Can coal-to-oil still hold up? --Coal-to-oil in the eyes of the media

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This post was last edited by slowstar on 2015-10-28 at 11:01. Oil prices continue to fall sharply, costs related to safety and environmental protection as well as labor and financial expenses are rising dramatically, the consumption tax on refined oil products has been significantly increased, and the policy and public opinion environment is becoming more stringent… The coal-to-oil industry, which once demonstrated strong profitability and attracted substantial capital investment, is now facing considerable pressure. When international oil prices began to decline in the second half of 2014, officials from coal-to-oil companies said that $70–$80 per barrel was the break-even point for such projects. But as international oil prices have rapidly exceeded this threshold and remained low, can coal-to-oil projects still hold up today? How is the operation of the pilot project currently? What is the way forward for coal-to-oil enterprises under multiple pressures? Reporters conducted investigations and interviews recently. Performance reversal: From substantial profits to huge losses. In the years prior to 2014, coal-to-liquid projects demonstrated good profitability. At that time, international oil prices remained at high levels, while domestic demand for refined oil products was strong and their prices were rising; as a result, coal-to-liquid enterprises reaped considerable profits. China’s first industrial demonstration project for coal indirect liquefaction – the 160,000 tons per year F-T synthetic oil project at Inner Mongolia Yitai Coal-to-Oil Co., Ltd. – produced a total of 799,300 tons of refined oil from March 17, 2009, to the end of 2014, generating a net profit of 530 million yuan. Although the Shenhua million-ton coal direct liquefaction project has faced numerous challenges since it began operations at the end of 2008, by the end of 2014 its output of refined oil had exceeded 4 million tons, generating a net profit of 2 billion yuan for the company. However, since last year, the operating environment for coal-to-oil projects has reversed. Starting in the second half of 2014, international oil prices plummeted, directly reducing the competitiveness of coal-to-oil products ； The consumption tax on refined oil has been increased by three tiers in a row, posing a heavy burden on coal-to-oil enterprises. At the same time, in recent years, various types of capital from the coal, power, and chemical industries have shown interest in coal-to-oil projects, raising concerns about overheating in this sector. Coupled with a series of environmental and technical issues identified in the pilot projects, these developments have put coal-to-oil projects under intense public scrutiny, leading to a shift in policy from strong support to cautious development. Coupled with increasingly stringent safety and environmental regulations that force companies to increase their investments in these areas, as well as rising costs related to labor and financial management, the overall costs for coal-based oil manufacturers have risen significantly, leading to a sharp decline in their profitability. According to investigations by reporters from China Chemical Industry News, under various pressures, coal-to-oil enterprises are currently operating with minimal profits or even in the red. Taking Yitai’s 160,000-ton/year coal indirect liquefaction project, which boasts strong profitability, as an example, in the first half of this year, although the facility operated at full capacity continuously and the output of refined products reached a record level of 101,300 tons, an increase of 13% on a year-on-year basis, the net profit achieved was only 4.3364 million yuan, less than 1/20 of that recorded in the same period last year. Qi Yaping, general manager of Inner Mongolia Yitai Coal-to-Oil Co., Ltd., said that selling refined oil alone results in losses; profitability is achieved only by taking into account by-products such as paraffin, with a profit of around 100 yuan per ton of oil. “As oil prices continued to fall in the third quarter, they are likely to remain low in the fourth quarter as well; it is expected that companies will find it difficult to turn a profit in the second half of the year. ”Wang Shanzhang, deputy general manager of Yitai Coal-to-Oil Company, said. According to a report on the Ordos People’s ** website, from January to August this year, China Shenhua Coal-to-Oil Chemical Co., Ltd. incurred losses of 980 million yuan. Shu Geping, the company’s chief engineer, told a reporter from China Chemical Industry News that, given the current low oil prices, the high consumption tax on refined oil products is the main reason behind the severe losses suffered by these companies. Overwhelmed: Low oil prices coupled with high taxes. Falling oil prices are a key factor behind the sharp drop in profitability of coal-to-oil projects. Since the beginning of this year, the downward trend in international oil prices has persisted; although there have been fluctuations, prices have remained around $40–$50 per barrel for most of the time. This represents a halving compared to the price of around $100 per barrel prior to 2014; thus, the economic advantage of “replacing oil with coal” has been significantly reduced. According to reports from China Chemical Industry News, after several consecutive reductions, the price of refined oil in China is now only a little over 5,000 yuan per ton. The naphtha and diesel blending components obtained through the hydrogenation of medium- and low-temperature coal tar cost only 4,300 yuan per ton, representing a halving of these prices compared to their peak levels. Previously, officials from coal-to-oil companies said that a oil price of $70–$80 per barrel represented the break-even point for such projects, but with further drops in oil prices, this threshold has long since been crossed. Xie Kechang, an academician of the Chinese Academy of Engineering and chairman of the Academic Committee of the Key Laboratory of Coal Liquefaction and Coal Chemical Industry, said in an interview with reporters that the extent to which coal-to-oil projects can adapt to fluctuations in oil prices depends on both the market and technology. For most current coal-to-oil projects, by tapping into internal potential, it is still possible to achieve profitability when international oil prices are above $60 per barrel. But business owners cannot control the changes in the oil market. On the other hand, the profitability of coal-to-oil projects also depends on energy output efficiency. This requires enterprises to accelerate the upgrading of coal liquefaction technology in order to enhance their core competitiveness. In their interviews, reporters heard that the main complaint raised by coal-to-oil companies was \"excessively high taxes and fees.\" “Were it not for the excessively high consumption tax on refined oil, coal-to-oil projects would still enjoy good profitability even at current low oil prices. ”The coal-to-oil companies interviewed were almost unanimous. In September this year, the million-ton-scale coal indirect liquefaction oil production demonstration project of Shaanxi Future Energy Chemical Co., Ltd., which has been planned by Yankuang Group for many years, was successfully commissioned in Yulin. But this project came at the wrong time. Despite having many advantages such as coal supplied by Yankuang, advanced technologies developed independently, high production efficiency, and a pool of top-tier talent, Sun Qiwen, vice general manager of Yankuang Group and general manager of Shaanxi Future Energy Chemical Co., Ltd., still feels immense economic pressure. Sun Qiwen admitted that aside from falling oil prices, the biggest pressure comes from excessive taxes. While the prices of refined oil products have been cut in half, the consumption tax on such products has been raised three times since November 28, 2014; currently, coal-based oil manufacturers have to pay a consumption tax of over 1,400 yuan per ton for diesel, while the tax on gasoline and naphtha exceeds 2,100 yuan per ton. Not only that, but other taxes such as value-added tax and urban construction tax have also increased. “Half of the price per ton of oil is in taxes. ”Sun Qiwen said. Li Dapeng, a leading expert in coal chemical industry at PetroChina Coal Chemicals Group, said that China’s oil extraction and refining enterprises already bear numerous taxes and fees. Following the “triple hike” in the consumption tax on refined oil products, the burden on refineries and enterprises producing coal-based oil products has been further increased. At present, for every ton of refined oil produced and sold by Yanchang Petroleum Group, 61 yuan in various taxes and fees must be paid, making the tax burden comparable to that of the tobacco industry. Under these circumstances, Yanchang Petroleum Group, whose main business is oil exploration and refining and which has just built two coal-based oil product production facilities, is facing unprecedented pressure in its operations, and may even incur substantial losses. Great pressure: Stricter environmental policies are being implemented. In July of this year, the environmental impact assessment for Shanxi Lu’an’s coal-to-oil project was rejected, drawing significant attention from the industry. This means that this key project under the 12th Five-Year Plan, which has been in preparation since 2010 and received approval from the National Development and Reform Commission in July 2012, with a capacity of 1.8 million tons per year, will see its operation postponed. What is widely discussed in the industry is that this indicates that environmental protection has truly become a key factor determining the survival and development of projects. The goal of coal-to-oil conversion is the clean and efficient utilization of coal, but issues such as high water consumption, substantial carbon emissions, and difficulties in dealing with pollution that have emerged from pilot projects in recent years have become significant factors contributing to environmental pressures. “The environmental impact assessment for the Lu’an coal-to-oil project was rejected, indicating that the Ministry of Environmental Protection is taking things seriously. ”An expert from the Petroleum and Chemical Industry Planning Institute said that under low oil prices, the economic viability of coal-to-oil projects has been significantly affected; the return on investment for enterprises has decreased. Now, they must also cope with stricter environmental regulations. The actual investments made by these enterprises have exceeded expectations, and their future development will face considerable difficulties. According to the data, based solely on the original plans for the Lu’an coal-to-oil project, the investment in environmental protection measures amounted to 2.3 billion yuan, accounting for nearly 10% of the total investment. Previously, Lu’an estimated that upon reaching full production, the coal-to-oil project would generate an annual sales revenue of 12.1 billion yuan and a profit of 2.18 billion yuan. This means that even at the original oil price levels and with the original environmental protection design plan in place, environmental protection investments would consume a project’s net profit for an entire year—and this does not include subsequent operation and maintenance costs. In fact, for the Lu’an coal-to-oil project, which had its environmental impact assessment rejected, to obtain approval it would need to make substantial additional investments in environmental protection; at the same time, the project’s economic viability would have to be reassessed, with expectations regarding annual sales revenue and profits likely to be significantly reduced. Apart from the initial environmental protection investments, with the successive introduction of environmental policies such as the new Environmental Protection Law, the Work Safety Law, and the “Ten Measures on Water Pollution Control”, public awareness regarding environmental protection and safety has been steadily increasing. Consequently, the daily supervision of coal-to-liquid projects has become increasingly stringent, driving up the associated environmental protection and safety costs. For example, the Yunnan Pioneer Coal-to-Oil Project, one of China’s industrial demonstration projects for coal-to-oil conversion, faced numerous complaints related to environmental issues, which forced it to suspend operations at the beginning of this year for rectification work; an additional 80 million yuan was invested in carrying out enclosed renovation efforts. Furthermore, many companies have reported that coal-to-oil projects are also facing the awkward situation of public opinion pressure and tightened policies. A few years ago, the significant economic benefits of coal-to-oil projects triggered a boom in investment and development. According to reports by journalists, China has currently developed more than a dozen production technologies for coal-based oils, and 33 projects related to such oils have been built, with a total annual production capacity of 7.52 million tons. According to industry experts, if all projects that are under construction or in the preliminary stages are carried out as planned, by 2020 China’s total production capacity for coal-based oil products will reach 39 million tons per year. As a result, concerns regarding overheating in coal-to-oil production first appeared in the major media, and were later reflected in a shift in **policy directions. In recent years, the approval process for coal chemical projects such as coal-to-oil production has been increasingly tightened, and preferential policies in some areas have been revoked. But is coal-to-oil really overheated? In Sun Qiwen’s view, “coal-to-oil is merely an overblown media phenomenon.” He said that due to the high technical, financial, human resource, environmental, and resource barriers associated with coal-to-oil production, the actual development of this industry is very slow. Coupled with low oil prices, many planned coal-to-oil projects are on hold, and those that have already been put into operation are not functioning well. For example, it was estimated in China that by 2015 a production capacity of 12 million tons of coal-to-oil products could be achieved, but it is now clear that this goal will never be met; even the \"ambitious target\" for 2020 is likely unattainable. Coal-to-oil production has been booming for about 10 years now, but the several million tons produced across the country still fall short of the output of a single large-scale refinery, so it cannot be considered truly overheated. The industry generally believes that cautious development does not mean no development at all; the construction of coal-to-oil demonstration projects in our country still needs to be carried out steadily. **On the basis of strict access requirements, certain support should also be provided, offering qualified enterprises relatively more flexible policy frameworks so that the coal-to-oil industry can continue to improve itself and develop innovatively. The industry calls for an immediate adjustment to the tax and fee system. Xie Kechang believes that, historically, China’s energy profile has been characterized by an abundance of coal, but a shortage of oil and gas. China’s economic development has led to a continuous increase in the demand for raw materials and fuels for industrial production, resulting in a record-high level of dependence on imported crude oil and posing a threat to the country’s energy security. Meanwhile, the core of the “coal revolution” is clean utilization; coal liquefaction technology will become one of the key directions for the new coal chemical industry. Developing coal-to-oil projects is beneficial to **, to society, and to enterprises as well. It is widely believed in the industry that it is understandable to raise the consumption tax on refined oil products during periods of low oil prices, so as to curb excessive oil consumption and promote energy conservation, emission reduction, and energy substitution. However, it is unreasonable to tax coal-to-oil production, which uses coal as raw material, in the same way as oil refining companies. China’s coal-to-liquid industry is currently in the demonstration and pilot phase. Under the impact of low oil prices, coupled with high investment requirements and costs, as well as heavy taxation, this industry risks stifling innovation and hindering progress, thus failing to fulfill its demonstration objectives. Faced with the current predicament of coal-to-oil enterprises, many experts are calling for **a prompt adjustment to the fuel taxation system, particularly the consumption tax on refined oil**. Experts such as Yang Zhanbiao, General Manager of Shenmu Fuyou Energy Technology Co., Ltd. under Shaanxi Coal and Chemical Industry Group, and Liu Yanwei, Deputy Chief Engineer of the Petroleum and Chemical Industry Planning Institute, suggested that a scientific and reasonable fixed tax rate should be determined by taking into account **fiscal revenue, social impacts, and the capacity of enterprises to bear such costs; based on this rate, a consumption tax on refined oil products should be levied on a value-based basis. Shu Geping, chief engineer of the Ordos Coal-to-Oil Branch of Shenhua Coal-to-Oil Chemical Company, suggested that **a consumption tax on coal-based fuels should be abolished. Qi Yaping, General Manager of Inner Mongolia Yitai Coal-to-Liquid Co., Ltd., also stated that for coal-to-liquid enterprises, the consumption tax should be halved, or waived for five years before being imposed, or levied in a tiered manner. Sun Qiwen suggested that the relevant authorities take full account of the special nature of coal-to-oil as a model industry, change the practice of applying oil industry tax rates to coal-to-oil enterprises, and implement a more differentiated and lower tax policy. It’s possible to levy a higher tax when oil prices rise and companies make more profits ； When oil prices fall and there is no profit to be made, taxes should be levied at a lower rate; alternatively, in accordance with the support policies for other emerging industries and high-tech industries, corresponding tax reductions or exemptions, or financial subsidies should be provided. Sun Qiwen, who worked for many years in South Africa—a major global producer of coal-to-liquid fuel—also noted that in South Africa, when international oil prices decline, **subsidies are provided to coal-to-liquid fuel producers based on fluctuations in oil prices and their break-even points. This practice is worth emulating.** “As the coal-to-oil industry is still in its infancy, its development will have a positive impact on ensuring China’s energy security, promoting the transformation and upgrading of the coal industry as well as the efficient and clean use of coal, and also enhancing China’s bargaining power in terms of importing oil and gas resources. Therefore, it is hoped that there will be **more support and less suppression; at the very least, the persistently high taxes and fees should not become the final straw that breaks the coal-to-oil industry**. ”Industry insiders are urgently calling for it. The fundamental solution: upgrading technologies, conserving energy and reducing emissions, and expanding downstream operations. Faced with the current predicament, how can coal-to-oil enterprises break the deadlock? Whether the device can operate safely, stably, and over a long period is an important factor affecting the profitability of coal-to-oil production. According to Shu Geping, apart from low oil prices and high tax rates, there is another reason for Shenhua Ordos’ losses in coal-to-oil production: due to various factors, the first production line has yet to reach its designed output level. “During the design process of the second and third production lines, we will eliminate all influencing factors to achieve the designed values. ”Shu Geping said. Industry insiders all agree that for a complex and large-scale production system like coal-to-oil, only by possessing robust technologies and ensuring the stable operation of equipment can costs be reduced and profitability be enhanced. “Some say that the product chain for coal-to-liquids is short; in reality, this is not the case at all—it simply hasn’t been properly developed. Coal-to-liquid projects can be extended downstream to produce a variety of chemical products, some of which cannot be produced through petrochemical processes. Extending downstream, diversifying products, and achieving co-production are the ways to improve efficiency in coal-to-oil production. ”Sun Qiwen explained that Sasol, a South African giant in the coal-to-liquids industry, can produce 136 types of downstream chemical products. Among these, products accounting for 40% of the total volume generate over 70% of the profits. Future Energy Company has plans to expand into chemical products in the future. Coal-to-oil should have been a project for the clean utilization of coal, but its development is now restricted by environmental regulations; therefore, accelerating efforts to reduce emissions and conserve energy, improving resource utilization rates, and protecting the environment have become a consensus within the industry. Companies that take the lead in environmental protection gain a competitive advantage. Since the future coal-to-oil energy projects will be put into operation under current strict environmental regulations, and resource recycling systems have been established, Sun Qiwen expresses great confidence in terms of energy conservation, emission reduction, and clean production. Xie Kechang pointed out that for coal-to-oil enterprises to develop sustainably, they must make further efforts in energy conservation and emission reduction, minimize overall costs, develop chemical products with high added value, and improve economic efficiency. And this first requires the improvement and upgrading of technical processes. The Key Laboratory of Coal Liquefaction and Coal Chemical Engineering will strengthen basic research, focus on improving the energy efficiency of projects, and promote the development of multi-product technology based on demonstration plants. “At present, it appears that over the next 30 to 50 years, coal will continue to play a dominant role in China’s energy structure. Coal-to-oil projects will assume the important task of ensuring energy security and enabling the clean and efficient utilization of coal resources. I believe that by continuously improving technical processes, intensifying efforts to save energy and reduce emissions, and actively expanding the industrial chain, the prospects for coal-to-oil production are certainly very bright. ”Xie Kechang said. (China Chemical Industry News) Background Information: Overview of Domestic Coal-to-Oil Projects. Coal-based oils, commonly referred to as coal-to-oil products, are a term that encompasses the production of liquid fuels from coal as raw material. This includes various techniques such as direct coal liquefaction, indirect coal liquefaction, hydrogenation of medium- and low-temperature coal tar, kerosene blending, synthesis of oil from coke oven gas, as well as the MTG process for converting coal (or coke oven gas) into gasoline. According to statistics, there is currently 1 coal direct liquefaction project in operation in China, with a production capacity of 1.08 million tons per year ； There are 6 coal indirect liquefaction projects, with a total capacity of 1.7 million tons per year ； There are 10 medium- and low-temperature coal tar hydrogenation projects, with a total capacity of 2.83 million tons per year ； 1 kerosene blending project, with a production capacity of 450,000 tons per year ； 1 project for producing synthetic oil from coke oven gas, with a production capacity of 60,000 tons per year ； There are 14 methanol-to-gasoline (MTG) plants for coal (coker gas), with a combined production capacity of 1.4 million tons per year. Companies such as Shenhua Group, Yitai Group, Lu’an Group, Jinmei Group, Yunnan Xianfeng, Yankuang Group, and Yan’an Petroleum are the main investors and participants in coal-to-oil projects in China, and the industrial demonstration projects that have been built are also represented by the projects of these companies. In addition, the projects that are under construction or for which preliminary work is underway are mainly as follows: For the Shenhua Ordos project, starting in 2013, tenders were issued for the preliminary work related to the second and third production lines of Phase I of this approved coal direct liquefaction project in Ordos (with a total oil production capacity of around 2 million tons per year); construction of supporting facilities such as water treatment plants has already begun. Shenhua Ningmei’s 4 million tons per year coal indirect liquefaction project is considered the largest coal-to-oil project of its kind in the world; construction on it began in September 2013. The project is located in the Ningdong Energy and Chemical Industry Base in Ningxia, with a total investment of around 55 billion yuan. It is scheduled to begin commercial operations in 2017. Yitai Group: The group has three coal-to-oil projects that are either under construction or in the preliminary stages, located in Yili, Xinjiang; Urumqi, Xinjiang; Jungeer Banner, Ordos; and Hangjin Banner, Ordos. The first phase of the Itai Ili coal-to-oil project, with a capacity of 1 million tons per year, requires an investment of 19 billion yuan; subsequent capacity will be gradually expanded to 5.4 million tons per year. In July 2014, the gasification unit of the first phase of the project was put into operation, with completion scheduled for 2016. In July 2014, the gasification unit of Yitai-Huadian Ganquanbao 2 million tons/year coal-to-oil project operated by Yitai Xinjiang Energy Co., Ltd. was put into operation. The total investment in this project is approximately 32.6 billion yuan, with a capacity of 2 million tons per year; the main products are diesel, naphtha, and LPG. In December 2013, Inner Mongolia Yitai Coal-to-Oil Co., Ltd.’s 2 million tons per year coal indirect liquefaction project received approval. The project is located in the Dali Industrial Park in Zhungeer Banner, Ordos, with a total investment of around 30 billion yuan; the construction period for this project is 3 to 4 years. The technical transformation project for producing clean fuels from methanol at a capacity of 1 million tons per year by Jinnan Coal Group’s Huayu Company began construction in July 2012. At present, the comprehensive warehouse, comprehensive building, control building, and comprehensive tank farm have been completed. The steel structure for the synthetic oil production area of the main plant is almost finished, and equipment installation is underway. It is expected that the 500,000 tons per year MTG plant in Phase 1 will be fully installed by December 2016. Shanxi Lu’an: The integrated demonstration project for the clean utilization of high-sulfur coal for oil, chemicals, and heat production in Shanxi Lu’an is located in Xiangyuan County, Changzhi City, Shanxi Province. Its capacity is 1.8 million tons per year of coal-to-oil production, with a total investment of over 20 billion yuan. The project received approval from the National Development and Reform Commission in July 2012, with completion and operation scheduled for 2015; however, its environmental impact assessment was rejected in July 2015. In April 2014, Yufu Energy’s 2000,000 tons per year coal-based clean fuel project in Bijie, Guizhou, received approval from the National Development and Reform Commission. The main components of the project are a facility capable of producing 2 million tons per year of petroleum products and chemicals, along with related utility and auxiliary systems; Guizhou Yufu Energy Development Co., Ltd. is leading the preliminary work for this project. Yanchang Petroleum’s 150,000 tons per year synthetic gas-based oil production demonstration project at Yulin Coal Chemical was completed by the end of 2014, and it entered the trial operation phase in 2015. (Huahua Network Coal Chemicals)