BEIJING Oct 8 China is spending $14 billion on
pilot projects to turn coal in remote parts of the country into
natural gas, a risky bet that could help meet the country's
surging demand for the cleaner fuel.
As China triples natural gas use to around 10 percent of
total energy demand by the end of the decade, it needs to find
fresh sources of supply if it wants to avoid costly imports from
Australia, Indonesia, Qatar and Turkmenistan.
The first of four pilot coal-to-gas (CTG) projects should
ship gas by the end of the year, ramping up to 15 billion cubic
metres (bcm) a year by 2015, or around 7 percent of China's gas
If achieved, this level of output would put CTG on par with
China's booming coal-seam gas sector and ahead of nascent shale
gas. It could also give Beijing an advantage in marathon talks
with Russia to secure gas from the Siberian basin.
The costly experiment relies on technology similar to that
used in apartheid-era South Africa to produce oil from coal, but
which has seen few commercial applications.
It is cheaper and easier to burn the coal directly, but
China, which overtook the United States as the world's
number-one energy guzzler and greenhouse gas emitter, struggles
to move coal from remote western and northern regions to the
east and south, where the bulk of its energy is consumed.
"With the Russian gas negotiations proving no easier than
ever, Central Asian gas not cheap, and some of the LNG import
deals needing tax sweeteners to break even, coal-to-gas
definitely has room to grow," said Mao Jiaxiang, a senior
researcher with Sinopec Group.
"Otherwise China will become highly dependent on gas
imports, similar to oil."
Imports now meet a quarter of China's gas demand of some 120
bcm last year, a share industry experts forecast to expand to 40
percent by the end of the decade.
GOVERNMENT COOL ON APPROVING
Leading the CTG foray are a state-owned power firm and two
privately-run, unlisted coal miners.
Datang Power, parent of Datang International Power
Generation Co Ltd , in 2007 started
bringing in gasification know-how from Europe.
It started up the country's first CTG plant in July, a 1.33
bcm/year facility in Inner Mongolia that will pump gas to
Beijing, the 20-milion-population capital that has over the
years experienced gas shortages when heating demand peaks in
Over 30 firms proposed a total of about 125 bcm of CTG
plants by 2020, but Beijing approved only four.
"The top guideline is we allow CTG investments only in
coal-surplus regions and where water is also plentiful," said
Zeng Yachuan, head of policy and regulation with the National
Energy Administration, the nation's top energy body.
For each 1,000 cubic metres of CTG gas, 5-6 tonnes of water
Zeng said the northern provinces of Shanxi, Shaanxi and
Inner Mongolia, and Xinjiang in the far west, are potential
areas for CTG development.
ECONOMICS, PIPELINE ACCESS
China's surging gas demand and a liberalisation of gas
pricing should mean the economics of CTG make sense, at least
before 2020 when China starts to unlock its potentially huge
shale gas resources.
A CTG plant, costing 4-6 billion yuan ($630-$950 million)
for every bcm of gas capacity, can break even with a pipeline
feed-in price of $6.5 per million British thermal unit (mmbtu)
in Xinjiang and under $8 for Inner Mongolia, according to
industry officials and Wood Mackenzie.
That compares with an average of $10-12 for imported
liquefied natural gas (LNG) and close to $12 at China's border
for Turkmenistan gas.
The challenge for investors is more about access to
pipelines, industry officials said, as three-quarters of China's
50,000 kilometres of gas grid are owned by top energy giant
PetroChina, which has shown scant interest in
"Striking a good gas price (with PetroChina) is key for CTG
builders," said an official with Datang Power.
SINOPEC WADES IN
That is where Sinopec Corp, China's number-two
energy firm, could potentially make a difference.
Sinopec is proposing two giant pipelines, each able to carry
30 bcm/year, from Xinjiang to the east and south of the country.
The pipelines would span 12,000 kilometres, nearly a quarter of
China's current total.
The firm in late 2011 agreed framework deals with half a
dozen companies - utility operators and coal miners with plans
to build CTG in Xinjiang - to supply the pipelines.
The pipelines, if approved, would establish Sinopec as a
competitor to PetroChina in China's rapidly expanding gas
For now, three-quarters of China's gas production comes from
PetroChina. Sinopec makes up 15 percent, and number-three energy
firm CNOOC Ltd the remaining 10 percent.
"If Sinopec fails to grab a stake in China's surging gas
market over the next five to ten years, it would be a story of
failure for the company," said Sinopec researcher Mao.
(Editing by Michael Urquhart)