Shattered Hopes for Synfuels

By Barbara Rudolph

For most of this century, Beulah, N. Dak., was a sleepy prairie town with two grocery stores and a pair of gas stations. Founded in 1913 and named for the niece of the region's largest landowner, Beulah was populated mostly by farmers and coal miners. Then, in 1978, the Department of Energy announced that it would finance a $2.1 billion commercial synthetic-fuels plant, the first in the U.S., to be built on the outskirts of Beulah. Operated by a five-member consortium of energy companies, including Tenneco and Transco Energy, the 600-acre project would turn coal into natural gas and be the centerpiece of the Government's efforts to produce substitutes for expensive imported oil. When the Great Plains Gasification Project opened in July 1984, Beulah was booming. Its population had jumped from 1,300 in 1977 to 5,600, as $100,000 houses and even a golf course appeared.

Today Beulah is a town in crisis. Great Plains has lost much of its Government backing. Moreover, its synthetic fuel is uneconomical because the price of imported oil is falling. The plant may be shuttered within a month, dealing a devastating blow to the community, the state of North Dakota and the future of synthetic fuels. Great Plains has an annual payroll of $36 million, employing 973 people and generating more than 5,000 additional jobs in the area. Says Cynthia Lynk, executive director of Beulah's Chamber of Commerce: "If the plant closes, we'll have businesses shutting down, school enrollments off and houses left empty all over." Concludes Beulah City Planner John Rogers: "It would be a disaster."

The troubles of the synfuels industry deepened last month when the U.S. House of Representatives voted 312 to 111 to eliminate all funding for the Synthetic Fuels Corporation, which has financed several large-scale projects. The bill provides only $500 million for a Department of Energy program of synfuels research. The Senate is expected to pass a similar measure. As Congress has grown increasingly skeptical of synfuels, so too has the DOE. Last month it decided to withdraw $1.4 billion in aid to Great Plains. As a result, the plant's private consortium of owners announced that it was pulling out of the project.

Great Plains is now under the control of the DOE. Last week the department sent a team of investigators to inspect Great Plains and confer with plant managers. Some employees hoped the Government would find a way to keep the project running. Said Michael Mujadin, the operations director: "Once they see things for themselves, I'm confident the DOE will let us continue." But that may prove impossible if Congress decides to cut off synfuels funding.

Rarely, if ever, has a Government program grown so large only to face extinction in so short a time. Created in 1980, the Synthetic Fuels Corporation had a monstrous initial budget of $15 billion. At the time, some experts expected the price of imported oil to reach $60 per bbl. by the end of the decade. The only solution seemed to be a drive to convert coal reserves, like those underlying the Great Plains site, to synthetic gas or oil. The SFC's first grandiose goal called for the U.S. to produce the equivalent of 2 million bbl. of crude oil a day by 1992, replacing about 50% of imports.

But the program was doomed almost from the start. The price of oil peaked at more than $40 per bbl. in 1982 and has fallen steadily since, to about $27 per bbl. today. It has thus become much cheaper to import oil than to manufacture synthetic fuels. And that has made projects like Great Plains losing propositions. Says Energy Secretary John Herrington: "Oil and natural-gas prices have simply not proved high enough to make the [Great Plains] project economical. On balance, the costs outweigh the benefits."

Great Plains has been the only large synfuels plant to start production. Most other projects were halted in the planning stage, before construction began. The industry's increasing troubles have had the most serious repercussions in the West. In Colorado, the residents of four counties that sit atop shale-oil deposits still speak of May 2, 1982, as "Black Sunday." On that day, Exxon and Tosco pulled out of their Colony Oil shale project after having invested about $1 billion. Home prices in Mesa County tumbled by as much as 50%. Unemployment climbed to 15%, and now stands at 9.8%, in contrast to the U.S. average of 7.3%.

While the economics of synfuels turned sour, mismanagement and improprieties within the SFC also contributed to the agency's political problems. Its first president, Victor Schroeder, resigned in 1983 amid accusations that he had improperly charged $25,000 in mortgage payments on his home to the SFC. A year later his successor, Victor Thompson, stepped down soon after it came to light that a Tulsa bank he had headed had been the target of an investigation for securities violations. No criminal charges resulted from the investigation. Early on, the SFC earned a reputation for inefficiency and waste. Says Iowa Congressman James Leach, a Republican: "These are the only guys in the world who make the Pentagon look streamlined."

Whatever the faults of the synfuels program, advocates argue that its purpose is still valid. Because world energy supplies are so volatile, they say, the price of oil could surge once again in the future. Says Thomas Haan, a Great Plains spokesman: "Just because it quit raining doesn't mean you stop fixing the roof. Just because energy is cheap right now doesn't mean we should stop trying to develop synthetic fuel."

The production of synfuels would indeed be a hedge against future energy shocks. But at a time when the price of oil is falling and the size of the federal deficit is ballooning, Congress seems set to decide that synfuels are a much too expensive form of insurance. --By Barbara Rudolph. Reported by Lee Griggs/Beulah and Gregory H. Wierzynski/Washington

With reporting by Reported by Lee Griggs/Beulah, Gregory H. Wierzynski/Washington