Thoughts on the Development of Domestic Coal-to-Natural Gas Projects

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Thoughts on the Development of Domestic Coal-to-Natural Gas Projects Author/Source: Date: 2016-09-05 Clicks: 11 China’s energy structure, characterized by a shortage of oil and gas and an abundance of coal, makes efficient, energy-saving, and comprehensive utilization of coal a trend in the development of energy use in the country. The fact that China relies primarily on its own energy sources, with coal playing a key role, is not expected to change for a long time to come. With the growing scarcity of oil and natural gas resources, coal is becoming increasingly important. However, due to its inherent properties, conventional coal conversion technologies impose a heavy burden on resources and the environment, while also requiring high transportation capabilities. To meet energy demands and promote energy conservation and emission reduction, the development of coal-to-natural gas is an inevitable choice for the clean utilization of coal in the future. At present, the technology for coal-to-natural gas production is quite mature, with multiple industrial-scale coal-to-gas production facilities around the world operating stably, resulting in low technical risks. Therefore, developing the coal-to-natural gas industry is an effective way to address the shortage of oil and natural gas resources in China and ensure energy security; it will help alleviate the imbalance between supply and demand for natural gas in the country and promote balanced socioeconomic development. However, the development of China’s coal-to-gas industry has always been controversial within the industry. Some business experts have pointed out that coal-to-gas projects require huge investment amounts, often in the range of 10 to 20 billion yuan, and they are characterized by high coal, water, and electricity consumption. Even though natural gas is considered a clean energy source, coal-to-natural gas does not seem to be clean when considering its entire life cycle. Given the current situation where **natural gas pipelines and markets are monopolized by major oil companies, the subsequent sale of coal-to-natural gas also poses a problem.** Furthermore, since 2015, the global economy has been in decline, international oil prices have dropped significantly, and natural gas prices have followed suit, with the growth rate of demand gradually slowing down. All these factors result in uncertain return expectations for coal-to-gas project investments, leading to a strong atmosphere of caution within the industry. This is also one of the main reasons why there are many project approvals but little actual construction, resulting in slow progress. 1 Analysis of China’s natural gas supply and demand: In 2014, China’s natural gas supply, imports, and consumption continued to increase; natural gas production reached 127.9 billion cubic meters, a 5.7% increase on a year-on-year basis ； Natural gas imports amounted to 57.8 billion m3, an increase of 8.2% ； The apparent consumption of natural gas was 178.6 billion m3, an increase of 5.6%. The proportion of natural gas in China’s energy consumption structure continues to rise; in contrast, the share of fossil fuels such as coal and oil generally shows a downward trend. In 2015, under the pressure to protect the environment and due to the specific structure of China’s energy supply, the country began to pay more attention to clean energy sources such as natural gas. Various policies were implemented to encourage the use of such clean energy sources, resulting in an annual increase in their consumption. Table 1 shows the comparison between China’s total consumption and total supply of natural gas over the 12-year period from 2003 to 2015 (Figure 1 illustrates the trend in China’s natural gas consumption and production, data sourced from the National Bureau of Statistics). As can be seen from Figure 1, the supply and demand of natural gas in China remained in balance prior to 2009. Starting from 2010, the growth rate of natural gas consumption accelerated, and the demand gap widened year by year. However, beginning in 2014, the growth rate of natural gas production increased, while the growth rate of consumption slowed down, resulting in a reduction of the demand gap. Based on current trends, supply and demand are set to reach equilibrium in the future. If the growth rate of consumption continues to decline while the growth rate of production keeps rising, the imbalance between supply and demand will soon reverse, and a situation of surplus supply may arise. 2 Development Status of Coal-to-Natural Gas Projects 2.1 Current Situation of Coal-to-Natural Gas Projects Coal-to-natural gas projects have been included as demonstration projects in the **Petrochemical Industry Adjustment and Revitalization Plan**, which clearly demonstrates the need for natural gas as an energy source and the high level of emphasis placed on developing the coal-to-natural gas industry. Entering the 21st century, China’s growing energy demand, coupled with the particularities of its energy structure, has further fueled the vigorous development of its coal chemical industry. Compared with other coal chemical technologies, coal-to-natural gas production offers advantages such as shorter processes, higher energy efficiency, relatively mature technology, lower investment costs, and reduced pollutant emissions. The total capacity of the coal-to-natural gas projects that have been approved so far amounts to 85.1 billion m3 per year. Among them, the Development and Reform Commission has approved 4 such projects: one in Keshiketeng Banner, Inner Mongolia, with a capacity of 4 billion m3 per year; one in Fuxin, Liaoning, also with a capacity of 4 billion m3 per year; one in Xinjiang operated by Qinghua, with a capacity of 5.5 billion m3 per year; and one in Inner Mongolia operated by Hui Neng, with a capacity of 1.6 billion m3 per year. In total, these projects have an aggregate capacity of 15.1 billion m3 per year. According to incomplete statistics, there are currently 55 coal-to-gas projects at various stages in China (including those already in operation, those under construction, as well as those in the preliminary preparation phase, planned or under contract), with a total production capacity of 241 billion m3 per year. However, in terms of project distribution, coal-to-gas projects in China are unevenly spread, with more projects in the west and fewer in the east ； In terms of project progress, there are currently many plans but few projects that are put into operation. As of today, only 5 coal-to-gas projects have been put into operation nationwide, with a combined production capacity of 3.803 billion m³ per year. It accounts for only 1.58% of all coal-to-gas projects. The reason why there are many planned domestic coal-to-gas projects but few that are put into operation is closely related to the problems encountered during the operation of coal-to-gas plants. 2.2 Problems in Project Operation 2.2.1 Poor economic efficiency: In the cost structure of coal-to-gas production, coal accounts for 60% of the total costs; fluctuations in coal prices have a significant impact on the costs associated with coal-to-gas production, resulting in high risks. Furthermore, based on the performance of pilot projects, the actual production cost of coal-to-gas is very high, being only lower than that of imported gas (which enjoys **subsidies); thus, coal-to-gas has almost no advantage in terms of production costs. In terms of selling prices, at present, the prices of gas transported through pipelines and LNG produced by liquefaction, as well as gas derived from coal, are all higher than the local natural gas gate station prices, resulting in less competitiveness. 2.2.2 Issues in the selection of gasification technologies: The gasification technologies used in currently operational coal-to-gas projects mainly fall into two categories: pulverized coal pressurized gasification technology and coal slurry gasification technology. Among them, pressurized gasification of coal dust is widely used, accounting for 89.48% ； The proportion of water-coal slurry gasification technology is 10.52%. Both technologies have their own advantages and disadvantages; however, problems have arisen to varying degrees during their application. The main problems associated with the pressurized gasification of coal fines are the difficulty in treating wastewater and environmental pollution, whereas the issue with coal-water slurry gasification is that the energy consumption of the gasification process does not meet the standards set for demonstration projects. Clearly, the application of a single gasification technology poses risks to project operations. 2.2.3 Water resources and wastewater discharge issues: Coal-to-gas projects consume vast amounts of water; however, most current projects are located in regions with scarce water resources, such as Inner Mongolia and Xinjiang. These areas have fragile ecosystems and weak soil self-purification capabilities; most of them are severely desertified deserts and wastelands lacking water bodies capable of holding wastewater, leaving them with almost no capacity to handle the wastewater generated by the project. In recent years, incidents of corporate wastewater polluting deserts have occurred frequently, causing numerous environmental problems. To prevent such incidents from occurring, companies are required to invest more in wastewater treatment in order to achieve zero wastewater discharge. However, zero wastewater discharge is a global challenge, and no mature technology is available at present. This is the main issue that restricts project development and affects its profitability. 3 Market Analysis of Coal-to-Natural Gas The development prospects of coal-to-natural gas projects can be determined from the overall supply and demand balance in the natural gas market. Based on the previous analysis, the ratio of total natural gas consumption to total supply is rising year by year, with demand exceeding supply; therefore, coal-to-natural gas, as a supplementary source, holds great potential for development. Currently, the operational capacity of coal-to-natural gas production is approximately 4 billion m³/year. This includes coal-to-liquids and co-produced methane projects run by Datang in Keshiketeng Banner, Inner Mongolia; Qinghua in Xinjiang; Huineng in Ordos; Guanghui in Xinjiang; and Jiehua in Yunnan. As of December 2014, there were as many as 116.2 (121.5) billion m3/year of projects under construction or approved for implementation (according to the China Chemical Industry News), with these projects expected to enter the market gradually after 2018. Driven by society’s strong desire to improve the air quality, the use of clean energy will continue to increase; more and more cities and residents will turn to natural gas, and in the future it will become as common as electricity and water. This is undoubtedly a huge market. 4 Economic Analysis of Coal-to-Natural Gas: Depending on the process technologies employed in coal-to-natural gas projects, there are certain differences in terms of investment and economic benefits. Let’s take the 4 billion m3/year natural gas project as an example for calculation. The project is planned to be constructed in a certain location in Ordos, Inner Mongolia. For gasification, GSP pulverized coal gasification and (MK+Lurgi gasification technology) will be employed ； The conversion is carried out using a sulfur-tolerant conversion process with a low water/vapor ratio ； Low-temperature methanol washing technology is used for desulfurization and decarbonization ； Methanation utilizes advanced foreign technology, with the total investment in project construction amounting to approximately 25.6 billion yuan. Annual output of the project: 4 billion cubic meters of natural gas, 80,000 tons of sulfur, 50,000 tons of liquid ammonia, 45,000 tons of crude phenol, 25,000 tons of ammonium sulfate, 80,000 tons of naphtha, 180,000 tons of diesel, and 2,000 tons of hydrogenation tail oil ； Annual coal consumption: 7.02 million tons of raw coal with a particle size of 5–50 mm, 4 million tons of raw coal with a particle size of 0–5 mm, and 830,000 tons of fuel coal ； 19.7 million tons of water were used. On February 28, 2015, the National Development and Reform Commission issued a notice stating that for domestically produced non-residential natural gas, the maximum gate price for newly added gas supplies was reduced by 0.44 yuan per cubic meter, while that for existing gas supplies was increased by 0.04 yuan per cubic meter. This adjustment ultimately led to the unification of gas prices. According to the notification, the price at the Ordos natural gas gate station is 2.04 yuan/m3; therefore, the estimated range for the natural gas price is set at (1.8~2.1) yuan/m3. Within this gas price range, the price of the raw coal corresponding to an internal rate of return of 11% for natural gas plants is calculated, while other economic evaluation parameters are determined in accordance with relevant regulations. It is possible to calculate the different gas prices and raw coal prices at which an internal rate of return of 11% can be achieved (see Figure 3). Thoughts on the Development of Domestic Coal-to-Natural Gas Projects As shown in Figure 3, when the price of natural gas remains constant and the price of coal is below the value indicated by the line on the left, the internal rate of return of the project is higher than the industry benchmark rate of return, making the project economically viable. Conversely, if the project’s internal rate of return is lower than the industry benchmark, the project is economically unfeasible. 5 Analysis of the Advantages and Disadvantages of Coal-to-Natural Gas 5.1 Advantages of Coal-to-Natural Gas 5.1.1 Energy-saving and emission-reduction advantages of coal-to-natural gas. Low-carbon development has become a new driver of international economic growth and a focus of competition, with the core being to establish a development model characterized by high energy efficiency and low emissions. Compared to coal-to-oil and coal-to-methanol processes, coal-to-natural gas has the greatest advantage in terms of carbon dioxide emissions; therefore, developing the coal-to-natural gas industry is the most effective way to achieve emission reduction goals, and it meets the requirements for the development of modern coal chemical industries. 5.1.2 Advantages of high energy efficiency in coal-to-natural gas conversion. As an energy source, coal can be utilized through various methods such as direct combustion for power generation, conversion into oil, natural gas, methanol, or olefins. Among these methods, coal-to-natural gas conversion offers the highest efficiency, which can theoretically exceed 60%. Therefore, in terms of overall energy utilization efficiency, using coal to be converted into natural gas as a clean energy source is the most efficient way to save energy. 5.2 Problems existing in coal-to-gas projects Currently, China’s coal-to-natural gas industry is experiencing excessive and unregulated development. Document No. 69 issued by the National Energy Administration, titled “Guiding Opinions on Regulating Demonstration Projects for Coal-based Fuels,” stipulates that based on a thorough evaluation of the experiences and issues encountered in existing demonstration projects, efforts should be made to plan comprehensively, make scientific arrangements, enforce strict entry criteria, and steadily promote the industrial demonstration of coal-based fuels. The main tasks involve carrying out industrial demonstration projects focusing on energy efficiency, environmental protection, water conservation, and the localization of related technologies and equipment. The document also calls for adhering to the fundamental principle of “prioritizing demonstrations while ensuring sustainable water usage.” However, no specific industrial policies or design standards have been introduced yet; thus, many issues still require further research. 5.2.1 Selection of gasification technologies: The reliability of gasification technologies directly affects the safe and stable operation of coal-to-natural gas projects as well as the company’s profitability; coal gasification is the core technology in coal-to-natural gas production. Various gasification technologies have their own advantages and disadvantages; there is no single “universal” gasification technology. The choice of gasification technology depends on the properties of the feed coal and the product specifications. Table 3 lists the coal qualities and gasification technologies selected for coal-to-natural gas projects under construction or planned, as well as the main issues encountered. The pressurized coal gasification technology is quite commonly used in coal-to-natural gas plants. Its advantages include broad adaptability to various types of coal, low investment costs, high energy efficiency, a high methane content in the raw gas, the production of phenol and oil as by-products, and a 100% domestic production rate. Based on a single production line with a capacity of 1 billion m³/year, its investment level is the lowest among all currently available coal gasification technologies ； The disadvantages include the use of lump coal with a particle size of 5–50 mm as raw material; coal powder with a particle size smaller than 5 mm cannot be utilized, the steam decomposition rate is low, there is a large volume of phenol-containing wastewater to be treated, environmental protection pressures are high, and the processing capacity of each individual furnace is relatively low. 5.2.2 Water resource issues Compared with other energy and chemical products, coal-to-natural gas projects have the highest energy utilization efficiency and water resource utilization efficiency; however, due to their large scale, they also consume a great deal of water. A coal-to-natural gas project with an annual output of 4 billion m³ requires approximately 20 million tons of water per year. This is quite challenging for water-scarce regions in the west that are rich in coal resources. The largest water-consuming device in coal-to-natural gas projects is the circulating cooling water system; followed by water used for production, leaks, testing, domestic purposes, and landscaping, which cannot be recycled. Therefore, the key to saving water in coal-to-natural gas plants is to reduce the consumption of circulating cooling water. The main and most effective water-saving measures for recirculating cooling water are adopting closed-loop recirculation systems and making greater use of air coolers ； At the same time, water conservation through measures such as the reuse of dewatering water from coal mines, urban sewage, and reclaimed water, improved design, optimized technologies, and enhanced corporate management has become a development trend to support the growth of large-scale modern industrial sectors. 5.2.3 Issues in industrial parks: There is competition among industrial parks in terms of industrial positioning, with scales that are not realistic; the positioning is not based on objective conditions for industrial clustering. There is also chaotic competition in attracting investment. For example, a certain domestic industrial park already has enterprises engaged in coal-to-oil, synthetic ammonia and urea, methanol, dimethyl ether, and ethylene glycol production. In its long-term plans, it aims to add a coal-to-gas project with an output of 12 billion cubic meters per year, and the construction and management of the transportation network for this project will face many challenges. Table 4 provides only an estimate of the transportation capacity required in the industrial park to support such a coal-to-gas project. Thoughts on the Development of Domestic Coal-to-Natural Gas Projects: As can be seen from Table 4, when an annual coal consumption of around 40 million tons is involved and railway transportation is used, 1.25 trains (with 67 carriages each) are required per hour. Approximately 4 million tons of ash and slag are generated annually, and road transportation is used for their transport; currently, road transport is the common method for moving such materials. With vehicles capable of carrying 20 tons each, 25 trucks would be needed per hour. Adding in the time required for loading and unloading, as well as the transportation of certain raw materials and by-products generated during production, a very large transportation network is formed. Managing such a complex transportation network, as well as constructing it, presents insurmountable challenges. If the project is located near coal mines, coal transportation can be carried out via conveyor belts to meet production needs, but the volume of ash and slag generated during production will ultimately become a bottleneck for the development of the facility and the enterprise. Therefore, the park must be planned and laid out rationally. In accordance with the principles of a circular economy, it should engage in the comprehensive development and efficient utilization of coal resources, leverage the advantages of economies of scale, expand and strengthen its projects, and achieve the local conversion of coal resources. 5.2.4 Economic benefits issues First and foremost, the development of China’s coal-to-natural gas industry is affected by changes in the international energy structure, particularly the tendency for oil prices to remain low in the long term; as a result, its economic competitiveness and economic benefits will be severely undermined. A decline in oil prices will indirectly lead to a downward trend in natural gas prices in the future. Since June 2014, international crude oil prices have shown a severe downward trend, with limited room for further declines in the future. Coupled with the gradual increase in natural gas imports, it will further intensify competition in China’s natural gas market, leading to greater homogenized competition within the market. Secondly, **the environmental protection requirements and cost investment demands for coal-to-natural gas projects are increasing gradually. **Emission limits for nitrogen oxides and sulfur dioxide have been explicitly set, and zero discharge of wastewater is required; environmental regulations are now stricter than before. As a result, the investment in environmental protection equipment and facilities for such projects has increased. Judging from the coal-to-natural gas demonstration projects that are already in operation, the environmental pressures ahead are enormous, and the economic viability of these enterprises is concerning. Once again, the mechanism of aligning prices for newly produced natural gas and existing gas reserves will eventually become a reality. The integration of these two types of gas improves market fairness and reduces the competitive advantages in the natural gas market ； The deregulation of direct supply prices at user gate stations will significantly enhance the bargaining power of major downstream users in market transactions. Consequently, gas suppliers will be compelled to further reduce their gas production costs in order to ensure their survival. With the operation of the China-Myanmar gas pipeline by the end of 2013, the signing of large-scale contracts for natural gas imports from Russia, and the gradual commissioning of import receiving stations along the coast, the supply of imported natural gas will increase significantly. At the same time, as China’s overall economic growth slows down, the growth rate of demand for natural gas also declines. It is foreseeable that in the future, there will be a situation of full competition among various gas sources, with particularly intense competition in the coal-to-natural-gas sector. 6 Recommendations for the Development of Domestic Coal-to-Natural Gas Projects Over the past 10 years, the natural gas industry has not only experienced rapid growth but has also developed a relatively complete industrial framework. The development and utilization of natural gas are not only of great significance for ensuring energy security in our country, but also play a vital role in improving the energy structure and promoting the development of clean energy. China **attaches great importance to the development of natural gas**, and has always regarded it as a strategic priority in the development of the national economy. Therefore, it is inevitable for China to develop coal-to-natural gas technology. However, with profound changes taking place in the structure of the world oil market, falling oil prices and a slowdown in domestic GDP growth are leading to changes in the internal and external conditions governing the development of China’s natural gas market. In the future, the development of coal-to-natural gas in our country will face a situation where opportunities and challenges coexist; therefore, it is necessary to develop this technology in a scientific and rational manner. 6.1 Select coal gasification technology reasonably. It is crucial to choose an appropriate coal gasification technology based on the characteristics of the coal ； The selection of process technologies for coal-to-natural gas projects is closely related to the characteristics of the coal used as feedstock; having a stable supply of raw coal for production is the fundamental guarantee for safe, stable, and environmentally sustainable coal-to-gas production in the future. Several coal-to-gas projects in the country have experienced problems such as gasifiers failing to operate properly or even being damaged, due to significant variations in the quality of the coal used as raw material. This has led to plant shutdowns and equipment modifications, resulting in substantial economic losses. Therefore, coal quality is the core issue of greatest concern in coal gasification technology. Based on the determination of coal quality, combined gasification technology represents the optimal choice. Taking the fixed-bed pressurized gasification technique for natural gas production as an example, this technology is already highly mature. To more effectively handle the refractory phenolic wastewater and biochemical sludge generated during production, and to make more rational use of pulverized coal in order to achieve energy savings, reduced consumption, and compliance with environmental standards, a combined gasification technique that utilizes two different gasification methods is a good option. The choice between pulverized coal gasification or coal slurry gasification techniques depends on the quality of the coal. For example: a certain type of coal has good thermal stability, favorable viscosity-temperature properties, a falling strength greater than 78%, a ash fusion point of around 1250°C, and a slurry formation quality fraction of about 60%. This type of coal is well suited for fixed-bed slag gasification and water-coal slurry gasification technologies. Taking an annual production volume of 4 billion cubic meters of natural gas as an example, and assuming that 50% of the production is achieved through fixed-bed slag gasification and 50% through water-coal slurry gasification, the ratio of lump coal to pulverized coal used as input materials is 1:1. The lump coal is used in fixed-bed slag gasification, while the pulverized coal is used in water-coal slurry gasification and in boilers. The refractory phenolic-containing wastewater generated during the natural gas production process using the fixed-bed slag gasification method can be used to replace part of the water required for making the slurry; the resulting biochemical sludge can be incorporated into the coal slurry as a fuel additive. This approach enables the resource utilization and harmless treatment of the refractory phenolic-containing wastewater and biochemical sludge, as well as the rational use of lump coal and pulverized coal ； This reduces the investment and operating costs for enterprises, and also leads to significant improvements in water conservation and environmental protection. 6.2 Make rational plans based on water resources; take local conditions into account, plan appropriately, and conduct scientific assessments to determine the feasibility of the water resources and environmental carrying capacity ； The production of natural gas from coal consumes large amounts of water, and extensive coal mining also has a significant impact on fragile ecological environments. At present, most of China’s coal-to-natural gas projects are located in western regions such as Inner Mongolia and Xinjiang, where coal resources are abundant but water resources are scarce. The development of coal-to-natural gas will have a significant negative impact on the already fragile local ecological environment. Therefore, areas facing severe water shortages must plan the development of coal-to-natural gas under the strict constraint of water scarcity. From the perspective of **energy strategic security and technical reserves, and taking into full account the carrying capacity of the environment and water resources, it is necessary to develop coal-to-natural gas production to a moderate extent by making use of the relatively abundant low-quality coal resources. With the upcoming implementation of China’s new environmental protection laws, **the policies regarding the development of coal-to-natural gas projects have taken environmental concerns into account, and there is a gradual shift toward cautious support for such projects. For example, the environmental impact assessments for Su New Energy and Yili Xintian coal-to-natural gas projects explicitly call for further evaluation of issues such as water resources and environmental capacity. Therefore, the development of coal-to-natural gas projects must be planned carefully, based on scientific analysis, and in line with available water resources. 6.3 Emphasize the efficient and clean utilization of coal. Fully understand the overall situation regarding coal-to-natural gas production, integrate and implement relevant **plans and policies, and proceed with coal gasification in a planned, confident manner, thereby achieving the scientific conversion of coal on-site. At the same time, enterprises improve the environment through continuous technological innovation and process optimization, as well as various measures such as energy conservation, cost reduction, emission reduction, and water conservation. This helps to lower costs and increase the internal rate of return for the enterprises, thereby achieving a win-win situation for the enterprises, **, and the environment, and facilitating the comprehensive, clean, and efficient use of coal.