[Page 645]

205. Memorandum to President Carter 1

FROM

  • Cy Vance
  • Mike Blumenthal
  • Jim Schlesinger
  • Henry Owen

SUBJECT

  • Economic Summit Energy Initiative: International Energy Finance Corp.

At your direction, we have begun exploratory discussions with our Summit partners on Economic Summit initiatives to attain greater energy supply security for all nations. The Tokyo meeting, coinciding with likely OPEC decisions on further price increases, will be expected by world public opinion to come up with specific and important initiatives to this end.

We need to submit to the Preparatory Group meeting here Friday morning2 any US proposals requiring extensive consideration by Summit governments if we are to get agreement at Tokyo. One of our draft proposals needs to be reviewed by you before we ask the other governments to consider it thoroughly.

Proposal

We propose to initiate consultations with other Summit governments and members of Congress looking to a possible Tokyo Summit decision to establish an International Energy Finance Corporation. It would pool resources of Summit and other interested governments to provide long-term capital financing for the first generation of projects using commercially unproved technologies in large-scale production of energy. It would be limited to projects that cannot obtain sufficient private financing. By including some OPEC countries (e.g., Venezuela) it would create a practical partnership of producing and consuming countries to expand the world’s energy supplies.

This decision could save what may be a critical number of years in launching additional energy production processes that the world will need by the 1990s.

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It also would save money as compared with present plans for financing energy demonstration projects. First, capital would be raised internationally; we would be mobilizing subscriptions from other countries on a scale about double our own. Second, the Corporation would borrow its project-financing funds in relatively low-cost markets. Third, by financing projects largely on a loan basis, a larger portion of risk would be assigned to project sponsors than would be the case with either US Government equity financing or ad hoc international equity funding by several governments. This more efficient system would yield more projects for the same amount of governmental capital outlays.

Paid-in US subscriptions to support a lending-only program would be $100 to $150 million annually for each of the first three years. Appropriations would be the same unless appropriation of callable capital also were required, in which case callable capital might be subscribed and appropriated incrementally over three or four years.

The Corporation would speed the application of processes coming out of our intensified energy R&D programs—initially using heavy crude, shale oil, tar sands, coal (in solid, liquid, and gaseous forms), wood and other biomass, and ultimately direct solar and other technologies. Projects supported by this corporation would produce fuels usable in existing combustion and transport or transmission systems. The Department of Energy lists many promising technologies (Tab A),3 some of which are ready now, some likely to be ready in the early 1980s for commercial demonstrations.

Background

The IEA Secretariat predicts that, even with optimistic assumptions about Mexican and other oil production and with heroic assumptions about nuclear and coal production, the world will need to create the equivalent of another Saudi Arabia by the early 1990s. The alternative is increasingly severe and damaging energy price increases.

We believe it would be imprudent, perhaps recklessly so, to wait until private companies and banks are likely to finance fully the initial production scale projects demonstrating promising energy technologies in commercial settings. These pioneer projects’ billion dollar costs, coupled with great uncertainties as to actual production costs, virtually preclude full private financing, at least so long as projections of oil prices are subject to widely varying estimates.

Dependence on wholly private financing thus guarantees years of delay, so that commercial-scale models will not be available during the [Page 647]1980s, when private investment decisions must be made to assure large-scale production using new technologies in the 1990s. The Energy Department believes that promising technologies, now or soon to be available, will require a substantial number of large-scale commercial demonstrations in the 1980s.

Three alternative mechanisms for international public financing of such commercial demonstration projects have been considered:

1. An ad hoc consortium for each project, primarily with equity contributions by interested governments. This single-project consortium approach is being used in the US-German-Japanese public funding of SRC–2, the coal liquefaction demonstration project. DOE believes that it is unlikely we could put together additional ad hoc consortia, in view of the laborious and lengthy negotiations, as well as multiple national budgetary and/or appropriation action, required on each project.

2. An international energy technology fund providing both capital financing and subsidies to projects selected for support by its international board of directors. We believe that international pooling of subsidy costs would involve greater US appropriations and capital subscriptions than necessary. Other governments will probably take the same view. Host governments and sponsoring companies should share those risks not covered by capital financing which require subsidies because these risks depend partly on host government policies.

3. An international finance corporation confined to financing part of the capital costs of projects, largely in the form of long-term unguaranteed project loans at market interest rates. We believe that this alternative is preferable and that consultations about it should be initiated. Such a corporation would greatly enlarge international participation in cost-sharing. It would be the least costly of the three options in budgetary outlays, assuming an equal set of energy projects. Any subsidy requirements would be borne by host governments. Moreover, the corporation’s long-term loans would marginally reduce the required scale and duration of public subsidies as compared with alternative financing by DOE loan guaranties in today’s market.

The alternative of an international group without financial commitments, disposed to consider joining consortia on a project-by-project basis, may be proposed by some other countries. We believe it has most of the disadvantages of the ad hoc approach indicated above.

The Corporation would enable us to get international financing for some of the planned DOE commercialization projects and would thus free up US budget funds for support of a more extensive global effort to create new energy capacity. For example, it would provide a politically acceptable vehicle for certain international projects such as the initial [Page 648]commercial scale use of new technologies for extracting and processing Venezuela’s vast deposits of heavy crude. DOE believes, however, that over time a larger proportion of the Corporation’s funds would be devoted to US-sponsored projects than was subscribed by the US, because we have more diverse technological and resource potential than other prospective members.

The Corporation would not duplicate planned DOE support of projects. Rather, it would give us a means of lowering the DOE capital outlay and/or lowering DOE budget subsidies to some projects.

Ideally the US subscription should be drawn from the Energy Trust Fund,4 but this decision need not be made immediately.

The Corporation would normally require a sponsoring company or group to raise at least 25% of the capital as equity and to obtain required legal and other clearances, host government floor price guarantees or other subsidies before obtaining a loan from the Corporation. The Corporation would lend to a project and in some cases take a minor equity position when desirable.

Fears have been expressed that an international corporation would foster “white elephant” projects, whose production costs would far exceed oil or natural gas prices. This risk is inherent in any action, whether national or international, to commercialize new technologies. A corporation controlled by an intergovernmental board, weighing risks and balancing national interests in different technologies and feedstocks, seems at least as likely to be prudent about risking limited funds as individual governments acting singly in pursuit of locally promoted technologies.

There also are fears that the US would be forced, in such a corporation, to support technologies and projects that do not commend themselves to us. Our experience in international financial institutions to date suggests that we will have little difficulty in blocking unsound projects. It also suggests that we will be able to mobilize substantial resources from other countries for projects that we do favor.

Critics also may assert that the proposed corporation would tend to support projects sponsored by the biggest international energy companies, because only they have the capacity to meet requirements for large amounts of risk capital, alongside the corporation’s loan funds. On the contrary, the fact that the corporation would increase the amount of loan capital that could be offered to sponsors over what would otherwise be available, and would provide it directly to project [Page 649]enterprises without requiring parent companies to guarantee repayment, would make possible sponsorship of projects by a broader universe of companies than seems likely otherwise to be involved.

Cost

The corporation would be established by international agreement among the Summit governments, which would subscribe about 70 percent of the stock. By objective criteria, the US share should be about 30–40 percent. The remaining 25–30 percent of shares would be offered to other industrial and OPEC countries. Subscriptions would be 90 percent callable capital and 10 percent paid in over a period of two or three years.

Initial capitalization might be $10 billion—sufficient to permit financing 12–18 large projects over the first four to five years of operation. If this capitalization were agreed, the nominal US share would be $3–4 billion, requiring annual pay-in of $100 million to $150 million over the three initial years. If defaults requiring additional pay-in of capital occurred in some projects, the net additional pay-in after liquidation should not be so large as to alter the above orders of magnitude. Recovery on failures would be higher in a loan program than in the alternative of grant/equity financing.

As you know, we hope to persuade the Congress to approve a procedure to require appropriations only for paid-in capital of established international financial institutions. In this case, however, the likelihood of calls being made on some part of the callable subscriptions is greater than in the multilateral development banks.

If appropriations were also required in this case to establish the callable portion of a new international corporation’s capital, incremental capitalization could be adopted so as to spread appropriations over three or four years.

Recommendation

We request your authorization to propose active preparatory consideration of this initiative in the Summit Preparatory Group, reserving your personal decision on it pending our securing preliminary reactions of the Summit governments through this Group and pending further exploration of the idea in the Executive Branch and in consultations with key Members of Congress.5

  1. Source: Carter Library, National Security Affairs, Staff Material, International Economics File, Box 45, Rutherford Poats File, Chron, 4/12–30/79. No classification marking. Sent for action. The memorandum is on White House stationery.
  2. May 18.
  3. Not found.
  4. See footnote 7, Document 196. The Energy Security Trust Fund was part of the second National Energy Plan submitted to Congress on May 7. See Public Papers of the Presidents of the United States: Jimmy Carter, 1979, pp. 816–817.
  5. Carter did not check either the Agree or Disagree option, but wrote: “This proposal leaves me cold. OMB idea has some merit. I’ll read NSC ideas. Consultations should be conducted on a very tentative basis—JC” The OMB proposal has not been found.