China looks at $24bn coal-to-oil plan as Beijing bets on oil price staying high

By Richard McGregor
Published: September 27 2005 03:00 | Last updated: September 27 2005 03:00

China is gearing up for a massive investment in a homegrown fuel source to cut its growing reliance on imports - plants to turn coal into gas and oil.


High oil and gas prices have made the coal-to-liquids (CTL) technology increasingly attractive to China, which has abundant reserves of the traditional "black gold", but relatively diminishing reserves of other fuels.

China's central planners have on their desks proposals for at least $24bn (€20bn, £13.6bn) worth of large-scale coal-to-liquids projects, with a number of pilot plants already under construction in Inner Mongolia and other coal-rich provinces.

"If all of these projects went ahead, it would be the equivalent of replacing one million barrels of oil a day," said Jim Brock, a Beijing- based energy consultant. China now consumes about 7m barrels of oil a day.

The technology to turn coal into gas and oil was invented in the 1920s by the Germans, who used it to power their military during the second world war. More recently, it was refined by South Africa in the 1980s under apartheid-era sanctions.

China has long used coal-to-liquids technology on a local level, with 8,000-9,000 crude gasifiers deployed to make everything from fertiliser to chemicals in areas that have long struggled to obtain or afford oil and gas.

Building large CTL plants is a different proposition - effectively, a big bet that oil will remain above $35-$40 a barrel, something many officials and industry executives think is getting less risky by the day.

"We believe they are on the verge of approving some major projects," said Richard Whiting, an executive vice-president of St Louis-based Peabody, the world's largest coal company, which has just opened a Beijing office.

State-owned Shenhua, China's largest coal company, has already announced plans to transform itself from a mere miner into a producer of power, oil, chemicals and methanol.

"Coal will be the best substitute for oil and gas in the future," said Ren Xiangkun, the Shenhua executive in charge of CTL, in a recent speech.

Mr Ren says that by 2020, Shenhua plans an output of 30m tonnes a year of coal liquefied oil products and coal chemical products. China's crude oil output is 180m tonnes a year.

Sasol, the South African company that produces most of that country's diesel fuel using coal, has feasibility studies under way with local partners for two plants, in Ningxia and Shaanxi, to produce 80,000 barrels each a day.

The company believes the success of CTL in China could be underwritten by government support, especially in coal-rich regions trying to use fuel production to stimulate growth.

Johann Van Rheede, a Sasol spokesman, said China was well positioned to develop a CTL industry "particularly because it is a centrally planned economy".

He said it was possible that both the Ningxia autonomous region and Shaanxi province in the central west of China could offer incentives for CTL projects to stimulate industrial growth.

But Sasol has a number of hurdles to pass before any plants are built - namely, its desire to have up to 50 per cent equity in any projects, rather than just providing its precious technical know-how. Shell, the Anglo-Dutch oil and gas group, is also studying using its technology to convert coal to synthetic gas, and then gas to liquids, in a project with Shenhua and Ningxia Coal in western China.

As well as tapping into foreign expertise, Chinese companies and research labs are developing their own CTL applications.

The Yankuang Group, which owns the overseas-listed Yanzhou Coal, has just launched a coal gasification plant to produce acetic acid and other liquids in Shandong province.

"It is not only much cheaper than imported equipment, but is running more efficiently than foreign-made facilities on some key parameters," said Jia Peng, a spokesman for the company.

The philosophy underlying the central government's approach to CTL mirrors that in other industries that the government deems strategic - to maximise self-reliance. Despite its growing oil import bill, and all the headlines that have accompanied it, China remains an energy-rich country, especially compared with Asia's other major economies, Japan and South Korea.

Japan and South Korea import more than 95 per cent of their energy needs. China by contrast relies on imports for 6 per cent of its energy, according to the official government estimate, or 13 per cent, by Mr Brock's calculation.

The government's desire to maintain that self-reliance is boosting the case to maximise use of local coal, which is expected to provide about 60 per cent of China's energy needs by 2020 in any case, and the need specifically for CTL plants.

China now relies on domestic coal for 77 per cent of its power needs and by 2030 it will still be about 60 to 70 per cent.

The recent backlash in Washington against the bid by CNOOC, a state-owned oil major, for Unocal, a US energy company, stung China's central government and has only reinforced its belief in self-reliance.

Joe Zhang, an analyst with UBS in Hong Kong, who has long been sceptical about the viability of, and the political will behind, a large CTL programme, says that persistent high oil prices have changed his mind.

"I think the government has probably run out of options to do anything but get serious about this," he said.