IND. GASIFICATION PROJECT CONTINUES TO FACE QUESTIONS

Lindsay Kalter
GHG Monitor
3/29/13

Developers of a proposed coal gasification plant slated for construction just outside of Rockport, Ind., defended their plans in front of the state’s House Utility Committee March 27, arguing that the project is a good economic bet in the long-term because natural gas prices are likely to increase over time. The $2.8 billion Spencer County project, under development by Indiana Gasification, a subsidiary of Leucadia National Corp., plans to gasify 3.5 million tons of Illinois Basin coal annually, converting the feedstock into substitute natural gas that would be sold to the state at a pre-negotiated rate. Opponents have expressed doubt that natural gas prices will rise enough to make the agreement beneficial to residents, but two officials brought into the General Assembly to testify by Leucadia—Arthur Berman and Lynn Pittinger, both from Labyrinth Consulting Services—told lawmakers that companies will likely decrease shale gas production until the current price of natural gas is doubled. “Shale gas is a miserable commercial failure,” Berman, a Houston-based petroleum geologist, told the committee.

According to Berman, a shale gas critic who is a paid consultant for Leucadia, energy companies that have invested heavily in shale gas production are suffering financial losses and are now switching to oil-focused ventures. The price of natural gas has doubled over the last several months and will continue to move in that direction, he said in his testimony. “I’m not a price forecaster, but I do look at the fundamentals of supply and demand. It is my firm belief is that natural gas [prices are] low because the companies involved have recklessly overproduced and killed their own market,” said Berman, adding that the price will likely rise significantly over the next three years. “The notion of cheap gas forever just is not supported by data. Natural gas prices only have one way to go, and that’s up.” Indiana Gasification retained Berman as an expert witness to provide testimony in an effort to obtain a project permit in the summer of 2011.

Project Viability Tied to 30-Year Contract

Leucadia’s plans for the gasification project—which would pipe CO2 to the Gulf Coast for enhanced oil recovery operations through a contract with Denbury Resources—hinge on a 30-year contract between the state’s Indiana Finance Authority and Indiana Gasification, in which the IFA agreed to buy gas from the plant and sell it on the open market. State Sen. Doug Eckerty introduced Senate Bill 510 at a Feb. 14 hearing, which would have forced the developer to reimburse every three years any losses the state might incur as a result its 30-year purchasing agreement. If passed,the legislation would render the project financially infeasible, according to Indiana Gasification. During a Feb. 21 vote, the state Senate Utility Committee passed an amended version of the bill put forth by chairman Jim Merritt (R) that would remove those provisions and allow the Indiana Supreme Court to determine the agreement’s validity. The modified legislation mandates that the Supreme Court decide whether Indiana Gasification and the IFA’s 30-year purchasing agreement is unconstitutional. If the agreement is deemed unsuitable, the issue will be sent back to the Indiana Utility Regulatory Commission for further consideration. The amendment also orders the state utility regulators to conduct a study on the projected volatility of Indiana’s natural gas market by the end of the year.

Evansville-based Vectren Corp., the primary natural gas-provider for Central Indiana and the project’s main opponent, has predicted the IFA deal would cost ratepayers $1 billion during the first eight years of operation if it moves forward. But Leucadia representatives say state residents will benefit from the agreement. “We’re taking a piece of the natural gas portfolio and getting it attached to a different commodity to stabilize the price,” Mark Lubbers, Leucadia’s Indiana lead, said during a Senate hearing last month.

A House committee vote on the legislation will take place next week. However, the future of the project will ultimately be determined by the high courts’ decision on the agreement. If the Supreme Court determines the agreement to be insufficient, the legislation in question would send the deal back to the Indiana Utility Regulatory Commission and the process would be restarted.