A tight natural gas market and high-cost coal-to-natural gas

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The Tight Natural Gas Market and the High Costs of Coal-to-Natural Gas Author/Source: Date: 11-27-2017 Clicks: 12 Under China’s 13th Five-Year Plan, natural gas is set to account for 10% of total primary energy consumption by 2020, with a target consumption volume of 378.6 billion cubic meters; in 2016, China’s natural gas consumption was 205.8 billion cubic meters. To achieve the goals set out in the 13th Five-Year Plan, the average annual compound growth rate of natural gas consumption between 2017 and 2020 needs to be 16.46%. At the 2017 High-Level Forum on Energy Transformation, various departments including China’s National Energy Administration jointly released the \"Report on China’s Natural Gas Development (2017)\”. According to this report, China’s annual natural gas consumption in 2017 was expected to range from 230.3 billion to 234.3 billion cubic meters, accounting for 7% of the total primary energy consumption. This represented an increase of 24.5 billion to 28.5 billion cubic meters compared to the previous year, with a growth rate of 11.9% to 13.8%. According to data from the **National Development and Reform Commission, natural gas production, imports, and consumption from January to September were 108.8 billion cubic meters, 64.4 billion cubic meters, and 167.7 billion cubic meters respectively, showing year-on-year increases of 10.8%, 26.5%, and 18.44% respectively. According to supply and demand forecasts, the total shortage of natural gas supply during this heating season (November 15 – March 15) will be 10.5 billion cubic meters, an increase of 1.7 billion cubic meters compared to last year, representing a 20% rise on a year-on-year basis. In recent years, China’s dependence on imported natural gas was only 12% in 2010; it rose to 31% by 2013. It stabilized in 2014 and 2015, reaching 35% by 2016. 2017 was a turning point for China’s natural gas sector, as it shifted from a period of decline to one of growth. With the arrival of the winter heating season, the pressure on natural gas supply increased significantly, and China’s natural gas production encountered bottlenecks, forcing the country to rely on imports to cover the supply gap. Given this high level of dependence on foreign sources, it is urgent for our country to make improvements in the natural gas supply sector in order to ensure the security of its natural gas supply. However, China has a very high level of coal production, and with the continuous advancement of technologies related to coal-to-gas conversion, there is an urgent need for this method to fill the gap in natural gas supply. Coal gasification is a scientific and technological method that has become popular in many coal-producing countries in recent years. It involves the reaction of coal with steam and oxygen at high temperatures (up to 1300 degrees Celsius) and high pressures, resulting in a mixture primarily composed of carbon monoxide, methane, and hydrogen; this mixture is then subjected to methanation to produce synthetic natural gas (SNG). Based on the process, it can be divided into indirect methanation for natural gas production and direct methanation for natural gas production. http://img.yf116.cn/image/img/20171127/95823588224.jpg Coal-based gas has an energy conversion rate of up to 60%-65%, requires less water, results in lower carbon dioxide emissions, and benefits from relatively advanced science and technology; it is therefore an effective method for producing alternatives to oil. Currently, many projects under construction or planned in China use the fixed-bed gasification process of Lurgi and BGL, which features a high conversion rate of syngas and a high calorific value of the products. With the arrival of winter and the start of heating, the implementation of the \"coal-to-gas\" transition across the country has led to a sharp increase in demand for natural gas in the northern regions. Natural gas consumption has risen significantly, resulting in a supply shortage. As a result, the marketing departments of the natural gas sales companies have begun to reduce the volume of gas sold in various regional offices. Given the severe situation regarding natural gas supply, cities such as Beijing and Qingdao have raised the price of natural gas, by around 10%. Faced with a tight natural gas market and shortages of this resource in various regions, there has been significant demand in such conditions. So, what is the current status of the development of coal-to-gas projects, which is encouraged by policy? At the beginning of this year, reports indicated that there were nearly 70 coal-to-gas projects at different stages in China, including those already in operation, under construction, in the planning phase, those for which contracts have been signed, and planned projects; the total capacity associated with these projects exceeds 200 billion cubic meters per year, with most of them still in the planning or construction stage. Initially, it was estimated that the actual production capacity of coal-to-natural gas would be 39.9 billion cubic meters per year, while the capacity yet to come online would be 93.8 billion cubic meters per year. This already exceeds the estimated gap in natural gas supply and demand during the 13th Five-Year Plan period, which was 86.2 billion cubic meters per year. The projections seem ideal, but reality is harsh – what will actually happen? Keep reading. On June 16 this year, the world’s largest single coal-to-gas project – the 2 billion cubic meters per year coal-to-natural gas project operated by Xinjiang Yili Xintian Coal Chemical Co., Ltd. – began trial production. This project successfully converts the region’s abundant coal resources into clean and environmentally friendly natural gas, which will then be transported continuously to Zhejiang via the Second West-East Gas Pipeline. Throughout the project, 22 major tasks related to the localization of technologies, equipment, and materials were completed, achieving a localization rate of 96.28%. This broke the monopoly of foreign technologies, and many of the relevant indicators are at the world’s leading level. On July 4th of this year, **as part of the policy push toward a transition to clean energy,** 13 departments including the National Development and Reform Commission, the Ministry of Science and Technology, the Ministry of Industry and Information Technology, the Ministry of Finance, the Ministry of Environmental Protection, and the National Energy Administration formulated the \"Opinions on Accelerating the Utilization of Natural Gas.\" The Guidelines specify the need to further advance the development of demonstration projects in the coal-to-gas industry, and to support the construction of transmission pipelines for coalbed methane, shale gas, and coal-derived natural gas, as well as to ensure that gas sources can be connected locally. Previously, the **‘13th Five-Year Plan for Demonstrating Advanced Coal Processing Industries’ issued by the Energy Bureau stated that by 2020, the production capacity for coal-to-natural gas would be 17 billion cubic meters per year. It is specified to establish demonstration projects for coal-to-natural gas production in Su New Energy and Feng, Beikong Ordos, Shanxi Datong, Xinjiang Yili, and Anhui Energy Huainan, with each project undertaking its respective demonstration tasks. On July 17, the environmental impact assessment process for Inner Mongolia Huaxing New Energy Co., Ltd.’s coal-to-natural gas project with an annual capacity of 4 billion Nm3 was nearing completion. The total investment in Inner Mongolia Huaxing New Energy’s coal-to-gas project is approximately 24.9 billion yuan. It is capable of producing 4 billion cubic meters of natural gas per year, as well as 450,000 tons of tar, 100,000 tons of naphtha, 120,000 tons of sulfur, 60,000 tons of crude phenol, and 50,000 tons of liquid ammonia; it can also process 31 million tons of coal. On September 15, the Beikong Ordos 4 billion cubic meter coal-to-natural gas project, which is one of the key coal deep-processing projects under the region’s 13th Five-Year Plan as well as one of the 3 coal-to-gas demonstration projects, commenced construction in Zhungeer Banner. After going through processes such as gasification, coal is sent through natural gas transmission pipelines to consumers, mainly supplying cities in Beijing and its surrounding areas. The launch of the Beikong coal-to-gas project has also filled the gap in the coal-to-natural gas industry in Zhungeer Banner, helping to establish there a modern coal chemical industry chain that includes coal-to-oil, coal-to-methanol, coal-to-olefins, and coal-to-natural gas production. A year has passed, and with a relatively tight natural gas market, what is the current situation of coal-to-natural gas projects? According to a report in China Chemical Industry News on November 23, there are currently four coal-to-natural gas projects that are in operation in China: the Qinghua project in Xinjiang with an annual production capacity of 5.5 billion cubic meters, the Datang project in Keqi, Inner Mongolia, with an annual capacity of 4 billion cubic meters, the Xintian project in Ili with an annual capacity of 2 billion cubic meters, and the HuiNeng project in Inner Mongolia with an annual capacity of 1.6 billion cubic meters. The total designed capacity of the four projects is 13.1 billion cubic meters per year. However, in the actual construction process, only the first phase of the three projects – Datang Keqi, Inner Mongolia HuiNeng, and Xinjiang Qinghua – has been completed and put into operation. Their production capacities are 1.33 billion cubic meters, 400 million cubic meters, and 1.375 billion cubic meters respectively, which is one-third of the designed capacity for each project ； Only the Yili Xintian project was built in one go in accordance with the principle of going straight to full capacity, achieving a designed production capacity of 2 billion cubic meters. The total capacity of the four coal-to-gas projects that are currently in operation is 5.1 billion cubic meters per year; however, the total production volume in the first half of this year was only 1.1 billion cubic meters, accounting for just 21% of the total capacity ； The actual average production volume of coal-to-natural gas since its commissioning has also been only around 50% of the capacity intended for operation, falling far short of the expected results. Faced with such a large natural gas market in China, the production volume of gas produced from coal appears to be insufficient. The reason for this may be that, for some time, the cost of producing gas from coal has remained high, often several times higher than that of conventional natural gas. Moreover, the temporary settlement prices for gas produced from coal are far lower than the production costs for these enterprises, resulting in a situation where the cost of natural gas exceeds its selling price. This leads to companies enduring severe losses, with high production costs and low revenues. A company’s basic production and operations are also affected by factors such as natural gas demand regulation and low market prices. Faced with such a situation, companies still need **help to coordinate and resolve various issues, including maintaining stable gas prices, providing special subsidies for coal-to-gas conversion, ensuring stability in the financial environment, and establishing funds for the clean energy industry. Relying on **for everything is not a sustainable approach in the long term. Following the gas negotiations between China and the United States, the U.S. has set its sights on China’s gas market. With the establishment of the Shanghai Petroleum and Natural Gas Exchange in China, marketization of gas prices is an inevitable trend in the long run. Only by continuously improving technological levels and reducing the costs of coal-to-gas production in a scientific manner can this sector maintain its foothold. In the face of accelerating institutional reforms, it is necessary to leave competitive aspects to the market, encourage greater participation from various social actors, and pursue fairness and openness. By increasing competition, costs can be reduced, which will help address the issues of either insufficient or excessive supply of natural gas in China, allowing coal-to-gas production to develop side by side with other types of natural gas.