An energy firm owned by Adnan Khashoggi, a billionaire Saudi Arabian arms dealer, is to receive a $72 million federal loan guarantee to build an alcohol-fuels plant in Louisiana, according to federal and company officials.
A flamboyant businessman thought to be one of the world's wealthiest individuals, Khashoggi, 50, built his fortune in part by brokering arms deals for U.S. companies in the 1970s. Operating through a Cayman Islands corporation called Triad International, Khashoggi has vast real estate, banking and energy holdings in Europe, the Middle East and the United States.
A Department of Energy official confirmed Friday that Agrifuels Refining Corp., a wholly owned subsidiary of Triad International's U.S. holding company, has met all conditions to receive federal backing for a proposed ethanol project in New Iberia, La. The arrangement was first reported in the trade newsletter Oil Express.
The project is the one of four proposals likely to be approved before the department's authority to issue loan guarantees for alcohol plants runs out Sept. 30, said Dan Beckman, deputy director of the Office of Alcohol Fuels.
Beckman said "there is no legal basis" for denying Agrifuels the loan guarantee because it is based in the United States. Under the 1980 Energy Security Act, designed to lessen reliance on foreign oil, the office was charged with fostering a domestic alcohol-fuels industry through federal backing for high-risk ethanol plants.
"Without the government guarantee, this plant would not be built because of the risk in the industry," Beckman said. " . . . They've gotten all their ducks in a row. Unless there is some breakdown in the negotiations, it looks like this one will close before Sept. 30."
Asked why a Khashoggi-owned company needs federal support, Charles Seldin, a Triad spokesman in Salt Lake City, said Khashoggi "operates as a U.S. businessman. This is an expensive plant and the government is offering these loans . . . . If the government offers loans, why would you get it from a bank?"
In fact, the Energy Department program required Agrifuels to first line up private financing for the project. The firm has agreements for $88.8 million in loans from a syndicate headed by the Bank of New England.
This will cover most of the $105 million projected cost of the plant, which will be built over 21 months and will eventually produce 35 million gallons of ethanol a year from sugar-derived molasses. The ethanol will then be mixed with regular gasoline to make gasohol.
The impending DOE contract calls on the U.S. government to guarantee $72 million of Agrifuels' loans. This means that if Agrifuels defaults on the loans, the U.S. Treasury will pay the interest and principal.
DOE's expected action drew strong criticism from Sen. J. James Exon (D-Neb.), who had been lobbying the Office of Alcohol Fuels to approve a project in his state.
"This has got to tell you something about the priorities of this administration," Exon said. "They're more interested in what they can do for foreign nationals than in what they can do for farmers and ranchers in Nebraska."
The son of the doctor to the Saudi royal family, Khashoggi has long been controversial because of his lavish life style and central role in arranging large U.S. arms sales to the Mideast. These deals generated hundreds of millions of dollars in commissions for Khashoggi and spurred allegations that he had funneled payoffs from U.S. defense contractors to Saudi officials.
In 1976, Khashoggi was subpoenaed to testify before the Securities and Exchange Commission, but he refused to appear and left the country claiming that he was not under U.S. jurisdiction.
In recent years, however, Khashoggi has resurfaced in the United States and expanded his business activities here. He has launched an ambitious plan to pump up to $6 billion into his U.S. company, Triad America, by 1995 to finance investments that include a showcase $700 million office and hotel project in Salt Lake City called Triad Center. Salt Lake City is the headquarters of Triad America.
But Triad's operations still revolve closely around Khashoggi. Asked where Triad's parent, Triad International, has its main office, Seldin replied, "They have so many companies all over the world and Mr. Khashoggi spends so much of his time on airplanes, that I've always said the headquarters is wherever Mr. Khashoggi is."
Triad's interest in alcohol fuels stems from its extensive investment in oil refining and other energy ventures, Seldin said. But in addition to the DOE loan guarantee, the company has been lured by a lucrative system of federal and state tax breaks for ethanol that, in Agrifuels' case, will exceed its cost of production, Beckman said.
Ethanol now receives a 60-cents-a-gallon tax subsidy under federal law and, if produced in-state, a $1.60 a gallon tax subsidy in Louisiana. This will translate into a tax break for agrifuels of $2.20 a gallon, compared with a projected production cost of $1.25 to $1.60 a gallon, depending on the cost of molasses, according to Beckman. But federal and Louisiana officials say they think that this additional subsidy is justified because the project will provide jobs and a new market for Louisiana farmers, Beckman said.
Despite such lucrative tax breaks, few ethanol projects have survived and the industry today is essentially dominated by Archer Daniels Midland Co. of Decatur, Ill. Of the 50 proposals originally received by the Office of Alcohol Fuels in 1981, only two have received DOE approvals -- a $73 million Tennessee plant and a $140 million Indiana project whose partners include E.F. Hutton and American Financial Corp.
Most of the others were scrapped because slumping gas prices made high-cost alcohol fuels less practical. "Economics would not allow these things to survive without government support," Beckman said.