China's coal-to-liquids projects buffeted by changing policy, economics

Special Report:Global Financial Crisis

By Xinhua writer Ren Huibin

HOHHOT, April 5 (Xinhua) -- Chinese coal enterprises
have made strides in coal to liquids (CTL) projects, using both direct and
indirect methods, despite difficulties in the market and policy environments.

The pressures they face include sharply lower oil
prices and a surge in coal prices, which together can change the economics of
many projects, and policy changes at the national level.

The latest success story took place in North China's
Inner Mongolia. On March 23, Yitai Group announced a successful test run with
its 160,000-tonne indirect CTL facility, producing quality diesel oil and
naphtha.

Based in Jungar Banner, Inner Mongolia, Yitai Group
has an annual output of 100 million tonnes of coal. Its CTL project was approved
by the central government in 2005 and began construction in 2006, with an
investment of nearly 2.7 billion yuan (395 million U.S. dollars).

"The Yitai facility is China's first industrial-scale
CTL line and it means China has made substantial progress in independent
industrialization of coal to oil using the indirect method," said Li Yongwang,
chief scientist of the coal-to-oil task force of the Shanxi Coal Chemical
Research Institute (SCCRI), under the Chinese Academy of Sciences (CAS).

Direct coal-to-oil production involves mixing heavy
oil with coal to produce coal slurry and converting that mix into diesel oil and
other products via hydrocracking. China's Shenhua Group was the first in the
world to achieve industrial-scale direct production.

The indirect technique requires gasifying and
purifying the coal, then adding activators to synthesize diesel oil and naphtha.
Yitai uses this type of technology, as does Lu'an Mining Group.

Before Yitai's project took off, Shenhua -- China's
top coal producer -- conducted trial operations of a 1 million-tonne direct CTL
production line on Dec. 31, producing quality diesel, naphtha and oil. This
trial run made China the only country in the world to have achieved key
technologies for 1 million-tonne-scale direct CTL production.

The trial ended after 300 hours, but Shenhua is
*** improvements so it can conduct a 1,000-hour trial next month.

As a key component of the national energy strategy,
the Shenhua direct CTL project, also based in coal-rich Inner Mongolia,
officially kicked off in May 2005.

Also, on Dec. 22, north China's Shanxi Lu'an Mining
Group successfully experimented with a small-scale indirect CTL facility,
developed by SCCRI. It will conduct a trial of its 160,000-tonne indirect CTL
facility in the near future.

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NEW LIQUID ENERGY SOURCES

Coal accounts for more than 70 percent of the energy
mix in China, which has abundant coal reserves but poor oil and natural gas
resources.

Over the past five decades, China has tapped several
large oilfields, such as Daqing and Shengli. But discoveries and production
can't keep up with demand. With rapid economic growth, China became a net oil
importer in 1992 and has increased oil imports every year since.

According to Liu Keyu, vice president of the China
Petroleum Economy and Technology Research Institute, China's oil consumption
reached 389.3 million tonnes in 2008, up 5.1 percent from the previous year. But
during 2008, net oil imports approached 200 million tonnes, up 9.2 percent.

Thus, a little more than one half of oil consumed had
to be imported.

Liu warned that China, which was expected to continue
raising its oil imports, would meet increasingly tough energy-security
challenges.

High and volatile prices are among those challenges.
During the four years before the financial crisis erupted with full force in
late 2008, world crude prices soared. Prices reached a record high of 147.27
U.S. dollars per barrel on July 11, 2008. These high prices meant that many
areas of the country lacked enough oil.

Price changes affect the economic viability of CTL
projects, but the issue of energy security persists.

In 2003, when world oil prices were high and supply
was tight, Chinese companies crowded into CTL projects. The central government
called for a series of pilot CTL projects during the 11th Five-Year Plan period
(2006-2010) to lay the foundation for industrial-scale production.

"It is very important to promote industrial-scale
coal liquefaction," said Zhao Shuanglian, vice-chairman of the Inner Mongolia
Autonomous Region. With CTL projects, "we can turn coal mines into oil fields to
ensure energy security for China."

Take the Shenhua direct CTL facility. The project,
which will have an annual capacity of 5 million tonnes, will be implemented in
two stages.

In the first stage, there will be three production
lines with combined annual capacity of 3.2 million tonnes. The first pilot
production line, which proved successful in the December trial, will be able to
convert 3.5 million tonnes of coal annually to 1.08 million tonnes of diesel oil
and naphtha, equivalent to a 100million-tonne oilfield in annual output.

According to Zhang Xiwu, board chairman of Shenhua Group, if everything goes smoothly with the first 1 million-tonne pilot production line, the business will build two more lines of about the same size, for a planned total of 3.2 million tonnes.

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