Business booms as international oil prices hit almost US$80 per barrel


31 August 2007

Hepeng Jia and Xiaohua Sun/ Beijing, China 

As international oil prices hit almost US$80 per barrel, China - already the world’s biggest coal producer - is developing its coal-to-chemicals businesses faster than ever before. 

Coal chemical projects flourish

Coal could supply an increasing amount of China’s chemicals


According to a UNESCO-Shell report on China’s coal chemical industry, released in late July, large coal chemical projects have been mushrooming in 19 of the 32 Chinese provinces. 

Coal chemical technologies convert coal from a solid to a gaseous form through catalysis. The gasified products can be used as fuel for electricity generation, but also as raw materials for chemical products such as ethanol, dimethyl ether (DME) and olefins.  

With a growing dependence on imported oil and the dramatic price fluctuation in the international market, China has every reason to embrace coal chemical technologies. The country produced 2.3 billion tonnes of coal in 2006 while importing 145 million tonnes of oil, accounting for 43 per cent of its total consumption. 

Zhang Yuzhuo, vice-president of China’s largest coal producer Shenhua Group and head of its coal-to-liquid (CTL) branch, predicted that by 2020, China’s annual outputs of oil from coal could reach 50 million tonnes. He estimated that as long as the international oil price is higher than US$40 per barrel, there will be reasonable profits for coal chemicals. 

’CTL is the only realistic approach to solve China’s oil shortage,’ said Han Yizhuo, a senior scientist at the Shanxi Province-based Institute of Coal Chemistry, operated by the Chinese Academy of Sciences. 

Cooler attitude  

Despite promising prospects for coal chemicals, the National Development and Reform Commission (NDRC), China’s powerful investment watchdog, has adopted a cautious approach. In July 2006, NDRC issued a circular warning against the overheated investment in coal chemicals. 

’In principle, coal chemical projects whose annual outputs are less than 3 million tonnes of oil, or 1 million tonnes of methanol or DME, or 600 000 tonnes of olefin should not be approved,’ states the circular. 

The major concern for NDRC is the overuse of water by the coal chemical projects, says Zheng Chunlin, an analyst of Shanghai-based consultants Chemsina. Producing one tonne of oil or other chemical material from coal will consume at least 10 tonnes of water, while most of China’s coal mines are located in the dry western regions. 

Cao Fengzhong, a senior policy researcher with the State Environmental Protection Administration, claims that despite the shortage of water in China’s coal producing regions, all coal chemical projects he investigated said that they expect special treatment by local governments to allot more water.  

According to Xiao Hanping, a coal industry analyst of Beijing-based Galaxy Securities, NDRC’s decision is designed to discourage rushed investments, rather than enforce an outright ban.  

’The technologies for large CTL projects are not very mature so far, and there is the risk that overinvestment could bring both financial and resource wastes,’ Xiao told Chemistry World. 

Big deal 

Nevertheless, new investment deals have been signed, including, most recently, one between Shenhua and Dow in May. With a reported 9 billion yuan (US$1.2 billion) initial investment, the Shenhua-Dow project is said to be the world’s largest coal chemical project. 

The Shanghai-based Oriental Morning Post  quoted Jim McIlvenny, president for Dow Asia Pacific, as saying that currently the project was at the feasibility study stage. The project will be submitted for NDRC approval within two years. 

Local Chinese investors are more zealous. Anhui provincial government, for example, announced in June that it plans to invest 220 billion yuan (US$29.3 billion) in coal chemicals over the next few years. 

According to a story by China Industrial and Economic News  in late July, total investments signed for coal chemicals have reached 382 billion yuan (US$50.9 billion) so far.  

’I think the blind investment impulse of local governments are the major reason leading to NDRC not approving projects meeting the thresholds it has set,’ Zheng told Chemistry World.  

An official from Shenhua’s CTL branch denied that the coal giant has been too hasty in developing coal chemical projects. 

’Our ratified project in Inner Mongolia will be put into operation in March 2008. It will soon prove the economic and environmental feasibilities of large coal chemical facilities. After that, the deals we signed with foreign and local government partners could be easily advanced,’ he told Chemistry World. 

Some fear that with so many new projects on the horizon, there may soon be a surplus of coal chemicals. In 2005, China produced 5.36 million tonnes of methanol, yet according to the NDRC, the annual output capacities of methanol plants currently under construction tops 9 million tonnes, with another 10 million tonnes planned. 

’The key to tackle the possible oversupplies of coal chemicals is to only build those large integrated projects, which could adjust projects in accordance with market demands,’ says Zheng, adding that if ethanol and DME could be used as supplemental vehicle fuels, demand would rise rapidly.