DoD Snythetic Fuel Obsession

On June 13, 2008, Congressional Budget Office released a cost estimate report on S. 3001 National Defense Authorization Act for Fiscal Year 2009. CBO made the following observations:

“Multiyear Procurement Authority for Synthetic and Alternative Fuels. Section 821
would allow the Department of Defense to enter into contracts with terms of up to 10 years
for the acquisition of synthetic and alternative fuels. CBO expects that under those
contracts, DoD would commit to purchase a certain amount of fuel during each year of the
contract. Those guaranteed payments would allow makers of synthetic fuels such as those
derived from coal or natural gas, and alternative fuels such as ethanol, to recover some or all
of the capital costs of the plants and refineries that would be built to produce the fuel. Thus,
those federal commitments would likely provide producers with a guaranteed source of
income that would enable them to obtain financing for development and construction from
private-sector lenders. DoD would use such contracts to finance new facilities intended to
produce fuel for federal consumption, and CBO considers spending for those facilities to be
a governmental expenditure.

Because the technology to produce synthetic fuels such as liquid fuel from coal has not yet
proven commercially viable—there are only a few facilities operating worldwide, and none
in the United States—it is difficult to obtain the financing needed to develop and construct
such facilities at acceptable interest rates. The production of alternative fuels such as ethanol
and biodiesel is not profitable without a variety of government support programs and
regulatory requirements, such as tax credits, import tariffs, and the renewable fuel standard,
which requires refiners to blend a certain amount of alternative fuels with the gasoline they
produce. Thus, some form of government commitment will be necessary to facilitate the
construction of production capacity to meet DoD’s demand for synthetic and alternative
fuels. We expect that the long-term contracts that would be authorized by section 821 would
provide lenders the surety they need to make loans to enable the construction of such
facilities.

…...

Based on DoD’s plans to reduce its consumption of imported petroleum products, CBO
estimates that within the next 10 years, synthetic and alternative fuels could account for
10 percent (approximately 12 million barrels per year) of DoD’s annual purchases of fuel for
aircraft and ground vehicles. Most of that fuel would come from synthetic sources. Ethanol
lacks the energy to power military aircraft engines and is not commonly blended for use in
diesel engines, which are common in military vehicles. Thus, CBO assumes that 90 percent
of fuel purchased under those multiyear contracts would be synthetic fuel produced from coal
and the remainder would be alternative fuels such as ethanol and biodiesel.

Because it will be at least several years before the technology for coal-to-liquid fuel
production is mature enough for commercial deployment in the United States, CBO estimates
that expenditures for synthetic fuel plants would begin in 2015. Contracts for alternative
fuels could be signed sooner, and we expect that construction of ethanol or biodiesel plants
would begin by 2010. CBO estimates that it would cost approximately $5.8 billion to
construct a synthetic fuel plant with the capacity to produce 11 million barrels annually and
about $100 million to construct ethanol plants with the capacity to produce 1 million barrels
per year. Thus, enacting section 821 would increase direct spending by an estimated
$5.9 billion over the 2009-2018 period.”
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Let me make one simple calculation:

if conventional oil were used then DoD would spend

11 million barrels (annual purchase) * 42 (to convert to gallon) * 10 (years) * 3 (assuming a constant $3 per gallon) = $13.9 billion.

NOW,

CBO estimates that it would cost $5.8 billion to construct a synthetic fuel plant that would produce yearly 11 million barrels of fuel annually.

QUESTION1: How many years a private company would wait to recuperate its costs?
QUESTION2: How much should the company charge per gallon of synthetic fuel in order not to bankrupt?

Whatever assumptions you make private company must charge whole lot of money to DOD per gallon of synthetic fuel to stay break-even. However, only charity organizations would stay at break-even. So, unless American tax payers subsidize private companies so that DoD could waste more money, synthetic fuel has no place in engines of tactical vehicles. Where is the free market and the market economy the US teach all over the world?

Synthetic fuel derived from coal is not cost effective and does not minimize price risk for DOD. Good luck to DoD and companies seeking for lucrative contracts.

By the way, fuel cycle GHG emissions from synthetic fuel derived from coal will never ever be smaller than conventional oil. This means that the proposed Act already contradicts itself.

FYI: The original TEXT of the proposed act says that (I omitted boring and unnecessary legal parts):

`Sec. 2410r. Multiyear procurement authority: purchase of alternative and synthetic fuels
`(a) Multiyear Contracts Authorized- …. the head of an agency may enter into contracts for a period not to exceed 10 years for the purchase of alternative fuels or synthetic fuels.
`(b) Limitations on Contracts for Periods in Excess of Five Years- The head of an agency may exercise the authority in subsection (a) to enter a contract for a period in excess of five years only if the head of the agency determines in writing, on the basis of a business case analysis prepared by the agency, that-- the proposed purchase of fuels under such contract is cost effective for the agency; it would not be possible to purchase fuels from the source in an economical manner without the use of a contract for a period in excess of five years;
…

* Limitation on Lifecycle Greenhouse Gas Emissions- The head of an agency may not purchase alternative fuels or synthetic fuels under the authority in subsection unless the contract specifies that lifecycle greenhouse gas emissions associated with the production and combustion of the fuels to be provided under the contract are not greater than such emissions from conventional petroleum-based fuels that are used in the same application.

* Definitions: `synthetic fuel' ….. is produced by chemical or physical transformation of domestic sources of energy.'.

* Regulations- the multiyear contract will contain appropriate pricing mechanisms to minimize risk to the government from significant changes in market prices for energy;

(2) MINIMUM ANTICIPATED SAVINGS- The regulations required by paragraph (1) shall provide that, in any case in which the estimated total expenditure under a multiyear contract ….. are anticipated to be more than …. $540,000,000 (in fiscal year 1990 constant dollars), the head of an agency may initiate such contract under such section only upon a finding that use of such contract will result in savings exceeding 10 percent of the total anticipated costs of procuring an equivalent amount of fuel for the same application through other means. …