Stalemate in the restructuring of Datang Coal Chemicals – Is the launch of Fuxin’s coal-to-gas project still a long way off?

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The construction of Liaoning Datang International Fuxin Coal-to-Natural Gas Co., Ltd. (hereinafter referred to as “Fuxin Coal-to-Gas”) remains stalled, and various indications suggest that prospects for progress on this project in 2016 are also bleak. Reporters learned from relevant sources that the restructuring efforts related to the coal chemical sector projects initiated by Datang International Power Generation Co., Ltd. (hereinafter referred to as “Datang Power”, 601991.SH) in mid-2014 have not progressed smoothly. Shenhua Group Co., Ltd., the company that was once seen as a promising successor, showed interest only in one of the five coal chemical projects sold together by Datang. However, the proposal was put on hold due to difficulties in reaching an agreement regarding asset impairment. It is reported that another option is under consideration: Datang Power, Shenhua Group, and China State Assets Investment Corporation Limited (hereinafter referred to as “CSIC”) would jointly form an entity dedicated to operating coal chemical projects. One of the conclusions reached by the central inspection team during its inspection of Datang Power in 2015 was that blind investment in industries other than power generation had resulted in a large amount of inefficient and ineffective assets. The Fuxin coal-to-gas project, whose cumulative investment has reached 14 billion yuan, may serve as a typical example of Dalian Power’s reckless investments. The reporter also specifically called key personnel at Datang Energy and Chemical Corporation to request an interview. As of press time, no response has been received from them. The Fuxin project remains at a standstill. Ten months later, on November 10, reporters paid another visit to the Datang Fuxin Coal-to-Gas Project. What they saw showed no significant changes compared to early this year (for details, see the January 2015 report titled “Datang Fuxin Coal-to-Gas Project Becomes a Hot Potato; 14 Billion Yuan in Investments Put on Hold”). Infrastructure such as office buildings, factory buildings, staff dormitories, and canteens has already been put into use, but the factory area is empty and quiet; aside from occasional vehicles coming in and out and employees walking around, there are no signs of any construction, work, or production activities. However, according to the security guard at the entrance, around 1,000 people are still working at the Fuxin coal-to-gas plant on a daily basis. “The Fuxin project has been on hold; although the announcement regarding its suspension was issued at the end of last year, work on it actually stopped gradually starting in 2013. ”According to informed officials in Fuxin. Meanwhile, information from within Datang indicates that in Datang Power’s investment plan for 2016, there are no provisions whatsoever regarding the Fuxin coal-to-gas project. This means that no progress will be made on the project next year. According to various investigations by reporters, the Fuxin coal-to-gas project is currently facing difficulties and incurs high costs. “Just the financial costs for this project amount to 1 billion yuan per year, and it hasn’t started operations yet – where will this money come from? There are still many facilities and equipment that haven’t been completed; some are only half-built ； The completed pipelines, equipment, facilities, materials, etc. require maintenance and storage, with costs amounting to approximately 100 million yuan per year. ”As stated by the aforementioned local officials in Fuxin. Regarding the possibility of further investment by Datang, this person was not optimistic. “It was supposed to be completed in 4 years, but it has remained unfinished for 6 years; even if work resumes in the future, extensive adjustments and renovations will be necessary, and the entire project will have long since lost its original appearance. ”The individual said that if things continue like this for a few more years, the various costs will become unbearable; it would be a bottomless pit for investors. “For Datang as well, it’s currently a problem with no solution – neither can it give up on it nor afford to take on the burden.” ”The person said. It is also understood that the internal management of Fuxin’s coal-to-gas project is facing difficulties as well. “The situation with the Fuxin project has led many people to want to switch to Datang’s power system, but their employment relationships are currently on hold. Before the restructuring, no one’s job will be transferred. ”An insider at Fuxin Coal-to-Gas said. “Currently, no payments are being made to external parties. However, various equipment suppliers and construction contractors keep demanding payment, leaving the management completely overwhelmed. ”The insider mentioned that wages also fail to be paid on time; to keep employees’ morale up, various sports competitions and recreational activities are frequently organized for them. Public records show that the Fuxin coal-to-gas project invested in by Datang Power Generation was approved by the **National Development and Reform Commission in March 2010 and construction began. The total investment amounted to 24.57 billion yuan, with a production capacity of 4 billion cubic meters of coal-to-natural gas per year (12 million cubic meters per day); the project was originally scheduled to go into operation in December 2014. The coal-to-natural gas produced in Fuxin will supply cities in the surrounding areas of the Northeast, such as Fuxin, Shenyang, Tieling, Benxi, and Fushun, with natural gas. On December 22, 2014, Datang Power Generation stated that the company plans to sell its coal chemical business and has suspended the construction of the Fuxin coal-to-gas project. By the time construction was halted, a total of 14 billion yuan had been invested in the project. Blind investment ultimately leads to regrettable consequences. From February 28 to April 30, 2015, the 11th Central Inspection Team conducted a special inspection of China Datang Group Corporation. One of the inspection conclusions reached by the inspection team was that the decision-making process for matters of significant importance was violated, with investments being made blindly in industries other than electricity generation, resulting in a large amount of inefficient and ineffective assets. Some industry insiders say that Datang has made reckless investments in industries other than electricity generation, with the coal chemical sector being the most affected by this. “The processes and procedures in the chemical industry are extremely complex; they cannot be achieved simply by investing money. For Datang, which focuses on the thermal power sector, lacking the necessary technology, talent, and knowledge of the coal chemical industry, making hasty large-scale investments would surely result in heavy costs as a consequence of such decisions. In such cases, it’s possible that even after paying the price, no lessons are learned. ”The industry insiders mentioned above said. It is said that when Datang made its investment decision, the situation was relatively optimistic; at that time international energy prices were high, with crude oil costing around $140 per barrel, while now the price has dropped to almost $40 per barrel. Although coal prices have also fallen, oil and natural gas prices have dropped even more. The conditions in the market have changed significantly compared to before. It turned out that despite Tangda recruiting many highly skilled professionals in the chemical industry through various channels, working on coal-to-gas projects for which there was no existing experience, either domestically or internationally, remained a challenging task that required trial and error. “The development of key core technologies for equipment, the selection of appropriate designs, and the optimization of processes were all advanced through ongoing research; the coal-to-gas project in Keshiketeng Banner, Inner Mongolia, had to replace its large-scale equipment on multiple occasions. ”Relevant personnel from Liaoning Datang stated that this has led to continuous increases in budgeted investments, which will also severely affect the economic viability of the project. Keqi is Datang’s first coal-to-gas project, and to this day this industry remains the subject of criticism from many experts, primarily due to its high level of pollution and lack of economic efficiency ； Secondly, there is also much debate over whether converting coal into gas for subsequent use constitutes an excellent way of utilizing energy. “The Keqi project was originally a demonstration project for coal-to-gas conversion; the plan was to summarize the experiences gained after the final acceptance and completion of the project, before proceeding to implement other similar projects. ”The aforementioned person from Liaoning Datang said. However, even though the Keqi project had already started operations, it had not produced any results, benefits, or valuable experience, and many technical issues had not been fully resolved; as a result, Datang decided to pursue the Fuxin project instead. “The process routes for the Fuxin project and the Keqi project are exactly the same; in other words, it is a complete copy of the Keqi project. The difference is that the gas from Keqi is sent to Beijing, while the gas from Fuxin will serve Liaoning. ”The aforementioned officials from Liaoning Datang said that even if it were able to start operating, it would still incur losses, and it could not escape the fate of suffering losses as soon as it began operations. The continuous large-scale investments by Datang Power in its coal chemical business have resulted in high levels of debt for the company. As of the first half of 2014, the total assets of Datang’s coal chemical business segment amounted to 75.125 billion yuan, while its total liabilities were as high as 63.621 billion yuan, accounting for 40% of the company’s total liabilities ； During the reporting period, the coal chemical business unit of Datang Power Generation incurred a loss of 1.367 billion yuan, a figure that was 1.65 times higher than in the previous year; its debt-to-asset ratio reached 84.69%. Some experts in the coal chemical industry who wished to remain anonymous pointed out that the successive failures of projects such as Datang Fuxin Coal-to-Gas have imposed the burden of high pollution and high energy consumption on an already struggling coal chemical industry. Shenhua refused to take over or establish a new platform. In July 2014, Datang Power and Guoxin Holdings signed a restructuring framework agreement aimed at reorganizing the coal chemical sector and related projects. The scope of the restructuring includes: Tolun Coal Chemicals, Keqi Coal-to-Gas Project, Fuxin Coal-to-Gas Project, Hulunbuir Fertilizer Plant, Xilinhot Mining Industry, as well as related supporting and affiliated projects. As the largest potential buyer, Shenhua Group, together with Guoxin Holdings, evaluated each project. According to internal information from Datang Power, following the evaluation, Shenhua Group is only interested in the Tolon coal chemical project and has no greater interest in the other projects. In order to enable Shenhua Group to take over, Datang Power was even willing to make sacrifices; it decided to offer Shenhua 6 high-quality thermal power plant projects located in Keqi, Xilin Gol, Dolun, and other areas, but this still failed to persuade Shenhua. Not only that, but according to people familiar with the matter, even just to take over one of Dorun’s projects, Shenhua requested a write-down of 5 billion yuan, using its Baotou coal-to-olefins project as a reference. Public information shows that the Shenhua Baotou coal-to-olefins project commenced construction in September 2007 and was fully completed in May 2010, with a total investment of 16.5 billion yuan. At the beginning of its preparation, the Ludian Coal Chemical Project of Datang Power announced a total investment amount of 16.2 billion yuan; by the end of 2012, the actual investment exceeded the estimated amount by 6.179 billion yuan. Datang Power does not accept a depreciation of 5 billion yuan, while Shenhua insists on not taking over unless there is such a depreciation; the two sides fail to reach an agreement, and the negotiations reach a deadlock. As for why the Dolun project exceeded its budget by billions of yuan, some clues can be found in a report in the media regarding the fact that \"Datang purchased catalysts worth 20 million yuan for the Dolun coal chemical project, only for those catalysts to become expired and unusable.\" “Delays in the construction timeline lead to waste during the investment process, which is not uncommon. Optimistic estimates suggest that production can start soon, so large quantities of raw materials are purchased; yet if production doesn’t begin on time, those materials become useless and expire ； There are also numerous losses resulting from the modification and refurbishment of equipment and facilities. ”The aforementioned person familiar with the matter said. “Shenhua will not take over, and even the State-owned Assets Supervision and Administration Commission cannot force it to do so; in fact, the first attempt by Datang Power to divest its coal chemical business for restructuring was a failure. ”The insider said. It is also reported that new cooperation plans are under discussion, with Datang Power, Shenhua Group, and Guoxin Holdings considering establishing an entity dedicated to managing coal chemical projects. For now, Shenhua Group, which has achieved numerous major breakthroughs in the coal chemical sector, is unwilling to give up on new coal chemical projects such as coal-to-methanol, coal-to-oil, and coal-to-olefins. In other words, even if new cooperation models are proposed, Shenhua Group will not relinquish control over the newly established entities. This also means that by then, Datang will not only have to give up the coal chemical projects for which it has already invested heavily, but it may also find itself in a passive position regarding shareholding structures. (China Business News)