China’s coal-to-liquids plans: a good idea?

In December it was announced that the NDRC had drafted a plan to rapidly expand the scale and scope of the programme to convert coal into liquids which can be used for transport fuels and petro-chemicals. A number of pilot plants are already under construction or in operation, but this announcement is a clear sign that the government is considering making the coal-to-liquids (CTL) technology  a major part of its strategy for security of oil supply. At present this plan is subject to government approval. I sincerely hope that the government does not rush into approving a CTL programme of the proposed size without carefully weighing the risks and the costs. For, though CTL appears to be a magic wand that can significantly alleviate China’s oil supply problems, a decision to take this route would have wide ranging ramifications for China and for the rest of the world.


CTL is a long-proven technology which allows coal to be converted to a number of different types of liquids which can substitute for gasoline, diesel or liquefied petroleum gas (LPG) or which can provide the ingredients for certain types of petrochemicals. The South African company, SASOL, has the largest operations which allowed the country’s economy to operate under sanctions. Shell is one of the few other companies to have commercialised its CTL technology. These existing technologies are ‘indirect’ in that they extract gas from the coal and then liquefy the gas. An alternative and more advanced technology involves the direct production of liquids from coal. This has not be done at commercial scale anywhere in the world.


The commercial production of liquids from coal is a capital intensive process, with high running costs. The break-even price for selling the liquid product is in the range US$ 30-40 per barrel, though this will be highly dependent on the price of coal.


The logic for implementing a massive CTL programme in China is clear. China has the world’s third largest reserves of coal after the USA and Russia, and yet has only modest remaining reserves of oil with a rapidly rising demand for petroleum products of oil kinds. Imports currently account for 45% of China’s oil consumption, and this percentage is  due to grow for the foreseeable future, reaching as high as 70% by 2020. Such a high degree of import dependence for a fuel which is so critical for transport and as feedstock to petro-chemicals exposes China to high costs and high risks. The costs come in the form of foreign exchange required to pay for imports, and derive mainly from the exposure both to high oil prices and to interruption to supplies. In this context, a large CTL programme can make a significant contribution to China’s security of oil supply, by reducing its import dependence and the consequent import bill and supply risks.


Whilst this logic has a certain degree of validity when described in these narrow terms, a more considered evaluation should take into account a number of external costs and risks, which are either large or as yet uncertain in magnitude. These are: the opportunity costs, the carbon emissions, the water requirements and the draw on coal reserves.


The phrase ‘opportunity cost’ refers to what else the money could have been spent on, and whether the alternatives would prove more effective or at least cheaper ways of addressing the problem. The current draft plan calls for some US $130 billion to be invested over the coming decade or so, in order to construct the capacity to produce about 130 million tonnes per year of liquids by the year 2020. This is expected to be equivalent to about 10% of the nations liquid fuel needs and the same percentage of olefin requirement for petrochemicals. This is indeed a huge amount of money and it has to be asked whether it might be better spent on such things as building efficient urban transport systems, raising the fuel efficiency of all of China’s vehicles including agricultural ones, switching to electric vehicles, or just keeping the money to pay for imports when the price goes high.


At present nearly all transport fuels emit greenhouse gases either in the production of the fuel or in the consumption. Refining of crude oil produces carbon emissions as does combustion in a vehicle’s engine. The production and use of biomass is relatively clean. An electric vehicle may not emit greenhouse gases, but most non-renewable electricity generating plants do, unless they use renewable energy. The use of CTL technology involves approximately double the level of carbon emissions than does the production and use of conventional oil products. The rise of greenhouse gas emissions in China in the last five years has been rapid and is of great concern to China’s government and to governments around the world. A number of international agencies and national governments are seeking to work with China to find ways to support and finance technologies which will constrain the rise of carbon emissions in China. If China decides to embark on the large scale use of a technology which adds further to the level of carbon emissions, these efforts will be seriously undermined, as will China’s international credibility. If the costs of capturing and storing the carbon emissions are included within costing of the programme, then it will start to look much less attractive.


CTL technology requires a large and sustained supply of water. Yet much of China’s remaining reserves of coal are situated in areas in northern China which either have a low rainfall or suffer from water shortages because of excessive upstream depletion of river water supplies. Indeed the shortage of water across northern China is a economic and environmental challenge of greater magnitude than the oil security challenge. If the government decides to push ahead with the CTL programme it will need to explain how these water supplies will be secured without undermining other economic activities and without further damaging the environment. Further, the full cost of the water supply, including recycling if applied, should be included in the project evaluation.


The final issue relates to the coal reserves themselves. Coal has long formed the core of China’s supply of commercial energy. Some 80% of electricity is generated from coal, and more than 65% of all commercial energy comes from coal. Though the remaining coal reserves in China appear to be abundant, three questions require consideration. First, how confident is the government in the officially-stated level of coal reserves? The annual production and consumption of coal has doubled over the last seven years. There is a risk that by further accelerating coal output to produce liquid fuels, China will become an importer of coal as its reserves are depleted. Second, even if the reserves are there, can the large coal mining companies invest rapidly enough to satisfy this additional source of demand on top of an already soaring demand for coal? Thirdly, given that much of China’s coal comes from badly managed mines which are have poor safety and environmental records, can the government radically improve the effectiveness of the regulation of the coal mining sector?


So, whilst the case against a large CTL programme in China is not proven, the government has a heavy responsibility to carefully evaluate the costs as well as the benefits, and to consider whether such large amounts of money might be better spent on something else.

Print Friendly, PDF & Email