Coal-to-oil: Can the dream become reality?

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Coal-to-oil: Can the dream become reality? Author/Source: Date: 2016-07-29 Clicks: 13 In 2016, there seemed to be signs of relaxation in the approval process for coal-to-oil projects; the second environmental impact assessment for the Lu’an coal-to-oil project, which had been rejected by the Ministry of Environmental Protection in 2015, was approved this time. The Inner Mongolia Yitai coal-to-oil project also passed its environmental impact assessment in July. On July 19th, ****, who was on an inspection tour in Ningxia, visited the Ningdong Energy and Chemical Industry Base to learn in detail about the progress of construction of the Shenhua Ningmei Coal Indirect Liquefaction Demonstration Project – the world’s largest coal-to-oil project of its kind. This seems to have boosted confidence among those working in the coal-to-oil industry as well. However, for the coal-to-oil industry, the real situation still seems fraught with challenges; factors such as the macroeconomy, the coal industry itself, oil prices, and taxes all place significant pressure on project owners. International oil prices plummeted in the second half of 2014 and have remained low to this day. The industry generally believes that the cost of coal-to-oil production is equivalent to an international oil price of $60 per barrel. The consumption tax on refined oil has always been regarded by the coal-to-oil industry as an unbearable burden. Public information shows that in 2015, Shenhua Coal-to-Oil Company’s coal-to-oil project in Ordos incurred losses of over 1 billion yuan. The first-phase 16-ton/year coal-to-oil project at Inner Mongolia Yitai Coal-to-Oil Company has suspended the production of coal diesel and naphtha, and has instead shifted to producing intermediate products and downstream chemical products that generate higher profits. As China’s largest province for coal-to-oil production, Shaanxi Province has faced unprecedented difficulties in the operation of its coal-to-oil facilities this year. According to incomplete statistics from the Shaanxi Petroleum and Chemical Industry Federation, in the first half of this year, coal-to-oil enterprises in Shaanxi produced more than 500,000 tons of various oil products in total, and the production facilities of nearly half of these enterprises failed to operate stably. To date, Shaanxi Province has built 11 coal-to-oil projects utilizing four different processes: coal indirect liquefaction, direct liquefaction (co-processing with kerosene), coal tar hydrogenation (the Yulin version of coal-to-oil production), and methanol-to-gasoline (MTG). The total annual production capacity of these projects exceeds 4 million tons, ranking them first in China. The fuel consumption tax on coal-to-oil products is still considered the final straw that will crush the industry. Feng Baotian, deputy general manager of Shaanxi Future Energy Chemical Co., Ltd., analyzed that based on the current prices including taxes – 4,300 yuan per ton for diesel and 3,170 yuan per ton for naphtha – the tax burden on diesel amounts to 50.49%, while that on naphtha is 93.72%. After normal production begins, 1.66 billion yuan in consumption tax must be paid each year, with various taxes and fees adding up to a total of 2.2 billion yuan. During **2016**, several representatives proposed reducing or exempting the consumption tax on coal-based oil, or implementing a system of pre-collection followed by refund, in order to boost the development of this industry. Calls for tax cuts in the coal-to-oil industry also appear frequently in the media. Industry experts believe that the consumption tax is a tax primarily applied to consumer goods that are characterized by high energy consumption, high pollution levels, and high consumption. Since coal-to-oil conversion plays a positive role in improving the efficient and clean utilization of coal, companies engaged in this activity should be recognized as high-tech enterprises so that they can benefit from preferential tax policies. Earlier reports indicated that the State-owned Assets Supervision and Administration Commission of the State Council and the National Development and Reform Commission have in principle agreed to provide tax exemptions for coal-based petroleum products; the Ministry of Finance and the State Taxation Administration are currently in discussions, and a policy for such tax exemptions is expected to be introduced within this year. Additionally, industry experts are optimistic that coal-to-oil and gas projects in China actually benefit from a number of advantages: low costs for raw materials and energy, the resumption of environmental impact assessments for such projects, simplified approval procedures, the use of domestically produced 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 excellent profit margins when oil prices rise in the future.