High oil prices and low coal costs have spurred an investment
spree in coal liquefaction projects in China in recent years. Coal
liquefaction is a process converting coal from a solid state into
liquid fuels, usually to provide substitutes for petroleum
products.
China Securities Journal carried some experts' opinions
on this profitable but risky sector on November 7, 2006.
Starting from 2002, global oil prices witnessed another hike,
hitting a record high of US$77.03 per barrel in the middle of July.
Although the price has begun to tumble of late, it still remains at
a high level of US$58 per barrel.
In comparison, coal prices are quite low in China. According to
China's largest coal company Shenhua Group, the coal used for
coal-to-oil projects costs only 100 to 150 yuan per ton. Even
factoring other costs, coal liquefaction projects are still quite
profitable.
Coal-to-oil technology is also hailed by many experts as a way
to cut China's dependence on oil imports by taking advantage of
China's abundant coal resources.
Crude oil import from the Middle East requires long-distance sea
transport and has to pass the narrow Strait of Malacca. Some
experts are worried that China's oil security will be threatened in
case of a sudden change in the international political scenario.
Therefore, they think, it is necessary to develop coal
liquefaction.
China has recoverable coal reserves of 200 billion tons, which
are able to satisfy coal demand for a century based on the current
consumption level of 2.2 billion tons a year.
However, the substitution of one kind of scarce resource for
another is foolish, according to some.
If many coal-based projects are approved, coal could run out in
under 100 years, experts warn.?
"All countries have taken coal liquefaction as a technology
reserve. I'm not against having such technology and developing it
to a certain scale," said Zhou Dadi, director of the National
Development and Reform Commission's Energy Research Institute.
However, he continued, “Substituting oil with coal resources and
further commercialization is unpractical,” explaining that although
China has vast coal reserves, its per capita possession is only 60
percent of the world average.
Resources waste is also a problem in the process of coal
liquefaction, according to Lin Boqiang, director of China Energy
Research Institute at Xiamen University. According to Lin, in the
process of producing one ton of petroleum which produce 10,000
kilocalories of special heat per kilogram from 4 tons of
high-quality coal which can produce 5,000 kilocalories of special
heat per kilogram, nearly half the amount of energy is wasted.
Experts state that although many countries have taken coal
liquefaction as a technology reserve, only South Africa
industrializes the technology due to having no viable alternative.
In the 1950s, in order to get over the oil embargo, South Africa
set up the Sasol Company to produce gasoline and diesel through
coal liquefaction technology.
Huge fixed asset investment in the early stage will also involve
investment risks in coal liquefaction projects, another reason for
opposing blind acceptance of large-scale construction of coal
liquefaction projects.
Fixed asset investment for 10,000-ton coal-to-oil processing
capability amounts to 100 million yuan and 10 billion yuan for a
processing capacity of one million tons.
China's current research on coal liquefaction is still at the
pilot program stage. The largest scale so far reached stands at
10,000 tons with some projects only averaging 2,000 tons. Smaller
processing capacities will undoubtedly amplify technological
risks.
China's first coal liquefaction project, owned by Shenhua Group
and with an investment of 10 billion yuan, will start production at
the end of next year with a designed capacity of 1.08 million tons.
To guard against potential risks, Shenhua Group signed agreements
in September 2004 with four insurance companies including PICC
Property and Casualty Company Ltd. and Ping An Property and
Casualty Company to insure the huge investment project with
policies totaling 7.5 billion yuan.
With oil prices remaining stubbornly high, local governments and
enterprises are circling to get in on the action. Many domestic
coal groups are preparing coal liquefaction projects with most
submitting feasibility study reports. According to the China Coal
Research Institute, preparatory investment for related projects may
stand at a staggering 100 billion yuan.
"The current experiments aim at finding out technological
difficulties and solutions to solve them but not for enterprises to
make money. But current situation shows more an obvious commercial
motive and its risks have been sharply increased," said an official
from China Coal Industry Association.
Furthermore, if China's renminbi appreciates rapidly and
sharply, the real cost of imported crude oil will be slashed,
posing a threat to coal liquefaction profits.
Some experts say coal liquefaction development has displayed
disorder despite its fledgling status. So long as there are
development plans, coal liquefaction projects will begin. As a
result, it is difficult to calculate the total investment in the
market.
In some areas, speculation factor is playing a bigger role than
the actual needs of developing coal-chemical industry. Knowing that
the possibility of getting approval for a coal liquefaction project
is very slim, some enterprises still try to acquire coal resources
in the name of coal liquefaction project. Their actual purpose is
mining, said Du Minghua, director of the Beijing Research Institute
of Coal Chemistry under the China Coal Research Institute.
To regulate the coal-chemical industry, the National Development
and Reform Commission issued a circular in July this year,
requiring local governments to tighten controls over new coal
liquefaction projects before the completion of the national
development program for the coal liquefaction industry.
According to the circular, the government will not approve coal
liquefaction projects with an annual production capacity under 3
million tons.
(China Securities Journal, translated by Yuan Fang for
China.org.cn, November 12, 2006)