BEIJING - To avert
potential risks, China has raised the capital
threshold for projects converting coal to liquid
(CTL) fuel to brake a possible overheating in the
coal-chemical industry, as excessive investment in
such projects pollutes the environment and strains
the
water supply.
In early July, the National
Development and Reform Commission (NDRC), China's
top economic-planning body and industrial
watchdog, issued a circular demanding that local
governments tighten control of new CTL projects
before the national CTL development program is
complete.
The government will not approve
coal-liquefaction projects with an annual
production capacity under 3 million tons,
according to the NDRC circular.
One ton of
coal-to-oil-processing capacity requires an
investment of 10,000 yuan (US$1,250). Thus the
3-million-ton annual capacity means an investment
of 30 billion yuan, an astronomical figure for
most enterprises, said Li Dadong, an academician
with the Chinese Academy of Engineering.
"The move aims to contain possible
overheating and ensure a healthy development of
the coal-liquefaction industry across the
country," he said.
The world's largest
coal producer, China generates about 70% of its
energy needs by burning coal.
Constantly
rising oil prices have prompted the coal-chemical
industry to try to find alternatives for petroleum
in China, the world's fourth-largest economy.
Oil-price hikes have further spurred a wave of new
CTL projects.
Coal liquefaction is a
process that converts coal from a solid state into
liquid fuels, usually to provide substitutes for
petroleum products. Coal-liquefaction processes
were first developed in the early part of the 20th
century but later application was hindered by the
relatively low price and wide availability of
crude oil and natural gas.
Large-scale
applications have existed in only a few countries,
such as Germany during World War II and South
Africa since the 1960s. The oil crises of the
1970s and the threat of depletion of conventional
oil supplies sparked a renewed interest in the
production of oil substitutes from coal during the
1980s. However, the wide availability of
inexpensive oil and natural-gas supplies in the
1990s in effect ended the near-term commercial
prospects of these technologies.
CTL fuel
technology is still in an experimental phase in
China, according to the NDRC.
China is the
world's second-largest energy producer and
fifth-largest crude-oil producer. Driven by high
oil prices and fast economic growth rates, China
reached a record high in domestic oil production
and consumption in the first half of 2006.
In the first six months, China's domestic
production of crude oil totaled 92 million tons,
up 2.1% year-on-year. Domestic production of
refined oil reached 85 million tons, up 5.6%,
according to China Petroleum and Chemical Industry
Association statistics.
In that same
period, China's net crude-oil imports reached 70
million tons, up 17.6%, and China's net import of
oil products reached 12 million tons, up 48%,
according to customs figures. Ministry of Commerce
sources said China's oil imports accounted for 47%
its total consumption in the first half of this
year. And the latest figures from the NDRC show
China imported 95.8 million tons of crude oil in
the first eight months of this year, up 15.3% from
a year ago.
"China will continue to rely
mainly on domestic energy supplies, and its oil
production will stay anywhere between 180
[million] and 200 million tons a year for a
relatively long period of time," said Zhang
Guobao, vice minister in charge of the NDRC.
The country will meet the energy challenge
through stabilizing domestic oil output, looking
for better energy alternatives and enhancing
energy efficiency, according to a plan for the
mid- and long-term development of the Chinese
energy sector.
"The coal-liquefaction
project will offer an efficient way to quench
China's thirst for oil. It is conducive to
reducing China's external dependence on crude
oil," said Professor Lin Boqiang of Xiamen
University in eastern China's Fujian province.
CTL investment rush China began
developing CTL technologies in the 1980s. The
coal-liquefaction project was given strategic
significance in the mid-1990s, as China became a
net oil importer, according to Zhang Yuzhuo,
deputy general manager of Shenhua Group, China's
biggest coal producer.
In 1999, China
launched its first CTL project at Pingdingshan in
Henan province. However,
the project, with a 500,000-ton annual capacity,
came to an untimely end because the type of coal
it used proved unfit for liquefaction.
In
2001, a high-tech research project under the
national 863 Program picked up the pace on CTL
projects.
Shenhua Group took the lead in
the process. In August 2004, it embarked on an
ambitious direct coal-liquefaction project, the
first of its kind in the world, at Ordos in Inner Mongolia.
The project is designed to have an annual
capacity of 5 million tons. Estimated to cost 24.5
billion yuan ($3 billion), the project will be
undertaken in two phases. The first phase,
designed to produce 3.2 million tons of oil
products, is scheduled for production by 2007, the
second phase by 2010, with a designed annual
production capacity of 2.8 million tons.
Other major coal producers followed suit.
Last February, a coal-liquefaction project with a
designed initial annual capacity of 160,000 tons
was kicked off by the Lu'an Group in Tunliu, Shanxi province.
Two months later, Yankuang Group initiated
a huge two-phase coal-liquefaction project at
Yulin in Shaanxi province that
will involve a total investment of 100 billion
yuan. The project is expected to yield 10 million
tons of oil products a year by 2020.
However, in addition to the three projects
that have won approval from the NDRC, many other
provinces and regions have blindly planned and
built coal-liquefaction projects in recent years.
The businesses look forward to significant
economic returns counting the high price of oil
and the current low cost of coal, despite
potentially overloading local resources and
ecosystem. The result: a headlong rush into CTL
projects.
It is reported that a total of
30 coal-liquefaction projects are under detailed
planning or at the feasibility stage. According to
conservative estimates, the total capacity would
exceed 16 million tons, and the involved
investment would surpass 120 billion yuan ($15
billion). Insiders predict that China's annual oil
output liquefied from coal will reach 50 million
tons by 2020.
Enthusiastic foreign
investors In addition to domestic coal
giants, foreign businesses with CTL know-how are
also attracted by the promising business
opportunities.
Shell Gas and Power
Developments BV and the Shenhua Ningxia Coal
Industry Co (Shenhua-Ningmei) signed an agreement
jointly to study coal-liquefaction technology on
July 11 in Yinchuan, capital of northwestern
China's Ningxia Hui autonomous
region.
Under the accord, the Anglo-Dutch
company will work with Shenhua-Ningmei on the
technological and commercial feasibility of
launching an indirect coal-liquefaction facility
with a daily production capacity of 70,000 barrels
of oil products and chemicals at the Ningdong
coal-production base.
"If the three-year
feasibility program goes smoothly, the new
coal-to-liquid fuel plant, with an investment of
$5 [billion] to $6 billion, will be one of the
largest foreign-invested projects in the country,"
said Zhang Wenjiang, chairman of Shenhua-Ningmei.
Lim Haw Kuang, executive chairman of Shell
China operations, said that as a leader in clean
coal technology, "We have proven technology that
converts coal to gas and then gas to liquids. We
believe this technology is important to China,
particularly in large coal-producing areas such as
Ningxia."
Zhang Wenjiang said: "Ningxia is
not only rich in coal but also in water and power
supply, which are all important for the successful
development of an indirect coal-liquefaction
project."
Aside from Shell, many other
enthusiastic foreign businesses have come to China
seeking opportunities with coal-to-liquid-fuel
projects.
In June, South Africa-based
Sasol, the world leader in producing fuel from
coal, joined hands with Shenhua Group to set up
two coal-to-liquids plants using Sasol's unique
Fischer-Tropsch technology in northwestern China.
The firms signed two agreements. One was
to proceed on feasibility studies of an
80,000-barrel-a-day potential CTL project in
Shaanxi province. The other is an
80,000-barrel-a-day coal-to-liquid project in
Ningxia Hui autonomous region.
"Each plant
is expected to cost more than $5 billion. They
could be brought into operation in 2012 if these
coal-to-liquid projects go ahead," said Sasol
chief executive Pat Davies.
Japan also
plans to provide China as well as other Asian
nations with the technology to liquefy coal as
part of a broader effort to reduce global
dependence on crude oil, a report in the Nihon
Keizai Shimbun financial newspaper said in June.
High risks Industry officials
have appealed for Chinese authorities and
businesses to stay cool about coal liquefaction.
"Although coal liquefaction promises to
help ease China's oil shortage, huge potential
risks are involved in its mass production," said
Professor Lin Boqiang of Xiamen University.
Besides, unchecked growth of the sector
would damage China's already deteriorating
environment, analysts say.
Coal
liquefaction requires high standards for coal
resources, water resources, ecology, environment,
technology and capital. Blind construction of such
projects is unsustainable alongside the healthy
development of the national economy, according to
the NDRC.
Coal liquefaction soaks up
water, and China - especially its northern and
northwestern regions - is short of water. To
develop coal liquefaction would intensify such
inadequacy. Except for Yunnan and Guizhou provinces in the
southwest, most coal-rich provinces run short of
water.
In addition to its massive water
needs, coal liquefaction discharges waste gas,
waste water and industrial effluent, creating
significant environmental risks.
The
profit margins of coal-liquefaction projects are
closely linked to the fluctuating international
price of oil, which changes year to year. A
coal-liquefaction project takes three to five
years to build and operate.
"CTL
technology will be economical if the crude-oil
price is higher than $25 per barrel. In this
sense, it will not face any risk in the near
term," said Zhou Fengqi, a researcher with the
Energy Institute of the NDRC's Academy of
Macroeconomic Research. "But it is hard to tell
whether coal-liquefaction projects will certainly
generate profits. If the international oil price
plummets in the future, the nation will suffer a
lot."
Other industry experts worry that
China's coal resources are not so rich: verified
exploitable coal reserves were 188.6 billion tons
at the end of 2002, but the average
resource-recovery rate was only 30%. Calculated at
an annual coal output of 1.9 billion tons, the
reserves would last only 30 years.
"In
fact, investment in coal liquefaction incurs a
high risk when the industry is still in its
infancy. Coal liquefaction should spread only
after the success of trial efforts," said
Professor Lin Boqiang.
The NDRC concludes
that in the five-year period from 2006 to 2010, or
the 11th Five-Year Development Program period for
China, the coal-liquefaction industry should be
developed smoothly and steadily.
Wu
Qi is a writer for China Features, the sole
English-language news service in mainland China
offering bylined feature stories, news analyses
and opinion pieces about China.
(Copyright 2006 China
Features. Published with permission.)
