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With An Uninterested Private Sector, Federal Loans May Be Only Option For DKRW

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DKRW’s proposal to build a coal-to-liquids plant in Medicine Bow may provide jobs and tax revenue to the state… and could be a major boost to the energy industry. But with DKRW requesting a 1.7 billion dollar loan from the Department of Energy, one big question comes up: should the federal government make decisions about investing in questionable technology that the market has never wanted to invest in. Wyoming Public Radio’s Tristan Ahtone reports.

TRISTAN AHTONE: In the past, the private sector has not invested in Coal to Liquid projects because of high risks associated with the technology. At this point, the 1.7 billion dollar loan guarantee from the Department of Energy represents over 80% of the Medicine Bow project cost, and general operations may be the only ticket to getting the plant off the ground, which concerns many people.

AUTUMN HANNA: Subsidizing liquid coal is a money loser for taxpayers.

AHTONE: That’s Autumn Hanna, Senior Program Director with Taxpayers for Common Sense.

HANNA: This is a project asking for a federally backed loan guarantee, and that would guarantee that taxpayers would be on the hook for up to 80% of the project cost, and they've already asked for 1.75 billion dollars.

AHTONE: In the 1980's the Synthetic Fuels Corporation was formed by Congress under the Carter administration, and in 1980, the corporation received initial funding of about 20 billion dollars in appropriations authority to produce up to a million barrels of coal liquids per day, across the country, by helping to subsidize coal to liquid plants through purchase agreements, loan guarantees, loans, and price guarantees. Ken Glozer is a consultant to the energy industry, and former employee of the white house office of management and budget for 30 years.

KEN GLOZER: This was by far the most ambitious, expansive program that the federal government had ever undertaken and the grand plan was to put a total of roughly 88-billion dollars into the synthetic fuels.

AHTONE: According to Glozer, during its lifetime, the corporation only issued one loan guarantee for around 1.4 billion that went to a coal gasification plant still operating in North Dakota. However, by 1984 the Reagan administration had decided to phase out the Synthetic Fuels Corporation in favor of allowing the private sector to make businesses decisions instead of sanctioning government regulation and help. And with falling oil prices, and the elimination of regulations and price controls, there was little interest in liquid coal.

GLOZER: If you can imagine coal liquids at the time, I think were estimated to cost something like $40 dollars a barrel. And had that plant been built and had the usual cost overruns occurred, you might have been at $50 or $60 dollars a barrel - this was in the 1980's when oil, by 1990, was as little as $12 bucks a barrel.

AHTONE: Incidentally, Glozer says that one North Dakota plant eventually defaulted on its loan, and he says taxpayers were only able to recover about 25% of the 1.4-billion dollar default.

Fast forward to 2011: After the Obama administration provided federal loan guarantees to the California Solar Panel manufacturer as part of an attempt to subsidize clean energy,  Solyndra declared bankruptcy. It’s estimated that the Solyndra default could cost taxpayers over $500-million dollars. The company borrowed money directly from the federal government through the Federal Financing Bank. DKRW on the other hand will be getting a private bank loan with federal guarantees. It may sound different, but according to Autumn Hanna, the process still works the same:

HANNA: So we’re talking about these highly capital intensive projects moving forward after Solyndra and we’re seeing now that we’re unable to recoup the money, we have a default when we thought we had this project that was a good investment and clearly was not.

AHTONE: She doesn’t think the Medicine Bow project looks any better either. As well, loan terms are worked out privately with the Department of Energy, and officials from the DOE did not return calls for this story.

To get a sense of how this will work should the 1.75 billion dollar loan from DOE go through, it'll happen like this: The DOE will negotiate privately with Citibank, DKRW's financier; When Citibank gets the money from the DOE, they turn it over to DKRW; DKRW builds the Medicine Bow Plant, Citbank makes money off fees, and if the plant goes belly up, Citibanks loan to DKRW is backed by the full faith of the federal government - so the money comes out of the treasury and taxpayers ultimately foot the bill.

HANNA: Just like your parents, if they've cosigned your loan and have to bail them out, and that's what we think is highly likely to happen if taxpayers were asked to get behind the Medicine Bow Plant.

AHTONE: Dave Grossman is a consultant and author of the report “Investor Risks From Development of Oil Shale And Coal-To-Liquids”. He says investors should be aware that there are a range of potential risks to consider when investing in coal to liquid projects.

DAVE GROSSMAN: These include water constraints, regulatory risks, a range of uncertainty about technology and various technological costs, market risks including oil prices, risks of public opposition, and to the extent that policy uncertainty plays a role, advocating for greater policy certainty.

AHTONE: One of the biggest obstacles is oil prices. According to Grossman, history has shown that when oil prices drop, interest in synthetic fuels tends to drop, and that volatile market could pose a significant challenge to the viability of the industry. Ken Glozer says the U.S. has enough access to domestic petroleum that converting coal to oil might not be worth it.

GLOZER: I think the question becomes "what are the coal liquids needed for?" You're able to buy all the oil you want at a hundred bucks a barrel. It's never been demonstrated that you can produce them for less.

AHTONE: Oil prices are on the rise and domestically produced oil could bring prices down. But here's the rub, one plant does not make an industry, and at this point, for an industry - dozens of plants around the country - to get off the ground a lot of money is needed. And now, just like in the 80's, nobody's throwing down cash except the federal government.

GLOZER: If it were an attractive proposition for a company, somebody out there would be doing it.

HANNA: These are big businesses that stand to make a lot of money and they shouldn't be asking for taxpayer backed subsidies, especially right now.

AHTONE: Again, Autumn Hanna.

HANNA: Given the way the finances look right now for the Medicine Bow plant, I think that they are definitely counting on that loan guarantee even though there are many times where they have been reported saying "we don't need this and we can get private investment and that if we can't get private investment we shouldn't go forward," and we agree with that.

AHTONE: So is the government wise to invest in projects the the private marketplace has never wanted to invest in? Taxpayers will find out whether their money will be going to Medicine Bow whenever the Department of Energy decides to approve or scrap the loan to DKRW.

For Wyoming Public Radio, I'm Tristan Ahtone.