Energy markets: 'coal-to-liquids' promise big profits, but obstacles remain.

• Author: Frodl, Michael G.
• Position: Alternative Fuels

Thanks to the rapid rise in the price of oil, projects to develop synthetic fuels have stopped waiting for U.S. government funding and are moving forward.

As the government's largest consumer of fossil fuels, the Air Force announced its intent to increase the use of synthetic fuel, which is mainly made from coal. So far, however, the military's coal-to-liquids efforts have slowed down. Congress failed to authorize much of the needed funds and the White House has yet to allow the Air Force to enter long-term contracts with synthetic fuel manufacturers.

Private industry, on the other hand, has made strides in launching coal-to-liquids projects and in capturing and recycling carbon dioxide.

Coal-based fuel entrepreneurs will still require governmental guidance, and will need to agree to invest in carbon capture technologies that will make the conversion of coal into liquids no more emitting in carbon than current oil refining processes.

Companies believe that the investment in carbon capture technology can be recouped by recycling the byproduct for downstream domestic industries. This is contrasted with the costly sequestering of carbon into the ground, an option that will be both economical and safe only for oil and gas drilling and coal mining operations.

Coal-to-liquids programs can serve as the best vehicle for accelerated development of carbon capture, storage and recycling technologies, even without a large Air Force contract as the main driver. A barrel of synthetic fuel can be made for about $40, and capture might add another $20. Even after the price of a barrel of oil comes back down--Lehman Brothers is predicting about $95 by end of the year--synthetic fuels will remain a sound investment.

Energy entrepreneurs are now free to stop waiting for Congress and instead they are lining up billions of dollars in financing to build coal-to-liquids plants to supply the commercial market. And the Pentagon may soon be able to buy synthetic fuels this way.

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Baard Energy announced earlier this year that it has raised private funds and won state assistance to build coal-to-liquids and biomass plants in Ohio. Baard was one of the companies maneuvering for an Air Force contract but lost patience with Washington. Another firm, DKRW, associated with Arch Coal, announced it will build a coal-to-liquids plant in Wyoming that will make gasoline and jet fuel.

The Crow Nation announced it is partnering with an outside investor to...