A decade of “demonstration” in coal chemical industry, and a decade of policy fluctuations

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A Decade of \"Demonstration\" in Coal Chemicals: Policies Have Fluctuated for a Decade Author/Source: Date: 2016-03-21 Clicks: 36 Policy Incentives That historic document was the draft of the \"Medium- and Long-Term Energy Development Plan (2004–2020)\") issued by the State Council on June 30, 2004. Although the plan does not explicitly mention the concept of modern coal chemical industry, it does state that it is necessary to carry out research and development on technologies for the gasification of large-scale, high-efficiency coal, with a focus on overcoming key common technologies such as carbon monoxide conversion, purification, and catalytic synthesis. This plan is considered to be the first to indirectly incorporate modern coal chemical industry into China’s medium- and long-term energy development strategy from a technical perspective. In August of the same year, with **approval, China’s first coal-to-oil project – the Shenhua Group’s direct coal liquefaction project – officially commenced construction in Ordos, Inner Mongolia. In June 2005, the first coal-to-olefins project – the Inner Mongolia Datang Dolun coal-to-olefins project – was approved by the autonomous region’s **authorities, and construction began in July of that year. The commencement of these two projects marked a pivotal moment in which China’s modern coal chemical industry moved from concept to reality; it sparked the ambitions of many industry experts, entrepreneurs, and scientists almost overnight. Shortly thereafter, the \"11th Five-Year Plan for Energy Development (2006–2010)\\" released in April 2007 marked China’s **public support for demonstration projects in coal chemical technology. In the section on \"Oil substitution projects\" in Chapter 3, the plan states clearly that China should \"follow the principles of leveraging resource advantages, relying on scientific and technological progress, and advancing efforts in a steady and orderly manner\", accelerate the development of coal-based and biomass-based liquid fuels as well as coal chemical technologies, and carry out comprehensive planning to build key demonstration projects in an organized way. At the same time, the State-owned Assets Supervision and Administration Commission of the State Council, under the banner of adjusting the industrial structure, began to actively encourage China Huaneng Group, China Datang Group, China Huadian Group, China Guodian Group, and China Power Investment Corporation – the five major power generation groups in China – to enter the coal chemical industry. The first to respond were also several major coal-producing provinces such as Inner Mongolia and Shanxi. They keenly identified from this information business opportunities to convert raw coal into high-value-added products locally, thereby significantly boosting the GDP of the region. Based on publicly available information, as of June 2015, there were 13 coal-to-oil projects at various stages, 30 coal-to-natural gas projects, 51 coal-to-olefins projects, 37 coal-to-ethylene glycol projects, and 5 coal-to-aromatics projects across the country. According to Greenpeace International, as of October 2015, coal chemical projects that were already in operation or under construction had seen an investment of around 230 billion yuan. The planned funding for the national coal chemical industry exceeds 2 trillion RMB. Perhaps in the industrial history of New China, no industry has ever been able to attract attention and capital so rapidly in just one or two years, and to become a globally leading industry within 10 years, like the coal chemical industry. A decade of fluctuations – yet in reality, over the past 10 years, the coal chemical industry has never truly become a **strategic industry**, nor has it received comprehensive planning support at the **national level**. The journalist compiled the key policies affecting the development of China’s coal chemical industry, from which it can be seen that **the attitude toward this industry has remained inconsistent. In the early stages of the development of modern coal chemical industry, **a generally positive attitude toward it existed, and policies were aimed at encouraging its growth. The key policies include: in July 2006, the National Development and Reform Commission issued a notice on strengthening the management of coal chemical industry project construction to promote the healthy development of this sector, with an emphasis on controlling total production volumes, phasing out outdated production capacities, and establishing pilot and demonstration projects for coal-to-oil conversion (methanol and dimethyl ether). In April 2007, the National Development and Reform Commission released the 11th Five-Year Plan for Energy Development, which focused on accelerating the development of coal-based and biomass-based liquid fuels as well as coal chemical technologies, while also ensuring systematic planning and the orderly implementation of key demonstration projects. However, from 2008 to 2011, the policy shifted from actively promoting it to controlling the increase in modern coal chemical production capacity. These include: in August 2008, the National Development and Reform Commission issued a notice on issues related to strengthening the management of coal-to-oil projects, stating that aside from Shenhua’s direct coal-to-oil project in Ordos and the joint venture project between Shenhua and Sasol in Ningxia, all other coal chemical projects were to be halted; in September 2009, the State Council issued a notice containing several guidelines for curbing overcapacity and redundant construction in certain industries and promoting the healthy development of these sectors, which called for a suspension of the approval of new projects in traditional and modern coal chemistry, with focus instead on existing demonstration projects in this field; in June 2010, the National Development and Reform Commission issued another notice on regulating the development of coal-to-natural gas projects, clearly stating that only the national-level NDRC had the authority to approve such projects, while provincial-level NDRCs did not have that authority. At the same time, strict controls were imposed on the development of the coal-to-natural gas industry during the 12th Five-Year Plan period. In April 2011, the National Development and Reform Commission issued the \"Notice on Regulating the Orderly Development of the Coal Chemical Industry,\" which explicitly stated that strict control should be exercised over the growth of this industry. In December 2011, the National Development and Reform Commission removed the production of large-scale coal chemical products from the list of industries encouraged for foreign investment. However, just one month after the release of the \"Guidance Catalogue for Foreign Investment Industries,\" **there seems to be a renewed interest in coal chemical industry, and policy has once again shifted quietly. In January 2012, the Energy Bureau approved 18 key demonstration projects at once, through its \"Plan for Demonstration Projects of Advanced Coal Processing\" and \"Development Policies for the Advanced Coal Processing Industry\". These include 15 demonstration projects for the deep processing of coal in regions such as Inner Mongolia and Xinjiang. In less than half a year, the Energy Bureau issued another document, in which, through the \"Implementation Opinions on Encouraging and Guiding Private Capital to Further Expand Investment in the Energy Sector,\" it encouraged private capital to invest in coal-to-gas projects. In January 2013, the State Council’s 12th Five-Year Plan for Energy Development provided priority support for the development of coal chemical industry demonstration projects in regions such as Xinjiang, Inner Mongolia, Shaanxi, Shanxi, Yunnan, Guizhou, and Anhui. In September 2013, the State Council stated in the Action Plan for Air Pollution Prevention and Control that China’s air pollution problem should be addressed by diversifying its energy sources, which was equivalent to granting approval for coal-to-natural gas projects. In January 2014, the Energy Bureau set an ambitious target to reach 50 billion cubic meters of coal-to-natural gas production by 2020, accounting for 12.5% of the country’s total natural gas output. A few months after a series of favorable policies for the development of modern coal chemical industry were introduced, by July 2014, **things seemed to take a bad turn, and once again policies turned hostile toward coal chemistry. The main purpose of the Energy Bureau’s “Notice on Regulating the Scientific and Orderly Development of the Coal-to-Oil and Coal-to-Natural Gas Industries” is to strictly control the approval processes and capacity requirements for coal chemical projects. In December 2014, it **quietly lowered the informal target for coal chemical production by 2020 and stated that no new coal-to-gas projects would be approved before that year.** In November 2015, the Ministry of Environmental Protection organized the preparation of the \"Environmental Access Requirements for Modern Coal Chemical Industry Projects (Draft for Comment)\“, raising the thresholds for the construction of such projects. By the end of December 2015, the Ministry of Environmental Protection issued the \"Environmental Access Requirements for Modern Coal Chemical Industry Projects (Trial)\\", stipulating that such projects should be located in optimized and key development areas, with priority given to regions that have relatively abundant water resources and good environmental capacity, and that they must comply with environmental protection plans. In areas that no longer have environmental capacity to support modern coal chemical projects, it is necessary to first carry out measures such as economic structural adjustment and replacing coal consumption with equivalent or reduced amounts of other fuels in order to free up environmental capacity. Additionally, advanced process technologies and pollution control methods must be employed to minimize pollutant emissions. In the Beijing-Tianjin-Hebei region, the Yangtze River Delta, the Pearl River Delta, and water-scarce areas, the establishment of new modern coal chemical projects is strictly controlled. Imposing strict restrictions on modern coal chemical industry equates to exerting the greatest pressure on its development. Why have modern coal chemical industry policies experienced several fluctuations? What are the reasons behind this? According to research by Greenpeace International, as the scale, scope, and experience of demonstration projects increase, the shortcomings of the coal chemical industry in terms of technology, operation, finance, and the environment become increasingly apparent; as a result, **the organization continuously adjusts its recommendations for the entire industry while weighing different options. This may be a key reason for the inconsistent policies introduced over the past 10 years. Analysis of successes and failures in demonstrations generally shows that, as the coal chemical industry adheres to the principle of starting with demonstrations, the performance of large-scale demonstration projects influences **judgments regarding the industry. Departments such as the State Council, the **National Development and Reform Commission, the Ministry of Environmental Protection, and the National Energy Administration** have adopted an indecisive attitude toward the coal chemical industry, issuing a series of contradictory policies and recommendations. On the other hand, the unsatisfactory performance of some coal chemical demonstration projects can be attributed, in part, to policy instability. Datang Group’s entry into the coal chemical industry began in 2005. That year, Datang Group’s first coal chemical project – the Dolun coal-to-olefins project in Inner Mongolia – was launched. In the following years, 2007, 2009, and 2010, the Datang Keqi coal-to-natural gas project, the Datang Fuxin coal-to-natural gas project, the Datang Hulunbuir coal-to-fertilizer project, as well as the Datang large-scale coal mine project in Inner Mongolia that supplies lignite for other projects, were launched one after another, with a total investment of up to 70 billion yuan. It is understood that the assets of Datang Coal Chemical Industry saw rapid growth in 2009 and 2010, increasing at rates of 46.8% and 57.0% on an annual basis. Coal chemical industry has also become an important segment of Datang Group. However, by 2013, the Datang coal chemical business unit incurred a loss of 2.19 billion yuan. In that year, the Datang Group’s annual report outlined its strategic outlook for the coming year, and it revised its key slogan from \"Focusing on electricity generation with diversified development\" to \"Consolidating its leading position in power generation, striving to improve the profitability of non-electricity-related businesses, and accelerating the optimization of its business structure\", indicating a significant decline in its enthusiasm for coal chemical projects. In early 2014, Datang Group announced the suspension of further development of the Fuxin project. In July, Datang Group announced the signing of a Framework Agreement on the Restructuring of Coal Chemicals and Related Projects with China State Asset Management Corporation Limited, aimed at restructuring Datang’s coal chemicals business unit and related projects. The 2014 annual report showed that the losses incurred by Datang’s coal chemical business had risen to 5.16 billion yuan. In its annual report, Datang Group revised its outlook for 2015 once again. It no longer mentions “striving to improve the profitability of non-power generation segments,” but instead focuses on “strengthening the competitive advantage in power generation and accelerating the optimization of the business structure.” Datang Group is refocusing on its power business. Over the course of 10 years, Datang has not received any returns from its once ambitious coal chemical projects; instead, it has been plagued by negative news related to various such projects. In line with the performance of the coal chemical industry within the Datang Group, there was also a significant shift in **attitude toward the coal chemical industry in 2014. Ultimately, in December 2014, media reports indicated that China **had changed its previously positive stance on coal-to-natural gas projects and reduced the unofficial 2020 targets for the coal chemical industry. Coal-to-natural gas: reduced from 50 billion cubic meters to 15 billion cubic meters; coal-to-oil: reduced from 30 million tons to 6.6 million tons; coal-to-olefins: reduced from 24 million tons to 15 million tons. Meanwhile, it is reported that **no new coal-to-natural gas projects will be approved before 2020. In this case, it is clear that as a central state-owned enterprise, Datang Group’s entry into the coal chemical industry was not an initiative taken on its own, but rather one that received guidance and support from the **relevant regulatory authorities. Therefore, entering the coal chemical industry was not only a decision made by Datang Group but also a decision made by the relevant **authorities. Similarly, the location where the Datang Coal Chemical Project is situated, as well as the state-owned commercial banks that provided funding for the Datang Coal Chemical demonstration project, made the same decision. Therefore, the conclusion should be that reflecting on Datang Coal Chemicals actually entails reflecting on China’s coal chemical industry policies as well.