Model for proposed Indiana Gasification project has been operating since early 1980s

But if the Indiana Gasification project proposed to be built near Rockport, Ind., becomes reality it could become one of the first commercially viable synthetic natural gas plants to be built in the United States since the Great Plains Synfuels Plant in North Dakota began operating in the early 1980s.

Proponents say it is a breakthrough in cleanly making the most of our country's natural energy resources while detractors scoff at the idea that any use of coal can be done cleanly.

A similar project near Lake Charles, La., backed by Leucadia National, the same company behind Indiana Gasification, already has received its environmental permits.

Developers are seeking to build the Indiana plant in Spencer County near Rockport, where access to rail, river and highway transportation converge near two interstate natural gas lines.

Similar to the Great Plains plant in North Dakota, and the Lake Charles plant when it is built, Indiana Gasification will produce "pipeline quality" substitute natural gas that can be supplied to utilities for customer uses such as home heating.

The gasification process does not burn the coal it uses like conventional power plant technology. Instead, it uses a combination of coal, water and oxygen to create a hot gas. The gas is cooled and water vapor is added, separating out impurities and chemical byproducts as the gas is refined. It then will be passed through a further process to remove the carbon dioxide.

Proponents of the project say it would give the county a much-needed economic boost with jobs and local spending. The estimated $2 billion construction cost is about double the $1.1 billion spent to build AK Steel in 1998 — the last major industrial facility to locate in Spencer County.

Developer William Rosenberg says the plant will take three to four years to build, employing up to 1,000 construction workers and creating 200 full-time jobs. He also has estimated it could result in the creation of up to 300 new mining jobs. But beyond assurances that the plant will use Illinois Basin coal, including from Indiana, no specific mine sources have been identified.

Rosenberg, president of the Cary, N.C.-based E3 Gasification, is developing the project along with Johnston Development Co., an outfit headed by Bennett Johnston of Louisiana, a former four-term U.S. senator turned lobbyist.

Rosenberg is a former assistant administrator for the U.S. Environmental Protection Agency and Federal Energy Administration, as well as former chair of the Michigan Public Service Commission.

Indiana Gasification has financial backing from Leucadia National, a Fortune 500 investment company based in Houston. It is one of four such gasification projects in various stages of development that are backed by Leucadia — including the Lake Charles project.

But opponents say the project will add to the county's pollution and continue reliance on fossil fuels over the development of cleaner energy sources.

Public perception of the plant is polarized between the issue of jobs and opposition to the plant based on environmental and financial concerns.

"I think it's good to create jobs for the area. Everybody needs to know more of the environmental impact of it though," said David Esau, in downtown Rockport, earlier this month. "I don't know much about the process of gasification. I don't know what it involves. People need to know more."

Clean coal technology

Tom Utter, executive director of Lincolnland Economic Development Corp., said he is satisfied the plant will be clean and safe.

When Utter first heard such a project was seeking to locate in the region he threw Spencer County's name in the hat to be considered as a site.

"My interest was the environmentally friendly nature of gasification," he said. "Every project of any scale must be assessed for its environmental impact."

Utter said he immediately consulted with the Indiana Department of Environmental Management and began researching coal gasification.

"I called regulators and they said, 'Tom, you're not going to get much cleaner,'" Utter said. "An economic developer is employed to bring jobs and investments that are acceptable to regulators. If they tell an economic developer that the process appears to be nonthreatening, that is good."

Air quality in North Dakota is overseen by the state Department of Health. Terry O'Clair, who heads its Division of Air Quality, said there are eight facilities in the state that use coal as a fuel source. Those include the Great Plains Synfuels Plant operated by Dakota Gasification Co. (owned by Basin Electric Power Cooperative), and seven conventional coal-burning power plants with a total of 12 generating units.

Because the Great Plains plant doesn't burn coal, it is the cleanest of those facilities, he said.

According to the North Dakota Department of Health, the Great Plains Synfuels Plant emitted about 3,636 tons of sulfur dioxide and 3,232 tons of nitrogen oxide per year in 2007 and 2008.

By comparison, Indiana has 30 coal-burning power plants, including 21 that generate 100 or more megawatts of power, according to the U.S. Energy Information Administration. Indiana Michigan Power's (owned by American Electric Power) Rockport generating station alone emitted 83,543 tons of sulfur dioxide and 28,124 tons of nitrogen oxide per year in 2006, according to the EPA.

Indiana Gasification — using an updated version of the process used at the Great Plains plant — would emit an estimated 380 tons per year of sulfur dioxide and 122 of nitrogen oxide, according to the company.

Those figures are consistent with those in the air permit for the Lake Charles, La., project, according to the Louisiana Department of Environmental Quality, which will allow the plant to emit 262 tons per year of sulfur dioxide and 218 of nitrogen oxide per year.

"What's really happening here is that these projects are really coal refineries. They operate to extract clean energy from the coal," Rosenberg said.

It also would produce about 4.5 million to 5 million tons of carbon dioxide — an amount consistent with the gasification process and the nearly 6 million tons of carbon dioxide emitted by the Great Plains plant.

In addition, Indiana Gasification will use an estimated 11 million gallons a day of Ohio River water in its process. While the Great Plains plant has no water discharges, apart from some steam loss, Indiana Gasification may discharge some of its cooling water back into the Ohio according to state and federal permit guidelines. But Rosenberg said no water that has been in contact with the gasification process will be discharged.

How much is enough?

Some opposed to Indiana Gasification worry that any amount of air pollution may be too much on top of the emissions from Indiana Michigan Power and other area power plants and industries.

From the living room of his house near Reo, Ind., Steve Obermeier can see Indiana Michigan Power's cooling tower and plume in the distance above the southern Spencer County's flat landscape.

"I don't mind it so much. It's the pollution that I mind," he said.

Obermeier is a semiretired field geologist and civil engineer who returned to live on his family's farm. It didn't take long for him to notice how little time it took for his clean white pickup truck to acquire a fine coat of black dust when it was parked outside.

"When I was a boy here we could leave a white car outside and it would stay clean," he said.

Obermeier's observation prompted him to begin digging for information about the Rockport plant and other area industries. He eventually concluded the dust was coming from an industry in a neighboring county. But his research had piqued his interest in the Tri-State's power plant pollution.

That in turn led to his objections to the Indiana Gasification project.

"Yes, it's cleaner than coal-fired power plants, but we are already on the edge here. How much more should we be expected to take?" he said. "There are a lot of questions about it. Natural gas has gotten cheaper. Our natural gas situation in the United States is good. Why do we need this thing?"

More than 209 million pounds of toxic chemicals were released into Indiana's air, water and land in 2008, according to the EPA's Toxic Release Inventory, with Rockport topping the list of Indiana cities receiving the most of those toxic releases, at nearly 25 million pounds. AK Steel's Rockport works released the second highest amount of toxic chemicals of industries in the state in 2008 and the Rockport power station ranked sixth.

By contrast, slightly more than 22.5 million pounds of toxics were released in North Dakota in 2008, with Beulah (the town nearest the Great Plains plant) ranking fifth. However, the top toxic polluter there was not the gasification plant but a neighboring conventional coal-burning power plant.

All of that pollution, including air pollution and toxic releases, is allowed by environmental permits issued by the state acting within federal guidelines.

Even so, Obermeier points to the large number of studies linking air pollution, especially from coal-burning power plants, to health concerns and premature deaths.

"If they shut down some of these coal plants, I wouldn't object to it," Obermeier said.

He and other opponents gathered more than 1,000 signatures on a petition against the plant that they sent to federal officials.

Rockport

At 10.1 percent, Spencer County has the second highest unemployment rate among nine Southwestern Indiana counties, behind only Perry County.

"We need jobs, man," said Delbert Calhoun, pausing at the corner of Second and Main streets by the Spencer County Courthouse recently. The longtime Rockport resident looked back down Main Street.

"Main Street needs help," he said.

Insurance and law offices outnumber the handful of businesses and beauty shops on Main Street. Although it is the county seat, Rockport's chief commercial attractions are two groceries, two convenience stores, a Grandy's restaurant and a Family Dollar and Dollar General Store located half a block apart.

The rejuvenation some hoped for when AK Steel located in Spencer County a decade ago never really materialized. Nedra Groves, Rockport's mayor and former county clerk, said many of those who came to work at that plant chose to live elsewhere.

"They moved to Newburgh and that's all right. One guy told me, 'We need to because it is closer to the shopping,'" she said.

In the third year of her mayoral term, Groves is blunt in her support for Indiana Gasification, which would be located less than three miles north of the Rockport's Main Street.

"I support it. I say that because some people say there will be all these bad health problems from it. It creates health problems too when people don't have jobs and can't feed their children. I back this plan even if it's controversial," Groves said. "I have a lot of faith in this. If we can get this thing going, we are talking about a lot of construction jobs and jobs thereafter."

Groves herself dreams of opening an antiques store on Main Street.

"We don't have a lot of business. When I came here 50 years ago they had jewelry, shoe and clothing stores. It's just like every Main Street, everything went somewhere else. I would just like to fill Main Street up," she said.

Rockport's only other economic hope at the moment is Abraham Lincoln-related tourism, Groves said.

Jack Kroeger has been on the Spencer County Council for 16 years. He still has reservations about Indiana Gasification, mainly its environmental impact and whether it is economically viable. But Kroeger said the financial shot in the arm it could provide the county would be immense.

"I certainly support economic development. From a county official's standpoint, we can't continue with the tax structure the way it is. The only way we can overcome the loss of revenue due to property tax caps is through assessed value growth," he said.

"I was on the council when AK Steel came here and we worked with them to get them to come. A county, especially a rural county like ours, we just have to have some sort of assessed value growth and it doesn't come from Walmarts and those kind of things. It would mean a lot not only for our tax base but also for employment."

He said that while AK Steel's influence may not have affected Rockport's Main Street, its overall impact on Spencer County has been good.

"I live in Santa Claus, at Christmas Lake, and there are very many people who either live here now or lived here during construction. Things would have been a lot different around the county had AK Steel not been here," he said.

Kroeger noted that the full affect of AK Steel on county coffers has yet to be felt. A tax increment financing district around the plant is diverting 90 percent of AK Steel's taxes to pay off bonds that funded infrastructure improvements, leaving the county with just the remaining 10 percent of its taxes. Those bonds will be paid off in 2017, freeing the remaining tax revenues for the county.

Indiana state Rep. Russ Stilwell, a Boonville, Ind., resident and former United Mine Workers official, said he has been a supporter of the project not just because it would use Indiana coal but also provide the state with an added natural gas resource.

"I think that many of the opponents that live near the plant have a legitimate reason to oppose it because it will be in their backyard and that's understandable," he said. "Others are opposed to it because it uses coal. Folks have a legitimate right to oppose anything and that's what makes this country great. Many folks don't want to support any kind of coal (use). We would have an energy crisis if there were no coal."

For many, however, it comes down to economics.

"I think it would be a good thing if it creates jobs and it's local people — and if it saves (gas) consumers money," said Jeff Fofrich, a Rockport resident.

Making gasification profitable

Protecting consumer interests is what Jennifer Alvey, public finance director of the Indiana Finance Authority, said she is working to do.

In 2009, the Indiana General Assembly approved legislation empowering the state to enter a 30-year contract to buy Indiana Gasification's substitute natural gas and resell it to utilities for the same price. The utilities' purchase of the substitute natural gas would be reflected on customers' bills, Alvey said.

The gas Indiana purchases would amount to about 17 percent of the state's overall supply, she said.

Alvey said she still is negotiating a deal with Indiana Gasification and it is uncertain whether the state ultimately will enter into that deal. Once a deal is reached, it must be approved by the Indiana Utility Regulatory Commission.

"The premise is to lock in a rate for this portion of the gas and that market prices should be higher over the 30 years than the price of this gas. If the market is higher than the substitute natural gas price, they will get a credit on their bills in months it is higher," Alvey said.

The credit would offset some of the customers' costs. The reverse of that would be that if the market price of natural gas is lower than the rate negotiated with Indiana Gasification, utility customers would possibly be charged.

Alvey said part of her negotiations include building in ways to ensure consumers get the credit on their bills, such as creating a reserve account to cover those times.

In addition, legislation passed this year will allow utilities to pass along their gas in storage to customers instead of the substitute natural gas.

"We don't have to change the way the utilities buy gas. It eliminates storage costs and the costs of breaking long-term storage contracts. Those extra costs will not be passed on to consumers whereas before they would have been," Alvey said.

Rosenberg was so confident of the plant's long-term benefit that, when legislators were considering the bill last year, he promised if the plant doesn't achieve $400 million in savings over the 30 years from what natural gas would have cost, the company will turn the plant over to the state or pay the $400 million.

Natural gas prices rose sharply in 2008, but dived to nearly 10-year lows last year. Although they have rebounded slightly, prices so far this year have remained around $5 per million British thermal units.

The Energy Information Administration is forecasting natural gas prices to continue to slowly increase through 2035.

It's a situation that gives opponents hope and even some of its biggest supporters cause for concern.

"This is not feasible under any circumstances ... maybe if the government takes all the risk or forces the taxpayers to take the risk," said John Blair, an Evansville environmentalist.

Stilwell said, "If the price of gas stays at $5 I have huge doubts that this plant will be built. It makes it all the more difficult for the developer."

The U.S. Energy Information Administration is forecasting the average price will remain at that level in 2010 and increase only slightly in 2011.

Daphne Magnuson, director of public affairs at the Natural Gas Supply Association, said the available supply appears plentiful.

"Since 2006, the natural gas supply picture has really transformed," she said. "In the previous decade and the early 2000s, it was a very tight balance between supply and demand. The supply was there, it just took awhile to get to it."

An independent group of industry, government and academic experts called the Potential Gas Committee, which assesses the country's natural gas resources estimates the amount readily available for recovery increased 39 percent from 2006 to 2008.

"They have said that is about a 100-year supply at current levels of consumption. Most people actually expect consumption to actually decrease due to efficiency," Magnuson said.

Part of that, she said, is due to new technologies that have made it easier to free gas previously unavailable. In short, Magnuson said there appears to be a sustainable abundance of natural gas available.

But Alvey said that same supply increase likely could cause prices to go up again by decreasing sales and lessening the profits that would be put back into more gas drilling and recovery.

"It's going to flood back. It goes up and down. Natural gas prices are wildly volatile," she said. "If we don't believe that this is the case we wouldn't do the deal."

Having the state purchase or guarantee a customer for the substitute natural gas is an essential part of the funding formula for the plant, which otherwise would be at the mercy of the market.

It is part of a "three-party covenant" financing model for gasification plants developed by Rosenberg. In the arrangement, a private investor — in this case Leucadia — will cover 20 percent of the cost with the other 80 percent to be funded by loans backed by federal loan guarantees.

The arrangement avoids a problem that almost killed the Great Plains Synfuels Plant, Rosenberg said. Developers of that plant received a $1.5 billion loan guarantee from the Department of Energy. But when the government declined to also provide price supports to lessen the impact of low natural gas prices, the group defaulted on its loans and abandoned ownership of the plant to the federal government.

"They said we're going to sell the gas on the open market. Had they had that contract that never would have happened," Rosenberg said. "We learned from that and so did the federal government."

When Basin Electric Cooperative formed Dakota Gasification Co. and bought the $2.2 billion Great Plains plant from the federal government for just $85 million in 1988 it agreed to give up $754 million in tax credits and to a revenue-sharing agreement with the Department of Energy.

A federal court refused to let the pipelines buying Great Plains' gas out of their contracts. As a result, the company sells half its gas to two pipeline companies and the other half on the open market. When prices began going up in 2001, Great Plains was able to begin returning more money to the government. As a result, when the agreement ended last month, the plant in North Dakota had been profitable enough to have repaid $1.3 billion to the federal government.

In addition to sharing profits with the federal government, Dakota Gasification has invested nearly $500 million in environmental and efficiency improvements and developing byproducts from the gasification process, said Floyd Robb, Basin Electric's vice president of communications.

"If you don't wring out every ounce of efficiency from a facility like this, you just don't make it," he said.

Another lesson learned is that gasification projects emit a lot of carbon dioxide, a gas largely blamed for climate change and one that is on the verge of being federally regulated. Finding a cost-effective way to dispose of carbon dioxide without emitting it into the atmosphere has become an essential part of the equation for gasification projects.

The Great Plains plant found a solution when in September 2000 it began sending carbon dioxide through a 205-mile pipeline to Canada to be used for enhanced oil recovery and as part of a carbon sequestration study project between Canada and the United States.

Denbury Resources, a Plano, Texas-based company, has signed a 15-year agreement with Indiana Gasification to purchase its carbon dioxide. But the deal hinges on the construction of a pipeline to move the gas to the Gulf Coast.