Trying a new tactic to produce a viable synthetic fuels industry, the U.S. Synthetic Fuels Corp. has asked sponsors of oil shale projects to bid for agency support, offering to guarantee payments of up to double current oil prices as an incentive.
The agency's new approach is a "targeted solicitation," in contrast to the past when the SFC simply asked for proposals from anyone who might have a plan for producing synthetic fuels. So far, no project has been funded under the general solicitations, leaving the SFC short of its goals of actual production.
The targeted approach and the high levels of price support are designed to overcome both procedural difficulties in getting a project under way and the disincentives in today's marketplace for synthetic fuels production. With oil prices depressed and likely to drop further, few companies want to produce higher priced synthetic fuels. Part of the SFC's role as a "strategic player" is to overcome that difficulty and to develop an industry believed to be in the nation's long-term interest, SFC officials said Tuesday.
"We're really trying to get a go-er here," said Jimmie R. Bowden, SFC executive vice president.
Companies could receive up to an average of $67 a barrel for shale oil, with the price pegged to a so-called "market price" for a type of oil now selling for about $35 a barrel. Total support for each project could be a loan guarantee, a price support, or a combination, and could be as high as $1.6 billion.
Under the terms of the solicitation, which is expected to begin Jan. 20, projects must produce at least 10,000 barrels of fuel a day and plan to begin operations before 1990. To encourage rapid start-up, price guarantees will expire on Jan. 1, 1998.
The price-support level was based on estimations of what it costs to produce the oil shale. "It's designed to be an incentive for the project to go forth," Bowden said. He added that both figures are ceilings and that successful bidders may want to propose lower levels of assistance.
The way the solicitation is structured, the SFC would pay the difference between the guaranteed price and the "market price," a figure to be computed monthly and to equal 85 percent of what the Department of Defense pays for a designated type of oil. Even if a company sold its shale oil for higher than the specified "market price," it would receive the difference between the guarantee and the lower price.
Officials said it chose to peg the price to what the DOD pays, because doing so would produce a figure immune from manipulation. If a major oil company running a project sold shale oil to its own refineries, there would be questions about whether the price set by the related parties was an accurate market price, officials noted.
The lowest bidder, and perhaps other bidders, will be the winner or winners, the SFC said. Even only one bidder may be considered sufficient competition for financial assistance to be awarded, Bowden said, noting that "competition is the opportunity to bid."
Bidding under this system should make it easier to seek assistance for projects, because they will compete only against other similar projects and the limits on assistance will be known in advance, Bowden said.