Persian Gulf Crisis Reopening Debate Over Synthetic Fuel

It is both a great success and a colossal failure.

Rising like a mirage from the barren North Dakota prairie, the Great Plains Synfuels Plant is one of the most noteworthy remnants of the frantic era that followed the Arab oil embargo, when the United States spent millions of dollars to develop alternative energy sources.

The Great Plains plant showed that the country could produce natural gas on a commercial scale from the West’s vast supply of coal. But because of the unexpected plummeting of natural gas prices, the synthetic product could not be manufactured at a profit.

“It was a technological success but a financial failure,” said James Hartnett, director of the Energy Resources Center at the University of Illinois in Chicago.

The plant was almost shut down in 1985 after the consortium that built it defaulted on $1.5 billion in federal loans. It now makes money--but only because its current owners bought it from the government at a fire sale price in 1988 and because buyers of its gas are bound by long-term contracts that set the price above market rates.

After years of cheap fuel that made the costly search for alternative energy sources seem economically impractical, the crisis in the Middle East has once again focused attention on alternative fuels and sharpened the debate over national energy policy.

Despite the roughly $2 billion spent so far on Great Plains and other alternative energy projects, the United States today is just as dependent on foreign oil as it ever was, energy experts say.

In 1973, when the energy crunch began, the country imported 6 million barrels of oil per day, according to figures from the U.S. Energy Information Center. For a time, oil imports declined, but last year’s averaged 7.2 million barrels per day.

So far this year, oil imports average 7.6 million barrels per day. And imported oil once again accounts for more than half of the oil consumed in the United States.

“We’re right back in the same trap we were in 1973,” Hartnett argues.

Not quite, says Ralph Bayre, director of the Synthetic Fuels Project in the Treasury Department, which monitors projects begun under the now-defunct federal Synthetic Fuels Corp.

Although acknowledging that relatively small amounts of energy are being produced from alternative energy sources, Bayre said Great Plains and a host of other projects begun in the early 1980s “were certainly a success to the extent to which we’ve developed a number of technologies that would be very useful if we needed them.”

The Synthetic Fuels Corp. was created in 1980 to find ways of developing cleaner fuels from coal and shale. It developed four alternative energy projects: coal gasification plants in California and Louisiana, a shale facility in Colorado and a heavy oil plant in Texas.

Great Plains, by far the largest alternative energy project, was funded by the Energy Department before the Synthetic Fuels Corp. was created.

Noting the large quantity of coal and shale in the Western states, Bayre said that because of the technology developed in the early 1980s, “we can start generating large quantities (of energy) very quickly if we need to.”

Still, critics of the synfuels programs, such as Hartnett, complain that the programs threw “billions of dollars around in three or four different directions (when) we didn’t have the technology to accommodate that kind of money.”

Others, such as Kent Janssen, chief operating officer of Dakota Gasification Co., which operates the synfuels plant, believe that the government has moved too slowly in developing synthetic fuels.

Noting the long lead time required to build plants such as Great Plains, he said: “We can’t wait until we actually need it” to start building new plants. “We have to get started on that path to get some part of our mix from coal. . . . The government needs to develop an energy policy.”

President Bush’s top advisers held a vigorous debate Friday over the outlines of such a policy. Energy Secretary James D. Watkins reportedly favors tougher requirement for automotive fuel efficiency and greater use of non-gasoline fuels. But John H. Sununu, the White House chief of staff, and Michael Boskin, the President’s chief economist, oppose those proposals as too costly.

North Dakota Gov. George A. Sinner, chairman of the National Governors Assn.’s committee on energy and the environment, supports a combination of conservation and increased reliance on alternative energy sources. Sinner argues, too, that the government should impose a floor price on the cost of oil and gas.

Companies are reluctant to drill for new energy, he says--just as they fear investing heavily in alternative fuels--because of concern that plummeting oil prices will once again make such ventures uneconomical. Establishing a floor, Sinner argues, would remove that fear and force Americans to cut consumption.

Hartnett agrees that fuel prices should rise. High gasoline taxes, he said, should be used to build up the nation’s public transportation systems. Gasoline costs $3 to $4 a gallon in much of Europe, Hartnett noted. If prices began to rise here, he said, “you would begin to see people exercise a little more caution in how they use gasoline.”

However, Hartnett acknowledged, there is little political support for such a move. Special programs--such as a “fuel stamp” system akin to food stamps--would have to be devised to help those who couldn’t afford the high prices, he said.

Despite the Great Plains plant’s rocky past, Janssen predicts that by the time the company’s long-term contracts with buyers expire in 2009, the price of natural gas will be high enough that Great Plains’ synthetic product can be sold at a profit. “We think there will be customers out there to buy our gas,” he said.

When the plant opened in 1984, it cost $6.75 to produce 1,000 cubic feet of gas, Janssen said. The market rate was about $5.

Now, because of more efficient operations and because of the money the company makes from selling byproducts of the gas-conversion process--such as anhydrous ammonia, sulfur and liquid nitrogen--the average cost of production is $2.75.

But the market price is about $1.90.

Because the plant emits more sulfur dioxide into the air than is permissible under state standards, the company expects to spend more than $100 million adding scrubbers and other pollution-cutting equipment. That will drive the cost of production higher--but not enough to threaten the plant’s future profitability, Janssen said.

The 600-acre plant produces 148 million cubic feet of gas per day, enough to heat 3,000 homes.

In the gasification process, lignite coal is mixed with oxygen and steam, and subjected to intense heat to break down its components. The resultant hydrogen and carbon are then reassembled as methane.

“As long as the market price is below production costs, the plant is somewhat at risk,” acknowledged Robert L. McPhail, general manager of Basin Electric Power Cooperative, Dakota Gasification’s parent company. Still, he says of Great Plains: “This is the biggest success story out of all the millions the government spent on alternative fuels.”

It didn’t seem that way in 1984 when the plant opened. It was already a white elephant. The price of natural gas had plummetted. The consortium that built the plant was losing money.

When the Energy Department refused to provide more financial assistance, the partners defaulted on $1.5 billion in government loans and walked away. Basin Electric purchased the plant in 1988 for $85 million.