When President Carter was searching for ways to solve America's energy problems, one project that appeared to have almost utopian potential was the Solvent Refined Coal II project, designed to turn the country's abundant sources of coal into a clean-burning liquid fuel.
After several years of preliminary work, however, the government's most ambitious synfuels project was killed earlier this month by the Reagan administration for budgetary reasons.
But Department of Energy officials as well as industry and Hill sources say the role of Gulf Oil Co., the government's private-industry partner, was a contributing factor in the demise of the project -- which was scrapped before ground was ever broken.
Sources involved in the project point to cost overruns, schedule delays and lax procurement practices, which they claim were abetted by indifference and a lack of planning by Gulf.
The Energy Department, which was responsible for overseeing the project, also has been criticized for not preventing more of these problems.
The most recent allegation to come to light involves the questionable awarding of a major subcontract for a design review by Gulf's subsidiary, Pittsburgh & Midway Coal, to Badger Energy Inc.
Industry and government officia;s sau the subcontract award, made in late 1979, was given to Badger despite the preference of three out of four members of a subcontract selection board for another firm.
These sources allege that one board member had a bias against a Badger competitor -- Stone & Webster Inc. -- that Gulf was aware of but failed to reveal in apparent conflict with federal procurement policy.
Gulf Oil has denied wrongdoing in connection with the Badger contract. None of the company officials named in the allegations involving the Badger contract would consent to interviews with The Washington Post. Instead, Gulf issued a written statement, in which it said that "no impropriety existed" in the subcontract selection, that no conflict of interest existed among members of the selection board and that they were not aware of any allegations of such a conflict.
The estimated cost of completing the Badger subcontract has more than doubled in the 18 months since the $6.6 million award was made. Cost estimates now range between $13 million and $14 million. DOE officials said last December's deadline for design review passed with about 70 percent of the work still undone. Work is going to stop on the subcontract because the project has been killed, but DOE estimated Badger already had run up $8.5 million in charges through June.
Even that number may be about to increase by another $1 million. Last week Badger told the Energy Department it would charge $9.5 million for the subcontract work.
The additional $1 million is related to another allegation about Gulf's handling of the subcontract.Former contract officers who worked for Gulf and were responsible for the subcontract say it was negotiated in such a way that it was likely to result in cost overruns and delays that would cost the government millions of dollars.
The contract officers said that they brought these problems to the attention of Gulf officials at the time of the negotiations, but that Gulf didn't follow their advice.
A close look at the Badger subcontract, pieced together from government documents, internal company memos and dozens of interviews, reveals a number of controversial incidents involved in the subcontract award.
Before the subcontract was led out for competitive bid, sources said, Gulf executive S. A. Zagnoli, who as contract selection officer would choose the subcontractor with the advice of the selection board, had indicated a preference for Badger. Sources said Zagnoli sought a "sole-source" contract for Badger, but DOE officials turned down the request and insisted on competitive bidding.
A subcontract selection board comprising four Gulf executives was formed to make a recommendation to Zagnoli on which of four bidders to choose. While the board was deliberating, however, the participation of one of the four selection board members was questioned by an executive with one of the bidding firms.
That board member, Gulf executive Richard A. Flinn, previously had been assigned to a joint project between Gulf and one of the bidders, Stone & Webster, and S&W feared the experience had prejudiced Flinn against that company, according to both Gulf and S&W executives.
Stone & Webster Vice President A. T. Cerniglia confirmed in an interview that he called Gulf Vice President Don Lessig, one of the board members, to complain of Flinn's participation on the board. Cerniglia said S&W believed there was a conflict of interest because on the previous project, S&W executives had refused to deal with Flinn because they didn't agree with the job he was doing.
Cerniglia says Lessig "assured me that [the alleged conflict] would not interfere with sound business judgments."
Gulf has denied that contract selection officer Zagnoli or any of the board members was aware of any allegations of Flinn's possible bias.
But one of the four board members say he and the others were aware of the allegations. Richard L. Yale, then the company's director of contracts and a member of the selection board, says Lessig called him about the problem after Cerniglia's call.
Contract director Yale and George Paulson, the contract lawyer on the project, say they told Gulf executive Zagnoli and other selection board member that, in their view, it would be a violation of federal procurement policy to award the subcontract when there was an allegation of conflict on the part of a board member. They said their advice was not followed.
Federal energy and procurement officials agree that awarding a competitive subcontract when an official influencing the award has an undisclosed conflict of interest -- one that may prevent an impartial judgment -- is contrary to federal procurement policy and normal procurement practice. These officials believe that Gulf's alleged conduct is contrary to such policy and practice but is not illegal.
Industry and DOE officials say the usual procedure would be for the contractor to report to DOE a conflict of interest allegation, even if the alleged conflict does not involve a financial stake in the contract award. The Energy Department then would resolve any conflict it found -- by disqualifying the individual with the conflict, invalidating the bidding altogether or making an exception.
Gulf denies the existence of a conflict in its written response to The Post: "We unequivocally deny that there was a conflict of interest . . . Dr. Flinn was not prejudiced toward or against Stone & Webster when he served on the selection board."
In any event, when a vote on the bidders was taken by the selection board, three of the four chose S&W; only Flinn favored Badger, according to contract officers Yale and Paulson. They also say Flinn rated S&W very low and Badger very high compared with the other board members, and as a result Badger ended up ahead of S&W in the board's aggregate numberical rating of the firms. The other two companies in the bidding were knocked out on technicalities, Gulf says.
At this point, Zagnoli overruled the selection board majority and chose Badger as the subcontractor. This was not beyond his authority but is highly irregular, according to a number of industry officials.
Badger President Terry Flint said in a recent interview that he was not aware of the 3-to-1 preference for another company. He called Zagnoli's decision "a shock" that appeared "to fly in the face of the federal procurement system."
Gulf states that there were "only minor differences among board members" and explains that Zagnoli's choice was based on the slightly higher aggregate numerical rating for Badger and his own judgment.
Board member Yale says those "minor differences" were "a roaring war." Gulf contends no vote was taken by the board, but Yale says the only reason the 3-to-1 vote was not reflected in company records is that he, acting as secretary, was "ordered" by another board member not to record it.
The awarding was not the only alleged problem with the subcontract.
The subcontract was renegotiated in a way that made it more difficult for Gulf to exercise cost and quality control over Badger's work, according to Yale, Paulson and a draft report in a General Accounting Office investigation of the solvent refined coal project. (The GAO investigation was dropped, and the report was never put in final form or released.)
Yale explains that in the renegotiation, Gulf committed itself all at once to pay $6.6 million for the subcontract work. Before, commitments for payment were made in short-term increments, such as $200,000 for six weeks, meaning Gulf routinely had to review the subcontractor's progress and costs, Yale said. In addition, both Yale and the GAO draft report criticized the work description as too general, enabling Badger to enlarge the scope and thus the cost of the subcontract.
Yale detailed his concerns in a memo to Zagnoli in February 1980. The concerns were backed by contract lawyer Paulson. Gulf executives did not follow their recommendations, the contract officers say.
The delays and cost overruns on the Badger subcontract -- while not overwhelming in themselves -- were one of a number of problems that plagued the project throughout its short life, and were a significant factor in government officials' disappointment with Gulf management generally, according to individuals involved in the project.
The House Government Operations energy subcommittee, chaired by Rep. Toby Moffett (D-Conn.), has just begun an investigation of the latest $1 million overrun on the subcontract, a staff aide said.
The subcommittee earlier this year investigated and held hearings on Gulf's part in the solvent refined coal project. In a subsequent letter to Gulf Oil Chairman Jerry McAfee, Moffett said the subcommittee was "particularly concerned about Gulf's management of the SRCII project," citing cost overruns and delays and "serious questions on Gulf's commitment" to the project.
One DOE official involved with the project said Gulf didn't live up to the Energy Department's expectations for an efficient management team on the project.
From his point of view: "No one was pulling it together."
Larry Joseph sits in his DOE office in Germantown, Md., pondering what the end of SRCII means to the future of synfuels. The SCRII program manager, whose job it is to "eat, sleep and drink" SRCII, fears much "painful experience" is going to be lost because little of it has been recorded.
While many have been critical of Gulf for its handling of the project, Joseph says he can see why Gulf would be frustrated with having to deal with DOE, where the structure "borders on anarchy."
"SRCII was done all on the strength of personality, not organization," he says of DOE's role. Tapping his forehead with his finger, he sighs, "It's all stored here -- in people's brains . . . It was all done with loose structure and camaraderie."
And, he adds: "I just wish it could be done right -- and all that is lost."