Low Gas Prices Cast Doubt on Midwestern Synthetic Natural Gas Projects

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Low natural gas prices, balky utilities and environmental regulators are playing havoc with three proposed plants that would turn coal into synthetic natural gas (SNG). The three proposed projects, which carry a combined total investment value (TIV) of about $5.6 billion, would produce SNG for delivery to businesses and homes in Indiana and Illinois.

The three proposed projects are:

• Chicago New Synthetic Natural Gas Plant, under development by Leucadia National Corporation (NYSE:LUK) (New York, New York). This project, with a TIV of approximately $2 billion, is scheduled to be built on the southeast side of Chicago. Originally proposed in 2009, the project currently has a kick-off date of first-quarter 2013, and is scheduled to be operating by early 2015.
• Waltonville Grassroot Synthetic Natural Gas Plant, a $1.6 billion project slated to be built in southern Illinois' Jefferson County. Under development by Power Holdings of Illinois LLC (Aurora, Illinois), this project is scheduled to kick off in late 2012 and begin operating in late 2014. This plant would convert about 3.65 million tons of coal per year into 65 billion cubic feet per year (bcf/year) of SNG.
• Rockport Grassroot Coal-to-SNG Plant, located in Spencer County, Indiana, would convert approximately 3.2 million tons of coal per year into about 40 bcf/year of SNG. This $2 billion project, under development since 2007 by Leucadia, has a construction start date of early 2014, and an in-service date of early 2017.

The Power Holdings project faces the most significant obstacles. In late May, the company said it shelved the project due to difficulty obtaining financing. "Given the current unprecedented low price for natural gas, Aurora-based Power Holdings, like other new energy development projects, is finding capital markets hesitant to provide funding," the company said in a late-May statement quoted by The Chicago Tribune. In a separate Tribune article, Christopher Stone, lobbyist for Power Holdings, is quoted as saying, "When natural gas prices are at historic lows, it makes it kind of hard to convince people to enter into contracts that are three times the price" of naturally occurring natural gas. Industrial Info's efforts to contact Power Holdings were not successful.

U.S. natural gas prices have plunged about 50% over the last year. Robust gas production from shale formations, coupled with slack demand caused by a weak U.S. economy and a warm winter, have pushed down prices to about $2.25 per million British thermal unit (MMBtu). Four years ago, natural gas was fetching more than $10 per MMBtu.

Beyond financing hurdles, the Power Holdings project's application for a construction permit was denied in early June by the Illinois Environmental Protection Agency (Springfield, Illinois). In its rejection letter, the agency said Power Holding's application did not include certain required information, including emissions data and an air quality analysis. The agency said Power Holdings could reapply for a permit.

The other Illinois SNG project, planned for the southeast side Chicago, seems to be faring better. Illinois lawmakers recently passed a bill requiring Illinois natural gas distribution utilities Nicor Gas Company (Naperville, Illinois) and Ameren Illinois (Peoria, Illinois) to purchase virtually all of the gas produced by the plant.

That bill was presented to Governor Pat Quinn on June 11. Illinois law gives a governor 60 days to decide whether to support or veto legislation that has been passed by the state House and Senate. If the governor takes no action, the bill would become law in early August, according to a spokesperson in the governor's office, who added it was too early to say which way the governor was leaning.

Nicor, a unit of AGL Resources Incorporated (NYSE:GAS) (Atlanta, Georgia), and Ameren Illinois, a unit of Ameren Corporation (NYSE:AEE) (St. Louis, Missouri), have opposed the legislation, saying it would saddle their customers with significantly above-market costs. Nicor is suing to block the legislation in an Illinois county court. The Illinois Commerce Commission (ICC) (Springfield, Illinois), the state's utility regulator, had previously sided with the gas distributors against the southeast Chicago SNG project. But the legislation awaiting Quinn's signature does not allow the ICC to review the contracts.

The third proposed SNG project, located in Rockport, Indiana, appears to be on the firmest ground, though construction is not scheduled to begin for about 18 months. That project, also being developed by Leucadia, recently received critical financial backing in the form of a 30-year contract under which the Indiana Finance Authority agreed to purchase all of the plant's output for 30 years at a fixed, long-term rate. The agency would then resell the gas to local gas utilities, for delivery to customers across the Hoosier State.

One of Indiana's gas utilities, Vectren Corporation (NYSE:VVC) (Evansville, Indiana), said the governor made a bad deal: "The abundant supply of natural gas and the low prices continued to question whether these projects make sense," Mike Roeder, Vectren's vice president of government affairs and communications, told the Evansville Courier & Press.

"Five, six years ago, when natural gas prices were more volatile, it may have made sense. But the world has changed with this shale gas, and we continue to believe that it raises legitimate questions about whether these kinds of projects need to be built," Roeder told the newspaper.

A Leucadia representative, Bill Rosenberg, was quoted by the paper as saying, "Natural gas prices go up and down like a yo-yo. They're very volatile. As recently as 2008, they were above $13. Six months ago, they were under $2. At this moment in time, the supply exceeds the demand. But we're talking about selling gas five years from now, and 30 years from that. Today's price is not indicative of what the future price will be."

Regarding the perspective of those opposing the Rockport plant, Rosenberg said: "They're looking at this at this moment. They're ignoring the prices they charged their ratepayers in 2008 for natural gas. They're ignoring recent history, and they're ignoring projections."

The Rockport plant would capture the carbon dioxide (CO2) produced by the gasification process and sell it for use in enhanced oil recovery (EOR) projects in Texas. The U.S. Department of Energy (DoE) (Washington, D.C.) has invited Leucadia's Rockport plant to apply for a federal construction loan guarantee. In theory, that should lower the risks and ultimate cost of the gas produced by the project.

However, it is doubtful that the current Congress would provide funding for a multibillion-dollar project to convert coal to natural gas. Abundant supplies of inexpensive, naturally occurring natural gas, plus the political controversy over the DoE's construction loan guarantee to now- bankrupt Solyndra LLC (Fremont, California), raise significant questions about Congress' willingness to fund other big-ticket advanced energy projects.

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