Business Regulation and Consumer Protection:

Plans To Award Additional Financial Assistance to the Union Oil Company Oil Shale Program

RCED-84-187: Published: Jul 23, 1984. Publicly Released: Jul 23, 1984.

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In response to a congressional request, GAO commented on whether the U.S. Synthetic Fuels Corporation's plans to award up to $2.7 billion in assistance to Union Oil Company for phase II of an oil shale program were consistent with the Corporation's programmatic goals. GAO also reviewed whether the Corporation's awarding of financial assistance to the company for phase II was proper, since: (1) phase I had already received $400 million in assistance from the Department of Energy; and (2) the company had not been successful in operating phase I even though construction was completed in August 1983.

GAO found that, in 1982, the Corporation realized that it could not meet the Energy Security Act's production goals; therefore, it decided to trade off some production to concentrate on developing a diversity of projects using various synthetic fuels technologies. The Corporation's current goal is to spend $4.94 billion on oil shale projects. However, the Corporation's ability to follow through with these plans is in question. Price guarantees differed between the two phases because construction costs were higher for the first phase and the Corporation assumed that energy prices would increase. Neither GAO nor the Corporation identified any phase II costs specifically targeted to supplement phase I operations. GAO found that the company will take 16 years from the start of construction of phase I to experience a positive cumulative after-tax cash flow. The technology planned to be used in phase II is the same as that used in phase I; however, phase II adds a component which processes the waste product to extract additional energy. GAO found that the company may achieve the expected savings if a number of technical factors are resolved and if natural gas prices increase. Finally, additional study will be needed to determine the transferability of the technology used. The Corporation and company officials have agreed that phase II will not proceed until phase I has operated at 50 percent of design capacity and the phase II technology has been tested.

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