What are the three main reasons for the losses in coal-to-natural gas projects?

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What are the three main reasons for the losses in coal-to-natural gas projects? Author/Source: Date: 2017-12-05 Clicks: 7 According to media reports, all of the coal-to-natural gas demonstration projects that have been put into operation have incurred losses, without exception. After long-term monitoring and analysis, the author identified three main reasons for the losses incurred by coal-to-natural gas demonstration projects. First, the production capacity has not reached the designed level. To date, there are 4 coal-to-natural gas projects in operation in China, namely the Datang Inner Mongolia Keqi 4 billion cubic meters per year coal-to-natural gas demonstration project, the Inner Mongolia HuiNeng 1.6 billion cubic meters per year coal-to-natural gas demonstration project, the Xinjiang Qinghua 5.5 billion cubic meters per year coal-to-natural gas demonstration project, and the Xinjiang Yili Xintian 2 billion cubic meters per year coal-to-natural gas project. The total designed capacity of these 4 projects is 13.1 billion cubic meters per year. However, in the actual construction process, taking into account various factors such as funds, technology, talent, and resources, projects are usually designed once and constructed in phases. The three coal-to-gas projects in Datang Keqi, Inner Mongolia HuiNeng, and Xinjiang Qinghua have so far only completed the first phase of construction and 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 ； Only the Xintian project in Yili, Xinjiang, has managed to achieve a designed production capacity of 2 billion cubic meters after nearly 8 years of hard work in construction. As is well known, although the main components of coal-to-natural gas projects can be constructed in phases, certain fundamental facilities such as power systems, safety measures, and environmental protection systems must be fully established before the main parts of the project are completed. Therefore, except for the Yili Xintian project, the construction approach adopted for the other three coal-to-gas projects is to build all the infrastructure at once, while the main facilities are constructed in three phases; currently, one-third of the main installations have been built. As a result, these coal-to-gas projects are inevitably subject to the phenomenon of using overpowered resources for relatively minor tasks. To put it vividly, the actual investment in the project already accounts for two-thirds of the total investment, yet only one-third of the production capacity has been built; that one-third of capacity has to bear two-thirds of the investment costs. Yet the harsher reality is that although only one-third of the total designed capacity has been built, the actual output is significantly lower. The author has learned that the total production capacity of the four coal-to-gas projects currently in operation is 5.1 billion cubic meters per year. In the first half of this year, their total output was merely 1.1 billion cubic meters, accounting for only 21% of their total capacity. The actual average production volume of coal-to-natural gas since its commissioning has also been only around 50% of the capacity available upon commissioning. Obviously, it’s practically impossible to make a profit from such large-scale coal-to-gas projects with such low production levels. In fact, these coal-to-gas companies are well aware that to make profits they must reach full production capacity as soon as possible, and complete and put into operation the second and third phases of construction. But it’s not that the project can’t be done; it’s just difficult to do. First, there is a shortage of funds. To develop subsequent projects, further investment is needed on top of what already exists. However, to the author’s knowledge, these coal-to-gas projects are all currently facing financing difficulties. The second is hesitation. The prospects for coal-to-gas production are unclear, and there are concerns about future changes in the natural gas market; as a result, people hesitate and are reluctant to take action ； Third is difficulty. The coal-to-gas demonstration projects are not yet mature in terms of technology and wastewater treatment, which poses certain difficulties in advancing these projects. Second, the market is in a weak position. At present, China’s natural gas market remains in a relatively monopolistic state, with both the producers of natural gas and the market shares controlled by the \"Big Three Oil Companies\". In 2016, China’s natural gas consumption was approximately 205.8 billion cubic meters, with coal-based natural gas accounting for less than 1% of that amount, making it practically negligible. The coal-to-natural gas market holds negligible significance and has no say in decision-making. The biggest challenge in coal-to-gas projects is that the products manufactured by these companies cannot be delivered directly to customers; to transport the gas, they are forced to rely on others. Since China’s natural gas main pipeline network is in the hands of the \"Big Three oil companies,\" the main markets have been monopolized. If coal-to-natural gas companies want to sell their products, they have no choice but to form alliances with the giants in order to sell them at low prices. The highest price at the inlet station for natural gas in Xinjiang is only 1.05 yuan per cubic meter; the price at which Xinjiang Qinghua sells coal-based natural gas to Sinopec is also limited to 1.05 yuan per cubic meter, whereas the cost is higher than 1.5 yuan per cubic meter. Loss-making operations just to gain visibility seem to be the common dilemma for coal-to-natural gas companies at present, as they have no other options when faced with monopolies in both the pipeline network and the market. Not only that, but in addition to natural gas prices being controlled by others, production is also under their control. Since none of these major coal-to-gas projects have installed peak-shaving facilities, their output must be sold entirely to the three major oil companies. However, during the summer lull in demand, market demand for natural gas drops significantly, and the major oil companies generally reduce their production targets for coal-to-natural gas facilities, as a result of which such projects are unable to operate at full capacity. To the author’s knowledge, the Datang Keqi coal-to-gas project encountered similar situations during the summer months in previous years, being required to reduce its production volume; as a result, a large portion of the plant’s capacity remained unused, leaving no possibility of achieving any profits. Third, costs are generally higher than selling prices. In recent years, as international crude oil prices have continued to fall, the prices of natural gas products, which are closely linked to crude oil, have also dropped steadily. The reduction in natural gas prices is undoubtedly beneficial for companies that use natural gas in their operations, while it only adds to the difficulties faced by companies that produce natural gas from coal. At the current highest natural gas gate prices in various provinces, the costs of all currently operational coal-to-natural gas projects exceed their selling prices. In other words, coal-to-gas companies are bound to lose money. In terms of costs, coal-to-natural gas projects suffer from high financial expenses due to their large investment requirements. As coal prices rise, the production costs of coal-to-natural gas also increase significantly. Take the main raw materials and fuel coal as an example. Coal-to-natural gas production requires approximately 1.93 tons of raw coal per thousand standard cubic meters, and about 2.26 tons of fuel coal per thousand standard cubic meters. At current market prices, the cost of coal alone accounts for around 40% of the total cost associated with coal-to-gas production. Adding in the costs of energy, labor, as well as financial and administrative expenses and sales costs, although these costs vary from region to region, the actual total cost of coal-to-gas projects that are currently in operation is likely to be between 1.5 yuan per cubic meter and 2.5 yuan per cubic meter. Just for financial costs alone, the cost of certain projects already reaches around 1 yuan per cubic meter. For example, the highest price at the gate station for natural gas in Xinjiang is 1.05 yuan per cubic meter. According to media reports, the cost of producing coal-based gas at Xinjiang Qinghua is around 1.5 yuan per cubic meter; in other words, for each cubic meter of gas sold, the company incurs a loss of 0.45 yuan. Based on this calculation, if the 5.5 billion cubic meters per year coal-to-gas project in Xinjiang’s Qinghua is fully built and put into operation, it will face a tragic situation of annual losses amounting to 2.475 billion yuan. Yet even so, **the National Development and Reform Commission has adjusted the prices at natural gas distribution stations on multiple occasions, and natural gas market prices continue to show a downward trend. Currently, the average price of gas supply stations for non-residents across the country is 1.6 yuan per cubic meter. However, not long ago, the **National Development and Reform Commission decided once again to lower pipeline transportation prices based on the results of cost audits for natural gas pipeline pricing. Taking into account adjustments to the VAT rate on natural gas, starting from September 1, 2017, the benchmark gate prices for non-residential natural gas in all provinces (autonomous regions and municipalities) will be reduced by 100 yuan per thousand cubic meters.** It involves reducing the current average price of gas supply stations for non-residents across the country, which is around 1.7 yuan per cubic meter, by an additional 0.1 yuan per cubic meter. Take Beijing as an example. Natural gas prices have dropped from 2.75 yuan per cubic meter in 2013 to the current level of 1.7 yuan per cubic meter.