By JAMES KROHE JR.

Every time there has been an energy shortage in the last decade, hopes for a synfuels industry have burned brightly — only to dim again when basic assumptions about the energy market and federal policy prove wrong

Partial support for the energy series has been provided through a grant from the Office of Consumer Affairs of the U.S. Department of Energy. Opinions and conclusions expressed in the article are solely the responsibility of the author.
— Editor

IT SEEMS LONGER, but as recently as two years ago officials in Springfield were predicting that Illinois would be the Saudi Arabia of the 1980s. The nation's dependence on imported oil had become alarmingly clear, first in the winter of 1973-74 when the Organization of Petroleum Exporting Countries (OPEC) embargoed oil shipments to the U.S. and again in 1979, when supplies from Iran were cut off following the overthrow of the shah. Crude oil prices were quadrupled, then doubled again. Since the U.S. has a lot more coal than oil, the solution seemed simple enough: Make oil from coal.

Thus were born coal "synfuels" — petroleum and natural gas substitutes synthesized from coal. The need was new but the idea was old. Gas made from coal lit Illinois cities as early as the 1850s, and the gashouse remained a landmark in every sizable Illinois city until the 1930s. The Germans ran their tanks on coal synfuels during World War II, and the South Africans are running their trucks on them today. Cheap oil and natural gas made the gashouse obsolete in this country, but the technology to make gas and liquids from coal survived even if the market for them did not.

Coal, petroleum and natural gas, or methane, are all hydrocarbons, varying chiefly in the ratio of carbon atoms to hydrogen atoms in each. Converting coal into a liquid or a gas requires merely that one either add hydrogen atoms to its constituent molecules or strip them of carbon atoms. This can be done under heat and pressure by nearly 60 different processes. Vary the process, and one can vary the end products, from synthetic heating oil to gasoline, diesel fuel, low-grade gas or high-grade, "pipeline quality" gas, not to mention a bevy of chemical byproducts such as ammonia, naphthalene or methyl alcohol (methanol). Indeed, in some ways coal is more attractive when transformed, since in its original form it is bulky and (especially in the case of Illinois' high-sulfur coal) dirty to burn.

To Washington, however, coal's virtue lay principally in its abundance and its accessibility. Congress in 1974 authorized stepped-up research into various nonnuclear alternatives to petroleum, and President Gerald Ford in 1975 proposed a national synfuels program which would produce the equivalent of 1 million barrels of oil per day by 1985. Not all of those million barrels were likely to come from coal; some would come from western oil shales or tar sands. Even so, synfuels promised a new market for coal as potentially profitable as home heating or electric utility markets.

If coal was the U.S. energy ace, then Illinois held a very good hand. The state harbors the largest reserves of high-heat bituminous coal in the country. It has abundant water — as vital an asset as coal, since a commercial-scale synfuels plant could consume (both for cooling and as raw material) up to 21 billion gallons of water a year. Illinois also boasts pipeline connections to other states, transportation facilities and a skilled labor force, enough (in the words of a 1975 joint study by the state's water and geological surveys) to support a synfuels industry "large enough to contribute significantly to the energy needs not only of Illinois but of the surrounding regions."

During the mid-seventies, many experts came to regard synfuels as the ressurection of the Illinois coal industry. But the state's coal is high in sulfur, and regulations derived from the 1977 federal Clean Air Act had made it illegal to burn it in new plants without expensive and balky flue gas scrubbers. Converting coal to either a liquid or a gas removes all or most of its sulfur. Not quite turning lead into gold, but for a stagnant industry it was close enough.

Promised coal boom

A boom in coal seemed in the offing. A single commercial-scale gasification plant, for example, might consume as much as 10 million tons of coal per year, which is roughly a sixth of the state's entire annual production in recent years. The import of these numbers was not lost on either state officials or private investors. At a cost of one billion dollars each, such plants would add vast sums to the state's tax coffers, both directly and indirectly through the creation of new jobs in the mines and at construction sites. (The new Office of Coal Commerce in the Illinois Department of Commerce and Community Affairs calculates that every 4 million tons' annual increase in coal output creates 4,013 new jobs, producing a $76 million annual increase in personal income in the state — $6.7 million of which ends up in state and local tax coffers.

Seldom had the national interest merged so profitably with the state in terest. Synfuels made patriots of Illinoisans of every party. The is emerged on the state's agenda officially in 1974, in Gov. Dan Walker's inaugural address. It was during tt subsequent General Assembly session that Walker and Republican legislative leaders agreed on the size and shape of the Illinois Coal Development Bond Program — $65 million in research funds, a sort of dowry with which to court officials from Washington who were then giving funding priority pilot projects already funded in part by the states to help pay for the search for new ways to use coal, including synfuels (see Illinois Issues, January 19 pp. 24-26).

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By the time state officials jumped on the synfuels bandwagon in the mid-70's, Big Oil already was in the driver's seat. Faced with uncertain access to foreign suppies and declining reserves at home, the major U.S. oil companies in the 1970s began in effect to drill for coal instead. By 1979, 14 out of Illinois' 26 large coal mines (producing a million tons or more) were owned by either an oil company or a natural gas company. Of the new mines being opened in recent years, most are owned by oil or gas interests. (Examples: Shell's new deep mine near Elkhart in Logan County and a mine in White County owned by MAPCO, an Oklahoma gas supplier.) The roster of firms owning substantial chunks of Illinois' coal now includes newcomers such as Shell, Mobil, Gulf, Occidental Petroleum, Standard Oil, Conoco and Exxon.

The hopes of both government and energy companies rested, however, on several "laws" related to the energy market which later proved to be merely assumptions. One was that world oil prices would continue to rise, probably at a rate slightly faster than inflation. Second, it was assumed that expanding non-OPEC supplies of oil was so vital to the national interest that the federal government would subsidize the private synfuels industry, picking up the costs of research and development of conversion technologies which had never been tried on a commercial scale before. Third, synfuels planning proceeded on the assumption not only of potentially interruptible oil supplies but of an impending shortage of natural gas, which the Federal Power Commission in 1974 predicted would kitby 1980. The "shortage" eventually proved to be mainly the result of government price controls which had made the exploitation of new supplies unprofitable. (For long-term gas supply projections, see "Natural gas: What's in the pipeline for Illinois?" February, pp. 6-12.)

Because of these various factors, the first generation of coal synfuels plants was designed to produce oil or gas for use mainly in the crucial transportation and home heating markets. They would be built quickly, mostly with federal money, and their products marketed in an energy economy dominated by shrinking supplies, steady or growing demand and inexorably rising prices.

In Illinois, these factors produced the Coalcon project. Coalcon was the first and in many ways most typical of the post-OPEC synfuels plans in its scale, its economic rationale and its eventual fate. A coal gasification plant to be built near New Athens in St. Clair County was proposed in 1974 by a partnership headed by Union Carbide, which had been awarded a research and development contract by the federal Energy Research and Development Administration (ERDA), an agency created by President Nixon in 1974 and a forerunner to the present U.S. Department of Energy (DOE). A demonstration plant would test Coalcon's hydrocarbonization process on a small scale; if it worked, a commercial plant would follow which would convert 1.5 million tons of Illinois coal a year into 7 billion cubic feet of high-Btu gas and roughly 1.6 million barrels of fuel oil equivalent, along with marketable chemical byproducts such as ammonia and naphthalene. The then-president of Coalcon, Stanley Noss, speaking in 1976, described the project as follows: "The crisis is real. We feel that the shortage of natural gas and the economic and political effects of our imports of large quantities of oil are indeed critical circumstances. Because it is in response to a critical need, the program is purposely high risk and accelerated."

High risk it certainly proved to be, although accelerated it never was. Originally Coalcon hoped to begin construction of the demonstration plant in 1977, with a commercial-scale plant to follow in 1980 (see Illinois Issues, November 1976, pp. 16-20). Early estimates placed the cost of the demonstration phase at $350 million, with the state supplying $25 million of that from its coal bond fund kitty. But ERDA developed doubts about the technology, and cost overruns more than doubled the projected costs. In 1977 the project was canceled.

The Coalcon project was merely the first of many which began with high hopes and ended with even higher costs. Chicago's Commonwealth Edison, for example, tried to coax the synfuels genie out of a bottle in 1974 at its Powerton and Kincaid generating stations, only to withdraw those plans a year later, citing escalating costs.

Sluggish start

By 1979 there had not been a single barrel of synthetic crude oil produced in Illinois, although one could have run a fair-sized factory for a month by burning accumulated engineering reports and feasibility studies. The collapse of Com Ed's Powerton project illustrated what coal converions might have meant to Illinois miners. Without the gasified coal, the company was obliged either to install sulfur dioxide scrubbers — which it declined to do on grounds of cost and unreliability — or import cleaner-burning coal from the West. Com Ed did the latter, and in the process canceled its million-ton-a-year contract with a downstate mine.

The sluggish start for the synfuels industry may have caused consternation in the Illinois coal fields, but most other Americans had grown complacent about oil supplies. The oil was flowing again, and even after OPEC's quadrupling of prices in 1974 the inflation-adjusted price of gasoline in the U.S. remained at 1960s levels, in part because the bulk of U.S. consumption was from domestic fields whose prices were controlled by Washington. Drivers switched to bigger cars and drove more, and oil imports in 1979 actually were higher than they had been in 1973.

The revolution in Iran changed all that. Supply cutoffs followed by steep price increases, reintroduced drivers to gas lines. Beginning in April 1979, President Jimmy Carter announced a series of energy initiatives intended to reduce imports and expand domestic supplies.

As Nixon and Ford had done before him, Carter looked to synfuels. Carter in 1979 had proposed the gradual decontrol of domestic oil prices, coupled with a tax on the "windfall" profits thus earned by the oil companies, proceeds from which would help

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underwrite a massive synfuels effort. It was planned that synfuels R & D would remain largely within the purview of DOE, while a new Synthetic Fuels Corporation (SFC) would be formed to serve as a sort of quasi-public midwife to a bouncing baby synfuels industry. The price tag would be huge — $88 billion, spread over 10 years — and so would be its goal — two million barrels of crude oil equivalent per day by 1992, enough to replace up to 30 percent of current oil imports, all of which would result in new coal demand of 124 million tons per year nationwide.

Illinoisans did not need to be reminded that much of that new coal would come from Illinois. When funding for another proposed major gasification plant was canceled that same year, supporters did not decry the rise in oil imports but the rise in the local unemployment rate.

Gov. Dan Walker didn't resist the lure of synfuels, and neither has his successor. Gov. James R. Thompson hasn't agreed with Walker on much; synfuels is the exception. To Thompson, who likes to call himself a "jobs governor," the issue is neither Democrat nor Republican, business nor labor. He had been critical of the pace of Carter's synfuels program (in 1979 he wrote then-Energy Secy. James Schlesinger of the need for an Apollo Project approach to perfect "a new generation of technologies in gasification, liquefaction and clean combustion of coal"), but when his own party's President Reagan canceled funding for a major Illinois synfuels demonstration plant, Thompson vowed to "scream and fight like hell" for its restoration. Syncrude is thicker than water.

The State of Illinois never intended to build synfuels plants. A mere state cannot finance such Brobdingnagian projects; only the federal government, or an energy company, can. The state's policy since 1974 has been to make those people who can build them feel right at home. The coal bond fund was a tangible gesture of welcome. Less visible, but hardly less important, is the work done since then by the such scientific agencies as the State Geological Survey in mapping, cataloging and testing Illinois coal.

Financing a billion-dollar synfuels plant takes money, but actually building it takes permits, which are often hard to get. Various state agencies, from the Illinois Energy Resources Commission to the staff of the Department of Energy and Natural Resources (DENR), recognized the need for a path through these paper forests. Gov. Thompson obliged them in the spring of 1981 with an executive order establishing a so-called "fast track" permitting process in the form of the Illinois Energy Review Board. Made up of the directors of the eight state agencies with responsibility over various aspects of project development, the board was empowered to devise a coordinated review process to speed up regulatory decisions on permits, certificates and licenses affecting major energy projects. The board also was instructed to "enlist and encourage" the involvement of local and federal officials in the project review process.

Three-way partnership

The structure of the synfuels industry in Illinois in the late '70s, then, was a three-way partnership in which the private sector managed, the federal government funded, and the state government expedited. George Benda, manager of DENR's Energy Bond Section, explains the state's role: "We've tried to create institutions to insure not only that synfuels plants are developed in Illinois but that they are developed so that citizens benefit environmentally as well as economically. We've done that by performing site screening based on environmental criteria, by encouraging the creation of the coordinated review process to balance all the interests involved." Benda says, "Some companies tell us that we're the only state looking this far ahead."

It is ironic, then, that the state has had so few chances to demonstrate it. In spite of the ballyhoo during the Carter years, Illinois is little closer to seeing its first synfuels plant than it was in 1974. Critics — divided nearly equally between environmentalists and economists — had predicted that Carter's program would fail. Ultimately, they were proved right, but mostly for the wrong reasons. A synfuels effort on the scale envisioned by Carter, it was warned, would disrupt credit and labor markets to the detriment of other parts of the economy. (For example, DOE estimated at the time that the synfuels industry would initially require the services of four out of every five pipefitters, welders, electricians and boilermakers in the country.) Us-ing chemical plants and refineries as models, the Rand Corporation predicted in 1980 that the costs of synfuels plants were likely to run from two to five times the initial estimates, while the Library of Congress concluded that the U.S. would be able to produce no more than a tenth of the two million barrel-a-day goal by 1992, and possibly much less.

But it was oil price decontrol and OPEC, and not the SFC, which put a dent in oil imports. In 1979 tt inflation-adjusted price of gasoline in the U.S. finally rose above cheap, 1960s levels. Gasoline demand, which economists had long assumed to be relatively insensitive to price, proved to be very sensitive indeed. People began to drive less, and drive in more fuel-efficient cars. Consumption dropped (Americans are buying 25 percent less gasoline now than in 1975, according toone trade study), imports went down, world oil supplies increased, and in Wand 1981 the OPEC price structure began to crack. By 1980 — the year when oil imports were once supposed to account for 50 percent of consumption and domestic natual gas supplies were supposed to fall below demand — the "energy problem" was what to do with all of it. There was no more damning evidence of the general wrongheadedness of Carter's synfuels program than the oil import statistics. Imports ranged near 8 million barrels a day in late 1979; in the latter months of 1981 imports averaged roughly 4 million barrels daily. Conservation had reduced imports twice as much in two years as synfuels was to have accomplished in 10. The synfuels program wasn't just expensive and risky. It wasn't even necessary.

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New oil arithmetic

The unexpected oil "glut" of 1981 rewrote the rules of energy economics. Candidate Ronald Reagan complained that massive government intervention in the energy markets was not the solution to energy shortages but their cause. The market, not bureaucrats, should set the price of energy, he argued. If the price of oil or gas goes high enough to make the production of synthetics profitable, then such substitutes will be made, not by Washington but by a private sector liberated from price controls, allocation plans and DOE delays.

For the synfuels industry, however, the new arithmetic of oil may not add up. As some OPEC ministers have admitted, oil prices may have been allowed to rise too high after Iran. It seems unlikely that OPEC will make that mistake again. OPEC's 1981 price Ms, for example, are not necessarily a Sgn of OPEC's demise but of a prudent regrouping done to reestablish a unified price structure. OPEC's role as in oil supplier is diminished in the U.S. for the moment, in part because domestic production in 1981 reversed a decade's decline and rose to 7 million barrels a day. But the 4 million barrels adayOPEC sells to the U.S. still con-iitutes a vital part of the nation's supply.

More importantly, knowledgeable observers credit OPEC nations, especially Saudi Arabia, with the intention of using their continuing leverage on world oil supplies to keep prices high, but not high enough to make substitutes affordable. If the market price for oil never rises high enough to support the production of substitutes for it, and if the federal government withdraws from its commitment to make up the difference through subsidies, then synthetic oil and possibly synthetic gas will never be paying propositions.

To the dismay of the industry, both those things seem to be happening. Since his election, for example, Reagan has effectively dismantled the Carter synfuels apparatus. In his famous interview in the Atlantic Monthly, Reagan budget director David Stockman admitted that the synfuels program has always stood high on the administration's list of budget targets; by chopping the budgets of what Stockman called "powerful clients with weak claims" the White House hoped to make other cuts (presumably in programs benefitting weak clients with powerful claims) more palatable to Congress and the country.

As a result, Reagan cut funding for several major synfuels projects already approved by Carter, raised the private sector's required investment share in commercial plants from 25 percent to 40 percent, cut the SFC budget by a third (to $6 billion), and named an outspokenly pro-market man, Edward Noble, to run it.

The Reagan synfuels cuts drew blood in Illinois. In 1975 a consortium of five Illinois natural gas companies calling themselves the Illinois Coal Gasification Group (ICGG) announced plans to build a $276 million synfuels plant near Pinckneyville in Perry County. Like Coalcon's New Athens operation, this was to be a demonstration plant, which would transform 800,000 tons of coal a year into gas and crude oil. The contract between the ICGG and the DOE was signed in mid-1977, with construction to begin in 1978.

It didn't. By 1979 projected costs had ballooned to more than $400 million. (By 1981, some estimates would run as high as $800 million.) Late in 1981 Carter, after a protracted delay by DOE, approved an initial appropriation of $45 million for the project, to relieved applause back in Illinois. Rep. Paul Simon, in whose 24th Congressional District the Perry County plant would be built, told reporters at the time that he expected presidentelect Reagan to abide by Congress' wish and support continued funding for the project. However, Reagan chose to abide instead by what he considered the voters' wishes and canceled money for Perry County and four other DOE demonstration projects.

Under the circumstances it seems inevitable that the sole survivor among Illinois' first generation of coal synfuels projects should be the one project which has not relied on federal funding. The Allis-Chalmers Corporation, in cooperation with 10 other companies, proposed a low-Btu coal gasification plant to be built next to IIlinois Power Company's Wood River generating station near East Alton. The plant would test A-C's "Kilngas" process for converting coal into a clean-burning boiler fuel. The Kilngas project sought no federal funds, relying instead on private capital ($80 million from A-C plus another $37 million from its partners, mostly utilities interested in the potential application of the system in their own plants) and $18 million in coal development bond funds from the state.

Ground was broken for the Kilngas facility in November 1980. But even though this project has come farther than its ill-fated cousins, its future too is uncertain. Financing was not complete as of early 1982, and state officials familiar with the project described it as "still shaky." Kilngas avoided the pitfalls of federal involvement but it has not been able to avoid some of the other perils which so far

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have doomed synfuels. Gasification remains a very capital-intensive process. While utilities remain eager as ever to find ways to burn coal cleanly, there have appeared in recent years other, less expensive ways to do it. Fluidized bed combustion (in which pulverized coal is burned with limestone, which reacts with and neutralizes noxious gases) is one promising new method; newer, more dependable "dry" scrubbing systems are another.

The synfuel future

The suspicion lingers, in fact, that coal synfuels are a sort of technological dinosaur — cumbersome, ill-adapted to their environment and doomed. A December 1981 report by the staff of the SFC, for example, concluded that synthetic coal liquids are at a competitive disadvantage because they cost more to make than it costs to extract oil from tar sands or oil shale. Coal gas is cheaper, they note, but it is not directly usable in the huge transportation market, where replacement of oil is most crucial. Investment in coal gas or liquids is unattractive because conventional fuels remain relatively cheap. (A natural gas company canceled plans for a $2 billion high-Btu gasification plant in West Virginia, for example, just two months after announcing it, because of federal cutbacks and increased natural gas supplies.) Coal synfuels plants based in the Midwest have the advantage of access to markets, but the SFC staff concluded that it would take another world oil price boost to brighten their otherwise dim economic prospects.

For example, in 1980 the Clark Oil Co. was awarded a $4 million grant by DOE to study the feasibility of a coal-to-unleaded gasoline plant to be built at the old Coalcon site at New Athens. But MAPCO reportedly is still a year or two away from a final decision, and Clark decided not to resubmit its project for funding under the new "maturity" criteria of the Reagan administration.

Anthony Liberatore, director of the Illinois Council on Coal Development, an office of the executive branch, explains: "The economics are tilting away from synfuels. The state's emphasis through the '70s was on major gasification or liquefaction facilities. Today we're looking more in the direction of the direct combustion of coal, because that is within the reach of economic competitiveness.

"For example, we are looking at the industrial applications of the fluidized bed boilers at Great Lakes," continues Liberatore, referring to an $8 million pilot project at the Great Lakes Naval Training Station near Waukegan funded by DOE and the state, which committed $750,000 in coal development bond funds to the project. DENR has estimated that such new technologies could boost demand for Illinois coal by as much as 16 million tons a year by 1995, creating 4,000 new jobs and saving Illinois industry as much as $1 billion in oil and gas bills. They would accomplish the goals of the synfuels industry, in short, without the synfuels.

"Our thinking has changed from the demonstration mentality of the early '70s," DENR's George Benda points out. "We thought we could ride coat-tails on the big federal projects. We know now that's not going to happen. We've spent the last two years thinking about other ways to use Illinois coal in an environmentally acceptable manner.

The suspicion lingers that coal synfuels are a sort of technological dinosaur — cumbersome, ill-adapted to their environment and doomed "B.F. Goodrich, for example wants to build a second-generation fluidized bed system for use at its Henry plant which has a higher heat transfer efficiency. Midwest Solvents wants to apply conventional fluidized bed technology but do it in a cogeneration system at its alcohol plant. These projects are relatively low in cost — they're in the $20-30 million range — compared to synfuels plants. Sixty-five million dollars won't even cover interest charges on a billion-dollar plant."

This is not to say that synfuels have no future in Illinois, nor that state officials responsible for its coal development programs have completely abandoned their once-fond hopes. Ratal the heavily subsidized plants usial commercially untested technology may soon be seen as a symptom oim industry's adolescent phase, rather teenage acne. State officials I foresee Illinois as the heart of a Lil synfuels industry. However, it willbeJ different kind of industry from theoa envisioned in the early 1970s, and will take longer to build.

State officials agree, for example! that few if any of the state's futuresyil fuels plants will be geared to product! synthetic gasoline or gas. Instead (htjj will look to the utilities or chemical io-l dustries as their markets. "Companisl are looking at a much different prod-1 uct curve than they were a few yean ago," says Benda. "The idea thatsyo-l fuels would replace gasoline is pretty I much gone. They're looking at metha-l nol to sell to utilities to run auxiliary! generators during peak power period I or the chemical industry. Methanol B widely used in the manufacture of dyes, resins, drugs and so on. Those uses might be followed in a few years by the use of methanol as a motor fud in fleet vehicles. Then, sometime after 1995, we might see the use of methanol as a general transportation fuel."

And in the longer term? Given the dizzying events of the last eight years, no one wants to even guess, includinj Mitch Beaver, the manager of DENR's Resource Development Division. Noting that the current flux in the energy markets has made corporationi cautious, he said, "We can't read the minds of the oil companies or Europe as to what value the Illinois coal resource has for them." That such interest exists is clear; Exxon reportedly is considering an Illinois site for a plant to be built in the 1990s, using its "donor solvent" liquefaction process, and firms from both Europe and Japan have expressed similar interest.

Postscript: In a three-page pres release in December describing n«w technologies which will enable Illinois coal to "play an important part inth nation's energy future," DENR director Michael Witte didn't use the wod "synfuels" once.

James Krohe Jr. is a contributing editor to Illinois Issues and associate editor of the Illinois Times in Springfield; he specializes in planning, land use and energy issues.

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