Shenhua's Research Breakthrough Spurs Pace of Coal to Liquid Projects in China

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). In March 2004, the state-owned Shenhua Group (Beijing), Shanghai Huayan Group, and Shanghai Electric have invested $12 million in China's first coal liquefaction research center. Shenhua and other major Chinese coal and fuel resource groups had been setting up coal liquefaction bases in association with foreign oil and technology companies for some years prior to this, against the backdrop of the country's oil import bill. In 2003, China consumed 252 million tons of oil, with 91.1 million tons (36%) of that total being imported. In 2004, China imported 122.72 tons of crude oil. The percentage of imported oil is estimated to hit 60% by 2020.

In January 2005, Shenhua, China's largest coal company, announced a breakthrough with its coal liquefaction technology that will accelerate the progress of coal liquefaction projects on a large commercial scale.

Based on ongoing cooperation with South Africa's Sasol (NYSE:SSL ) (Johannesburg, South Africa), which has been developing liquefaction processes for over 40 years, Shenhua reports that it is using a direct hydrogenation process. After months of build-up testing, the Shanghai research and development center produced oil in mid-December 2004.

Reports say that news of the success has brought a rush of promises for $15 billion of investments in coal liquefaction projects, and Shenhua has made a massive upward revision of its planned coal-to-oil project, from ten million tons to 30 plus million tons by 2020. It is planning to move forward with project designs, installations, and construction in 2005 in Ordos city, in Inner Mongolia, the base for the hydrogenation project. In 2003, Ordos became the largest coal producer in China and exceeded production in Datong in Shanxi Province by 20 million tons.

According to the company's program The Ordos project will set up the liquefaction line in 2007 and consume 9.7 million tons of coal to produce 3.2 million tons of oil. This capacity will increase to five million tons in 2010, fifteen million in 2015, and 20 to 30 million tons through 2020.

In 2004, the $1 billion technology transfer charge, which it was reported that Sasol was proposing to make to Shenhua, was described as a 'deterrent' to fulfilling the proposed cooperation between the companies. Both companies are playing the exact form of their cooperation close to the chest, with the Chinese looking for long-term leverage and Sasol concerned about ongoing protection of its intellectual property rights in the technology of the process. For related news item see June 28, 2004 - Shenhuan's Coal-to-Oil Projects Moving as Chinese Government Nods to Sasol. There is a possibility of a merger of the interests of Shenhua and the Ningxia coal company in the Yulin project in Shanxi province. Sasol could take the opportunity to invest directly in the project.

Sources also report that Qinhe Energy Company in Jincheng Province is negotiating a multi-million dollar coal-to-oil project with China Petrochemical and Sasol, with an initial intake of four million tons of coal. The project of the Yanzhiou Mining group, the largest coal company in Shangdong, is on schedule and other coal companies in the province are planning to initiate coal-to-oil projects. In other regions, such as Anhui, Heilongjiang, Henan, and Xibnjiang, a range of coal-to-oil projects are underway.

Shenhua also has major project plans in Shanxi province, where it plans to build a 'mammoth group enterprise' between the major coalfields of Shuoahou and Datong, with a large coal-to-oil base near the 'coal capital' Datong.

With other international majors, in addition to Sasol, establishing liquefaction bases for the proprietary technologies, the overall picture in the sector is aptly fluid with a touch of Chinese walls and whispers obscuring the detail. But the fact that coal-to-oil projects are now lifting beyond the take-off stage is a certainty. With the pressures for more and more energy and power in the Chinese market long term plans tend to become medium term and medium term plans are fast tracked to immediate implementation, despite hand-wringing at the headlong pace of expansion and government attempts to cool down the pace. Potential investors may also be encouraged by remarks from top Chinese government officials at the Davos financial summit in late January 2004, that China needs foreign investment as badly as global trade needs the Chinese market to maintain its growth.

To seal the prospects of 2005 as the year for Chinese coal-to-oil projects blossom, it is reported that the powerful National Reform and Development Commission is considering making coal liquefaction one of China's ten key construction projects.

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