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Show Western Resources WE1AP-UIP By HeleneC. Monberg Washington-Shortages of skilled manpower and materials and "hyperinflation" "hyper-inflation" in the construction industry in the 1980's would result if Congress authorized the President's proposed $88 billion 10-year program to have a 2 million-barrel-a-day synthetics fuels industry in place by 1990. (Late word is that the President is scaling back his , proposal.) That was the consensus of the experts who appeared before a task force chaired by Sen. Gary Hart, D-Colo., of the Senate Budget Committee on Sept. 5-6 to discuss the effects of the President's ambitious syn-fuels proposal on the federal budget and the national economy. The task force is expected to report to the Senate next week the result of its two-month study of the various syn-fuels proposals before the Senate It's exnected to recommend a "go-slow" two-stage approach to the development of a syn-fuels syn-fuels industry under government sponsorship. Not a single commercial plant is operating anywhere in the United States today that can turn out a synthetic syn-thetic fuel like petroleum or natural gas from oil shale, coal or tar sands. Largely for national security reasons, including protection of America's liquid-fuels based economy, Mr. Carter on July 15 proposed an ambitious program to have the nation producing 2 million barrels a day of syn-fuels by 1990. The federal effort would be directed by an Energy Security Corporation, a Congressionally chartered newly proposed federal agency, which would provide financial incentives and absorb many of the risks to get a syn-fuels industry started, under the Carter plan. The House passed a similar bill by a vote of 368-25 on June 26 guaranteeing government purchases of up to 2 million barrels of syn-fuels a day by 1990 for national defense purposes, but it carried only a $3 billion price tag. NEW SYN FUELS INDUSTRY GOOD IDEA BUT- Most of the witnesses before the Hart task force testified it is high time that the United States help private industry start a domestic syn-fuels program. Their concern was that a crash program, like that proposed by Mr. Carter, would cause shortages and dislocations in the nation's economy, thereby adding fuel to inflation. S. Frank Culberson, president of the Rocky Mountain Division of Pace Co. (formerly Cameron Engineers, Inc., of Denver), said its studies showed the largest amount of syn-fuels that could be produced in this country by 1990 under a crash program would be 1.8 million barrels of oil a day, at a cost of $60 billion in 1979 dollars. Costs would run higher in dollar value in the 1980's and in 1990 "because of the likely hyper-inflation in the construction industry" that would result "if we embark on a crash syn-fuels syn-fuels program," Culberson testified. "We find that engineering and construction con-struction capability could limit syn-fuels syn-fuels production in 1990 with an all-out effort. ..We find that the controlling restraint will probably be construction industry capability to engineer, design and construct plants. ..This will limit syn-fuels output by 1990 to less than 2 million barrels per day." Culberson said. "If you have a strong program, there are certain limitations in the system, such as particular kinds of equipment that are needed in syn-fuels-high pressure vessels, pumps, items like' that-which have to be channeled into syn-fuels as opposed to other portions of our economy, and that is where the greatest impact would be felt," he continued. This probably would double the amount of inflation in the construction con-struction industry over that in the general economy during the 1980's, Culberson said. There would be no shortage of the resource, except for tar sands, he noted. "The U.S. resources of coal and oil shale are large enough to support an extensive synthetic fuels program. ..But there are only a limited number of sites capable of supporting a large syn-fuels plant. These sites will not, however, become a limiting factor at less than 2 million barrels per day," Culberson told the task force. Water availability will not place a restraint on syn-fuels production before 1990, he said. "A national commitment to syn-fuels should include a significant effort at reducing" existing impediments to the development of a viable syn-fuels industry, in-dustry, Culberson underscored. They include lack of suitable technology; poor product quality relative to crude oil; delays in obtaining permits; uncertainties un-certainties over changing environmental en-vironmental rules and regulations; lack of transportation systems; socioeconomic socio-economic concerns; government - regulations that go beyond the provisions of statutory law; jurisdictional jurisdic-tional disputes among various government agencies; conditional permits; lengthy public hearings; Syn-fuels failure to make federal lands available to lease for syn-fuels development; and "the threat of continued litigation and other disruptions that can unreasonably delay or stop a $l-$2 billion syn-fuels project," Culberson told the Committee task force. These constraints are all aside from the fact that it is not now commercially attractive at-tractive to develop syn-fuels, the task force was told. OTHER CONSIDERATIONS Bruce A. Pasternack, vice president of Booz, Allen and Hamilton, Inc., said legislation should be most carefully drafted by Congress if it does embark on a syn-fuels program. It should look at the "real world" economics in which private industry functions before putting a new law on the statute books, he advised the task force. "We recommend extensive discussion with a range of potential owner-operators of syn-fuel projects prior to final enactment of legislation or a specification of economic incentives. in-centives. We believe that any syn-fuel legislation should contain four key characteristics: first, a clear legislative history which outlines the purposes, scope and rationale for the provisions in the legislation. It should express a fairly simple and clear set of goals and bounds for the financing authority including. .the degree to which the Congress and the Executive Branch is willing to relinquish any authority or oversight, if at all, and the restrictions on the types of incentives to be utilized. "We believe the legislation should allow wide latitude in the types of incentives in-centives to deal with the technology. ..We do not believe the legislation should tie the hands of the financing authority without considerably con-siderably more in-depth analysis at the time in which the incentives will be rrn .... ' i . : i appneu... i lie truci gy buuduuu cudllgea dramatically and quickly, and the incentives that look very good today may not look as good two or three years' from now. And finally, we believe that legislation should be enacted to consider con-sider those non-economic aspects of the various barriers affecting syn-fuels (such as government red tape), since dealing with financial considerations alone is unlikely to create a viable freestanding free-standing industry," Pasternack testified. Witnesses before the task force underscored un-derscored the need for flexibility in the legislation and commitment by Congress if a syn-fuels program is to have any chance for success. "Flexibility is number one," Pasternack Paster-nack told Sen. Pete Domenici, R-N.M., under questioning, "because we cannot predict OPEC prices, the status of the technology, domestic regulatory policy et cetera" over time relative to a program that is designed to build syn-fuels syn-fuels projects five or ten years from now. W. Bowman Cutter, Associate Director for the Office of Management and Budget, insisted that Congress agree to vote up to $88 billion in budget authority (ie., contract authority) to the federal government in increments of $22 billion between now and April 1984 to make the President's syn-fuels program credible "in the eyes of OPEC and industry." When Sen. Henry Bellmon, R-Okla., flatly told Cutter there is no chance whatsoever that Congress is going to put up that kind of budget authority for a syn-fuels program now, Cutter was tenacious in his stand : If America is to have a viable syn-fuels industry circa 1990. Congress must provide budget authority to fund the program early. The private engineering consultants could not agree, under questioning by Hart and others, how much contract authority from the federal government was needed. They did agree a substantial sum would be needed. FINANCIAL INCENTIVES The private engineering consultants were in agreement, as Culberson put it, "that no single financial incentive will be effective in encouraging the development of a broad range of synthetic fuels processes. Each potential resource, process and plant owner will have different responses to different incentives. Different incentives in-centives will be required at different stages of process development." For example, Pasternack outlined what types of financial incentives might be needed to help Indian tribes that own substantial energy resources participate in a syn-fuels program. They would require equity assistance in the form of direct loans, loan guarantees, construction grants and completion guarantees, he said. Both Indian tribes and coal companies lack capital and "very often lack both access ac-cess to markets and technology experience" ex-perience" which may require all of the above and perhaps other aid for these important resource holders to get into syn-fuels, he testified. Among the financial incentives that were discussed were investment tax credit and production tax credit, expensing ex-pensing of construction costs and ac- - celerated depreciation; completion guarantee and price guarantee; all-events all-events tariff for regulated industries; purchase guarantee; rolled-in pricing; construction grant, direct loan and loan guarantee; aid for work in progress. Because of product quality problems with some syn-fuels, Culberson noted some refineries might have to be altered to accomodate syn-fuels in the s refining process or to mix syn-fuels with petroleum in quantities of "maybe 10, 15, 20 percent." C. Hoff Stauffer, chairman of the board of ICF, Inc., said the needs of industry for petroleum might dictate "that the syn-fuels may go to transportation." So incentives for those purposes would have to be considered con-sidered too. Culberson pointed out the likely candidates for getting into syn-fuels. "The oil industry is in the liquids 1 : ml r - f u1 :i 1 -l uubiuectb. iiiciciuic, iui auoic yu Hie Ull industry would be the producers... The people who are likely to invest in coal gasification are the utilities," he testified. Culberson testified that only one coal liquefaction and one high BTU coal gasification technology are ready for commercial application, both based on Lurgi coal gasifiers, a German process. Several above-ground oil shale retorting processes are ready or nearly ready for scale-up to commercial size, and a modified in-situ (on site) oil shale retorting process is being tested by two companies, he said. But there is "no established class of second generation oil shale retorting processes on the horizon," Culberson stated. Nor is there any effort being made now to extract oil from U.S. tar sands commercially, altho such a program has been going on in the Athabasca tar sands in Western Canada for several years, he stated. So it would make sense for the United States to have a two-stage syn-fuels program, with a testing stage first prior to building big commercial plants that might become white elephants without pretesting, the engineering firm representatives told the task force. Clearly much can be done in the way of conservation and substitution of energy, William Stitt, president of ICF, Inc., testified. But to "minimize risk of failure" it would be wise to have a mix of programs to cut down on oil imports "including syn-fuels," Stitt advised. |
