In essence, the Air Force is offering a pilot site for a coal-to-liquid (CTL) project at a base in Montana. This will be the first of many such CTL facilities around the nation. The idea is that funding will come from the private sector, not the Air Force or any other government source.

The Air Force will sweeten the pot, however, by guaranteeing that it will purchase the fuel that comes out of the CTL plants. Eventually, much of the Air Force fleet will fly on a mixture of CTL fuel and traditional petroleum-based fuel. For the past two years or so, the Air Force has been qualifying its planes to fly on synthetic fuels. Just recently, a B-1B “Lancer” bomber went supersonic over New Mexico on a mix of synthetic fuel. So synthetic fuels work.

The Wagon Train Is Forming Up

Some of the synthetic fuels information has made it into various trade press publications. But the major media have pretty much ignored the synthetic fuels development. Even on Wall Street, this program is under the radar screens. I guess the people on Wall Street are too busy counting up their losses from subprime mortgages. But the wagon train is forming up on the trail to synthetic fuels. Things are going to start happening, and soon.

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The idea is to jump-start a large U.S. military-industrial CTL program that will eventually serve the rest of the economy. The CTL projects will cost over $5 billion each, based on preliminary estimates. In other words, each CTL refinery will cost about as much as an aircraft carrier, and use about as much steel and equipment.

This ambitious CTL project will have major implications for the future of the coal-mining industry, as well as many companies in the engineering, construction and capital equipment sectors.

Future Liquid Fuel Supplies — We’re Running Out of Time

CTL will surely generate controversy. I cannot begin to describe the visceral opposition to CTL projects from the usual suspects. The NIMBYs, the environmental lobbyists the “global warming” activists and many others will all fight against CTL with tooth and nail. You will hear glib arguments about how “If we just do this or that” (windmills, biofuels, conservation, etc.) we can avoid the need to build any CTL plants. As a nation, we should “do this or that” in any event. Really, we need to do everything. But we will also have to build the CTL plants. The opposition to CTL reflects how deeply the “Just say no” approach is hard-wired into our modern culture.

The U.S. could get away with avoiding major capital investments in energy projects when the dollar was strong and oil was cheap. (How else did we wind up importing two-thirds of our daily oil?) If the U.S. needed oil, we just waved dollars and the tankers showed up at the piers. But no more.

It is crystal clear that the U.S. no longer has long-term assured access to liquid fuels. I hope you got the memo. This reality is rapidly transforming into a supreme matter of national security. A U.S. CTL industry cannot come about too fast, in my view. The nation is not “running out of oil,” technically speaking. But not enough oil can cause just as much havoc as running out. And the national “adult supervision” sure knows that the U.S. is running out of time. Let’s look at the present and forecast the future.

Oil Output and Supply

First, let’s discuss the U.S. oil supply going forward. The U.S. presently consumes about 21 million barrels of oil per day. This is a mix of domestic output (much coming in small quantities from several hundred thousand old stripper wells) and imports.

According to the most recent figures from the U.S. DOE, in January 2008, U.S. crude oil output was just over five million barrels per day, plus additional natural gas liquids. The balance of oil consumption comes from imports. (Also, the U.S. supply of transportation fuel is supplemented about 3-4% with ethanol that comes from distilling about half the U.S. corn crop. That is why your grocery bill is skyrocketing.)

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But domestic volumes of oil output are depleting and declining inexorably. From the North Slope of Alaska to the deep water of the Gulf of Mexico, U.S. output is just plain falling. There is very little good news, and even the good news is oft-times not so good.

New discoveries and new wells just cannot keep up with depletion of older oil fields. By 2025, U.S. daily oil output will be a fraction of its current level (probably down to about 2-3 million barrels per day), even with an aggressive program of drilling offshore and in Alaska — which is not happening, in any case.

Also by 2025, U.S. imports will almost certainly decline. The oil will not be available to buy and import from world markets. Not everyone agrees with this. In one fanciful projection from 2005, the U.S. DOE forecast that “Total U.S. gross petroleum imports are projected to increase in the reference case from 12.3 million barrels per day in 2003 to 20.2 million in 2025.” Maybe in somebody’s dreams, but my view is that this is one projection that will never come true.

Shares in leading German solar stocks rose substantially on expectations that other big players, including oil groups, are on the prowl in a market that grew to €6.6bn last year and is forecast to top €18bn by 2020.

Germany is by far the world’s biggest solar energy market thanks to its “feed-in” tariffs, which pay a government-guaranteed premium of up to €0.47 a kilowatt hour for power produced by photovoltaic panels. It is expected to continue to grow despite government plans to cut subsidies by 8% or 9% in 2009 and 2010.

“The richest investment opportunities can be found in the fast-emerging alternative energy sector,” says Mike Burnick in The Offshore A-Letter.

“That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

“The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.

“Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago. The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!”

“The days of meeting an unchecked demand for energy through monolithic carbon intensive power stations are coming to an end. Increasingly the emphasis will be on energy efficiency, renewables, cleaned up fossil fuel plant and micro generation,” the company said in a statement accompanying its full-year results, according to Britain’s The Guardian newspaper.

SSE, which currently gets 15% of its energy from nuclear suppliers, said it believed “one more tranche of nuclear power stations will be necessary, but that the deployment of such power stations should be minimised through the maximum exploitation of renewable energy sources.”

“The richest investment opportunities can be found in the fast-emerging alternative energy sector,” says Mike Burnick in The Offshore A-Letter.

“That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

“The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.

“Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago. The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!”

Floyd Brown in Investment U looks at another alternative energy source: the Fischer-Tropsch process, used to create synthetic fuels.

“The process works like this: Coal is broken into its components by subjecting it to high temperature and pressure, using steam and measured amounts of oxygen. This leads to the production of synthetic gas.

“In the United States, a small firm provides technology to produce ultra-clean synthetic fuels and chemicals. It licenses its proprietary derivative process from the Fischer-Tropsch method.

“It converts synthesis gas derived from coal, petroleum coke, biomass, natural gas, or municipal solid waste into liquid hydrocarbon products. This includes ultra clean diesel fuel, jet fuel, naphtha, specialty chemicals and other fuel products. It also manufactures anhydrous ammonia, UAN, nitric acid, carbon dioxide and granular and liquid urea.”

Read on here to find out Floyd’s cashing in on this conventional energy alternative.

I heard some of the “inside baseball” information on one major DOD program that will convert large amounts of U.S. coal into synthetic liquid fuel. This will be a government-industry partnership, with the U.S. Air Force as the lead agency.

In essence, the Air Force is offering a pilot site for a coal-to-liquid (CTL) project at a base in Montana. This will be the first of many such CTL facilities around the nation. The idea is that funding will come from the private sector, not the Air Force or any other government source.

The Air Force will sweeten the pot, however, by guaranteeing that it will purchase the fuel that comes out of the CTL plants. Eventually, much of the Air Force fleet will fly on a mixture of CTL fuel and traditional petroleum-based fuel. For the past two years or so, the Air Force has been qualifying its planes to fly on synthetic fuels. Just recently, a B-1B “Lancer” bomber went supersonic over New Mexico on a mix of synthetic fuel. So synthetic fuels work.

The Wagon Train Is Forming Up

Some of the synthetic fuels information has made it into various trade press publications. But the major media have pretty much ignored the synthetic fuels development. Even on Wall Street, this program is under the radar screens. I guess the people on Wall Street are too busy counting up their losses from subprime mortgages. But the wagon train is forming up on the trail to synthetic fuels. Things are going to start happening, and soon.

The idea is to jump-start a large U.S. military-industrial CTL program that will eventually serve the rest of the economy. The CTL projects will cost over $5 billion each, based on preliminary estimates. In other words, each CTL refinery will cost about as much as an aircraft carrier, and use about as much steel and equipment.

This ambitious CTL project will have major implications for the future of the coal-mining industry, as well as many companies in the engineering, construction and capital equipment sectors. It made me glad to have the likes of CONSOL Energy (CNX: NYSE) and Foundation Coal Holdings (FCL: NYSE) in the portfolio. I already have some other ideas for additional investment opportunities in this sector. So keep your Outstanding Investments subscription current.

Future Liquid Fuel Supplies — We’re Running out of Time

CTL will surely generate controversy. I cannot begin to describe the visceral opposition to CTL projects from the usual suspects. The NIMBYs, the environmental lobbyists the “global warming” activists and many others will all fight against CTL with tooth and nail. You will hear glib arguments about how “If we just do this or that” (windmills, biofuels, conservation, etc.) we can avoid the need to build any CTL plants. As a nation, we should “do this or that” in any event. Really, we need to do everything. But we will also have to build the CTL plants. The opposition to CTL reflects how deeply the “Just say no” approach is hard-wired into our modern culture.

The U.S. could get away with avoiding major capital investments in energy projects when the dollar was strong and oil was cheap. (How else did we wind up importing two-thirds of our daily oil?) If the U.S. needed oil, we just waved dollars and the tankers showed up at the piers. But no more.

It is crystal clear that the U.S. no longer has long-term assured access to liquid fuels. I hope you got the memo. This reality is rapidly transforming into a supreme matter of national security. A U.S. CTL industry cannot come about too fast, in my view. The nation is not “running out of oil,” technically speaking. But not enough oil can cause just as much havoc as running out. And the national “adult supervision” sure knows that the U.S. is running out of time. Let’s look at the present and forecast the future.

Oil Output and Supply

First, let’s discuss the U.S. oil supply going forward. The U.S. presently consumes about 21 million barrels of oil per day. This is a mix of domestic output (much coming in small quantities from several hundred thousand old stripper wells) and imports.

According to the most recent figures from the U.S. DOE, in January 2008, U.S. crude oil output was just over 5 million barrels per day, plus additional natural gas liquids. The balance of oil consumption comes from imports. (Also, the U.S. supply of transportation fuel is supplemented about 3-4% with ethanol that comes from distilling about half the U.S. corn crop. That is why your grocery bill is skyrocketing.)

But domestic volumes of oil output are depleting and declining inexorably. From the North Slope of Alaska to the deep water of the Gulf of Mexico, U.S. output is just plain falling. There is very little good news, and even the good news is oft-times not so good.

New discoveries and new wells just cannot keep up with depletion of older oil fields. By 2025, U.S. daily oil output will be a fraction of its current level (probably down to about 2-3 million barrels per day), even with an aggressive program of drilling offshore and in Alaska — which is not happening, in any case.

Also by 2025, U.S. imports will almost certainly decline. The oil will not be available to buy and import from world markets. Not everyone agrees with this. In one fanciful projection from 2005, the U.S. DOE forecast that “Total U.S. gross petroleum imports are projected to increase in the reference case from 12.3 million barrels per day in 2003 to 20.2 million in 2025.” Maybe in somebody’s dreams, but my view is that this is one projection that will never come true.

Really, by 2025, the rest of the oil-producing world will simply lack the product to export. This will be due to reasons of depletion on a global scale, and fast-growing internal demand in oil-producing nations. Gasoline consumption in places as diverse as Russia, Iran, Venezuela and Saudi Arabia is just soaring, so there is less net oil available for export.

And oil output everywhere is flat or declining. (Just last month, Russia announced a plateau in oil output.) And closer to home, Mexico’s Cantarell field is simply crashing at an annual depletion rate of 8% or more.

So what will happen in 2025? Will the U.S. pump its own oil? No, it’s not there. Will the U.S. continue to import large volumes? No, it won’t be available. The bottom line is that conventional oil sources for the U.S. — domestic output and imports — are simply drying up.

Be on the lookout for Part II tomorrow!

Until we meet again,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: The Coal To Liquid Debate Part I