Sept. 1 (Bloomberg) -- Interior Secretary Ken Salazar sang the praises of a North Dakota coal plant he visited in May. The Great Plains facility is the world’s largest that captures and buries carbon dioxide emissions.

“We need to figure out a way we can do it in other parts of the country,” Salazar said in a speech in Washington.

Great Plains may be an environmental success and a showcase for technology central to President Barack Obama’s plans to curb global warming. It was also a financial flop, defaulting on $1.5 billion in federal loan guarantees before being sold for 4 percent of its construction cost.

The “clean-coal” plant’s travails should be a warning to Obama and environmentalists eager to use still-developing technologies on a commercial scale to curb emissions, said William Hederman, a Washington energy analyst.

“A lot of the lessons got lost” after Great Plains’ default, said Hederman, senior vice president of energy policy for Concept Capital’s Washington Research Group. “There’s a lot of overly optimistic expectations about what you can get.”

House-passed legislation now before the Senate would provide $10 billion over 10 years for clean-coal facilities, and the Energy Department is preparing to dole out about $83 billion in loan guarantees for energy projects that reduce greenhouse gas emissions. The administration also intends to spend $1 billion on a low-emission coal project in Illinois.

Oil Embargo

The Great Plains plant, located 60 miles (97 kilometers) northeast of North Dakota’s capital of Bismarck, was built in response to the Arab oil embargo of the 1970s. The primary aim was to reduce U.S. dependence on imported fuel.

The facility uses a chemical process to turn coal into a synthetic natural gas, one of dozens of projects that received U.S. aid and tax breaks through a “synfuels” program begun under President Jimmy Carter. This “gasification” produces less greenhouse gas emissions than burning coal.

Since 2000, the plant has also captured half of the carbon dioxide that would otherwise be released. The CO2 is sent 200 miles through a pipeline to Weyburn, Canada, where it is injected into depleted oil wells, increasing the amount of fuel that can be recovered.

Completed in 1984, on time and under budget, Great Plains defaulted on its government loan guarantee nine months after it began operating. It was the largest-ever default on an Energy Department loan guarantee, according to John Panek, project manager for the department.

‘We Can Do It’

Great Plains foundered because the synthetic fuel it produced couldn’t compete with natural gas, said Floyd Robb, spokesman for the Basin Electric Power Cooperative of Bismarck, which now owns the facility.

“The plant was originally built with projections that gas would be going to approximately $7 a thousand cubic feet,” Robb said in an interview. When the original partners walked away from it, “gas was below a dollar.”

The nonprofit Basin cooperative bought the plant, which cost $2.1 billion to build, for $85 million in 1988.

Its financial history notwithstanding, the Great Plains project has become a magnet for technology and clean-environment enthusiasts. Interior Secretary Salazar is among Cabinet members, governors, members of Congress and state officials who have made pilgrimages to the site.

The Great Plains project proves “we can do it,” said North Dakota Governor John Hoeven, a Republican. “We can produce more energy and we can do it in environmentally sound ways.”

No Debt Load

The venture has yielded some financial benefits for the government, which has collected $380 million since the sale in a revenue-sharing agreement that ends this year.

EnCana Corp., a Calgary oil-well operator, says the carbon dioxide it receives from the Great Plains plant helped increase production to 28,000 barrels of oil a day from 10,000.

“This is one of the few survivors of the effort to try and transform the energy landscape,” said former Representative Phil Sharp, who headed the electricity subcommittee on the House Energy and Commerce Committee when Great Plains was sold.

“The final owners who have it now, they didn’t have to carry that debt, that’s why it survived,” said Sharp, an Indiana Democrat who is now president of Resources for the Future, a nonprofit Washington organization that does research on energy and environmental issues.

The Obama administration’s project on the scale of Great Plains is FutureGen, the Illinois power plant. It would turn coal into gas, generate electricity, and bury the resulting carbon dioxide in caverns.

Scientists Disagree

President George W. Bush’s administration dropped funding for the venture after its estimated cost ballooned. Federal support was revived under Obama, a former Illinois senator.

The two largest coal-burning U.S. utilities, American Electric Power Co. and Southern Co., said in June they were dropping out of the group supporting FutureGen, saying they wanted to focus on their own carbon-capture efforts.

Scientists disagree over whether burying carbon emissions from coal plants is a practical solution, even if the technology pioneered at Great Plains is perfected.

The costs of replicating carbon-capture technology nationwide would be “tremendous,” wrote chemistry professors Xina Xie of the University of Wyoming and Michael Economides of the University of Houston in a paper published by the Society of Petroleum Engineers. “There are too many uncertainties and risks for long-term CO2 sequestration.”

A paper issued in June by Harvard University’s Kennedy School of Government found the carbon-capture costs would be higher than previous estimates for the first plants, at about $150 per ton of CO2.

The costs would drop as the technology becomes more widespread, “implying that mature technology would be competitive with conventional fossil fuel plants at prevailing carbon prices,” the authors wrote.

Great Plains was a “pioneer” project, said Governor Hoeven. There must be recognition that “there are real costs and there are real risks to it.”

To contact the reporter on this story: Tina Seeley in Washington at tseeley@bloomberg.net.

Last Updated: September 1, 2009 00:00 EDT