Yanzhou began work on a 1 million-tonne indirect CTL plant in February 2006 in Yulin City, Shaanxi Province. It has conducted environmental reviews and is awaiting approval from the National Development and Reform Commission, China's top planning agency. The Yanzhou project would have two stages, each with annual output of 5 million tonnes, the group said.

Also, about 10 provinces or autonomous regions, including Xinjiang, Shandong, Shaanxi, Guizhou and Ningxia, are planning CTL projects.

Taking all these plans into account, industry analysts estimate China will have an annual CTL capacity of 30 million tonnes to 50 million tonnes in 2020.

WORLD CONDITIONS CHANGE

However, oil prices are far off their mid-2008 highs, hovering at about 50 U.S. dollars per barrel now, and lower prices can change the economic environment of these capital-intensive projects.

To reduce the risk of having excessive, uneconomic capacity, the NDRC announced policies as early as 2006, banning projects with annual output below 3 million tonnes. In September 2008, the NDRC followed up with a circular, ordering a halt to almost all projects except for the Shenhua Group's direct CTL project and an indirect CTL plant proposed in northwest China's Ningxia.

The directive, combined with the impact of the global financial crisis, cooled enthusiasm for many CTL projects in China. However, Yitai Group and Lu'an managed to keep their projects on the list.

NEW ECONOMIC REALITIES

According to Li Yongwang, it takes 3.5 tonnes of coal to produce 1 tonne of oil under the direct process and 4.02 tonnes under the indirect process, at least in the pilot projects.

However, it's not just oil prices that have changed. Domestic coal prices have doubled since some of the pilot programs got under way, meaning that CTL project costs have also surged. Li said the higher coal price would make it tough for many CTL projects to be profitable.

Based on current coal prices, the costs of an indirect CTL plant would be about 50 U.S. dollars per barrel. Larger production scales and better technology could, in time, help reduce the volume of coal needed. In that case, the cost might fall closer to 40 U.S. dollars per barrel, said Li.

DOWNTURN WON'T LAST

Zhao said he still believed in the future of the CTL industry.

"It is widely acknowledged that oil prices will rise again in the long term, because oil is a strategic resource," said Zhao.

He added: "Chinese companies building coal-to-oil projects are strong, with large coal reserves, and they can be competitive. If they can increase their economies of scale and extend their production chains to produce higher value-added products such as ethylene, the coal-to-oil projects have a good chance to be profitable."

(Xinhua News Agency April 6, 2009)