Current challenges faced by China’s coal-to-natural gas industry and suggested measures

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Challenges Faced by China’s Coal-to-Natural Gas Industry and Recommended Measures Author/Source: Modern Coal Chemical Engineering Date: 2020-05-07 Clicks: 38 The coal-to-natural gas demonstration projects not only serve as a means for engineering demonstration but also play a role in addressing air pollution issues and compensating for the shortage of natural gas in China. The demonstration project is located in the western regions, which are rich in coal resources. It enables the local conversion of coal resources into clean natural gas for transmission to inland areas, and holds great significance for developing the economy of the western regions, especially those inhabited by ethnic minorities, creating jobs, promoting ethnic unity, and enhancing social stability in border areas. Datang Keqi Coal-to-Natural Gas Pilot Project 1: Operation of the coal-to-natural gas industry (I) Steady growth in industry scale and product output: In 2019, China’s coal-to-natural gas production capacity was 5.105 billion cubic meters, with an actual output of 4.321 billion cubic meters, representing a year-on-year increase of 43.6%. In the first quarter of this year, the production of coal-to-natural gas was 1.19 billion cubic meters, representing a 1.7% increase on a year-on-year basis. The coal-to-natural gas industry makes a positive contribution to ensuring heating supply in winter, but as the heating season comes to an end, companies are forced to reduce production, leading to increased losses. (II) Continuous improvement in operational efficiency and production capacity: The key technical parameters of the first phase of the Datang Keqi coal-to-natural gas project are close to or exceed the design values. In the first half of 2019, the specific consumption of coal for producing natural gas per thousand cubic meters was as follows: energy conversion efficiency of 55.4%, 1.84 tons of coal per unit of output, and 5.77 tons of water used. After overcoming several technical challenges, Xinjiang Qinghua achieved a production load of around 92% at its peak. It successfully developed 4.0 MPa coal gasification technology using pressurized gas, as well as advanced technologies for wastewater treatment and reuse, thereby achieving zero wastewater discharge and a 95% domestic production rate for equipment in China’s manufacturing sector. For the Yili Xintian coal-to-natural gas project, it took 14 days for the first series to produce qualified natural gas that could be fed into CNPC’s West-East Gas Transmission pipeline, while it took 4 days for the second series to achieve the same result; this sets a global record for the shortest time required to produce qualified natural gas from coal in this industry. It is currently the largest coal-to-natural gas project of its kind that has been completed in a single phase. The methane purity in the SNG produced by the coal-to-natural gas project of Inner Mongolia HuiNeng Coal Chemical Co., Ltd. exceeds 97.0%, while the methane purity in LNG is above 99.7%; the energy conversion efficiency is close to 51% ； Its product quality and consumption metrics are close to or better than the **control targets, making it the only coal-to-natural gas project that is currently profitable. (III) Coal-to-natural gas contributes to ensuring a stable supply of natural gas. It can expand the various sources of natural gas supply, safeguarding its availability, and is one of the important supplements to China’s natural gas market; it is also an effective means of addressing seasonal shortages. During the heating seasons of 2017, 2018, and 2019, the four enterprises that produce natural gas from coal supplied a total of 4.805 billion cubic meters of natural gas. This clean fuel was used to supply heat in areas where air pollution control is a priority, contributing significantly to the reduction of air pollutant emissions. (IV) Continuous improvement in technical capabilities: Xinjiang Guanghui New Energy Company and the Dalian Institute of Chemical Physics, Chinese Academy of Sciences, have established a complete methanation simulation test system with a capacity of 7,000 standard cubic meters per hour in the Naomaohu Industrial Zone in Yiwu County, Xinjiang. Stability tests were conducted under industrial gas supply conditions, with a total operating time of 4,400 hours. Through the introduction, assimilation, and re-innovation of advanced technologies, Datang International Chemical Technology Research Institute Co., Ltd. developed a syngas methanation technology with independent intellectual property rights. It built a methanation unit with a capacity of 3,000 standard cubic meters per hour in accordance with industrial plant standards, and this unit has been operating stably for over 4,000 hours to date. Southwest Chemical Research and Design Institute Co., Ltd. and CNOOC Gas & Power Group Co., Ltd. jointly developed a methanation process for coal-to-natural gas, and completed an industrial-scale test with a capacity of 20,000 standard cubic meters per hour. Our country now has the conditions to achieve autonomy in coal-to-natural gas methanation technology. Xinjiang Qinghua Coal-to-Natural Gas Project 2: Current difficulties faced by the coal-to-natural gas industry (1) The selling price of natural gas produced from coal is lower than the production costs. Affected by low domestic natural gas prices, all currently operational coal-to-natural gas projects are in trouble. The original agreement between Xinjiang Qinghua Energy Group and CNPC for natural gas priced it at 2.75 yuan per standard cubic meter; now, the price of natural gas supplied by this company is around 1 yuan per standard cubic meter, which is far below the cost of production. The natural gas price for the Datang Keqi coal-to-natural gas project started at 2.75 yuan per cubic meter (including taxes; the same applies hereafter), as approved by the National Development and Reform Commission. After several adjustments to the pricing at various distribution stations and a reduction in tax rates, the current price at which the gas is sold to PetroChina is 1.75 yuan per cubic meter, representing a decrease of approximately 36% in the selling price. Due to the single composition of the main product, natural gas, and its delivery to consumers primarily through CNPC’s pipeline network, there has been no adjustment in the price of natural gas. In recent years, despite the ongoing efforts by the company behind this project to increase production capacity and reduce costs, it has still not been possible to change the reality of negative prices. (II) The transportation of coal-to-natural gas is constrained by pipelines. At present, coal-to-natural gas projects are mainly transported via CNPC’s pipelines, which means that their transportation is dependent on others. There is a significant difference between peak and off-peak periods in China’s natural gas consumption; demand is high during the winter heating season, while consumption drops significantly in the other seasons. Due to the limited options available for peak load management in existing pipeline networks, pipeline companies currently rely on coal-to-gas projects for this purpose. Coal-to-natural gas projects can operate at full capacity only during winter, while their capacity is around 50-60% in other seasons. This has a significant impact on the operations of these companies, leading to heavy losses and preventing these projects from serving as effective models. Taking the Datang Keqi coal-to-natural gas project as an example, the first-phase facility of this project in Keqi currently has the design capacity to produce 4.3 million cubic meters of natural gas per day (with a designed capacity of 4 million cubic meters per day) and 1.33 billion cubic meters of natural gas annually. However, due to restrictions imposed by CNPC during the non-heating season on the supply of natural gas, the amount of natural gas that can be received each day is limited to around 2.8 million cubic meters, representing 65% of the designed capacity. Since the beginning of this year, the Keqi project received a notice from CNPC on February 17, 2020, requiring a reduction in gas supply volume from 3.85 million cubic meters per day to 3.04 million cubic meters per day ； On February 25, CNPC sent a second letter, further reducing the gas supply volume to 2.8 million cubic meters per day ； On March 26, CNPC sent a third letter, reducing the gas supply volume once again to 2.8 million cubic meters per day. The continuous reduction in the plant’s production capacity has significantly increased the consumption of process parameters and the production costs of products, imposing considerable pressure on the company’s operations and creating safety hazards. (III) Limited coal resources in some enterprises: At present, the equipment and related facilities of the first phase of Datang Keqi Coal-to-Natural Gas Company have undergone technical upgrades over the past three years or so, and are now fully capable of supporting the full operation of at least 14 gasification units. Under conditions of full operation with a natural gas production volume of 4.3 million cubic meters per day (with a designed capacity of 4 million cubic meters per day), the company consumes approximately 26,000 tons of raw coal per day. In recent years, due to insufficient expansion of coal production capacity in the Xilinhot area and limited railway transport capacity, the supply of raw coal in eastern Mongolia has been relatively tight. In line with the company’s overall plan, Phase II of the Keqi project will be ready for operation by the end of September 2020. By then, the demand for raw coal will double, and the increased transportation of liquid products will further strain railway capacity, posing a significant bottleneck for future production operations. (IV) Difficulties in selling by-products of coal-to-natural gas production. Due to the impact of the pandemic, as well as the low operating rates and capacity utilization of downstream processing enterprises that deal with by-products such as crude phenol, coal tar, and sulfuric acid, it has been difficult to sell these by-products. This has led to serious inventory buildup, and the imbalance between supply and demand has caused sales prices to drop sharply. It is reported that recently, the Department of Ecology and Environment of Inner Mongolia Autonomous Region, the Ecology and Environment Bureau of Chifeng City, and the Ecology and Environment Sub-bureau of Keqi County issued respective documents requiring that the coal tar, a by-product of this project company (which does not meet the conditions for exemption from regulatory requirements), be treated as hazardous waste throughout its entire lifecycle. In accordance with the regulations regarding the management of hazardous waste, if the coal tar generated as a by-product by the project company is treated as hazardous waste, the purchasers involved must hold a license for handling hazardous waste. The Department of Ecology and Environment of the autonomous region will impose restrictions on its sale outside the region, and most of the surrounding provinces will also prohibit local enterprises from accepting such coal tar. This will ultimately lead to serious obstacles in the sales channels for coal tar, affect its selling price, and even pose the risk of production and operation shutdowns due to accumulated stockpiles of unsold coal tar. The Yili Xintian coal-to-natural gas project faces the same issue: the approval documents classify heavy aromatics as by-products rather than hazardous waste. However, the local environmental authorities where the project is located consider these heavy aromatics to be coal tar, which is listed in the 2016 version of the **Hazardous Waste List**, and thus constitutes hazardous waste (450-003-11). It should therefore be managed as such. As a result, Xintian Company will have to incur additional expenses of hundreds of millions of yuan each year for the disposal of this hazardous waste, putting further pressure on the company’s operations. Natural gas transmission pipelines 3: Policy recommendations and countermeasures (I) Establishing a reasonable natural gas pricing mechanism: It is recommended to **fully consider the strategic importance of the coal-to-natural gas industry as well as its actual production costs, and to promptly develop a scientific and reasonable pricing mechanism for coal-to-natural gas in order to address the issue of inverted prices in this sector. The price fluctuation mechanism can be determined by referring to factors such as the import prices of natural gas in Central Asia, so as to raise the prices of coal-to-natural gas as soon as possible to a reasonable level and ensure the sustainable development of this industry. (II) Intensify reforms of the natural gas pipeline network. It is recommended to accelerate the use of a direct supply method for selling gas produced from coal, adopt a model of \"proxy transportation and sales\" for such gas, thereby enabling enterprises to fully utilize their production capacity, improving their profitability, and boosting their confidence and enthusiasm for investing in new facilities. This will contribute positively to increasing China’s natural gas production and ensuring a stable supply. (III) Provide certain policy support for coal-to-natural gas projects. It is recommended to **refer to the subsidy policies for unconventional natural gases such as shale gas and tight gas, include the existing coal-to-natural gas projects in the list of unconventional natural gas projects, and offer subsidies to these projects. This will help them play a demonstrative role, assist enterprises in reducing losses and overcoming difficulties, boost their production enthusiasm, and contribute to increasing the overall supply of natural gas across the country as well as ensuring a stable supply during winter. (IV) By-product tar should not be classified as hazardous waste. The tar produced as a by-product of coal-to-natural gas conversion should be regarded as a by-product of the manufacturing process and not classified as hazardous waste, thereby reducing the operational burden on enterprises.