2015 Annual Review and Outlook on Coal-to-Synthetic Natural Gas (SNG) in China

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Yahua Consulting: Annual Review and Outlook on Coal-based Synthetic Natural Gas (SNG) in China in 2015 2016-1-13 The development of the coal-based synthetic natural gas industry in China (hereinafter referred to as “coal-based gas or coal-based SNG”) did not proceed smoothly in 2015. Due to falling international oil prices and increasingly stringent environmental standards in China, coal-to-gas projects face dual challenges in terms of economic viability and environmental protection. Nevertheless, coal-to-gas remains strategically valuable in promoting the clean use of coal and ensuring **energy security**. In 2015, China’s coal-to-gas industry made significant progress in areas such as project development and product transportation. Yaha Consulting will review these developments for readers in the following text, while also outlining the prospects for the growth of this industry during the 13th Five-Year Plan period. Operation Status of Coal-to-Gas Projects in Operation in 2015: According to Datang Power’s semi-annual report for 2015, the coal-to-gas project in Keqi with an annual production capacity of 4 billion cubic meters completed the environmental improvement works for its power generation units aimed at lifting production limits during the first half of 2015. Unit B continued to operate at high capacity for extended periods; by the end of June, a total of 321 million standard cubic meters of natural gas had been produced. The Fuxin coal-to-gas project with a capacity of 4 billion cubic meters per year carried out its infrastructure construction activities as planned in the first half of 2015. The entire SNG from Inner Mongolia HuiNeng’s 400 million cubic meters per year coal-to-gas project was liquefied into LNG, and the facility came online in November 2014. In order to develop downstream sales channels, HuiNeng Group began construction of an LNG storage facility and fueling stations in Nangong City, Xingtai Province, in July 2015; it also built LNG/L-CNG fueling stations in Weixian County. Additionally, 50 more LNG/L-CNG fueling stations in Xingtai City will be completed over the next three years. The Qinghua coal-to-gas project is located in the Yidong Industrial Park in Yining County, Xinjiang. The first phase of this project involves the production of 1.375 billion cubic meters of gas per year from coal, and it began trial operation in December 2013. In January 2015, Xinjiang Qinghua’s 300,000 cubic meters per day SNG liquefaction project came online. This project is a downstream coal-to-gas project in Xinjiang Qinghua, with its products mainly sold in the Ili market. Progress in the preliminary work for coal-to-gas projects in 2015: In 2015, more than a dozen coal-to-gas projects were still in the stage of active preliminary work, and certain progress was made. The latest characteristics of China’s coal-to-gas industry are as follows. 1. The preliminary work for the project is carried out to high standards and in a standardized manner, effectively preventing construction before approval is obtained. 2. Great emphasis is placed on key approval-supporting documents such as environmental impact assessments, energy efficiency evaluations, and water resource certifications. 3. The preliminary work for some projects is already at a high level; only 1-2 types of supporting documents are still needed for approval, including environmental impact assessments. Nine of these projects have made significant progress in terms of obtaining water resources. The development of pipeline infrastructure facilitates the growth of coal-to-gas projects. Over the past decade, the length of natural gas pipelines in China has increased by about 5,000 kilometers per year on average, and in 2015 the natural gas pipeline industry continued to show rapid growth. Yahua Consulting has drawn the layout of China’s natural gas pipeline network and LNG receiving terminals based on public information, as shown in the figure below. The transportation plan for coal-to-gas products is closely related to the location of the project, and there are mainly the following four methods: 1. Integration into the long-distance main gas transmission networks with multiple sources. 2. Enter the dedicated long-distance pipeline for coal-to-natural gas. 3. Build its own gas pipelines to supply urban users locally. 4. Sell LNG after liquefaction. In July 2015, the Ministry of Environmental Protection issued a announcement stating that the Sinopec Xinjiang coal-to-gas transmission pipeline project (Xin Yue Zhe Pipeline) had received approval for its environmental impact assessment. The total investment for this pipeline project is 139.9 billion yuan. The construction includes one main pipeline and six branch pipelines, with a total length of 8,372 kilometers; the designed capacity is 30 billion cubic meters per year. The main gas supply for the Xin Yue Zhe pipeline comes from coal-to-natural gas produced in the Zhundong Comprehensive Demonstration Zone in Xinjiang; an important source of gas is coal-to-natural gas from the Ili region. Conventional natural gas, coalbed methane, and shale gas from Sinopec’s Northwest region serve as important supplementary sources of gas. The minimum requirements for the quality of SNG produced from coal shall comply with the specifications for Class II gas as defined in the national standard \"Natural Gas\" (GB17820). In June 2015, Xinjiang Longyu Energy Zhundong Coal Chemical Company and Su New Energy Company signed coal-to-natural gas purchase and sale agreements with Sinopec Natural Gas Company respectively. Furthermore, in March 2015, the first public announcement was made regarding the public participation survey for the environmental impact assessment of the Ordos-Anping-Cangzhou gas pipeline project (the EAC pipeline), which was constructed by Sinopec’s Natural Gas Division. According to the public information, the project includes one main line and five branch lines, with a total length of 2,422 kilometers and a gas transmission capacity of 30 billion cubic meters per year. The starting point of the main line is at Tabamiiao Station in Xiaohaotu Township, Yuyang District, Yulin City, while the ending point is at the terminal station in Cangzhou, Hebei Province. The total length of pipelines within the Inner Mongolia Autonomous Region is 685 km, with 8 stations installed; they pass through Ordos City (Hangjin Banner, Yijinhuoluo Banner, Wushen Banner, Zhungeer Banner, Etuokeqian Banner). Yahua Consulting believes that the Sinopec E’an-Cang pipeline will provide a channel for transporting products from coal-to-gas projects in the Ordos and Shaanxi regions, **enhancing the feasibility of such projects in those areas. Low oil and gas prices put pressure on the economic viability of coal-to-gas production. The prices of pipeline natural gas imported into China, as well as LNG imported under long-term contracts, are linked to international oil prices according to certain formulas; due to the consistently low level of international oil prices, the cost of natural gas imports into China has decreased significantly. On the other hand, China’s natural gas pricing mechanism has been reformed from the \"cost-plus method\" to the \"market net back value method\". **The National Development and Reform Commission has chosen the Shanghai market (the central market) as the pricing benchmark, and established a mechanism that links the prices at stations in this central market to those of alternative energy sources (fuel oil, LPG). Based on the reverse push of the gas flow, reference pipeline transportation costs determine the gate prices for each province as well as the ex-factory prices for each gas field. This means that the price of natural gas in China is closely linked to international oil prices. Coal-to-gas production is economically viable when oil prices are high (80–100 dollars per barrel), but at current oil prices (40–60 dollars per barrel), it becomes difficult to make a profit from coal-to-gas production. On November 18, 2015, the **National Development and Reform Commission announced that, with the approval of the State Council, it had been decided to reduce the maximum gate price for gas used by non-residential customers by 700 yuan per thousand cubic meters, starting from November 20, 2015. The current system of managing maximum gate prices was replaced by a system based on benchmark gate prices; the reduced price would serve as this benchmark, and both supply and demand parties could negotiate the actual gate price within a range that allowed for an increase of 20% or a decrease without limit. During the implementation of the plan, station fares will not be increased temporarily; an increase will be allowed starting from November 20, 2016. Based on the **\"Table of Maximum Gate Station Prices for Natural Gas in Various Provinces (Regions, Municipalities)\” issued by the National Development and Reform Commission in February 2015**, and taking into account the scale of this price adjustment, Yahuazhengxun has prepared the following **\"Map of Benchmark Gate Station Prices for Natural Gas in China as of November 2015\"**. In August 2014, the **National Development and Reform Commission issued a notice stating that for imported LNG, as well as shale gas, coalbed methane, and gas produced from coal, if it is to be fed into pipelines to be mixed with domestically produced onshore gas and imported pipeline gas for joint sales, the supplier and buyer can enter into separate purchase, sale, and transportation contracts based on the different sources of gas. The prices of these gases and their cost at the point of production are determined by the market, while pipeline transportation costs are set in accordance with relevant regulations. Yahua Consulting believes that since the ex-factory prices of coal-based gas and shale gas have already been market-driven, this reduction in natural gas prices will put coal-based gas and shale gas at a further disadvantage in competition with domestically produced gas and imported LNG. Taking a typical coal-to-gas project with an output of 4 billion cubic meters per year as an example, a reduction of 0.7 yuan per cubic meter in price is equivalent to a decrease in annual sales revenue of 2.8 billion yuan, with costs remaining unchanged. For coal-to-gas projects that are still in the planning and construction phase, there is hope that rising oil prices upon completion will lead to an increase in natural gas prices; however, for those projects that are already operational, the operational pressures will be extremely high. Based on its exclusive coal-to-gas cost model, as well as China’s natural gas pricing mechanism linked to international oil prices, Yaha Consulting has conducted an economic analysis of the viability of coal-based SNG production in Ordos, Xinjiang, and Huainan under different oil price levels. Among them, the international oil price is based on the BRENT price, and the discount factor K for natural gas pricing is 0.9. The gasifier in the coal-based SNG project uses a fixed-bed and water-coal slurry configuration in a 2:1 ratio, with 100% annual operation rate. It can be seen that coal-based SNG projects can still remain roughly break-even at an international oil price of $60 per barrel; if the price reaches $80 per barrel, such projects can achieve good profit margins. The strategic value of coal-to-gas conversion remains significant. Natural gas is an important part of China’s clean energy strategy, and since China relies heavily on imports of natural gas, coal-to-gas conversion, along with shale gas and coalbed methane, will serve as a necessary supplement to China’s natural gas supply. According to planning documents such as the 2014 guidelines issued by the State Council and the National Development and Reform Commission on establishing a long-term mechanism to ensure a stable supply of natural gas, the Work Plan for Strengthening Air Pollution Control in the energy sector, and the Energy Development Strategy Action Plan (2014–2020), the natural gas supply capacity is set to reach 400 billion cubic meters by 2020, with an aim to reach 420 billion cubic meters. Based on public planning documents and industry information, Yaha Consulting has compiled the supply capacity of natural gas from various sources for the period 2014–2020, as shown in the figure below. Based on the latest developments in the industry, it is possible for shale gas production to reach 30 billion cubic meters per year by 2020. However, it will be quite difficult for coalbed methane and gas produced from coal to reach 30 billion cubic meters per year and 50 billion cubic meters per year, respectively. International oil prices cannot remain low for a long time; sooner or later, due to supply shortages resulting from reduced investment in exploration and development, international energy prices will rise. Coal-to-gas technology takes advantage of the abundant coal resources in China’s areas with poor transportation access to produce clean natural gas products at predictable costs, and it remains strategically valuable for China, which relies heavily on imported natural gas. Developing a certain scale of coal-to-gas production capacity can help China control natural gas import prices. Yahua Consulting believes that coal-to-gas projects that are in the construction phase or at the preliminary stage should draw on the experiences and lessons learned from pilot projects, particularly the valuable insights gained by those pilot projects regarding environmental protection measures and the proper disposal of waste materials. http://www.chinacoalchem.com/news.asp?id=60741