High oil prices spurring rush towards coal-to-oil plants in China

High oil prices spurring rush towards coal-to-oil plants in China

Hong Kong (Platts)--23Jun2006

Continued high oil prices are spurring major Chinese coal producers to
pursue a number of coal-to-oil projects, a source from the country's Institute
of Coal, Chemistry and Gas said Friday. The ICCG is affiliated to the Chinese
Academy of Sciences.
Producing gasoil or gasoline by coal liquefaction costs around
$25-30/barrel for projects with a production capacity of over one million
mt/year, the source said, making it extremely competitive at current prices
and generating a healthy profit for coal companies.
The Chinese government's guidance prices for refined products were last
set on a wholesale basis at around $87/barrel for gasoil and at around
$86/barrel, $91/barrel and $96/barrel for 90 RON, 93 RON and 97 RON gasoline.
State-owned refiners selling their products on the domestic market have
complained that they are making a loss at these prices, given the high price
of the crude feedstock.
"As the government is expected to allow the guidance prices to be raised
further so as to level up the domestic market prices with international oil
prices, we see a larger price spread between coal-to-oil cost and the cost of
oil products from refining crude oil," the source said.
ICCG has been investing in the development of indirect coal-to-oil
technology over the past 20 years, the source said, adding that the technology
has now reached the "commercialization stage."
In order to commercialize the technology, ICCG has signed cooperation
agreements with domestic coal majors, allowing ICCG to have interests in the
coal-to-oil projects in exchange for use of its proprietary technology, the
source said.
Contracted coal majors include the state-owned Shenhua Group, the Jiangsu
Xuzhou Coal Mining Group, Inner Mongolia Yitai Group and Shan'xi Lu'an group,
and the private Lianshun Energy company based in the capital city of Beijing.
Building coal-to-oil plants is fairly capital-intensive, with a facility
that can produce 1 million mt/yr of products estimated to cost around Yuan
billion ($1.25 billion), the ICCG source said. A 3 million mt/yr plant is
estimated to cost around Yuan 24 billion.

SHELL, SASOL INVOLVED
Foreign companies are also becoming involved. Royal Dutch Shell is
involved in a project with Shenhua Ningxia Coal Mining to produce 3 million
mt/year of oil products from a coal-to-oil plant in northwest China by 2010.
South Africa's Sasol earlier this week signed a deal with a Shenhua-led
consortium to carry out a feasibility study into an 80,000 b/d plant in the
Shaanxi Province, about 650 kilometres west of Beijing.
Sasol also signed a similar agreement for another 80,000 b/d project in
the Ningxia Hui Autonomous region, about 1 000 kilometers west of Beijing,
with Shenhua Ningxia Coal.
Coal is currently used to meet some 69% of China's energy demand, with
22% coming from oil, 2.5% from natural gas and the remainder from hydro,
according to a senior government official.
The Chinese government is encouraging more efficient utilization of the
low heat value coal in order to reduce the country's dependence on imported
energy. China produces around 2.1 billion mt/yr of raw coal, according to the
state-owned Xinhua News Agency.
The ICC source said he expected China's coal-to-oil production capacity
to start reaping economies of scale in the coming 10 to 15 years, as most of
the project proposals are expected to win NDRC approvals.
More than 30 proposed coal-to-oil projects have been submitted to the
NDRC, of which only three have so far been approved, the source said.
"The NDRC tends to prefer approving other submitted proposals after the
successful launch of earlier approved large-scale projects, thus developing
the country's coal liquefaction industry in a gradual and certain path," he
added.
Two of the three approved projects include the 1 million mt/year plant in
the northern Inner Mongolia Autonomous Region, expected to go into production
in 2007, and the 3 million mt/year plant planned with Shell in northwestern
Ningxia Hui Nationality Autonomous Region, targeted to start up in 2010.
Both these plants will be operated by Shenhua Group, China's largest
state-owned coal mining company.
The other approved proposal is for a five million mt/year plant in
northwestern Shan'xi province, owned by another state-owned coal major,
Yankuang Group. The plant is expected reach its design capacity in 2013.

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