On August 29, 2005, at its 45th Annual Meeting, the Southern States Energy Board unanimously approved the American Energy Security study. The purpose of the study is to examine the undue burden currently being placed on our liquid transportation fuels through foreign oil imports and to determine a means to provide for energy security and independence to ensure fuel price stability and future economic prosperity.

Energy security and the price of petroleum fuel supplies have been a dominant theme in the news over the past year. Escalating prices of oil above $75 per barrel have given rise to a number of legislative calls for alternative methods of reducing the Nation's dependence on foreign oil supplies and drastically increasing the use of our domestic resources by providing petroleum substitutes for transportation fuel. The President, in his 2006 State of the Union address, called for the United States to drastically reduce its dependence on foreign oil, particularly from the Middle East. With imports of over 12 million barrels of foreign oil per day, the United States is economically vulnerable to the price and quantity of oil available. The SSEB study has determined that this Nation faces four serious oil-related risks: (1) excessive dependence on the Organization of Petroleum Exporting Countries (OPEC) and on other unstable foreign oil suppliers; (2) conventional oil supplies are not meeting dramatic increases in world demand; (3) rapidly increasing global competition for oil from China, India and other developing nations will further stretch supplies; and (4) supply disruptions from natural disasters (and potential terrorism).

The American Energy Security action plan and study results will focus on the rapid development of an alternative oil and liquid fuels production base in America utilizing our vast domestic resources including coal, oil shale and biomass. The plan also will emphasize the need for increased transportation fuel efficiency, sensible energy conservation and improved domestic enhanced oil and coal bed methane recovery programs using carbon dioxide.

One goal of the SSEB study is to show how America can replace approximately five percent of U.S. imported oil each year for 20 years, beginning in the next five years. A key component of this plan will be construction of multiple alternative liquid fuel plants each year. Several important factors in this approach to energy independence include, first, the fact that the United States has significant quantities of alternative oil resources rivaling the total worldwide conventional oil reserves. Trillions of tons of American coal, oil shale and renewable biomass resources are available to be converted to premium quality liquid fuels using existing and rapidly emerging technologies. Second, by producing environmentally superior transportation fuels from near-zero emissions plants that can recycle, utilize and sequester CO₂, the United States can be an example for the world, in particular the rapidly expanding energy production capabilities of China and India. Liquid fuels produced from coal, oil shale and biomass have very low sulfur, low particulate and nitrogen oxides emissions and higher performance characteristics than their conventional distillate counterparts. In addition, the plants that produce the liquids can be capable of capturing carbon. Third, the SSEB study will focus primarily on the rapid development of coal/oil shale/biomass-to-liquid fuels production. Finally, commercial enhanced oil recovery successes using CO₂ flooding suggest that American oil and gas production can be dramatically increased using these methods. Miscible CO2 flooding can revitalize certain mature oil fields. In addition, the study will support CO₂ injection into coal and oil shale deposits in an emerging technology that can increase natural gas production from these sources. At present, limited availability of CO₂ supplies severely constrains this production-enhancing technique. However, the liquids plants will produce and capture large quantities of CO₂ that can be used by oil and gas producers for this purpose. Not only can the CO₂ be put to a positive use and sequestered beneath the earth's surface, the petroleum residuals generated by oil and gas producers can be upgraded to liquid fuels in the new carbon-to-liquids plants.

Commercial coal-to-liquid fuels technologies have existed for decades. Sasol, a South African company, currently provides almost 30 percent of that country's liquid fuel needs through coal conversion in the open market. Sasol was created with support from the government to decrease dependence on foreign oil, and the company quickly outgrew its need for government assistance. Embarking on a national mission to achieve energy independence can reduce the risk of supply and lower oil prices, and it also should facilitate an industrial boom, create jobs, foster new technology, enhance economic growth and establish a reliable domestic energy base on which to rebuild domestic industries for global competition.

Congressional legislation will be needed to implement the American Energy Security study, and discussions are underway with members of Congress to achieve success. The following measures are target issues.

Extend the $0.50 Per Gallon Alternative Liquid Fuels Excise Tax Credit

The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, SAFETEA-LU 2005 extension, provides a $0.50 per gallon excise tax credit for certain alternative liquid fuels, including CTL products. This incentive is set to expire in 2009, before any major new coal-to-liquids and oil shale plants (for example) can come online. Its extension through 2020 and the inclusion of oil shale products will provide “real” market incentive to future alternative liquid fuel plant developers.

Provide Accelerated Cost Recovery to Alternative Fuel Plant Owners

Authorization for 100 percent expensing in the year of outlay for any alternative liquid fuel plants begun by 2020 is recommended. This will provide a substantial tax incentive to build alternative fuels manufacturing capacity, with the government recapturing the deferred taxes in the early years of a plant’s operation.

Incentivize Refining of Alternative Liquid Fuels

We recommend the extension of the now temporary expensing allowance for equipment used in refining to 100 percent of any required additions to existing refineries needed to handle domestic alternative liquid fuels products (see the Energy Policy Act of 2005, or EPAct2005, § 1323). This incentive will redirect refinery owners to domestic and away from imported feedstock sources.

Provide Explicit U.S. Department of Energy Authority and Appropriations for Loan Guarantees

The Energy Policy Act of 2005 establishes a loan guarantee program within the U.S. Department of Energy. However, the Office of Management and Budget’s view is that the Federal Credit Reform Act of 1990 contains a requirement preventing the DOE from issuing any loan guarantees until they have an authorization, including a loan volume limitation, in an appropriations bill. It is recommended that Congress provide explicit authorization in the form of a federal loan facility to support the first approximately 100,000 barrels per day of new commercial production capacity (ten 10,000 bpd plants +/-) for coal-to-liquids, biomass-to-liquids and oil shale-to-liquids facilities. Additionally, it is recommended that Congress provide appropriations for technologies demonstration, as provided in EPAct2005.

Fund the Military Alternative Fuels Testing and Development Program

The U.S. Department of Defense has a development program underway to evaluate, demonstrate and certify turbine fuels from alternative energy resources for use in tactical vehicles, aircraft and ships. Fuel sources include Fischer-Tropsch (F-T) fuels made from domestic coal, refined fuels derived from oil shale kerogen and renewable/biobased fuels. The ultimate goal is to develop a single Battlefield Use Fuel of the Future (BUFF). At the center of this development effort is a DoD fuel testing program. Congress should fully fund this critical program through FY2013. The military need is approximately $500 million over a five to six-year period, beginning in 2007.

Authorize and Fund Military Purchases of Alternative Fuels Under Long-term Contract

Total oil consumption by U.S. military forces is approximately 400,000 barrels per day. Through the development of BUFF specifications, it is believed that a substantial portion of this requirement can be met with domestically produced alternative liquid fuels. The DoD desires to enter into long-term contracts for the purchase of alternative fuels made in the United States from domestic resources. This is part of DoD’s Total Energy Development Program (TED), with a stated mission to “catalyze industry development and investment in [alternative] energy resources.” Congressional support is encouraged for DoD’s TED program, including extending its long-term contracting capabilities from five to as long as 25 years. Appropriate and necessary authorizations and funding should be given high priority. DoD fuel purchases under long-term contracts can help establish a foundation on which to build a new alternative fuels industry, and secure, high quality U.S.-made alternative liquid fuels will help our military.

Eliminate the $10 Million Cap for Tax Exempt Industrial Development Bonds

To encourage investment, certain pollution control and solid waste disposal facilities currently are not included in the $10 million limit on tax exempt Industrial Development Bonds (IDBs). It is recommended that alternative liquid fuels production facilities be added to this list of activities having no tax exempt IDB size limits. This will lower the cost of capital to build new alternative liquid fuels processing projects and enable expansion of existing ethanol and biodiesel plants.

Provide Regulatory Streamlining for the Production of Alternative Liquid Fuels

In order to facilitate the rapid scale-up of alternative liquid fuels production capabilities in the United States, regulatory changes are necessary. Standardizing, simplifying and expediting the permitting process for manufacturing/processing facilities, mines, agricultural operations and necessary infrastructure is crucial. Below are a few recommendations in this very important area.

	Standardize, simplify and expedite permitting and siting with joint federal, state and local processes, policies and initiatives.
	Make appropriate federal, state and local government sites available for alternative liquid fuels manufacture, including Base Realignment and Closure (BRAC) military sites.
	Exempt initial alternative liquid fuels processing facilities from New Source Review (NSR) and National Ambient Air Quality Standards (NAAQS) offset requirements.
	Encourage local leadership to modify approaches to zoning and other land use and business regulations, to accommodate the strategically important new activities of alternative energy harvest and manufacture.
	Prioritize, expand and promote the impressive reforestation work being done to dramatically accelerate the rate of tree growth by creating optimal soil conditions at reclaimed mine sites.

Establish a Self-sustaining Government Corporation to Provide Market Risk Insurance

Congress is encouraged to establish the Strategic Energy Security Corporation (SESC), a self-funding, self-sustaining government corporation. The SESC is proposed to administer a new, “fuel-neutral,” alternative liquid fuels market insurance program to protect against predatory pricing by OPEC and others. More details on the SESC initiative are provided in the American Energy Security study.

Expand the Strategic Petroleum Reserve Program to Include Alternative Liquid Fuels Products

Stockpiling crude oil in a centralized location has its limitations. Crude oil needs to be refined to be useful. The logistics of moving SPR crude to refineries having available capacity and then transporting the refined products to locations in need is cumbersome and takes time. There are only four centrally located SPR storage sites in the United States; two in Texas and two in Louisiana. All four sites are centrally situated on the Gulf Coast, making them vulnerable to natural disaster and also to enemy attack.

Congress should examine the feasibility of purchasing and storing “finished” alternative fuel products such as diesel fuel, jet fuel, heating oil and ethanol at a number of locations strategic dispersed throughout the United States, as an extension of the SPR program. Fischer-Tropsch wax produced from coal, biomass and perhaps even oil shale may be an ideal product for this purpose. The F-T process is capable of making a biodegradable wax as an alternative to producing diesel and jet fuels. This wax has a very long shelf life and can be upgraded to superior quality fuels much more quickly and inexpensively than crude oil. In general, a variety of alternative fuels could be purchased by the SPR under long-term contract to control costs and to help establish a vibrant, rapidly expanding alternative fuels industry. Congress should authorize the sale of portions of the crude oil currently in storage on the open market to fund available alternative fuels purchases.

Provide Incentives for Existing Ethanol Plants to Convert to Coal

Until very recently, natural gas was the ethanol plant fuel source of choice for process heat and electricity. With the recent escalation in natural gas prices, new ethanol plants are opting for coal-firing. Like crude oil, limited domestic natural gas supplies have necessitated increasing imports of this fuel as liquefied natural gas (LNG) to produce ethanol. To promote energy efficiency and lower energy imports, Congress should consider providing for 100 percent expensing in the year of outlay for the cost of converting ethanol plants currently using natural gas to domestic coal, if the new plant is in service by 2010.

Provide Incentives for Enhanced Oil Recovery and Enhanced Coal Bed Methane Recovery Using CO₂ Captured From Alternative Fuel Plants

The capture and use of the CO₂ from alternative liquid fuel plants can greatly expand domestic oil production from existing oil fields and enhance methane recovery from coal bed methane operations. To lower the barriers to expanded use of CO₂ injection, the following actions should be considered:
 

	exclusion of oil production from the Alternative Minimum Tax (AMT); increase the investment tax credit to 50 percent;
	provide federal royalty and severance relief until the investment in CO2 injection is recovered; and
	provide access to federal and state lands for the construction of CO2 pipelines.

Additional Recommendations

Issues and policy options related to the prioritization and catalyzing of a new domestic alternative liquid fuels industry are extremely complex and important. The policy recommendations provided in the American Energy Security study are believed to be crucial to the success of a comprehensive national initiative for alternative fuels harvesting and manufacturing. The American Energy Security study partners are developing additional policy options for states.

For additional information regarding the American Energy Security study, please visit the partner’s website at www.americanenergysecurity.org.