In an era of natural gas surplus, is there still a future for coal-to-gas technology?

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In an era of natural gas surplus, is there still a future for coal-to-gas technology? Author/Source: Southern Energy Observer, Trading Branch of CNOOC Gas & Power Group Co., Ltd., Yan Qun. Date: October 8, 2016. Click-through rate: 16. In 2004, the first phase of the West-East Gas Pipeline Project was put into operation, marking the beginning of the widespread use of natural gas in China. Since then, the annual growth rate of natural gas consumption has exceeded 16%. However, due to a combination of factors such as the overlap of three phases (a period of shift in growth rates, a period of pain associated with structural adjustments, and a period of adjustment following previous stimulus policies), an economic downturn, and unresolved issues regarding the price relationship between natural gas and alternative energy sources, China began to experience a slowdown in natural gas consumption growth and an excess in supply capacity in 2014 ； Moreover, natural gas prices saw a dramatic increase following international oil prices, with the National Development and Reform Commission issuing two orders in 2015 to significantly reduce the prices of natural gas for non-residential use at provincial-level distribution stations. This action wiped out all the price increases that had taken place since 2010; currently, the prices at provincial-level distribution stations in China’s eastern regions are around 2 yuan per cubic meter. It’s really as if years of hard work have been undone in just one night. So, another set of three factors comes into play: a temporary surplus of natural gas, low gas prices, and difficulties in corporate cash flow. Under such circumstances, what fate awaits the costly and controversial coal-to-natural gas industry? Let a seasoned novice in the coal-to-gas \"service\" industry (specializing in pipelines for coal-to-gas projects and market development) explain it to you step by step. I. A brief introduction to knowledge in the coal-to-gas industry 1. What is coal-to-gas? Is coal-to-gas the same as coalbed methane? The answer is: NO ； Coal gas = artificial gas? The answer is: NO. ①Coalbed methane refers to hydrocarbon gases stored in coal seams, with methane as its main component; these gases are primarily adsorbed on the surface of coal matrix particles, with some being present in the pores of the coal or dissolved in the coal seam water. It is a mineral resource associated with coal, commonly known as \"gas\". ②Gas refers to gases produced by processing coal as a raw material, containing combustible components; its methane content is low (ranging from several hundred ppm to over 10%, depending on the gasification technique), and it also contains large amounts of CO and H2. It has poor safety and environmental characteristics. ③Coal gasification refers to the process in which coal is gasified to produce syngas (coal gas). This syngas then undergoes a methanation process: the H2 and CO (CO2) in the coal gas react to form methane, CH4, thereby producing substitute natural gas (SNG). The methane content in coal-derived gas is relatively high, exceeding 95%. Generally speaking, depending on the gasification technology and the quality of the coal used for gasification, approximately 2.4 to 2.9 kilograms of raw coal are required to produce 1 cubic meter of coal-derived natural gas. 2. Unveiling the ‘tip of the iceberg’ in the economic evaluation of coal-to-gas projects: Based on the current development of the coal-to-gas industry, market conditions, and the different technologies used, the total investment for a project producing 4 billion cubic meters of gas from coal generally ranges between 1.9024 trillion yuan. Based on preliminary calculations (with gas and coal prices in all three scenarios being inclusive of taxes): ② When the gas price is 1.6 yuan per cubic meter and the coal price is below 220 yuan per ton, the project exhibits good economic viability. ②The project is economically viable when the gas price is 1.8 yuan per cubic meter and the coal price is below 300 yuan per ton. ③ The project is also economically viable when the gas price is 2.0 yuan per cubic meter and the coal price is below 400 yuan per ton. It should be noted that currently, the price of 5,000 kcal thermal coal in the Mengxi area is around 220 yuan per ton. The reasonable transportation cost for pipelines of this grade is about 0.2 yuan per cubic kilometer. The price of coal-based gas produced in the Mengjin area when it reaches the Bohai Rim region is generally lower than the price at the receiving stations. According to customs data from July, the average cost of imported pipeline gas in the first half of 2016 (January to June) was 1.35 yuan per cubic meter (the price before taxes at the border). Adding the pipeline transportation cost of 0.8–1.0 yuan per cubic meter, the overall cost made it unprofitable and uncompetitive to deliver the gas to provincial distribution stations in the east ； The average landed price of imported LNG is 1.67 yuan per cubic meter (excluding taxes). When storage, gasification, and pipeline transportation costs of around 0.3–0.5 yuan per cubic meter are added, it results in a break-even point with little competitive advantage. It can be seen that building coal-to-gas projects in areas where natural gas terminal markets are relatively close, such as the Mengjin region, has certain economic benefits, and its competitiveness is greater than that of imported gas. In other words, when importing gas results in losses, it’s sufficient for coal-based gas to generate fewer profits or not incur any losses at all ； When everyone is making money, isn’t it okay for coal-to-gas to make a little extra profit? 3. Advantages of the coal-to-gas industry: 1) The calorific value and cleanliness of coal-to-gas are higher than those of artificial gas and coalbed methane, and even higher than those of Central Asian gas and Shaanxi gas. 2) Coal-to-gas production has the advantage of enabling peak shaving; conventional oil and gas fields generally do not possess such capability, with a variation of at most ±10%, and a peak-to-valley ratio of 1.22 ； During the off-season, coal-to-gas plants can operate at 75% capacity to carry out maintenance work or switch to producing other products; in winter, they can operate at 110% capacity, resulting in a peak-to-valley ratio of 1.46. 3) Coal-to-gas production has the characteristic of a long production cycle. The production cycle of the coal mine supporting a coal-to-gas project lasts up to 70 years; in other words, such projects can also maintain a production lifespan of 70 years through equipment upgrades and maintenance, which is far longer than the 20–30 year production lifespan of conventional gas fields. 4) The safety and stability of coal-derived gas supply are higher than those of imported gas. As is well known, imported goods are affected by various factors such as international relations, geopolitics, terrorist activities, piracy, port controls, weather conditions, and sea conditions, which results in low safety and stability. Putting aside the \"gas war\" between Russia and Ukraine, during the heating season of 2015–2016, due to sea conditions and weather factors, the Sinopec Caofeidian LNG receiving station in Tangshan experienced a situation similar to one that occurred at many other receiving stations: on one hand, extreme cold weather led to restrictions on gas usage, creating an urgent need to replenish natural gas supplies ； The complicated situation on the other side is this: because of \"Kuimi-kun,\" LNG carriers could only stay at sea and admire the city’s \"hazy beauty\" from a distance. When a strong wind finally drove away \"Kuimi-kun,\" the LNG carriers were still forced to remain at sea due to the strong winds (they couldn’t dock, and this incurred high costs for chartering ships). 5) Advantages of coal-to-gas over other coal chemical processes. Modern coal chemical industry has multiple directions, such as coal-to-oil, coal-to-natural gas, coal-to-olefins, coal-to-ethylene glycol, coal-to-ammonia, coal-to-aromatics, coal-to-dimethyl ether, and so on. Compared with other coal chemical processes, the coal-to-gas route has the highest energy conversion efficiency, at around 56%–60%. It’s not because of the advanced technology, but rather because the coal-to-gas process is relatively short, resulting in less loss of energy and materials. The water consumption per unit is low. Producing oil from one ton of coal requires about 10 tons of water, whereas producing gas from 1,000 cubic meters of coal requires less than 5 tons of water. II. Veteran beginners and industry experts engage in a fierce competition over coal-to-gas technology. Currently, coal-to-gas technology is facing a \"crisis,\" and those working in this field jokingly say that they lack ambition. Seeing some people taking pleasure in others’ misfortunes without understanding the situation, this veteran beginner has decided to step in and use all his skills to compete with these industry experts in what can be described as a \"fierce battle.\" 1. Was a coal-to-gas project of a certain group unsuccessful? When it comes to coal-to-gas conversion, many so-called \"experts\" always mention a certain company, claiming that it performed poorly and that therefore this approach has no future. They really only know one side of the story. A certain group cannot represent the entire coal-to-gas industry, right? At least there are projects like Xinjiang Qinghua and Inner Mongolia HuiNeng for coal-to-gas production that perform better than him, right? There are mainly three reasons for the failure of a certain group’s coal-to-gas project: (1) Engaging in coal chemical processing was an area outside that group’s expertise; they lacked the necessary talent and professional management skills, and the scope of this activity was so large that they accidentally stumbled into difficulties. However, we should allow them to learn from these mistakes ； (2) The project’s cost overruns are extremely severe ； (3) This project involves transporting coal from a distance of two to three hundred kilometers away. Moreover, it’s lignite with a moisture content of 20%–30%. It’s easy to imagine how high the costs must be. For the coal-to-gas projects planned today, most of the plant sites are located 3 to 5 kilometers away from the coal mines, and transportation via conveyor belts is very economical and convenient. Thus, the tuition fees paid by that group were not in vain, as they can serve as a source of experience and lessons for future coal-to-gas projects. 2. Are coal-to-gas projects costly and unprofitable? This is indeed a problem, but based on the analysis above, coal-to-gas projects remain economically viable even during periods of low natural gas prices. Furthermore, the fact that so many companies are willing to undertake coal-to-gas projects indicates that there is still profit to be made, or that the long-term prospects are promising. And it’s not entirely impossible to find a solution; for example, combining coal mines with coal-to-gas projects (with the same shareholding ratios), supplying coal at low prices over the long term to keep the coal mines operating at a slight profit margin, and realizing profits from the sales of coal-to-gas products. Regarding the issues of high investment costs and economic viability, it is believed that companies will do their calculations carefully and strike a proper balance, unless it is a unconditional government mandate; therefore, this should not be a reason for the industry to oppose the development of coal-to-gas technology. 3. Are there many environmental issues associated with coal-to-gas projects? The environmental issues raised by those concerned about shrimp farming include high pollution, high water consumption, large amounts of CO2 emissions, and the failure to achieve emission reductions. “The clarifications are as follows: (1) The issue of high pollution is not true. In the first half of this year, the environmental impact assessments for three coal-to-natural gas projects with an annual capacity of 4 billion standard cubic meters each – those operated by CNOOC Datong, Beikong Ordos, as well as Su New Energy and Feng Co., Ltd. in Xinjiang – were successively approved by the Ministry of Environmental Protection. This shows that the environmental protection aspects of coal-to-gas projects can be met in terms of equipment, processes, and theory; there are no issues ； The next priority is to ensure proper supervision over the \"three simultaneities\" requirement for environmental protection facilities in projects that have already been approved. Dear experts, having been reviewed by so many specialists from the Ministry of Environmental Protection, there should be no issue of high pollution anymore. I believe they wouldn’t dare to abuse their powers, as our country has already implemented a \"lifelong responsibility system for environmental protection\". Guys, stop using money meant for selling cabbages to try and make money from selling heroin, will you? (2) The issue of high water consumption is a fact. Given the scarcity and value of water resources, the layout of coal-to-gas projects should be planned in consideration of the regional distribution of water resources. The water quotas in each area are limited, and water is essential for industrial development. **Wouldn’t it be good if these quotas weren’t allocated indiscriminately?** (3) It is a fact that there are massive CO2 emissions, but the claim that “emission reductions have not been achieved” is a false proposition. Although coal-to-gas projects emit large amounts of CO2, on the one hand, this emissions occur in the sparsely populated northwestern region ； On the other hand, the high concentration and pressure of the emitted CO2 create favorable conditions for subsequent applications, such as oil and gas displacement, soda production, dry ice production, etc. Indeed, it has been reported recently that the German company Covestro has already utilized CO2 for the industrial production of plastics, and in China as well research has been conducted on using CO2 to produce methanol. Regarding emissions reduction, although the total amount of CO2 emissions remains unchanged, it is certain that coal-to-gas conversion has contributed to emissions reduction. This is because, on one hand, coal combustion generates a large amount of SOx; however, through the purification process in coal-to-gas conversion, this waste product is turned into a useful resource, with almost all of the sulfur being recovered ； On the other hand, after coal is converted into natural gas, it can be transported from underground, thereby reducing transportation costs and energy consumption. More importantly, gas boilers can achieve a combustion efficiency of 96%, whereas conventional coal-fired boilers have an efficiency of only 70%–80%. Therefore, to obtain the same amount of heat, less natural gas is required, which effectively leads to reduced emissions. As the saying goes, “Those who do not know are not guilty.” Could you please change your mindset from now on? 4. If coal-derived gas is used for power generation, isn’t it better to generate electricity directly by burning coal at the mine mouth? A simple comparison shows that generating electricity from coal gas is less suitable than building coal-fired power plants directly at the mine site. But after reading the following points, do the experts still stick to their views? (1) Long-distance power transmission generally incurs 10% losses, whereas gas transmission has almost no losses. (2) Considering the practical needs of the coal-to-gas market and the necessity of ensuring the project’s economic viability, it is essential that a portion of the coal-derived gas be supplied to end-users for power generation or combined heat and power production. However, the majority of this gas should be used to replace coal-fired boilers or the direct combustion of raw coal; this would contribute to environmental improvement in densely populated areas. (3) When coal-derived natural gas is delivered to end-users, it can be used for combined heat and power generation; however, if a power plant is built at the mine site, the waste heat goes to waste. For clean heating or combined heat and power in large cities, natural gas (including coal-derived gas) should be the preferred choice. Even if coal-based combined heat and power could achieve emission levels for SOx and NOx that are comparable to those of natural gas, as claimed, what about the issue of dust? What about the coal transportation and storage stages? Keep in mind that dust is the “culprit” behind fog formation. III. Where lies the path for coal-to-gas production? In 2015, China’s apparent natural gas consumption reached 1932×108 billion cubic meters, placing it third in the world in terms of volume; there is still considerable room for further development. The industry expects that China’s natural gas consumption could reach 500 billion cubic meters by 2030, yet the growth potential for domestic conventional and unconventional gas is limited. China’s dependence on imported oil is already close to 60%; for natural gas, this figure is currently 30%, and it is expected to rise to 50% in the long term. For the sake of energy security, isn’t it necessary to develop coal-to-gas technologies and related technical capabilities? Considering: (1) China’s resource endowment – abundant coal, scarce oil, and limited gas – therefore, in addition to using coal for power generation, developing coal-to-gas technology is a priority; this also represents an important technical asset for ensuring China’s energy security ； (2) Developing coal-to-gas production helps enhance China’s bargaining power regarding imported goods ； (3) The development of rural, remote, and impoverished areas (such as Shanxi, Inner Mongolia, and Xinjiang) relies heavily on coal. Simply exporting raw coal is not conducive to local economic development; therefore, it is necessary to pursue advanced processing of coal, with coal-to-gas conversion being a preferred option ； (4) The supply assurance and peak-shaving capabilities of any single gas source are extremely limited. The best way to address these issues is to diversify gas sources; it is imperative to introduce new gas sources in addition to conventional and imported gases. Taking all the above factors into account, and in line with the concept of **\"upgrading and demonstration\" for the coal-to-gas industry, suggestions are offered for the development of this sector in China: it is necessary to carry out such projects, but not too many; random implementation should be prohibited. Coal-to-gas production can be developed to a certain extent, but only those projects that feature technological innovations that improve the efficiency of coal conversion, reduce energy consumption, or introduce advanced environmental protection technologies will be approved for upgrade and demonstration purposes ； However, it is not appropriate to launch upgrade demonstration projects everywhere; 6 to 8 across the country are sufficient.