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August 2, 2005

Last modified August 2, 2005 - 12:38 am

Schweitzer wants to convert Otter Creek coal into liquid fuel
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Schweitzer wants to convert Otter Creek coal into liquid fuel

Montana acquired 533 million tons of federal coal near Ashland three years ago. A private company owns more than that interspersed checkerboard fashion among the state's holdings.

Both would like to develop that high-quality coal.

And there are others, too, who have ideas for turning the coal into energy, revenue and profits.

Because the price of oil is at unheard- of levels, and the United States needs alternative energy supplies, Gov. Brian Schweitzer has targeted an old/new process to turn the coal into diesel and jet fuel. Sen. Max Baucus, D-Mont., has put tax incentives for the process into the new energy and highway bills, and several U.S. energy technology firms have perfected the method.

The missing ingredient is investment capital - billions of dollars worth.

In a recent interview, Schweitzer said "there are a great number of believers, potential partners, who will put their money down."

The process is called Fischer-Tropsch, named for the German scientists who developed the process in the 1920s for converting coal to diesel fuel, which later ran the Nazi war machine. In more recent decades, the process was used in South Africa to fuel its vehicles when the world would not trade with the apartheid nation. It still produces 150,000 barrels of fuel a day from coal. Energy technology firms in the United States and elsewhere have fine-tuned F-T to make both its process and products pollution-free.

"There are no smoke stacks," Schweitzer said.

To develop the state's Otter Creek Tracts - 11 square miles in three separate parcels - the State Land Board would have to offer a specific amount of coal for bid, or any person or consortium that wished to develop the resource could ask the board to offer it for bid, both subject to board approval.

The State Land Board, which consists of the governor, attorney general, secretary of state, state auditor and superintendent of public instruction, is constitutionally mandated to manage the state school trust lands for their maximum return in the short term and long term. The state acquisition of the Otter Creek Tracts was specifically designated to the school trust lands.

Schweitzer said the land board "might" offer coal tracts for bid in the near future. But before doing that, he said, he wanted to explore possibilities with companies like General Electric, Shell USA and Exxon/Mobil. The latter two have coal-and-gas-to-liquid fuel projects in China and Qatar.

Montana has 120 billion tons of state and federal coal reserves under its surface, mostly in Eastern Montana. Schweitzer said 115 billion tons of that coal is recoverable. He said using the Fischer-Tropsch method, one ton of coal would produce 1.5 barrels of diesel fuel. A barrel is 42 gallons.

"It would cost less that a $1 per gallon to make that diesel," he said.

Most of those presently using F-T to produce diesel and other petroleum products start with natural gas. But that fuel is getting expensive and scarce. Thus Montana's coal would have to be gasified first then turned into diesel.

Coal gasification is an old technology, he said, pointing to the Great Plains coal gasification plant near Beulah, N.D. which has been turning out synthetic natural gas since the early 1980s.

Clean fuel

The F-T fuels are also clean - no sulfur, mercury or arsenic. Those ingredients are recovered from the process and are marketable byproducts on their own.

Schweitzer said a 150,000 barrel per day unit would cost about $7.5 billion to build. However, F-T units can be built in modules, so a 22,000 barrel per day unit could cost $1.2 billion, he said.

One impetus for the development of the F-T fuel is that the Pentagon wants to have a single battlefield fuel. The F-T product can be used as jet fuel also.

There are some obstacles, the governor acknowledged: Several different companies hold different patents for the process. For example, a Tulsa, Okla., company, Syntroleum, uses a process with common air, rather than pure oxygen, which make it safer and less expensive to make.

And it is the cost that heretofore has kept the process in the experimental/pilot project stages. For F-T, the break even point comes when crude oil is more than $35 a barrel. Friday crude oil futures settled at $60.57 a barrel.

Schweitzer sees the state's coal beds as a solution for America's energy security and for economic development in Montana.

"This will be done in partnership and we have an equity role in it," he said. "It gives us control over our own destiny, a say in the construction. We don't walk in as a pauper."

Schweitzer said the development will be a business deal and there will be no risk to Montana's air or water. "More than any other, I want it (Otter Creek development) to be a reality."

So does Chuck Kerr, president of Great Northern Properties based in Houston, which owns the sections in the Otter Creek Tracts that the state does not. In tract 3, Chevron owns a section and the Consol coal company also has sections.

"We're tickled to have the state as a partner," Kerr said in a phone interview. "The federal government is too rigid and slow."

Kerr, who grew up in Billings, shares Schweitzer's enthusiasm for the Fischer-Tropsch process. And now that oil prices are above $40 a barrel and not likely to drop below that level, it makes economic sense.

"There is a lot of money to be made now with commodity prices where they are," Kerr said. "And we are in this for the long haul, not for a quick trip. Our grand kids have a vested interest in these reserves."

GNP is the largest private holder of coal reserves - 20 billion tons - in the United States. Most of the coal is in Montana and North Dakota. GNP in 1992 bought the coal reserves from Burlington Resources. The coal tracts, 40 in Eastern Montana, were part of the federal land grant to the Northern Pacific Railway. Three-fourths of the holdings are lignite coal, while one-fourth, at Otter Creek, is high-quality sub-bituminous.

"It will take billions to develop," Kerr said. "It will take both of us. Otherwise it would be impractical to mine every other square mile."

"We are willing to work with the state, align our interests to maximize the value of the coal to GNP and the state," Kerr said.

Martz and Otter Creek

During the Gov. Judy Martz administration, which pushed the U.S. Department of Interior to make good on its promise to transfer Otter Creek to Montana, GNP signed a coordination agreement with the state to proceed towards cooperative leasing of their respective checkerboard coal land interests.

One of the drawbacks is lack of infrastructure in the area, namely a railroad and a coal mine. A pipeline for the F-T fuel would be useful, too.

A Billings natural resources company is a member of a consortium that has had an eye on the Otter Creek Tracts from the beginning.

"The state would be remiss if it missed an opportunity to use some portion of the coal reserves to foster investment for infrastructure," said Mike Gustafson, president of Wesco Resources of Billings.

Gustafson said the energy business is now in chaos and there is a role for coal more than ever.

He said the state should offer 350-400 million tons of Otter Creek coal (state and GNP), which would be large enough to sustain the capital investment to build a railroad and a coal mine.

Gustafson, who has a permit to build the Tongue River Railroad from just north of the Wyoming border north to the Burlington Northern Santa Fe mainline near Miles City, is part of a joint development group, Otter Creek Energy Project. Other members are Bechtel Enterprises Inc., the investment arm of the global construction firm, and Kennecott Energy Co., which owns and operates coal mines in Montana and Wyoming. The BNSF is affiliated in an advisory capacity.

The OCEP has proposed a three-phase, multibillion dollar energy package for Otter Creek. The first phase would include a 750-megawatt coal fired generator, a 100-mile power line to tie into existing transmission, a 3-million-ton a year coal mine for the power plant with the electricity being sold in Montana and the Pacific Northwest. An estimated completion date is 2008-10.

Gustafson said the leasing could be done in the same manner as the federal government with one slight modification, a due diligence clause that requires an operating mine within 10 years of the successful bid.

He estimates the railroad from Ashland to Miles City would cost about $200 million to build and another $80-$90 million to open a mine producing 12 million tons per year. He argued that any customer for the coal is going to want to know what the delivered price was going to be before signing a contract. The state must offer a sufficient amount of reserves in its first bid to sustain the infrastructure once it is committed, he said.

He sees other coal technologies as long-term developments, and doubts the F-T process will be part of the energy mix in the short term.

"Natural resources development is incremental," he said. "The transition (to F-T) will be there when it is commercial."

According to Jack Holmes, president of Syntroleum, that time is now, both economically and strategically.

Like single-malt scotch

"We need a certainty of cost," Holmes said, noting that oil prices ran up in the early 1970s and then fell back. That run up was a result of a producer embargo. The price of oil now is fueled by worldwide demand. Most analysts doubt it will drop below $40 a barrel.

Because of economic variables, Holmes was reluctant to estimate a cost for a 100,000 barrel a day facility.

"Several billion," he said.

More likely, an F-T module plant of 17,000-20,000 barrels a day would be constructed first, he said. "We call them trains. The vessels are expensive. You'd build one or two to begin with."

Holmes has visited Montana at the invitation of Sen. Conrad Burns, R-Mont., who has expressed an interest in helping the military find a single battlefield fuel.

In extolling the cleanliness of F-T diesel, Holmes said the quality is so high that it can be burned straight or blended with regular diesel fuel.

"It's like a single-malt scotch," he said.

The one downside he identified was Montana's transportation costs because of its relative remoteness from markets.

In the just-passed energy bill, Baucus included an investment tax credit for coal gasification technology used with the updated Fischer-Tropsch process and in the highway bill, he included a 50-cent-a-gallon tax credit for F-T diesel.

Governor's Energy Summit

  • Oct. 18-19
  • Montana State University-Bozeman
  • Register at

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