In-depth investigation into coal-to-natural gas: 70 projects to be launched swiftly; demonstration projects face difficulties in achieving profitability

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Recently, there have been more reports of coal-to-natural gas projects being approved or launched. According to reports from China Chemical Industry News, as of May 2017, there were nearly 70 coal-to-gas projects at various stages in China, with a total production capacity of over 200 billion cubic meters per year. However, at a seminar on the development of new coal chemical industries held recently in Hohhot, participants reported that the coal-to-natural gas plants currently in operation are facing unprecedented losses. On one hand, there is a push for rapid implementation, while on the other hand the demonstration units are operating at a loss; this puts coal-to-natural gas projects in an awkward position. Planning for increased production: annual capacity to exceed 200 billion cubic meters. In the second quarter of 2017, the National Development and Reform Commission and the Environmental Protection Department approved several coal-to-natural gas projects, and companies were actively submitting plans for new projects; the coal-to-natural gas industry was thus very active at that time. According to Professor Li Jilin, former deputy dean of the School of Mining at Inner Mongolia University of Science and Technology, in recent years China’s demand for natural gas has grown rapidly, resulting in a large domestic shortage, which has sparked investors’ interest in coal-to-natural gas projects. At the same time, some regions rich in coal resources have introduced industrial policies stipulating that to obtain the rights to exploit new coal mines, such projects must include coal conversion initiatives, which has indirectly contributed to a surge in coal-to-natural gas projects. Li Jilin said that, according to incomplete statistics, as of May 2017, there were nearly 70 coal-to-gas projects at various stages in China, including those that were already in operation, under construction, in the preliminary preparation phase, those for which contracts had been signed, and planned projects, with a total production capacity of over 200 billion cubic meters per year. However, judging from the progress of these projects, there is currently a trend of many plans but few actual implementations. The cumulative production capacity of coal-to-natural gas plants that are already in operation is less than 5 billion cubic meters per year, accounting for only about 2.5% of the planned capacity. However, the total capacity of projects that have been approved to start operations by 2017 amounts to 90 billion cubic meters per year. Wang Qiang, deputy director of the Inner Mongolia Longmei Science and Technology Chemical Research Institute, told reporters that among the projects approved by the National Development and Reform Commission, 3 are currently in the construction or launch phase. These are the coal-to-natural gas demonstration projects with a capacity of 4 billion cubic meters per year each, carried out by Inner Mongolia Beikong Jingtai Energy Development Co., Ltd., Liaoning Datang International Fuxin, and Xinjiang Su New Energy He Feng Co., Ltd. Demonstration facilities: Negative profitability is a significant issue. Wang Qiang told reporters that in recent years, driven by the **energy security strategy**, the National Development and Reform Commission has approved several coal-to-natural gas projects, all of which are tasked with carrying out demonstrations related to the industrial application of **innovative technologies in modern coal chemical processing as well as the development of domestic manufacturing capabilities for key equipment**. However, judging from the coal-to-gas plants that are currently in operation, the economic benefits are not optimistic, with issues such as persistently high overall costs and a pronounced problem of negative profitability. This is the case for most of the 4 coal-to-natural gas projects that are currently in operation, including the 4 billion cubic meters per year project of Datang International Keshiketeng Coal-to-Gas Co., Ltd. in Chifeng City, the 2 billion cubic meters per year project of Inner Mongolia HuiNeng Coal Chemical Co., Ltd. in Ordos City, the 5.5 billion cubic meters per year project of Xinjiang Qinghua Energy Group Co., Ltd. in Yili, and the 2 billion cubic meters per year project of Xinjiang Yili Xintian Coal Chemical Co., Ltd. Speaking of the market situation for coal-to-natural gas, Wang Qiang analyzed that the natural gas produced by China’s coal-to-natural gas companies is sold through two channels: one is via pipelines connected to the national grid ； Another method is to liquefy natural gas and transport it by vehicle for sale. The construction cost of a coal-to-natural gas project with a capacity of 4 billion cubic meters per year is approximately 20 billion yuan. If the coal price is 200 yuan per ton, electricity costs 0.6 yuan per kilowatt-hour, the catalyst costs 55 yuan per thousand cubic meters, water consumption is 6.3 tons per thousand cubic meters with a water cost of 5 yuan per ton, in addition to depreciation and other expenses, the production cost of natural gas is approximately 1.58 yuan per cubic meter. When coal-based natural gas is sold through the pipeline network, certain transportation costs, as well as value-added tax and business tax, must also be deducted. Given current market conditions, whether through pipeline transport or by transporting the gas in liquefied form by road, the market selling prices of almost all coal-derived gas are higher than the local natural gas prices at distribution stations; as a result, any potential for profitability is lost, and such gas has no competitive advantage over conventional natural gas. Meng Lingjiang, general manager of Xinjiang Qinghua Group, also confirmed this. According to him, the first phase of Xinjiang Qinghua’s project with a capacity of 5.5 billion cubic meters per year came online in November 2013, producing 1.375 billion cubic meters of coal-based natural gas annually. The facility has operated at a high load level, with a production capacity of over 80%, resulting in a monthly output of nearly 100 million cubic meters. However, CNPC’s decisions to cut prices and limit production in 2015 had a significant impact on Xinjiang Qinghua, severely affecting the company’s revenue and cash flow. Currently, due to natural gas prices, the company is facing increasing difficulties in its development. A senior executive from a coal-to-natural gas company who wished to remain anonymous revealed that the benchmark prices for natural gas at distribution stations in Xinjiang and Inner Mongolia are currently the lowest in the country, at 1,150 yuan per thousand cubic meters and 1,340 yuan per thousand cubic meters respectively. Even after November 2016, when the natural gas benchmark gate price could increase by 20%, the gate prices in those two areas were still only 1.380 yuan per cubic meter and 1.608 yuan per cubic meter respectively. Currently, affected by various factors such as falling gas prices, high costs and taxes, and increasing environmental pressures, it is becoming increasingly difficult for coal-to-natural gas enterprises to operate, and they are in a severe predicament. “The 4 projects that have been put into operation domestically are all located in Xinjiang and Inner Mongolia. The first phase of the Qinghua project in Xinjiang has an annual production capacity of 1.375 billion cubic meters of coal-based natural gas, at a price of only 1.6 yuan per cubic meter; this gas is sold to CNPC, and profits were achievable in the early stages. The initial settlement price for the Datang Keqi coal-to-gas project was 2.75 yuan per cubic meter; under normal full-load operation, the profit could reach 0.7–0.8 yuan per cubic meter. After two price reductions, the current settlement price is 1.82 yuan per cubic meter, representing a reduction of approximately 34%. The first phase of HuiNeng Coal Chemical’s plant, with an annual production capacity of 400 million cubic meters, came online in November 2014; a liquefied natural gas production line was also built as part of this facility. Since its commissioning, the project has been operating at a loss for a long time. In particular, after the National Development and Reform Commission announced a reduction in the price of natural gas at distribution stations by 0.7 yuan per cubic meter in November 2015, the price advantage that coal-based natural gas once had disappeared almost entirely. ”The official complained to the reporters. The industry calls for pricing and taxation policies to be adjusted. Faced with such a challenging situation, what will become of coal-to-natural gas? How should the problems faced by enterprises be solved? Industry experts are offering their advice and making every effort to appeal, while businesses are eagerly awaiting relief. Some industry experts told reporters that **the relevant authorities have already noticed the chaotic development of coal-to-natural gas projects. At the beginning of this year, the **Energy Bureau, in the newly released ‘13th Five-Year Plan for Demonstrating Advanced Coal Processing Industries’, proposed that during the ‘13th Five-Year Plan’ period, focus should be placed on five types of approaches: coal-to-oil conversion, coal-to-natural gas conversion, differentiated utilization of low-grade coal, coal-based chemical production, and comprehensive utilization of coal and oil. Additionally, efforts should be made to upgrade and demonstrate advanced technical equipment. In terms of coal-to-natural gas, the production capacity is expected to be 17 billion cubic meters per year in 2020. Currently, there are only 5 projects planned for construction, including Su New Energy and Feng, Beikong Ordos, Shanxi Datong, Xinjiang Yili, and Anhui Energy Huainan, each tasked with carrying out corresponding demonstration activities. The reserve projects include Zhundong in Xinjiang, western Inner Mongolia (including Tianjin Bohua and Guocu Energy), eastern Inner Mongolia (Xingan League and Yimin), Yulin in Shaanxi, Wu’an Xinfeng, Hubei Energy, and Anqing in Anhui. At the same time, in May 2017, the **Energy Bureau issued the \"Implementation Opinions on Deepening the Reform of the Investment and Financing System in the Energy Sector,\" which stipulated that no approval documents of a \"permission-type\" nature should be issued to authorize preliminary work on projects. Wang Xiaofeng, deputy director of the Industry Development Department of the China Petroleum and Chemical Industry Federation, provided an interpretation of the \"Plan for the Innovative Development and Layout of the Modern Coal Chemical Industry\" issued recently by the National Development and Reform Commission in conjunction with the Ministry of Industry and Information Technology. He suggested that modern coal chemical industries should be planned and developed scientifically, taking into account technical maturity and the performance of demonstration projects during the 12th Five-Year Plan period; efforts should be focused on carrying out demonstrations for the upgrading of industrial technologies, with particular emphasis on advancements in coal-to-olefins and coal-to-oil processes ； Carry out industrialization demonstrations for coal-to-natural gas and coal-to-ethylene glycol in an orderly manner ； Steadily advance the engineering demonstration of coal-based aromatics, and accelerate the transformation and application of scientific research results. Jia Ruixia, a researcher at the Development Research Center of the State Council, told reporters that compared with conventional natural gas extracted from mines, coal-based synthetic natural gas has a higher purity; its methane content can reach 99.9% after liquefaction. It is a green and clean energy source, as well as a strategic energy source that should be developed to meet China’s resource needs, and its development should be encouraged. At the same time, it should be noted that coal-to-gas production is still an emerging industry in China and is in its initial stages of development; therefore, it is not appropriate to rush into large-scale implementation, and development should proceed in a moderate and orderly manner in accordance with an overall plan. For projects that have been approved, **policy preferences should be granted. Experts such as Li Jilin and Jia Ruixia suggest that policies should be formulated as soon as possible to provide more support to the coal-to-gas industry. On the one hand, it involves supporting coal-to-natural gas through pricing mechanisms, by formulating preferential policies that give priority to the use of coal-to-natural gas ； On the other hand, through local tax policies, a portion of the value-added tax, income tax, and resource tax that enterprises pay to local authorities is refunded to them in the form of incentives, thereby encouraging and supporting enterprises in overcoming the challenges of their initial stages. Furthermore, it is also possible to study industries such as shale gas, coal-to-oil, and coalbed methane, and use subsidies for enterprises to help this industry make a smooth transition. At the same time, industry experts have issued warnings regarding the current proliferation of coal-to-natural gas projects. The cost of producing coal-to-natural gas is often several times higher than that of conventional natural gas, and if such projects are to be developed in the future, many challenges still need to be overcome in order to identify their competitive advantages and viable business models.