An objective evaluation of the Yankuang coal-to-oil project

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On September 20, Yankuang Group officially announced the commissioning of its 1.1 million-ton coal-to-oil project. Since the second half of last year, oil prices have experienced a sharp drop, and they remain volatile. On September 27, Brent crude oil closed at $48.17 per barrel. According to calculations by the China Petroleum and Chemical Federation, under current conditions, oil prices need to reach $65–$75 per barrel for coal-to-oil production to reach break-even. Undoubtedly, the Yankuang coal-to-oil project faces severe economic challenges, which has given rise to doubts from outside parties. The Yankuang coal-to-oil project came at the wrong time. But for Yankuang Group, this is an inevitable choice. I. Success in technology and project management: On August 23, the Yankuang coal-to-oil project achieved full operational capability across the entire process, producing qualified oil products. By September 20, it was announced that the project had been in operation for nearly a month, with the load remaining stable at 70%. From a technical perspective, this is a good result. Generally, chemical production requires reaching full capacity within 3 years: 70% capacity in the first year, 85% in the second year, and 100% in the third year, which can be considered normal. Yankuang’s coal-to-oil project is the first domestic coal indirect liquefaction project on a million-ton scale, with no precedents to follow. Previously, only 3 100,000-ton coal indirect liquefaction projects were in operation. The Yankuang coal-to-oil project utilizes the coal indirect liquefaction technology developed by Yankuang itself; prior to this, only a pilot-scale production of 5,000 tons had been carried out. From this perspective, the achievements that the Yankuang coal-to-liquids project has managed to accomplish so far are hard-won. The Yankuang coal-to-liquids project is invested in, constructed, and operated by Future Energy Chemical Co., Ltd. The Future Energy company was established with investments of 50%:25%:25% by Yankuang Group, Yanzhou Coal Industry, and Yan’an Petroleum Group respectively. Sun Qiwen, General Manager of Future Energy, explained that the project cannot operate at full capacity at present due to issues with the air separation unit; one of the air separation units is not functional, which limits the overall capacity of the project. The air separation unit operates under a third-party gas supply model; it is invested in, operated by, and supplies gas to the coal-to-liquids project on behalf of the U.S.-based AP Company. Yankuang bears no responsibility in this regard. In line with the standards of safety, stability, long operational duration, full capacity, and high-quality operation in chemical production, the Yankuang coal-to-oil project will next aim to achieve long-term operation. Sun Qiwen said that the originally planned target operating time was 150 days, and based on the current situation, this target can be extended further. Additionally, the actual investment in this project was lower than the estimated amount. In recent years, investments in coal chemical industries have frequently exceeded their estimates; therefore, it wasn’t easy for Yankuang to keep its actual investment below the projected figure. The coal-to-oil project put into operation by Yankuang is the first production line of Phase I of the project, comprising a coal-to-oil production line with an annual output of 1.15 million tons of oil products, along with the associated coal mine. There are additional capacity projects of 4 million tons, as well as another 5 million tons of capacity for phase two. The first coal-to-oil production line put into operation as part of this project, which includes the coal-to-oil facility, the Jinchitan coal mine, and the catalyst production unit, has a total estimated investment of 21.409 billion yuan. Among them, the estimated investment for the coal-to-oil project is 16.406 billion yuan; the actual investment is expected to be 13.906 billion yuan, resulting in a savings of 2.5 billion yuan. The Jjinjitan Coal Mine had a planned investment of 4.634 billion yuan; the actual investment amount was 3.942 billion yuan, resulting in savings of 0.692 billion yuan. The estimated investment for the catalyst project related to coal-to-oil production is 369 million yuan; the actual investment amount is 273 million yuan, resulting in a savings of 96.8 million yuan. This shows that Yankuang is excellent in technology research and development as well as project management. II. Strategic mistakes resulted in the loss of valuable time – It took nearly 10 years for the Yankuang coal-to-oil project to go into operation, during which precious time was lost. From a project perspective. Yankuang initially planned to develop coal indirect liquefaction technology over a period of three years, while simultaneously planning an industrial-scale project; production was then scheduled to begin three years after that. By July 2004, the technical development for Yankuang was completed, meeting the conditions for industrialization; during the same period, Yankuang was also planning industrial projects. In August 2004, the proposal for Yankuang’s coal-to-oil project was approved by the Shaanxi Provincial Development and Reform Commission and submitted to the **Development and Reform Commission. The feasibility study report was completed in December 2015. On February 8, 2006, the **NDRC approved the initiation of preliminary work for the project. The Yankuang coal-to-oil project was included in the coal industry’s 11th Five-Year Plan, and it was originally expected to be approved during that period. For example, included in the coal industry’s 11th Five-Year Plan was Shenhua’s 1.08 million-ton coal direct liquefaction project, which was successfully put into operation in 2009. However, the decision-makers at Yankuang were inconsistent in their attitudes over time. Yankuang’s coal-to-oil strategy was established during the tenure of the former chairman of Yankuang, Zhao Jingche. After Zhao Jingche stepped down, Geng Jiahuai took on the role of chairman of Yankuang Group. Geng Jiahu actually supports the coal-to-oil project; however, the Shandong Provincial Party Committee hopes that Yankuang will slow down its pace of external expansion. During his tenure, Zhao Jingche established a strategy to create “three more Yankuang companies” outside the province. The Shandong Provincial Party Committee prefers that Yankuang invest within the province. As a result, the pace of the Yankuang coal-to-liquid project slowed down. The organizational structure of the project preparatory team was maintained, with some personnel remaining to handle the approval processes for preliminary project documents. In 2008, the policy environment for coal-to-oil production changed. The NDRC has tightened regulations on coal-to-oil projects; except for Shenhua Ordos’s direct coal liquefaction project and Shenhua Ningxia Coal Industry’s indirect coal liquefaction project, all other coal-to-oil projects have been suspended. This is a heavy blow to Yankuang. The slowdown of coal-to-oil projects occurred during Geng Jiahuai’s tenure. But Geng Jiahuai actually made contributions. First, after the ban issued by the National Development and Reform Commission, the Yankuang coal-to-oil project came to a halt; Shenhua took advantage of this situation and tried to recruit Sun Qiwen to join their team. Sun Qiwen is the key figure behind Yankuang Coal-to-Oil. If Sun were to leave, Yankuang Coal-to-Oil would collapse. It was Geng Jiahui who retained Sun Qiwen, leaving behind the seed for coal-to-oil production at Yankuang. II. Internally within Yankuang Group, there is still much debate over coal-to-oil technology. For many years, coal-to-oil projects have operated as project preparation units, always at risk of being aborted. On the eve of his departure, Geng Jiahuai promoted the establishment of Future Energy, with the participation of Yankuang Group, Yanzhou Coal Industry, and Yan’an Petroleum, ensuring the continuation of coal-to-oil production. During Wang Xin’s tenure, the coal-to-oil project at Yankuang remained uncertain in terms of its prospects. A turning point came in 2013, when Zhang Xinwen took office as the chairman of Yankuang. At that time, Yankuang was facing huge losses; Zhang Xinwen took on the challenge of managing the situation. After reviewing Yankuang’s strategies, he designated the coal-to-oil project as the company’s top priority. By coordinating with the Shaanxi Provincial Party Committee, he drove forward the process to obtain approval for this project, accelerating its implementation. Thus, on September 23, 2014, after three successive **Energy Bureau directors and over eight years, the Yankuang coal-to-oil project was finally approved. The project went into operation the following year, but had to deal with low oil prices. From the perspective of technology export. There have been several opportunities for the export of coal indirect liquefaction technology. The first is the 4 million-ton coal indirect liquefaction project of Shenhua Ningmei Group. Originally, this project was planned to utilize the technology of South Africa’s Sasol. However, Shaso demanded very high terms: it sought not only a technical equity stake but also a fixed rate of return, which led to a deadlock in the negotiations with the Chinese side. At the end of 2009, Shenhua Ningxia Coal Industry Group submitted to the National Development and Reform Commission a feasibility report for the Ningcoal Project, which is based on Sasol’s technology. However, the landscape of indirect coal liquefaction technology has changed; Sasol is no longer the sole technology provider. This provides opportunities for domestic coal indirect liquefaction technology providers. By the end of 2009, Yankuang was no longer the only player in the game. Yankuang completed the low-temperature and high-temperature Fischer-Tropsch coal indirect liquefaction processes in 2004 and 2006 respectively, and carried out pilot tests of 5,000 tons each. By mid-2004, the coal indirect liquefaction technology team at the Shanxi Coal Chemical Research Institute had only completed a pilot-scale test on a thousand-ton scale. During this period, Yankuang’s coal indirect liquefaction technology was also at the forefront. In April 2006, the coal indirect liquefaction research team from the Shanxi Coal Chemical Research Institute, in collaboration with Yitai Group, established Zhongke Synthetic Oil Technology Co., Ltd. With Itai’s support, a 100,000-ton coal indirect liquefaction project was launched. Sinopec Synthetic Oil Technology is at the forefront in terms of industrialization. After 2008, with the coal indirect liquefaction technology developed by Zhongke Synthetic Oil, three such facilities were established in China: the 180,000-ton coal indirect liquefaction facility of Lu’an Group, the 180,000-ton coal indirect liquefaction facility of Shenhua Ordos, and the 160,000-ton coal indirect liquefaction facility of Yitai Ordos. ReneSola Group, relying on its own technical team, has developed its own coal indirect liquefaction technology based on the synthetic oil technology developed by China Science Academy. At the end of 2009, CCIC conducted research on three domestic technologies for the indirect liquefaction of coal and concluded that the Sinochem synthetic oil technology was the most mature; it had its own advantages even when compared to the Sasol technology. As a result, Sasol was ruled out, and the Shenhua Ningxia coal-to-oil project chose the Sinochem synthetic oil technology. The second wave of opportunities arose in 2012, when coal-to-oil production was launched; the coal-to-oil projects of Lu’an Group and Shenhua Ningmei Group successively received approval from the National Development and Reform Commission. In February 2014, the **Energy Bureau also released a preliminary plan for coal-to-oil production: by 2020, achieve an output capacity of 30 million tons of coal-to-oil products. Thanks to its leadership in the industrialization of technology, Sinopec Synthetic Oil has achieved great success. Apart from the Shenhua Ordos 1.08-million-ton coal direct liquefaction project, the second and third production lines still employ coal direct liquefaction technology; the Yankuang coal-to-oil project uses the technology developed by Yankuang Energy Technology, while all other coal-to-oil projects under construction or in planning in China utilize the technology developed by CAS Synthetic Oil. In recent years, new players have entered the field of coal indirect liquefaction. The Dalian Institute of Physical Chemistry, Chinese Academy of Sciences, has developed an indirect coal liquefaction process, which has undergone pilot tests involving 5,000 tons. The Shanxi Coal Chemical Research Institute has also developed a new indirect coal liquefaction process, and in collaboration with the Lu’an Group, it has built a pilot project with a capacity of 10,000 tons. However, with the commissioning of Yankuang’s million-ton-scale projects, Yankuang Energy Technology’s coal indirect liquefaction technology has temporarily gained a competitive advantage. Several multimillion-ton projects utilizing Sinopec Synthetic Oil Technology are currently under construction and will be put into operation successively in the future. However, with the decline in oil prices, the investment boom in coal-to-oil has come to an end. Companies that originally planned to invest in coal-to-oil production have suspended those plans indefinitely. The coal indirect liquefaction technology developed by Yankuang Energy Technology has achieved a higher level of maturity following verification through million-ton-scale projects, but it faces the challenge of having no applicable technologies to export for coal-to-oil projects. III. The inevitable choice: As early as the beginning of the century, during Zhao Jingche’s tenure, a strategy emphasizing both coal and non-coal resources was established. Among non-coal industries, coal chemical industry holds paramount importance. The coal chemical sector of Yankuang focuses on traditional coal chemical products, offering nearly 30 different varieties in four main categories, including urea, acetic acid, and methanol. But the problem is that, first, there is no technical barrier, and second, the market is limited. Soon, with a large influx of capital, these coal chemical products quickly fell into a situation of overcapacity. Coal-to-oil precisely solves these two problems. First, there are technical barriers to entry; originally only Sasol in South Africa possessed this technology, and now only a few companies in China have it. Second, China’s reliance on imported oil products is increasing year by year, meaning the oil market is virtually unlimited. Additionally, Yankuang’s main base in Shandong is facing the threat of resource depletion. More than a decade ago, Yankuang Group conducted calculations and concluded that the exploitable lifespan of its coal mines at the headquarters site would not exceed 20 years. Having experienced excessive extraction during the golden decade of coal, this sector may see further reductions. By investing in coal-to-oil projects in Yulin, Northern Shaanxi, Yankuang obtained valuable local coal resources. For the first production line of Yankuang’s coal-to-oil project in Phase 1, the local authorities provided it with the Jjinjitan Coal Mine as a supporting facility. With the advancement of the subsequent 4 million tons per year coal-to-oil project, Yankuang will also acquire the Xihongdun coal mine. The transfer price of the accompanying coal mine is extremely low. The Jjinjitan coal mine has reserves of 1.87 billion tons, with a designed recoverable reserve of 980 million tons; Yankuang paid only 1.66 billion yuan as the cost for those resources. For comparison, in 2011 Yankuang Group won the bid for the Zhuolongwan Coal Mine in Ordos; its total resource reserves amounted to 548 million tons, and the investment required was 7.8 billion yuan. In the same year, Yankuang acquired 51% of the shares in Haosheng Company for 6.726 billion yuan, thereby gaining control over 838 million tons of reserves at the Shilawaosu coal mine in Ordos. Currently, Shaanxi coal is gradually showing competitiveness. Zhang Chuanchang, the manager of Jinjitan Coal Mine, revealed that Jinjitan is the most profitable coal mine under the Yankuang Group. This year, the coal-to-oil project is planned to produce 300,000 tons of oil products; it is estimated that 1.5 million tons of coal will be required for this purpose. The remaining coal can be sold, generating profits of around 600 to 700 million yuan. In the future, the planned annual production capacity of Xihongdun Coal Mine will reach 30 million tons, while that of Jijitan Coal Mine will reach 10 million tons! In addition to supplying coal-to-oil projects, it also undertakes the strategic task of transferring workers from Yankuang’s headquarters. There are 28 coal chemical products across 4 major categories, including ammonia, methanol, and acetic acid. Therefore, through its coal-to-oil project, Yankuang not only improved the quality of its coal chemical business but also acquired valuable coal resources; this decision is reasonable. IV. Economic challenges: According to calculations by the China Petrochemical Federation, under current conditions, oil prices need to remain between $65 and $75 per barrel for coal-to-oil projects to reach break-even point. Yankuang’s calculations differ slightly from these; Sun Qiwen revealed that the feasibility study for Yankuang’s coal-to-oil project assumes a coal price of 220 yuan per ton and an oil price of 40 dollars per barrel, resulting in an internal rate of return of 12.7% for the project. According to Yankuang’s internal projections, based on the current prices of coal and oil, the company is expected to generate annual sales revenue of 4.286 billion yuan and a profit of 146 million yuan. But in reality, the Yankuang Northern Shaanxi coal-to-oil project adopts an integrated plant-and-mine model, with the raw coal from the Jijitan Coal Mine being transported directly to the coal-to-oil factory. However, within Yankuang, Future Energy Company is evaluated as an independent entity; its profit target for this year is 1 billion yuan, and Sun Qiwen admitted that the pressure is immense. On the one hand, Yankuang is expanding towards the sales side. Since it is a product of coal indirect liquefaction, its sulfur content can be below 0.1PPM, and all its parameters exceed the Euro V standards. At present, as most of this year has already passed, the petroleum products produced by Yankuang have all been sold to Yanchang Petroleum Group for use as blending oil. However, in the future, Yankuang plans to establish its own sales channels. At present, Yankuang is applying for the qualifications necessary to sell petroleum products within Shandong Province, with plans to build its own gas stations. The aim is to sell its clean synthetic petroleum products to local refineries in Shandong for use in blending oils, thereby earning a premium price. Second, expand to the downstream sales side to improve cost efficiency. Greater hopes lie in tax relief. Yankuang Group is calling for a reduction in the tax burden on coal-to-oil production. Sun Qiwen explained that, based on an annual production of 1.15 million tons of petroleum products, 1.661 billion yuan in consumption tax would need to be paid each year; if this tax were completely exempted, it would increase the company’s profits by 1.86 billion yuan. Currently, the Raw Materials Department of the Ministry of Industry and Information Technology is leading the effort to address this request from the coal-to-oil industry. Pan Aihua, deputy director of the Raw Materials Department at the Ministry of Industry and Information Technology, revealed that **the Tax Administration is investigating this situation. Recently, Li Ye, the chief engineer of the **Energy Bureau**, also said that the bureau will work with relevant departments to study the value-added tax and consumption tax applicable to coal-to-oil production. However, there is no timeline yet for when it will be introduced. V. The impact of increasingly stringent environmental assessments: At present, Yankuang is preparing to move forward with the subsequent 4 million tons per year coal-to-oil project. Sun Qiwen said that Yankuang will follow the Sasol model; in the second phase, more specialty chemicals will be produced, which can improve the economic viability of the project and help mitigate risks associated with fluctuations in oil prices. The application report for the preliminary work related to this follow-up project has been submitted to the **Development and Reform Commission; the project feasibility study report was completed in March 2015 ； The feasibility study report for the accompanying Xihongdun Coal Mine was completed in November 2014. Yankuang Group is considering making further use of the capital market to secure funding for the second-phase project. However, it has not yet been determined whether Future Energy Company will be listed separately or incorporated into Yanzhou Coal Industry. But the most crucial aspect of phase two is still how to pass the environmental impact assessment. There are 31 large-scale coal chemical projects in the country, all of which have been hindered from being implemented due to environmental assessment issues. In coal chemical projects with the best environmental performance, such as the China National Coal Group Tukue Project and Shenhua’s direct coal liquefaction project, the wastewater from the production process is treated biologically, recycled, and the saline water is concentrated to produce high-concentration brine. Through multi-effect evaporation, a large amount of miscellaneous salts are generated. There is still no economically viable method for the treatment of mixed salts. This is also one of the biggest obstacles to coal chemical projects passing environmental impact assessments at present. For Yankuang’s subsequent projects to be approved, they too must pass this hurdle.