Synthetic Fuels

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Synthetic Fuels: How Converting Coal to Oil Can Solve The Energy Crisis

by Floyd G. Brown, Advisory Panelist, Investment U
Wednesday, May 28, 2008: Issue #800

Nearly 90 years ago, German researchers Franz Fischer and Hans Tropsch developed a process of changing coal to oil that will solve our energy crisis. Today the term “Fischer-Tropsch” is seen frequently in articles about synthetic fuels. It now applies to a wide variety of similar processes for converting coal, biomass and other carbon intensive feedstocks into useable products such as diesel and jet fuel.

These two scientists at the Kaiser Wilhelm Institute invented the process because of a petroleum shortage, increased demand and skyrocketing prices – similar to what the United States faces today. During World War II, Germany used the technology to keep Hitler’s war-machine running. By 1944, Germany’s annual synthetic fuel production reached more than 124,000 barrels per day from 25 plants. After the war, captured German scientists continued to improve the process in the United States.

But the synthetic fuel technology faded away after the 1980s. That’s when Congress passed the Energy Security Act, which birthed the Synthetic Fuels Corp. This corporation spent over $88 billion in government loans and incentives, with the goal of creating two million barrels a day of synthetic oil within seven years.

Synthetic Fuels Corp was launched in 1980 and it folded in 1986 after spending billions without providing any fuel. In the grinding recession of the early 1980s, oil prices sunk from more than $39 a barrel to less than $8 a barrel. Synthetic oil became a financial bust. Now the economics have changed…

How the Synthetic Fuel Process Works

The synthetic fuel 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.

Because the United States has benefited from years of low price petroleum, the leader in synthetic fuel and gas grew up in South Africa. The global leader is Sasol (NYSE: SSL). Sasol uses coal and natural gas as a feedstock to produce a variety of synthetic petroleum products. Sasol produces most of South Africa’s diesel fuel using a modified Fischer-Tropsch process.

This synthetic fuel process helped South Africa to meet energy needs during its economic isolation under Apartheid. Sasol’s process has received recent investor attention because they produce a low-sulfur diesel fuel, which minimizes the environmental impacts. As a result its stock has soared.

In the United States, a small firm named Rentech, Inc. (AMEX: RTK) provides technology to produce ultra-clean synthetic fuels and chemicals. It licenses its proprietary derivative process from the Fischer-Tropsch method.

It converts synthetic gas derived from coal, petroleum coke, biomass, natural gas, or municipal solid waste into liquid hydrocarbon products. These products include:

Ultra clean diesel fuel
Jet fuel
Naphtha
Specialty chemicals
And other fuel products.

Rentech also manufactures anhydrous ammonia, UAN, nitric acid, carbon dioxide and granular and liquid urea.

Utilizing Synthetic Fuels in the United States

The US Air Force has been a leader in the utilization of synthetic fuels in the United States. Most of the fleet is being certified to fly on a blend of jet and synthetic fuels. Recently, a B-1 Bomber became the first plane to break the sound barrier flying with a mixture that included synthetic jet fuel.

In addition, Rentech has a joint development agreement with Peabody Energy Corporation for the co-development of CTL projects that convert coal into ultra-clean transportation fuels using Rentech’s Process.

As with many companies focused on research and development of new technology, Rentech has yet to post a profit and its shares have traded in a small range for over a decade. RTK is still a highly speculative investment in one of the many potential solutions to our rising fuel costs.

So while the media hype is focused on alternative energy investments like solar, wind and even tidal power to solve our energy needs, the likely successor to petroleum will be refined from a black, sooty fuel that has been used since ancient times – coal.

I am happy to report that the United States has lots of coal, and companies operating in our free enterprise profit-incentive world are perfecting the synthetic fuel technology to cleanly burn it in our planes, trains and automobiles.

Happy investing,

Floyd

Floyd Brown, a regular contributor to Investment U, began his highly successful investing career while still in high school… making his first million before turning 30. Floyd is a regular contributor to The Oxford Club, as well. Just go here to find out why becoming a member could be so profitable.

Today’s Investment U Crib Sheet

When it comes to skyrocketing energy prices, oil is certainly leading the pack. It’s hitting new all-time highs on nearly a weekly basis. But here’s a look at some other energy resources in play.

Coal: Forecasts of 2008 coal prices of $80 to $90 per ton have recently been revised to over $100. This is double coal’s price of $50 from just last year.

Natural Gas: Residential natural gas climbed from $12.12 per thousand cubic feet in January to $15.13 in April. It’s expected to climb to $16.31 for May

Ethanol: As oil remains high, it supports increased prices for ethanol around $2.50 a gallon. However, the market environment could turn as producers are faced with rising corn prices and uncertain regulatory mandates.

The price of commodities has been unfazed by the numerous forces trying to bring it down. But the laws of supply and demand are still in effect, highlighted by Memorial Day weekend travel numbers. With gas prices at all-time highs, Americans cut their holiday drive time by 4.3%.

That’s 11 billion fewer miles traveled.

Time will tell if high prices will force consumers to continue changing their habits, ultimately affecting the price of commodities across the board. Either way, here’s an oil company we see outperforming the market for years to come.