Challenges faced by China’s coal-to-oil industry under the combined impact of low oil prices and the pandemic, and corresponding countermeasures

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Under the combined impact of low oil prices and the pandemic, the challenges faced by China’s coal-to-oil industry and corresponding countermeasures Author/Source: Modern Coal Chemical Industry Date: 2020-04-30 Clicks: 10 The resource profile of \"a shortage of oil and gas, but relatively abundant coal resources\" determines that China’s energy structure, which is dominated by coal, will be difficult to change in the short term. In 2019, China’s dependence on imported crude oil reached 72%, while its dependence on imported natural gas reached 43%; this poses challenges to China’s energy security. Carrying out demonstration projects for coal-to-oil conversion in our country holds great strategic significance for ensuring **energy security, enhancing China’s influence in international oil trade, and diversifying the sources of clean petroleum products in the country. I. Operation status of the coal-to-oil industry (1) Steady growth in industry scale and product output According to statistics from the Coal Chemicals Committee of the China Petroleum and Chemical Industry Federation, in 2019 China’s coal-to-oil production capacity was 9.21 million tons, with an output of 7.436 million tons, representing a year-on-year increase of 20.4% ； In the first quarter of this year, coal-to-oil production amounted to 1.736 million tons, a 6.9% decrease compared to the previous year. Through the operation of demonstration projects, China’s coal-to-oil industry has built up a strong reserve of technology and production capacity. (II) Continuous improvement in operational efficiency and production capacity: The Ordos direct coal liquefaction demonstration project of the Energy Group produced a total of 7.28 million tons of oil products between 2011 and 2019. The operation load remained at around 85%, and the stable operation period per cycle exceeded 420 days, far surpassing the designed operating time of 310 days. In 2019, the China Petroleum and Chemical Industry Federation organized on-site calibration expert teams to conduct 72 hours of continuous operation calibration for three coal indirect liquefaction projects on a million-ton scale: Shanxi Lu’an Group’s “Integrated Demonstration Project for the Clean Utilization of High-Sulfur Coal for Oil, Chemicals, and Heat Production,” **Energy Group Ningxia Coal Company’s “4 million tons per year Coal Indirect Liquefaction Demonstration Project,” and Inner Mongolia Yitai Chemical Company’s “1.2 million tons per year Fine Chemicals Demonstration Project.” Calibration results show that the operating load factor for all three projects exceeds 95%; the comprehensive energy consumption per unit of product is 1.98–2.04 tons of standard coal per ton, the coal consumption per unit of product is 3.48–3.54 tons of standard coal per ton, and the water consumption per unit of product is 5.12–5.72 tons per ton. (III) Continuous improvement in technological innovation: Building on the successful demonstration of the complete set of technologies for indirect coal liquefaction using high-temperature slurry beds, the Shanxi Institute of Coal Chemistry, Chinese Academy of Sciences/CSOIL Technology Co., Ltd. has developed a technology for mild hydrogenation pyrolysis (liquefaction) of coal. This technology has enabled the safe and stable operation of pilot-scale plants with a capacity of tens of thousands of tons; the coal conversion rate reached 88.5 wt%, while the yield of distilled oil was 42.1 wt%. Shaanxi Future Energy Chemical Co., Ltd. has utilized its independently developed key high-temperature fluidized-bed Fischer-Tropsch synthesis technology to enhance and improve coal-to-oil product solutions. Results from 72 hours of on-site calibration show a methane selectivity of 10.02% and a total olefin selectivity of 52.58%. Among them, the ethylene selectivity is 3.75%, the propylene selectivity is 8.42%, and the selectivity for α-olefins with C4 content or more is 28.94% ； The C5+ selectivity is 52.56% ； The selectivity for oxides is 10.48%. This technology will gradually break down the boundaries between the coal-to-oil and coal-to-olefins industries, giving rise to a new, highly competitive coal-based energy and chemical industry. II. Current difficulties faced by the coal-to-oil industry The coal-to-oil companies generally have high inventory levels, reduced production capacity, prices of their products falling below their costs, resulting in severe losses. (1) Severe inversion between product prices and costs. Due to the impact of the pandemic, international oil prices have continued to drop, reaching historic lows. Coal-to-oil companies are facing a severe inversion between the prices of their products and their costs, resulting in heavy losses for these companies throughout the pandemic. Taking a coal-to-oil project as an example, during the COVID-19 pandemic, due to factors such as a lack of demand from downstream customers and increased costs associated with storage, the production of this project was highly unprofitable. In March, the average selling price of the products was only around 3,500–3,800 yuan, which is about 1,300 yuan lower than last year’s selling price of 4,800–5,000 yuan; the loss per ton of product amounted to around 900–1,000 yuan. (II) Affected by the pandemic, the annual major maintenance cannot be carried out as planned. Coal-to-oil enterprises usually schedule their annual major maintenance for the first half of the year; for such maintenance tasks, spare parts that require a long production time must be manufactured by upstream equipment manufacturers on schedule. The delayed resumption of operations by these manufacturers results in the inability to carry out the maintenance as planned, which may lead to a situation where multiple enterprises conduct their maintenance at the same time, thereby having a negative impact on the orderly operation of the industry and its supply chain. (III) Insufficient operation in the downstream industrial chain, with high inventory pressure. The downstream industrial chain for coal-based oils and chemicals is not operating at full capacity, and the products sold currently end up as raw material inventories for downstream enterprises. In the long run, this will disrupt the normal operation of upstream enterprises, ultimately leading to reduced production capacity or shutdowns. To maintain stable production, upstream companies are forced to lower their selling prices or rent storage tanks in order to address the issue of excess inventory. Currently, the selling prices are **below the cost of production; coupled with the additional costs associated with moving products during the pandemic, these companies are operating at severe losses throughout that period. (IV) The heavy tax burden on coal-to-oil production severely affects enterprises’ operations. The taxes and fees associated with coal-to-oil projects include consumption tax, value-added tax, as well as urban construction tax and education surcharges; among these, consumption tax and value-added tax have the greatest impact. Since the sharp drop in oil prices in 2014, in order to mitigate the impact of volatile crude oil prices and maintain relative stability in the domestic refined oil market, the Ministry of Finance has issued orders to raise the consumption tax rate on refined oils on three occasions, resulting in an overall increase in the consumption tax of over 50%. The consumption tax burden on coal-to-oil enterprises has risen from 12% to the current 30%. Coupled with the high value-added tax burden, statistics show that the overall tax load on coal-to-oil enterprises is approaching 40% of their sales revenue, and this excessive tax burden significantly affects the operations of such enterprises. The coal-to-oil project undertakes the task of demonstrating modern coal chemical technology; it is still in the demonstration phase at present, representing the initial stage of industrial development, and thus has a weak capacity to withstand risks. III. Policy Recommendations and Countermeasures (1) Provide certain policy support for coal-to-oil and gas projects to ensure energy security. Given that the technological processes used in producing coal-based oil products are vastly different from those used for petroleum-based products, at current coal prices, taxes account for over 39% of the total cost per ton for coal-based diesel and naphtha, respectively; such high tax burdens significantly hinder the innovative development of coal-to-oil technologies as well as the implementation of demonstration projects. Full consideration should be given to the uniqueness of coal-to-oil as an emerging industry; in line with the original intent behind introducing a consumption tax on petroleum products, a differentiated consumption tax policy for refined petroleum products should be implemented temporarily. For example, the consumption tax on coal-to-oil products can be adjusted in line with fluctuations in oil prices, using a tiered system for its collection. Consumption tax is exempted in low oil price ranges, levied in a tiered manner in medium oil price ranges, and the levy rate is increased in high oil price ranges. Alternatively, a consumption tax can be imposed based on the different stages of the project; a policy of exemption or reduced taxes can be applied during the initial phase of operation, with the tax rate gradually increased over time until it matches that of petroleum-based products. (II) Promote exchanges and cooperation in coal-to-oil technology. There are still some issues that hinder the steady operation of coal-to-oil plants at full capacity; it is recommended to **increase investment in science and technology, actively pursue original innovation, integrated innovation, and innovation through the adoption and adaptation of external technologies, focus on the key stages and major products in coal-to-oil production, and strengthen research and development of common technologies as well as the transformation of research results into practical applications. Promote cooperation among coal-to-oil manufacturers, domestic and foreign universities, as well as research institutions in the areas of industry-university-research collaboration. By leveraging coal-to-oil demonstration projects, technical exchanges can be carried out in areas such as product structure optimization, energy conservation and environmental protection, as well as improvement of quality and efficiency, thereby fostering the high-quality development of the coal-to-oil industry. (III) Improving the National VI standards for refined petroleum products: The current standards for various petroleum products are based on traditional petroleum refining products. The newly revised National VI standards for gasoline and diesel, namely GB 17930-2016 Standard for Motor Gasoline (VI) and GB 19147-2016 Standard for Motor Diesel (VI), exclude coal-based oil products, which hinders the widespread use of such products. It is recommended to amend the relevant standards to include coal-to-oil products within their scope of application, thereby facilitating their entry into existing refined oil distribution channels.