China's first coal liquefaction project is expected to begin operating in 2007, with an initial annual oil output topping 1 million tons.

Shenhua Group embarked on an ambitious project last year in Erdos, a city in north China's Inner Mongolia Autonomous Region.

By transforming coal into refined oil after a series of processes in an environment of high pressure and temperature, the Shenhua coal liquefaction project will offer an efficient way to quench China's thirst for energy.

"The project consists of two phases of construction, and after the second is complete the plant aims to yield 5 million tons of oil products annually and greatly reduce China's reliance on crude oil imports," Zhang Yuzhuo, vice-president of Shenhua Group Corp Limited, told China Daily.

It is estimated that by 2013, 10 percent of oil imports will have been replaced by coal-liquefied oil.

The coal liquefaction technique has drawn increasing attention recently due to skyrocketing international oil prices.

Crude oil hit US$55.57 a barrel last October, a 21-year high. By December 1, the price had dropped to US$49.5 per barrel, but still represented an increase of 80 percent on a yearly basis.

"The fluctuating international oil market has a negative impact on China's robust economy, thus making coal liquefaction even more important in terms of energy safety and China's sustainable development," Zhang said.

According to Zhou Dadi, director of the Energy Research Institute under the National Development and Reform Commission, China would have to pay another 58.1 to 66.4 billion yuan (US$7 to 8 billion) if the price of crude oil on the international market climbed by 83 yuan (US$10) per barrel.

Statistics indicated that China's consumption of oil in 2003 topped 252 million tons, with net imports making up 91.1 million tons. And China's reliance on oil imports is expected to hit 60 percent by 2020.

"Coal is a reliable substitute for oil in the future as China boasts abundant coal reserves," said Zhang Yuzhuo. "And coal liquefaction will help provide China with enough oil products."

A report released from the Ministry of Land and Resources states that China's coal reserves that can be directly utilized reached 188.6 billion tons by the end of 2002.

However, this coal-to-oil technique has faced critics in the past over whether its price is competitive.

Some scholars doubted that coal liquefaction could turn a profit after the market price of coal climbed to over 500 yuan (US$60.2) per ton.

In the feasibility report of the Yunnan Xianfeng coal liquefaction project, the cost of coal as raw material is calculated at 81.9 yuan (US$9.8) per ton. And most enterprises use 90 yuan (US$10.8) per ton as the benchmark when launching such projects.

"The surging price of coal, to a large extent, resulted from the growing fees in transportation and circulation," said Zhang. "The mine-mouth price remains almost the same compared with several years ago, and our mining costs saw no rise."

As the raw materials for the Shenhua project come directly from the Shenhua coal mine, the rising costs of transportation and circulation will bear no influence on the company's coal liquefaction project.

Moreover, international indicators show that if the cost of liquefied-coal oil ranges from US$22 to US$28, the process is still profitable.

Du Minghua, a researcher from the China Coal Research Institute, shares the same viewpoint.

"Presently, it costs around US$25 per barrel to produce one ton of coal-liquefied oil with three to five tons of coal used in the production, which is quite low compared with the price of crude oil on the international market."

"We can further reduce the coal liquefaction cost by adopting domestic equipment, optimizing techniques and reducing energy consumption," Zhang added.

Currently, about 60 percent of the equipment involved in the first phase of the plant's construction is domestically made. And the figure is expected to rise to 80 percent when the second phase begins.

Although coal liquefaction promises to help alleviate China's oil shortage, huge potential risks are involved in its large-scale production which prevent the launching of similar projects.

"We are striving to reduce the risks by co-operating with world leaders in equipment supply and project contracts," Zhang said. "It took us four years to optimize the Shenhua coal liquefaction technique."

In December, Shenhua signed a contract valued at 54.8 million yuan (US$6.6 million) with Honeywell International, a world leader in the high-tech industry, to introduce Honeywell equipment to the coal liquefaction project.

Shenhua is also working on a series of coal transformation projects.

Shenhua recently signed letters of intention with Kerry Group and The Dow Chemical Company on coal-to-olefins and coal-to-polyolefin projects.

An insider who declined to be named said that the National Reform and Development Commission is thinking about making coal liquefaction one of China's 10 key construction projects this year.

(China Daily January 24, 2005)