The 27 billion yuan coal-to-gas project is canceled – what lies behind it?

Thread Content

The cancellation of the 27 billion yuan coal-to-gas project: What lies behind it? Author/Source: Huahua Network – Coal Chemical Industry. Date: June 25, 2018. Clicks: 14. At the beginning of June 2018, it was reported that CNOOC issued an internal order to cancel the project managed by its subsidiary, CNOOC Ordos Energy Chemical Co., Ltd. (hereinafter referred to as “Ordos Energy Company”), and three people including the company’s general manager were removed from their positions. Public information shows that Ordos Energy Company’s main project is the CNOOC Ordos Coal-to-Natural Gas Project, which is regarded as an important part of CNOOC’s \"Northern Route Plan\" for developing coal-based clean energy (hereinafter referred to as the \"CNOOC Ordos Coal-to-Natural Gas Project\"). In response, on June 14, 2018, a mid-level executive at CNOOC told a reporter from China Business Journal that he was aware of the news regarding the dissolution of Ordos Energy Company. The main reasons for the dissolution were environmental concerns and excessively high prices of raw coal. As for whether CNOOC’s coal-to-natural gas project in Ordos received local **coal resource allocation** at that time, and if so, whether such allocation would change due to the dissolution of the associated company? The aforementioned person suggested asking CNOOC’s spokesperson. Subsequently, our newspaper’s reporters tried to contact CNOOC’s spokesperson Gao Jianhua on several occasions, but as of the time of publication, no response was received. Furthermore, according to the **Enterprise Credit Information Publicity System, Erdos Energy Company’s registration status is shown as “cancelled”. The billion-yuan coal-to-natural gas project failed. The reason why CNOOC’s Ordos coal-to-natural gas project failed is mainly due to two factors. ”A senior official from an energy company told a reporter from China Business News that, first, on August 7, 2015, the Ministry of Environmental Protection (now the Ministry of Ecology and Environment) officially accepted the environmental impact assessment documents for CNOOC’s Ordos coal-to-natural gas project with a capacity of 4 billion standard cubic meters per year. However, to date the project has not received approval for its environmental impact assessment, which indicates that it is quite difficult to obtain such approval for this project ； Secondly, current coal prices are too high, which has led to soaring costs for coal-to-natural gas projects that use coal as a raw material; once these projects come online, it is very likely that the price of their output will be lower than the cost of production. Therefore, canceling the project is a wise move. This claim was confirmed through conversations with several people from CNOOC’s system. “In 2013, coal prices were low, and China’s energy structure, characterized by abundant coal but limited oil and gas resources, encouraged many companies to extend the coal industry chain by launching projects for converting coal into oil, natural gas, or olefins. ”A CNOOC executive interviewed by reporters said that the CNOOC Ordos coal-to-natural gas project was granted the necessary approval from the National Development and Reform Commission in March 2013, allowing preliminary work to proceed. However, it failed to obtain the environmental impact assessment approval for several years thereafter. After the new Environmental Protection Law came into effect on January 1, 2015, the company submitted additional applications for the necessary approvals on multiple occasions, but still did not receive any approval. The reporter noted that on January 5, 2015, CNOOC established the Ordos Energy Company, with its registered address being the Dalu Industrial Park in Ordos City, Inner Mongolia. The company is responsible for the construction and operation of energy and chemical projects. It undertakes the preliminary preparations for CNOOC’s coal-to-gas project in Ordos, which has an annual capacity of 4 billion standard cubic meters, as well as the actual construction, production, and operations of the project. In May of the same year, CNOOC submitted the \"Environmental Impact Assessment Report for CNOOC’s Ordos Coal-to-Natural Gas Project with an output of 4 billion standard cubic meters per year\" to the Ministry of Environmental Protection. The report indicates that the total investment planned for CNOOC’s coal-to-natural gas project in Ordos is 27.4737 billion yuan, with the construction site located in the coal-based clean energy industry zone of Dali Industrial Park, Jungeer Banner, Ordos City. The total planned land area is 309.1033 hectares. The current land use is as follows: agricultural land covers 136.8470 hectares, which includes 0.6992 hectares of forest land and 136.1478 hectares of grassland ； 33.7993 hectares for construction purposes ； Unutilized land: 138.457 hectares. Although Ordos has a vast territory with a sparse population, and companies are required to make only minimal contributions when acquiring land—in some cases, land is even provided free of charge—the environmental impact assessments are extremely stringent. This strictness is even greater when it comes to forested or grassland areas. Therefore, it’s quite normal that CNOOC’s project in Ordos has yet to obtain the necessary permits. A member of the Ordos Development and Reform Commission recalled to reporters that in August 2017, a review of the progress of major coal chemical projects in Ordos showed that the CNOOC Ordos coal-to-natural gas project was in the process of revising its report. The decision to revoke the status of these companies is now being made, with greater consideration given to the return on investment following the rise in coal prices. So, is it true, as stated by the aforementioned NDRC official*, that CNOOC’s abandonment of the Ordos coal-to-natural gas project was largely due to economic considerations? In this regard, reporters from this newspaper called several public relations personnel at CNOOC, but as of press time, no clear response has been given. The problem of using resources in exchange for projects: \"Among the ‘three major oil companies’, CNOOC entered the coal chemical industry at an earlier stage.\" ”The mid-level manager at CNOOC mentioned above told reporters that as early as 2007, CNOOC’s subsidiary, CNOOC Chemical Co., Ltd. (hereinafter referred to as “CNOOC Chemical”), jointly established CNOOC Jincheng Coal Chemical Industry Co., Ltd. with Jincheng City in Shanxi Province. The registered capital of this joint venture is 1.6 billion yuan, with CNOOC Chemical contributing 1.2 billion yuan, accounting for 75% of the shares. The main business of the joint venture is to establish a demonstration base for the high-tech, clean, and environmentally friendly coal chemical industry, engaging in the development, production, and sales of fertilizers and chemical products, as well as the import and export of raw materials, and providing agricultural technology services. This is also considered to be the first step by CNOOC into the coal chemical industry. Subsequently, CNOOC further developed its coal chemical industry in Shanxi, Inner Mongolia, Heilongjiang and other regions. However, cross-border operations are not smooth sailing. Five years later, after multiple coal chemical projects all incurred losses, CNOOC sold some of these loss-making projects at low prices. In 2014, CNOOC Chemical listed its Baotou coal chemical project for sale on the Beijing Property Rights Exchange, at a listing price of around 100 million yuan. The previous year, in 2013, the project incurred a loss of 12.8389 million yuan. Public information also shows that in addition to the Baotou coal chemical project, it owns Zhonghai Chemical Jincheng Coal Chemical Industry Co., Ltd., Hegang Huahè Coal Chemical Co., Ltd., and Zhonghai Chemical Hualu Shanxi Coal Chemical Co., Ltd. CNOOC Chemical holds 75%, 80%, and 51% of the shares in these three companies respectively. In the **auditor general’s past audit reports on CNOOC, there are also repeated mentions of its failures in coal chemical industry investments.** For example, in 2014, CNPC’s Zhonglian Coalbed Methane Co., Ltd. began work on the coalbed methane development project in the Xingjia Community area of Gujiao, Shanxi, with a total investment of 2.85 billion yuan, without going through procedures such as environmental impact assessments ； In June 2015, the Yangpoquan Coal Mine and coal chemical project, in which China Overseas Chemical invested 678 million yuan, was shut down due to underground water inrush incidents and disputes among shareholders; this resulted in losses amounting to 511 million yuan, among other consequences. So, what is the current operating status of these coal chemical projects? Has CNOOC really managed to get a share of the coal chemical industry market? In response to this, our newspaper’s reporters called CNOOC but received no reply. Furthermore, since crossing industry boundaries is not easy, why does CNOOC continue to launch coal chemical projects in areas of China where coal resources are abundant? “Although China is rich in coal resources, they are concentrated in certain regions. For a period of time, in order to boost local GDP growth and extend the coal industry chain, coal-rich regions implemented an investment attraction policy known as ‘exchanging resources for projects’. In other words, to obtain coal resources, one had to undertake a corresponding project; conversely, by launching a large-scale project, one could secure the necessary coal resources. ”The official from the Ordos Development and Reform Commission mentioned that this approach of \"exchanging resources for projects\" is most evident in Ordos and Yulin. So, has CNOOC’s Ordos coal-to-natural gas project received local **“resource allocation”? In this regard, reporters from our newspaper tried various ways to verify the information with CNOOC, but received no responses. However, by searching through public information, the reporter found that several CNOOC coal chemical projects are equipped with coal resources. For example, a document titled \"Introduction to the Fertilizer Project of Heigang Huahe Coal Chemical Co., Ltd.\" states that Heilongjiang Province and Heigang City have provided many preferential policies to CNOOC for its investments in Heigang; in particular, the Heigang Xinhua Coal Mine, with reserves of 120 million tons, was designated to supply this project with reliable and low-cost raw material and fuel coal. Additionally, the reporter found that according to the “Several Regulations on Improving the Management of Coal Resource Allocation in Inner Mongolia Autonomous Region” issued by Inner Mongolia in 2012, the policy of the Inner Mongolia Autonomous Region is to allocate coal at a 1:1 ratio, calculated based on the start-up year and annual production capacity. The CNOOC Ordos coal-to-natural gas project, with a capacity of 4 billion standard cubic meters per year, also complies with the Inner Mongolia Coal Resource Allocation Catalogue. “The regulation of the autonomous region ** states that coal will be provided once the investment amount reaches a certain threshold. ”A person in charge of coal chemical operations at Guoneng stated that for companies involved in both coal mining and chemical projects, these two operations are often separate. If the mining division charges the chemical division at market prices, the costs will be extremely high. Given that the price of natural gas transported via pipelines is set uniformly by the National Development and Reform Commission, it is inevitable for such companies to incur losses under these pricing conditions. However, if mining and chemical processing are carried out together, then only the mining costs need to be taken into account. For such coal chemical projects, the main cost factor is the initial investment in equipment, which essentially ensures a break-even point. “CNOOC once intended to extend the coal-to-natural gas pipeline planned to be built from Ordos, via Datong, to Tianjin, southward to Ningxia; however, this plan was not carried out because the Ningxia Autonomous Region was unable to provide the necessary coal resources for it. ”The head of the aforementioned energy company told reporters that this practice of exchanging resources for projects is not limited to CNOOC or to Ordos alone; the problem is that after many companies obtain the resources, the projects are canceled or remain unfinished.