Coal Liquefaction

Part of Petition – in the House of Commons at 9:54 am on 22 May 1981.

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Photo of Mr John Moore Mr John Moore , Croydon Central 9:54, 22 May 1981

I welcome the remarks of my hon. Friend the Member for Flint, West (Sir A. Meyer). I am sure that the House is grateful to him for raising this question, which is of keen interest to his constituents, of course, but, as the early-day motion signed by over 100 hon. Members confirms, it is also a matter of great importance to the whole House.

The House will recognise that the matter is important because of the presence on the Opposition Front Bench of the right hon. Member for Leeds, South (Mr. Rees), and the presence of the hon. Member for Rother Valley (Mr. Hardy), who has taken a consistent and diligent interest in the future of the coal industry. I am sorry that the illness of his wife has prevented the attendance of the hon. Member for Midlothian (Mr. Eadie), who has been at the back of this project from its beginning.

I also express my gratitude to my hon. Friend the Member for Flint, West for the appreciation that he has shown of the complexity of the issue and the difficulties for the Government in reaching an early decision. He has pursued the issue with the diligence that I would expect of one who serves so well his constituents and the interests of the country. In replying to my hon. Friend, I propose to cover the various issues drawn to the House's attention and to put the Point of Ayr proposal into the context of work on this exciting technology, which is going on around the world.

The world is using up its oil reserves faster than we are discovering new ones. For every three barrels of oil that we use, we discover only two to replace them. Yet the industrialised world is still heavily dependent on liquid fuels, and, despite our best efforts to reduce that dependence, I think we can all see the long-term need, for example, in transport uses, for liquid fuels. That may be much more difficult to curtail. Hence the enormous interest world-wide in the conversion of coal to liquid fuel.

The main impetus behind the major development programmes on oil from coal in the United States of America, West Germany and Japan is to find ways to reduce dependence upon imported oil. In Germany and Japan, those programmes go beyond the mere development of a technology and into exploring the possibilities of investment in politically stable countries where coal can be produced cheaply. No one would disagree that that is a sensible strategy, but I stress to the House that both West Germany and Japan face a different energy situation from our own. Unlike us, they do not have the breathing space afforded by North Sea oil. They are both totally dependent on imported oil supplies. So their need to develop oil from coal technologies is far more urgent than ours.

The Government believe that it is precisely at times like these, when we have adequate indigenous energy supplies, that we should provide for tomorrow by doing the necessary work to establish prospects for our energy supplies in the future.

The Government have honoured the last Administration's agreement with the National Coal Board to provide support for the design phase of Point of Ayr. Indeed, we have agreed to two modest extensions. The first data from this work became available in mid-1980 and the Department began its evaluation immediately. Hon. Members will know from discussion in the press that the data are complex. The decision is crucial. I can certainly understand the anxiety of hon. Members to see a decision at the earliest possible moment, and I sympathise with their impatience. But this is a matter which could not be rushed. Naturally, I am as sorry as my hon. Friend that those serious matters have been portrayed in some press reports in terms of a dispute between the Government and the board. I was particularly sorry that there had been any allegation of delay on the part of the Government in dealing with this important matter.

Far from vacillating, the Government, on receipt of the pilot plant proposal and cost estimates in April 1980, immediately began detailed technical discussions with the board and BP, which lasted until April of this year. Those discussions led to an agreement to extend the design contract to cover, in particular, a 2,000-hour test with the three-quarter tonne per day LSE plant at Stoke Orchard. This test is to determine the long-term performance of the process in a continuous mode. Together with a critical design review, this is intended to improve the quality of the NCB's technology package. We have thus shown a continuing interest in the board's proposal and have gone beyond the contractual commitments of the previous Government.

I am glad to be able to use this opportunity to announce to the House this morning the conclusion of the Government's very careful study of the proposal to develop coal liquefaction technology at Point of Ayr. But first I think that the House would welcome it if I set out in some detail the economic background to this study and the Government's conclusion.

First, there is the question of United Kingdom self-sufficiency. That point was raised by my hon. Friend the Member for Flint, West. I stress that that self-sufficiency is not in oil itself, but in the premium products of transport fuels—petrol, diesel and aviation fuels—and chemical feedstocks, the raw materials for rubbers, plastics, paints, resins and fibres. Our concentration on the premium uses requires us to make a commitment to oil substitution, leading to a decline of non-premium demand for oil.

As a nation we have already made good progress in those sectors of the economy where there is the greatest potential for oil substitution. In electricity generation, United Kingdom public sector power stations burned only 6·3 million tonnes of oil in 1980—a reduction of nearly 40 per cent. on 1979. In the domestic sector, oil use fell by over 20 per cent. last year to a level of about 2·5 million tonnes. Oil use in industry also fell by over 20 per cent., but consumption here is still running at over 16 million tonnes per year.

There remains, therefore, sizeable potential for further substitution of oil in non-premium industrial uses. The economic pricing of fuels is the primary means of achieving a successful transition out of oil, and is already providing industrialists with a clear incentive to move from oil to coal. However, in order to give industrialists further encouragement to switch, the Government announced recently their decision to make available £50 million, to be committed over the next two years, in the form of capital grants of up to 25 per cent. of the cost of replacing oil-fired boilers by those burning coal. This represents an additional potential coal burn of 2 million tonnes—obviously not immediately, but building up to that level as plant is installed. As I said, the scheme will be administered by the Department of Industry and details will be announced in the very near future.

In addition to the new boiler conversion scheme, the Government have been giving financial support to a number of demonstration projects designed to improve coal combustion techniques. The NCB has, in collaboration with the boiler manufacturers, also achieved considerable progress in this area. The use of coal-oil mixtures, another promising means of promoting substitution, is being actively pursued, notably by BP and Shell. There is then considerable potential for moving the United Kingdom away from the use of oil for bulk heating purposes, and replacing some of it with coal.

However, the speed with which we need to develop alternatives to oil in its transport and chemical uses is uncertain. Experts differ in their views on the question when our oil supplies will no longer be sufficient to meet our needs, although it would seem unjustifiably optimistic to assume that they could do so for more than a few decades.

United Kingdom oil production in 1980 was just over 80 million tonnes, and it is expected to rise to between 90 million and 120 million tonnes in 1984. Thereafter it will peak and then fall away, but the remaining reserves of 2 billion to 4 billion tonnes, including estimates of oil in future discoveries, should enable a contribution to domestic needs to be maintained well into the next century.

The indications are that with a full commitment to energy conservation and oil substitution measures the United Kingdom ought to be able to maintain net self-sufficiency in transport fuels and chemicals feedstocks well into the next century. If oil is to be used increasingly for these premium applications, coal will play an important part in displacing oil from the non-premium markets.

The prospects for the production of oil from coal in the United Kingdom must be examined against this background. The economics of oil from coal depend heavily on the difference between coal and oil prices. It takes about 1½ therms of coal to produce 1 therm of synthetic liquids. The high capital and running costs of the plants have to be recovered from this margin between coal and oil prices. The present gap in the United Kingdom, which is about 7p to 9p a therm, is not enough to cover these costs either with existing technologies or with the more advanced technologies under development.

To estimate when liquefaction will become economic requires a projection of how and when the price gap will widen sufficiently, and I need hardly remind the House of the pitfalls associated with making such projections. Estimates put out by Governments here and elsewhere generally suggest that oil prices will continue to rise in real terms as pressure on supplies of natural crude oil increases, but the price of coal on world markets is also likely to rise in real terms, as one would expect. The rise in the price of oil—the energy source on which industrialised nations most depend—is bound to put pressure on the price of any alternatives to it. Coal producers are bound to respond to increased demand for their product. Indeed, this happened in the past, with each successive oil price rise. Therefore, it is not enough for us to look at the trend in oil price increases in isolation.

For a considerable time, the most economic way of using coal will be to substitute it, where possible, directly for oil. It is likely that coal liquefaction will become the most attractive option only when opportunities for direct substitution have been taken up.

The economics of liquefaction will also depend upon the extent to which world coal supplies can be expanded to meet, first, the demand for substitution and then for liquefaction. That, in turn, will depend on political developments and on the resolution of environmental problems in a number of countries. The indications are that the world's major coal producers—Australia and the United States, for example—will be able to expand production to meet not only their own direct needs but demands for exports and, to some extent, demand from coal conversion industries. In these countries, given successful development of the new technologies, commercial liquefaction could become viable at some time in the 1990s, but that is based on relatively optimistic assumptions.

However, the position in Western Europe is not the same. The economics of liquefaction are more doubtful. Indigenous coal supplies will not be sufficient to meet home demand, and all the expert studies that have been conducted agree that Western Europe is likely to be a major steam coal importer towards the end of the century. The logic of this is that, provided that our costs are lower than the European price, the United Kingdom will find a ready market in Western Europe for any surplus coal that we may produce for conventional steam raising. Liquefaction of coal will be economically more attractive in the countries which are major exporters of coal, while European-produced coal will continue to find its best application in the more traditional uses.

One day, of course, when coal substitution for oil is well advanced, and particularly if nuclear power is by then playing a major role in electricity generation, liquefaction may become economic in the United Kingdom, but this situation is not one that we believe will arise here in the 1990s, as it may do in the United States or Australia. It is unlikely, we think, to arise until well into the next century.

The only oil from coal technology in use on a commercial scale today is in South Africa, where a £3,000 million investment is in progress to provide the country with 50 per cent. self-sufficiency in petrol and diesel. the technology involves gasification and synthesis, as used in Germany during the Second World War, and is expensive and energy-inefficient. If applied in the United Kingdom, this process would yield oil products at a cost of around $60 per barrel, which is far higher than current world oil prices. Even in South Africa, with access to cheap coal, a significant subsidy is required to make liquefaction products competitive with those from natural crude oil.

America, Germany and Japan, direct liquefaction technologies are being developed along lines similar to those of the NCB's Coal Research Establishment. In Texas, the Exxon Corporation already has a 200-tonne per day pilot plant operating smoothly. In Kentucky, a plant of the same size is operating using the H-coal process. In Germany, a 200-tonne per day plant is in the advanced stages of construction. I have visited all three, and, in terms of the size of plant available, the United States and Germany have a lead of several years over the work here in the United Kingdom.

These, then, are the many factors that we have had to take into account in arriving at our decision.

There is the question of how long we shall be able to meet our needs for premium liquid fuels and feedstocks from conventional petroleum sources. The indications are that this will be considerably longer than in many other countries.

There is the question of when the margin between coal and oil prices will become enough to cover the capital and fuel charges of an oil from coal conversion process.

There is the fact that other countries are ahead of us in building large-scale pilot plants.

There are questions over whether the potential advantages of the NCB process can be realised, and the technology advanced to successful commercial operation.

We have weighed all these issues very carefully. The Government have decided that, subject to substantial financial participation by private industry, they will back the Point of Ayr proposal. The Government are prepared to make £5 million available from the Department of Energy's research and development budget to aid pilot plant construction and commissioning. As I have said, this is subject to the National Coal Board demonstrating that it has secured the whole of the balance of the funding required to complete these phases of the work. I have told Sir Derek Ezra of this decision and I expect that officials will meet shortly to discuss the details.