July 2005

Carbon Dioxide for Sale

Continued from page 1

By Peter Fairley

Dakota by Default
Dakota Gasification was conceived during the energy shortages of the 1970s. While OPEC squeezed oil supplies, price controls in the United States choked production of natural gas. Natural-gas-pipeline firms, alarmed by tight supplies, began exploring alternative sources; by 1978, a consortium of gas pipeline companies, Great Plains Gasification Associates, had coalesced to build the world's first synthetic natural-gas plant. Construction commenced in 1981 after President Reagan agreed to backstop the technologically ambitious project with federal loan guarantees, and in 1984 it was complete. Barely a year later, the gas pipeline companies bailed out, defaulting on $1.5 billion in loans.

The problem wasn't Great Plains' technology. Its process, adapted from the chemistry that enabled Nazi Germany to produce synthetic motor fuels, worked as designed: Coal and steam reacted together at 1,000 °C to yield a gaseous mixture of hydrogen, carbon monoxide, and CO2 (plus contaminants such as sulfur, mercury, and xenon gas). Pure CO2 and contaminant streams were bled off, and the remaining carbon monoxide and hydrogen -- a mixture known as synthesis gas or "syngas" -- was fed to a catalyst to form hydrocarbons. The Nazis' catalysts turned out fuel for tanks, planes, and submarines; Great Plains' catalyst turned out high-quality methane.

Lukes, a chemical engineer who returned to his native North Dakota to work for Great Plains, says what upended the company was directional drilling and the deregulation of natural gas, which took place over several years, beginning in 1978. Deregulation unleashed a frenzied search for new gas deposits, and directional drilling multiplied each well's output. Great Plains expected to fetch $9 to $10 per thousand cubic feet for its synthetic gas, but by the mid-1980s, a gas glut had driven prices as low as $1 per thousand cubic feet. "No way could we make gas for that price," says Lukes.

The plant was earning revenue, but at its owners' expense: thanks to pricing formulas written into their 25-year gas purchase agreement, the pipelines paid Great Plains upward of 50 percent more than the market price for natural gas.

The Department of Energy took possession of Great Plains when the pipeline companies walked away. Under pressure to protect 822 jobs in economically depressed North Dakota and to recoup some of the government's losses, the agency allowed the plant to keep operating. But it immediately began looking for a buyer. In 1988 it found the Basin Electric Power Cooperative of Bismarck, the local utility that powered the plant. Basin Electric stood to lose $37 million a year -- about 8 percent of its annual revenues -- if the plant closed. That $37 million "was a big number for Basin back then," says Lukes. Basin acquired the plant for $85 million in cash (and a promise to share future profits with the Department of Energy) and created a subsidiary, Dakota Gasification, to run it.

It was a risky move for Basin. In the years after the purchase, political support for alternative energy wavered. Gas prices slid. And the gas pipelines litigated their gas purchase agreements, forcing a settlement that would strip Dakota's protective price premium by the late 1990s.