The Energy Department vetoed yesterday a last-minute plan to pump more federal funds into the Great Plains coal gasification plant -- a decision that officials said will probably shut down the country's biggest synthetic fuels project by the end of this week.
In a letter yesterday to the U.S. Synthetic Fuels Corp., Energy Secretary John S. Herrington said the corporation's recent proposal to salvage Great Plains by providing an additional $720 million in federal subsidies was too costly and probably would still not be enough to keep the coal-consuming plant in business on a long-term basis.
The decision appears to spell the end of the $2.1 billion project in Beulah, N.D. -- the flagship of a federal synthetic fuels program that has been hurt in recent years by spiraling costs and falling energy prices.
Energy Department officials said they are making contingency plans to assume control of the Beulah facility by Thursday, when the consortium of energy firms that operates the plant must begin making payments on its $1.5 billion debt to the federal government. Rather than begin servicing that debt, a top consortium official said yesterday, the project's sponsors will almost certainly carry out their threats to default on the loans and walk away from the project, where nearly 1,000 people are employed.
"The government has apparently left us with no choice," said Clifford W. Rackley, chairman of the Great Plains management committee and a senior vice president of Tenneco Inc., which owns the largest share of the project. "In my opinion, the secretary left no room . . . . We've already given them [DOE] instructions on what actions need to be taken and how to take control of the plant."
A senior DOE official said that it will cost the government nearly $1.2 billion to shut the project down and absorb the defaulted loans, but that this was less than half of what it was expected to cost the taxpayers to keep the plant operating. The department is now considering whether to mothball the facility for future use or simply seal it off and abandon it, the official said.
"This is the end of Great Plains," acknowledged Tom Corcoran, vice chairman of the Synthetic Fuels Corp., which only last week had negotiated and approved the rescue plan.
The Energy Department's decision could also spell the demise of the Synfuels Corp. itself. It has been rapidly scaling down its once-ambitious plans to finance a national synthetic fuels industry, in response to congressional charges of agency mismanagement and questions about whether the experimental technologies really work. The House is scheduled to vote today on an amendment abolishing the agency, and its critics said Herrington's move strengthened their case.
"I think this is the death knell for the Synthetic Fuels Corp.," said Rep. Mike Synar (D-Okla.), one of the sponsors of the amendment.
A senior DOE official said yesterday that the department's decision was dictated by an internal analysis showing that, under the "best-case scenario," oil prices would have to rise to $160 per barrel by the year 2009 for the Great Plains rescue plan to work -- and even so the government would eventually spend $2.6 billion on the project.
The official said there was no certainty that oil prices -- currently less than $25 per barrel -- would rise that sharply. As a result, he said, the project's sponsors might later decide to abandon the project, costing the government even more money.
Under the plan negotiated between the Synfuels Corp. and Great Plains officials, the consortium members would still have had the right to abandon the project two years from now -- when it would cost the government $200 million more to close the plant.
The Great Plains plant has been operating for nearly a year, producing synthetic natural gas from coal at a cost of about $5.65 per million British thermal units (BTUs), or well above the market price of $3 per million BTUs. The Great Plains operators currently are allowed to pass the higher cost of this natural gas on to consumers. But a recent proposal by the Federal Energy Regulatory Commission would prohibit the consortium from doing that in the future, making the economics of the plant even more questionable, department officials said.