" Victor ... said TransGas has received commitments for a first portion of financing through private placement -- sale to one or a few large institutional investors -- and it's enough to begin construction by mid-summer. " See full articles below.
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THE STATE JOURNAL:
TransGas Development Systems of New York broke ground May 9 on the Adams Fork facility it has been preparing to build in Mingo County since December 2008.
By Pam Kasey
Back in 2007 and 2008, conventional wisdom said investors needed two conditions to feel comfortable backing the conversion of coal to liquid transportation fuels in the U.S.
First, a sustained high price for oil -- above, say, $50/barrel. The price was that high at the time and, after a big dip during the recession, is that high again.
That dip underscores the second, more fundamental condition: Assurance that, if the price of oil drops below a threshold, there still will be a market for the more expensive coal-to-liquid, or CTL, fuels.
A favorite approach to that assurance was long-term purchase commitments by the Department of Defense -- an arrangement that would both establish a large market for the nascent industry and forestall any OPEC price manipulation to nip the industry in the bud.
DoD commitments have not materialized. Nor have any other large institutional purchase commitments. Nor has a single commercial-scale CTL plant.
Yet, TransGas Development Systems LLC of New York, the only company still in the running among several that have proposed CTL plants in West Virginia, broke ground May 9 on the Adams Fork facility it has been preparing to build in Mingo County since December 2008.
What makes TransGas think they can make a go of it?
Difficult Conditions
The CTL industry in the U.S. has been trying to get its start under difficult conditions, according to Julie Dawoodjee, a spokeswoman for synthetic fuels developer Rentech Inc. In 2006, Rentech proposed the first CTL project in West Virginia. Since then, it has shelved that project but has other synthetic fuels projects under way.
Oil price volatility challenges both investors and potential customers, she said.
"Whenever crude reaches a high, suddenly everyone's interested in alternative energy. But then it's too late -- it's a four-to-five-year plan to get a plant producing," she said. "When crude comes down, everyone forgets, and that's when you should be building."
Also making developers think twice is environmental interests' track record at holding up or stopping projects that have a coal component, she said.
And, yes, government support has been lacking, she added, including long-term DoD contracts.
However, Dawoodjee did say DoD contracts are not the only route to viability.
"It would be very helpful if the government was interested and had the ability to sign these long-term off-take agreements," she said. "But there are other customers interested in long-term purchases."
TransGas' Business Model
"I've always taken issue with the people that were looking to get projects financed through an off-take agreement -- by getting a long-term contract with, say, the Defense Department," said TransGas Manager Adam Victor.
It's an old model, he said, typical for building a power plant: Buy, for example, natural gas under long-term contracts at a certain price, and secure long-term power purchase agreements to sell it as electricity for, maybe, twice that price.
"But in coal-to-liquids, the commodity price that you pay for coal is significantly less as a percentage of the revenue that you get from gasoline than what it would be when you buy natural gas and sell it as electricity," he said.
There's plenty of cushion, he seems to feel.
"The break-even price of oil for this project is between $45 and $50" per barrel, he said -- half of today's price, and a price that oil has dipped below for only about a month in the past six years. "That's when you're buying coal in the ground at today's current price of about $50/ton delivered."
Victor expects to sell the fuel on the spot market and do a "back-to-back hedge," he said.
"It's like if you have a floating rate on your mortgage but you don't want a floating rate, you go and enter into a hedge, a long-term swap and you get a fixed rate on your mortgage," he explained. "Same concept, but with fuel."
Financing
Victor's confidence seems to have convinced investors, in spite of last year's bankruptcy of an energy company he developed.
Although he does not give out specifics, he said TransGas has received commitments for a first portion of financing through private placement -- sale to one or a few large institutional investors -- and it's enough to begin construction by mid-summer.
To simplify the financing, the state Economic Development Authority in April authorized the potential issuance of up to $3 billion in industrial revenue bonds, or IRBs.
The bonds are not tax exempt and will not implicate the EDA or any state body in the event of default, according to Brian Helmick, a lawyer with Spilman, Thomas & Battle, which serves as TransGas's bond counsel to the EDA.
But the bonds simplify financing in that, while no single lender or investor would put up $3 billion, Helmick said, TransGas could, say, find five banks willing to lend.
"Instead of doing five loan agreements, they could do it through one IRB structure, and each bank would buy a bond that represents its portion of the debt -- that's a simpler way to put the debt together," he explained.
The bonds can be issued to bondholders at different times.
In the event of default, Helmick said, the bondholders are liable or, if the bonds are insured, the insurer. Typically, although details haven't been worked out, title is pledged to the bondholders, who could take the project over just as a bank forecloses when a mortgage goes into arrears.
DoD, Climate Change and Deficit
Congress is considering legislation now that would extended the DoD's multi-year contract authority, according to Carol Raulston, spokeswoman for the National Mining Association.
However, as currently configured, the Adams Fork plant would not be able to sell to the DoD.
The 2007 energy bill prevents the government from purchasing motor fuels that will contribute more to climate change than do conventional motor fuels. CTL produces more greenhouse gases than petroleum-based fuels, and this plant will not store its carbon dioxide emissions.
Victor said he believes storing CO2 underground is dangerous, citing a 1987 mudslide in Cameroon that released volcanically generated CO2 that suffocated 1,700 people.
If the government requires the CO2 to be stored away, he said, he would most like to send it to the Gulf of Mexico for enhanced oil recovery, to help increase oil well yields. But, he said, he will follow the law and the cost will not hurt his competitiveness because capturing the CO2 is an integral part of his process, whereas crude oil refineries will need large capital investments to make that capture.
TransGas's output would represent slightly more than 2 percent of imported gasoline, according to Victor, and enough similar plants could make the country a gasoline exporter and pay down the trade deficit.
"I think this is a game changer and important for people to rally around, for us to show it can be done here in West Virginia and then throughout the country," he said.
Proposed W.Va. Coal-to-Liquid Plant Proceeds as Other Companies Hold Off on Similar Projects Posted Wednesday, May 25, 2011 ; 04:36 PM Updated Wednesday, May 25, 2011; 05:30 PM
No commercial coal-to-liquid plants currently exist in U.S.
By PAM KASEY and JIM ROSS
pkasey@statejournal.com
jross@statejournal.com
With TransGas Development Systems LLC expecting to begin construction on its Adams Fork coal-to-liquids plant in Mingo County in a few weeks, it seems fair to ask: Why isn't anyone else doing this?
For all the talk over the years of the need to develop liquid fuels from coal, and for all the statements by political leaders that coal-to-liquids is a bright opportunity for West Virginia, the idea just hasn't caught on with the people who would invest the time and money in siting, designing, building and operating such plants.
Synthetic fuels developer Rentech Inc. of Los Angeles, Calif., which at one time considered a coal-to-liquids, or CTL, project in Mingo County, shelved its project for now.
"It just kind of naturally evolved to the point where both parties (Rentech and the Mingo County Redevelopment Authority) felt there wasn't a project there at this time," said spokeswoman Julie Dawoodjee. "Energy is such a dynamic industry that you never know when a project can be resurrected, but that's not an active opportunity for us at this time."
The company has one project under way for producing alternative liquid transportation fuels: its Gulf Coast Synthetic Energy Center at Natchez, Miss.
As initially planned, that project would have used coal as its feedstock.
"The difficult macro-economic and regulatory environments have made seeking financing for such a design challenging," according to the company's website. "Rentech is evaluating alternative configurations that could make the Natchez Project more feasible in the near term."
Dawoodjee said the company is considering other feedstocks.
"That could use coal or could use some other type of fossil feedstock including natural gas," she said. "We even sit in an area where we have the opportunity to use petcoke (a refinery byproduct) or biomass."
West Virginia University chemical engineer Elliot Kennel noted the new abundance and affordability of natural gas for producing domestic liquid transportation fuels in a conversation last month with The State Journal.
His laboratory developed a process for liquefying coal directly through dissolution. The process that TransGas would use is "indirect" in that it first gasifies the coal -- performing an energy-intensive industrial process to make a synthetic gas similar to natural gas -- then liquefies it.
"There are going to be questions asked about why you want to gasify coal given the current low price of natural gas," Kennel said, not of TransGas specifically but of CTL in general. "Natural gas itself as a feedstock looks tough to compete against economically in North America."
And, of course, the electric industry lately has turned to natural gas over coal for new plants.
One example of that is in Meigs County, Ohio, where American Municipal Power planned to build a new coal-fired power plant a few miles down the Ohio River from Ravenswood, W.Va. Construction workers and others were looking forward to such a large project. As with most large-scale coal projects, though, that project was challenged by several groups on environmental and economic grounds. Eventually, AMP bought an existing gas-fired plant and abandoned its coal plans.
American Electric Power had considered sites in West Virginia, Ohio and Kentucky for new power plants using the integrated gasification combined cycle, or IGCC, technology that converts coal to gas. But those plans have fallen by the wayside.
"The proposed IGCC plant in West Virginia would have been in the rate base for Appalachian Power, which meant the plant required rate-recovery approval from both West Virginia and Virginia. West Virginia provided approval. Virginia denied it," said Pat Hemlepp, director of corporate media relations for AEP.
"The proposed IGCC plant in Ohio ended up tangled in litigation. The Ohio Consumers Counsel and others challenged the Public Utilities Commission of Ohio's authority to approve new generation under the current Ohio rules. The Supreme Court remanded the decision to the PUCO. It's still there...
"The economic downturn has delayed the need for new generation. And the changing energy dynamics caused by the abundance of shale gas, combined with the variety of pending EPA regulations that target coal-fueled generation, has made natural gas the likely fuel of choice for new generation."
It all adds up to one basic fact: Should TransGas build its facility in Mingo County, it would be unique in the United States.
"There are no commercial coal-to-liquid plants in the U.S right now," Nicholas Paduano, a coal analyst with the Energy Information Administration, said in an e-mail to The State Journal when asked whether any such plants are in operation.
"There is one commercial coal-to-gas plant operating in the U.S. in North Dakota. It uses North Dakota lignite coal to produce pipeline-quality synthetic gas.
"There are plans right now in Illinois and Indiana to build coal-to-gas plants. The Air Force did have a coal-to-liquids project to produce fuel for aircraft, but plans for building a full-scale operation in Montana were scrapped about two years ago. West Virginia had approved a CTL project a few years ago before the recession. Consol Energy had planned to build a CTL plant in West Virginia, but that got scrapped in late 2008 after the credit crunch and drop in oil prices."
Nevertheless, TransGas Manager Adam Victor is confident.
"Everybody has been waiting for the government to fund these things, and I think that's been a waste of time," he said.
Asked what he thinks is the reason no commercial-scale CTL plant has yet been built, he pointed to the nation's social capital over any lack of investment capital.
"We have simply failed to educate people into the maths and sciences," he said. "Whether political, financial, legal -- we are not giving a rigorous enough technical education to people. We are not producing the engineers who would say, 'Of course we can do this.'"