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6 Major Conclusions and Recommendations for R&D on Liquid Transportation Fuels OVERVIEW World oil resources are large enough that low-cost production of oil is expected well into the 21st century, although cartel action will likely keep international oil prices substantially above cartel production costs. While the United States has plentiful fossil fuel resources, production costs for transportation fuels derived from most of these resources are currently greater than those from most imported petroleum. The level of oil prices of recent years, combined with the expectation of continued price volatility, has sub- stantially decreased private investment in exploration, development, and research on domestic resources. In time, however, imported oil prices may increase to the point where a large portion of U.S. domestic resources are again attractive, especially if the cost from domestic resources can be low- ered. A continued decline in private investment in domestic oil and gas pro- duction is expected over the near term, however. Without government assistance this decline will result in continually decreasing domestic pro- duction. Government assistance can take two forms: (1) improved finan- cial incentives for investment in domestic production and (2) support of research, development, and demonstration of technologies for lower-cost production from domestic resources. The first form of assistance would be needed if the United States chose to slow the near-term decline in oil and gas production and to stimulate the use of advanced techniques for increasing resource recovery. Over the longer term, support of continuous R&D in advanced oil and gas recovery and in pioneering coal liquids and shale oil developments would accelerate the use of these resources. 115

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116 FUELS TO DRIVE OUR Fl1TURE This study focuses on the second of these approaches. Emphasis is placed on production of carbon-containing liquid transportation fuels and the use of fossil combustion heat to drive the processes. Under Scenario V (controls on greenhouse gas emissions), presented in Chapter 1, energy alternatives other than fossil fuels would need to be considered. These are being addressed in a concurrent study by the National Academy of Sci- ences, Committee on Alternative Energy R&D Strategies. Reduction of carbon dioxide emissions for processes considered in the present report could be accomplished by using nonfossil sources of energy for process heat and hydrogen production. These are discussed briefly later, but the committee was not able, because of time constraints, to investigate these processes in technical detail. Federal R&D at the U.S. Department of Energy (DOE) is an important factor in advancing technology to decrease the costs and environmental impacts of producing liquid transportation fuels from domestic resources. Several issues must be considered in establishing the nature and size of a DOE R&D program for producing such fuels: expected timing of commercial application; potential size of the application; potential for cost reduction, improvements in reliability; and dimin- ished environmental impacts; and the need for DOE participation. R&D Issues Timing of Commercial Applications The timing of commercial application of new technology depends criti- cally on production costs and environmental impacts. These costs depend on the technology but are also strongly influenced by environmental consid- erations and by state and federal taxes and tax credits. The scenarios for the future presented in Chapter 1 were developed to provide a framework for the committee's recommendations. The scenarios cover a range of pos- sibilities, whose relative probabilities are inevitably matters of judgment. For research planning the committee judged the most probable economic scenario to be that future oil prices would be between $20 and $30/barrel (in 1988 dollars) within 20 years from now (Scenario II). However, the likelihood that prices would either remain under $20Abarrel or exceed $30/ barrel appears high enough to necessitate program recommendations that are reasonable given any of the three scenarios presented in Chapter 1.

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CONCLUSIONS ED RECOMMENDATIONS Potential Size of the Applications Potential size of the applications depends on the size and geographical distribution of the resource. A geographically dispersed resource offers more widespread commercial and employment opportunities and is less vulnerable to local disruption, regulations, and restrictions. 117 Potential for Cost Reduction The potential for cost reduction is generally least for mature and techni- cally advanced operations. However, for very large scale activities, such as oil and gas production, even small percentage improvements can justify extensive research. Need for DOE Participation U.S. R&D in transportation fuels production is the sum of industry- supported and government-supported activities. The role of DOE is to help ensure that the major national needs for technology are met and that poten- tial benefits of domestic production, not the subject of R&D by private firms, are pursued where justified by the above criteria and can be realized. Where there is substantial and continuing industrial involvement, the role of DOE is generally to support long-range and relevant basic research and in some cases to participate in large demonstration programs, such as the Clean Coal Program. In areas where commercial projects are far in the future but where continued technological advances are in the national interest, it is logical for DOE to take a lead role. RESOURCES Petroleum, Heavy Oils, and Tar Projections of the availability of petroleum, heavy oils, and tar from domestic resources, summarized in Table 6-1, show that, for an oil price of roughly $25/barrel, current production rates could be maintained for some decades. Even lower but stable prices from $20 to $24/barrel would en- courage production from resources that are still substantial. A higher oil price ($40 to $50/barrel) would make possible the more extensive develop- ment and use of advanced oil recovery techniques. Scenario I (with future oil prices less than or equal to about $20/barrel) would result in a continued decline in U.S. oil production, while in Scenario II (prices reach $30/barrel within 20 years) or Scenario III (prices reach

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118 FUEI~; TO DRIVE OUR FI7TURE TABLE 6-1 Estimated Remaining Economically Producible Crude Oil Resourcesa Current Technology $24-$25 $40-$50 Advanced Technology "L" $24-$25V $40-$50 Billion barrels oil Ratio of resource base to annual production 75-76 95-140 25 3247 105-129 140-247 35-43 47-82 aSee also Chapter 2. bOil price ($tbarrel). $40/barrel within 20 years), U.S. oil production decline could be reduced for at least the 20-year period of the scenario. Scenario IV (imposition of more stringent environmental controls) seems quite probable. In general, greater environmental controls will increase the costs of exploration and production and will delay the application of ad- vanced oil recovery techniques. Closing frontier areas for exploration and production also reduces the amount of oil available at a given price and shortens the time over which domestic oil could supply a major fraction of U.S. transportation fuels. These trends would increase the need for imports. Energy efficiency improvements can be very important and can help reduce imports. Scenario V (greater greenhouse gas controls) would tend to miti- gate against thermal enhanced oil recovery and CO2 enhanced oil recovery using fossil CO2. For Scenario VI (no government encouragement of domestic oil produc- tion), U.S. oil production decline will continue for oil prices below $20/ barrel. Even under the price increases of Scenario II and Scenario III, the stabilization of production would require years. Thus, if the U.S. govern- ment wanted to retard domestic oil production declines, some form of gov- ernment encouragement would be required. Not only is U.S. petroleum production declining, but industry emphasis is changing. The major oil companies are increasingly investing abroad where costs are lower, the potential for successful large oil fields is higher, and where developing countries are offering special incentives to encourage development of their petroleum resources. In addition, the number and financial health of small independent companies and individuals has de- creased. While the traditional form of industry encouragement is through tax in- centives, improved technology and its transfer through cooperative efforts will be of increasing importance, especially for the independent operators who, in general, do not have significant R&D programs. To the extent that licensing of technology and use of expert consultants do not facilitate tech-

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CONCLUSIONS AlID RECOMMENDATIONS 119 nology transfer to the independent sector, significant advice may be neces- sary to develop and make available advanced technology to this segment of the domestic oil-producing industry. Oil cannot be produced to exhaustion at a constant rate but generally declines slowly over time. Even if constant fuel consumption could be maintained, it seems reasonable to expect that significant supplemental sources (either domestic or imported) of transportation fuels will be needed 20 to 30 years from now. At this time it is expected that R&D on fuels from coal and oil shale would reduce the costs to the level where they could compete with petroleum-based fuels. Natural Gas and Synthesis Gas Economically producible resources of natural gas for two price levels and different levels of technologies are summarized in Table 6-2. An ex- pansion in the resource base of more than 100 percent is projected at the high price, given use of advanced technology. Significant amounts of gas could therefore be made available as an alternative source of transportation fuels. There are several approaches to exploit this resource: . use compressed gas directly for transportation fuel; displace fuel oil from power generation and industrial fuel use, mak- ing it available for conversion to transportation fuels; manufacture hydrogen and carbon monoxide for production of trans- poration fuels; and possibly use advanced, low-cost processes for direct conversion to liquid transportation fuels. Compressed natural gas vehicles, while not expected to be a significant part of the market because of short vehicle range and onboard storage con- stra~nts, have recently attracted much interest as a relatively low polluting alternative for urban fleet use. TABLE 6-2 Estimated Remaining Economically Producible Natural Gas Resources Current Technology Advanced Technology $3a $sa $3a $sa Tcf Gas (Bbbl oil equivalent) Ratio of Resource Base to Current Production 595 (107) 770 (140) 880 (160) 1,420 (256) 33 43 50 80 aWellhead gas price ($/Mcf).

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120 FUELS TO DRIVE OUR FUTURE A rise in oil price to the range of $25 to $40/barrel would make conver- sion of heavy fuel oil and heavy oil to transportation fuels more economi- cally attractive. This use is expected to grow. Tar sands bitumen could also be upgraded. Natural gas could be used as the hydrogen source for hydroconversion (which increases liquid yields) of these heavy fuels. Natu- ral gas consumption would also increase from the replacement of the heavy fuel oil that might otherwise be used in power generation and industrial boilers and heaters. Coal liquefaction and methanol and Fischer-Tropsch (F-T) liquid synthe- sis from coal are also potentially very large consumers of hydrogen or synthesis gas. For example, the production of the equivalent of 1 billion bbVyear (2.74 MMbbl/day) of crude oil (30 percent of current production) would require about 40 percent of the gas now produced. Such an increase could come from domestic resources, but it would require greatly acceler- ated exploration and production and would increase the cost of natural gas. Methane would likely be used for hydrogen in the initial stages of fuels manufacture from coal and shale because gas price increases will probably lag oil price increases, and gas prices may be initially lower than those of the base case used in the economic studies. For the longer term, however, coal gasification may be more economical than use of natural gas to supply hydrogen for coal and shale liquefaction. Estimated costs for alternative conversion processes to make transporta- tion fuels are shown in Table 6-3. Table 6-3 also illustrates the extreme sensitivity of methanol costs to natural gas costs. In the process of produc- ing methanol, coal or natural gas is first converted to synthesis gas. The conversion of coal to syngas is a major cost; high natural gas prices also make natural gas conversion to syngas expensive. Methanol synthesis con- sumes more synthesis gas than coal liquefaction and tends to be more ex- pensive for equal synthesis gas costs. The natural gas price of $4.89/Mcf, corresponds to the historical domestic relationship between gas and fuel oil prices and to a price where coal gasification is expected to be competitive as a methanol source. For the lower price of $3.00/Mcf, gasoline from heavy oils is competitive. At still lower prices, corresponding to low value remote gas, imported methanol would be less expensive than methanol pro- duced domestically from higher priced gas indicating that, unless assisted by legislative action based on environmental and energy security considera- tion, fuel methanol will be imported. For the longer term, when natural gas will be expensive, advances in the manufacture of synthesis gas from coal could reduce methanol costs, and a DOE program in syngas manufacture from coal for use with coal liquefac- tion could then make a major contribution if it becomes desirable to pro- duce methanol domestically.

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CO~CWSIONS AND RECOMMENDATIONS TABLE 6-3 Equivalent Crude Oil Cost of Alternative Fuels (in 1988 dollars/barrel, at 10 percent discounted cash flow) Process Current Cost Estimatesa Cost Targets for Improved Technology Heavy Oil Conversion Coal Liquefaction CoaVMTG Western Shale Oil Methanol Coal gasificationb Natural gas atC $4.89/Mcf $3.00/Mcf $1.00/Mcf 25 38 62 43 53 45 37 24 30 30 aThe processes on which these numbers are based are in various stages of R&D (see Chapter 3~. See Table Data. New estimated reduced capital and operating expenses for entrained-flow coal gasification could lead to coal-to- methanol costs of about $401barrel. CSee Table D-7. Coal and Oil Shale Conversion 121 Direct coal liquefaction is shown in Table 6-3 to have a lower estimated cost than oil from western shale. In the past the estimated costs for conver- sion of oil shale were somewhat lower than for coal liquefaction. This change in relative costs reflects the progress from steady DOE R&D on coal liquefaction in recent years. The committee believes that vigorous R&D and optimizing these processes has the potential to bring the cost of both down to about $30/barrel or lower. A substantial effort is required to accomplish this reduction, and, with the reduced industry effort, govern- ment encouragement through DOE participation and leadership is essential. The price assumption for Scenario II ($30/barrel) allows approximately 20 years to demonstrate coal or oil shale processes that can compete with $30/ barrel oil. This scenario is consistent with an R&D program organized around a $30/barrel goal and a large pilot plant and demonstration programs arranged when pathways to reaching this goal have been established. The coal liquefaction program has a good start in this direction; how- ever, since achieving this cost reduction is aided by improvement of and

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122 FUEL; TO DRWE OUR FUTURE integration with the coal gasification process, some strengthening of coal gasification research is indicated if the potential for sizeable cost reductions can be realized. The shale program has recently received much less attention than coal liquefaction. While the size of the shale resource is comparable to that of coal, the active industry and geographical dispersions of coal resources are consistent with giving a somewhat higher priority to coal. An increase in the shale oil program, however, is needed to bring the two programs into better balance. ENVIRONMENTAL CONSIDERATIONS The manufacture and use of transportation fuels raise many environ- mental issues. For fuel production, air and water pollution can generally be controlled to meet emission standards with available technology, although lower-cost technologies are needed. Special problems include the preven- tion of significant deterioration of air quality in some regions and the recov- ery of solvent in tar sands extraction. Issues related to land use and visual impacts are beyond the scope of the current study and must be addressed in the political and regulatory arena. R&D efforts must change with social priorities. The contribution of gasoline vehicle emissions to urban air pollution has generated increased interest in alternative-fueled vehicles using, for example, natural gas or methanol. An alternative may be reformulating gasoline to facilitate redesign of improved vehicle emission control systems. Future vehicle emissions constraints may well affect fuel composition and there- fore the choice of conversion processes and related research programs. Although environmental restrictions may influence automotive fuel com- position, the economic, environmental, and health effects of fuel compo- nents (paraffins, aromatics, methanol, formaldehyde, and other oxygenates) and optimal control technologies and engine designs are far from well es- tablished. The DOE should participate in quantifying these effects and variables to help ensure that production technologies for liquid transporta- tion fuels from domestic resources are properly developed to meet future regulations on vehicle emissions. This area requires more detailed study. The greenhouse effect is of increasing concern, and the production and use of transportation fuels could be an increasing source of CO2 and other greenhouse gases. Table 5-1 shows estimates of relative greenhouse gas emissions for the manufacture and use of transportation fuels from several sources. Because of coal's low hydrogen content and impurities, the manufacture and use of liquid fuels from coal produce almost twice the CO2 as use of gasoline from petroleum (see Table 5-1~. Manufacture and use of liquid

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CONCLUSIONS AND RECOMMENDATIONS 123 fuels such as methanol or F-T gasoline from methane, however, produce an amount of CO2 approximately equal to that from petroleum-based gasoline. Gasoline from oil shale produces less CO2, the amount depending on the amount of decomposition of carbonates during retorting. CO2 emissions can be reduced in all cases by increasing end-use efficiency and by reduc- ing process heat requirements. The heat necessary to drive processes is conventionally derived from combustion of fossil fuel, with liberation of CO2. In addition, hydrogen needed for processing is derived from water, where oxygen is eliminated by CO2 generation. This is also a major CO2 source beyond the CO2 generated by fuel end-use. Nuclear or solar energy and biomass are alternative sources of heat and hydrogen. Water splitting by heat, electrolysis, or photolysis using noncombustion sources of energy is substantially more expensive than use of carbon as an oxygen acceptor (NBC, 1979~. However, a long-range exploratory and basic research program on water splitting is justified. Use of biomass to supply heat and hydrogen to fossil fuel processes (if use of fossil fuels in biomass production and processing is minimized) can eliminate or reduce these sources of CO2. Comparison of the use of bio- mass-generated methanol via synthesis gas to the conversion of this synthe- sis gas to hydrogen and its use for coal liquefaction indicates that, for a limited supply of biomass, a greater reduction of fossil carbon-generated CO2 is obtained by combining biomass gasification with coal liquefaction. System studies research relevant to this combination are recommended. MAJOR CONCLUSIONS AND RECOMMENDATIONS A federally funded R&D program on liquid transportation fuels can pro- vide future options for domestic uncertainities in oil prices and investment decisions by the private sector. The current funding for liquid fuels R&D is only about 29 percent of the total fossil energy budget (see Table 6-4~. A diverse approach to different resources and technologies expands these op- tions in recognition that there may be failure of some technologies and resources may fail to meet expectations. The DOE program should contain a continuing effort by unbiased and capable groups to evaluate the economic and commercial potential of the technologies in the program. The most promising technologies should be moved forward from the research laboratory to field test units and eventu- ally to larger facilities for demonstration on small commercial equipment. The government-sponsored program should include industrial participation at all phases, particularly in development and demonstration to facilitate technology transfer and ensure that the latest practical industrial concepts are incorporated into the program. A properly balanced program should

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124 FUELS TO DRIVE OUR FUTURE TABLE 6-4 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 and 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, environmental 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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CONCLUSIONS ED RECOMMENDATIONS 125 achieve a key objective of providing an understanding of how U.S. re- sources can best be used to produce transportation fuels. Since industry participation is essential to an effective program, DOE must provide the appropriate leadership to achieve such participation. The DOE can encourage industrial participation by proper structuring of the program. In addition, industrial participation will be more readily achieved if the DOE R&D program is viewed as a key element of a national energy policy. A steady program is essential for success in a long-range R&D program. To ensure such a program there must be a long-term funding commitment, and the elements of the program should be primarily decided by DOE tech- nical and administrative professionals based on technical and economic merit. Furthermore, a well-balanced program should include demonstration of state-of-the-art technology on small-scale commercial equipment as well as continued search for new technology that may eventually make the demon- strated technology obsolete. In this way the program will continually be updating information on the best way to use domestic resources for trans- portation fuels. Technology that is selected for demonstration must meet strict economic and environmental criteria. Thus, the portion of the pro- gram devoted to demonstration is determined largely by opportunities gen- erated by the research program and further developed in pilot facilities. The program should develop specific objectives within the next 5 years regarding demonstration of the best technologies. The recommended directions for the DOE program for the next 5 years are listed below in three funding categories. The listing within each cate- gory is not in priority order. All areas listed are of potential importance and there should be continuing related programs of fundamental and ex- ploratory research. The need for the more costly process R&D depends on the need for DOE participation during the next 5 years and varies consid- erably. Under Scenario II the premise that oil prices will 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, whereas Scenario III would call for a more rapid pace. Increased emphasis on curtailing greenhouse gas emissions would result in techniques for reducing such gases, whereas greater environmental constraints would lead to emphasis on environmental research. The recommended areas of R&D as proposed are diverse and provide op- tions in the face of the uncertainty these scenarios encompass. Major Funding Areas With regard to use of domestic resources, the high funding areas are oil and gas, coal, and oil shale. These represent large domestic resources with

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126 Fuels TO DRIVE OUR FUTURE oil R&D also providing a means to significant U.S. production over a pe- riod of time when coal and oil shale technologies can be further developed. The committee has not made a detailed analysis of required federal funding for R&D activity for these resources. However, they are all of major im- portance, and this should be reflected in their relative funding levels. There is less need for DOE funding of R&D on conventional gas produc- tion since there is much private sector activity but DOE should continue its work on unconventional gas recovery. Significant funding and attention is also recommended for R&D related to fuel composition and its environ- mental and end-use consequences. 1. Participation in R&D and Technology Transfer for Oil and Gas Pro- duction. In recent years the DOE research program in oil and natural gas has been substantially reduced. Industry activity in R&D for domestic oil is also declining Important opportunities for both cost reduction and im- proved resource utilization exist, and DOE participation should be in bal- ance with other energy research areas. The program should focus on those parts of the resource base whose exploitation depends on more comprehen- sive understanding of geologically complex reservoirs and on technologies yet to be fully developed. The program should be pursued in coordination with industry (both independent oil producers and major oil companies), preferably with direct industry participation. Finally, an effective program of information and technology dissemination is needed. 2. Production from Coal and Western Oil Shales. Coal and western oil shales both represent very large resources compared to domestic petroleum and natural gas. Estimated costs with current technology require oil prices greater than $36 to $43/barrel, but recent advances suggest that their costs may be reduced to the equivalent crude oil price of around $30/barrel or less. Because the cost of producing domestic oil may rise to this level in the next several decades and this is also the time frame required to bring new technology to commercial status, DOE should establish the goal of reducing the cost of these alternatives to below $30/barrel. The DOE should also take the lead in establishing a demonstration program when pilot plant and engineering studies indicate that this goal can be achieved. Important components of such a program are the following: . a vigorous basic and exploratory research program; a pilot plant program capable of supplying the information needed for commercial-scale designs; continuing systems studies aimed at optimization; a new thrust aimed at integration of hydrogen production from both biomass and coal; and a high level of industrial involvement. Over the next 5 years, exploratory research on coal should stress new

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CONCLUSIONS AND RECOMMENDATIONS 127 catalysts and processes based on fundamental coal science understanding. The opportunity to reduce costs by integrating hydrogen manufacture should be explored. The program should be guided partly by economic and techni- cal evaluations by engineering firms, petroleum industry operating compa- nies, and qualified consultants. The program should have a 5-year objec- tive to reduce the cost of direct liquefaction to $30/barrel or less. If this objective is achieved, preparations for a larger pilot plant (500 to 1000 bbl/ day) would begin. In the judgment of the committee, the current shale oil program is too small compared to the coal liquefaction program and should be increased. Over the next 5 years a field pilot facility with a capacity of about 100 bbl/ day should be built to further develop surface retorting technologies. These technologies must clearly have the potential for meeting anticipated envi- ronmental requirements and for production costs of $30/barrel or less. Because manufacture of transportation fuels from both of these resources produces more CO2 by-product than processes based on oil, gas, or bio- mass, a special effort should be made to identify and pursue opportunities for reduction in emissions of this greenhouse gas from these resources. Study of nonfossil fuel sources of heat and hydrogen should be included. 3. Environmental and End-Use Considerations. There are a number of uncertainties about the health, safety, and air quality implications of alter- native fuels use. With other federal agencies, such as the U.S. Environ- mental Protection Agency and the National Institutes of Health, DOE should continue R&D to develop a better data base on these potential impacts. In particular, health effects and also different fuel-engine- emission controls combinations should be investigated to identify the safest and most cost- effective combinations and to provide guidance on fuel composition effects for use in the DOE R&D programs. This will help ensure that future regulations are balanced and on a firm technical basis and that the technolo- gies for liquid transportation fuels production are properly developed to meet these regulations. Medium Funding Areas 4. Coal-Oil Coprocessing. Coprocessing of heavy oils or residuum with coal may permit the introduction of coal as a refinery feedstock. It is expected to have rather limited application unless important synergism be- tween oil and coal occurs. Funding of basic bench-scale research should be continued over the next 5 years to define the extent of synergy between coal and oil for coprocessing coal-residuum combinations, followed by a thor- ough economic analysis of its impact. If favorable, the results should be confirmed in the Wilsonville test facility to define optimal processing con- ditions.

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128 FUELS TO DRIVE OUR FUTURE 5. Tar Sands. The domestic tar sands resource is small relative to those of coal and oil shale. However, it is significant relative to proven domestic crude oil reserves, and much of it is owned by the federal government. Liquid fuels can potentially be produced from some U.S. tar sands at about $25 to $30/barrel equivalent crude oil price with a hydrocarbon solvent extraction process. Furthermore, there is little industry activity in this area. Therefore, a modest DOE R&D program on tar sands is appropriate if there are sufficient leads toward cost reduction or if costs are low enough to justify development and demonstration of the best technology. Over ache next 5 years all potential processes and mining techniques ap- plicable to U.S. tar sands should be evaluated both technically and eco- nomically. The DOE should sponsor preliminary evaluations by engineer- ing firms, petroleum operating companies, and qualified consultants. The best process should be selected for further development and demonstration in a field pilot plant with a capacity of 50 to 100 bbVday. Based on Cana- dian experience, this size should be suitable for scale-up to a commercial plant. A field pilot operation is justified only if the technology is judged to be sound, all environmental requirements are projected to be met, and costs are sufficiently low (probably about $25/barrel) to attract industry partici- pation. 6. Petroleum-Residaum, Heavy Oil, and Tar Conversion Processes. Conversion processes for petroleum residuum, heavy oils, and tar have been under intensive development in both domestic and foreign petroleum indus- tries. Increasing crude oil prices will tend to favor hydroconversion proc- esses over carbon rejection processes because of the higher liquid product yield from hydroconversion. This continuing industrial process develop- ment should be supplemented by basic research on the molecular structures of metals, sulfur, and nitrogen-binding sites and coke precursor species in heavy oil feeds and upgraded products. Results of this research would help the private sector improve existing carbon removal and hydrogen addition processes. The DOE should involve the private sector in the design of this research program to ensure good technology transfer. This R&D area is considered medium priority because there is considerable activity in the private sector. Because of industrial efforts, DOE work on catalyst and process development is not recommended at this time. 7. Biomass Utilization. Use of some biomass resources for the produc- tion of liquid transportation fuels is one pathway that can result in less net release of greenhouse gases. Biomass supply constraints and costs will probably require continued use of fossil fuel resources. Use of biomass to produce liquid fuels directly is of continuing interest; however, by integra- tion of processing of biomass and fossil resources (e.g., by generating proc- ess hydrogen from biomass instead of coal), a greater reduction in CO: from the combined processes may be achievable. There is little industry

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CONCLUSIONS AND RECOMMENDATIONS 129 activity in this area. Hence, it is recommended that research and systems studies be conducted on the optimum integration of biomass with fossil fuel conversion processes as well as for stand-alone biomass conversion. 8. Coal Pyrolysis. The current DOE program is aimed at production of pyrolysis liquids and metallurgical coke and does not have a high priority for liquid transportation fuels. There is little privately funded R&D in this area. The chemistry and mechanisms of pyrolysis are not well understood, and therefore DOE should place medium priority on a program of basic pyrolysis research, including research in catalytic hydropyrolysis. Systems studies should be carried out over the next 5 years to evaluate integrating pyrolysis with direct coal liquefaction as well as with gasification or combustion. Modest Funding Areas 9. Processes for Producing Methanol, Methanol-derived Fuels, or Fisher- Tropsch (F-T) Liquids from Synthesis Gas. Industry is vigorously studying the production of methanol and F-T Liquids. While they may find applica- tion in the United States, production is expected primarily outside the United States where low-cost natural gas is available. These factors discourage DOE work in this area beyond fundamental and exploratory research. 10. Direct Methane Conversion. Direct methane conversion to liquid hydrocarbons or methanol is being studied at the bench scale by various companies, government agencies, and universities. These processes theo- retically have the potential for being more energy efficient and less expen- sive than indirect conversion since they bypass the formation of syngas, an energy-intensive and expensive step. However, potentially significant cost reductions have not yet been achieved. Even if direct conversion of natural gas to liquid fuels becomes economi- cally viable, the sources would be predominately low-cost natural gas in foreign locations. U.S. government-sponsored research on direct methane conversion technology should be limited to continuing fundamental and exploratory research. 11. Eastern Oil Shale. Although widespread, most eastern oil shale is low grade, occurs in thin seams, and has a high stripping ratio for mining. Its processing is also inherently more expensive than that of western shale because of its low grade and low hydrogen and high sulfur content. These disadvantages are expected to outweigh the infrastructure advantages of the eastern location. This resource will be economical only after exploitation of coal or western oil shale. No development is recommended at this time.

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