[Repost] Partnering with Beikong for coal-to-gas production: Can Haohua take advantage of this opportunity?

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Haohua Energy, whose main business is coal production and sales, is accelerating its transition toward the coal chemical industry. “We have discussed this with Beikong twice, with senior executives from the group being involved in those discussions. Beikong believes that once the necessary resources are secured, the project can proceed. ”Recently, Guan Jie, director, deputy general manager, and board secretary of Haohua Energy, revealed in an exclusive interview with a reporter from China Business News that the company intends to form a partnership with Beijing Holdings Group Co., Ltd. (hereinafter referred to as “Beijing Holdings”) in order to get deeply involved in Beijing Holdings’ coal-to-natural gas project with an annual production capacity of 4 billion cubic meters, located in the Dalu Industrial Park in Zhungeer Banner, Ordos City, Inner Mongolia (hereinafter referred to as “Beijing Holdings’ 4 billion cubic meter coal-to-gas project”). Guotai Chemical’s 400,000-ton coal-to-methanol project, located in the Duguitala Industrial Park in Hangjin Banner, Ordos, is the first project in which Haohua Energy has entered the coal chemical industry. Previously, our newspaper reported under the title \"400,000 tons of coal-based methanol production faces challenges; Haohua Energy struggles with its transformation\" that the project has been ordered to undergo rectification and maintenance ever since a gas leak occurred, resulting in the death of 4 workers due to nitrogen asphyxiation. Guan Jie admitted that the contents of the report were true, and other issues were also identified during the rectification and maintenance processes; the project is now being restarted for operation. “Chemical industries are more dangerous than coal, and the explosions of harmful gases and flammable gases cause severe damage. ”Although Guan Jie believes that Haohua Energy lacks talent and experience in the field of coal chemicals, and that companies in this industry that undergo rapid transformations in this sector face difficulties, he emphasizes that a rational transformation toward coal chemicals is part of Haohua Energy’s established strategy, and such a transformation must be carried out in an integrated manner. “Under the planned \"integrated\" transformation, Beikong Group, CNOOC New Energy Investment Co., Ltd., and Hebei Provincial Construction Investment Group Co., Ltd. will jointly build a coal-to-gas project in the Dalu Industrial Park of Zhungeer Banner in Ordos, with an annual production capacity of 3×4 billion cubic meters. Once completed, in addition to meeting the natural gas needs of Hohhot City and Tuoketuo County, the gas will also be transported to Beijing via pipelines. Reporters have learned that a natural gas pipeline from Zhungeer Banner in Ordos to Beijing is under construction. Among them, Beikong Group intends to invest in a coal-to-gas project with a capacity of 4 billion cubic meters through Inner Mongolia Beikong Jingtai Energy Development Co., Ltd. The preliminary work for this project began in 2012 ； By March 15, 2013, a reply from the National Development and Reform Commission was received, stating approval for the preliminary work to be carried out on the demonstration project for the clean and efficient comprehensive utilization of coal in Zhungeer Banner, Inner Mongolia; thus, the necessary approval for the project was obtained” ； And a “public announcement on environmental impact assessment” was carried out in September 2014. Information from the Ministry of Environmental Protection also shows that among the 5 environmental impact assessment documents for construction projects submitted between May 18 and 22, 2015, the Beikong coal-to-gas project with a capacity of 4 billion cubic meters was listed among them. Meanwhile, the Yellow River Water Resources Commission under the Ministry of Water Resources also approved the water resources assessment report for this project in April 2015. With this, the construction of Beikong’s 4 billion cubic meter coal-to-gas project has begun; everything is ready, awaiting only the final approval. According to the reporter, the \"east wind\" that Beikong is waiting for is simply \"waiting for (Inner Mongolia Autonomous Region) to make the necessary arrangements regarding resources; once those resources are available, the project can begin.\" Haohua Energy does not have the approval needed for coal-to-gas projects. However, the advantage lies in the fact that Beikong \"does not possess any coal mines and is unable to carry out mining activities\". Haohua Energy, as the major shareholder, owns coal resources amounting to no less than 1 billion tons in the Bayannaojie coalfield, which is located at the border between Wushen Banner and Yijinholo Banner in Ordos. This location is not far from Beikong’s coal-to-gas project with a capacity of 4 billion cubic meters. “Surely there will be a company in Beijing that invests in natural gas projects in Inner Mongolia; what if it doesn’t have coal mines? Obviously, this presents huge cooperation opportunities for Haohua, which owns coal mine resources. ”Guan Jie said. The Bayannao Wellfield is a resource allocated by the Inner Mongolia Autonomous Region for BOE’s related projects; currently, Haohua Energy holds 50% of the shares in it. However, the prospecting rights for this oil field are currently held on behalf of the Inner Mongolia geological exploration authorities, and the resources have not yet been confirmed. The Bayannao wellfield is part of the Hujilete mining area. The obstacles to securing the resources there are, first, that the \"mining rights allocation plan for this area has just been approved\", and second, that the \"overall plan for this mining area is still under revision, and it will take more than five years before that revised plan can be approved\". This year is the fifth year, and revisions are currently underway. Once the master plan is approved, there will be no problem in including the Bayannaojie oil field in the 13th Five-Year Plan during the second half of this year. ”Guan Jie said that once the resources are secured, cooperation between Haohua Energy and Beikong should not present any problems. As for the form of cooperation, “discussions are still underway.” Triple challenge: “Focusing solely on the fuel business is too limited; relying only on coal is no longer sufficient.” ”Guan Jie said that this judgment had already reached a consensus within Haohua Energy, with transitioning toward coal chemical industry being seen as the only way forward. However, on the path to transformation, Haohua Energy faces numerous challenges, the foremost of which is a shortage of talent. “Our coal enterprises don’t have chemical industry professionals, let alone management experience. ”An insider at Haohua Energy told reporters that in the field of coal chemical industry, there are widespread concerns within the company regarding issues such as the accuracy of market assessments and the ability to manage projects effectively. Guotai Chemical’s 400,000-ton coal-to-methanol project was once seen as a trial run for Haohua Energy’s coal chemical business. However, after the accident in November 2014 in which 4 people died due to an industrial gas leak, Haohua Energy realized that experience is crucial for managing coal chemical operations, and that such experience can only be gained through practice. As a result, the 400,000-ton coal-to-methanol project, which is tasked with building the workforce and accumulating experience needed for Haohua Energy’s transition into the coal chemical sector, may slow down the pace of investment in its second phase. The second major challenge is financial pressure. The Guotai Chemical coal-to-methanol project is a conversion project for Haohua Energy’s Hongqingliang coal mine. According to Guan Jie, \"the investment is substantial, roughly five times that of a typical coal mine project.\" For a Red Qingliang project, 3 billion yuan needs to be invested, while the transformation of such a project requires an investment of 15 billion yuan. ” Partnering with Beikong on the 4 billion cubic meter coal-to-gas project allows Haohua Energy to address the issues related to the resource conversion project in the Bayannaoer basin, as well as accelerate the transformation of its coal chemical business; however, the investment pressure is also considerable. It is understood that the coal resources in the Bayannaojie mining area are several times those in the Hongqingliang mining area of Haohua Energy, while the planned investment for Beijing Enterprises’ 4 billion cubic meter coal-to-gas project exceeds 28 billion yuan. According to estimates, over the 8 years from 2007 to 2014, Haohua Energy’s total net profit amounted to approximately 5.31 billion yuan, which is only one-third of the capital required for Guotai Chemical’s coal-to-methanol project. Another challenge is **policy uncertainty**. An analyst at Zhuochuang Consulting said that due to the poor progress of some previous coal-to-gas demonstration projects, as well as frequent media exposure of environmental scandals, China’s target for coal-to-gas production capacity in 2015 was reduced from the initially set level of 50 billion cubic meters per year to 15 billion cubic meters per year. This change indicates a bleak outlook for policies related to coal-to-gas production. The analyst said that, compared to the challenges related to talent and funding, the biggest risk for Haohua Energy’s coal chemical business in the future lies in **the continuous tightening of policies and environmental standards**. (Source: China Business News)