Wasted Billions: How Your Tax Dollars Were Lost on Synthetic Fuel (Part 4)

December 9, 1980

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In Rapid City, S.D., the federal government opened a pilot synthetic fuel plant in 1972. For the next several years, the plant converted low-grade coal to synthetic natural gas. An Interior Department report to Congress predicted that "a commercial plant. . .could be in operation early in the 1980s."

Today, the Rapid City plant is shuttered, its equipment in mothballs.

In Princeton, N.J., another federally-financed synthetic fuel plant – this one to turn coal into high-grade oil – also was operating in 1972. It was a big success, according to Interior Department reports to Congress in 1972 and 1973, and was certain to "get into the marketplace quite fast."

Today, the Princeton plant has vanished, its equipment dismantled and carted away.

In Bruceton, Pa., the federal government dedicated a pilot coal gasification plant in 1975. Three years later, the Department of Energy told Congress that the plant proved it was possible to make natural synthetic gas from coal and to price it competitively with conventional natural gas.

Today, the Bruceton plant sits empty, the engineers and technicians who once ran it long gone.

Those abandoned synthetic fuel plants and more than a half-dozen others like them litter the nation's landscape, monuments to a national energy policy gone wrong.

As The Inquirer reported yesterday, muddled Congresses and indecisive administrations – both Democratic and Republican – have succeeded in passing and promulgating hundreds of energy laws, regulations and programs that go off in as many different directions.

Taken together, this collection of conflicting laws and programs has left the United States without a coherent energy policy and has led to massive waste.

This is a story about some of that waste. It is about a government bureaucracy that spends without purpose. And it is about scientific research that has become a repetitive academic exercise that leads nowhere.

Thirty-three years ago, in December 1947, an internal memorandum circulated in the Interior Department projected that within "a period of four or five years" a federally subsidized fuels industry could result in "the production of 2 million barrels" of petroleum products daily. (A barrel contains 42 gallons.)

But in June 1979, after President Carter's call for just such an undertaking, a Library of Congress study concluded that "even if substantial federal incentives were offered," synthetic fuel production would total no more than "100,000 to 200,000 barrels" daily by 1990.

Incredibly, after four decades of research, funded with hundreds of millions of taxpayers' dollars, the federal government has concluded that this country is capable of producing only one-tenth of the goal set in 1947 – and taking twice as long to accomplish even that.

Why is this?

The technology for converting coal to synthetic oil and gas has existed in the United States for a half-century or more, and through most of those years various federal agencies have engaged in synthetic fuel research.

In 1949, for example, the Bureau of Mines opened twin synthetic fuel plants at Louisiana, Mo., that turned coal into a variety of petroleum products, including gasoline used in plant vehicles and diesel fuel used experimentally to power Burlington Railroad engines.

The tests established, according to government reports, that gasoline made from coal would cost about "3 to 4 cents" a gallon more than gasoline made from crude, or about 30 to 31 cents per gallon. It was expected that cost could be reduced through experience and the sale of by-products.

Ever since, the federal government has been opening and closing similar experimental plants. But all have failed in their avowed purpose of setting the stage for timely production of synthetic fuels for sale to the general public.

They have failed because Congress has refused to set specific, mandatory long-range synthetic fuel objectives – and then stick by them.

They have failed because the oil industry for many years actively discouraged serious synthetic fuel research, especially during the years when the oil companies had no coal holdings.

They have failed because the same oil industry, which now possesses substantial coal holdings, still prefers to buy oil from foreign suppliers rather than produce synthetic fuels from domestic resources.

And they have failed because there are enormous reserves of conventional crude oil worldwide, and it is more profitable to produce and sell that oil than invest in costly coal conversion plants.

None of this, though, has stopped the federal government from squandering hundreds of millions of dollars on devising a growing number of different ways of turning coal into liquid petroleum products and gas – without ever actually following through with commercial production.

With all this emphasis on research, one might assume that the process of converting coal into synthetic fuels is awaiting some major technological breakthrough.

Such is not the case. In truth, the technology for turning coal into synthetic gas has been around for almost two centuries. The technology for turning coal into synthetic crude oil has been around for more than a century.

In the early 1800s, the London Bridge was illuminated by lights that burned gas made from coal. The first residential gas street lights were installed in London in 1820.

A large coal gas industry began growing up in the United States in the 1850s. During that decade, the conversion of coal to both oil and gas made lamplight from such traditional sources as whale oil, lard oil and tallow candles almost obsolete.

The new industry that turned coal into oil and gas flourished for about 75 years. But with the introduction of the electric light, and the growing use of conventional oil and natural gas for heating, demand for oil and gas made from coal gradually eroded, disappearing in the 1930s.

Still, as late as 1920, there were nearly 1,000 gas plants in this country that produced gas made from coal to either light or heat 9 million homes and businesses.

Throughout World War II, German industry kept the Luftwaffe flying largely on aviation gasoline made from coal in plants that produced nearly 100,000 barrels of petroleum products daily.

And the government of South Africa, which has operated a coal-fed synthetic plant since the mid-1950s, currently is expanding the facility into the world's largest commercial coal-to-oil-and-gas complex, reducing that country's dependence on foreign oil.

The world's nearly 200 years of synthetic fuel experience notwithstanding, the United States has yet to build its first modern commercial coal conversion plant.

What it has managed to do is build one pilot plant after another – all financed by the American taxpayer – to conduct an endless series of tests.

Each of those plants was a scaled-down version, from a tenth to a hundredth the size of a commercial facility. Each was built and operated at a cost of about $100 million or less.

Now the government is gearing up to spend not hundreds of millions, but billions and billions of taxpayers' dollars on yet a new generation of synthetic fuel testing facilities.

With passage in June of the Energy Security Act – an energy Christmas tree that provides something for everyone – Congress created the Synthetic Fuels Corporation, which has the power to dole out $88 billion over the next 10 years.

The billions will finance still more pilot and demonstration plants and an assortment of lesser energy experiments – from schemes for the production of soybean oil to replace diesel fuel to the production of synthetic natural gas from rice hulls.

The government's grand multibillion-dollar energy giveaway plan will do nothing to end America's dependence on hostile foreign oil producers in the 1980s – the period when the nation will be most vulnerable to supply disruptions because of a large imbalance between U.S. oil production and consumption – but it will please some powerful constituencies.

For the nation's largest oil companies, the marketing of commercial synthetic oils will be delayed until the companies are ready to profit handsomely from their introduction.

For the federal energy bureaucracy, it means more dollars than ever to spend, more work to oversee, more studies to complete, more positions to fill – with salaries that now range up to $175,000 a year.

For politicians in Congress, Democrats and Republicans both, it means concrete examples – albeit meaningless ones – of their efforts to solve the nation's energy problems.

And for the cottage industry supported by the federal research dollars – universities, think tanks and research firms across the country – it means more contracts, more jobs.

None too surprisingly then, these groups, including such prestigious institutions as the Harvard Business School, have heartily endorsed more and more research.

One veteran Washington economist offered this assessment of the never-ending quest for studies and research:

"The whole business of conducting studies is so lucrative. It's no wonder we are not moving ahead with the building of commercial plants. There is much more money in all the proposals than in getting married."

Nonetheless, the outgoing administration of President Carter is enthusiastic about the prospects for the new generation of experimental facilities it has fathered.

While president-elect Ronald Reagan expressed some skepticism in the early days of the campaign, he has since tempered his views.

More importantly, some of Reagan's key advisors are as deeply committed to the new synthetic fuel ventures as are the departing Carter administrators.

William J. Casey, the head of Reagan's transition team, is a founder and director of Energy Transition Corporation, a Washington consulting firm that specializes in helping companies to win lucrative government energy contracts.

The company – whose president is Robert W. Fri, former acting administrator of the Energy Research and Development Administration – describes its services, in part, this way:

"To minimize the risk and enhance the profitability of (energy) products, Energy Transition Corp. serves its clients by. . .assisting in the conception, planning, and management of major projects, new ventures, and technology introduction. . .(and) interpreting the policies of, and assisting in relations with, U.S. and foreign governments."

So it is, then, that enthusiasm for synthetic fuels crosses administration and party lines. It has been ever so.

Every year for the last four decades, federal energy officials have marked the approach of spring by trooping up to Capitol Hill to make their case for increased appropriations to develop synthetic fuel technologies.

And every year, succeeding Congresses have responded – with varying degrees of generosity – by providing federal agencies with the money they sought to carry on their research, without ever questioning how the money was being spent.

It has become a spring ritual, with federal officials testifying on the need to continue and expand their work, as well as the need for additional funds to support it, assuring members of Congress, over and over, of their ongoing successes in converting coal to oil and gas.

Back in the spring of 1951, James Boyd, director of the Bureau of Mines in the Interior Department, advised a House Appropriations subcommittee that his department's research would "provide the basis for a new industry in this country. . .

"As we improve (the technology)," Boyd said, "we improve the economics. It has reached the stage of an economic question as affected by new techniques in the process. We have produced oil from coal, but we are trying to reduce the cost of it."

More than a quarter-century later, during the spring of 1978, Robert D. Thorne, assistant secretary for energy technology in the Energy Department, assured a Senate Appropriations subcommittee that work on coal gasification and liquefaction processes was proceeding nicely.

"In response to a question as to whether the government was moving "as rapidly as (it) could," Thorne declared:

"I believe we're moving ahead at a satisfactory, even somewhat accelerated, pace."

An "accelerated pace"?

In August 1968, Interior Secretary Stewart L. Udall signed a $10 million contract with Consolidation Coal Co. to build a pilot synthetic fuel plant at Cresap, W. Va., to test a Consolidation process to turn coal into gasoline.

Nearly three years later, the Cresap plant, designed to convert 24 tons of coal a day into 72 barrels of gasoline, was still under construction.

Nonetheless, Office of Coal Research officials confirmed for members of Congress projections that the Consolidation process, designated "Project Gasoline," would produce gasoline that would sell for less than 14 cents a gallon.

Sidney D. Larson, an Office of Coal Research budget director, told a House Appropriations subcommittee in February 1966 that the pilot plant, which was to begin shakedown operations in the fall of that year, "was intended to prove out the process which will produce gasoline for this range of 10 ½ to 13 cents in a commercial plant."

In March 1969, Neal P. Cochran, chief of the division of utilization in the Office of Coal Research, reassured members of the same House Appropriations subcommittee that – even after three years of rising costs and inflation – Project Gasoline still would produce gasoline at under 14 cents a gallon. "We believe we are, even with the increased costs, under the proper assumptions of success with what we are currently doing at Cresap and in other parts of the program, that we would not change those numbers today. They would still be in the range of 11 ½ to 13 ½ cents per gallon," Cochran testified.

A year later, in February 1970, an official of Consolidation Coal Co., by then a subsidiary of Continental Oil Co., reasserted the favorable economics of making gasoline from coal during a synthetic fuel symposium at the Colorado School of Mines.

"The pilot program to date has yielded very encouraging results," the Consolidation executive said, adding that "an economic evaluation of the process, based on these results, reaffirms the conclusion that gasoline can be produced to sell at the refinery in the range of 11 to 13 cents per gallon."

At the time, dealers paid 17 to 18 cents a gallon and the retail price of gasoline at service stations, including taxes, averaged 34 to 35 cents a gallon.

The glowing predictions of federal and coal company officials notwithstanding, the Cresap plant – whose technology was hailed by Consolidation as the "farthest advanced" of synthetic fuel processes – shut down in April 1970.

The Cresap facility, which employed about 150 persons, never did produce gasoline from coal that could be sold for 11 to 13 cents a gallon, as everyone had confidently promised. In fact, it produced very little gasoline at all.

As federal officials later explained in a report to Congress:

"Mechanical problems causing interruption to process runs and data collection precluded proof of the process. . .The Consolidation Coal Co. endeavored to obtain good experimental operation of the plant. This was never achieved."

When he made a return appearance before the House Appropriations subcommittee in March 1971, the Office of Coal Research's Cochran, under questioning from committee members, elaborated, albeit vaguely, on what went wrong:

"(There was) a series of operating problems ranging from difficulties with original pieces of equipment to difficulties with individual sections of equipment. . .We had some difficulties with the equipment just as I think all companies are experiencing today.

"Then in addition, the plant was the first of its kind. The operation had never really been undertaken at this scale before and, in addition then to the purely mechanical problems and process problems, we had problems associated with the operators."

Interestingly, in July 1971, four months after Cochran's testimony on the plant's failure and more than a year after the plant had been closed, Howard Hardesty, senior vice president of Continental Oil Co., painted quite another picture of Cresap for a different congressional subcommittee.

Hardesty told a subcommittee of the House Select Committee on Small Business:

"Already Project Gasoline at Cresap, W. Va., has demonstrated the feasibility of a liquefaction process having substantial cost advantages over earlier technology.

"In addition to the Consol (Consolidation Coal Co.) talents at work on this project, Continental assigned at least five, and sometimes as many as eight, top technical and process engineers to assure the project's successful operation."

The Cresap synthetic fuel plant remained idle until 1974, when the Office of Coal Research awarded a contract to the Fluor Corp. to start up the plant and conduct experiments with another process, this one to convert coal into fuel oil.

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