China bets big on coal-to-oil
projects By Wu Zhong, China
Editor
HONG KONG - To ease its increasing
thirst for oil, China is throwing tens of billions
of yuan into so-called coal-to-liquid (CTL)
projects, which permit the conversion of coal into
a liquid fuel that can substitute for crude-oil
derivatives in many applications. If successful,
this move has the potential to shake up the
current energy markets greatly at home and abroad.
Analysts see China's investment in CTL
projects as a big gamble. If successful, the
projects could reap staggering profits, provided
crude-oil prices remain at today's levels or
higher (about US$70
per
barrel) and coal prices remain low. However, if
oil prices drop below $30, they will suffer
losses.
Moreover, mass production of CTL
fuel, on the assumption that China has really
mastered the required know-how, may bring down oil
prices but push up coal prices by boosting demand
for coal.
For the purpose of scientific
research, China began to study CTL in the 1980s,
led by the Chinese Academy of Sciences' Institute
of Coal Chemistry, which is based in Taiyuan,
provincial capital of Shanxi - China's "coal
capital".
As demand for oil increased,
China began importing it in 1992. The next year,
China became a net importer of refined oil
products, and in 1996 China became a net importer
of crude oil.
Alerted by these changes,
the government began to pay attention to CTL
research and development (R&D). In 1998, the
State Council, China's cabinet, allocated an 11
billion yuan CTL R&D fund to state-owned China
Shenhua Group, the country's largest coal
producer.
With its fast economic
development, China has become increasingly
dependent on imported oil. According to statistics
from the General Administration of Customs (GAC),
China imported 130 million tons of crude oil,
accounting for 43% of its total consumption.
With the boom of automobile ownership, the
expansion of civil aviation and growth of the
petrochemical industry, China's imports of oil are
expected to soar to 160 million tons by 2010, if
it cannot somehow boost domestic supplies. But
China's expanding demand for oil has helped push
up international oil prices, which in turn has
made CTL projects look more feasible economically.
According to Zhang Yuzuo, vice general
manager of Shenhua Group, if crude-oil prices
remain at $22 or higher, its projects can break
even, given the current spot prices for coal of
between 80 and 100 yuan (about $10-$12.50) per
ton. Inspired by the soaring oil prices,
therefore, Shenhua Group began to build a
large-scale CTL plant in Inner Mongolia's
E'erduosi in August 2004. Construction of Phase 1
of the project is expected to be completed by the
end of next year. Phase 1, which required 10
billion yuan in investment, is designed to produce
1.08 million tons of oil products from coal
annually, said Shi Yulin, deputy director of
Shenhua's CTL Research Center.
This
facility is just a small part of Shenhua's
ambitious CTL plans. According to earlier reports,
Shenhua intends to build a number of CTL plants,
including joint ventures with South Africa's Sasol
and Shell, to produce the equivalent of 10 million
tons of crude oil by 2010, and 30 million tons by
2020. If a 1.08-million-ton CTL plant needs 10
billion yuan in investment, 30 million tons of
capacity will need 300 billion yuan in investment.
And Shenhua is not the only Chinese
enterprise that wants to build CTL plants to cash
in on rising oil prices. Nearly all the major coal
producers in China have similar plans. For
example, Yanzhou Coal Mining Co, another large
coal producer listed in Hong Kong and New York,
announced in April it plans to complete
construction of a 2-million-ton CTL plant by 2008.
Even smaller, local coal mines do not want
to miss the opportunity. So far, almost all
coal-producing provinces - Inner Mongolia, Yunnan, Heilongjiang, Shaanxi, Shanxi, Shandong, GansuGansu, Guizhou, Anhui and Henan - have their CTL
plans. One estimate says the total production
capability of CTL plants that are currently under
construction or ready to be kicked off could
exceed the equivalent of 16 million tons of crude
oil.
However, the rush to investment in
CTL projects implies potential risks. Shenzhen
Group and Yanzhou Mining claim they have mastered
the key technologies required with their own
intellectual-property rights. Other firms may have
to pay patent fees. But even Shenhua Group and
Yanzhou Mining will suffer losses when crude-oil
prices drop to below $30. Who can guarantee that
oil prices will remain as high as today for the
next 10 or 15 years?
Also, the CTL
planners have calculated that coal prices will
remain stable over the next 10-15 years. But if
coal prices go up, the cost of CTL production will
also go up. Furthermore, the feasibility of
massive CTL production assumes an abundant supply
of coal.
It is true that China has a great
deal of coal. According to a nationwide survey in
2002, China's coal reserves could be as much as
188.6 billion tons. China produced 2.19 billion
tons of coal in 2005, according to the National
Bureau of Statistics. Therefore, CTL supporters
say the reserves could support the nation for more
than 80 years.
But such forecasts are
static, and therefore questionable. China's demand
and hence its production of coal are also growing
fast, as coal remains the country's major energy
source. For instance, the 2.19-billion-ton
production in 2005 was up nearly 10% from the
previous year.
According to official data,
the total energy China consumed in 2005 was
equivalent to the burning of 2.11 billion tons of
coal (coal is so fundamental to the Chinese
economy that all other forms of energy are
calculated as "tons of coal equivalent" in
government planning). Of the total energy China
consumed last year, 68% was coal, 23.45% from oil,
3% from natural gas, and the remaining 5.55% from
hydroelectric or nuclear plants.
Since
coal is China's major energy source, the demand
for coal will continue to soar as China's demand
for energy grows. For instance, more coal-fueled
power plants are expected to enter operation in
the next few years.
So the seemingly
abundant coal reserves may not be able to supply
China for another 80 years after all. Massive CTL
production will sharply increase the demand for
coal and exhaust the country's coal reserves
sooner, as well as pushing up coal prices.
Moreover, there have been plentiful signs
that China's coal-mining capacity has been bumping
against its natural limits in recent years. The
frequent deadly coal-mining accidents - the
incident in Datong, Shanxi province, is only the
latest - are evidence that the existing facilities
are far from sufficient to sustain production
levels safely. The extra demand for coal by
massive CTL production will inevitably cost more
human lives unless a huge investment is made to
improve safety facilities, which, again, would
increase mining costs.
If China's domestic
coal production cannot meet the suddenly increased
demand by mushrooming CTL plants, it may have to
import coal despite its abundant reserves. In that
case China would push up coal prices in the world
markets, as it has done with the prices of many
other commodities in recent years.
On the
other side of the ledger, if China could manage to
produce oil substitutes massively through CTL, its
imports of oil would inevitably drop and
international oil prices would drop as well. But
when oil prices go down to a certain point, CTL
would become too non-viable and many plants might
therefore have to cease production or close down.
It is a fact that China's consumption of
energy will steadily increase. The problem with
the CTL solution lies in that it simply tries to
turn one form of fossil fuel into another. The
reserves of fossil fuel in China, as well as in
the rest of the world, are limited, and changing
one form of fossil fuel into another does nothing
to increase supply.
Therefore, a better
solution for the energy shortage China is facing
is to develop non-fossil energy sources such as
hydroelectric power, nuclear power, or the various
renewable energy technologies (windmills, solar
towers, geothermal power, etc). Vehicles can be
fueled by alcohol or hydrogen. Instead of throwing
huge funds into CTL plants, China could use the
money to do R&D on the industrial use of new
energy technologies.
Moreover, China now
is one of the world's most energy-inefficient
countries. Consequently, arduous efforts to
improve energy efficiency will also help ease
China's current oil thirst and reduce pollution.
This should be less costly than the ambitious CTL
program.
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