China pushes coal-to-gas power despite doubts

Beijing has acted with unusual speed to approve several coal-to-gas (CTG) projects recently. The expedited approvals indicate a shift in official thinking, with past perceptions of CTG as costly and dirty yielding to more favourable impressions prompted by low-priced coal, restricted gas supplies, and the introduction of technologies said to minimise CTG’s environmental impact.

Carbon emissions and water issues had previously placed CTG on the official backburner, as authorities were more inclined to develop CBM and shale gas projects, according to Wang Xiaokun, an analyst with Sublime China Information.

Citing the “disorderly development” of the coal chemical industry, in 2011 the National Development and Reform Commission (NDRC) banned the construction of CTG projects with production capacitybelow 2 billion cubic metres per year, while projects above 2 bcm required NDRC approval. Development of the CTG industry slowed following this.

About-face

Attitudes toward CTG began to shift as a result of gas supply shortfalls this year. China’s reliance on imported gas has been rising, with the country importing 42.5 bcm – or 28.9% of total consumption – in 2012, said Yang Lei, deputy director of the Department of Oil and Gas under the National Energy Administration (NEA). China’s dependence on imported gas exceeded 32% in the first three quarters of this year – causing concern in government circles.

Improving the national energy mix is an important component of China’s energy strategy and developing CTG is key to the diversification of gas sources. Yang conceded the environmental impact of CTG remains a problem, noting the large volumes of water consumed by the process.

The NEA, meanwhile, is drafting standards aimed at ensuring the healthy development of the industry. Demonstration projects, which allow CTG processes to be trialled and ecological impacts assessed, are among the methods being employed to monitor the sector’s progress, said Yang.

The heat is on

The about-face on CTG is also linked to an anti-air pollution policy released by State Council, China’s cabinet, in September. The policy calls for an expedited and scaled development of the CTG industry to increase the supply of synthetic gas from coal.

The NDRC, China’s powerful economic lanning body, has ordered the development of two CTG projects to meet peak winter gas demand. The NDRC is applying pressure on China Datang and Xinjiang Kingho Energy to put their CTG projects in Inner Mongolia and Xinjiang, respectively, into operation as soon as possible.

China had 60-70 CTG projects under development by the end of September, with combined production capacity of 260-270 bcm/y, according to a research note sent to clients by Tang Xiao, an analyst with GF Securities, on 8 October.

Earlier this month, a 30 bcm/y CTG project led by Sinopec in Zhundong in the Xinjiang Uyghur Autonomous Region won approval from State Council to conduct pre-phase work (see China to spend $30 billion on largest CTG project yet , 8 October 2013).

Price is right

With the coal market depressed in recent months, the CTG sector offers some cost advantages, particularly in light of the NDRC’s move to raise gas prices in July.

With the cost of producing CTG in Xinjiang at approximately RMB 1.1 ($0.18) to RMB 1.5 per cubic metre (cm), and transmission costs at RMB 1.2/cm, CTG would be RMB 0.5-1.0 cheaper than gas transmitted via the West-East Pipeline, according to GF Securities.

As a result of the NDRC’s gas pricing reform, the city-gate price of new or incremental gas orders in Beijing is expected to reach RMB 3.14/cm – a price that would ensure the profitability of output from China Datang’s CTG project in Inner Mongolia, according to a July research note by Zou Xuyuan of China Galaxy Securities Research.

Datang Power’s Keqi project in Inner Mongolia is expected to supply gas to Beijing by the end of this year, with first phase production capacity standing at 1.3 bcm/y, Zou wrote.

The renewed interest in CTG has not gone unnoticed by investors, Yan Beina, a petrochemical analyst with UBS, wrote in a note last month. The total investment channelled to CTG projects is forecast to hit RMB 400 billion from 2014 to 2019, and CTG production is projected to reach 55 bcm by 2020, Yan said. She noted CTG output will only reach 300 million cubic metres this year.

However, there is a difference of opinion regarding the economics of CTG projects. “According to our analysis, the costs [of CTG] will be high…You have to have more facilities, so the cost will be higher compared with CBM and LNG, pipeline gas and conventionals,” Li Yulong, executive director of the National Energy R&D Centre for LNG Technology said.

“CTG companies have to calculate how much profit [is available], but judging from our calculations, the margins are very slim,” he said.

Doubts remain

While industry and local governments are excited by the prospects of CTG in China, researchers and analysts are more circumspect.

Speaking at last week’s unconventional gas summit in Beijing, Li Junfeng, director of the National Centre for Climate Change Strategy and International Cooperation under the NDRC, said China should be cautious about promoting CTG projects to avoid blind expansion and strive to strike a balance between the development of CTG and other gas sources.

Furthermore, development of the CTG industry does little to ease China’s reliance on coal in its energy mix, Li said, adding the three state-owned majors’ pursuit of CTG could distract them from the more critical development of natural gas resources.

Similarly, large-scale expansion of CTG projects may result in competition with other unconventional hydrocarbons, said Li. Once CTG scaled development is settled on, it would require an enormous infrastructure commitment that could not be easily modified or undone, he said.

Li Ting, chief consultant with Ruineng Energy Consulting, said the government needs to consider the market conditions, costs, technology and environmental implications of CTG before making the vast capital expenditure needed to develop the coal chemical industry infrastructure.

The market space for the coal chemical industry, including CTG will depend on the supply of oil and gas in the future, said Li Ting. There is a high degree of uncertainty with CTG, he added, especially if unconventional gas makes a breakthrough in China.

Moreover, a boom in unconventionals would create greater competition for pipeline access, and with the network controlled by China National Petroleum Corp. (CNPC) and Sinopec, CTG producers may find themselves at the back of the queue.

A reversal in the current prices of coal, oil and gas could throw CTG plans into disarray. Present pricing dynamics, which are advantageous to CTG, may change as production of unconventional gas increases and the cost of coal mining rises, according to Li Ting.

interfax