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Burning Money to Turn Coal into Gas

In which Science Correspondent Ronald Bailey confesses to his role as a petty Igor to Jimmy Carter's energy-regulating Dr. Frankenstein.

Ronald Bailey
September 17, 2010

North Dakota is all about energy production. The landscape in the Peace Garden State is thick with rocking oil derricks and its byways are clotted with oil tanker trucks. When one drives in at night from the west, Highway 83 just south of Minot is bordered with wind turbines whose string of eerie red airplane-warning lights look like a picket line of giant alien sentries 20 miles out. The hydroelectric Garrison Dam blocking the Missouri river is a graceful feat of engineering and the countryside is dotted with electric power generation plants rising on the prairies from the middle of vast open pit coal mines.

But for me, the most interesting feature of North Dakota’s energy landscape is the Great Plains Synfuels plant located near the town of Beulah, just south of Lake Sakakawea. “If you want to see what $4 billion can build in the middle of the prairie,” says Basin Electric communications director Darrell Hill, “it’s the Great Plains and the Antelope Valley electric station next door to it.” And the two are indeed an impressive sight. From a distance the gigantic coal gasfication plant with its enormous smokestacks billowing white clouds is an easy stand-in for William Blake’s “dark satanic mills.” That is until you learn that the Great Plains billows are essentially steam.

Why did I particularly desire to visit the Great Plains Synfuels plant? I have some small bit of personal history with it. Back in the late 1970s and early 80s, I was a low level federal natural gas regulator and a peripheral member of the team that was guiding the plant’s initial development at the Department of Energy (DOE). I functioned as a petty Igor to President Jimmy Carter’s energy Dr. Frankenstein. I was eager to see up close what I helped in some minor way bring to life. But besides my personal history, the Great Plains Synfuels plant stands as a very apt cautionary tale about massive energy projects promoted and financed by visionary presidents and their equally visionary helpmeets in Congress and in the federal energy bureaucracies.

The Great Plains Synfuels plant is a monument to our ancient Me Decade fears about foreign oil and impending energy shortages. The plant was a public/private project that aimed to demonstrate the commercial feasibility of turning copious quantities of lignite (the least energy dense form of coal) into natural gas. Today it transforms 18,000 tons of coal per day into 150 million cubic feet of natural gas and 150 million cubic feet of carbon dioxide using steam and oxygen. That's enough natural gas to supply the needs of 500,000 homes.

Before arriving, I had arranged to join what I thought would be a tour of the facility. But when I got to the plant, it turned out that the public “tour” consisted of a 10-minute video extolling the heroic efforts to finance, build, and keep the plant open combined with a half-hour walk around a very nice $8 million 1/32nd scale model of the plant, with videos interspersed along the walls describing how various parts of the plant operate. Hardly the gritty hardhat on-the-ground experience I was looking for, but it certainly worked as a way to cage in a noisy reporter from a public policy magazine. I later asked Daryl Hill, who heads up public communications for the plant’s owner Basin Electric, about other reporting on the plant. He happily told me about the wonderful CBS 60 Minutes feature done by reporter Scott Pelley. I mentioned that Pelley probably got an actual tour of the plant. Hill had the grace to blush.

Even my iPhone was forbidden on the grounds that no photos should be taken. Michelle, the very nice tour guide, explained that curious members of the public and reporters couldn’t tour the plant itself or take any photos on orders from Homeland Security, even of the model.

I did pick up a good deal of history on my "tour," however. Construction of the plant was first proposed in 1978, just months after the creation of the new Department of Energy during the “energy crisis.” Natural gas production in the U.S. had been declining since 1971 and nationwide shortages were causing schools and factories to close in the winters as gas was diverted to home heating and cooking. The solution to the shortages? Import liquefied natural gas from Algeria and other places. To that end a number of liquefied natural gas terminals were built on the Atlantic and Gulf coasts. (I got to regulate those, too.)

The other solution was to turn coal into methane. In 1980, Congress created the Synfuels Corporation, endowing it with $20 billion with the goal of eventually building as many as 22 enormous coal gasification plants, each one producing 300 million cubic feet of natural gas per day. Since coal gasification was an unproven technology in the U.S., natural gas pipeline companies were reluctant invest in it. The federal government rushed to the rescue. The Department of Energy helped create a public/private partnership with five natural gas pipeline companies that agreed to put up 25 percent of the cost of building a demonstration plant while the government supplied the remaining 75 percent in the form of loan guarantees. Out of this bold alliance between business and government was born the hugely ambitious Great Plains Coal Gasification plant.

The plant was built at a cost of $2.1 billion and shipped its first thousand feet of natural gas in July 1984. Due to escalating costs, the plant was scaled back to half size so that it was designed to produce 150 million cubic feet of gas per day. In the meantime, the hapless Jimmy Carter unknowingly had already undercut the rationale for constructing a massive coal gasification industry by a simple change in policy—he deregulated the price of natural gas. It turned out that the country wasn’t running out of natural gas; it was running out of natural gas with a government imposed price cap. That old truism—only governments create shortages—was once again proven correct.

Gas supplies soared and the price crashed, meaning that there was no need for the Great Plains Synfuels plant nor for the liquefied natural gas facilities along the coasts. In the face of faltering prices, the five gas pipeline “partner” companies demanded that government give them a price guarantee on the gas, or they would default on $1.5 billion in government backed loans. To its credit, the DOE refused to meet this demand and the companies promptly defaulted, abandoning the project.

The bankrupt plant was sold at public auction by the sheriff of Mercer County, North Dakota, on the local courthouse steps. The auction took five minutes and the only bidder was the DOE which bid $1 billion. No money changed hands since DOE already held $1.5 billion in defaulted loans. The DOE began operating it and looking for someone else to take it off their hands.

As it happens, the electric power generation company Basin Electric had built the next door Antelope Valley station in good part to supply the coal gasification facility with electricity. Closing the coal gasification plant would have had a significant negative effect on the company’s bottom line. In 1988, a desperate DOE agreed to sell the plant to Basin for the fire-sale price of $85 million and a split of future profits, if any. In other words, Basin Electric acquired an operating facility for 4 cents on the dollar. "Not having capital investment is the key,” said Keith Janssen, the head of the Basin Electric subsidiary in a 1990 Washington Post article. Well, yes. But even with taxpayers picking up the tab for building the plant, running it profitably was still a challenge.

The gas pipeline companies were trying to weasel out of their long term contracts with the plant in which they were obligated to pay two to three times more than the market rate for conventional natural gas. Eventually, a federal court ordered them to stop whining and pay up. But those contracts were set to expire in 1995. So Basin Electric developed markets in the byproducts of coal gasification. In 2009, more than two-thirds of the plant’s $400 million in revenues were derived from the sales of byproducts.

For example, the plant produces ammonia fertilizers. In one very technically sweet twist, the plant uses ammonia produced at the plant to capture sulfur emissions from the coal turning it into the valuable fertilizer ammonium sulfate. It also produces industrial chemicals like phenol, crude cresylic acid, and naptha. Since the coal gasification requires pure oxygen, the plant takes in ambient air and liquefies it by cooling it down. This enables the company to separate out the oxygen, but also to supply krypton, xenon, and liquid nitrogen to buyers. Finally, as of 1999, the plant also sells two-thirds of its daily emissions of 150 million cubic feet of carbon dioxide to oil producers 200 miles north in Canada to pressurize their fields. The fields that once produced 10,000 barrels per day are now gushing 30,000 barrels per day.

What was once a waste product is now a profitable business. The plant sold its carbon dioxide for about $53 million last year. But could this work for other companies that produce quantities of the greenhouse gas? Probably not. Hill points out that the plant does not produce carbon dioxide through combustion but as an integral part of turning coal into natural gas. This means that it’s a lot easier to capture carbon dioxide at Great Plains Synfuels than it will be at a conventional coal-fired electric generation plant. “A commercial scale technology for capturing carbon dioxide at conventional power plants simply doesn’t exist now,” says Hill. In addition, few power plants would have the happy coincidence of being located close enough to oil fields that will buy carbon dioxide for pressurizing their wells.

I asked Hill how much Basin Electric sells its gas for, and he declined to tell me, saying that it was confidential company information. However, since the long term gas supply contracts expired 15 years ago, the company has been selling its gas at current market prices. Looking at the company’s annual report one finds that the gasification subsidiary made a nice profit until those contracts expired in the mid-1990s. Between 1997 and 2005, the subsidiary experienced a cumulative loss of over $44 million.

Soaring gas prices in the last few years bulked up the gasification plant’s bottom line with a cumulative profit of $334 million between 2005 and 2009. So the gasification plant is profitable now. But hold on. Let’s make a very rough calculation of what would have happened if Basin Electric had had to make interest payments on the entire $2.1 billion in capital costs for the plant. Again roughly, paying just 5 percent interest annually on $2.1 billion would cost $105 million per year (and that does not include paying principal). In only one year since 1991 (earlier years not available) did the plant’s income exceed $105 million and that was in 2008 when the plant earned $128 million when natural gas prices rose to over $10 per thousand cubic feet. In other words, it’s a whole lot easier to make a “profit” if you don’t have to pay back your loans. Still, it is the case that by taking advantage of federal government ineptitude, Basin Electric executives made a pretty savvy investment at rock bottom prices.

In February of this year, Basin Electric sent a check for $7.1 million as its last profit-sharing payment to the DOE. Since it purchased the plant in 1988, Basin Electric has paid the DOE a total of $388 million. On receiving the last check, the DOE had the gall to declare that it had recovered $1.3 billion of the initial $1.5 billion loan. How? By noting that as an electric power generating company for a series of rural electric cooperatives, Basin Electric could not take advantage of about $800 million in federal tax credits that the feds would otherwise have been obligated to pay out for synthetic natural gas production.

At the end of my chat with Basin Electric’s Hill, I asked what lessons we could learn from the Great Plains Synfuels saga? “It shows us a way to use coal that is different from a burning it in a conventional power plant and it gives us a technological baseline of what could be,” replied Hill. He also recited the same points that I have now heard during a visit to a wind farm and a bioethanol plant: It provides jobs and frees us from foreign oil.

In 2007, John Panek, an analyst for the Energy Department's Office of Clean Energy Collaboration, pretty much summed up continuing government cluelessness when he told the Associated Press, "Technologically, it's always been a success, but it always has been a victim of the marketplace." The Obama administration is embarking on numerous similarly “visionary” subsidized energy R&D technology projects. I expect to see lots of technological "successes" and an equal number of market “victims.”



Ronald Bailey is Science Correspondent

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