The Remarks of



The Remarks of

 

 

Daniel Wm. Fessler

 

Managing Principal

 

Clear Energy Solutions, LLC

Story, Wyoming     San Francisco, California,    Cheyenne, Wyoming

 

Before the

 

Wyoming Pipeline Authority

 

Casper, Wyoming

December 14, 2004

 

 

 

Mr. Chairman and members of the Authority:  For the second time I have the privilege of offering suggestions on how the natural resources in my native state may be developed to diversify and broaden Wyoming’s economy and deployed in the service of neighboring jurisdictions and our nation.  On October 14 I spoke before your colleagues at the initial public hearing held by the Infrastructure Authority to outline the vital role that enhanced electric transmission facilities must play if we are to succeed in what I have termed a “no regrets” policy of economic development and environmental stewardship. 

Two months to the day I return to Casper to avail myself of your kind invitation and the privilege of speaking to your equally critical role in creating a climate in which the private sector can build and deploy an industry that will co-generate electricity and produce synthetic vehicle fuels from Powder River Basin Coal.  Each facility will offer between two hundred fifty and two hundred seventy secure, full-time jobs.  Each will add significant local tax base and a long-term community presence.  Each facility will address two critical national needs:  reliable and affordable electricity, and synthetic transport fuels derived from Wyoming coal rather than Middle Eastern crude.  Equally important, these jobs, tax revenues and critical products will be produced from facilities that do not pollute the air, water or land.  They will produce significant amounts of carbon dioxide but it will not go into the atmosphere.  Instead it will be sequestered having first been deployed within fifty miles of this city to revive the region’s significance as a source of domestic oil production and enable the recovery of coal-bed methane with a footprint far more agreeable to the owner of the surface estate.

As each of you appreciates better than I, the Wyoming Legislature created this Authority, and a year later followed it with the Infrastructure Authority because---in collaboration with Governor Freudenthal---our elected representatives were determined to use the State’s current budgetary surplus to transform the economy as opposed to provide a brief run of economic good times.  The coal-to-synthetic fuels and electricity plants that I am advocating may be the first to challenge the agenda of each Authority and require an amendment to your organic act expanding your responsibilities and augmenting your authority.  We cannot develop markets for Powder River coal west of the Basin without the coordinated guidance of both bodies in securing access to electricity markets by wire and the urban and rural transport, construction and agricultural markets by product pipeline.  The challenge is daunting but let’s take a few minutes to grasp just what success would mean to Wyoming, the west and the nation.

But before I do so, it may not be remiss to introduce myself because I have been gone a long time.  Mr. Chairman I may be the only graduate of the Torrington public schools to appear at this hearing and surely the only one to have done so by undertaking a journey from San Francisco.  The link between Torrington and California is the short version of my biography.  Like too many high school graduates, I left Wyoming at the age of eighteen.  That was some forty- five years ago.  I spent seven years in Washington, DC attending college and law school at Georgetown.  For a part of that time I was the gopher on Milward Simpson’s Senate staff.  In 1966 I overshot Wyoming and wound up in San Francisco as a law clerk on the federal court of appeals.  I next became a schoolteacher spending twenty-five years on the faculty of the University of California where I taught contracts, business organizations and securities regulation.

          In 1991 I accepted a challenge from Pete Wilson to take leave from the UC faculty and serve a six-year term on the California Public Utilities Commission. The fact that I had no involvement with, or experience in, the energy, telecommunications, water and transport mandates of that Commission made me the ideal candidate.  It was Oscar Wilde who observed that a “man about to be married should know everything or nothing.”  It would appear that the same standard obtained for appointive office in California.  Six years later, many would claim that I left that office with my ignorance unsullied.

They would not be totally correct for I learned that the thirty-six million Americans who reside in California are in a very dependent posture when it comes to energy, and, for that matter, water. The Commission’s mandate was to seek an adequate, reliable and reasonable priced supply of energy that, for us, meant concentrating on electricity and natural gas.  I spent the first three years working out a settlement of the dispute between the State of California and the Province of Alberta over the terms of the natural gas trade that, at the time, was one of the largest deficits in the US balance of payments.  Each year California exported two and one half billion dollars and Alberta exported natural gas under pricing arrangements viewed in California as the functional equivalent of a cartel.  As I sought to open that market to competitive forces and free trade, I began to wonder about the wisdom of compounding our nation’s dependence upon foreign oil reserves with an insatiable appetite for yet another imported energy commodity.

          In February 1993, I startled members of the state Senate Energy Committee by suggesting that serious consideration be devoted to shifting a significant portion of our future need to western coal.  The hearing had been called to consider the long-term implications of the state policy to promote zero emission cars.  No one disputed the pressing health and economic impacts of the dirty air that marked both our urban centers and agricultural valleys.  Electric cars would dramatically reduce the incidence of mobile source emissions but the successful deployment or large numbers of such vehicles would drive up the demand for generating capacity.  No committee member denied that coal was an abundant domestic resource from which additional electricity could be generated.  But, and to several members of the Committee this was the controlling factor, all we would accomplish by the utilization of coal was to shift the incidence of pollution from the point of consumption to that of production. Coal fired generation, I was reminded, belched tons of acid rain producing sulfur into the atmosphere, emitted vaporized metals such as lead, mercury and vanadium, and constituted the number one source of carbon dioxide emissions which caused global warming.  The year was 1993.

          In December 1996 my term on the Commission expired.  I had taken voluntary early retirement from the University and was obliged by California’s anti-revolving door statutes to find employment either in areas that had nothing to do with energy, telecommunications, water or transport or to pursue such interests outside of the state.  I elected to retain the interest in energy and joined a New York law firm that specialized in international work for both government and private sector interests aimed at building out infrastructure in third world economies.  The work was fascinating but a long way from home.

          In 2002 I proposed to my partners that we begin to seek solutions to the immediate and long-term issues presented by America’s increasing dependence upon petroleum imports.  My interest was again centering on coal. In that same year client assignments in South Africa drew my attention to the fact that virtually all of the heavy transport fuels used in that country are produced from domestic coal reserves using what is termed “Fischer Tropsch technology.” My curiosity having been stimulated, I began to discuss this technology with former colleagues at the University and contacts in the federal Department of Energy.  What I learned was startling and stimulated a journey back to

Wyoming and this Authority.

In remarks to the Infrastructure Authority I took as my text the motto on a poster in the Denver Airport.  It dealt with Kermit the Frog, a creature that eats flies, dates a pig and yet is a mega-star.  The lesson I derived was that in this life the only chance any of us have is to play the hand we are dealt.  In Wyoming the high cards in our hand are black reflecting our history in oil and our future in coal.  If we are to play that hand we need two things:  an accurate understanding of markets and a sound assessment of what we need to develop if we are to reach them with value-added products that created jobs and sustainable growth in Wyoming.  With your permission I would first like to concentrate on the markets.

          It was J. C. Penney, then a small merchant in Kemmerer, who remarked, “it is always easier to sell a man something he needs.”  Such an obvious truth hides the challenge for to determine what is needed the potential seller must grasp the plight of the potential customer.  So what is the plight of potential customers for Wyoming’s energy products?  In my view the significant problems center on acceptable air quality, and reliable and affordable electric energy and transport fuels.  These problems are “significant” in the sense that they impact millions.  Beyond the numbers the significance lies in their threat to our way of life as Americans. As you listen please bear in mind that while I am seeking to come home to Wyoming I begin that journey in California.

Air quality in California is unacceptable, not just in our cities but in our great agricultural valleys.  Throughout the west the heavy transport infrastructure is beset by fuel prices that are idling deliveries and increasing the cost of every service and product to the point that many doubt the sustainability of the nascent economic recovery.  Natural gas prices reflect a scarcity premium that shows no signs of abating and every indication of getting worse.  At a national level dependence upon the import of petroleum drives much of our foreign and defense policy with the consequence that an increasing proportion of our citizenry is, on alternate days, frightened, angered and confused. 

To be certain each of these problems is felt in Wyoming and it is ironic that they are most threatening in the Powder River Basin.  But they are exacerbated in my adopted state of California for the simple reason that there are so many more of us.  Our air is worse, far worse; our prices are high, much higher; and our dependence on imports of energy from both international and domestic sources is the greatest drain on our economy.  State and federal economic forecasters unite in warning that the dramatic run up in energy and fuel prices is hindering the economy.  Placed in real terms, in October the difference between what Californians paid to fuel their vehicles when contrasted with the same month in 2003 was $39 million per day.  Startling as this figure is it merely suggests the enormity of the economic dislocation.  The fuel scarcity premium begins at the pump and then is collected in a perverse multiplier with enhanced costs being recovered for every item in the economy that depends on transport.

The problem I am describing would be bad enough if our only challenge was to pay for it over and over.  But the cost is reckoned in more than fuel prices.  The truly challenging realization is that, as of this morning, California does not even have a plan that would achieve compliance with federal ambient air quality standards for such criteria pollutants as NOx, SOx and particulate matter. If you visit the web site of the federal Environmental Protection Agency you will find a county-by-county map depicting in purple all those that fall under the category of “extreme non-attainment.” 

The Agency’s enforcement division has studied this map and used its color scheme to allocate the option of a glide path or “cold turkey” approach toward compliance with the 2006 and 2008 fuel reformulation mandates.  Purple is the code for cold turkey and most of California and nearly all of southern California glistens like a ripe plum.  In practical terms this means that on June 1, 2006 all on road usage of diesel transport in all non-attainment air sheds in California will have to switch to a fuel in which the sulfur content has been reduced from 140 to 15 parts per million and the volume of aromatics (the industry’s romantic term for the soup of respiratory assailing chemicals emitted as a cloud of black smoke from the tail pipe) is similarly curtailed.  And where are we to obtain such fuel? 

An answer to a question relating to developments some two years from now is, by definition, a prediction.  Yet I will predict that the demand for reformulated diesel fuel by the transport and agricultural sectors of California’s economy will not, indeed, cannot, be met by an adequate supply refined within the state or imported from other western jurisdictions.  This prediction is rooted in two current facts. 

First, starting eight months ago price signals revealed a current shortage of refinery capacity in the West.  All your adult life you have been vaguely aware that diesel sold at a discount---often as much a ten to fifteen cents a gallon---when compared to 87 octane gasoline.  In the late spring with little notice and virtually no comment in the media, that situation reversed in many sections of the west and most markets in California.  Today it is not uncommon for diesel fuel to command a premium of five to ten cents per gallon.  The situation I am describing obtains in Carson, California as well as Casper and Cheyenne.  The impact has not been startling but it has already produced disruption in the heavy transport infrastructure.  Local and short-haul freight deliveries from California’s ports are handled by heavy trucks.  Many of these units are owned by sole proprietors who make a livelihood using their puller to haul trailers that had arrived by ship or rail in the distribution of goods.  There are fewer of them on California’s roads today because many of the driver-owners find that they can’t make a livelihood paying as much as $2.40 per gallon for diesel. 

I have alluded to the second factor:  the pending EPA regulations slated to go into effect on June 1, 2006.  Refiners throughout the west face a choice:  invest in expensive new equipment needed to produce the low sulphur fuel or abandon the production of diesel products.  In fairness to refiners, the challenge is to do more than lower the sulphur content.  They must simultaneously maintain or enhance the lubricity factor because a high-compression diesel engine derives much of its internal lubrication from the fuel as opposed to crank case oil.  And if that were not enough, they have to maintain or improve on what is called the “cetane rating” which describes the temperature at which the fuel will explode under pressure.  The higher the cetane rating the lower the temperature at which combustion takes place and can be sustained with the result that the motor runs at a lower temperature improving mechanical life and avoiding the production of NOx emissions. 

It has been more than three decades since we built a new refinery in the west with the consequence that a near-term business case for substantial investment to achieve this triple objective is unappealing given the age and condition of the balance of the refinery.  Shell has already provided an answer:  it is ceasing the production of diesel at its Bakersfield refinery.  I have read, but have not verified, that this one closure takes 6% of the supply of diesel fuel off the market.  When you consider what a similar disparity between supply and demand did to electricity prices in the fall of 2000 and spring of 2001, there is genuine cause for alarm.  I leave it to your imagination if other refineries follow the Shell example. 

My pessimism is not shared by the EPA which continues to predict that most refiners will achieve a timely ability to produce ultra low-sulfur diesel.  The Agency also points to certain “partial compliance” and “hardship exemptions” which can be granted on a temporary basis through the end of 2009.  What worries me is that the EPA is currently unable to explain the remarkable and threatening run-up in the retail price of the current, non-conforming fuel.  This trend is national but, as usual, it is having its most dramatic and depressing impact on the California economy.

Suffice it to say, the issue of acute non-attainment of federal air quality standards and the status of current diesel exhausts as the #1 source of urban and rural air emissions did not occupy the focus of last year’s gubernatorial recall effort.  Discovery came as belated news to Arnold Schwarzenegger along with the realization that June 1, 2006 will occur on his watch with the amplification of the crisis for off-road usage in 2008 as a reward should he seek and secure an additional term.  As he searched the drawers of Gray Davis’ abandoned desk, Governor Schwarzenegger did not find a trace of what is termed a “state implementation plan” the formal document which was to have been submitted to the federal government revealing the compliance roadmap.  A year and a month into its tenure, I am unable to find evidence that the new Administration has made up for this glaring defect with the consequence that, on some not so distant day, the Governor may well have to sit down with whoever occupies the post of Administrator at the EPA and disclose that come June 1, 2006 California will face a fuel crisis.  My hope is that on that day California’s Governor will be armed with a plan as well as a plea.  A plan that, if given an extension, California___in critical collaboration with neighboring jurisdictions and the private sector___will exceed the currently articulated ambitions of the EPA not only with respect to diesel fuel content but also with respect to cleaning our air. 

The plan which I commend to Governor Schwarzenegger and to you is that we switch our transport fleet to a synthetic diesel fuel that has zero sulphur, virtually no aromatics, a cetane rating which is fifty percent greater than currently achievable at a refinery, and very high lubricity.   This crystal clear, virtually odorless fuel will come from coal.[1]

When I make this assertion in California I am met with disbelief.  After all, isn’t coal the domestic energy resource recently ridiculed by the Los Angeles Times as “truly the fossil of a fuel.”  Last August  Mayor Hahn made headlines with the announcement that he was ordering the Department of Water and Power to terminate participation in the Intermountain Power Agency’s Phase Three Project described by its proponents as a “state of the art coal facility.”  His stated reason was a concern for atmospheric emissions in Utah and a desire to see the Department re-direct its bid for additional generation to an increased reliance upon renewables.  

The Mayor objected to the construction and deployment of a conventional pulverized coal-fired project which would have incorporated advanced technology to reduce NOx and SOx emissions.  Carbon dioxide and trace amounts of lead and mercury would have escaped into the atmosphere.  Herein lies the legitimate objection to the coal option.  But what if it was eliminated by proven technology that would generate electricity from a coal feedstock with no atmospheric emissions, period?  And what if this same coal-fired facility could produce a synthetic diesel that, when substituted for the #2 refinery product in any stationary or mobile compression engine would, without any mechanical modification, alter that equipment from the #1 remaining source of urban and rural air pollution into an ultra-low emission unit with tail pipe emissions more benign than equipment designed or modified to run on compressed natural gas?

Here is the opportunity the Los Angeles Times neglected to mention, what Paul Harvey would call “the rest of the story.”  The proposition I wish to advance this morning is that projects meeting these output criteria for two products in critical short supply in the West and zero atmospheric emissions could be sited today and in service within five years.  The technology is well proven, the cost is quantifiable and, in today’s markets for both electricity and vehicular fuels, that cost can be recovered in the marketplace along with a profit.

          The quest for an environmentally acceptable use of the fossil of fossil fuels begins with a distinction long known to engineers but little discussed among those of us who do not happen to be members of that distinguished profession.  Essentially there are two ways to go after the objectionable byproducts of electrical generation based on a coal feedstock.  The terms of art are remarkably suggestive:  pre- vs. post-combustion. 

          With modest and geographically dispersed exceptions, the footprint of the historic coal based generation industry has been that of post-combustion efforts to clean up smokestack emissions.  As an aside, let me acknowledge that there are other environmental issues dealing with the impact of residual byproducts and solid wastes on groundwater, but sufficient for our present purpose is a focus on atmospheric emissions.  An array of technologies are available to designers of modern pulverized coal facilities such as the one contemplated at the Intermountain Power Agency.  Some, like low NOx burners, can improve combustion while others, like electric precipitators and selective catalytic reduction equipment, can capture the great bulk of NOx and SOx emissions.  But this equipment, even in its sate of the art iterations, cannot prevent carbon dioxide and trace minerals from escaping into the atmosphere.

          If the goal is to generate electricity using coal as a fuel and at the same time eliminate atmospheric emissions, the solution is conceptually very simple:  don’t burn coal.  Burn instead a fuel, termed “synthesis gas” from which all of the objectionable trace elements have been removed pre-combustion.  The challenge is to consume the synthesis so completely that the only matter escaping up the stack is water vapor and carbon dioxide.  At this point the zero emission plant requires only that you capture and then sequester the stream of carbon dioxide.  The water vapor can be condensed as part of a reclaim effort diminishing the demand upon scarce water recourses.

          Recent attention to coal gasification centers on burning the synthesis gas in combined cycle array of a primary turbine and a second unit operating off of stream generated by waste heat.  The basis for this “IGCC technology” was invented on the eve of the First World War and deployed on a massive scale in South Africa more than twenty years ago.   In North America coal gasification has been a mainstay of the photo/chemistry industry for more than 20 years.  Ironically, the most wide-spread commercialization of coal gasification employs American technology marketed by Texaco.  Following the merger with Chevron, this technology has been acquired by GE Energy.  At the same time rival products offering claimed design improvements have attracted investor interest.  Witness Conoco/Phillips’ acquisition of the E-Gasifier.  Shell offers a third variant on coal gasification technology.

          Beginning in September we have been reading of a major push by GE Energy to introduce IGCC projects in the mid-west.  From Wyoming’s perspective this is essentially a large dose of “bad news.”  The major advantage of deploying pre-combustion technologies in new mid-western coal plants is their ability to burn local, high-sulfur coal.  Every ton of this coal that becomes usable is likely to displace a ton of low-sulfur Powder River Basin product.  The economics of switching to the consumption of local coal is rooted in the rail transport costs that already cloud the future of the historic markets for Powder River Basin coal. 

          At a recent technical conference held by the Western Governors’ Conference industry spokesmen warned that IGCC facilities are likely a decade away from deployment in the mountain west.  There are two reasons the first related to the properties of low-ranked coals and the second to the environmental Achilles heel of this technology.  ChevronTexaco was candid that its industry leading gasifier does not work well with low and mid-rank sub-bituminous coal and so is currently ill-suited for deployment in the west.  Even if this problem could be solved, there is no economical way to isolate the CO2 emissions which escape into the atmosphere.  This last factor may become critical if the Western Governors’ Association defines “clean” in the clean coal component of their energy initiative in terms of power plants that produce a stream of CO2  which can be captured and sequestered.

          Fortunately from the perspective of Wyoming’s economic future and our stewardship over the environment there is a solution, one that builds on the concept of coal gasification but goes beyond the aspiration to simply burn the synthesis gas in a turbine.  Once you have gasified the coal into a clean synthesis gas using oxygen, you are more than half way to solving America’s transport fuel and air emission challenges.  If you simply pass the synthesis gas over a catalyst and create a longer carbon chain molecule, you precipitate a clear, nearly odorless synthetic substitute for refinery diesel.  This fuel contains zero sulphur, produces virtually no aromatics, and has a cetane rating nearly fifty per cent higher than can be economically attained by refining petroleum.  It can also be formulated to attain a very high lubricity factor.  If this fuel is substituted for #2 refinery diesel in any compression engine it will instantly transform a major source of toxic air contaminants into an ultra-low emission unit.  No mechanical modification of the users equipment is required and the emission pattern would be more benign than that which is achievable by the costly replacement or conversion to natural gas.  I am a fan of LNG but it is both fair and factual to point out that many projects are being designed to utilize what are termed “stranded gas reserves” in the Middle East with the attendant risk to national security and our armed forces.

          Beyond the national and human security concerns, ponder the financial implications of switching our heavy transport and transportation fleets to natural gas.  Aside from the small detail that we do not have a delivery system for such an infrastructure, what school district can afford to replace what are otherwise perfectly serviceable buses with natural gas propelled units when cleaner air can be accomplished by a mere liquid fuel substitution, with the infrastructure for distribution already in place?  A similar and utterly unnecessary economic threat need not be imposed on our beleaguered public transit agencies to say nothing of California’s farm and ranch economy. 

          Mayor Hahn rekindled a debate over what was termed “environmental imperialism” during my tenure in government.  In the 1990’s it centered on California’s ambition to deploy large numbers of electric cars.  Critics conceded that such vehicles worked an environmental benefit at the point of consumption but contended that this was off-set by the environmental damage inflicted at the point of production.  Recall Hahn’s concern about the air quality consequences in Utah from another pulverized coal plant. 

Let me take up this vital point in closing for it is my favorite aspect of the vision.  If we sequester the carbon dioxide emissions from a coal to synthetic fuel and electric generation facility, we inflict no environmental damage.  All trace elements are recovered in their elemental form.  The water vapor is condensed for further usage and is potable.  And, if we can prevail in the race to site these facilities in Wyoming,  the carbon dioxide emissions will be employed in the tertiary recovery of oil and the release of coal-bed methane.  And like that domestic crude, every barrel of synthetic fuel produced by what you may envision as a “coal refinery” is oil we do not need to import in exchange for the greatest drain on America’s balance of payments and, far more importantly, the lives of our young men and women. 

Gentlemen I have now described a set of problems and the role that I envision for coal in providing a solution to those problems.  Let me conclude by laying this matter on your doorstep with some thoughts as to what Wyoming must do if it is to attract a coal to synthetic fuels and electricity industry.  Put in a sentence, and asking for the implausible substitution in your mind of me for Tom Cruise, “help me help you.”  For the foreseeable future I am dedicated to amassing the coalition of private sector interests to make a business out of producing electricity for the wholesale market and producing and distributing synthetic fuels.  My goal is not to create a project but to found an industry limited only by the coal available from the Powder River Basin and the needs of urban and rural markets for electricity and transport fuels west of Wyoming.  But I cannot get beyond talking unless the project sponsors and industry founders are confident that there will be adequate transport infrastructure to deliver these value added products.  This means product pipelines originating in Converse and Natrona Counties in addition to high voltage  transmission lines reaching Utah, Nevada, Arizona and California.  Infrastructure facilitating delivery to Colorado is also on my wish list. 

The Executive and Legislative branches of the Wyoming State Government have stolen a march on any other state in providing for this Authority and augmenting it with the Infrastructure Authority.  But for you to play the role that I envision our elected representatives will need to amend and enlarge your mandate making it clear that you are to pursue pipeline facilities capable of moving both gaseous and distillate products derived from coal.  I have discussed this need with Governor Freudenthal’s office and with Senator Hawks and Representative Lockhart.  I have assured them, and I assure you that my colleagues and I are committed to Wyoming and this means to working with you to devise a plan and facilitate its implementation so that there is adequate confidence in the targets of my efforts that if they respond with an industry you will achieve a just in time delivery of the critical infrastructure to access the markets.

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*Daniel Fessler is Of Counsel to Holland & Knight LLP, a national law firm with offices in most major west coast cities.  He is also the managing principal of Clear Energy Solutions, LLC a special purpose entity that works with emerging technologies and project development.  From 1991-96 he was President of the California Public Utilities Commission.

 

For further information contact:

 

Daniel Wm. Fessler

Clear Energy Solutions, LLC

Suite 2800

50 California Street

San Francisco, CA 94111

415-743-6960

daniel.fessler@

 

or

 

Clear Energy Solutions, LLC

Post Office Box 98

Story, WY 82842

307-683-2728

dwfessle@

 

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[1] Fischer-Tropsch synthetic diesel must be augmented to achieve a satisfactory lubricity factor.  The easiest way to achieve this augmentation is to blend it with bio-diesel.  An ideal blend is 95% F-T and 5% bio-diesel.

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