China has raised the capital threshold for projects converting coal to liquid fuel to prevent a possible overheating of the coal-chemical industry, as the excessive development of fossil fuels pollutes the environment and strains water supplies.

 

On July 7, the National Development and Reform Commission (NDRC), China's top economic policy-making body, issued a circular requiring local governments to tighten controls over new coal liquefaction projects before the completion of the national development program for the coal liquefaction industry.

 

The government will not approve coal liquefaction projects with an annual production capacity under three million tons, said the NDRC circular.

 

One ton of coal-to-oil processing capacity needs an investment of 10,000 yuan (US$1,250). Therefore, an annual capacity of three million tons requires an investment of 30 billion yuan (US$3.75 billion), an astronomical figure for most enterprises, said Li Dadong, an academic from the Chinese Academy of Engineering.

 

Constantly rising international oil prices have prompted the coal chemical industry to try to find alternatives to petroleum in China. Oil's recent rally towards US$80 a barrel has spurred a further wave of coal liquefaction 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 20th century, but its 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 crisis of the 1970s and the threatened depletion of conventional oil supplies sparked a renewed interest in the production of oil substitutes from coal in the 1980s. However, the wide availability of inexpensive oil and natural gas supplies in the 1990s effectively ended the short-term commercial prospects of these technologies.

 

Coal-to-liquid fuel technology remains in its infancy in China, according to the NDRC.

 

China is the world's second-largest energy producer and fifth-largest producer of crude oil. 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 of 2006, China's domestic production of crude oil totaled 92 million tons, up 2.1 percent year-on-year. Domestic production of processed oil reached 85 million tons, up 5.6 percent, according to statistics from the China Petroleum and Chemical Industry Association.

 

Over the same period, China's net crude oil imports reached 70 million tons, up 17.6 percent, and China's net import of processed oil reached 12 million tons, up 48 percent, according to customs figures.

 

China imported 47 percent of its total oil consumption in the first half of this year, sources from the Minister of Commerce said.

 

"China will continue to rely mainly on domestic energy supplies and its annual oil production will stay anywhere between 180 and 200 million tons for a relatively long period of time," said NDRC Vice-Minister Zhang Guobao.

 

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 medium- and long-term development of China's energy sector.

 

"The coal liquefaction project will offer an efficient way to quench China's thirst for energy. It is conducive to reducing China's external dependence on crude oil," said Professor Lin Boqiang from Xiamen University in East China's Fujian Province.

 

China began developing coal-to-liquid fuel technologies in the 1980s. The coal liquefaction project was given strategic significance in the mid-1990s, after China became a net oil importer in 1993, said Zhang Yuzhuo, deputy general manager of Shenhua Group, China's biggest coal producer.

 

In 1999, China launched its first coal-to-liquid project in Pingdingshan, Central China's Henan Province. However, the project, with an annual capacity of 500,000 tons, came to an untimely end, because the type of coal proved unfit for liquefaction.

 

In 2001, a high-tech research project, the 863 Program, picked up the pace on coal-to-liquid fuel 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, in Ordos, northern China's Inner Mongolia Autonomous Region.

 

The project is designed to have an annual capacity of five million tons. Estimated to cost 24.5 billion yuan (US$3 billion), it will be undertaken in two phases. The first, designed to produce 3.2 million tons of oil products, is scheduled for production by 2007. The second phase is scheduled for production by 2010, with a designed annual production capacity of 2.8 million tons.

 

Other major coal producers have followed suit. In February 2006, a coal liquefaction project with a designed initial annual capacity of 160,000 tons was launched by Lu'an Group in Tunliu, Shanxi Province.

 

Two months later, Yankuang Group initiated a huge two-phase coal liquefaction project in Yulin, Northwest China's Shaanxi Province, which will involve a total investment of 100 billion yuan (US$12.5 million). The project is expected to reach an annual output of 10 million tons of oil products by 2020.

 

However, in addition to the three projects that have won the NDRC's approval, 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 on the high oil price and the current low cost of coal, despite the impact on local resources and the ecosystem. The result a headlong rush to launch coal-to-oil projects across the country.

 

It is reported that a total of 30 coal liquefaction projects across the country are either at the stage of detailed planning or feasibility studies. According to conservative estimates, the total capacity would exceed 16 million tons, and the total investment would exceed 120 billion yuan (US$15 billion). Insiders predict that China's annual oil output liquefied from coal will reach 50 million tons by 2020.

 

In addition to domestic coal giants, foreign businesses with coal-to-oil know-how are also attracted by the promising business opportunities.

 

On July 11, Shell Gas and Power Developments BV and the Shenhua Ningxia Coal Industry Co (Shenhua-Ningmei) signed an agreement on joint study of coal liquefaction technology in Yinchuan, the capital of Northwest China's Ningxia Hui Autonomous Region.

 

Under the deal, 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 mining centre.

 

"Ningxia is not only rich in coal but in water and power supply, which are all important for the successful development of an indirect coal liquefaction project," said Zhang Wenjiang, chairman of Shenhua-Ningmei.

 

Apart from Shell, many other foreign businesses have come to China seeking opportunities from coal-to-liquid fuel projects.

 

In June 2006, South Africa-based Sasol, the world leader in producing fuel from coal, joined forces with Shenhua Group to establish two coal liquefaction plants in Northwest China.

 

Chinese industry officials have appealed to authorities and business to keep 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 from Xiamen University.

 

In addition, the unchecked growth of the sector would damage China's already deteriorating environment, analysts said.

 

Coal liquefaction consumes large amounts of water, and China especially its northern and northwestern regions is short of this resource. Developing coal liquefaction would greatly exacerbate such shortages. Apart from Yunnan and Guizhou provinces in Southwest China, most coal-rich provinces are short of water.

 

In addition to its need for massive quantities of water, 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 from year to year. A coal liquefaction project takes three to five years to build and operate.

 

"Coal-for-oil technology will be economic if the crude oil price is higher than US$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 Macroeconomic Research Institute.

 

"But it is hard to tell whether coal liquefaction projects will certainly profit. If the international oil price plummets in the future, the nation will suffer a lot," said Zhou.

 

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 percent. 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 remains in its infancy. Coal liquefaction should spread only after the success of trial efforts," said Professor Lin Boqiang.

 

The NDRC concluded that during the period of the 11th Five-Year Plan (2006-10), the coal liquefaction industry should be developed smoothly and steadily.

 

(China Daily August 10, 2006)