Believe in the Future of Coal? Then Invest in Oil. Really.

In this week's update from financial analysts at Innovest Strategic Value Advisors was one short item titled "Market Opportunity for Carbon Sequestration." The vernacular translation: how to make a buck on "clean" coal.

But the CCS investment opportunity doesn't actually rest with coal companies, or even electric utilities. It's with oil companies. Here's the heads up from analyst Yulia Reuter:

Next to the leader StatoilHydro, our integrated oil & gas universe features the following CCS developers, which are positioning themselves for the potential opportunity either through the R&D efforts or existing commercial applications: BP, Chevron, ConocoPhillips, ENI, Exxon, Occidental, OMV, Petrobras, Repsol, Shell, Suncor, and Total.

 It looks like we're witnessing the developing marriage of fossil fuel interests.

One example: BP struck a deal to work with a Wyoming based company to develop in-situ, coal gasification technology in the Powder River Basin.

But more commonly, the oil companies are leading the charge on CCS because since 1996 it has been a commercially viable technology for oil recovery operations. The technology was pioneered by StatoilHydro, a Norwegian company, at its Sleipner offshore gas field after the national government there imposed a carbon tax.

Statoil figured out how to capture carbon emissions and re-inject them underground. Other oil companies now do the same in their oil fields to enhance recovery. Carbon dioxide goes in, out comes the last drop of oil.

Reuter doesn't know how much the oil companies are now sinking into CCS R&D. They won't tell her.

She does know Exxon is actively working in Norway at Sleipner; that Total is going to start injecting CO2 in one project in 2008; and that Austrian oil company OMV announced a 500 million Euro investment in CCS and biofuels, without disclosing how much for each.

But here's what is undeniable: the oil and gas sector has come up with the earliest, biggest, and
commercially viable CCS solutions. And there's unlikely to be much competition from other quarters. First, there's no incentive yet to power new entrants into the business. That would require a price on carbon. Second, barriers to entry are high. The oil companies know how to drill, own the equipment and own most existing intellectual capital related to carbon sequestration.

So if you are believer in clean coal and think it's where America's energy future lies, the word on the street, ironic as it is, is this: invest in oil!

Imagine the conversations that might be going on in oil company board rooms right now. With oil production undeniably declining, they must be figuring one of the smartest long term investments is in CCS. It will allow the oil companies to squeeze declining oil fields dry, but maybe more importantly, transition to a future without oil.

The day when oil runs out -- that's only in about 40 years. No one disputes that. So the industry has four decades to figure out what next. Looks like the answer is coal. Coal buys them another 100 or 200 years of raw material for extraction (depending on who you believe) -- fossil fuel as far into the future as anyone can care to imagine.

And let's not forget, CCS is only half the picture. The other half is converting coal into liquids, which is something the Air Force is keen on promoting.

Reuter may right about her investment advice.

But why would anyone want to invest in a fossil nightmare?

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