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COAL-TO-LIQUIDS TECHNOLOGY AND ITS IMPORTANCE TO THE AIR FORCE AND CIVILIAN AVIATION

This presentation discusses the importance of coal-to-liquids (CTL) technology in enhancing U.S. energy security for both the Air Force and civilian aviation. It assesses the implications of increasing energy imports, identifies CTL advantages over alternate fuels, estimates U.S. CTL potential, and examines DOD and USAF interest in CTL fuels.

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COAL-TO-LIQUIDS TECHNOLOGY AND ITS IMPORTANCE TO THE AIR FORCE AND CIVILIAN AVIATION

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  1. 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

  2. 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

  3. 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

  4. SECURITY CONCERNS: U.S. IMPORTS CONTINUE TO INCREASE

  5. SERIOUS RISKS TO U.S. OFINCREASING ENERGY IMPORTS • 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

  6. 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

  7. COAL IS KEY TO U.S. ENERGY SECURITY AND INDEPENDENCE Eliminating U.S. oil imports by 2030 – Southern States Energy Board, 2006

  8. COAL IS AMERICA’S MOSTABUNDANT FUEL U.S. Fuel Resources Electricity Fuel Sources 51.3% Oil 5% Gas 10% Coal 85% Percent of Electricity Generation 20.1% 17.4% 6.7% 3.0% 1.5% Oil Gas Coal Other Hydro Nuclear 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.

  9. LIQUID FUELS FROM COAL U.S. Could Be the New Middle East1.55 Trillion Barrels of Coal Synfuel Old Middle East U.S. Domestic Coal (oil equivalent) Saudi Arabia: 261.8 Billion Barrels Iraq: 112.5 Billion Barrels UAE: 97.8 Billion Barrels Kuwait: 96.5 Billion Barrels Iran: 89.7 Billion Barrels Qatar: 15.2 Billion Barrels Oman: 5.5 Billion Barrels Yemen: 4.0 Billion Barrels Syria: 2.5 Billion Barrels • Recoverable reserves 0.55 B Bbls • Demonstrated • reserve base 1.0 T Bbls TOTAL 686 Billion Barrels TOTAL 1.55 T Bbls Equivalent

  10. 3 3 UPGRADE The FT liquid product is upgraded to ultra high purity fuels UPGRADE The FT liquid produced is upgraded into ultra clean synthetic fuels 1 1 GASIFICATION Coal is converted into syngas GASIFICATION Coal is converted into syngas 2 2 FT CONVERSION Syngas passes through an FT catalyst and is converted to an ultra-clean liquid FT CONVERSION Syngas passes through an FT catalyst and is converted into hydrocarbon liquid COAL-TO-LIQUIDS TECHNOLOGYA Proven Technology Currently in Use World-Wide 10

  11. FISCHER-TROPSCH TECHNOLOGY Natural Gas Coal Pet Coke Biomass Wastes CO H2 Tail Gas FT Liquid Synthesis Product Recovery Synthesis Gas Production Power Generation O2 Hydrogen Recovery Liquid Fuels Wax Oxygen Plant Air H2 An Option Wax Hydrocracking Hydrogen Separation Liquid Fuels Transportation Fuels Hydrogen

  12. 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 MMBPDby 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

  13. jet fuels, 73.5% ground marine fuels, 15.1% fuels, 7.9% Military Demand Approx 2% of US Consumption Approx: 300,000 bbl/ dayof 20M bbl/day Total DOD ENERGY CONCERNS • 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

  14. DOD GOAL: SINGLE BATTLESPACE FUELFROM UNCONVENTIONAL RESOURCES Fischer-Tropsch Fuels Current and advanced gas turbine aircraft (Jet A/JP-8 replacement) low emissions, high stability 2.2X – 5X increase in cooling high stability, endotherm reduced exhaust pollutants high cetane, >74 High thermal stability, high H/C No poisoning, less coking of reformer catalyst No sulfur, no aromatics 1200 Btu/lb cooling Single Fuel for the Navy Army and Marine Equipment Hydrocarbon reformers (fuel cell power generation) ISP=362.5 Hydrocarbon Rockets (RP-1 replacement) Hypersonic Vehicles (JP-7 replacement) Ships (JP-5/F-76 replacement)

  15. USG/DOD/AF FUEL UTILIZATION (USAF USES 57% OF USG FUEL) Other Govt: 7.5% U.S. Gov’t Gov’t 1.9% % of U.S. government petroleum consumption [DOE] % of 20.5M bbl/day US petroleum consumption (861M gal/day)[DOE] DoD: 92.5% Non Gov’t 98.1% 4.2% Trainers 7.1% Bombers Marines+other: 1% Army: 9% AF 4.4% Other DoD 54.2% Mobility: Tankers + Transports AF: 57% ($2.84B, 2.8B gal) % of AF fuel consumed by aircraft type (FY98-04) Navy: 33% 30.1% Fighters % 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

  16. Vehicles 74% Buildings 22% Installations Industrial Exempt 3% 1% DOD ENERGY USETOTAL SITE-DELIVERED ENERGY (BTU) Commodity Nation’s single largest energy user (1% of total U.S. energy use & 78% of Federal energy use) Electricity Jet Fuel 18% 71% Application Fuel Oil 3% Natural Gas 8% Coal Diesel 2.3% 1.6% $10.9B Auto Gas Steam 0.7% 1% 919 Trillion BTU Other 0.8%

  17. 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

  18. 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 “

  19. 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 onMiddle Eastern oil by innovative practices and pursuit of latest technologies

  20. 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

  21. USAF SYNTHETIC FUEL PROGRAM PLAN • Continue to build consensus; signal intent to the industry • Aviation Flight Demonstration • Procure 100,000 gals Synfuel; distribute to TACOM, Pax River, WP-AFB, WR- ALC, OC-ALC & Edwards AFB • Conduct basic materials compatibility testing at WPAFB, TACOM-Detroit, Naval Fuels lab @ Pax River; publish results • Conduct diesel engine tests at TACOM- Detroit and SWRI • Conduct Solid Oxide Fuel Cell tests at WR-ALC, GA, publish results • Static ground engine runs at Tinker AFB, collect some science, publish results • On wing ground engine runs at Edwards AFB, collect some science, publish results • B-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 contracts • Analyze results from RFI and other Studies

  22. y FISCHER-TROPSCH FUELS BENEFITS Significantly Reduced Emissions Relative Total Deposition – ECAT (6 Hrs) Deposition, micrograms/cc S-8 JP-8 JP-7 SR-71 Superior Low Temperature Properties S-5 Excellent Thermal Stability at High temperature

  23. 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

  24. JET FUEL PRICES HAVE RISEN EVENMORE RAPIDLY THAN CRUDE OIL Jet fuel costs have tripled in 4 years

  25. 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

  26. 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

  27. 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

  28. 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

  29. 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 development of U.S. synfuel industry

  30. 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

  31. THANK YOU! ROGER H. BEZDEK, PH.D. PRESIDENT MANAGEMENT INFORMATION SERVICES, INC. 202-889-1324 rbezdek@misi-net.com www.misi-net.com

  32. www.ASPO-Australia.org.au Association for the Study of Peak Oil and Gas International Australia LOCAL CONTACT INFORMATION While in Australia through July 6, Dr. Bezdek can be contacted via ASPO Australia

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