China bets big on coal-to-oil projects

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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
[color=]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
[color=]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 -
[color=]Inner Mongolia
,
[color=]Yunnan
,
[color=]Heilongjiang
,
[color=]Shaanxi
,
[color=]Shanxi
,
[color=]Shandong
, Gansu
[color=]Gansu
,
[color=]Guizhou
,
[color=]Anhui
and
[color=]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.