Lack of a pricing mechanism over the past 10 years: “The survival of coal-to-gas production is very uncertain””

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In the past decade, there has been a lack of a pricing mechanism; “the prospects for coal-to-gas industry are rather bleak.” Author/Source: ChemNet Coal Chemical Industry. Date: December 4, 2018. Click-through rate: 54. “As a strategic industry aimed at ensuring **energy security, has coal-to-gas industry fulfilled its expected role?” In the past two years, we have often seen news of new projects being launched, but how many of them have actually been carried out? If even the projects that are already in operation lose their economic viability, will any new companies dare to enter the market? ”At the annual meeting of the Coal Chemicals Committee of the China Petroleum and Chemical Industry Federation held recently, Wu Xiuzhang, vice president of China Datang Group and general manager of Sino-Singapore Energy Chemicals Company, used a series of questions to reveal the rather unfavorable development prospects of the coal-to-gas industry. At present, China’s dependence on imported natural gas is close to 40%; as a \"strategic energy technology and capacity reserve,\" coal-to-natural gas plays a vital role in ensuring energy security. In August 2009, the National Development and Reform Commission approved the Datang International Kezkesitengqi Coal-to-Natural Gas Project (hereinafter referred to as the “Datang Project”) and designated it as the first national-level demonstration project for coal-to-gas conversion. Although it has been nearly 10 years since its development began, China’s coal-to-gas industry remains in a modest pilot stage, falling far short of the expectations placed on it by the industry as a whole. To date, including the Datang project, four coal-to-gas projects have been put into operation in China. Three of these have been struggling for a long time due to high costs of coal in the upstream stage, monopolies in the transportation and distribution networks in the middle stage, and low gas prices in the downstream stage; as a result, they have suffered chronic losses and are unable to achieve sustainable development. The experiences of these pioneers directly caused the entire industry to hesitate and stall amid a strong atmosphere of caution. What exactly is holding back the “strategic” industry of coal-to-gas production? So how can the situation be resolved? With these questions, our newspaper’s reporter recently went to the project site to seek answers. 01、 Gas prices keep falling, causing the demonstration projects to incur losses. Within the premises of the Xinjiang Qinghua Coal-to-Gas Project in Yining, signs indicating the “Coal-to-Natural Gas **Demonstration Project” and the “**12th Five-Year Plan Coal Deep Processing Demonstration Project” can be seen everywhere. “In 2012, we received approval from the National Development and Reform Commission to undertake a coal-to-natural gas demonstration project as well as a coal deep-processing demonstration project. The project is to be constructed in two phases. The first-phase project utilizes the technology of fixed-bed pressurized coal gasification, which is one of the methods in the coal chemical industry that features the shortest process flow, highest conversion efficiency, and relatively low energy consumption. The successful commissioning of Phase I proves that this technology has truly been localized in China. ”Li Xuguang, deputy general manager of Xinjiang Qinghua Energy Group, told reporters, “Our planned total capacity is 5.5 billion cubic meters per year. Only Phase 1 is currently in operation; Phase 2 is already ready for construction, but due to the issues encountered with Phase 1, its construction has been delayed.” ” What Li Xuguang referred to as an “encounter” stemmed from a written agreement. In February 2013, Xinjiang Qinghua signed a Coal-to-Natural Gas Purchase and Sale Agreement with PetroChina Natural Gas Co., Ltd. Under the Agreement, Xinjiang Qinghua sells coal-based natural gas to CNPC at a price of 1.60 yuan per cubic meter, with the contract valid until December 31, 2042. At the same time, the two parties agreed that during the term of the agreement, the contract price could be reviewed periodically, with adjustments made after mutual agreement and the signing of a supplementary agreement. On December 28, 2013, the first phase of the Qinghua coal-to-gas project in Xinjiang produced qualified natural gas, which was then incorporated into CNPC’s West-East Gas Transmission pipeline network. At that time, following the adjustments made by the **National Development and Reform Commission to the natural gas prices for non-residential users that year, the average national gate price (the selling price at which natural gas suppliers such as CNPC sell gas to end-users) increased from 1.69 yuan per cubic meter at the beginning of the year to 1.95 yuan per cubic meter. But two years later, the **National Development and Reform Commission issued another notice to reduce the prices of natural gas at distribution stations for non-residential users, starting from November 20, 2015; the average reduction across the country was 0.7 yuan per cubic meter. The price of natural gas at distribution stations for non-residents in Xinjiang has dropped to 1.15 yuan per cubic meter, making it the lowest such price among all provinces and regions in the country. In other words, at this time in Xinjiang, the price of pipeline natural gas sold by CNPC through its distribution stations has dropped to 1.15 yuan per cubic meter, which is far lower than the contract price of 1.60 yuan per cubic meter previously agreed upon with Xinjiang Qinghua, resulting in a situation of inverted pricing. After severe market fluctuations, “price negotiation” began to become the key term in the business dealings between Xinjiang Qinghua and CNPC. According to Li Xuguang, since no agreement was reached between the two parties, starting from January 1, 2016, CNPC suspended its settlements with Xinjiang Qinghua. Since the settlement payments from CNPC were the only source of funds for Xinjiang Qinghua, the latter immediately fell into a severe financial crisis, with its cash flow coming to a halt for a time. “To ensure that the **demonstration project can survive for the time being**, with the assistance of the Xinjiang Uygur Autonomous Region, both parties agreed to temporarily settle payments at a provisional price of 1.15 yuan per cubic meter. ”Thereafter, with **two reductions in the VAT rate, this temporary settlement price dropped to 1.13 yuan per cubic meter and then to 1.119 yuan per cubic meter, which was significantly lower than the contract price; as a result, Xinjiang Qinghua entered a prolonged period of losses. 02、 The industry suffers from high losses, with both producers and buyers having their own arguments. Another project in a similar situation is Datang’s coal-to-gas project with an annual capacity of 1.33 billion cubic meters. In fact, aside from the Inner Mongolia HuiNeng coal-to-gas project with a capacity of 1.6 billion cubic meters per year, which is profitable because its product is sold directly in the form of liquefied natural gas (LNG) without the need for pipeline transportation, all three coal-to-gas projects that have been put into operation in China are currently operating at a loss due to price issues. According to Xia Junbing, deputy general manager of Sino-Singapore New Energy Chemicals and general manager of Datang Keqi Coal-to-Gas Company, the first phase of the Datang project was connected to Beijing’s gas pipeline network on December 24, 2013, and began supplying gas to Beijing officially. After four successive price reductions, the tax-inclusive settlement price for the Datang project has dropped from 2.72 yuan per cubic meter at the beginning of its operation to 1.77 yuan per cubic meter at present, a reduction of nearly 1 yuan per cubic meter. “We agree that gas prices change according to actual market conditions. Previously, CNPC took the opportunity of the **NDRC’s adjustments to the prices at natural gas distribution stations to reduce the prices it charged us; however, later on the price of household gas in Beijing increased by more than 0.2 yuan per cubic meter, while the price CNPC charged us remained unchanged. To be honest, at the current price levels, most coal-to-gas companies simply cannot survive. ” However, CNPC seems to have its own difficulties as well. According to CNPC’s replies in August and October this year regarding issues such as settlement prices and gas supply volume concerning the Xinjiang Qinghua coal-to-gas project, the reason for the reduction in gas prices is that “coal-derived gas and conventional natural gas are mixed and transported together after entering the pipeline; they cannot be distinguished at the time of sale. The decrease in the gate price has led to a severe price inversion for CNPC, with its related sales operations operating at a loss.” Furthermore, the reply also stated that the gas supply provided by Xinjiang Qinghua failed to meet the requirements stipulated in the contract, forcing CNPC to purchase large quantities of LNG on the spot to make up for the shortfall, which resulted in severe losses for the company. However, Li Xuguang held a different view: “Firstly, the Purchase and Sale Agreement for coal-to-natural gas signed between Xinjiang Qinghua and CNPC Natural Gas Co., Ltd. does not stipulate any mechanism for price adjustments; therefore, the losses incurred by CNPC as a result of lower prices at the distribution stations cannot be placed on Xinjiang Qinghua’s shoulders ； Secondly, PetroChina’s unilateral reduction in the purchase price led to a severe shortage of cash flow for the project and huge losses; as a result, the company no longer has the capacity to build a second phase of the project in order to ensure a sufficient supply of gas ； Third, starting from April 2015, CNPC requested the enterprises to proactively cut production via telephone calls and written communications. ”Furthermore, Li Xuguang emphasized that during this period, CNPC did not raise any written objections regarding the volume of gas supplied, and the gas was received on a monthly basis based on the actual amount supplied, with settlements made accordingly. In response, the reporter contacted CNPC again, hoping to obtain details and updates on the price negotiations, but CNPC stated that it was undergoing internal structural adjustments, and the previously responsible staff had been reassigned, so it was unable to respond promptly. As of the time of publication, the reporter has not yet received a response. 03. Costs remain high, and there is no fixed benchmark for pricing. “Currently, if the coal price is calculated at 160 yuan per ton, the production cost alone for our project amounts to 1.1–1.2 yuan per cubic meter.” ”According to Li Xuguang, since Xinjiang Qinghua owns its own coal mine assets, its coal cost has a certain price advantage compared to other similar projects. Still, raw material costs account for about one-third of the production costs. “Financial costs account for about 30%, with the rest being costs such as equipment depreciation and labor expenses. ” According to Wu Xiuzhang, the raw material cost accounts for as high as 60% in the Datang project. Currently, PetroChina’s purchase price for the natural gas produced from coal at the Datang project is approximately 0.6 yuan per cubic meter higher than that for the Xinjiang Qinghua project. One of the main reasons for this is the relatively high raw material costs incurred by Datang. “In recent years, energy prices have fluctuated sharply: coal prices rose from 300 yuan per ton to 600 yuan per ton, while international crude oil prices increased from 45 dollars per barrel to a peak of 85 dollars per barrel. However, during the period from 2016 to 2018, natural gas prices remained unchanged. ” Wu Xiuzhang stated that due to persistently high costs, the current price of coal-to-gas is lower than that of imported gas. Additionally, since imported pipeline gas benefits from **preferential policies, the price of coal-derived gas remains uncompetitive in the market. At its core, Li Xuguang believes this is because there is currently a lack of a reasonable pricing benchmark for coal-to-gas. “It would be best to provide a price reference by taking costs into appropriate consideration; for example, international oil prices and the price of imported pipeline gas can serve as reference standards. Since coal-to-gas is positioned from the perspectives of **strategy and energy security, I believe the price of imported pipeline gas serves as a good reference. ” In this regard, Wang Xiujiang, deputy secretary-general of the Coal Chemical Industry Committee under the China National Petroleum and Chemical Industry Federation, also stated that currently, China lacks a unified pricing mechanism for coal-derived gas. The fluctuation mechanism for the purchase price of coal-derived gas can be determined by referencing the price of imported gas. “At the same time, a safety net mechanism must be established to address the current situation where the grid-connected price for coal-derived gas is significantly lower than the production costs of enterprises. Furthermore, the reform of the natural gas pipeline network can be intensified further, with pipeline transportation and sales separated so that gas is supplied directly. Coal-to-gas companies only need to pay a certain pipeline fee in order to deliver gas directly to consumers at market prices. ” Additionally, the difficulty in ensuring a stable coal supply is also restricting the development of the coal-to-gas industry. Wu Xiuzhang told reporters, \"Affected by the local ‘coal reserve’ policies in winter as well as the environmental protection requirements imposed on coal enterprises, there were severe shortages of raw coal supply in January-February and June-July this year, which forced the Datang project to operate at reduced capacity.\" If our second production line comes online, there will be even greater uncertainty regarding coal supply. ” Wang Yu, head of the Energy and Chemicals Division at the Petroleum and Chemical Industry Planning Institute, further pointed out: “The main reason for the limited profitability of coal-to-gas projects is the low price of natural gas supplied to the pipelines.” Whether it’s Xinjiang Qinghua or projects like Datang Keqi, if they can sell at the prices stipulated in the original contracts, these enterprises will be able to make a profit. However, since the natural gas pipelines are controlled by CNPC alone, coal-to-gas manufacturers have long lacked the power to set prices, resulting in a significant gap between the actual gas prices and those specified in the contracts. ” 04. Capacity expansion is hindered, prompting companies to seek product transformation. According to the reporter, compared with other projects related to the deep processing of coal and coal chemicals, the coal-to-gas industry suffers from a single product structure. “Its main product is only natural gas; unlike other coal chemical projects that have intermediate products, coal-to-gas is therefore the project with the lowest return on investment among all coal chemical projects. ”Wu Xiuzhang said. Furthermore, the fact that pipeline gas cannot be stored and that demand for the product is highly seasonal also constitutes a constraint on the development of coal-to-gas production. “Natural gas demand is extremely low in the summer; Beijing’s daily consumption peaks at 120 million cubic meters in winter, while it is less than 22 million cubic meters in summer. This means that for up to 8 months each year, there is almost no demand for natural gas in the market. ”Wu Xiuzhang said that for this reason, although over 80% of the second production line for the Datang project has been built, it still cannot be put into operation yet. Xia Junbing also revealed that Datang is currently considering converting half of its production capacity from natural gas to methanol and ethylene glycol, \"as it is the only alternative; otherwise, stopping production would also result in losses.\" ”Coincidentally, Xinjiang Qinghua also attempted to transition into other coal chemical industries. “However, since we applied for the project as two phases combined and it was approved entirely as a coal-to-gas project, it is very difficult to change the nature of the project. Furthermore, in the long term, natural gas still has broad market potential, but other coal chemical products may reach saturation soon. ”Li Xuguang said. “Adjusting the product structure is a breakthrough out of the predicament. ”Wang Yu said, “But it must also be acknowledged that the modern coal chemical industry has been developing for many years, and there are not many possible product directions available; many of these products already face issues such as overcapacity.” ” 05. The existing projects are a cause for concern, making it difficult to advance future projects. According to statistics from the Coal Chemicals Committee of the China Petroleum and Chemical Industry Federation, as of the end of September 2018, China’s coal-to-natural gas production capacity was 5.105 billion cubic meters per year; the total production volume in the first three quarters of this year was 2.006 billion cubic meters, resulting in a capacity utilization rate of only 52.4%. It is expected that due to strong winter demand in the fourth quarter, capacity utilization will increase slightly, with the annual total production likely to exceed 2.8 billion cubic meters. According to the 13th Five-Year Plan for Energy Development, during this period China’s target production capacity for coal-to-natural gas was around 17 billion cubic meters. Xinjiang’s Zhundong region, Xinjiang’s Ili region, Inner Mongolia’s Ordos region, Shanxi’s Datong city, and Inner Mongolia’s Xing’an League were identified as key areas for the construction of coal-to-natural gas projects. Wu Xiuzhang pointed out that, with losses occurring across almost the entire industry, **it is necessary to strengthen industrial guidance; first and foremost, those enterprises that contribute to energy security should be allowed to survive.** “If established companies acting as pioneers lack enthusiasm for further development, or are unable to convert the existing production capacity into products, then how can new companies come forward to build coal-to-gas projects? The prerequisite for coal-to-gas to serve as an effective supplement to China’s gas supply is that the project remains economically viable to ensure the healthy operation of enterprises, and that the market environment can attract more investment. ” “During last winter’s heating season, the 4 coal-to-gas companies supplied a total of 1.14 billion cubic meters of gas, which is worth recognizing and demonstrates the importance of coal-to-gas technology. ”However, according to Wang Xiujiang, aside from the 4 projects currently under construction, those that have already received approval to proceed are mostly on hold, with no plans to start work at this time. ↓↓↓ Comment: The pricing mechanism for coal-to-gas should not be absent. By Zhu Yan, reporter from China Energy News. Some projects have struggled to turn a profit over the long term; since their operation began, they have faced numerous difficulties and are now reluctantly seeking to switch to other production lines ； Some projects remain stagnant; even after having received approval for years, they still hesitate to start construction ； Some companies choose to wait and see, claiming to want to seize opportunities to get a share of the profits, but in reality they take no concrete action – the contradictions and anomalies in the coal-to-natural gas industry are worth reflecting on. There are supporters, and there are skeptics as well. It is undeniable, however, that as an **approved ‘model project for energy strategic technology and capacity reserves’, coal-to-gas projects have their significance and value. With the aim of ensuring energy security, and given that China’s dependence on imported natural gas is approaching 40%, coal-to-gas conversion plays an important role. From the perspective of clean utilization, the shift from coal to gas is undoubtedly one of the effective paths for the transformation of the coal industry, and it is also beneficial for reducing excess production capacity. Furthermore, from a practical perspective, as the demand for natural gas is growing rapidly, especially under pressures such as ensuring supply during winter and providing clean heating, the role of coal-to-gas conversion becomes even more significant. It is precisely due to these various advantages that the coal-to-gas market is highly regarded. The total number of projects that have been built, are under construction, or are planned across the country once exceeded 60; if all of them come online, future production capacity will reach 260 billion cubic meters per year or more. This amount is even 15 times higher than the target set in the \"13th Five-Year Plan for the Development of Advanced Coal Processing Industries\", which is 17 billion cubic meters per year by 2020. But today, ongoing projects are suffering continuous losses, investment enthusiasm among companies has plummeted, and the entire industry is facing difficulties. From great popularity to a rapid decline, what exactly is limiting the development of coal-to-gas technology? The gas transmission network has long been under the control of others; whether more or less gas is purchased, and at what price, is all determined by them. The purchase price is inversely related to the production costs, and such projects lack bargaining power for a long time – these are the core issues raised by coal-to-gas enterprises as a whole. Upon further investigation, there is a common thread running behind all these issues: the pricing mechanism. At present, apart from 1 coal-based LNG project, the other 3 coal-to-gas projects in operation in China all need to be sold through gas transmission networks. In the initial stage of operation, the acquisition price was based on the actual cost, calculated as the product cost plus a certain profit margin. Under the pricing mechanism and contract prices at the time, coal-to-gas enterprises were able to make a profit. For example, in the Datang Keqi project, which was the first pilot project, the initial gas price was as high as 2.72 yuan per cubic meter. But later, as the natural gas industry introduced reforms to its pricing mechanism, it became necessary to link gas prices to the prices of alternative energy sources determined by market competition; on this basis, pipeline transportation costs were deducted, and then the final price of natural gas was determined. With the **established unified gate price as the maximum ceiling, market mechanisms are used to regulate the ex-factory prices of unconventional natural gases such as coal-derived gas, with the price being determined through negotiation between supply and demand parties ； For gases entering long-distance pipelines for mixed transportation, a unified gate station price shall be applied. Under this rule, with a set upper limit in place, the price of coal-to-gas should adjust according to market conditions. But today, has “market” really returned to the market? In recent years, international crude oil prices have been rising gradually, which has benefited industries such as coal-to-oil, which also fall under the category of modern coal chemical technologies; however, the price of coal-to-gas has remained low ； As the price of raw coal rose in line with market conditions, going from 300 yuan per ton to 600 yuan per ton, the price of coal-based gas remained unchanged. Furthermore, at the current stage, there is only an upper price limit; with no other benchmarks and no lower price floor to serve as a safeguard, the price of coal-based gas can largely be determined by external forces. A prolonged \"price inversion\" fails to reflect the project’s true market value, let alone enable it to play its role as a so-called \"strategic\" industry. The coal-to-gas industry is now in a situation where it can hardly protect itself, let alone help others. Looking at its development history, coal-to-gas does indeed have certain shortcomings. However, as a strategic industry at a ** strategic level, without a reasonable and sound pricing mechanism, the industry will lack the prerequisites and foundation for stable and healthy development. In the context of survival in difficult circumstances, widespread shifts in the production of existing projects and disruptions to subsequent projects could pose risks to ensuring **energy security. What constitutes a truly appropriate pricing mechanism for the coal-to-gas industry is an answer that needs to be found urgently.