Energy Scheme Finds New Fuel

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Last updated at: (Beijing Time) Tuesday, June 11, 2002

Energy Scheme Finds New Fuel

China is planning to kick off a mega coal-to-oil project late this year in a move to safeguard its energy supplies and curb growing reliance on imported oil.

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China is planning to kick off a mega coal-to-oil project late this year in a move to safeguard its energy supplies and curb growing reliance on imported oil.

The project is believed to be a vital component of China's energy strategy, as the country in the past heavily relied on domestic supply but has been forced to turn to overseas markets in recent years due in part to the rapid growth of its economy.

With a total investment of over US$2 billion, the giant project, launched by the Beijing-based Shenhua Group, one of the country's titan State-owned energy groups, is to supply an annual total of 5 million tons of oil products, including diesel, gasoline and naphtha, to the domestic market by 2005.

The country's annual oil imports now stand at 70 million tons a year.

It will be the largest project of its kind to be put into practice worldwide. The technology has been available since World War II, but there have been fears that the project would not be profitable.

"The project should not be judged from one single standard - whether it is economical or not. It should be judged in the context of the overall national energy strategy," said Xu Yaowu, a manager with the Shenhua project.

While the process of turning coal into oil is technologically complex, the idea is basic: adding hydrogen to coal to achieve the transformation, said Fang Dewei, a senior expert adviser of the State Clean Coal Technology Planning Commission.

The project, whose preliminary developing report has already been reviewed and given the go-ahead by the State Council, China's Cabinet, is now being studied by the State Development Planning Commission (SDPC), the government's ministrial-level arm responsible for the decision-making of macro-investment.

"We have already received the feasibility study report from Shenhua," said a senior official with SDPC's infrastructure sectors department.

The official told Business Weekly that top officials with the SDPC, including Wang Chunzheng, vice-minister of the commission, have already reviewed the report, leaving only a number of detailed issues unresolved.

Given the fact that China's economic growth requires a stable supply of energy, the pioneering project is of strategic importance to China's future energy consumption, he said, as it could offer another replaceable source that could partly offset China's oil shortage.

But he declined to give the exact timing for the final green light for the landmark project, saying several issues still need to be reviewed, such as cost and overall construction period.

"It is hard for me to say when the project could get the go-ahead as I'm not in that high position," the official said.

Shenhua, one of the country's energy conglomerates under the direct control of the central government, seems to be more optimistic.

"Following a time-consuming preparation of four to five years, there could be a result next month," said Xu during a telephone interview last week with Business Weekly.

Xu said he is now busy with the preparatory work for the launch of the giant project, which will be located near Shenhua's large coal field in the Inner Mongolia Autonomous Region and Shaanxi Province.

Shenhua recently established three new departments and divisions to supervise the overall management of the new project, Xu said.

While the project, if implemented successfully, will be of strategic importance to the country, it is also believed to be vital for Shenhua, which is suffering from a drop in profits due to price wars in recent years resulting from over-supply in the coal market and competition from smaller private coal developers.

"The project could be one of the pillar energy supply programmes for the country's oil energy reserves," said Xu.

"If the project proves economical enough, it would be expanded to many other projects," said Wei.

"And the project could be a new model for others."

But the final decision will depend on the country's energy security strategy, the making of which involves higher level decision-making bodies who will eventually decide how big the project should be expanded, the official said.

Under Shenhua's plan, the development of the whole project will be introduced phase by phase, with production capacity reaching 5 million tons of products in three to four years.

The Phase One project will allow the company to develop an annual capacity of 2.5 million tons.

China seems to be stuck between a rock and a hard place: Demand for energy is rising and the country is abundant with coal reserves, but because of pollution concerns and other worries, the country must seek out other energy sources.

Mounting fears about stable energy supplies have led the nation to develop its own national energy security reserves and expand its energy structure, experts said.

Given the widely accepted forecast for 7-8 per cent economic growth in the next decade, China's energy needs undoubtedly will increase by a large margin.

The State Economic and Trade Commission, another senior ministry-level organ responsible for making decisions concerning China's industrial growth, said China's oil demand will surge at an annual rate of 4 per cent for the next 15 years, and demand could top 245 million tons by 2005, compared with 200 million tons in 2000.

But domestic oil output will only increase by 2 per cent each year, which means the country will have to look to other alternatives to satisfy its needs.

Developed nations, given their expertise and capabilities, would seem better candidates for leading the coal-to-oil project, but they have expressed little interest.

Fang said that apart from technological barriers, one of the major reasons why Western countries have not been keen to develop coal-to-oil technology is because their energy structures are more diversified and oil-saving technologies have taken off in those countries.

But the situation in China is different.

China holds one-third of the world's coal reserves, which supplies around 70 per cent of its basic energy needs. But the country's oil reserves are on the decline, with domestic output at top fields dwindling and development of frontier basins not economically feasible right now.

China consumes 4.9 million barrels of oil per day (bpd) and imports one-fourth of this. Over half of its imports come from the Middle East, and the number will increase rapidly in the coming decade.

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