Should China Develop Coal to Oil?    

Zhang Ruihe, Senior Professor of CNCIC  

Influenced by the weakening of the US dollar and the prospect of a typhoon in the Mexican Gulf, on September 20th, the crude oil price once again hit new highs in both peak trade prices and market-closing quotes, internationally. The prices of crude oil futures touched US$83.90/barrel in New York market and closed at US$83.32/barrel - the highest in nearly 30 years.  
   The incessant climb of international oil prices has put huge pressure on China's imported oil supply. According to reports on September 16th at the First China (Taiyuan) International New Industrial Exposition on Coal & Energy, China is developing key technology and constructing demonstration projects for replacing petroleum by coal, aiming to relieve the crude oil crisis domestically. Presently China has completed two pilot facilities for direct coal liquefaction with capacities of one thousand t/a and ten thousand t/a. Three coal to oil projects are planned go on stream in 2008 - the 1 million t/a coal directly liquefaction production line built by Shenhua Group; the indirect coal to oil project constructed by Inner Mongolia Yitai Co., Ltd. (CCR 2006 No.16); and the 160 000 t/a indirect coal to oil liquefaction project in Shanxi province launched by Shanxi Luan Mining (Group) Co., Ltd. So by 2008 a total capacity of 1.32 million t/a will be available, and by 2020 China will have 50 million tons of production capacity.
   Currently though, economic feasibility is in question. Zhang Yuzhuo, vice general manager of Shenhua Group and also chairman of the board of directors of Shenhua Coal to Oil Co., Ltd., forecast at the exposition that if the current crude oil prices last long, the coal to oil industry is feasible economically.
    Chen Liming, vice executive president of China branch of Sasol, which leads the coal to oil industry worldwide, agreed that the coal to oil industry has a bright future in China. In addition he said that the prudent manner and gradually advancing measures of the Chinese government are beneficial to the prolonged development of the industry.
   Chen Yuhui, a chemical industry analyst from Orient Securities Company Limited, shared the same views. In his judgment, in the present situation, if the first commercial CTO unit successfully goes on stream, the development prospect is surely bright in the future. Whether it is viewed as a national security measure for the energy supply or considered in tandem with other strategic efforts, the coal to oil industry will play a positive part.
   Considering nothing more than mounting oil prices and China's particular domestic energy resource mix - short of crude oil, poor in natural gas and rich in coal - it seems that coal to oil is an effective way to ease China's excessive dependence on the outside world for energy.  However many issues remain open to discussion such as: Is coal to oil to be developed vigorously as a commercial industry and/or controlled as a national energy source strategy?
   
1. Would 50 million t/a be sufficient?

China needs a large amount of energy. According to forecasts, the demand for crude oil in China will reach 600 million tons in 2020. Fifty million tons is small potatoes compared with 600 million tons. At that time, supposing that the yearly output of crude oil in China reaches 250 million tons, adding only 50 million tons of liquefied coal leaves China importing 50% of its petroleum. So even China reaches the supposed industrial scale of coal to oil, the national energy shortage will remain fundamentally unresolved.

2. Is China really coal-rich?

According to data, China has a coal reserve of 687.2 billion tons, accounting for 11% of the world total. But the per capita reserve is only 60% of the world average. The United States has 23% of the world's coal reserve total and unearths about 1 billion tons of coal each year, accounting for 27.4% of energy it consumes. China's output of coal reached 2.3 billion tons in 2006, providing 70% of the energy consumed. China can be regarded only as mining coal at the highest rate worldwide but absolutely not as a country with rich coal resources, no matter whether compared - per capita - with the United States, or the world average.

3. Carbon dioxide discharge

A 50 million t/a coal to oil unit it needs 200 million - 250 million tons of coal per year. Discharging 3.5 tons of carbon dioxide for every ton of coal, 700 million - 900 million tons of carbon dioxide would be discharged by a typical plant. At the special topic session of the UN Climate Change High Grade Adaptation Conference, Yang Jiechi, the foreign minister of China, stated on September 24th, 2007, that China, as a responsible developing country, will try its best to control the growth rate of greenhouse discharges. Meanwhile, vigorously developing the coal to oil industry prevents the China National Program for Handling Climate Change from being smoothly implemented.

4. Water supply

The coal to oil industry consumes large amounts of water. Over ten tons of water is consumed for one ton of liquefied coal. Perhaps 68% of water was evaporated out and 16% of water becomes part of the synthesized oil, and other 14% was consumed in the process. According to Shenhua Group, 55% of the consumed water can be recovered from the wastes.  China is short of fresh water. Shanxi and Shaanxi provinces and Inner Mongolia all have rich coal deposits indeed but also too little water. Should these regions launch coal-to-oil projects, no doubt the grave lack of water would be aggravated. If these areas encountered an ongoing drought, the normal operation of the coal to oil units would probably be impacted.  

5.  Ecological equilibrium

A 1 million t/a coal to oil plant consumes 5 million tons of coal and 10 million tons of water. And such a project needs to be matched with coal mines, downstream production units, logistics systems, production and living service facilities and so on. A new town with a large scale coal to oil production base would collect a population of over 100. If the 500 thousand tons of slag and 20 million - 30 million tons of sewage and a large quantity of flue gases containing sulfur are not well disposed of but wantonly discharged, they will seriously harm the local environment.  If coal to oil projects are built in areas that already have weak ecological equilibrium, then regardless of the plant's environmental protection efforts, the development of the local economy and society and the wellbeing of the natural environment are sure to be damaged directly.

6. Better utilization efficiency for coal

Like oil, coal is a vital resource. China's coal reserve is much richer than its oil reserve, so conversion of coal to oil seems very attractive from a national perspective, but both oil and coal are nonrenewable so both will be exhausted eventually. Therefore the nation's utilization of coal should be optimized and coal itself should be protected as a precious resource.
   Less energy is available from a gram of coal than from a gram of oil. Still, coal can be converted to oil only with a loss of some energy. According to a calculation of thermal equivalents by an organization of the United States, the ratio of oil and standard coal is 1.4286:1, so oil about 43 percent more valuable than coal in a sense, but much of that value is lost in conversion of the coal to oil. Using the same formula for measuring and calculation, the utilization efficiency of coal by the direct coal to oil process (3 tons coal to 1 ton oil) is 47.6% but only 28.6% in the indirect process, i.e. 71.4% of thermal energy is consum