Panda Ethanol has fired the contractor building its flagship cow manure-fueled ethanol plant and told regulators it is no longer sure it will be able to finance the plant.

The news could mark a setback for the company's plans for biomass-powered biofuel production.

Dallas-based Panda announced Monday that it was terminating Lurgi Inc. as the contractor on a planned 115 million gallon-per-year ethanol plant in Hereford, Texas, saying Panda's board of directors had "lost confidence in Lurgi's ability to finish the facility due to continued construction delays."

Panda, a publicly traded company whose shares are traded over the counter under the ticker symbol "PDAE," said it would take over construction of the plant, initially set to be completed by December 2007 at a cost of $269 million.

While Panda said the plant is 98 percent complete and predicted "substantial completion" in the first quarter of 2009, the company added in a filing with the U.S. Securities and Exchange Commission that existing financing for the Hereford facility may be inadequate to finish the project.

"We can't make any guarantees or promises, but we continue to have discussions with the lenders," Panda spokesman Bill Pentak said Monday. "When we know more, I'm sure we will disclose more."

This isn't the first setback for Panda Ethanol, a subsidiary of privately held Panda Energy International, which has plans to build six 115 million gallon-per-year ethanol plants, four of them powered by synthetic natural gas made from cow manure.

In December, Panda Ethanol canceled plans for a 100 million gallon-per-year in Wallace, Neb., that didn't use the manure-to-syngas system that is to fuel the Hereford plant (see Another Ethanol Plant Gets Canceled). The company also is waiting for market conditions to improve before starting work on plants proposed for Yuma, Colo., Haskell, Kansas and the towns of Sherman and Muleshoe in Texas, Pentak said.

Aside from the potential complications of integrating manure-to-fuel systems into ethanol production, the U.S. ethanol industry has suffered in general from declining profit margins driven by the rising cost of corn and fuel, said Rick Kment, biofuels analyst with DTN in Omaha, Neb. (See Pacific Ethanol Posts 2Q Loss and E.thanol Margins Suffer).

Add the tightening credit markets and the turmoil now gripping Wall Street, and many ethanol makers have found that "credit has virtually dried up, even for companies that are up and running," Kment said. (See Plans for Two Cellulosic-Ethanol Plants Scrapped).

Pentak said those factors have played a part in Panda's decision to put its other ethanol-plant construction projects on hold.

"We're primarily focused on getting Hereford built and online," Pentak said. "We want to demonstrate to the marketplace that we're building one of the most cost-efficient ethanol-production facilities in the United States."

So-called "closed loop" ethanol plants that derive fuel from animal or other waste to power operations can offer significant cost savings, given that natural gas can account for up to a third of a plant's operating costs, Pentak said.

Panda expects to pay about $2.17 per million British thermal units of energy for its manure-derived synthetic gas, he said. That's compared to natural gas prices that have run from as low as $4 per million BTU to as high as $12 per million BTU over the past several years. (Natural gas was trading at $7.91 per million BTU on the New York Mercantile Exchange as of last week.)

Even so, Kment said he didn't know of any other manure-powered ethanol plants being built in the United States. In December, E3 Biofuels, a company seeking to use a different manure-to-fuel technology to power its ethanol plant, declared bankruptcy and shut down operations after suffering mechanical failures at its Mead, Neb. plant (see E3 Plant Craps Out).

Pentak said Panda's construction delays were not related to its Hereford plant's

system to convert cow manure into energy, which underwent a successful test earlier this year and was designed by Energy Products of Idaho.

Energy Products' fluidized-bed combustion and boiler systems, which gasify biowaste using heat and leave ash behind, are already in use at more than 90 sites around the world, though none use cattle manure as a feedstock – most use wood chips or agricultural or urban demolition waste instead.

Pentak said the Hereford delays were caused by problems with Memphis, Tenn.-based Lurgi, which first pushed back the Hereford plant's completion date from late 2007 to March 2008, and then to the third quarter of 2008 after Panda discovered flaws in the plant's foundation work.

Also, according to a Panda filing with the SEC, Lurgi in June had its workers walk off the Hereford job site "due to its discovery that certain of its employees had been exposed to the microbe that causes Q fever."

Q fever, caused by bacteria carried by cattle and other livestock, can lead to fever, vomiting, headaches and pneumonia. It also can cause death in less than 2 percent of its sufferers, although most people recover from the disease with no treatment, according to the U.S. Centers for Disease Control and Prevention.

Panda objected to the walk-off as an "unreasonable reaction to a condition common to several industries" and told Lurgi it constituted a breach of its construction contract, according to the SEC filing.

Then, in August, Panda received a demand for arbitration from Lurgi, which sought damages of $29 million for delays and additional costs, according to a Panda filing with the SEC. Panda denied those allegations and submitted a counterclaim, promising to "vigorously defend itself" against Lurgi's allegations.

Panda's decision to terminate Lurgi came after the contractor pushed back its Hereford completion date to February 2009, when "the board of directors said enough was enough," Pentak said.

Panda has drawn on the full amount of a $16.2 million credit, tied to the contract it had with Lurgi, to pay subcontractors and cover the cost of fixing faulty foundation work that played a part in the plant's construction delays. On Sept. 4, the company got its lenders to approve an additional $3.8 million construction draw, Pentak said.

Panda intends to take over as general contractor and finish the plant with the current subcontractors, and remains confident in the idea behind using manure as a fuel feedstock, he said.

The company has contracts in place with 21 cattle feeders in the Hereford area, which Pentak called the "Saudi Arabia of cattle manure" for its ample supplies of the smelly feedstock.

"People have been using cattle manure (for fuel) ever since the pioneers crossed the prairies," he said.