It is doubtful that schemes to refine synthetic gas and liquids from coal will ever be economical. Indeed, only two countries have used such technology, because they were desperate for transportation fuels. And they were expelled from trading with other countries.

The first was Nazi Germany. The second was apartheid-controlled South Africa.

But that fact seems to escape those who seek giant profits by forcing unwilling consumers to buy their fuels and assume tremendous risks. That is the case in tiny Rockport, a town of a little over 2,000 people on the Ohio River in southwest Indiana. There, a Wall Street-based hedge fund called Leucadia National has developed a business.

It all started in 2006, when the price of natural gas was increasing to around $13 per million btu and gas shortages were feared. Leucadia, working through a former high-level Washington bureaucrat named William Rosenberg, saw Indiana Gov. Mitch Daniels’ initiative, called “home-grown energy,” as an opportunity to put his academic theory of what he called “third-party covenants” to the test.

"The 'conservative' U.S. Congress was again duped into believing the coal-to-gas fairy tale and passed legislation allowing federal 'loan guarantees' as an incentive to build and demonstrate the technology designed and manufactured by General Electric."

Under that arrangement, approved by several DC-based environmental NGOs, the covenant would create business models in which the sponsor took little risk while making gas consumers pay not only for the capital costs of their private refinery but also obligating taxpayers and ratepayers to enter into long-term contracts for their synfuels, regardless of what the future cost might be.

At $13, the deal looked pretty good if you believed the assertions by Rosenberg that the gas could be produced for about half that price. Daniels was a believer and dictated that the state’s gas utilities enter into negotiations designed to establish a price for the syngas that he claimed would provide a “hedge” against future gas increases. He speculated that those increases would occur 30 years out, well past his remaining six years in office.

Regulated gas utilities saw it differently. They were already aware of the new drilling taking place that they believed would force gas prices down to well below the $10-12 figure such a plant would require to pay off its capital expenditure to build the plant, as well as production costs, especially if they were required to capture and sequester the 4.5 million tons of carbon dioxide the plant would produce each year.

Of course, the “conservative” U.S. Congress was again duped into believing the coal-to-gas fairy tale and passed legislation allowing federal “loan guarantees” as an incentive to build and demonstrate the technology designed and manufactured by General Electric. That same law became controversial when the feds had to pay off a guarantee for a solar panel manufacturer after the Chinese developed a newer method of building the panels using heavy subsidies from the Chinese government.

But while that loan guarantee failure was condemned by conservatives, their ire was nowhere to be found when it came to risky coal ventures. After all, this same technology  from a different manufacturer was used for a plant in the early 1980s in North Dakota, with a similar loan guarantee of more than $2 billion. That plant went belly up due to huge capital outlays and fluctuating prices for coal.

When the deal with Indiana’s gas utilities went astray in 2009, opponents of the plant hoped that Leucadia would go away. But instead, they hired long-time friend of the governor Mark Lubbers to assume control of the political needs to make the third-party covenant work to their advantage.

"When the deal with Indiana’s gas utilities went astray in 2009, opponents of the plant hoped that Leucadia would go away. But instead, they hired long-time friend of the governor Mark Lubbers to assume control of the political needs to make the third-party covenant work to their advantage."

In 2009, Indiana legislators did something extraordinary. They passed a law putting the state smack in the middle of the competition for home heating gas. They directed the Indiana Finance Authority to purchase all the output from the proposed plant at some variable price above $6.60. After purchase, the state would turn around and sell the gas in direct competition with natural gas suppliers in the private sector.

The plan was based on the erroneous assumption that the price of gas would stay high, completely ignoring the fact that gas on the open market was in near free fall as more and more gas found its way to market. At this writing, the price of gas at the Henry Hub in Louisiana is selling for $2.18/mmbtu, up from less than $2 just a month before.

Daniels and Lubbers assured Indiana legislators that the price of gas was volatile, prognostications from the Energy Information Administration predicting low gas prices for the next three decades were wrong and the proposed plant was indeed a wise investment regardless of the facts about the future price of natural gas.

But it was not enough for these otherwise “conservative” legislators to make the state compete with the private sector. They also decided that if they could not sell their newly purchased syngas as planned due to its high cost of production, they would force Indiana consumers to buy it from the state at a substantial premium that could end up being 200-300 percent higher than natural gas on the conventional market.

Even Tea Party fave Indiana Treasurer Richard Mourdock, as a board member of the Indiana Finance Authority, gave the arrangement his complete blessing, although that was not a surprise since his first allegiance is clearly to his former vocation – coal mining.

The late Indiana congressperson Jim Jontz referred to this sort of deal as the “privatization of profit and the socialization of risk.”

I once described it as the Communist Chinese model of business because of the state ownership of the gas and the authoritarian requirement that Hoosier citizens buy the gas from the state as unwilling consumers.

"The late Indiana congressperson Jim Jontz referred to this sort of deal as the 'privatization of profit and the socialization of risk.'"

But the bizarre economic model does not end there. This plant also requires a federal government loan guarantee that was said to be higher than $2 billion in 2008, and that was supposed to cover the cost of building the plant.

Unfortunately for Hoosier consumers, however, Duke Energy was building a similar but combined-cycle plant designed to use the syngas to produce electricity just up the road, in Edwardsport, Indiana. Early on, that plant was sold to politicians at a price of $1.2 billion. To Duke customers’ dismay, that plant has ended up costing more than $3 billion, and Duke is having problems getting it to work as advertised.

It is likely the same building-cost problems will occur at Rockport since Leucadia knows little about building such a sophisticated and complex industrial facility. Their history as hedge fund capitalists is not a good reference for building a massive new chemical refinery. Most objective observers believe that Leucadia has vastly underestimated the cost of both their product and construction of the experimental plant.

Lately, one of the utilities that will be forced to pass the syngas to their customers in the deal has come out strongly in an effort to protect its customers from the exorbitant price increase home heating and commercial customers will be forced to bear if this deal goes through.

Vectren, a regional gas and electric utility company, has fought the plant on behalf of its customers for the last year. It seemed to be winning, by lobbying the legislature to forego yet another $120 million Indiana “tax credit” for Leucadia. But Daniels stepped in and said the deal did not need legislative approval, and he would dictate that the tax credits be issued directly by his administration.

Sadly, there is another issue that is being ignored by proponents’ zeal to enrich Leucadia and Daniels’  friend Lubbers. That is environmental justice.

"Sadly, there is another issue that is being ignored by proponents’ zeal to enrich Leucadia and Daniels’ friend Lubbers. That is environmental justice."

Rockport is already one of the most polluted communities on Earth. Already, two industries, AEP’s 2,600-megawatt Rockport power plant, which serves the other end of the state, and AK Steel together release 30 percent more toxic chemicals than all of the industry in Atlanta, New York City, Philadelphia, Pittsburgh, Indianapolis, Chicago, Seattle, Los Angeles and San Diego combined, according to the EPA’s Toxic Release Inventory. A little more than 2,000 people reside around Rockport.

When confronted in 2009, shortly after he signed the dubious legislation that is the center of the controversy, Daniels quipped that desperate times require desperate measures, referring to the business model and the jobs it would bring.

If it is not a new form of state socialism, it is certainly something close. Some people would rather refer to it as crony capitalism, which is an accurate description of the whole deal.

Whatever it is called, it is a sleazy, back room political deal that forces people to consume  against their will a product they could get could buy for less  in the private sector.

And all the while these same people call themselves “conservative.” What a joke!

John Blair edits ValleyWatch.net. He can be reached at ecoserve@valleywatch.net.