The signal for environmental impact assessments to be approved has appeared, but the path to a revival of coal-to-gas production remains fraught with difficulties?

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The signal for environmental impact assessments to be approved has appeared, but the path to a revival of coal-to-gas production remains fraught with difficulties? Author/Source: Date: 2016-04-12 Clicks: 5 Signals indicating a revival in the environmental assessment process have appeared, but is the path to a resurgence of coal-based gas production still full of difficulties? Introduction: Over the past year, the sharp drop in oil prices and weak growth in natural gas consumption have rapidly eroded the foundation for the rapid development of coal-to-gas production. However, at the beginning of 2016, it seemed as though there were sudden signs that environmental impact assessments for coal-to-gas projects were being approved again – could this lead to a revival of the industry, which had been in a state of stagnation? Reporters from Energy magazine found in their interviews that unfavorable external factors such as poor economic returns and the lack of suitable loan options make it extremely difficult for it to recover. The coal-to-gas industry, which had been in a state of \"stagnation\" earlier, reached a new crossroads in 2016. Zuoyun County is located in the northernmost part of Shanxi. Over 2,000 years ago, this area was part of Yanmen Commandery during the Qin Dynasty. Today, the ruined Han and Ming Great Walls tell us that this was once the frontline in the defense against foreign invasions of the Central Plains. This land with a rich historical and cultural heritage is now the site of China National Offshore Oil Corporation’s demonstration project for the clean utilization of low-metamorphic bituminous coal in Datong, Shanxi (hereinafter referred to as CNOOC Datong Coal-to-Gas Project). On March 4, the Ministry of Environmental Protection issued its approval for the environmental impact assessment report of CNOOC’s Datong coal-to-gas project. Public information from the Ministry of Ecology and Environment shows that the project meets relevant construction requirements. In principle, the nature, scale, process, location of the construction projects, as well as the environmental protection measures outlined in CNOOC’s environmental impact report, are approved. The signal for environmental impact assessments to be approved has appeared, but the path to a revival of coal-to-gas production remains fraught with difficulties? In fact, as early as March 2013, the CNOOC Datong coal-to-gas project had already received the approval document from the **National Development and Reform Commission. However, due to factors such as falling oil prices and stricter environmental policies, the project has failed to pass the environmental impact assessment for a long time. This is not the only positive news regarding coal-to-gas in this period. In early March 2016, an unremarkable announcement appeared on the official website of China Datang Group: Wu Xiuzhang, former vice president of China Shenhua and chairman of China Shenhua Coal-to-Oil Chemical Co., Ltd., had been appointed as a member of the Party leadership group and deputy general manager of China Datang Group (hereinafter referred to as Datang Group). Everyone keenly realized that this cross-industry transfer of employees from central state-owned enterprises might be related to Datang Group’s highly controversial coal-to-gas project. Shenhua Group and Datang Group are the two pioneers among state-owned enterprises in the non-chemical energy sector that have ventured into coal chemical industry. However, their fates and evaluations are vastly different. Shenhua Group’s coal-to-oil and coal-to-olefins technologies serve as benchmarks in the industry, and their early commercialization has yielded good results. In contrast, the coal-to-gas project of Datang Group has been highly controversial and plagued by negative publicity; its commercial operation results have also been less than satisfactory. The problem isn’t the patent for Datang’s coal-to-gas technology. Among the first batch of four coal-to-gas demonstration projects approved by the National Development and Reform Commission, aside from the two projects led by Datang, there are also many controversies and doubts regarding the technology, energy efficiency, and environmental impact of the Qinghua and HuiNeng projects. The numerous problems existing in the demonstration projects have directly affected the progress of new coal-to-gas projects. Starting in the second half of 2014, the sharp drop in oil prices and changes in environmental regulations directly led to a delay in the progress of coal-to-gas projects. To this day, aside from the first four projects that were approved, no new coal-to-gas projects have been approved by the NDRC. 2015 seems to have become the \"lost year\" for coal-to-gas technology. If Wu Xiuzhang’s transfer can only be described as somewhat vague, then the approval of the CNOOC Datong coal-to-gas project for environmental impact assessment can be regarded as a much clearer signal. Why did the coal-to-gas industry, which had been stagnant for over a year, suddenly show signs of resumption at the beginning of 2016? What drives this behind the scenes? With oil prices remaining low, how much enthusiasm do companies have for promoting coal-to-gas projects? Has the “controversy” in the environmental protection industry been completely resolved? By examining the current problems and opportunities associated with coal-to-gas production, and by reassessing reasonably whether it is appropriate to proceed with such projects, we may be able to move away from the investment frenzy of 2013 and 2014, and approach the future prospects of coal-to-gas production from a more rational perspective. Is the environmental impact assessment underway? Rong Yongqiao is the chief engineer of the preparatory team for CNOOC’s coal-to-gas project in Datong; traveling back and forth between Datong and Beijing has been the norm of his life over the past year. After the CNPC Datong coal-to-gas project passed the environmental impact assessment, a reporter from magazine Energy contacted Rong Yongqiao to ask for his views on the matter. “The environmental impact assessment has now been approved; the next step is to secure approval from the Development and Reform Commission. ”Rong Yongqiao simply said one thing. However, this is by no means small news for the coal chemical industry. Since January 2015, after the environmental impact assessment for Su Xin’s 4-billion-cubic-meter coal-to-gas project failed, it seems that such assessments have put a damper on the development of coal-to-gas projects. A number of coal-to-gas projects have either had their environmental impact assessments rejected or are still under evaluation. “Currently, the main problem in the coal chemical industry is still environmental impact assessment. ”Wang Xiujiang, deputy secretary-general of the Coal Chemicals Committee of the China Petroleum and Chemical Industry Federation, told a reporter from Energy Magazine, “Why is environmental impact assessment so important?” In areas where coal chemical projects are concentrated, either there is a shortage of water resources or the environmental capacity is poor. Now, overall requirements for environmental protection have increased significantly, and the same is true for coal chemical industry as well. ” On one hand, there are rising environmental requirements and stricter policies; on the other hand, coal-to-gas projects have failed to meet the corresponding standards in terms of environmental protection facilities and technologies. Regarding the controversies surrounding the 4-billion-cubic-meter coal-to-gas project in Keqi, Inner Mongolia, apart from corrosion of the inner wall of the gasifier jacket and unstable equipment operation, there are also issues related to non-compliance with environmental protection standards and inadequate water treatment. Within the industry, it is an open secret that nearly 2 billion yuan was invested additionally in water treatment for the Datang Keqi project in its later stages. However, over time, the issues related to environmental protection and zero emissions in coal gasification, or coal chemical industry, are gradually being resolved. “Zero emissions are absolutely achievable. ”He Zuoyun, vice general manager of Sinopec Great Wall Energy Chemical Co., Ltd., said clearly to a reporter from Energy magazine. Even more experts who preferred to remain anonymous stated outright: \"The views that claim there are problems with crystalline salt treatment or that it should be classified as hazardous waste are completely devoid of any technical basis.\" ” The signal for environmental impact assessments to be approved has appeared, but the path to a revival of coal-to-gas production remains fraught with difficulties? Although there are currently examples of coal-to-gas projects that manage to achieve zero wastewater discharge and proper treatment of crystalline salts, the fertilizer project operated by China Coal Turbine also has its shortcomings, and it differs technically from coal-to-gas projects. However, the CNOOC Datong coal-to-gas project has indeed passed the environmental impact assessment. According to reporters from Energy Magazine, the zero-emission technology used in CNOOC’s Datong coal-to-gas project was also questioned by the Environmental Impact Assessment Center of the Ministry of Ecology and Environment. At least we can now conclude that, from a technical theoretical perspective, zero-emission processes will not constitute an obstacle to the advancement of coal-to-gas projects. Another notable fact is that, alongside CNOOC’s Datong coal-to-gas project, the Lu’an coal-to-oil project also passed the environmental impact assessment at the same time. This project is now applying for an environmental impact assessment for the second time. “This time, both projects that passed the environmental impact assessment are located in Shanxi. Shanxi’s atmospheric environment and water resources are precisely unsuitable for coal chemical industry. ”A person in charge of a coal chemical project told a reporter from Energy magazine, “If the Datong project can be carried out, then projects in other locations naturally also have a chance of passing the environmental impact assessment.” ” **In February 2014, the National Energy Administration briefly introduced the coal-to-gas plan during an expert consultation meeting on the clean utilization of coal. According to the preliminary plan, by 2020, the production capacity of coal-to-gas would reach 50 billion cubic meters. Behind this massive plan are the approvals granted by the National Development and Reform Commission in 2013 for coal-to-gas projects with a capacity of over 50 billion yuan. The coal-to-gas boom of 2014 is still vivid in memory, and it was environmental impact assessments that brought an end to this boom. However, the environmental assessment is not due to a decline in the environmental standards of coal-to-gas projects, but rather to **tighter environmental policies**. On July 17, 2014, the **Energy Bureau issued a notice on its official website titled \"Notice on Regulating the Scientific and Orderly Development of the Coal-to-Oil and Coal-to-Natural Gas Industries.\" The notice states that the **Development and Reform Commission and the Energy Bureau are working on formulating the \"Guiding Principles for the Steady Promotion of Industrialization Demonstrations for Coal-to-Natural Gas\", which will be issued and put into effect in the near future. However, as of the time of this report, there has been no further update on this document. Simply based on the “Notice on Regulating the Scientific and Orderly Development of the Coal-to-Liquid and Coal-to-Natural Gas Industries”, the construction of coal-to-natural gas projects with an annual production capacity of 2 billion cubic meters or less has already been prohibited. Stricter regulations have also been introduced regarding policies on water and land use for coal-to-gas production. Today, there are signs that the restrictions on environmental impact assessments are beginning to ease. In the industry’s view, this is closely related to **’s attitude. “The investment scale for coal-to-gas projects is very large. It has a relatively direct and significant effect on stimulating investment. ” It is understood that the investment in a coal-to-gas project with an annual production capacity of 4 billion cubic meters exceeds 20 billion yuan; for a project with an annual output of 6 billion cubic meters, the investment exceeds 30 billion yuan. With the economic growth outlook uncertain in 2016, the ability to drive such substantial investment naturally became a focus of **. The Xinjiang Uygur Autonomous Region is a major coal-producing province, and it was also the province with the most coal-to-gas projects planned during the wave of investment in coal-to-gas projects in 2014. It was inevitably affected by the sluggish market in 2015 as well. Nevertheless, among the 13 coal chemical projects that were given priority in Xinjiang in 2015, 10 were gas production projects from coal. A local authority in Xinjiang **even offered to provide part of the funding for the enterprise, in an effort to accelerate the project progress. http://img.yf116.cn/image/img/20160412/941543491477.jpg For Xinjiang, a province that relies heavily on coal and coal-based chemical industries, the reduction of coal production capacity is now an irreversible process. If projects related to coal-to-gas conversion are not accelerated, it will inevitably have a significant impact on economic development. In 2015, the GDP of Xinjiang Uygur Autonomous Region grew by 8.8%, ranking eighth in the country – an excellent result indeed. Yet in 2014, Xinjiang’s GDP growth rate was still the fourth highest in the country, showing a significant decline. When environmental impact assessments no longer pose an insurmountable obstacle, and when there is a positive outlook regarding the substantial investments required for coal-to-gas projects, does this signify that a large-scale revival of such projects is on the horizon? “Several projects may be approved in the second half of the year. ”Gao Yang, deputy chief engineer at HuiNeng Chemical, told a reporter from Energy Magazine. Xia Wu, the chief engineer at China Five Rings Engineering Co., Ltd., was even more direct: \"It’s still very difficult to produce gas from coal; it mainly comes down to economic viability.\" ” This forces us to examine the current coal-to-gas industry from a more commercial perspective. Although there are solutions to environmental problems, they still come under criticism; but let’s set that aside for now. How exactly does cost become an obstacle to the development of coal-to-gas technology? Irreversible economic losses? “Behind the investment boom in coal-to-gas projects in 2014 were the high oil prices at that time. ”Wang Xiujiang told a reporter from Energy magazine, “If it’s $80 now, the industry will still be active.” ” A simple sentence captures the boom in coal-to-gas production in 2014 as well as the fundamental economic reasons behind its current decline. In 2013 and 2014, international oil prices remained at high levels above $80 for an extended period of time. China’s natural gas consumption and imports are also rising year by year. Coal-to-gas production holds a strategic position in terms of energy security, and it also offers good economic benefits; as a result, it is highly favored by governments and enterprises. However, with the sharp drop in oil prices and weak growth in natural gas consumption, the foundation for the rapid development of coal-to-gas production quickly disappeared. Companies have to determine whether proceeding with coal-to-gas projects can result in profitability. “Currently, the payback period for investments in coal-to-gas projects is generally over 10 years. ”Gao Yang told a reporter from Energy magazine. As oil prices fall and the downturn in the natural gas market persists, the cycle for achieving investment returns may be further extended. This is undoubtedly fatal for businesses. More importantly, investment in coal-to-gas projects is likely to increase further as environmental policies become stricter and environmental assessment requirements rise. “The impact of environmental impact assessments on coal-to-gas projects is not merely reflected in the failure to obtain such assessments. ”Wang Xiujiang explained, “At the current level of technology, as long as companies are willing to put in significant effort, they can pass the environmental impact assessment.” But what follows is that the cost of project construction may increase significantly, eventually resulting in working for the bank. ” The preparation of water is also of utmost importance. In coal chemical projects, water is primarily used as a reaction material and for cooling purposes. A portion of the water is consumed as a raw material, while most of it is used for cooling. In Inner Mongolia, some coal chemical projects under construction draw water from the Yellow River that flows through the region; through water rights exchanges, the water saved from agricultural irrigation is used to meet industrial water needs. In Zhundong, another hub for coal chemical projects, its water supply comes mainly from the Irtysh River in Northern Xinjiang. Initially, to address the water needs of developed areas such as Urumqi, **water transfer from the Irtysh River was implemented; if large-scale coal chemical projects come online, this will create conflicts with the previous water borrowing practices. “Water is a very practical issue; everyone relies on the water from the Yellow River, but the available resources are ultimately limited. ”The industry expert mentioned above told a reporter from Energy magazine, “There are many ways to address this water issue (such as the South-to-North Water Transfer project, even desalination, or cooling equipment installed in the air).” But this will ultimately affect your finances. No one will invest several times more for this. ” Unfavorable external conditions, strict environmental regulations, and poor economic returns are not the only factors that prevent the coal-to-gas industry from moving forward. There are also many problems that have persisted and plagued these companies since the inception of the coal-to-gas industry. The first issue is price. From the initial stage of design, the 4 billion cubic meter coal-to-gas project in Datang Keqi aimed to have Beijing as its main market, with the goal of becoming Beijing’s second largest source of gas supply. To this end, pipelines were even specially designed to lead to Beijing. The Datang Keqi coal-to-gas project faced the embarrassment of shutting down shortly after it was put into operation, and later encountered a series of problems including the failure to complete the pipeline connections in a timely manner. But it still successfully became a source of gas for Beijing. However, the connection fee of up to 2.75 yuan per cubic meter stands in sharp contrast to the gas price for Beijing residents, which is 2.28 yuan. “The price agreed upon by Datang with CNPC was 2.75 yuan, while the price reached between Qinghua and CNPC was less than 2 yuan. Despite geographical differences, it is still possible to observe price variations among different coal-to-gas companies, and this is largely related to the negotiations between these companies and pipeline operators. ”Gao Yang said. Due to the extremely low prices, it even happened that the grid connection price for coal-based natural gas was lower than its cost. Some coal-to-gas companies adopt the method of liquefying natural gas and then selling LNG. However, due to falling oil prices, the price of imported LNG has also had a significant impact on the domestic LNG market. It is easy to see that pipelines are also a barrier for coal-to-gas enterprises. Since the first companies to develop coal-to-gas technology hardly had any pipelines of their own, they had no choice but to connect to existing pipeline networks or sell LNG in its liquefied form. Sinopec and CNOOC, which are planning to produce gas from coal, have pipeline resources available, but due to insufficient quantities, they have chosen to build new pipelines instead. But there are still problems with doing this. Firstly, the investment is too large. In October 2015, the National Development and Reform Commission approved the Sinopec Group’s Xinjiang coal-to-gas transmission pipeline project, which involves the construction of 1 main pipeline and 6 branch pipelines, with a total length of approximately 8,400 kilometers. The main pipeline starts from Mulei County in Changji Prefecture, Xinjiang, and ends in Shaoguan, Guangdong, with a designed capacity of 30 billion cubic meters per year. The total investment in this pipeline, which was planned specifically for coal-to-gas production in Zhundong, exceeds 130 billion yuan, which is an exorbitant amount. The investment in the Mengxi gas pipeline, which is used to supply coal-to-gas production facilities operated by CNOOC, also exceeds 20 billion yuan. Furthermore, in terms of its starting point and ending point, Sinopec’s coal-to-gas pipeline in Xinjiang overlaps to some extent with CNPC’s West-East Gas Transmission Project Line 3. Once the pipeline is built, the market for this project is clearly the Pearl River Delta region. Although the natural gas market in the Pearl River Delta is not yet saturated, Guangdong Province, which has access to offshore gas, the West-East Gas Pipeline Project, and imported LNG, is likely to have no worries regarding gas supply. If each project is equipped with its own pipeline, regardless of whether the enterprise has the financial resources, there is a high likelihood of significant duplication of construction and waste of resources from a resource allocation perspective. The enthusiasm of capable companies for building their own pipelines is driven, on the one hand, by the desire to have control over their own channels for transporting goods, and on the other hand, it is likely closely related to the monopoly held by pipeline companies. The slow pace of natural gas price reforms has resulted in the pipeline prices for coal-to-gas being unable to be set through market mechanisms. The monopoly of pipeline companies has led to investments in pipelines by coal-to-gas enterprises. And all of these lie outside the coal-to-gas industry itself, yet they continuously affect the progress of coal-to-gas projects. Missing loans: Investments in coal-to-gas projects amount to hundreds of billions; if additional pipelines need to be built, the investment could even double. An investment of this scale is beyond the means of small and medium-sized companies, or even ordinary large companies. In fact, the vast majority of coal-to-gas projects adopt a joint venture model. The total investment estimated for the Datang Keqi project is 25.71 billion yuan, to be funded jointly by Datang Energy Chemical Co., Ltd., Beijing Gas Group Co., Ltd., Datang Group Company, and Tianjin Jineng Investment Company, with investment ratios of 51%, 34%, 10%, and 5% respectively. The 30 billion cubic meter coal-to-gas project in Zhundong, Xinjiang, involves multiple investors including Huaneng, Yankuang, Xinjiang Longyu Energy, Lu’an, Shenhua, China National Coal Group, and the Xinjiang Production and Construction Corps. Even so, no single company or consortium of companies has the sufficient cash flow to invest in coal-to-gas projects. Bank loans are the inevitable option. “Investing will be a big problem. ”He Zuoyun said, “Banks are very cautious about investing in coal-to-gas projects; in fact, they are not optimistic about them.” ” Due to the sharp drop in coal prices, the profitability of many coal mines has also declined. Companies borrow money from banks to develop coal mines, but end up unable to repay the loans and are forced to use the coal mines as collateral. However, for banks, when calculated using the income approach, many coal mines can even be classified as negative assets. It resulted in a large amount of bad debts for banks. Coal-to-gas production involves coal, and the natural gas produced as a result sees limited price increases due to low oil prices and slow market growth. Banks naturally are reluctant to grant loans for coal chemical projects. After the first phase of the four coal-to-gas demonstration projects was put into operation, no progress was made on phase two for a long time. In addition to the issue of poor economic returns, a lack of investment is also a problem that companies have to face. How much longer will the low oil price period last? This question cannot be answered for the coal-to-gas industry. However, oil prices directly determine the development pace of the coal-to-gas industry. “Current oil prices are not encouraging. ”He Zuoyun said, “But in the future, as oil price cycles change, coal-to-gas will still be economically viable.” ” The investment boom of two years ago has completely faded away. “Only after the tide goes out does one know who is swimming naked. ”For the coal-to-gas industry, although it’s not absolutely the case, enabling companies to think more rationally, during periods of low oil prices, about how to ensure that coal-to-gas projects achieve the best economic and environmental outcomes is likely the most urgent task at hand for this industry. After all, even for projects approved this year, it will take at least three years before they can start operating officially, giving the coal-to-gas industry more time to adjust its operational approach.