You may need to read the following sentence twice. China’s coal production now provides more energy to the global economy than oil from the Middle East.
That statistic – published earlier this week by the International Energy Agency – puts in context just how much coal China is using. Even at its current rate of consumption, the country has about 50 years worth of reserves; and it continues to find new seams. Paradoxically, its oil reserves are dwindling: so much so that by 2020 China is forecast to need 450 million tonnes of crude per year, of which 250 million tonnes will have to be imported.
When you see numbers like these, it should come as no surprise that China has thrown its weight behind coal-to-oil conversion technologies. Indeed, when the oil price was hovering around $150 a barrel – with some analysts even predicting it would breach $200 – the Chinese coal-to-oil dream seemed the closest thing to modern day alchemy.
The technology itself, however, is not new. It was pioneered in Germany in 1913 and during the Second World War became a vital part of the Nazi war machine. Wartime Japan likewise constructed a facility in occupied Manchuria. And apartheid-regime South Africa became the leading user in the post-war era.
More recently, the US and Europe began experimenting with second and third generation processes, which were designed to make it cheaper to convert a tonne of coal into a barrel of crude.
Until quite recently, however, the technology held little attraction for China. When ‘Iron Man’ Wang first discovered China’s giant Daqing oil field it seemed like the country would have cheap, plentiful oil for a long time.
All that changed this decade, when China became a net importer of oil, and started to worry more about the commodity’s international spot price. As that increased, so did the interest in coal-to-oil transformation, especially given the country’s huge coal reserves..
Approval was granted for the construction of a series of plants. Shenhua Group – the country’s biggest coal firm – is building two megatonnes worth of production facilities. Luan Mining Group forecasts its own facilities will generate 15 million tonnes of oil by 2020. Experts estimate the current roster of projects could produce 30-50 million tonnes of oil by 2020.
But stop! In recent weeks the authorities have suddenly become a little more skittish about approving new projects. There is even talk about suspending projects underway. Why? Well, with the oil price having collapsed to around $50 a barrel, the economics no longer stack up. That’s because it currently costs over $50 a barrel to convert coal to oil. It is therefore a money-losing exercise.
However, the debate between the industry’s proponents and its naysayers continues to rage. The critics see a white elephant in the making: a hugely capital-intensive industry in need of subsidies. But supporters make the valid point that when the global economy recovers the price of oil is bound to rise, and coal-to-oil will become viable again. Analysts tend to agree that oil will gravitate back to $75-80 a barrel in a normalised global economy.
Moreover, Li Yongwang, chief scientist with Synfuels China – which makes the country’s coal-to-oil technology – reckons that with economies of scale, catalyst upgrading and the application of coal-grading liquefaction – the production cost can be reduced by 20% to $40 a barrel.
If Li is right, the balance of arguments may sway in favour of the coal-to-oil industry. Indeed, in a world of uncertain oil supplies, it could even be classified as a ‘strategic industry’.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.