Synthetic Fuels Corporation and National Synfuels Policy

SYNTHETIC FUELS CORPORATION AND NATIONAL SYNFUELS POLICY ISSUE BRIEF NUMBER IB81139 AUTHOR: Paul Rothberg Science Policy Research Division THE LIBRARY OF CONGRESS CONGRESSIONAL RESEARCH SERVICE MAJOR ISSUES SYSTEM DATE ORIGINATED 08/17/81 DATE UPDATED 02/18/83 FOR ADDITIONAL INFORMATION CALL 287-5700 0222 CRS- 1 The Federal Government and U.S. industry a r e embarking on the largest and most intensive effort ever undertaken to increase the production o f synfuels, including o i l an-d gas from coal, peat, tar sands, and oil shale. This effort consists of two major parts: a n interim program and a long range program. T h e interim program was conducted by the Department of Energy's (DOE) Alternative Fuels Production Program, and a joint DOE-Department o f Defense (DOD) program which allowed funding for syr.fuels projects under amendments to the Defense Production Act. Under the interim program which has since been terminated, three projects -- the Union Oil shale proje.ct, the T O S C O portion of the Colony shale project, and the Great plains coal gasification project -- received Federal assistance to proceed with large scale development. The long range program is being conducted by the United States Synthetic Fuels Corporation (SFC), a n independent Federal entity which is functioning primarily a s a n investmen.t bank to accelerate the commercialization of synfuels. T o d a t e , SFC has issued three general solicitations requesting project sponsors to submit proposals for financial assistance. More than 9 0 groups responded with proposals of widely varying quality. The Corporation rejected most of these proposals because they failed to meet its criteria f o r denonstrating project strength and maturity. However, S F C judged several projects worthy of support and issued letters of funding intent to two groups of sponsors that intend to convert tar sands into liquid fuels and to process peat i n t o methanol. T h e Corporation has a l s o issued one "targetedf1 solicitation restricted to western oil shale projects and plan's to issue a t least o n e f o r coal-based synfuels projects. P.L. 96-294 directs S F C to help achieve the National Synfuels Production Goals of reaching a daily synfuels production capacity of . 5 million barrels of sil equivalent by 1 9 8 7 and 2.0 .million barrels by 1992. Although SFC is seeking to implement efficiently Title I of the Energy Security Act, i t i s unlikely that the Corporation will be able to carry out effectively many o f the g o a l s a n d objectives of this law. In f a c t , if a n average daily Synfuels prcduction level of 30,000 to 6 0 , 0 0 0 barrels of oil equivalent i s reached by 1 9 8 7 , industry and S F C wo.uld have achieved a major technological a n d economic accomplishment. Congress and the Administration can choose from a variety o f options (1) abolish the Corporation, (2) regarding the future of the S F C , including: extend S F C f s authority to include the support of biomass fuels projects a n d energy-from-solid-waste plants, and (3) provide additional appropriations beyond the $14.9 billion now available to the Corporation. T h e Reagan Administration has stated that i t does not intend to provide any additional appropriations to the SFC. BACKGROUND AND POLICY ANALYSIS UNITED STATES SYNTHETIC FUELS CORPORATION Title I o f the Energy Security Act creates a n independent, Federal entity called the United States Synthetic Fuels Corporation (SFC), which is authorized to provide several forms of financial assistance to foster the CRS- 2 IB81139 UPDATE-02/18/83 production of synfuels. SFC-supported p r o ~ e c t swlll be deslgned to convert s a n d s , peat, and c e r t a ~ n heavy oil tne K a t ~ o n ' sc o a l , oil shale, tar resources i ~ t osynfuels whlck czc be used a s s u b s ~ ~ t u t efor s natural qas Z R ~ s e t r c l e - x ( ~ r c l u d i n gcrzde o ~ l ,~ e t r o i e ~ rpcr ~ d u c t s ,a n 2 chemlcal feedstocks). (1) to produce The s a c also 1 s authorized to a s s ~ s tfaclllt1es used solely: mlxtures of coal a n d petroleum for dlrect fuel use, (2) f o r c o m m e r c ~ a l of production of hydrogen from water, and (3) for the commercial production electricity by a magnetohydrodynamlc (MHD) topplng cycle. Financial Resources of the Corporation T h e financial resources available to S F C over its 12-year lifetime a r e limited to a maximum of $ 8 8 billion. Congressional appropriations to finance S F C v s operations a r e deposited in the Energy Security Reserve of the U.S. Treasury (whi'ch w a s established by the Department of the Interior and Related The first installment of Agencies Appropriations Act, 1 9 8 0 , P.L. 96-126). funding for the S F C , $ 2 0 billion, is authorized a s of J u n e 3 0 , 1 9 8 0 , subject to appropriations. The second and subsequent installments will be authorized (up to a maximum of $ 6 8 billion) by joint congressional r e s o l u t i o n s , subject to appropriations. In P.L. 9 6 - 3 0 4 Congress stated that up to about $17.5 billion of the Energy Security R e s e r v e would be available to the SFC. Of t h e s e funds, $6 billion was made immediately available to cover the commitments and expenses of the Corporation; an additional $6.2 billion was made a v a i l a b l e for such purposes after J u n e 3 0 , 1982; and the remaining $5.3 billion was to be derived from f u n d s appropriated to D O E for the interim program under the a m e n d m e n t s to the Defense Production Act and the Kon-Nuclear Act -- to the extent that such f u n d s were not committed o r ccnditionally committed by the DOE. In February 1 9 8 2 , President Reagan transferred to S F C approximately T h u s , by June $2.7 billion t h a t DOE did not use cnder the interim program. 3 0 , 1 9 8 2 , S F C had a total of about $14.9 Sillion of appropriated funds. T h e S F C ' s a u t h o r i t y to make n e w awards o r commitments w i l l end after Sept. 3 0 , 1 9 9 2 , a n d S F C must terminate i t s affairs by Sept. 3 0 , 1997. Upon termination, S F C ' s outstanding contracts for financial a s s i s t a n c e will be transferred to the Secretary of the Treasury for administration. Administrative S t r u c t u r e and Expenses of the Corporation SFC's powers a r e vested in a seven-member Board o f D i r e c t o r s , composed of a chairman and s i x other directors, t o be appointed by t h e President a n d confirmed by the Senate. The chairman, who is r e s p o n s i b l e . for S F C v s management a n d d i r e c t i o n , will be appointed for a 7-year term a n d must serve The other six Directors may serve on a part-time on a full-time basis. basis. The B o a r d , by majority v o t e , appoints S F C v s officers (including a defines their duties, and fixes their General Counsel a n d a Treasurer), salaries. In a d d i t i o n , the Board sets a l l major p o l i c i e s , determines g u i d e l i n e s a n d c r i t e r i a for soliciting and evaluating p r o p o s a l s , and makes f i n a l judgments o n the award of financial assistance to projects. Up to 300 full-time professionals may work for S F C at any one time. Through F Y 8 2 , S F C spent $18.6 million o n its administrative operations, including generic studies to support program and policy activities. SFC expects its administrative expenses to amount to $23.6 million i n F Y 8 3 , and $26.9 m'illion in F Y 8 4 , versus authorized levels of $54.1 million and $56.7 CRS- 3 million in F Y 8 3 and F Y 8 4 , respectively. Proposed F Y 8 4 increases i n the S F C ' s administrative budget are incended to s u p p o r t additionai staffing to handle responsibilities ~ r o j e c tevaluation, negotiaticc, seiection, and monitoring acd z c develop the comprehensive strategy required 3y the Energy Security Act. (See section below for additional information on S F C ' s comprehensive strategy . ) President R e a g a n - a p p o i n t e d and the S e n a t e confirmed Edward Noble t o be Chairman of the SFC. In September 1 9 8 1 f o u r of the six members of the Board were confirmed by the Senate. They were Victor T h o m p s o n , R o b e r t Monks, Victor Schroeder, and Howard Wilkins. In August 1 9 8 2 , t h e last two members of the Board, John Carter a n d Milton Masson, were confirmed by the Senate, giving SFC's Board for the f i r s t time i t s f u l l complement of seven members. S F C 7 s Goals and Comprehensive Strategy a national g o a l of a c h i e v i n g a In P.L. 96-294, Congress established synthetic f u e l s production capability equivalent to at least 5 0 0 , 0 0 0 barrels of crude oil per day by 1 9 8 7 , increasing t o a t least 2 million barrels per day by 1992. Unless a one year-extension i s requested, S F C is required by June 3 0 , 1 9 8 4 , to develop a n d submit to C o n g r e s s a c o m p r e h e n s i v e strategy f o r achieving these production goals. The comprehensive strategy will include reports on economic, technological, a n d environmental a s p e c t s of synfuels projects granted financial incentives up to that d a t e , a n d will a l s o presect S F C 7 s longer-term objectives and its s c h e d u l e to a c h i e v e them. T h e plan will emphasize private sector responsibilities a n d will describe how specific limitations will be placed o n S F C ' s involvement. After consultation with the Secretary of D e f e n s e , S F C must consider the feasibility o f meeting national defense fuel requirements using synfuels produced by SFC-assisted projects. P.L. 96-294 specifies that Congress must consider S F C ' s comprehensive strategy f o r approval by joint' resolution. S F C cannot b e liable f o r more than $20 billion until the comprehensive strategy i s approved and funds appropriated. concluded that the national synfuels In February 1 9 8 2 S F C ' s Board production goals would be difficult to meet. Accordingly, the Board decided that would to support a diversity o f . p r o j e c t s , i n s t e a d of funding projects provide only near-term production. T h i s decision is c o n s i s t e n t with the the s p o n s o r i n g of technological provisions of P.L. 96-294 that emphasize diversity of projects prior to submission o f SFC's c o m p r e h e n s i v e strategy. By pursuing this strategy, SFC's ~ o a r dsuggested that a l a r g e r scale synfuels production could be achieved over the long-term, because t h e private sector could duplicate the various technologies t h a t proved successful. In July 1 9 8 2 , SFC's Board concluded that its d i v e r s i t y g o a l could be accomplished by supporting the commercialization of relatively few combinations o f synfuels resources and technologies, especially those that offer the greatest potential for large-scale production. To implement this decision, SFC's Board estimated that the following maximum a m o u n t s of financial assistance would be necessary to accomplish the desired technological diversity under its first three solicitations: $ 6 billion to support coal-b.ased projects, $3 billion f o r oil s h a l e projects, and $1 projects. The balance o f SFC's billion for tar sands and heavy o i l obligational authority will be a v a i l a b l e to meet either diversity or production objectives, or to fulfill other goals of T i t l e I of P.L. 96-294. CRS- 4 IB81139 UPDATE-02/18/83 Mechanisms of S F Z ' s Financial Assistance T5e S X r a y ~ r o v l d e flnanclal asslszance to the prlvate sector synfuels p r o ~ e c t s~n the foliowlng order of decreasing p r ~ o r i t i e s : fcr 1) purchase agreements, price guarantees, a n d loan guarantees; 2) l o a n s ; and 3) joint ventures for project modules. (This last type of assistance may b"e granted only prior to approval of SFC's comprehensive strategy.) Before awarding loans or participating in joint ventures, S F C ' s Board must determine that purchase a g r e e m e n t s , price guarantees, and loan guarantees will not adequately support the construction and operation of a synfuels project or will restrict its available participants. The SFC's Board will give preference to proposals which would likely result i n the least commitment of financial assistance by the Corporation and the lowest unit production cost within a given technological process. In deciding which synfuels projects to support, S F C must also consider the range of a v a i l a b l e technologies, the overall production potential of each technology, and the potential of each technology for compliance with 9 6 - 2 9 4 , if the synfuels environmental regulations. According to P.L. products o f a proposed project would be sold or transported a t regulated r a t e s , S F C may consider when awarding financial incentives whether the ratemaking decisions a r e likely t o protect the financial interests of the investors a n d SFC. Whenever judged practicable by SFC's B o a r d , S F C is directed to award financial a s s i s t a n c e o n the basis of competitive bids. If S F C solicits bids received, o r if those received a r e for a s y n f u e l s project and none are unacceptable to SFC's Board, the Board can negotiate a financial assistance contract f o r a specific project after reporting to the appropriate House and Senate authorities. The Board may decide to grant more than one form of financial assistance t o a s i n g l e project only if multiple assistance forms a r e required to a c h i e v e economic f e a s i b i l i t y , a n d if the project is necessary to satisfy national synfuels program goals. Investors who are granted more than one type of incentive must bear "a reasonable degree of risk" but those solely i n the position o f being a lender are not required to bear such risks. -- A maximum of 15% of S F C t s financial assistance budget may be awarded Once S F C awards a company some form each single company o r person. financial i n c e n t i v e , S F C may have access "at a l l reasonable times" whatever company records a r e needed to insure compliance with the terms financial a s s i s t a n c e provided by SFC. to of to of S F C is authorized t o require appropriate security a n d collateral for the repayment of any obligations owed to it. All forms of financial assistance States backed by granted b y S F C shall be general obligations of the United its full f a i t h and credit. A recipient of SFC's financial assistance must d e v e l o p a plan to monitor a project's environmental and health-related emissions. T h e plan must be acceptable to SFC's Board of Directors and i t must be developed in consultation with the Administrator of the EPA, the Secretary of Energy, and CRS- 5 appropriate State agencies. L!r,der c e r t a ~ nlimited circumstances., S F C cocld a c q u i r e control of o r pcrchase a n e leaseSack synfuels projects, subject to c o n g r e s s i o ~ a l review a n d veto. Such control would have to be disposed of within 5 years a f t e r acquisition. When the Secretary of the Treasury transfers requested f u n d s to S F C , obligations and outlays incurred will be included i n the U.S. budget. However, since S F C is a n independent entity, i t s receipts a n d disbursement will not be included in U.S. budget t o t a l s , although t h e s e f i n a n c i a l transactions will be made public in the budget report. T h u s , transactions between S F C and the Secretary of the Treasury w i l l be on-budget i t e m s , while the transactions between SFC a n d recipients w i l l be off-budget items. S F C t s Solicitation Process and Activities The S F C has organized its solicitation a c t i v i t i e s i n t o three phases. that have best Under P h a s e I S F C will select synthetic f u e l s proposals responded to a solicitation and a r e most l i k e l y t o a d v a n c e t h e purposes o f the Energy Security Act. SFC assesses whether a proposed p r o j e c t is m a t u r e and has a reasonable prospect of receiving f i n a n c i a l a s s i s t a n c e from t h e Corporation under its solicitation criteria. P h a s e I1 w i l l i n v o l v e f u r t h e r project assessmer!t, proposal r e f i n e m e n t , verification of i n d u s t r y d a t a a n d plans, and negotiation of appropriate financial assistance. P h a s e I11 w i l l include monitoring plant construction and eventual synfuels production. To assist and oversee projects, the S F C has devised a "project matrix system," which consists of integrated project teams a s s i g n e d from a l l relevant o f f i c e s of the SFC. Each team will help guide a project through S F C ' s solicitation process and will negotiate with the project s p o n s o r s the d e t a i l s of f i n a n c i a l assistance and methods of project oversight. T o d a t e , S F C has issued three general solicitations r e q u e s t i n g project sponsors to submit proposals for financial assistance. More than 90 industrial groups submitted proposals of widely varying quality i n f o u r resource categories: oil shale, coal or p e a t , tar sands o r heavy o i l s , a n d hydrogen from water by electrolysis. After a detailed r e v i e w , S F C rejected most of these proposals because they failed to meet i t s c r i t e r i a for project strength and maturity. However, the Corporation judged s e v e r a l projects worthy of support a n d conducted negotiations with their spon.sors over the terms of possible financial assistance. As a result of these negotiations, SFC signed a letter o f f u n d i n g i n t e n t i n December 1 9 8 2 with the sponsors o f the " F i r s t C o l o n y u project which w i l l be designed to produce 4,800 barrels per day o f methanol f r o m peat. Provided that f i n a l agreements can be r e a c h e d , the C o r p o r a t i o n i n t e n d s to provide up to $465 million in loan guarantees a n d price g u a r a n t e e s to this project, which is scheduled to be completed by Dec. 3 1 , 1 9 8 5 , n e a r C r e s w e l l , North Carolina. In a d d i t i o n , S F C signed a letter of funding i n t e n t with the sponsors of a project that will b e designed to produce 4 , 0 0 0 barrels of t a r s a n d s o i l per day near Santa R o s a , New ~ e x i c o . Pending that f i n a l a g r e e m e n t , the Corporation intends to provide a loan guarantee o f up to $ 2 0 million and a n initial price guarantee of up to $ 2 1 million. S F C officials a r e a l s o currently negotiating the final d e t a i l s of a letter CRS- 6 IB81139 UPDATE-02/18/83 of funding intent with sponsors of a heavy oil refining project proposed W e s t 3 i z z s b u r 9 , Cadifornia. This p.roject will Se d e s i g n e e to process 2qxivalent cf 5 , 0 5 0 barrels c.f oil per day. for he S ? C T s Board of Directors also has approved a competitive solicitation for western oil shale projects capable of producing at least 1 0 , 0 0 0 barrels per day of oil equivalent. SFC intends t o issue one o r more solicitations restricted to coal-based synfuels pr0ject.s. S F C As Part of the Nation's Synfuels Production Program The Federal Government and U.S. industry are jointly embarking on the largest and most intensive program ever undertaken to increase the domestic a key and production of synfuels. T h e Federal Government will play determining r o l e i n both promoting and' regulating this emerging industry. The S F C , which is a Federal entity a s defined by l a w , will be concerned primarily with providing economic incentives to stimulate commercialization. However, S F C will also consider other factors that will influence production. F o r example, S F C officials have stated that they must d e a l with a number of external constraints, including water and other resource availability, material and equipment c a p a c i t y , skiiled labor availability, socboeconomic development c a p a c i t y , and the limited number of potential project sponsors able to bear the risks of synfuels commercialization. SFC has also held meetings with various organizations that will influence their program. These groups include Federal regulatory a g e n c i e s , D O E , Department o f Treasury, a n d environmental and public interest groups. T h u s , the S F C can be viewed a s o n e of many participants in the Nation's synfuels commercialization efforts. An Assessment o f S F C 1 s Progress and Possible Accomplishments S F C ' s program can be assessed in terms of two criteria: efficiency, measure of the c o s t required t-o accomplish a task; a n d effectiveness, measure of accomplishments in terms of stated goals a n d objectives. a a There is much evidence t h a t S F C wants to carry o u t its responsibilities and impleaent i t s program efficiently. Chairman Noble has repeatedly stated that S F C will use its financial incentives to expedite the growth of a synfuels industry at the least cost t o the taxpayer and with minimum Government involvement. In selecting which projects to assist, the Corporation seeks spcnsors that exhibit strong management capability and that a r e willlng to back financially a major portion of their own projects. ~ u r t h e r m o r e ,S F C wants to fund only economically sound and environmentally s a f e synfuels plants. S F C has deliberately taken its time in defining its objectives, establishing i t s procedures and policies, a n d i n seeking to hire the best staff available. By proceeding c a u t i o u s l y , S F C hopes to avoid making costly mistakes. In order to choose the strongest and maturest projects, S F C has developed and is now using a rigorous and carefully designed selection process. Under Chairman Noble's g u i d a n c e , S F C a l s o h a s ' taken many administrative actions designed to improve its organizational efficiency. The Corporation has revised its salary structure to be more acceptable to Congress and t o a l l o w the Corporation to compete better with the private sector for qualified personnel. H o w e v e r , so.me Members are concerned that salaries of two o f S F C ' s CRS- 7 senlor offlclals are st111 too h ~ g h ,e.g., those ln the $ 5 0 , 0 0 3 to $100,000 range. Over the iast two y e a r s , S F C has funct-one3 wlth apprcxlmately 70 t o 123 professional s t a f f , fewer than t h e rnaxlinum number allowed under the s:.erqp Security Act (30C). in a C d ; t ~ o c , S F C haas realigned ~ t s organlzaclonal SC,-,dmC to a p r 0 1 e c t matrlx syscern that 1 s deslgned to maxlmlze Corporat;on efflclency and p r o ~ e c tmonltorrng. I of the Energy Although S F C is seeking to implement efficiently T i t l e Security A c t , i t i s unlikely that the Corporation will be a b l e to carry out effectively many of t h e various goals a n d objectives of this law. Under its first f o u r o r f i v e solicitations, S F C i s expected to commit m o s t , if n o t a l l , of its appropriated f u n d s , which total roughly $ 1 5 billion. With these monies, S F C might fund a b o u t 8 to 1 2 p r o j e c t s , including both small a n d l a r g e scale efforts. (In l i g h t of the Reagan Administration's policy to request n o additional f u n d s f o r the Corporation a n d the current budgetary s i t u a t i o n , i t seems that S F C ' s program will be limited to its currently appropriated f u n d s , unless there a r e major changes i n national policies affecting synfuels commercialization. T h e r e f o r e , S F C may be stimulating a much smaller s y n f u e l s industry t h a n was envisioned in the Energy Security Act. In f a c t , if a d a i l y synfuels production l e v e l of 3 0 , 0 0 0 to 6 0 , 0 0 0 barrels of oil equivalent is reached by 1 9 8 7 , industry and S F C would have acnieved a major technological and economic accomplishment. With this size of a n industrial b a s e , there is little c h a n c e o f meeting the Act's g o a l of having the capacity to produce 2 million barrels of synfuels per day by 1992. Consequently, S F C 7 s current pro7sain i s likely to be ineffective i n stimulating the growth of a s y n f u e l s indxstry c a p a 3 l s o f "improving the Nation's balance o f p a y m e n t s w or " r e d u c i n g the threat o f economic disruptions f r o m o i l supply interruptions" in the t h e U.S. near-term. Another 10 to 2 0 years is likely to be required before synfuels industry will be a b l e to contribute significantly to either o f t h e s e broad g o a l s embodied i n the Energy Security Act. decided t o proceed Instead o f implementing a crash p r o g r a m , S F C has cautiously with the f u n d i n g o f projects that a r e designed to a d v a n c e a w i d e diversity of synfuels processes. F o r those projects receiving SFC assistance, another f i v e to seven y e a r s a r e likely to be required to r e a c h full production and t o collect reliable information o n these operations. As a result of this lead t i m e , i t may well be into the 1 9 9 0 s before many o t h e r ccmpanies start investing i n n e w synfuels plants. T h u s , the S F C program, a s it is n o w unfolding, is making only limited progress towards a s s u r i n g "the f l o w of c a p i t a l f u n d s to those sectors of the national economy which are important to the d o m e s t i c production of synthetic fuels." On the other h a n d , the S F C may be maximizing the u s e of the $ 1 4 to $15 billion appropriated for its program by assisting only the strongest a n d maturest projects. By assisting i n the commercialization of a f e w s u c c e s s f u l synfuels projects, the S F C may a i d the synfuels industry more effectively selective program which assumed greater risks had been than if a less implemented. By carrying o u t i t s solicitation process on a s p e c i f i c timetable, determining i n a d v a n c e the s u m s to be s p e n t o n different synfuels technologies, quickly eliminating weak and immature projects from competition, a n d expediting its negotiation p r o c e s s , S F C is beginning to demonstrate to the private sector its commitment t o a i d the emerging synfuels industry. Policy Options Regarding the F u t u r e of the S F C Congress a n d the Administration can choose from a variety of options CRS- 8 1881139 UPDATE-02/18/83 regarding the f i t u r e of the S T , inclcdlng: (1) aSollsh the Corporation (see ieglslacive s e c t l o n , e - g . , S . 250), ( 2 ) extend s r c ' s authority to include t r . e S .U,,crz ,mof blonass fuels pro;ects asd energy from s o l ~ ewaste plants, and (3) :rcv:de a e d ~ t l c n a l appi?cpr:at:or.s beyond = h e $14.9 billion now avaliable to tne corporation. Some of he possrble advantages and disadvantages of each of these optlons a r e discussed Selow. Abolish S F C If the S F C w e r e abolished, there is the possibility, but not the guarantee, sf substantial near-term budgetary savings, assuming uncommitted funds a r e not used for other purposes. The actual costs of S F C ' s progFam will depend upon t h e success of the projects i t supports a s well as the terms of any contracts signed by the Corporation. T h u s , if a SFC-supported project defaults on a l o a n guarantee or requires a substantial price support, the public treasury would have to outlay funds to cover S F C ' s obligation. Although it is too premature to predict the probability of a n y outlays, o n e can estimate that the range of possible outlays might be between a total of $4 and $6 billion for the FY85 through F Y 9 0 budgets. Those who want to abolish S T C can a l s o argue that i t is no longer needed because the U.S. energy supply demand situation has become much more f a v o r a b l e and that SFC-supported projects would prove to be economically unfeasible or snvironmentally unacceptable. Those supporting S F C can a r g u e that its program is still essential to the Nation's long-term economic stability and national security a n d that this Nation cannot afford to have synfuels investors delay o r terminate their projects if S F C support were eliminated. They can point out that without S P C this Nation would have little of the technical infrastructure to construct a reduce o r viable synfuels i n d u s t r y , a n d that abolishment of SFC could a l s o delay any downward pressure that synfuels might place o n the price of OPEC oil. T h e Reagan Administration wants t o continue SFC's program at current fundinc levels, although this policy i s under review by the Presidential Cabinet Council o n Natural Resources. Extending SFC's Authority With the authority to support biomass fuels projects o r energy from solid wast'e plants (ESW), S F C would have a much wider range of synfuels resources to choose from. With S F C backing, many ESW and gasohol projects that a r e still in the i n i t i a l planning stages would likely move forward. SFC' s political constituency would also be expanded and the prospects for achieving additional near-term synfuels production increased. However, this extension of responsibilities could diffuse SFC's senior management capabilities, result i n additional budgetary o u t l a y s , and leave less f u n d s available t o support SFC's major activities in coal liquefaction and oil shale commercialization. Additional Appropriations for S F C With additional appropriations, S F C could fund a variety of new synfuels projects that eventually might help this Nation reach the National Synfuels Production Goals contained i n P.L. 96-294. These additional funds could be CRS- 9 I981139 U P D A T E - O ~ / ~ ~ used to contlnue development of the rnfrastrucrure of experienced people, know-how, and manufacturing capablllty needed to ensure a successful synfuels ~ n d c s t r y . A large-scale lndustry brollght z b o u t wlth S F C support would ~ r 3 v - e et h e Unlked Staces w ~ t 3a s u S s t a n t ~ a l l y proved posltion to deal wlth - - - n UYL, prlclng pollcies a s well as orner dislocations caused ~y dlsruprlons of lmported 011 supplies. On the other h a n d , i t can be argued t h a t a n y additional F e d e r a l f u n d s spent on S F C f s program might be better used f o r other purposes, e.g., for social programs o r f o r energy conservation m e a s u r e s , and that additional Federal g u a r a n t e e s administered by S F C might create distortions in the credit market. F u r t h e r m o r e , s o m e maintain that the f u n d s already appropriated to S F C should be a d e q u a t e to stimulate the i n i t i a l growth of a domestic synfuels industry a n d t h a t a l l f u t u r e risks should be assumed by the private sector. Development of S y n f u e l s Under Amendments to the 1 950 Defense Production Act of - In creating S F C , Congress recognized that some indeterminate period of time would be required before S F C could become operational. Given this lead time and the c o n g r e s s i o n a l m a n d a t e to expedite the production of synfuels f o r national d e f e n s e purposes, P.L. 9 6 - 2 9 4 provided the President with several new authorities which a r e specified i n the f o r m of amendments t o the Defense Production Act o f 1950. Before S F C b e c a m e o p e r a t i o n a l , the P r e s i d e n t had authority t o offer (through the D e p a r t m e n t of D e f e n s e a n d o t h e r Federal agencies) purchase agreements, l o a n s , a n d loan guarantees to stimulate synfuels development f o r national d e f e n s e needs. Up to $ 3 billion, subject to appropriations, w a s ~ a d ea v a i l a b l e f o r this purpose. Once S F C w a s declared operational by the President i n F e b r u a r y 1 9 8 2 , t h e s e authorities were converted to a standby basis. Prior to the S F C becoming operational, D O E issued s o l i c i t a t i o n s . u n d e r the Defense P r o d u c t i o n Act (DPA) amendments of P.L. 96-294, inviting interested parties to s u b m i t proposals f o r f i n a n c i a l assistance to expedite the commercial production of s y n f u e l s fcr national defense needs. Under the D P A program, D O E awarded a $1.1 billion loan guarantee t o TOSCO to help build t h e Colony oil shale plant a n d $400 million in price supports to encourage U n i o n Oil Co. t o produce shale o i l for use by the DOD. In February 1 9 8 2 , S F C accepted the responsibility for overseeing the management of the Federal f i n a n c i a l a s s i s t a n c e for these projects. S F C has since terminated the l o a n guarantee to TOSCO because the Colony project has been suspended. OTHER F E D E R A L ASSISTANCE FOR S Y N F U Z L S COMMERCIALIZATION In addition t o P.L. 9 6 - 2 9 4 , the C o n g r e s s passed several other laws designed to promote the commercialization o f synfuels projects. Among these a r e P.L. 9 6 - 1 2 6 and P.L. 96-304, which appropriated funds f o r D O E ' S Alternative F u e l s Production Program. This program allowed D O E to provide fun.ds to e n c o u r a g e industry g r o u p s to conduct project feasibility s t u d i e s , to enter into cooperative a g r e e m e n t s , to receive loan and price g u a r a n t e e s , aswell a s to r e c e i v e purchase commitments for their synfuels products. Using its aut'horities under this p r o g r a m , a s well a s those under the D P A , D O E was the major Federal agency promoting the commerclallzatlon of synfuels prolects SFC became operat~onai. Under the Alternative Fuels Production 1 ?r=gr&?, 335 c3npleted the ~ s s u s n c eof more t 9 a r 1 C C awards for feaslblllzy s z - 2 : ~ s a - Z cc3perat;-~e a g r e e ~ > e n t s . In a 5 e . l r ~ c n , 295 also awarded a $2 - ~l,~:on lsan guarantee co a consort~urn neaaed Sy the Amerlcan Natural Resources Co. to build a high-Btu coal gaslflcatlon plant. T h e Reagan Administration does not intend for the D O E to provide any additional f u n d s to help commercialize synfuels plants beyond the approximate $3.6 billion that have already been committed under the DPA and the Alternative F u e l s Production programs. Consistent with this p o l i c y , P.L. 9 7 - 1 2 rescinded $300 million previously appropriated under P.L. 9 6 - 3 0 4 for the support of preliminary alternative fuels commercialization activities. OVERVIEW AND ASSESSMENT OF REAGAN ADMINISTRATION'S ENERGY POLICIES AND THEIR RELATIONSRIP T O THE FUTURE PROSPECTS FOR SYNFUELS COMMERCIALIZATION In the National Energy Policy Plan I11 submitted to Congress i n July 1 9 8 1 , the Reagan Administration outlined a variety of policies and objectives that if implemented successfully could aid synfuels commercialization. An important objective of the plan i s "to establish s o u n d , stable public policies that will encourage individuals and groups in the private a n d public sector to produce and use energy resources wisely and efficiently." The to Reagan Administration wants to inventory the Federal lands and waters determine the quantities of energy resources so that wise resource decisions can be made. In addition, the ReagaR Administration's action t.o end oil price c o n t r o l s has provided additional capital for the petroleum industry. Some of this capital could be funneled into synfuels projects. Accelerated depreciation schedules, which were strongly supported by the Reagan Adninistration and enacted a s part of the Economic Recovery T a x Act of 1981, could a l s o spur new investments in synfuels projects. If these policies work a s projected by the Reagan Admicistration, a business environment could be created over the long-term that will promote more investment in synfuels projects than is forthcoming a t present. T h e Administration has restructured those aspects of the National Synfuels Production Program pertaining to the demonstration of new synfuels technologies. It wants . t o terminate direct D O E funding for synfuels demonstration projects. As evidenced by rescissions and deferrals contained i n P.L. 9 7 - 1 2 , the Congress has largely agreed with the Administration's position. Under its new policies, DOE will fund long-term, high risk research a n d development projects that industry would not be i n a position to finance. Thus f a r , the Xeagan Administration has not proposed that the S F C be abolished o r that i t s appropriations be reduced. The Administration hopes that responsiblity for commercializing synfuels technolog.ies will shift to the private sector, with potential support from the SFC. H o w e v e r , when a n d if the private sector will make substantial financial commitments of its own f u n d s t o construct a large number of synfuels projects remain uncertain. I t i s premature to assess the eventual outcome of these policies on the 'growth of the synfuels industry. However, to date the Federal Government has only made limited progress towards implementing the large-scale programs of public support for synfuels commercialization that were enacted by the 9 6 t h Congress. T h e f a s t tract program envisioned under the Defense Production Act Amendments of P.L. 96-294 resulted in the issuance of only two financial a w a r d s to encourage synfuels comrnerclalizatlon. D O E ' S loan guarantee authority under the F,ederal Non-Nuclear Energy Research and Development Act has only recently Seen u t l l ~ z e d - t oaid. cr.e large scale synfuels p r o ~ e c t . SFZ's pragram Pas seen delayed ~y a charge ln : ~ p l e m e n ~ a t ~ oof n o f installing a new AZnlnistration a s weil a s the Clme consuming process Chalrman and Board of Directors of the SFC. In a d d l t l o n , $ 3 0 0 mllllon of financial a w a r d s under P.L. 9 6 - 3 0 4 , which were designed to expedite p r e - c o m m e r c ~ a l i z a t i o n a c t i v i t i e s , have been rescinded. With respect t o industry's involvement, only a small number of private corporations have committed substantial a m o u n t s o f their o w n capital to commercialize synfuels projects. Industry still faces t h e potential for major delays a n d increased project c o s t s caused by lawsuits a n d uncertainties regarding environmental re.gu1ation.s and other governmental policies. In f a c t , over the l a s t year'about eight major synfuels projects have suspended o r delayed their commercialization e f f o r t s , a n d S F C has rejected numerous projects from i t s solicitation process. Based on SFC's and industry's progress to d a t e , i t appears that t h e prospects for meeting the National Synfuels Production G.oals have diminished substantially. Additional information on two of the major synthetic f u e l s technologies that will be a f f e c t e d by D O E and S E C programs is provided i n the following C R S issue briefs: IB 7 4 0 6 0 -- IB 7 7 1 0 5 -- Oil Shale Development: and Constraints O u t l o o k , C u r r e n t Activities Coal Gasification and Liquefaction LEGISLATION HEARINGS U.S. Congress. House. Committee on Banking, Finance a n d Urban Affairs. S.ubcommittee on Economic Stabilization. Synthetic fuel oversight hearing. H e a r i n g s , 9 7 t h Congress, 1 s t session. Mar. 3 , 1981. Washington, U.S. Govt. Print. 96 p. Off., 1981. "Serial No. 97-2" U.S. Congress. House. Committee on Government Operations. Synthetic F u e l s Corporation oversignt. Hearings, 9 7 t h C o n g r e s s , 1 s t session. Feb. 1 9 , 1981. Washington, U.S. Govt. Print. Off., 1981. 1 6 9 p. - REPORTS A N D CONGRESSIONAL DOCUMENTS U.S. Congress. House. Committee on Government Operations. Oversight o f the Energy S e c u r i t y Act: Imple'mentation of the S y n t h e t i c Fuels Corporation. Washington, U.S. Govt. Print. Off., 1981. 148 p. (97th C o n g r e s s , 1 s t session. House. R e p o r t no. 97-123) U.S. Congress. Jolnt Economic Committee. Pursulng energy supply options: cost effective R&D strategies. Washlngzon, -.S. Govt. Prin:. Off., i9E1. 352 p . ( 9 7 t h Zongress, Is: sess13n) 7. U.S. Congress. Senate. Committee on Energy and Natural Resources. Synfuels from coal and the national synfuels production program: technical, environmental, and economic aspects. January 1981. Washington, U.S. Govt. Print. Off., 1981. At head of title: 9 7 t h Congress, 1 s t session. Committee Print. CHRONOLOGY OF EVENTS 01/20/83 -- S F C issued a targeted solicitation for western oil shale projects. 01/10/83 -- S F C received 46 proposals for synfuels projects under its third solicitation. 08/16/82 -- U.S. Senate confirmed the nominations of J o h n Carter and Mike Masson to S F C ' s Board of Directors. 01/04/82 -- Opening of SFC's second s o l i c i t a t i o n . f o r proposals from industrial projects seeking SFC support. applications will be received until Nay 3 1 , 1982. 0 7 and 08/81 -- As authorized under the Federal Non-Nuclear Research and Development Act and the amendments to the Defense Production Act, the DOE provided loan guarantees and purchase commitments to a variety of companies to spur the commercialization of synfuels projects. 05/28/81 -- House Committee o n Government Operations issued its report entitled "Oversight of the Energy Security Act: Implementation of the Synthetic Fuels Corporation." 05/14/81 -- Edward Noble was confirmed a s Chairman of the the SFC by the U.S. Senate. 04/01/81 - - John McAtee, Jr., Acting Chairman of the S F C , arinounced that 5 1 proposals for .financial assistance were received by the Corporation. ADDITIONAL REFERENCE SOURCES ESCOE (The Engineering Societies Commission on Energy, Inc.). Synthetic fuels summary. Prepared for the U.S. Department of Energy. March 1981. 1 4 7 p. (Publ. no. FE-2458-82-A) U.S. Library of Congress. Congressional Research Service. Synthetic fuels commercialization. In Congressional Research Service Review, January 1 9 8 1 , pp. 16-19. ----- C h a l l e n g e s f a c i n g t h e U.S. s y n f u e l s i n d u s t r y a n d t h e s t a t u s of - o u r n a t i o n a l s y n f u e l s policy. S p e e c h g i v e n a t CRS s e m i n a r by Paul Rothberg. Feb. 3 , 1 9 8 2 . 1 0 p.