COAL-TO-LIQUIDS TECHNOLOGY AND ITS IMPORTANCE TO THE AIR

FORCE AND CIVILIAN AVIATION

Presented at the Western Business

Roundtable Briefing on Coal-to-Liquids

Technology and Legislation

S-115, U.S. Capitol

February 27, 2007

Roger H. Bezdek. Ph.D., President

Management Information Services, Inc.

www.misi-net.com

THIS PRESENTATION

• Summarize U.S. energy dependence• Assess implications of increasing energy imports• Discuss key role of coal in enhancing U.S. energy

security• Describe coal-to-liquids (CTL) technology• Identify CTL advantages over alternate fuels• Estimate U.S. CTL potential• Discuss DOD and USAF interest in CTL fuels• Discuss U.S. commercial airlines’ interest in CTL fuels

U.S. ENERGY IMPORTS ARE INCREASING

EIA forecasts that by 2030 U.S. will be importing 2/3 of its oil and nearly 25% of its natural gas

Source: EIA, Annual Energy Outlook 2007, December 2006

0%

10%

20%

30%

40%

50%

60%

70%

Oil Natural Gas

Imp

ort

s

20052030

20052030

SECURITY CONCERNS: U.S. IMPORTS CONTINUE TO INCREASE

• Excessive dependence on imported oil from OPEC and others

• Potential of excessive dependence on imported natural gas

• World oil production may soon peak and begin to decline

• Record trade deficit ($764 billion in 2006) driven by energy prices

• Increased global competition from China, India, and others

• Supply disruptions by natural disasters or terrorism

• National security concerns

SERIOUS RISKS TO U.S. OFINCREASING ENERGY IMPORTS

PRESIDENT BUSH: “REDUCE OIL IMPORT DEPENDENCE”

First Thing to do: Stop Digging!Just to keep oil imports at current level will require an additional 5

MMbpd U.S. production of liquid fuels by 2025

Imports held at 2005

level

Projected Production

Supply Gap

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COAL IS KEY TO U.S. ENERGY SECURITY AND INDEPENDENCE

Eliminating U.S. oil imports by 2030 – Southern States Energy Board, 2006

Conventional Oil Production

CTL

Biomass

Oil Shale

EOR

Import Gap

Trans.Eff iciency

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30

MM

bpd

15%

16%

24%

29%

16%

Coal-to-Liquids

Transportation Effiiency

Biomass

Oil Shale

Enhanced Oil Recovery

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55

Oil5%

Gas10%

Coal85%

Ultimately recoverable demonstrated reserves on Btu basis. Source: USGS, National Assessment of United States Oil and Gas Resources, U.S. Coal Reserves; Energy Information Administration Monthly Energy Review, August 2006 Table 7.2b, 2005 data.

U.S. Fuel ResourcesU.S. Fuel Resources Electricity Fuel SourcesElectricity Fuel Sources

Co

al

Nu

clea

r

Gas

Hyd

ro

Oth

er

51.3%

20.1%17.4%

6.7%

3.0%P

erc

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Ge

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COAL IS AMERICA’S MOSTABUNDANT FUEL

1.5%

Oil

LIQUID FUELS FROM COAL

U.S. Could Be the New Middle East1.55 Trillion Barrels of Coal Synfuel

Old Middle EastSaudi Arabia:

261.8 Billion BarrelsIraq:

112.5 Billion BarrelsUAE:

97.8 Billion BarrelsKuwait:

96.5 Billion BarrelsIran:

89.7 Billion Barrels Qatar:

15.2 Billion BarrelsOman:

5.5 Billion BarrelsYemen:

4.0 Billion BarrelsSyria:

2.5 Billion Barrels

TOTAL 686 Billion Barrels

Recoverable reserves 0.55 B Bbls

Demonstrated

reserve base 1.0 T Bbls

U.S. Domestic CoalU.S. Domestic Coal(oil equivalent)(oil equivalent)

TOTAL 1.55 T Bbls Equivalent

COAL-TO-LIQUIDS TECHNOLOGY

A Proven Technology Currently in Use World-Wide

1033UPGRADE

The FT liquid product is upgraded to ultra

high purity fuels33UPGRADE

The FT liquid produced is upgraded into

ultra clean synthetic fuels

22FT CONVERSION

Syngas passes through an FT catalyst and

is converted to an ultra-clean liquid22FT CONVERSION

Syngas passes through an FT catalyst and

is converted into hydrocarbon liquid

11GASIFICATION

Coal is converted into syngas11GASIFICATION

Coal is converted into syngas

Natural GasCoalPet CokeBiomassWastes

Synthesis GasProduction

OxygenPlant

Air

O2

FTLiquid

Synthesis

ProductRecovery

LiquidFuels

Transportation Fuels

TailGas

PowerGeneration

H2

HydrogenRecovery

WaxHydrocracking

Wax

Hydrogen Separation

Hydrogen

LiquidFuels

AnOption

FISCHER-TROPSCH TECHNOLOGY

COH2

ESTIMATES OF U.S. CTL POTENTIAL

• SSEB Study (July 2006): 5.6 MMBPD by 2030

• USDOE/National Energy Technology Laboratory Study (July 2006): 5.1 MMBPD by 2027

• U.S. National Coal Council Study (March 2006): 2.6 MMBPD by 2025

• USDOE Unconventional Fuels Task Force (November 2006): 2.5 MMBPD by 2035

• Bottom Line: All studies indicate huge potential for CTL in the USA

DOD ENERGY CONCERNS

ground fuels, 15.1%

marine fuels, 7.9%

jet fuels, 73.5%

Military DemandApprox 2% of US

ConsumptionApprox: 300,000 bbl/ day

of 20M bbl/day Total

Lack of secure & reliable sources of energy Dependent on foreign oil Becoming dependent on foreign refined fuels

Supply chain vulnerability Reliance on mega-refineries Vulnerable to terrorist threats and natural disasters

Need for cleaner fuels DoD exempt from some EPA regulations

Need for Better Fuels Thermal stability, advanced engines, fuel cells

Need for Fewer Fuels 9+ Fuels presently in use

Potential limits on deployments Possible conflict with EU rules

“DoD intends to catalyze the commercial industry to produce clean fuels for the military from secure domestic resources using environmentally sensitive processes to enable a bridge to the future.”

Theodore K. Barna, Ph.D.Assistant Deputy Under Secretary of Defense/Advanced Systems and Concepts

Fischer-TropschFuels

Hydrocarbon Rockets (RP-1 replacement)

Hypersonic Vehicles(JP-7 replacement)

Hydrocarbon reformers(fuel cell power generation)

low emissions, high stability

high stability, endotherm

No sulfur, no aromatics

High therm

al stability,

high H/C

ISP=362.5

1200 Btu/lb cooling

2.2X – 5X increase in cooling

DOD GOAL: SINGLE BATTLESPACE FUELFROM UNCONVENTIONAL RESOURCES

No poisoning, less coking

of reformer catalyst

high cetane, >74

reduced exhaust pollutants

Army and Marine Equipment

Single Fuel for the Navy

Ships(JP-5/F-76 replacement)

Current and advanced gas turbine aircraft(Jet A/JP-8 replacement)

U.S.U.S.

USG/DOD/AF FUEL UTILIZATION

(USAF USES 57% OF USG FUEL)

Gov’tGov’tOther Govt: 7.5%

DoD: 92.5%

Army: 9%Marines+other: 1%

DoDDoDAF: 57%($2.84B, 2.8B gal)

Navy: 33%

AFAF

Non Gov’tNon Gov’t98.1%98.1%

Gov’t 1.9%Gov’t 1.9%

% of 20.5M bbl/day US petroleum consumption (861M gal/day)[DOE]

% of U.S. government petroleum consumption [DOE]

% of DESC petroleum purchases

FY04 ($4.96B). Includes nat gas + missile fuels, but they are ~2% of

total.NOTE! FY04 JP-8=$0.91/gal.

FY06=$2.14/gal

4.4% Other

4.2%Trainers

30.1%Fighters

7.1%Bombers

54.2% Mobility:Tankers + Transports

% of AF fuel consumed by aircraft type (FY98-04)

DOD ENERGY USETOTAL SITE-DELIVERED ENERGY (BTU)

919 Trillion BTU

Nation’s single largest energy user (1% of total U.S. energy use & 78% of Federal energy use)

Application

Installations

Buildings22%

Vehicles74%

Industrial3%Exempt

1%

Commodity

$10.9B

Other0.8%

Coal1.6%

Steam 1%Auto Gas

0.7%

Electricity18%

Fuel Oil3%

Natural Gas 8%

Jet Fuel

71%

Diesel 2.3%

AIR FORCE ENERGY USE (COST)

AF Energy Bill (Fuel) exceeds $10M per day

Every $10/barrel increase drives up AF fuel costs $600M per year

Other6%

Aviation (Mobility)49%

Facilities3%

Ground Fuel2%

Aviation (Other)5%

Aviation (Trainer)3%

Aviation (Bomber)7%

Aviation (Fighter)25%

Grd Fuel2%

Aviation89%

Facilities3%

Other6%

ENERGY – THE USAF VIEWAF is, by far, Government’s Largest User of Fuel

• Energy is an Economic Security Issue– $5B/yr; 80% supports aviation operations– Costs have doubled since 9/11

• Energy is a National Security Issue – Flying hours cuts hurt training and combat readiness– Assured, domestic sources of supply required– Resilient & reliable energy distribution capability needed

• Post-Katrina/Rita crude oil prices remain high– Worldwide oil market remains jittery– Gulf of Mexico shut-in production capacity constrained– Energy price forecasts to remain elevated through 2007

• The Air Force’s energy problem is a subset of the Nation’s problem at large; the AF can demonstrate leadership

• While energy conservation can help, a more comprehensive Air Force energy strategy is required

• Develop “enough independence to have assured domestic supplies for aviation purposes “

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USAF AVIATION FUEL COSTS & TRENDS

Aviation Fuel Consumption in Gallons Fuel Cost (TY$) and Gallons Per Flying Hour

Total aviation fuel costs (TY$) • Aviation fuel consumption-rate increased 6% during last 10-yrs

• Fuel CPFH has increased 144%

• Some factors

• Fuel consumption jumped in support of GWOT

• Standard price of aviation fuel increased dramatically FY04 & FY05

• AF is committed to reducing U.S. dependence on Middle Eastern oil by innovative practices and pursuit of latest technologies

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AIR FORCE PROGRAM

• AF Goals:

– Accelerate development and use of alternative fuels

– Increase use of synfuels to 100 million gallons in the next two years

– 50% of fuel will be synfuels by 2016

• Secretary of the Air Force request: Demonstration of F-T fuel in manned Air Force aircraft – accomplished in a B-52

• Air Force Materiel Command (AFMC) is lead organization

• AFMC to define steps after demo

• Partner with industry to facilitate development of U.S. synfuel industry

USAF SYNTHETIC FUEL PROGRAM PLAN

Continue to build consensus; signal intent to the industryAviation Flight Demonstration

Procure 100,000 gals Synfuel; distribute to TACOM, Pax River, WP-AFB, WR- ALC, OC-ALC & Edwards AFBConduct basic materials compatibility testing at WPAFB, TACOM-Detroit, Naval Fuels lab @ Pax River; publish resultsConduct diesel engine tests at TACOM- Detroit and SWRIConduct Solid Oxide Fuel Cell tests at WR-ALC, GA, publish resultsStatic ground engine runs at Tinker AFB, collect some science, publish resultsOn wing ground engine runs at Edwards AFB, collect some science, publish resultsB-52 Flight Test, collect some science, publish results

DESC (DLA) Request for Information (RFI)Seek industry response to a broad area questionnaire on the readiness/interest to

invest in large scale, long term Synfuel production capability in support of long- term defense contractsAnalyze results from RFI and other Studies

FISCHER-TROPSCH FUELS BENEFITS

-12% -13%

-33%

-41%

-57%

-68%

-78%

-25%-30%

-50%

-61%

-75%

-86%

-92%

-51%

-96%-100%

-75%

-50%

-25%

0%

12.5 25 37.5 50 62.5 75 87.5 100

% Volume of FT Fuel in JP-8

% C

ha

ng

e i

n P

art

icle

Nu

mb

er

De

ns

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Cruise

Idle

12.5 25 37.5 50 62.5 75 87.5 100

y

Significantly Reduced Emissions

Scanning Brookfield Viscosity

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-65 -60 -55 -50 -45 -40 -35 -30 -25 -20

Temperature, °C

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Superior Low TemperatureProperties

Relative Total Deposition – ECAT (6 Hrs)

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po

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, m

icro

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ms

/cc

Excellent Thermal Stabilityat High temperature

JP-8JP-7

S-5

S-8

SR-71

COMMERCIAL AIRLINES ARE ALSO CONCERNED ABOUT RISING FUEL PRICES

• Fuel has overtaken labor as the largest

operating expense for most U.S. airlines• Fuel now constitutes 25 – 30% of total airline

operating costs – twice the historical average• When the price per gallon of jet fuel increases

by just one cent/gal., it costs the industry an

additional $195 million in annual operating expenses• American Airlines, which uses more oil annually than the country of

Ireland, in 2005 paid $2.8 billion more for fuel costs than in 2003. • Unlike other modes of transport, aircraft currently have no

alternative source of energy

U.S. Airlines Costs in 2006

Fuel 27.4%

Labor 23.6%

Transport Related 13.9%

Rents 11%

Prof. Services

7.7%

Other 16.4%

JET FUEL PRICES HAVE RISEN EVENMORE RAPIDLY THAN CRUDE OIL

Jet fuel costs have tripled in 4 years

U.S. Airlines' Fuel Costs

$12.70$15.20

$22.70

$33.10

$38

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U.S. AIRLINES CONCERNED ABOUTFUTURE FUEL AVAILABILITY

Fuel requirements for civilian aviation are increasing rapidly, and by 2030 will account for half of total U.S. domestic oil production

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2030 U.S. Civilian AviationFuel Requirements

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CTL PROVIDES THE ANSWER

• Aircraft have highly specialized demands

for fuel that exceed the requirements for

most other petroleum products• Synthetic fuel using CTL technology offers

most promise as a alternative aviation fuel• It can meet current specifications and

no aircraft redesign is required• CTL can provide a “drop-in” replacement for jet fuel• Bio-fuels are not currently compatible with

aircraft requirements• Synthetic aviation fuels derived from coal

are currently being used in some parts

of the world

INDIVIDUAL AIRLINES ARE ENCOURAGINGSYNFUEL DEVELOPMENT

Air Transport Association of America & individual airlines are encouraging synfuel development

• David Neeleman, JetBlue

founder and CEO• Fred Smith, Federal Express

founder and CEO• Richard Branson, Virgin Airlines

founder and CEO• ATA Commercial Aviation Alternative Fuels Initiative begun in October 2006 to

assess alternative aviation fuels & address rising fuel prices & supply instability• Coal-based “JP900” fuel could be used in commercial jetliners. Superior performance

characteristics & could reduce U.S. requirements for petroleum-based aviation fuels by 75%

• Richard Branson, Virgin Airlines, advocates aviation bio-fuels• South African Airways has been utilizing coal-derived aviation fuel for the past decade

SUMMARY (1)

• U.S. oil imports are increasing, and may exceed 2/3 by 2030• U.S. energy dependence causing economic, foreign policy, and

national security problems• Coal can and must play a key role in reducing U.S. energy

imports and enhancing national security• U.S. coal reserves are twice the oil equivalent of the entire Mideast• CTL technology is well-proven and currently in use in other

nations• U.S. CTL potential is estimated to be up to 5 MMbpd within 23 years• DOD and USAF have immense liquid fuel needs and need to rely on

CTL fuel• U.S. airlines are concerned about future price and availability of jet fuel

and are interested in CTL fuels• U.S. must develop a viable CTL industry

SUMMARY (2)

• U.S. Air Force is serious about using synthetic fuel blends (near term goal: 50% synfuels by 2016)– B-52 Flight Demo completed– Future demonstrations are being investigated– Potential 100M gal purchase in 2008/09– Establish certification process

• Ongoing research into the development & use of fully synthetic fuel (far term)– Assess operability/durability impacts– Understand role of aromatics and materials– Maximizes benefits of synthetic jet fuel– Develop S&T tech base for Single Battlespace Fuel

• Work with industry to catalyze developmentof U.S. synfuel industry

SUMMARY (3)

• Fuel is now largest single cost for

U.S. airlines• Airlines concerned about future price, volatility,

and availability of fuel• Coal-based synfuels are only viable

alternative & can meet current specifications • Coal-based “JP900” fuel could reduce U.S.

requirements for petroleum-based aviation

fuels by 75%• Individual airlines are pursuing synfuel

initiatives and promoting federal legislation• Air Transport Association has begun the

Commercial Aviation Alternative Fuels Initiative

THANK YOU!

ROGER H. BEZDEK, PH.D.

PRESIDENT

MANAGEMENT INFORMATION SERVICES, INC.

202-889-1324

rbezdek@misi-net.com

www.misi-net.com

LOCAL CONTACT INFORMATION

While in Australia through July 6,

Dr. Bezdek can be contacted via ASPO Australia

Association for the Study of Peak Oil and Gas

www.ASPO-Australia.org.au

International Australia