Shenning Coal-to-Oil Project Faces Changes; Saso at Risk of Being Excluded

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Shenning Coal-to-Oil Project at Risk; Sasol Faces Exclusion Threat Author: He Qing Source: 21st Century Business Herald Views: 93 Update Date: July 6, 2011 According to Sinochem News, Xu Hailong is very worried; even his promotion hasn’t managed to bring him joy—Sasol Synthetic Fuels International Ltd. (referred to as Sasol) is at risk of being excluded from the Shenning coal-to-oil project, and Xu Hailong is the president of Sasol’s Beijing branch. Reports from Ningxia indicate that the 4 million-ton coal-to-oil project of Shenhua Ningmei Group (referred to as the Ningmei Project) has recently passed the feasibility assessment for approval. This means that construction of this large-scale project, with a total investment of 55 billion yuan, is likely to begin in the near future. It makes use of China’s own proprietary technology for indirect coal liquefaction (referred to as ZK technology). “Zhongke Technology involves risks, which will put the entire project at economic risk ； And our technology has been tested through 60 years of practice. ”On July 4, Xu Hailong said. SASO was once the foreign partner in this project; it not only held 50% of the shares in the project but was also responsible for providing the technology required for it. “But Zhongke Technology was designated by the Energy Bureau, so it’s difficult for Shaso to turn things around, according to people familiar with the situation. According to the aforementioned individuals, last November the Energy Bureau hastily convened some experts and Shenhua Ningmei Group to discuss the feasibility of using CAS technology in the Ningmei project – to prepare a feasibility report using Sasso technology, Ningmei spent a whole year merely on data collection for the preliminary study ； Yet the entire development process for Zhongke Technology took less than half a year. As of the deadline, Li Yongwang, the chief technical officer of Zhongke Technology and general manager of Zhongke Synthetic Oil Technology Co., Ltd., continued to refuse interviews. In the debate over technical approaches, although Sinostechnology has managed to put the plant into operation at Yitai, there is still much controversy regarding expanding its capacity to one million tons. The Ningxia Coal project is a massive undertaking: according to Sinopec’s estimates, its investment cost will amount to 58 billion yuan, making it the largest Sino-foreign joint venture project in China to date ； By adopting Zhongke Technology, Shenhua Ningmei Group’s investment will also reach 55 billion yuan. According to Xu Hailong, since 2002, Saso has been in discussions with Shenhua regarding the introduction of coal-to-oil indirect liquefaction technology, with the aim of establishing a large-scale coal-to-oil production facility in Ningxia. After lengthy business negotiations, at the end of 2009, Shenhua Ningmei Group formally submitted an application to the **Development and Reform Commission for project approval, based on the Sasol technology. The group planned to put this large-scale facility into operation by 2016, at which point it would be capable of producing 3.85 million tons of refined oil per year. However, at this point, Zhongke Synthetic Oil Technology Co., Ltd. emerged suddenly. This high-tech company was established through joint investment by the Shanxi Coal Chemistry Research Institute of the Chinese Academy of Sciences, along with industry partners such as Inner Mongolia Yitai Group Co., Ltd., Shenhua Group Co., Ltd., Shanxi Lu’an Mining (Group) Co., Ltd., and Xuzhou Mining Group Co., Ltd., building on years of research into coal-based slurry-bed technology for the synthesis of liquid fuels. Li Yongwang proposed to the **Energy Bureau and Shenhua Ningxia Coal Group that he was willing to transfer Zhongke Technology to Shenhua Ningxia Coal Group, hoping that this technology would be used in the Ningxia coal project. This technology had previously been utilized in Inner Mongolia Yitai Group’s 160,000 tons per year coal-to-oil project. The fact that it possessed independent intellectual property rights convinced the relevant officials at the **Energy Bureau, and as a result, the technical approach for the Ningxia coal project was quickly changed. “It’s too risky; the jump from 160,000 tons to millions of tons is enormous—and the plants operated by Yitai Group are not functioning smoothly either! ”Liu Wenlong, former chief economist of Sinopec, said that over the past year he had held numerous discussions with Sasol, Shenhua Ningxia Coal, and other relevant parties, and was well aware of the investment risks associated with the Ningxia Coal project. He believes that given the enormous scale of investment in Ningxia Coal projects, their economic viability must be carefully considered. “The fact that such technology works on a scale of 160,000 tons does not mean it will also work at a scale of millions of tons; the production processes and various technical aspects would be very different, and using such technology carries too much risk.” An expert on the evaluation panel for the Zhongke technology project held a different opinion. “Saso’s technology wasn’t copied directly from South Africa either; there were modifications made, and there were risks involved ； Given the risks involved, since Zhongke Technology possesses independent intellectual property rights, why can’t it be used?” he asked. “As for the capacity aspect, relevant technologies from the petrochemical industry can certainly be utilized; with today’s advanced computer technology, the traditional technical limitations in the chemical industry have been overcome.” Since the Ningmei project has not been put into operation, it is still unclear at present who is right or wrong. However, the party responsible for bearing the risks is already clear: if Saso’s technology is used, Ningmei and we will each bear 50% of the risks ； On the contrary, by using Zhongke Technology, Li Yongwang only has to bear the risks associated with technology transfer; the other substantial investment risks have to be taken on by Ningmei alone,” said Xu Hailong. It is understood that in such large-scale projects, the technology transfer fee generally does not exceed 5% of the total project investment. The economic benefits behind this technology: The Ningxia Coal project is the first large-scale indirect coal-to-oil project in China, and as such it has a significant demonstrative effect. In fact, being the first large-scale indirect coal-to-oil project in the country, it possesses a considerable demonstrative impact, and the economic benefits associated with it are astounding. Liu Wenlong said, “Our country imports a large amount of oil; from a **safety perspective, the risks are relatively high. Therefore, it is very necessary to establish demonstration bases for coal-to-oil conversion, especially to master the relevant technology.” ” Shenhua Group has planned to build four large-scale coal-to-oil and coal chemical complexes, among which the Ordos direct coal-to-oil project was officially completed and put into operation in 2008. “In the first quarter of this year, the coal-to-oil project in Ordos produced 216,000 tons of refined oil, generating profits of over 100 million yuan. ”On May 14, Zhang Yuzhuo, general manager of Shenhua Group, said. However, regarding the technical choice for the Ningxia Coal project, many peers express a greater preference for Saso’s technology. A senior executive from Yanzhou Coal Industry said that although the company will use technologies developed in-house, it believes in taking a gradual approach to gradually increase production capacity. The aforementioned Shenhua official went on to say that due to the variety of coal types in China, multiple coal-to-oil conversion technologies can coexist; however, each technology must be tested in practice. \"For such a technology to move from the laboratory to actual industrial application, there should be a gradual process, and time is required – switching technologies hastily is irresponsible toward investors.\" Perhaps it was precisely due to the controversy within the industry regarding the Zhongke project that, at the review meeting for the Ningmei project, the experts present recommended that efforts be made to obtain and finalize the relevant materials required for approval.