Analysis of the favorable factors for constructing coal-to-oil and coal-to-gas projects from 2016 to 2018

Thread Content

Analysis of the favorable factors for constructing coal-to-oil and coal-to-gas projects from 2016 to 2018 Author/Source: Yaha Coal Chemical Industry Date: July 20, 2016 Clicks: 3 Research by Yaha Consulting shows that, aside from the unfavorable factor of persistently low international oil prices, China’s coal-to-oil and coal-to-gas industry actually faces a range of favorable conditions: low costs for raw materials and energy, resumption of environmental impact assessment procedures for such projects, simplified approval processes, localization of equipment, and low steel prices, all of which reduce the investment required for these projects. The coal-to-oil and gas projects under construction at present will enjoy high profit levels when oil prices rise in the future. Unlike coal-derived olefins, coal-derived ethylene glycol, coal-derived methanol and its derivatives, which are classified as coal-based chemicals, coal-derived oil and coal gas (CTL&SNG) are often classified as coal-based fuels. Although coal-to-oil production is moving toward the development of high-value fine chemicals, it is undeniable that international oil prices have a more direct impact on coal-to-oil and coal-to-gas production than on coal-based chemical production. At present, China’s coal-to-oil and coal-to-gas technologies have reached a mature stage. Apart from the persistently low international oil prices, a range of other factors are conducive to the development of these technologies. 1. Excess coal production capacity, along with low prices for raw materials and energy used in coal-to-oil and coal-to-gas processes. 2. Advances in environmental protection technologies have led to the resumption of environmental impact assessments for coal-to-oil and coal-to-gas projects, and the **National Development and Reform Commission has also simplified the approval procedures** for such projects. 3. The use of domestically produced equipment and low steel prices have reduced the investment costs for these projects. 4. Demonstration projects for coal-to-oil and coal-to-gas production provide valuable experience for subsequent commercial installations; optimizations in design and project management can likewise reduce investment and operating costs. 5. The use of domestically produced catalysts and other consumables can lower the operating costs of these projects. As a raw material and energy source in coal chemical industries, coal prices have a significant impact on the cost of products. According to China Shenhua’s annual report, in 2015 the price at which it sold coal to its internal coal chemical plants was 236.1 yuan per ton, representing a decrease of 60.4 yuan per ton compared to 2014’s price of 296.5 yuan per ton. Public information shows that by the end of 2015, China had an excess coal production capacity of over 1 billion tons. With the continued development of clean energy sources such as wind and solar power, coal consumption will face further pressure, and it is expected that overcapacity in China’s coal industry will persist for a long time. Large-scale coal-to-oil and gas projects, while benefiting from cheap coal supplies in the long term, will also contribute to addressing the overcapacity in coal production. With advancements in environmental protection technologies, starting in 2016, the **Ministry of Environmental Protection resumed the environmental impact assessment process for coal-to-oil and coal-to-gas projects. From January to July 2016, three coal-to-gas projects—Suxinhefeng, CNOOC Datong, and Beikong Jingtai—as well as two coal-to-oil projects—Luan An Changzhi and Yitai Ordos—received approval for their environmental impact assessments. In 2015, the **National Development and Reform Commission proposed to reduce the number of pre-approval procedures. With the exception of a few major projects for which environmental impact assessments remain as pre-approval requirements, for enterprise investment projects, only two types of pre-approvals are required in principle: a site selection opinion and a preliminary review opinion regarding land (or sea) use. For projects that can obtain approval from the National Development and Reform Commission and have all necessary procedures in place, the difficulty of securing financing will be reduced. To convert low-value coal into high-value-added products, the coal chemical industry is a typical capital-intensive sector; project investments are substantial, and financial costs and depreciation account for a large proportion of the product costs. The localization of equipment, the currently low prices of steel, and engineering designs optimized based on experience from pilot projects will all help to reduce project costs. The data model from Yahuazheng Consulting shows that for a typical indirect liquefaction coal-to-oil project, a 10% reduction in investment can lead to a reduction of 139 yuan per ton of oil produced in terms of financial costs and depreciation. For typical coal-to-gas projects, if investment is reduced by 10%, the financial costs and depreciation can be cut by 0.05 yuan per standard cubic meter of SNG, which means an increase in net profit of 200 million yuan per year. Overall, aside from the unfavorable factor of persistently low international oil prices, China’s coal-to-oil and gas industry actually faces a series of advantages: low costs for raw materials and energy, the resumption of environmental impact assessment procedures for projects, simplified approval processes, the use of domestically produced equipment, and low steel prices, all of which reduce the investment costs for such projects. The coal-to-oil and gas projects under construction at present will enjoy high profit levels when oil prices rise in the future.