The U.S. Department of Energy yesterday issued a $78.9 million federal loan guarantee to a Louisiana company that is part of a multinational conglomerate controlled by Saudi Arabian arms dealer Adnan Khashoggi.

The loan contract with Agrifuels Refining Corp. will permit the firm to build a $103.1 million alcohol fuels plant in New Iberia, La., that will use molasses and other sugar products to make high-cost ethanol.

It was swiftly criticized by a key congressman as an unjustified subsidy for Khashoggi, 50, a flamboyant businessman reputed to be one of the world's wealthiest individuals.

"I am quite frankly disgusted by the decision to subsidize a company controlled by a Saudi billionaire," said Rep. Mike Synar (D-Okla.), chairman of the House subcommittee on environment, energy and natural resources. "It's very difficult to believe that Mr. Khashoggi needs to hit up the American taxpayer for a $78.9 million loan."

But Department of Energy officials yesterday defended the contract, saying that the plant was in the national interest and that Agrifuels had demonstrated that it would be unable to get private financing for the project without federal backing.

"This was done strictly by the book," said spokesman Anson Franklin. "The law specifies that the project be built in the U.S. and does not address the question of ownership. . . . The government has certainly funded projects that have had foreign backing in the past."

According to DOE officials, Agrifuels is owned by Edgington Oil Corp. of California, a subsidiary of Triad America Corp., a Salt Lake City company headed by Khashoggi's brother, Essam Khashoggi. Triad America is, in turn, owned by Triad International, a Cayman Islands corporation through which Khashoggi controls vast real estate, banking and energy holdings that stretch from Europe to the Middle East.

The son of a doctor to the Saudi royal family, Khashoggi became the center of controversy in the 1970s for his role in brokering large arms deals for U.S. defense contractors to the Middle East. In 1976, he was subpoenaed to testify in connection with an investigation of alleged payoffs to Saudi officials, but he refused to appear and left the country, claiming that he was not under U.S. jurisdiction.

But Energy Department officials said Khashoggi was never a party to any of the negotiations over the loan and his ultimate ownership of Agrifuels was never an issue. Under the 1980 Energy Security Act, which was designed to lessen reliance on foreign oil, the Energy Department was charged with promoting a domestic alcohol-fuels industry though federal backing for high-risk ethanol plants.

But most of the 50 projects originally received by the department have either been rejected or scrapped as slumping gasoline prices made high-cost alcohol less economical. A key factor making the Agrifuels plant viable is a Louisiana state-tax exemption that, together with federal tax subsidies, will grant the company a tax break of $2.20 per gallon of ethanol -- more than the plant's projected cost of production of $1.25 to $1.60 a gallon.

Sen. J. Bennett Johnston (D-La.) praised the department's decision, saying the Agrifuels plant would have "tremendous economic benefits" for Louisiana by creating jobs and using a major portion of the state's sugar crop.

"I really think it's a phony issue to talk about foreign ownership," said Johnston, who had lobbied Secretary of Energy John Herrington for the Agrifuels plant. "This is a domestic corportion that employs domestic people. . . . If you're going to disqualify any corporation that has some foreign interest, you can't do business with many people, because this is an international economy."