Shenhuan’s Coal-to-Oil Projects Moving as Chinese Government Nods to Sasol

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). The possibility of Sasol (JSE:SOL, NYSE:SSL) (Johannesburg, South Africa) becoming involved with the Shenhua Group (Beijing, China), China’s largest coal mining company, in coal-to-liquid projects may become a certainty as a result of the visit of China’s vice president to South Africa. The signing of a Statement of Intent (SoI) between China’s government and the fuels and chemicals company may go some way toward allaying concerns that Sasol may have had concerning the protection of its proprietary technology rights in a country which has not built a good track record for copyright enforcement.

Repeating previous comments that his company had been in talks with the Chinese for several years about establishing a ‘Sasolburg’ in China, CEO Pieter Cox said that he would be going to China by late July or early August, following the signing of the SoI.

Reports say that Sasol is studying two projects in the $3 billion range and has had ‘intensive talks’ with a group of around six Chinese companies. Shenhua continues in talks and negotiations with other international companies. Some of these contacts have foundered. Liu Guijin, China’s ambassador to South Africa, said that concrete steps on feasibility studies would follow the signing of the statement of intent. He said the plans were finally coming on track after several years of negotiations. The proposed projects would be in Ning Xia and Shan Xi provinces.

The protection of Sasol’s technological and intellectual property rights had already been agreed upon, China was a responsible member of the WTO, Liu said. He added that he saw no problem with finance for the two $3 billion projects, which would probably go through Chinese banks. The energy sector was strategic and fully supported by the government.

The Chinese vice president will be in South Africa in the first week of July accompanied by a 100-man-strong business delegation. Several agreements covering minerals, energy, agriculture, and training will be signed, Liu said.

Sasol has said that China needed to invest $500 billion to $1,000 billion on energy production expansion plans to meet its needs. As the world’s largest coal producer, China is an attractive prospect for the world’s leading coal-to-fuels company. Although coal-to-liquids production is more costly than gas-to-liquids, Sasol, with a relationship at government level on the projects, may be successful in procuring significant long-term tax breaks. Shehuan produced 70 million tons of coal in 2001.

See related March 18, 2004 Industrialinfo.com interview with Pieter Cox – Technology Driven ‘Sasol Steps Up Fuel Diversification…’ and April 5, 2004 Industrialinfo.com report – ‘Sasol Inscrutable in China as Sasol Chevron Pushes $6 billion GTL Projects in Qatar’.

The actual state of play from month to month in the past year in the Shenhua Group’s coal-to-oil saga has often been difficult to bring into firm focus. Project interest has centered on the Inner Mongolian Autonomous Region of China. At the end of March, Shell (LSE:SHL) (London, UK) signed a technology licensing agreement with the Shenhua Group for the coal-to-oil plant that is currently under construction in Inner Mongolia’s Ordos region, at Ejin Horo Banner. The plant is a scheduled to have the capacity to converting five million tons of coal into one million tons of oil products when it comes into operation in 2007.

Interfax reported that the adoption of Shell’s technology marked the formal abandonment by Shenhua in its efforts to build the world’s first commercial coal-to-oil project using direct liquefaction technology. Direct and indirect liquefaction of coal are the two technologies available, but the direct liquefaction method, so far existing only in the laboratory, breaks the large, complex components of coal into smaller compounds that form liquids with properties similar to petroleum.

In the indirect technology coal is heated to produce gas and then recombines the gas molecules into liquid fuels using chemical methods. Sasol has led the way in the commercial scale use of the indirect method.

In late 2003, Shenhua temporarily suspended the Ordos project, after the direct liquefaction method submitted for testing was found to be impracticable on an industrial scale. The company said it would ‘reorient our perspective’.

Other projects in the region have been planned and some have been put under review in Shenhua’s reorientation process. Sasol is reported to feel that a new project planning and site confirmations process will still take some time.

In 2003, China imported 100 million tons of crude oil, which represented more than 33% of domestic consumption. The coal-to-oil projects, with a joint production of 60 million tons of oil a year, are designed to reduce this dependency.