bbl pales in compari- son to the rest of the world's total of about 860 billion bbl (EIA, 1989a). However, U.S. total petroleum resources are quite extensive and could, if vigorously exploited, replace these reserves for a number of decades (see Chapter 2~. Using these resources would require some combination of higher prices, advanced technologies, and government incentives. Local Air Quality Local air quality has become an important issue because many U.S. met- ropolitan areas fail to comply with national ambient ozone standards. Gaso- line vehicles contribute to ozone formation by emitting volatile organic carbon compounds and oxides of nitrogen. The issue has entailed calls for the use of fuels different from gasoline. In some areas, such as the Los Angeles Basin of California, alternative fueled vehicles (e.g., those using methanol, natural gas, or electricity) are being investigated to determine their potential air quality effects. In other areas oxygenated gasolines are being required to reduce wintertime carbon monoxide emissions. U.S. die- sel particulate standards have been promulgated for 1991 and 1994 and may necessitate the use of alternative fuels in some diesel engines (e.g., urban buses). Efforts are also under way to reformulate gasoline to facilitate improved vehicle emission control systems. These trends may affect the types and quantities of future transportation fuels.

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INTRODUCTION 15 Global Warming Another major environmental issue is increasing man-made emissions into the atmosphere of carbon dioxide, nitrous oxide, methane, chlorofluoro- carbons, and other gases, now collectively referred to as greenhouse gases because of their potential global warming effect. There are many uncertain- ties about the extent, rate, and potential impact of global warming. If greenhouse gases do in fact cause significant adverse changes in global weather patterns, global cooperation may be necessary to reduce these emis- sions and change future transportation fuels and the technologies and feed- stocks for their production. INCREASING THE USE OF DOMESTIC RESOURCES By virtue of its mandate, the committee addressed opportunities on the supply side for converting domestic resources into liquid transportation fuels. Recent sustained and volatile low crude oil prices in world markets have resulted in decreased U.S. production. Private sector investment in the conversion of U.S. nonpetroleum resources into liquid transportation fuels is therefore constrained by the high costs relative to oil prices. Even if oil prices rose, the private sector would still hesitate to invest in such technolo- gies given the uncertainties of future oil prices. The committee recognizes that fuel efficiency improvements would reduce import dependence, but such matters were not part of this study. Environmental concerns may also affect the balance of domestic production and imports because these partly determine the desirability of various fuel conversion technologies and their feedstocks. Proposals have also been discussed to convert remote gas in various regions of the world into methanol for transportation (U.S. DOE, 1988~. This might diversify U.S. supplies but not solve the import problem. U.S. petroleum and natural gas reserves are functions of prices, extrac- tion technology costs, and potential environmental impact (Chapter 2, this volume; Kuuskraa et al., 1989; AAPG, 1989a,b). Proved reserves of petro- leum at current conditions are about 27 billion bbl. Future potentially recoverable oil estimates vary widely depending on crude oil prices and technology. Table 1-2 presents petroleum reserve estimates for $24/barrel and $40/barrel with advanced technology (these figures include heavy oil and tar sands exploitation; see also Table 2-1 for a broader range of esti- mates). Natural gas reserve estimates for $3.00 per thousand cubic feet (Mcf) (1988 dollars at the wellhead) range from about 600 trillion cubic feet (Tcf) to 800 Tcf; at $5.00/Mcf reserves increase to between 900 and 1400 Tcf. (Note that in 1988 U.S. consumption of petroleum products was about 6.2 billion bbl, U.S. natural gas consumption was about 18 Tcf t3.25 billion bbl oil equivalent], and U.S. coal consumption was about 870 mil- lion short tons t3.37 billion bbl oil equivalent] [EIA, 1989a]~.

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16 FUEI~; TO DRIVE OUR FI7TURE TABLE 1-2 Estimates of U.S. Hydrocarbon Resources and Reserves Resource Approximate Amounts Petroleums Total resource base Proved reserves Recoverable at $24/barrel Recoverable at $40/barrel Natural Gas Proved reservesb For $3.00/Mcf For $5.00/Mcf Oil ShaleC Western Eastern coald Geological resource Demonstrated reserve base 484 billion bbl 27 billion bbl 76 to 106 billion bbl 97 to 143 billion bbl About 360 Tcf or 65 billion bbl oil equivalent (hoe) From 600 to 900 Tcf or 110 to 160 billion bee From 800 to 1400 Tcf or 140 to 250 billion bee 560 to 720 billion bbl 65 billion bbl 2.57 million tons or about 9.8 trillion hoe 490 billion tons or about 1.9 trillion boe aKuuskraa et al. (1989~. Includes conventional petroleum, heavy oil, and tar sands. Proved reserves also include heavy oil. Recoverable numbers are for implemented alla advanced technologies at the prices indicated. Also see Table 2-1. bThe lower end of the resource estimates is based on existing extraction technology and the higher end on advanced technology. See Table 2-2. CSee Appendix C and section on oil shale in Chapter 4. REIN (1984~. The U.S. resource base (including "in-place" and resources ultimately recoverable at some unspecified price) of heavy oil (oil with a viscosity between lOO and 10,000 cp) not yet produced is about 85 billion bbl, most of it in California and Alaska. The largest tar sands deposits (a bitumen deposit with greater than 10,000 cp in situ viscosity) occur in Utah and Alaska, with smaller deposits in Alabama, Texas, California, and Kentucky. Measured and speculative resources are estimated at about 22 billion and 41 billion bbl, respectively, for a total of about 63 billion bbl. (About 54 billion bbl represent deposits of 100 MMbbl or more.)

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INTRODUCTION 17 The largest and richest oil shale (an impure marlstone consisting of sili- cate and carbonate rock and the organic constituent kerogen) deposit is in the Piceance Creek Basin (Colorado), a part of the Green River formation that occurs in Colorado, Utah, and Wyoming. The bulk of the resource is on government land. Thinner and lower-grade shales occur in the eastern United States. Theoretical conversion of in-place western oil shale re- sources ranges from 560 billion to 720 billion bbl; eastern shale resources are estimated at around 65 billion bbl (Lewis, 1980; Riva, 1987~. The U.S. geological resource of coal is immense and widely distributed, and the reserve base that is technically recoverable is about 490 billion tons (1.9 trillion bbl of oil in terms of energy equivalent). Full development of underground gasification could extend this resource base. There is considerable uncertainty regarding the biomass resource base in the United States. One estimate is that biomass resources might yield, as a maximum, assuming minimal disruption of the agricultural and silvicultural industries, 1 billion bbl/year (3 MMbbl/day) of hydrocarbon fuel equiva- lents made up of methanol, ethanol, vegetable oils, and others (Sperling, 1988~. Emerging estimates suggest greater potential in the resource base than indicated in the above reference. The estimates and the economics of their conversion ought to be fully assessed by DOE, particularly with regard to increases in costs and impacts on agriculture and the environment as the resource base is fully utilized. Information that was available to the com- mittee on the practical limits to the production of biomass fuels (i.e., with- out undue stress on the environment and on agriculture) indicate that bio- mass could supply a substantial but limited fraction of the total require- ments for liquid fuels. As such, fossil fuels will continue to be dominant in the transportation sector for some time to come. Conversion of most nontraditional domestic resources into liquid trans- portation fuels is not economic at current world crude oil prices of about $20/barrel (average refiner acquisition costs in 1988 dollars) or less but could become competitive as oil prices rise. The DOE's R&D program should pursue those approaches that may en- able the economic exploitation of domestic energy resources to produce liquid transportation fuels. The emphasis and pace of such a program ought to be conditioned by the national need to adjust to increased environmental constraints and uncertain world oil prices and by the nature and extent of R&D that might be undertaken independently in the private sector. PLANNING SCENARIOS To address the formulation of DOE's program, the committee considered different planning scenarios, with attention to world oil price trends, envi- ronmental concerns, and national security policy. These scenarios are not

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18 FUELS TO DRIVE OUR FUTURE intended as forecasts but provide a context for planning a federal R&D program. In evaluating the R&D needs for transportation fuels, the com- mittee compared the attractiveness of different technological options in light of these various possible scenarios. Economic Scenarios World oil prices have been the primary determinant of U.S. liquid fuel prices for decades. This connection is likely to hold for the foreseeable future. Recent experience exemplifies both the uncertainties about price trends and the unreliability of predictions. Although energy economists have learned important lessons from the past, they cannot predict oil prices with confidence. One school of thought suggests that future world oil demand will grow, leading to increasing OPEC control of the market with prices rising above current levels. Another school of thought believes that substitutes for OPEC oil production, including oil and natural gas from non- OPEC nations, could induce relatively low and stable oil prices. The com- mittee has not ruled out either school of thought. Since meaningful plan- ning depends on projections of possible future world oil prices, it must address a wide range of projections. The EIA annually prepares three plausible projections of energy prices extending through the year 2000 (ElA, 1989a). The most recent forecasts present three world oil price trajectories reaching, for the year 2000, about $22, $28, and $35/barrel of crude oil (in 1988 dollars) imported to U.S. refiners (see Table D-2 in Appendix D). For investment and R&D planning a time horizon greater than 10 years is needed. For purposes of this study the EIA study results were extended as follows: Scenario I. Future world oil prices remain less than or equal to about $20/barrel (in 1988 dollars) over the next 10 to 20 years. Scenario II. Future world oil prices rise to about $30/barrel (in 1988 dollars) over the next 20 years. Scenario III. Future world oil prices rise to about $40/barrel or greater (in 1988 dollars) over the next 20 years. Crude oil prices are likely to be volatile, owing largely to war, revolu- tion, or other political instability; to actions by exporting countries; and to the delicate supply-demand market balance easily upset by temporary ups and downs in oil output and in buyer expectations. Significant price excur- sions could be expected to occur within each of these scenarios notwith- standing their long-term trends. Yet while actual prices may significantly influence industry investment decisions for producing liquid fuels, such variations should not perturb the federal R&D program on a short-term basis. The government program should be based on long-term fundamen- tals.

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INTRODUCTION 19 Environmental Scenarios Environmental concerns relating to liquid fuel production, transportation, and end use are complex and increasingly significant to both U.S. citizens and the federal government. Many of these concerns can be dealt with by employing various improved control technologies and increased safeguards against accidents; however, control technologies increase both capital and operating expenses. Concerns about greenhouse gases resulting from production and use of hydrocarbon fuels force consideration of feedstock choices and alternative sources of heat and energy for fuel manufacture. For R&D planning the following two scenarios were chosen to reflect actions that might be taken to protect the environment. Scenario IV does not include greenhouse gases, and the two scenarios are not necessarily mutually exclusive. Scenario IV. Much more stringent general emissions and waste disposal regulations are established. Scenario V. Controls are placed on U.S. emissions of greenhouse gases because of concerns about global climate change. Energy Security Scenarios The last planning dimension is government policy on energy security. In this area various issues must be considered, particularly national security concerns about the growing dependence on foreign oil. For simplicity the committee chose two scenarios for the purpose of this study: Scenario VI. Government policies neither encourage nor discourage liq- uid fuel production from domestic resources. Scenario VII. Government policies encourage liquid fuel production from domestic resources. Theimplications of these scenarios for a federal R&Dprogram on conver- sion technologies for liquid transportation fuels are discussed in Chapter 6. ORGANIZATION OF THE STUDY AND REPORT In evaluating the various conversion technologies and appropriate R&D that should be pursued, the committee was helped in several ways. Consult- ants from ICE Resources, Inc. (Fairfax, Virginia), summarized estimates of economically recoverable U.S. reserves and resources of petroleum and natural gas with committee guidance (Kuuskraa et al., 1989~. Chapter 2 of this report addresses U.S. oil and gas resources, the R&D that can reduce costs and improve production, and the relationship of prices to U.S. re- serves and supply. Costs reported in the literature and potential cost reduc-

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20 FUEL; TO DRIVE OUR FUTURE lions for converting various resources into transportation fuels were sum- marized and adjusted to a comparable basis by SEA Pacific, Inc. (Mountain View, California) (Schulman and Biasca, 1989~. These cost estimates served as a basis for the committee to continue the analysis and refine the costs. A workshop was also held to gather information from a wide variety of ex- perts. Chapter 3 presents the cost results, including some of the end-use issues, such as those related to alternative-fueled vehicles and fuel distribu- tion, that can affect the costs of various fuels. Chapter 4 addresses the present state of conversion technologies, envi- ronmental issues related to production, and R&D directions for the DOE. Chapter 5 addresses the environmental implications of using alternative fuels. Chapter 6 provides an integrating discussion and suggests general directions for a 5-year DOE R&D program in the context of the scenarios considered.