Introduction : This proposal introduces the concept and structure of a new, self-sustaining U.S. Government corporation (Strategic Energy Security Corporation [SESC]) created to offer a “fuel neutral” market risk “insurance” to owners of U.S. alternative liquid fuels plants.

Developers of a diverse assortment of alternative liquid fuels manufacturing plants are currently on the sidelines waiting to initiate commercially viable projects. The risk of market manipulation by OPEC and others is keeping them from committing. The oil market risk insurance program proposed in this outline provides a self-funding means to overcome a significant barrier to the rapid development of a new and needed domestic liquid fuel industry. By mitigating market risk, project sponsors, backed by large pools of private capital, will build alternative liquid fuels plants in all 50 U.S. states, strengthening economies, creating millions of jobs, stabilizing fuel prices, and lessening our dependence on foreign oil. The principal features of this program are:

Self Funding by Plant Owners, Minimal Seed Gov. Funds, Minimal Scoring $5.0 mil

• Countermeasure to Market Manipulation by OPEC Cartel and Others
• Substantial Risk Reduction and Protection of Public and Private Investment
• High Price Windfall Captured for the SESC
• Low Price Cushion Minimal
• Excise Tax Credit Substantially Lowers the Exposure to Low Prices
• Sunset by Date Certain
• Successes to Model

Concept Summary : Congress is encouraged to establish the Strategic Fuels Corporation (“SESC” or the “Corporation”), as a self-funding, self-sustaining government corporation that will administer a new alternative liquid fuels market insurance program. SESC will provide the following functions: (1) collect insurance premiums from companies that “opt in” to the SESC insurance program; (2) invest net premiums (after administrative costs) in an insurance fund for future payout to program members if and when necessary; (3) facilitate market insurance payments to members if oil prices fall below a defined “Low Trigger Price,” as described below; and (4) administer the collection of “standby” insurance fees, to be levied on imported oil if oil prices fall below the “Low Target Price” and the accumulated investment pool of insurance premiums (including investment returns thereon) is exhausted.

The primary function of the SESC program will be to insure viable markets prices for qualifying alternative liquid fuel plants in the event oil prices fall below a designated “Low Trigger Price” as defined below (also see Figure 2). This will be accomplished by providing insurance payments to insured plant owners if any oil products from their plants sell at prevailing market prices that are less than the Low Trigger Price on a crude oil equivalent basis. By way of example, if an SESC insured plant sells 300,000 barrels of diesel fuel for the crude oil equivalent prevailing market price of $45 per barrel, the insurance payment to the plant owner would be $1,500,000, computed as $50/bbl (Low Trigger Price) less $45/bbl (sale price of product on crude oil equivalent basis), times 300,000 barrels. Note: if the alternative fuel excise tax credit is operational (see below), the insurance payment is not available until the prevailing market price falls below $30 per barrel

Self funding, Minimal Government Funds, Minimal Scoring $5.0 million

Sources and Use of Proceeds : There will be several sources/levels of funding for this program. Each is described below.

Seed Capital. A one-time appropriation of $5.0 million provided by Congress to establish, staff and organize the SESC, and to cover ongoing administrative costs for an initial period until adequate member-paid premiums are received that allow the Corporation to stand on its own.

Opt-in Premiums. Plant developers will be required to pay a one-time up-front “Opt-in Premium” to insure a qualifying plant, calculated as two percent (2%) of the total capital cost of the plant. For example, to secure SESC insurance for a plant costing $800 million, the plant owner would pay an Opt-In Premium of $16 million. For a nominal cost, “a conditional letter of intent to insure” will be issued by SESC for a qualified project, locking in insurance while capital is raised for the project. Once financing is secured, a “commitment fee” portion of the Opt-In Premium will be payable to the SESC, with the balance of this Premium placed in an escrow account. When the plant begins operation, the remaining portion of the Opt-in Premium will be due and released from the escrow account to the SESC. Premium proceeds will be invested in the SESC insurance fund, available to pay future price insurance benefits, if and when required. Costs to operate the SESC will be drawn from the insurance fund as well.

Operating Premiums. Once an insured plant begins operation, an Operating Premium will become payable. This fee will be set at two percent (2.0%) of the price of all liquid fuel products sold. Proceeds will be invested in the SESC insurance fund, available to pay future price insurance benefits, if and when required.

Countermeasure to Market Manipulation by OPEC Cartel and Others

The risk of market manipulation by OPEC and others is believed to be the primary barrier to the rapid development of an alternative domestic liquid fuels industry. By mitigating this market risk, private capital will flow into alternative liquid fuels plants in all 50 U.S. states, strengthening economies, creating millions of jobs, stabilizing fuel prices, and lessening our dependence on foreign oil.

Substantial Risk Reduction and Protection of Public and Private Investment

Insuring against market manipulation by OPEC and others will serve to protect public as well as private investment in alternative liquid fuels plants.

High Price Windfall Captured for the SESC

Windfall Premiums . These premiums will be paid along with Operating Premiums whenever crude oil prices rise above the High Trigger Price level (assumed to be $65 for purposes of discussion-see Figure 2). Windfall Premium rates will be progressive, based on the level of crude oil prices above the High Trigger Price. They will be computed as follows, using the progressive premium rate table shown in Table 1.

Spot Crude Oil Price/bbl - $65

x

Applicable Windfall Premium Rate

x

Barrels Sold During Period

=

Windfall Premium

The following table presents the progressive premium rates proposed. The crude oil price ranges in Table 1 are presented for discussion purposes, and are subject to adjustment in the authorizing legislation.

Windfall Premiums will be allocated as follows: ¾ of proceeds invested in the SESC insurance fund, available to pay future price insurance benefits, if and when required; and, ¼ of proceeds distributed to LIHEAP, or to another low-income fuel assistance program established to help needy Americans pay for vehicle fuel.

Low Price Cushion Minimal

National Security Standby Insurance Fees : If oil prices fall below the Low Trigger Price level for more than 30 days, and funds in the SESC insurance pool are exhausted by payment of insurance benefits, a National Security Insurance Fee will then be applied to imported oil (crude and products) to enable ongoing market insurance benefit payments to SESC members. This fee will be assessed on a monthly basis, if and when required, and computed as the amount necessary to enable payment of SESC price insurance benefits for that month. Currently the U.S. imports approximately 13 million barrels of oil (crude and products) per day. Consequently, if and when National Security Insurance fees are required, they should not place much burden on oil prices. This is evident in the following example. Assume that oil prices fell to $40 per barrel, the Low Trigger Price was $50, and the SESC investment pool had been exhausted. Further, assume that there are 1.0 million barrels per day of alternative liquid fuels production covered under SESC price insurance, and 13 million barrels per day of oil being imported. The National Security Standby Insurance Fee would be calculated as follows: (Low Trigger Price – Spot Crude Price/bbl) x (Avg. SESC Insured Production per Day / Avg. Imported Oil per Day). Using the assumptions above this fee would be only $0.769 /bb, computed as ($50 - $40) x (1 MM bpd / 13 MM bpd) = $0.769 per barrel.

Figure 2

 Low Trigger Price : The approximate minimum price needed by an average commercial alternative liquid fuels plants to be viable. This price level is shown as $50/bbl (2007 dollars) for discussion purposes.

Excise Tax Credit Substantially Lowers the Exposure to Low Prices

Low Trigger Price With $0.50/gallon Tax Credit : The approximate minimum price needed by an average commercial alternative liquid fuels plants to be viable, assuming the provision for the current $0.50 per gallon alternative fuels excise tax credit is extended and is in effect (see discussion below). This price level is shown as $30/bbl (2007 dollars) for discussion purposes. As background, 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 coal-to-liquids and biomass-to-liquids fuel products. This translates to an additional $21.00 per barrel of added revenues for qualifying producers. The excise credit expires in 2009. If extended, which is strongly encouraged, it would have the effect of lowering the Low Trigger Price by about $20 per barrel.

High Trigger Price : The High Trigger price would be based on a $15 per barrel premium above the low trigger price. This is the price at which Windfall Premiums are triggered, shown as $65/bbl (2007 dollars) for discussion purposes.

High Trigger Price With $0.50/gallon Tax Credit : The price at which Windfall Premiums are triggered, assuming the provision for the current $0.50 per gallon alternative fuels excise tax credit is extended and is in effect (see discussion above). This price level is shown as $45/bbl (2007 dollars) for discussion purposes.

Full or Partial Insurance: Plant developers may choose to insure the market price for all or only a portion of plant output. Premium charges will be adjusted on a prorate basis. If, for example, a long-term contract is established for 60% of the output of a plant, the developer can insure the remaining 40% of production with SESC.

Insurance Benefit Payment Schedule : If and when necessary, insurance benefits will be paid on a monthly basis.

Inflation : Low and High Trigger Prices will be adjusted on a quarterly basis by a suitable escalation formula to be established.

Insurance Term. A plant can participate in the SESC insurance program for the first 10 years of its operation life.

SESC is Sunset by Date Certain

Program Term (Sunset and Winding Up) . The SESC will automatically dissolve at midnight on December 31, 2025. Money remaining in the SESC investment fund will be distributed: ½ to insurance program participants on the basis of their net premiums paid (premiums paid less insurance benefits received), with distribution computed with consideration given to the time value of money; and ½ distributed to LIHEAP, or to another low-income fuel assistance program established to help needy Americans pay for vehicle fuel.

Federal Loan Guarantee Recipients . It is suggested that alternative fuels plant developers utilizing federal loan guarantees be required to purchase insurance from SESC.

Successes to Model

Sasol : This South African company single-handedly provides for almost 30% of the countries transportation fuel requirements by converting coal to liquids. The South African Government, which facilitated the establishment of Sasol through the Industrial Development Corporation, did so by providing loan guarantees and a floor price mechanism. A requirement was also put in place for Sasol to repay the government if crude oil prices exceeded a pre-determined level, which occurred. All government loans and support were fully repaid in due time and there was no net cost to the taxpayer. No support has been in place for several decades. The economic and multiplier effects of having such facilities, and the national security benefits, are tremendous. Sasol is now a private sector company which is very profitable. It has produced more than 1.5 billion barrels of fuel from coal since its inception in 1950, and markets in excess of 200 chemical products internationally. Sasol shares are traded at various stock exchanges around the world, including the NYSE.

Alberta , Canada Tar Sands: The following statement made by Senator Orrin Hatch in October 2005 is instructive. “ Alberta [ Canada] is now second only to Saudi Arabia in proven oil reserves and ninth in the world in annual oil production. This is owing mostly to their successful development of oil sands. In Alberta, you have dozens of major oil companies, using a variety of technologies and recovery methods, going after very different types of oil sands resources, and in almost every case doing so [now] for less than $20 a barrel, including during their very tough winters. It is a gigantic success story, and it began with Alberta’s government deciding to promote the development of this resource and not giving up.”