BEIJING, Oct 8 (Reuters) - 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 demand.
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.
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 winter.
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 is needed.
Zeng said the northern provinces of Shanxi, Shaanxi and Inner Mongolia, and Xinjiang in the far west, are potential areas for CTG development.
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 unconventional alternatives.
"Striking a good gas price (with PetroChina) is key for CTG builders," said an official with Datang Power.
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 market.
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)