Rampant coal liquefaction ordered halted by China

Shanghai Daily
August 7, 2006

CHINA has raised the capital threshold for projects converting coal to liquid fuel in order to brake a possible overheating in the coal-chemical industry.

Excessive development of the fossil fuel pollutes the environment and strains water supply.

In addition to projects approved by the national authorities, many regions have blindly planned and built coal liquefaction projects.

National coal liquefaction standards set high standards for coal resources, water resources, ecology, environment, technology and capital - and the process drains water. Blind construction of such projects is unsustainable alongside the healthy development of the national economy, said the National Development and Reform Commission.

On July 7, the NRDC, China's industrial watchdog agency, required local governments to tighten control of new coal liquefaction projects before the national development program for the coal liquefaction industry is complete.

The government will reject coal liquefaction projects with an annual production capacity under three million tons, said the the commission's circular.

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

The world's largest producer of coal, China fuels about 70 percent of its own energy needs.

Rising oil prices have prompted the coal chemical industry to seek alternatives for petroleum in China, the world's fourth-largest economy.

The recent oil rally toward US$80 a barrel has further spurred a wave of coal liquefaction projects.

Coal liquefaction converts coal from a solid into liquid fuels, substitutes for petroleum products.

Coal liquefaction was first developed in the early part of the 20th century but 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 crises of the 1970s and the threat to conventional oil supplies sparked renewed interest in production of oil substitutes from coal during the 1980s.

However, the wide availability of inexpensive oil and natural gas supplies in the 1990s effectively ended the near-term commercial prospects of these technologies.

China is the world's second-largest energy producer and fifth-largest crude oil producer. Driven by high oil prices and fast economic growth, China reached a record high in domestic oil production and consumption in the first half of 2006.

"But China will continue to rely mainly on domestic energy supplies, and oil production will stay between 180 and 200 million tons a year for a relatively long period," said Zhang Guobao, vice minister of the NDRC.

"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 of Xiamen University in East China's Fujian Province.

However, industry officials and experts have appealed for the authorities and businesses to stay 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.

Coal liquefaction soaks up water, and China - especially its northern and northwestern regions - is short of water. Except for Yunnan and Guizhou provinces in Southwest China, most coal-rich provinces run short of water.

The profit margins of coal liquefaction projects are linked to the fluctuating international price of oil which changes every 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 senior researcher with the Energy Institute of the NDRC's Macro-Economic 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," Zhou said.

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.