Department of Energy

Burning Money to Turn Coal into Gas

In which Science Correspondent Ronald Bailey confesses to his role as a petty Igor to Jimmy Carter's energy-regulating Dr. Frankenstein.


North Dakota is all about energy production. The landscape in the Peace Garden State is thick with rocking oil derricks and its byways are clotted with oil tanker trucks. When one drives in at night from the west, Highway 83 just south of Minot is bordered with wind turbines whose string of eerie red airplane-warning lights look like a picket line of giant alien sentries 20 miles out. The hydroelectric Garrison Dam blocking the Missouri river is a graceful feat of engineering and the countryside is dotted with electric power generation plants rising on the prairies from the middle of vast open pit coal mines.

But for me, the most interesting feature of North Dakota's energy landscape is the Great Plains Synfuels plant located near the town of Beulah, just south of Lake Sakakawea. "If you want to see what $4 billion can build in the middle of the prairie," says Basin Electric communications director Darrell Hill, "it's the Great Plains and the Antelope Valley electric station next door to it." And the two are indeed an impressive sight. From a distance the gigantic coal gasfication plant with its enormous smokestacks billowing white clouds is an easy stand-in for William Blake's "dark satanic mills." That is until you learn that the Great Plains billows are essentially steam.

Why did I particularly desire to visit the Great Plains Synfuels plant? I have some small bit of personal history with it. Back in the late 1970s and early 80s, I was a low level federal natural gas regulator and a peripheral member of the team that was guiding the plant's initial development at the Department of Energy (DOE). I functioned as a petty Igor to President Jimmy Carter's energy Dr. Frankenstein. I was eager to see up close what I helped in some minor way bring to life. But besides my personal history, the Great Plains Synfuels plant stands as a very apt cautionary tale about massive energy projects promoted and financed by visionary presidents and their equally visionary helpmeets in Congress and in the federal energy bureaucracies.

The Great Plains Synfuels plant is a monument to our ancient Me Decade fears about foreign oil and impending energy shortages. The plant was a public/private project that aimed to demonstrate the commercial feasibility of turning copious quantities of lignite (the least energy dense form of coal) into natural gas. Today it transforms 18,000 tons of coal per day into 150 million cubic feet of natural gas and 150 million cubic feet of carbon dioxide using steam and oxygen. That's enough natural gas to supply the needs of 500,000 homes.

Before arriving, I had arranged to join what I thought would be a tour of the facility. But when I got to the plant, it turned out that the public "tour" consisted of a 10-minute video extolling the heroic efforts to finance, build, and keep the plant open combined with a half-hour walk around a very nice $8 million 1/32nd scale model of the plant, with videos interspersed along the walls describing how various parts of the plant operate. Hardly the gritty hardhat on-the-ground experience I was looking for, but it certainly worked as a way to cage in a noisy reporter from a public policy magazine. I later asked Daryl Hill, who heads up public communications for the plant's owner Basin Electric, about other reporting on the plant. He happily told me about the wonderful CBS 60 Minutes feature done by reporter Scott Pelley. I mentioned that Pelley probably got an actual tour of the plant. Hill had the grace to blush.

Even my iPhone was forbidden on the grounds that no photos should be taken. Michelle, the very nice tour guide, explained that curious members of the public and reporters couldn't tour the plant itself or take any photos on orders from Homeland Security, even of the model.

I did pick up a good deal of history on my "tour," however. Construction of the plant was first proposed in 1978, just months after the creation of the new Department of Energy during the "energy crisis." Natural gas production in the U.S. had been declining since 1971 and nationwide shortages were causing schools and factories to close in the winters as gas was diverted to home heating and cooking. The solution to the shortages? Import liquefied natural gas from Algeria and other places. To that end a number of liquefied natural gas terminals were built on the Atlantic and Gulf coasts. (I got to regulate those, too.)

The other solution was to turn coal into methane. In 1980, Congress created the Synfuels Corporation, endowing it with $20 billion with the goal of eventually building as many as 22 enormous coal gasification plants, each one producing 300 million cubic feet of natural gas per day. Since coal gasification was an unproven technology in the U.S., natural gas pipeline companies were reluctant invest in it. The federal government rushed to the rescue. The Department of Energy helped create a public/private partnership with five natural gas pipeline companies that agreed to put up 25 percent of the cost of building a demonstration plant while the government supplied the remaining 75 percent in the form of loan guarantees. Out of this bold alliance between business and government was born the hugely ambitious Great Plains Coal Gasification plant.

The plant was built at a cost of $2.1 billion and shipped its first thousand feet of natural gas in July 1984. Due to escalating costs, the plant was scaled back to half size so that it was designed to produce 150 million cubic feet of gas per day. In the meantime, the hapless Jimmy Carter unknowingly had already undercut the rationale for constructing a massive coal gasification industry by a simple change in policy—he deregulated the price of natural gas. It turned out that the country wasn't running out of natural gas; it was running out of natural gas with a government imposed price cap. That old truism—only governments create shortages—was once again proven correct.

Gas supplies soared and the price crashed, meaning that there was no need for the Great Plains Synfuels plant nor for the liquefied natural gas facilities along the coasts. In the face of faltering prices, the five gas pipeline "partner" companies demanded that government give them a price guarantee on the gas, or they would default on $1.5 billion in government backed loans. To its credit, the DOE refused to meet this demand and the companies promptly defaulted, abandoning the project.

The bankrupt plant was sold at public auction by the sheriff of Mercer County, North Dakota, on the local courthouse steps. The auction took five minutes and the only bidder was the DOE which bid $1 billion. No money changed hands since DOE already held $1.5 billion in defaulted loans. The DOE began operating it and looking for someone else to take it off their hands.

As it happens, the electric power generation company Basin Electric had built the next door Antelope Valley station in good part to supply the coal gasification facility with electricity. Closing the coal gasification plant would have had a significant negative effect on the company's bottom line. In 1988, a desperate DOE agreed to sell the plant to Basin for the fire-sale price of $85 million and a split of future profits, if any. In other words, Basin Electric acquired an operating facility for 4 cents on the dollar. "Not having capital investment is the key," said Keith Janssen, the head of the Basin Electric subsidiary in a 1990 Washington Post article. Well, yes. But even with taxpayers picking up the tab for building the plant, running it profitably was still a challenge.

The gas pipeline companies were trying to weasel out of their long term contracts with the plant in which they were obligated to pay two to three times more than the market rate for conventional natural gas. Eventually, a federal court ordered them to stop whining and pay up. But those contracts were set to expire in 1995. So Basin Electric developed markets in the byproducts of coal gasification. In 2009, more than two-thirds of the plant's $400 million in revenues were derived from the sales of byproducts.

For example, the plant produces ammonia fertilizers. In one very technically sweet twist, the plant uses ammonia produced at the plant to capture sulfur emissions from the coal turning it into the valuable fertilizer ammonium sulfate. It also produces industrial chemicals like phenol, crude cresylic acid, and naptha. Since the coal gasification requires pure oxygen, the plant takes in ambient air and liquefies it by cooling it down. This enables the company to separate out the oxygen, but also to supply krypton, xenon, and liquid nitrogen to buyers. Finally, as of 1999, the plant also sells two-thirds of its daily emissions of 150 million cubic feet of carbon dioxide to oil producers 200 miles north in Canada to pressurize their fields. The fields that once produced 10,000 barrels per day are now gushing 30,000 barrels per day.

What was once a waste product is now a profitable business. The plant sold its carbon dioxide for about $53 million last year. But could this work for other companies that produce quantities of the greenhouse gas? Probably not. Hill points out that the plant does not produce carbon dioxide through combustion but as an integral part of turning coal into natural gas. This means that it's a lot easier to capture carbon dioxide at Great Plains Synfuels than it will be at a conventional coal-fired electric generation plant. "A commercial scale technology for capturing carbon dioxide at conventional power plants simply doesn't exist now," says Hill. In addition, few power plants would have the happy coincidence of being located close enough to oil fields that will buy carbon dioxide for pressurizing their wells.

I asked Hill how much Basin Electric sells its gas for, and he declined to tell me, saying that it was confidential company information. However, since the long term gas supply contracts expired 15 years ago, the company has been selling its gas at current market prices. Looking at the company's annual report one finds that the gasification subsidiary made a nice profit until those contracts expired in the mid-1990s. Between 1997 and 2005, the subsidiary experienced a cumulative loss of over $44 million.

Soaring gas prices in the last few years bulked up the gasification plant's bottom line with a cumulative profit of $334 million between 2005 and 2009. So the gasification plant is profitable now. But hold on. Let's make a very rough calculation of what would have happened if Basin Electric had had to make interest payments on the entire $2.1 billion in capital costs for the plant. Again roughly, paying just 5 percent interest annually on $2.1 billion would cost $105 million per year (and that does not include paying principal). In only one year since 1991 (earlier years not available) did the plant's income exceed $105 million and that was in 2008 when the plant earned $128 million when natural gas prices rose to over $10 per thousand cubic feet. In other words, it's a whole lot easier to make a "profit" if you don't have to pay back your loans. Still, it is the case that by taking advantage of federal government ineptitude, Basin Electric executives made a pretty savvy investment at rock bottom prices.

In February of this year, Basin Electric sent a check for $7.1 million as its last profit-sharing payment to the DOE. Since it purchased the plant in 1988, Basin Electric has paid the DOE a total of $388 million. On receiving the last check, the DOE had the gall to declare that it had recovered $1.3 billion of the initial $1.5 billion loan. How? By noting that as an electric power generating company for a series of rural electric cooperatives, Basin Electric could not take advantage of about $800 million in federal tax credits that the feds would otherwise have been obligated to pay out for synthetic natural gas production.

At the end of my chat with Basin Electric's Hill, I asked what lessons we could learn from the Great Plains Synfuels saga? "It shows us a way to use coal that is different from a burning it in a conventional power plant and it gives us a technological baseline of what could be," replied Hill. He also recited the same points that I have now heard during a visit to a wind farm and a bioethanol plant: It provides jobs and frees us from foreign oil.

In 2007, John Panek, an analyst for the Energy Department's Office of Clean Energy Collaboration, pretty much summed up continuing government cluelessness when he told the Associated Press, "Technologically, it's always been a success, but it always has been a victim of the marketplace." The Obama administration is embarking on numerous similarly "visionary" subsidized energy R&D technology projects. I expect to see lots of technological "successes" and an equal number of market "victims."

Note: I am traveling back to the East Coast over the next couple of weeks from a summer in Montana spent working on a new book. Along the way I am visiting various energy production facilities. The goal of this circuitous trip is for me to get a better understanding of energy production and to geek out on technological marvels.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

NEXT: Reason Writers Around Town: Shikha Dalmia on D'Souza's Diatribe Against Obama

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  1. Gad or Gas? Or maybe Gold???

  2. Egads, Ron!

  3. Well, well, well. This is an extremely interesting article.

  4. “In other words, it’s a whole lot easier to make a “profit” if you don’t have to pay back your loans.”

    The same applies for GM.

    The US Treasury applies the same concept though it’s not after a profit.

  5. So what is a realistic ceiling on the oil price/bbl considering the state of the art of this technology? $100? $200?

  6. Absent government interference, the natural price for oil is around 10 -20% above the cost of producing a new barrel (which I understand is roughly $60), so I would put the natural price for the short to mid future at around $70 or so. About what we’ve been seeing.

    Now, as world demand ramps back up post-recession, that price floor will pretty much track growth in GDP, so build in an escalator.

    Long-term oil prices? If I knew how to project even a range of oil prices out several years, I’d be a trillionaire, and typing this from my secret base on the dark side of the moon, in between steering asteroids (very small ones) onto the homes of my enemies.

  7. The plant was a public/private project that aimed to demonstrate the commercial feasibility of turning copious quantities of lignite[…]

    That pretty much demonstrated the economic unfeasibility of the project.

  8. Absent government interference…

    You’ll forgive me if I chuckle?

    *chuckle, chuckle*

  9. Good article, Ron. If Antelope Valley Station was built after the gasification plant, why in the hell isn’t it combined cycle natural gas or syngas?

    “Hill points out that the plant does not produce carbon dioxide through combustion but as an integral part of turning coal into natural gas.”

    Brandybuck does not approve of this sort of rank speculation. How can anyone be so sure that’s where the CO2 came from?

  10. Ronald,

    If as your job as regulator you had any hand whatsoever in the banning of nuclear fuel reprocessing, I am legally allowed (and possibly obligated, will have to check) to kick you in the nuts.

    One of the few benefits of a NukE degree.

  11. There are several short words that can take the place of the ungainly phrase public/private partnership. Words like corruption and theft spring immediately to mind.

  12. Did they think we were at “peak natural gas” back in the 1970s?

  13. Ron, the DoE was right to have the “gall” to count a tax credit (or lack of one) in the bottom line. So your big-bad-government-is-dumb story ends up being nothing more than a mild loss on a single project. Want me to name a few that have paid themselves back ten-fold?

    And yes, coal-to-gas and coal-to-liquid schemes are stupid, and shouldn’t be pursued or subsidized.

    1. Chad|9.17.10 @ 6:42PM|#
      “Ron, the DoE was right to have the “gall” to count a tax credit (or lack of one) in the bottom line.”
      Gee chad, I can’t take advantage of that bit of legerdemain, so I guess the DOE can claim an $800M profit on my efforts this year? By that “logic”, why the debt will be paid off in no time! Fail.

      “Want me to name a few that have paid themselves back ten-fold?”

    2. Makes no sense Chud. If they gave them 1.5 billion and then did NOT have to give them 800 million in credits, then how is NOT giving them more money the same as them paying it back?

      1. Bill: That’s exactly right. Kind of shocked that Chad doesn’t understand that.

        1. Yeah, me too….Chad is such a genius.

        2. Ron, you are double-counting the credit.

          If the government normally gives a credit of X dollars for doing Y, but in a special case, offers a company X+Z dollars to do Y, then the subsidy related to that special case is Z, not X+Z.

          If this plant had been built with private money, it still would have been able to collect credits for synthetic production.

          1. Ergo, you prove you are a tool and a fantasist.

  14. Questions for Ron:

    How much water does this thing go through in a day?

    Where does the water come from?

    How much do they pay per cubic whatever?

    What happens to the water? Obviously some of it goes up in steam (a greenhouse gas, by the way), and the rest?

    And if I have your attention still:

    Ballparking some numbers from Wikipedia it looks like about 75% of greenhouse gases consist of water vapor and clouds. Approximately 16% is CO2. So while everyone yaps about increases in CO2, it seems to me, that it would take a significant increase in CO2 in order to affect the overall percentages. Which is to say, the CO2 effect is so much hot air, or no?

    1. 18000 tons of coal per day. You do the math.

      Good question.

      The water is part of syngas: H20 + C -> CO + H2.

      You’re confusing steam with water vapor.

      1. Once the steam cools a bit they are the same thing.

        1. I’m not a gasification expert, but I’m pretty sure it’s actually fog, like a cooling tower. I was just trying to convey that he needs to read some, in a nice way.

    2. CO2 is much more efficient at absorbing sunlight so it has a larger effect per unit than water vapor. Many of the amplification effects modeled to occur do so via production of clouds/water vapor. Depending on the altitude, clouds can either trap heat or reflect sunlight which have opposite greenhouse effects.

      1. In other words, the whole process is rather complicated, and to create a computer model that accurately reflects reality might be a tad difficult.

        1. The net effect of clouds is small relative to the other effects, and according to the latest studies, may actually make things worse (ie, be a positive feedback). There is no evidence that all that it is some utterly massive negative feedback that will somehow save us from the known and well-established positive feedbacks.

          Water vapor, on the other hand, is much easier to predict. It’s not really anything more than basic physics that determines how much water the atmosphere will hold. Heat it up, and it holds more water.

          1. They don’t even know the sign of the effects of clouds, in other words.

            Thank you for playing!

          2. For something so ‘easy to predict’ there isn’t a SINGLE climate model that incorporates cloud formation in its holistics. It’s almost like the formation of clouds is a random mystery and no one can figure out why or when it happens, what makes it rain, what controls their shape and altitude… yet they have a massive effect on the planet.


    3. Also there’s much less CO2 in the atmosphere than water vapor. Most of the earth is covered in water; it’s really hard to appreciably increase humidity.

      1. However, the amount of water in the atmosphere is in rapid equilibrium with the oceans, and therefore is largely unaffected by anything other than temperature. Heat the planet up, and you get more water vapor. This is 200+ year old physics, not rocket science. And btw, the amount of water vapor in the atmosphere is up some 4%, right in line with predictions.

    4. No human enterprise compares with the amount of h2o that evaporates of the oceans

  15. “The University of Texas at Arlington has found a way to turn coal into crude oil, and, perhaps more importantly, the money to do so on a large scale.

    Researchers with UTA’s Center for Renewable Energy and Science Technology expect to license the technology to a company, which will build a refinery by the end of the year to turn lignite coal into oil. According to a press release, the process can produce oil for around $30 a barrel — far less than the current market price for crude of around $75 a barrel. ”


    1. No way! I go to UTA and I hadn’t heard about that. That is pretty cool.

    2. That’s cool. I went to UTA 20 years ago.It’s good to hear what my alma mater is doing. I also live in North Dakota now where our economy and state treasury is busting at the seams from the Bakken oil fields and coal mines.

    3. Researchers with UTA’s Center for Renewable Energy and Science Technology expect to license the technology to a company

      “Renewable”. You keep using that word. I do not think it means what you think it means.

  16. “Michelle, the very nice tour guide, explained that curious members of the public and reporters couldn’t tour the plant itself or take any photos on orders from Homeland Security, even of the model.”

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  18. Ron,

    Sorry, but I am going to have to geek out on you.

    Oil producers don’t use carbon dioxide to ‘pressurize their fields’. Actually, they pump CO2 deep into the oil fields, where the gas mixes with and swells the crude, decreasing its viscosity and enabling it flow more freely. A primary alternative to CO2 flooding is water flooding, or in some cases, steam injection. However, CO2 injection greatly increases recovery over the traditional water-flooding method.

    Because the cost of extracting CO2 from coal in a coal gasification plant is prohibitive, most CO2 used in the oil patch is extracted from naturally occurring CO2 wells, and re-injected in the oil field. Right now, this CO2 is being extracted by a couple of big companies and transported by pipeline. CO2 is selling for $ 2 to $ 3 per thousand cubic feet, and is a profitable business for players like Kinder Morgan.

    Environmentally, I am not sure if CO2 injection is better than water flooding. My guess is that CO2 injection probably results in a net increase in CO2 emissions, versus water flood.

    1. It certainly is hard to say how that breaks. CO2 injection (also, “sequestration”) has been used as a stalking horse for oilfield remediation, but I doubt in practice it ever gets off the ground, for three reasons:

      1) The economic benefits accrue principally to the oilfield owner, while all the costs accrue to the utility owner.

      2) As discussed upthread, there is no known means to do this economically.

      3) One of the reasons for this is because CO2 sources are generally close to major cities, which means piping the exhaust of CO2-producing power plants over long distances. However, this brings into play some very large risks. According to a BP safety engineer I spoke with on the topic a couple years back, to run such a scheme effectively would require pipes capable of 6,000 psi that would have to run through residential areas — think of the recent San Bruno explosion only with CO2 stealthily killing every person and animal, as has occurred naturally in several lakes in Africa. They couldn’t buy insurance for that at any price, and so the project was shelved.

  19. Beautifully written article sir.

    The DOE needs to go. Let’s begin with ethanol subsidies. They’re my favorite.

    1. but how can the pres win without Iowa?

  20. a trip down memory lane for me personally. i was involved as a young lad in the litigation over wording of the contracts to buy the gas. fantastic case. the five companies who had purchase contracts were arguing bitterly over the meaning of three words in the contracts (“highest best price”). grazillions of dollars were at stake. it was decided, pretty much, by a dramatic deposition of the lead negotiator for the five companies who in one rapier thrust gutted their entire case when he said he understood what the government meant when drafting the contracts. DOE came out alright in the end although our sphincters were pretty tight there for awhile. as i recall the problem was important enough to feature a corporate arson … i think some guys may have been indicted for destruction of documents

  21. What you had mentioned is quite reasonable! Beautifully written article sir.

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