By Sam Li and Colleen Howe
BEIJING (Reuters) -At a sprawling complex in northwestern China opened in March, Ningxia Baofeng Energy can convert millions of tons of coal annually into chemicals to make plastics, part of a growing industry found almost nowhere else.
The 48 billion yuan ($6.7 billion) plant is the latest in a sector that performs a valuable alchemy for Beijing: turning the country’s abundant coal into oil, gas and chemicals, reducing the need for energy imports that could be cut off in a conflict.
Capacity is growing at the fastest pace in years, underpinned by cheap coal and state support.
The sector last year turned 276 million tons of coal – equivalent to almost a year of European coal use – into chemicals, oil and gas, according to the China National Petroleum and Chemical Planning Institute.
If all planned projects proceed, the industry would roughly double over the next five years, according to Sinolink Securities, with most projects producing synthetic natural gas or liquid fuels.
The expansion ticks two boxes for Beijing, according to Lauri Myllyvirta, co-founder of the Helsinki-based Centre for Research on Energy and Clean Air. It hedges the risk of a maritime blockade of energy imports for the world’s biggest importer of oil and liquefied natural gas, while also drawing investment to less-developed regions such as Xinjiang.
“One thing that happens in China is when you are politically favoured, when you’re a state-owned enterprise with a clear, politically-given mission, then capital costs become much less of a problem,” Myllyvirta said. “That makes a huge difference.”
COAL SLUMP BOOSTS ECONOMICS
That the industry exists, let alone is profitable and growing, reflects the enduring importance of energy security for Beijing. The industry’s shaky economics have meant only globally isolated, coal-rich states like Nazi Germany and apartheid South Africa have previously deployed it at scale.
Other oil importers with ample domestic coal, including India and Indonesia, have looked at the technology but struggled to make the economics work, said Jianjun Tu, managing director of consulting firm Agora Energy China.
Even in China, the industry’s growth has been stop-start. Profitability partly hinges on high oil prices, and a first big expansion in the early 2010s was derailed by an oil price collapse after 2014, according to Myllyvirta.
In recent years, oil prices north of $70 a barrel and cheap coal have improved the economics, he said. At the same time, conflicts with the U.S. dating back to President Donald Trump’s first term have heightened Beijing’s concern over dependence on energy imports.
Government backing for state-owned enterprises in the form of easier access to loans has also helped, analysts said.
The fastest-growing sector in the industry is expected to be coal-to-gas.
The capacity under construction is around four times what was built over the past decade, according to Reuters’ analysis of figures from Agora Energy China, the China National Coal Association and Guosen Securities.
That would more than double annual capacity to 19.5 billion cubic metres (bcm), equal to roughly a fifth of China’s LNG imports last year.
Most of the new plants are slated for coal-rich northwestern China, where 12 bcm per annum of coal-to-gas capacity is under construction, mostly for energy, with another 10 bcm planned, according to Guosen Securities.
Gas produced from coal is now almost a third cheaper than imported LNG, at less than 2 yuan per cubic meter versus 2.87 yuan excluding regasification and transportation costs, although pipeline gas remains cheaper, according to Oilchem.
“In the future, coal-to-gas is expected to further replace some imported LNG,” said Sun Yang, an analyst at Oilchem.
With coal prices touching four-year lows this year, the economics has improved for coal-to-chemicals, too.
In late July, coal-based olefins generated margins of 800-900 yuan per ton, compared to losses of 200 yuan per ton for olefins using oil-based ingredients naphtha or propane, according to consultancy Oilchem.
At its plant in Ordos, Inner Mongolia, Baofeng heats coal to some 1300 degrees Celsius (2372 degrees Fahrenheit) to produce synthetic gas, which is transformed into methanol and finally olefins, a building block for plastics.
Baofeng declined to comment for this story.
GROWTH LIMITS
Last year, coal-to-gas, liquids and chemicals production capacity hit 38 million tons of oil and gas equivalent, according to the China Petroleum and Chemical Industry Federation, or 6% of the 685 million tons of gas and crude oil imported last year.
However, the model is vulnerable. Projects are emissions- and capital-intensive, while China’s demand for fuels is slowing. Competition in the bloated petrochemical sector is already fierce.
If oil prices fall meaningfully next year, as many analysts predict, that could lead to project cancellations.
Longer term, the biggest threat to the sector is Beijing’s climate agenda, say analysts. The industry’s growth and the resulting emissions are a key reason China is behind on its 2025 carbon intensity target, according to Myllyvirta.
Coal-to-gas projects emit nearly three times as much carbon dioxide during conversion than is released when the gas is burned, according to research done by Tu.
Should Beijing ever decide the sector’s emissions outweigh its contribution to energy security then its future would seriously be in doubt.
“The big question of course is the geopolitical calculus,” Myllyvirta said. “And the outlook on that changes every weekend based on what’s coming out of the U.S.”
($1 = 7.1529 Chinese yuan renminbi)
(LNG 1 billion cubic metres = 0.73 million tonnes)
(Sam Li and Colleen Howe in Beijing; Editing by Lewis Jackson and Sonali Paul)
