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Investors face regulation risks in shale oil and coal-to-liquid fuels -- study

By Christa Marshal
E&E News / Climatewire
As the United States tries to wean itself off Middle Eastern oil, dollars are flowing to companies promising to produce alternative fuels. That includes crude extracted from oil shale and coal through the coal-to-liquids process. According to the Department of Energy, a production surge in both fuels could lead to their supplying almost 3 percent of U.S. oil in the next 25 years. But the investor group Ceres warns in a new report that both fuels offer significant risks for investors because of their water needs and associated carbon emissions. Both spew more carbon dioxide during the production process than conventional oil, and financiers need to look more closely at the costs of possible carbon controls at the national and local levels, the group said.

As the United States tries to wean itself off Middle Eastern oil, dollars are flowing to companies promising to produce alternative fuels.

That includes crude extracted from oil shale and coal through the coal-to-liquids process. According to the Department of Energy, a production surge in both fuels could lead to their supplying almost 3 percent of U.S. oil in the next 25 years.

But the investor group Ceres warns in a new report that both fuels offer significant risks for investors because of their water needs and associated carbon emissions. Both spew more carbon dioxide during the production process than conventional oil, and financiers need to look more closely at the costs of possible carbon controls at the national and local levels, the group said.

"Investors' potential exposure is significant, as companies are spending hundreds of millions of dollars on testing, preparation and research, and dozens of projects are under development," states the report from Ceres, which promotes environmental issues.

Investors in the fuels may not be considering the cost of carbon capture and sequestration, a yet-to-be-proven technology that would be needed in case of stricter climate regulations in the future, Ceres said.

More than 25 companies are working to develop U.S. oil shale, which holds a fuel called kerogen that can be turned into kerosene, jet and diesel fuel and gasoline. The majority of the reserves sit in a swath of the West stretching from Colorado to Utah.

That location creates a problem for shale production in a warming world, a Ceres analyst said, because shale production requires between 1.5 and 5 barrels of water to produce 1 barrel of oil.
Water and legal issues loom, as well

"This is an exceptionally water-intensive resource in a part of the world that is getting drier because of climate change," said Andrew Logan of Ceres.

Climate regulations such as proposed low-carbon fuel standards pose additional risks for investors in both fuels, Logan said. Section 526 of a 2007 federal energy bill forbids federal agencies from procuring alternative fuels unless their life-cycle greenhouse gas emissions are equal to or less than those of conventional fuels.

"Unless the section is actually repealed, section 526 could limit the market for oil shale and coal to liquid developers," Ceres said.

Outside of California, low-carbon fuel standards are furthest along in Oregon, Washington and New England, said Chris Tucker of the Consumer Energy Alliance.

In the Northeast, governors from 11 states signed a memorandum of understanding last year to develop such a standard. A model rule is expected early next year that would have to be approved by state legislatures in the region, with a possible enactment date of 2013.
A dozen coal to liquid projects in the U.S.

Supporters of oil shale and coal-to-liquids dismissed Ceres' findings yesterday as unoriginal and dismissive of problems with other fuel sources. The economics of alternative fuels remains positive with gas prices in a recovery phase, they said. Coal-to-liquids is viable when the price of oil exceeds $40 to $55 a barrel, Ceres said.

Luke Popovich, a spokesman for the National Mining Association, said that one of Ceres' risk factors for the two fuels, public acceptance, is a problem with other sources of power.

"Public acceptance can be a problem for wind turbines," said Popovich, whose organization represents many coal companies. It is in the United States' interest to research and invest in coal-to-liquid fuels, since other countries and China, in particular, are moving forward, he said.

The Chinese government stalled coal-to-liquid projects in 2008 out of overcapacity concerns, but there has been some movement this year. In December, China's Shenhua Group said it planned to triple the amount of oil products made from coal to 3 million tons by 2015, according to media reports.

There are a dozen coal-to-liquid projects under various stages of development in the United States, although lawsuits and controversy hover over the industry. In Ohio, a a proposed $6 billion refinery to convert coal into diesel and jet fuel in Ohio is stuck in limbo (Greenwire, Nov. 1).

The technology to extract fuel from coal is not new, and was used by Germany during World War II. More recently, South Africa jumped into the market, and it now relies on liquid coal for roughly 30 percent of its gasoline and diesel demand, according to the World Coal Association.

This story originally appeared on E&E News' Climatewire.