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USEC-AREVA Nuclear Game-Changer

Insights + Opinion

Geoffrey Sea

Congressional leaders of both parties had rushed to provide an emergency bailout for the limping nuclear fuel supplier USEC Inc.  But the bailout package, now stuck in the DC-standoff muddle, is too little and too late. USEC, hemorrhaging money, appears to be jumping ship to the arms of a French-government suitor.

Both former national nuclear companies of the United States and France, USEC and AREVA, are now quasi-privatized. Together they have driven the world market in nuclear fuel, and their axis of cooperation and competition has given definition to the global nuclear industry.

They were the only applicants for the fourth, forgotten, "front-end-nuclear"category of loan guarantees from the U.S. Department of Energy (DOE)—AREVA for its Eagle Rock centrifuge project in Idaho, and USEC for its "American Centrifuge" project or ACP near Piketon, Ohio. Both companies have suffered mightily from the global downturn in nuclear prospects and especially from the sudden market saturation in nuclear fuel, caused by the lingering shutdown of 44 of Japan's 54 nuclear reactors.

Many have believed it inevitable that USEC and AREVA would overcome their rivalry, and now the inevitable is happening. AREVA announced on Dec. 13 that the Eagle Rock facility, though now delayed, may be completed by a partnership of the two. The announcement would not be possible if discussions between the companies were not already at some advanced stage.

Significantly, on the same day, an expected congressional bailout of USEC, reported to be part of the omnibus 2012 appropriations package, evaporated in the most recent standoff between Reid and Boehner. USEC stock price plunged nearly 5 percent on that news, to $1.20, one penny higher than its historic closing low, reached just days ago.

Because the USEC bailout was structured in the form of federal "Research, Development & Demonstration" assistance for ACP technology [see part 4 in the series on USEC]—a poorly-chosen cover for the needed emergency cash infusion—the funds would not be spendable if USEC is pursuing project merger with AREVA. Even if the omnibus spending bill is salvaged, and it includes up to $300 million in ACP technology assistance, that provision would be immediately mooted by even the suggestion that USEC would abandon ACP for Eagle Rock.

(And to the Appropriations leaders reading this, the provision should be removed from the omnibus package, since the cat is out of the bag that USEC is pursuing another course).

USEC has made clear since the bailout was proposed in October that technology assistance would be insufficient to save the company or the project in the absence of a conditional commitment on a $2 billion loan guarantee. Meanwhile, the DOE has made clear that USEC has no chance of qualifying for a loan guarantee before at least two years of a technology development program not yet funded or begun.

Given the incompatibility of those positions, it was only a matter of time before ACP was acknowledged as over. How over is the American Centrifuge Plant? It's over like a flipped flapjack on the back of a turtle turned upside-down. And that, my friends, is over.

Around and Around We Go

While first reports provide few details of a prospective AREVA-USEC centrifuge partnership, the necessary parameters emerge from recent history. Almost as soon as he took office in 2007, Ohio Governor Ted Strickland, a hometown boy long familiar with USEC and its woes, pursued his own inspiration for an AREVA-led bailout of USEC, hosting talks between the companies at government offices in Columbus.

Strickland's conception, of course, was to substitute an AREVA centrifuge enrichment plant for USEC's unfinanced ACP, which was already foundering. That idea ran into a host of practical and legal roadblocks, including the impossibility of transferring USEC's NRC license to a different company using different technology, the straightjacket of USEC's long-term lease at the federal site, prohibitions of foreign ownership in the USEC Privatization Act, and, not least, the absence of any profit-incentive for USEC. Ultimately, it was USEC that ended the negotiation with insistence on a $2 billion federally-backed loan for its lonesome, and that pushed AREVA to Idaho, where it found a site on private land in sparse Bonneville County.

The last gasp of the failed Strickland initiative was a hoax event at the Piketon site in June of 2009, at which USEC and AREVA jointly announced, with an entourage of political parasites, that they would build an AREVA-design nuclear reactor at Piketon. But no one would say exactly where it would be built, or how it would obtain regulatory approval, or who would pay for it. Oops!

AREVAderci USEC

So let's see. AREVA has a private construction site, a centrifuge technology already proven and profitable around the world (licensed from URENCO), an NRC construction and operating license, and a conditional commitment on a $2 billion loan guarantee awarded in 2010. Despite the current downturn in its fortunes, AREVA is a diversified global giant with operations in dozens of countries.

USEC only leases the federal site in Ohio, which comes with a raft of regulatory and legacy cleanup problems. Its technology straddles the line between outmoded, dysfunctional, and fictitious, as the belated small demonstration-scale cascade suffered a major crash last June [see part 3 in the series on USEC]. USEC is mired in debt and has no financing to speak of, denied twice for a DOE loan guarantee and delayed for a federal bailout that would be restricted to a technology demonstration that probably never will come to pass. While USEC uses the slogan "A Global Energy Company," its only production plant is in Paducah, Kentucky, scheduled to close next May. Its slogan should be: "Think Globally, Act in Paducah."

The only thing that USEC does bring to the table is the chief asset it acquired through privatization—its order book of utility customers awaiting shipments of nuclear fuel.

USEC already signaled it was looking to team with a foreign partner when it signed an agreement with Russia's TENEX last March, including a commitment to support a future TENEX centrifuge plant on U.S. soil. That agreement went over with USEC's political backers like a depleted uranium balloon. Many of those same politicians had spent their careers making Cold War justifications for additional Piketon funding on the argument that Piketon was needed to kill the Russians, not capitalize them. (Lenin's prediction that western capitalists would one day sell him the rope he would use to hang them comes to mind).

Under political pressure, USEC unceremoniously dropped its Russian Centrifuge project plans. AREVA was the last and most logical resort.

Therefore, it is clear what a USEC-AREVA partnership would look like. USEC would abandon the Piketon site and the long-running fiction of ACP, releasing the company from hefty NRC licensing fees and other expenses it can no longer afford to pay. Paducah can close on schedule or soon thereafter, and USEC's customers, those that remain, can be delivered to the AREVA-USEC joint venture in Bonneville County, Idaho. With full subscription for its product, Eagle Rock could be up and running within two years. That's just in time to cover for the expiration of the current agreement that supplies USEC customers with uranium downblended from old Soviet nuclear warheads.

The foreign ownership statutory restriction would not be violated, since USEC would retain its corporate identity. USEC would be buying into AREVA, not vice versa. And the supposed "national security" justification for ACP would fall away as the malarkey it always was. It had been said that only USEC could provide the fuel for TVA reactors that then produce tritium for U.S. nuclear weapons. The argument was simply fallacious—TVA has legally contracted for uranium fuel from both URENCO's plant in New Mexico, and from downblended U.S. weapons-grade uranium stockpiled at Savannah River, South Carolina. Both of those sources, and possibly material from Eagle Rock, would continue to be available to TVA.

ACP RIP

Though only the first suggestion of USEC-AREVA partnership has been publicly aired, the logic of the confluence is overwhelming, and as the foregoing history reveals, discussions have actually been underway since 2007. The terrain has been well explored by both companies. The partnership will almost certainly happen, and it may be what the U.S. Department of Energy had in mind, when it responded to USEC's demands for a loan guarantee with a counter-demand described only vaguely for the public as "a restructuring."

In the post-Fukushima world, two new centrifuge plants in Idaho and Ohio made no sense. Yet it was also unrealistic to think that both projects would be canceled, leaving U.S. nuclear utilities partially dependent on foreign supply of uranium fuel.

Many will be unhappy with the unfolding outcome. Ohio politicians who mercilessly shilled and shoveled U.S. Treasury funds to USEC on the promise of creating American jobs will get their wish, but the jobs will be in Idaho, for the most part. Expect "overseas in Idaho" as a phrase to enter the Buckeye State boondocks vocabulary.

Some self-styled environmentalists, of the sort who don't imagine that sites east of the Mississippi can be worth saving, had counted on the success of ACP to generate a reciprocal failure at Eagle Rock. That won't be happening, and it's a good thing, because the Piketon site is located rather specially alongside one of the most important complexes of ancient Indian earthworks in the Americas.

Now there is the opportunity for consensus on the post-USEC redevelopment of the Piketon federal site. Attention and resources should focus on getting USEC removed, so redevelopment can begin without additional delay. The southern Ohio community has waited through vacuous boosterism and raucous hucksterism enough.

AREVAderci USEC indeed.

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Ola Elvestrun, Norway's environment minister, announced Thursday that it is freezing its contributions to the Amazon Fund, and will no longer be transferring €300 million ($33.2 million) to Brazil. In a press release, the Norwegian embassy in Brazil stated:

Given the present circumstances, Norway does not have either the legal or the technical basis for making its annual contribution to the Amazon Fund.

Brazilian President Jair Bolsonaro reacted with sarcasm to Norway's decision, which had been widely expected. After an official event, he commented: "Isn't Norway the country that kills whales at the North Pole? Doesn't it also produce oil? It has no basis for telling us what to do. It should give the money to Angela Merkel [the German Chancellor] to reforest Germany."

According to its website, the Amazon Fund is a "REDD+ mechanism created to raise donations for non-reimbursable investments in efforts to prevent, monitor and combat deforestation, as well as to promote the preservation and sustainable use in the Brazilian Amazon." The bulk of funding comes from Norway and Germany.

The annual transfer of funds from developed world donors to the Amazon Fund depends on a report from the Fund's technical committee. This committee meets after the National Institute of Space Research, which gathers official Amazon deforestation data, publishes its annual report with the definitive figures for deforestation in the previous year.

But this year the Amazon Fund's technical committee, along with its steering committee, COFA, were abolished by the Bolsonaro government on 11 April as part of a sweeping move to dissolve some 600 bodies, most of which had NGO involvement. The Bolsonaro government views NGO work in Brazil as a conspiracy to undermine Brazil's sovereignty.

The Brazilian government then demanded far-reaching changes in the way the fund is managed, as documented in a previous article. As a result, the Amazon Fund's technical committee has been unable to meet; Norway says it therefore cannot continue making donations without a favorable report from the committee.

Archer Daniels Midland soy silos in Mato Grosso along the BR-163 highway, where Amazon rainforest has largely been replaced by soy destined for the EU, UK, China and other international markets.

Thaís Borges.

An Uncertain Future

The Amazon Fund was announced during the 2007 United Nations Climate Change Conference in Bali, during a period when environmentalists were alarmed at the rocketing rate of deforestation in the Brazilian Amazon. It was created as a way of encouraging Brazil to continue bringing down the rate of forest conversion to pastures and croplands.

Government agencies, such as IBAMA, Brazil's environmental agency, and NGOs shared Amazon Fund donations. IBAMA used the money primarily to enforce deforestation laws, while the NGOs oversaw projects to support sustainable communities and livelihoods in the Amazon.

There has been some controversy as to whether the Fund has actually achieved its goals: in the three years before the deal, the rate of deforestation fell dramatically but, after money from the Fund started pouring into the Amazon, the rate remained fairly stationary until 2014, when it began to rise once again. But, in general, the international donors have been pleased with the Fund's performance, and until the Bolsonaro government came to office, the program was expected to continue indefinitely.

Norway has been the main donor (94 percent) to the Amazon Fund, followed by Germany (5 percent), and Brazil's state-owned oil company, Petrobrás (1 percent). Over the past 11 years, the Norwegians have made, by far, the biggest contribution: R$3.2 billion ($855 million) out of the total of R$3.4 billion ($903 million).

Up till now the Fund has approved 103 projects, with the dispersal of R$1.8 billion ($478 million). These projects will not be affected by Norway's funding freeze because the donors have already provided the funding and the Brazilian Development Bank is contractually obliged to disburse the money until the end of the projects. But there are another 54 projects, currently being analyzed, whose future is far less secure.

One of the projects left stranded by the dissolution of the Fund's committees is Projeto Frutificar, which should be a three-year project, with a budget of R$29 million ($7.3 million), for the production of açai and cacao by 1,000 small-scale farmers in the states of Amapá and Pará. The project was drawn up by the Brazilian NGO IPAM (Institute of Environmental research in Amazonia).

Paulo Moutinho, an IPAM researcher, told Globo newspaper: "Our program was ready to go when the [Brazilian] government asked for changes in the Fund. It's now stuck in the BNDES. Without funding from Norway, we don't know what will happen to it."

Norway is not the only European nation to be reconsidering the way it funds environmental projects in Brazil. Germany has many environmental projects in the Latin American country, apart from its small contribution to the Amazon Fund, and is deeply concerned about the way the rate of deforestation has been soaring this year.

The German environment ministry told Mongabay that its minister, Svenja Schulze, had decided to put financial support for forest and biodiversity projects in Brazil on hold, with €35 million ($39 million) for various projects now frozen.

The ministry explained why: "The Brazilian government's policy in the Amazon raises doubts whether a consistent reduction in deforestation rates is still being pursued. Only when clarity is restored, can project collaboration be continued."

Bauxite mines in Paragominas, Brazil. The Bolsonaro administration is urging new laws that would allow large-scale mining within Brazil's indigenous reserves.

Hydro / Halvor Molland / Flickr

Alternative Amazon Funding

Although there will certainly be disruption in the short-term as a result of the paralysis in the Amazon Fund, the governors of Brazil's Amazon states, which rely on international funding for their environmental projects, are already scrambling to create alternative channels.

In a press release issued yesterday Helder Barbalho, the governor of Pará, the state with the highest number of projects financed by the Fund, said that he will do all he can to maintain and increase his state partnership with Norway.

Barbalho had announced earlier that his state would be receiving €12.5 million ($11.1 million) to run deforestation monitoring centers in five regions of Pará. Barbalho said: "The state governments' monitoring systems are recording a high level of deforestation in Pará, as in the other Amazon states. The money will be made available to those who want to help [the Pará government reduce deforestation] without this being seen as international intervention."

Amazonas state has funding partnerships with Germany and is negotiating deals with France. "I am talking with countries, mainly European, that are interested in investing in projects in the Amazon," said Amazonas governor Wilson Miranda Lima. "It is important to look at Amazônia, not only from the point of view of conservation, but also — and this is even more important — from the point of view of its citizens. It's impossible to preserve Amazônia if its inhabitants are poor."

Signing of the EU-Mercusor Latin American trading agreement earlier this year. The pact still needs to be ratified.

Council of Hemispheric Affairs

Looming International Difficulties

The Bolsonaro government's perceived reluctance to take effective measures to curb deforestation may in the longer-term lead to a far more serious problem than the paralysis of the Amazon Fund.

In June, the European Union and Mercosur, the South American trade bloc, reached an agreement to create the largest trading bloc in the world. If all goes ahead as planned, the pact would account for a quarter of the world's economy, involving 780 million people, and remove import tariffs on 90 percent of the goods traded between the two blocs. The Brazilian government has predicted that the deal will lead to an increase of almost $100 billion in Brazilian exports, particularly agricultural products, by 2035.

But the huge surge this year in Amazon deforestation is leading some European countries to think twice about ratifying the deal. In an interview with Mongabay, the German environment ministry made it very clear that Germany is very worried about events in the Amazon: "We are deeply concerned given the pace of destruction in Brazil … The Amazon Forest is vital for the atmospheric circulation and considered as one of the tipping points of the climate system."

The ministry stated that, for the trade deal to go ahead, Brazil must carry out its commitment under the Paris Climate agreement to reduce its greenhouse gas emissions by 43 percent below the 2005 level by 2030. The German environment ministry said: If the trade deal is to go ahead, "It is necessary that Brazil is effectively implementing its climate change objectives adopted under the [Paris] Agreement. It is precisely this commitment that is expressly confirmed in the text of the EU-Mercosur Free Trade Agreement."

Blairo Maggi, Brazil agriculture minister under the Temer administration, and a major shareholder in Amaggi, the largest Brazilian-owned commodities trading company, has said very little in public since Bolsonaro came to power; he's been "in a voluntary retreat," as he puts it. But Maggi is so concerned about the damage Bolsonaro's off the cuff remarks and policies are doing to international relationships he decided to speak out earlier this week.

Former Brazil Agriculture Minister Blairo Maggi, who has broken a self-imposed silence to criticize the Bolsonaro government, saying that its rhetoric and policies could threaten Brazil's international commodities trade.

Senado Federal / Visualhunt / CC BY

Maggi, a ruralista who strongly supports agribusiness, told the newspaper, Valor Econômico, that, even if the European Union doesn't get to the point of tearing up a deal that has taken 20 years to negotiate, there could be long delays. "These environmental confusions could create a situation in which the EU says that Brazil isn't sticking to the rules." Maggi speculated. "France doesn't want the deal and perhaps it is taking advantage of the situation to tear it up. Or the deal could take much longer to ratify — three, five years."

Such a delay could have severe repercussions for Brazil's struggling economy which relies heavily on its commodities trade with the EU. Analysists say that Bolsonaro's fears over such an outcome could be one reason for his recently announced October meeting with Chinese President Xi Jinping, another key trading partner.

Maggi is worried about another, even more alarming, potential consequence of Bolsonaro's failure to stem illegal deforestation — Brazil could be hit by a boycott by its foreign customers. "I don't buy this idea that the world needs Brazil … We are only a player and, worse still, replaceable." Maggi warns, "As an exporter, I'm telling you: things are getting very difficult. Brazil has been saying for years that it is possible to produce and preserve, but with this [Bolsonaro administration] rhetoric, we are going back to square one … We could find markets closed to us."

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