Whither Synfuels?

After nearly two years of debate, the Energy Security Act was enacted into law on June 30, 1980.

The major provision of the act is its creation of a U.S. Synthetic Fuels Corporation with authority to provide federal financial support in the form (in order of decreasing priority) of price guarantees, purchase agreements, loan guarantees, direct loans, and, if necessary, joint ventures of the corporation and private industry for synthetic fuels projects. As a last resort, and only under special circumstances, the corporation can construct plants of its own.

The synthetic fuels production goals set by the act are at least 500,000 barrels per day in 1987 of oil equivalent and 2 million barrels per day by 1992. Included in the definition of synthetic fuels is any product made from coal (including peat and lignite), shale, and tar sands (including heavy oil resources) that can be used as a substitute for petroleum and natural gas.

The long debate over the terms of the act made Congress uneasy that the delays would make achieving the intended goals impossible. Accordingly, in fall 1979 an Energy Security Resale of $19 billion was created within the Treasury, out of which $200 million was to be used in equal amounts for funding feasibility studies and cooperative agreements. A 90-day deadline was imposed on the U.S. Department of Energy for issuing a solicitation for these studies, and by July 1980, DOE selected 99 feasibility studies and 11 proposed cooperative agreements. To expand the program even more, Congress made available $300 million in the 1980 Supplemental Appropriations Bill for additional feasibility studies and cooperative agreements—$100 million for feasibility studies and $200 million for cooperative agreements. 79 awards for the second-round solicitations were made in December 1980.

In the final version of the act, a two-phase program was developed—a $20-billion phase 1, which was authorized, and an additional $68-billion phase 2 that is subject to future congressional authorization. Under the authority of the Defense Production Act of 1950 and the Non-Nuclear Research and Development Act of 1974, $5 billion was made available for financing large synfuels projects.

Lengthy congressional debate and enactment into law notwithstanding, there remain serious objections to the Energy Security Act. These involve the massive size of the proposed synfuels program, the high cost of synfuels compared even to world oil prices, the unknown environmental and health risks, and the isolation of this activity from alternative ways to reduce oil imports and increase security.

As might be inferred from the stupendous figure of $88 billion, the size of a synfuels program that will make any practical impact on domestic liquid and gaseous fuel supplies would be enormous. If only 10 percent of current U.S. crude oil consumption were to be replaced by synthetic liquid fuels it would require thirty-five plants, each capable of producing 50,000 barrels per day. If all based on coal, this would require mining an additional 250 to 300 million tons of coal per year, or about twice the output of the fifty largest coal mines in the United States.

Product costs are highly uncertain. Present estimates range from $35 to $50 per barrel of liquids produced from coal. As with other projects still on paper, however, such as synfuels from oil shale and coal gasification, the costs almost certainly will be higher when the plants move off the drawing board and into production.

Nonetheless, if the program is carried out in an orderly way, the information that would be developed on costs, on technical risks, and on relative efficiency of the different processes that are available would be extremely valuable. While there now is general recognition that the program will not create an early remedy for supply interruptions or a "standby" facility, US industry would gain experience with constructing and operating these new types of plants. This would provide insurance that, if plants eventually were needed to provide relief in the event of a massive, persistent collapse of the world oil market, there would be the know-how to bring them into production with less delay.

An insurance sort of program would test a variety of technologies in plants that would be kept to the minimum size for demonstrating a technology but big enough to make certain that enough information is accumulated so that scale-up to larger sizes would involve no technical risks. This type of program could be accomplished during phase 1 or in the first five years of the current program. A more informed analysis then could be made before launching into the high-cost phase two.

So little is known about the environmental and health issues that may arise that a series of environmental impact assessments will have to be made as major designs are developed and more is learned from pilot plant operations. Although emissions per unit of product may be small, the plants are so huge that the total amount of pollutants emitted could be large. It is probable that pollutants can be kept to acceptable levels, but this is still to be demonstrated and the specter of environmental and health risks almost surely will provoke continuing controversy.

During the 1980 election campaign, the Republican policy was to not support a major government-funded synfuels program, and some spokesmen for the Reagan Administration are clearly hostile to the total program. A demonstration-oriented program seems to be more favorably regarded, however. At this point it is not clear what the Reagan Administration's long-term policy will be, nor how Congress will react to specific proposals, but it appears likely that the synfuels program will survive in some form.

The development of synthetic fuels will not make a substantial contribution to energy supplies now, and their future role is unclear at best. The Energy Security Act nevertheless is an important step away from national dependence on foreign energy sources. There are legitimate questions about dollar, social, and environmental costs of synfuels, and the only way solid answers will be forthcoming is actually to mount a program, however limited.

The author, Harry Perry, is a consultant in residence in RFF's Center for Energy Policy Research.