The sustained high oil prices and increasing oil imports, coupled with the country's rising demand for transportation fuels, has led to a perception that India's oil security is being threatened. While India has been securing overseas oil fields, through ONGC, for a while now, it is also actively pushing biomass-based fuels and the conversion of coal to liquid fuels (CTL). While production of biodiesel has now become a National Mission, CTL is also gaining currency as a commercially attractive proposition, primarily because high oil prices and the potentially cleaner characteristics.

An Indian push for CTL

The high oil prices have encouraged companies in India (and globally) for converting coal to liquid fuels. Initially, Oil India Limited (OIL) did some basic research on direct coal liquefaction, and they have now planned for a $2.5 billion project based on direct liquefaction of 3.5 million tonnes of (MT) low-ash, high-sulfur Assam coal to produce about 2 million barrels of diesel and naphtha.

Currently, however, only about 1 MT of Northeast coal is being produced annually. Studies to assess the feasibility of this project have been conducted with a U.S. company (Hydrocarbon Technologies, Inc.). OIL has requested Coal India Limited (CIL) to explore possibilities of supplying adequate quantity of coal for this venture. Assam coal is also better suited for non-power use, given the relatively low electrical load density in the Northeast and the large distances between the Northeast coalfields and the high load centres in West Bengal.

The Investment Commission, promulgated by the Finance Ministry, endorsed a project by Tata in association with the South African company Sasol. Interestingly, the chairman of the Investment Commission was (and still is) Ratan Tata. The Tata-Sasol project is a large $8 billion indirect liquefaction project using Sasol's gasification technology and patented Fischer-Tropsch process to convert high-ash open-cast mined coal into 80,000 barrels per day (BPD) of liquid products, which can then be refined to produce diesel, naphtha, jet fuel, LPG and base oils (lubricants). About 1-1.4 billion tons (BT) of extractable open cast coal mining reserves will be needed to produce the annual coal requirement of 28-31 MT.

Mukesh Ambani's Reliance Industries also put forward an $8 billion proposal late last year for an indirect liquefaction pithead plant using Mahanadi coal to produce 80,000 BPD of synthetic oil products. Reliance plans to use U.S. technology, and has requested the allocation of three coal blocks with 1.6 billion tons of reserves in the Talcher coalfields in Orissa.

Will CTL compromise India's ability to meet electricity demand?

In view of high oil prices, the Indian government has also been keen to promote CTL projects, especially as the private sector seems to be ready to invest in CTL. In 2005, the Expert Committee on Integrated Energy Policy had recommended that liquefaction and underground gasification of coal be declared as one of the end uses for facilitating private sector investment in this area. Accordingly, the Coal Mines (Nationalisation) Act was amended in July 2007 to allow coal gasification and coal liquefaction as valid end-uses for captive mining-hence, the private sector can now legitimately mine coal and use it for CTL.

After the Tatas made a presentation of their proposed venture before the Prime Minister using the Investment Commission as a forum, the Prime Minister's Office set up an Inter-Ministerial Group (IMG) headed by Member (Energy) of the Planning Commission, Dr Kirit Parikh, to examine the proposal. However, after deliberations, the Planning Commission rejected the proposal on technical grounds.

The Planning Commission noted that the coal would be better used for electricity generation rather for making liquid fuels. There are serious concerns about the benefits of converting a solid primary fuel, which is the dominant source for electricity production, into a liquid primary energy resource-especially as the efficiency of the conversion process to liquid fuels is quite low (about 42 per cent). As the Sankar Committee and the Integrated Energy Policy reports point out, India does not have surplus coal, as indicated by both the projected increases in import of non-coking coal to meet the demand for power generation and the fact that India only has an estimated 56-71 BT of extractable coal, out of the 250 BT of geological resources.

Under these conditions, investing in CTL might compromise the ability to meet electricity demand using domestic coal. So, large CTL plants will exacerbate the problem of coal import dependence and could actually threaten India's energy security, rather than alleviate it.

In general, CTL projects only make commercial sense under current high oil prices and low coal prices. Furthermore, the volatility of oil prices dramatically affects the commercial viability of CTL plants. In the late 70s, assuming high oil prices, the United States invested in six CTL projects, but by the early 80s, all its products became unviable due to a sustained drop in oil prices, and the projects were terminated in 1985.

Hence, companies were demanding government subsidies and incentives to maintain commercial viability; however, specific incentives just for CTL would promote distortions. The initial Tata proposal wanted the government to absorb some of the price fluctuation risk in the form of tax rebates/holidays and removal of import duties which were not acceptable to the Planning Commission.

Later, a revised proposal without tax rebates and subsidies was submitted to the IMG, and the IMG itself attempted to resolve the various technical issues. After some more deliberations, the IMG reached a conclusion that CTL technology may be pursued in the country and suitable coal blocks may be allocated for the purpose. At the same time, the Government also earmarked three coal blocks which suited the requirement of the Tata-Sasol project.

Dissensions within the government

Despite the IMG's approval, there were significant dissensions within the group, led primarily by the Principal Adviser (Energy), Surya Sethi. A dissent note was submitted to the IMG, especially highlighting the existing implicit subsidy for CTL because of coal pricing. The notified price of CIL-produced coal (average of Rs.900/tonne) is low compared to the international price for coal, which is on the order of Rs. 5000-6000/tonne. Even after taking into account the lower quality of Indian coals, the correct notified price in the current market situation should be around Rs.2400-3000/tonne.

For example, the e-auction prices for non-power use are significantly higher than the notified price. Thus, there is an implicit price subsidy already existing for the coal sector. Furthermore, the private sector believes that it can extract coal at costs lower than the CIL-notified price (around Rs.400/tonne), as long as they are allocated coal blocks with shallow coal reserves. Thus, the large difference between the procurement price of either domestic or imported coal and the cost of mining from a captive coal block heavily favours CTL based on captive mining.

In order to remove this implicit subsidy, the dissent note suggested that coal blocks should be bid out among potential competitors on the basis of what they are willing to pay to the government for the right to mine coal. In contrast, the current Act does not charge any money for allocation of coal block and first come first served principle is to be adopted. The government only has the role of assessing the eligibility of applicant based on their preparedness and capability.

Bringing competition to CTL

On 10 June, the government decided to post an open advertisement for inviting applications for allotment of a coal block in the Talcher coalfield in Orissa earmarked for a CTL project. It also decided that all those who submitted unsolicited application in the past (including the Tata-Sasol project) need to apply afresh. In effect, the IMG decided to restrict CTL to only one project at the moment, while also allowing for competition among different companies. However, the IMG only allowed 20 days for companies to submit their applications (deadline of 1 July). Nonetheless, in addition to Tatas and Reliance, Jindal and Adani have now joined the fray, and more companies will likely take the plunge and compete for CTL-coal blocks.

More recently, on 21 June, IMG and the Coal Ministry added two more blocks in the Talcher coalfield, and on 24 June, they extended the deadline to 21 July. In effect, this again changed the rules in the middle, while also adding more complexity. All the three blocks now earmarked for CTL have shallow coal reserves (less than 300 m) - hence, companies will push for the cheapest means of extraction via the more environmentally and socially destructive open cast mining technologies.

It is also yet to seen as to how unbiased the IMG and the Coal Ministry will be in deciding the winner. This may be an issue, as the IMG had already effectively approved the Tata-Sasol proposal even before this recent competition, and moreover the guidelines for the competition seem to favour the Tata proposal.

Furthermore, the short time allocated by the IMG (20 days) for companies to submit their applications, including technology tie-ups, favours companies who have already had technology tie-ups (i.e. Tata and Reliance). It is also odd that rather than go through the process of testing and demonstrating the viability of the CTL technology with Indian coal, the IMG and government seems to want to rush headlong into CTL with large private sector companies who are expected to tie up with "proven" technology providers.

Environmental impacts ignored

In addition to the various techno-economic issues already raised, there are serious environmental concerns, above and beyond the socio-environmental issues associated with coal mining. Sasol, which has the most CTL experience, has a questionable environmental and social record in South Africa. In 2001, Sasol's Sasolburg plant alone emitted over 42,000 tons of volatile organic compounds, 22,000 tons of hydrogen sulfide and 26,000 tons of sulfur dioxide. Statistics from clinics around Sasolburg indicate high rates of anemia, asthma and other respiratory problems among the local community near Sasolburg due to the air pollution. In fact, the Sasolburg plant has recently stopped using coal and is using natural gas as feedstock.

Water consumption is another key concern. About 12-14 barrels of water is needed to produce a barrel of liquid fuel from coal. Therefore, the water requirement for an 80,000 BPD CTL plant is around 125,000 cubic metres of water, which could serve the needs of nearly a million people in India. Incidentally, the area in the vicinity of the allocated coal blocks for CTL does not have large reservoirs of water, hence, it is likely that ground water will have to be used for CTL.

The consequences of extracting such large volumes of ground water have not yet been assessed.

CTL technologies are also highly carbon-intensive. A recent MIT study indicates that the CO2 emissions from CTL-derived fuels would be 2.5 to 3.5 times higher than the amount produced by burning conventional hydrocarbons. The emissions become comparable only if CO2 is captured and geologically stored-however, such capture and storage is not yet commercially proven at large scale, and CTL plants in India (or elsewhere) are not considering implementing CCS.

To address these environmental issues the government must make sure that its CTL policies are sensitive to the socio-environmental consequences of CTL. For example, a cess could be charged on the coal produced for CTL, and the amount raised from the cess could be for alleviating the environmental problems - this cess would also remove the implicit subsidy on coal.

This approach was also suggested by the dissent note to the IMG. In addition, given the high price of oil (hovering currently around $140/barrel), the private sector can readily afford to invest in advanced mining and pollution control technologies. For example, this could allow the private sector to bring in new technologies for underground mining and utilise the deeper reserves.

Is CTL good for India?

It is quite clear that there are various techno-economic and environmental issues associated with CTL. The private sector will push for it because there is a lot of profit to be made in a world of high oil prices. However, government polices must be more cognizant of the broader and longer term impacts of CTL on India's energy security, and it should not be seduced into giving away coal blocks for short term gains or focus exclusively on increasing oil supply.

Oil security should also include reducing demand, eliminating subsidies on petrol and diesel, and increasing mass transportation options in big cities. The dissensions within the IMG already point out that there is awareness on these issues within the government.

On balance, CTL would be relevant only if the country was under some kind of threat where oil imports were being denied to it (for example, Germany and South Africa only invested in CTL because they were deprived of oil due to war and embargo), if there was surplus coal and water, if coal for CTL is not subsidised, and if CTL's air pollution and CO2 emissions problems were mitigated. Hence, promotion of CTL in India may not be appropriate at the moment.