Tax relief drives Shenhua plan for new fuel source

PUBLISHED : Monday, 13 March, 2006, 12:00am
UPDATED : Monday, 13 March, 2006, 12:00am

The central government is considering taxation and financial support to help Shenhua Group jump-start China's first coal-to-liquid fuel project, according to president Zhang Yuzhuo.

Government support would help shore up the economic attractiveness of the project, which H share China Shenhua Energy has an option to acquire from parent Shenhua Group, as it is subject to financial risks stemming from uncertainties of oil and coal prices.

The importance of the project - based on Shenhua's own technology - has been recognised by two generations of state leaders, Mr Zhang told the South China Morning Post.

'Former president Jiang Zemin had paid a high-level visit to China Coal Research Institute in 1996 as part of the government's coal-to-oil strategy planning,' he said. 'Then, former premier Zhu Rongji, said on a visit to South Africa's coal-to-liquid fuel major Sasol that China would need 10 firms like Sasol to help meet its energy needs.'

Mr Zhang said the government was considering giving coal-to-liquid fuel projects preferential tax treatment and a guaranteed minimum selling price for their fuel products, such as diesel and petrol.

He expected the policies to be in place by the time its project comes on stream late next year.

To reduce China's reliance on imported crude oil, which makes up more than 40 per cent of consumption, the National Development and Reform Commission has put coal-to-liquid fuel projects development in its draft 11th Five-year Economic Development Plan, although it has yet to give details.

The government wants to tap China's huge proven coal reserves, the world's third-largest after those of the United States and Russia.

Shenhua Group, the country's largest coal producer, began building a liquefaction plant in Inner Mongolia in August 2004.

First-phase facilities would be capable of producing one million tonnes of fuel, rising to five million tonnes after completion of the second phase, Mr Zhang said. He would not disclose the project's investment

. Xinhua reported in 2004 when Shenhua broke ground that it involved investment of 24.5 billion yuan in first-phase facilities, but the capacity referred in the report was 2.75 million tonnes of products.

'Shenhua aims to produce 30 million tonnes of coal-to-liquid fuel products annually by 2020, at which time this amount will only be enough to replace 10 per cent of China's oil imports,' Mr Zhang said.

Despite a jump in coal prices of more than 50 per cent in the past two years, he said Shenhua's expectation that its project would be profitable had not changed - so long as global crude prices remained above US$30 a barrel.

He said this was due to the firm's low ex-mine coal production cost - less than US$12.50 a tonne, relatively small in a liquefaction project's cost structure. China's national average ex-mine cost was about US$18.50, compared with US$25 in the US, he added.

'While the resource tax has gone up somewhat, China has a tremendous cost advantage over other major coal-producing countries such as the US investment and labour costs,' he said.

Still, Shenhua's project in Inner Mongolia was considered risky, given uncertainties over future oil prices and the scarcity of existing commercially proven projects, and it was excluded from China Shenhua Energy when the company listed last year.

The project uses direct liquefaction technology, which produces liquid fuel from coal at high temperatures and pressure levels, with plenty of hydrogen injection.

Shenhua is in negotiations with global energy giant Royal Dutch/Shell and Sasol, the first company in the world to liquefy coal on a mass commercial scale, on using the South African company's indirect liquefaction technology on proposed projects in coal-rich Ningxia Autonomous Region and Shaanxi province.

Indirect liquefaction first transforms coal into synthetic gas, which is then turned into liquid fuel by adding catalysts.

Amid stubbornly high oil prices, many mainland companies had proposed coal-to-liquid fuel projects, including Yankuang Group, parent of H share Yanzhou Coal Mining, but none had come as far as Shenhua, Mr Zhang said.

'As of now, no other company has completed a feasibility study and won government approval to go ahead. They are at a stage where Shenhua was more than five years ago,' Mr Zhang said. 'We started our pre-feasibility study in 1997.'

Coal-to-liquid fuel projects have also reappeared on the energy development agenda of countries other than China.

A recent US Department of Energy report had forecast that such projects would produce one million barrels of oil equivalent a day by 2020, Mr Zhang said.

'In the early 1980s, they had a grand plan to produce three million barrels a day by 2000, but low crude oil prices meant it was not feasible subsequently,' he added.

Sasol is also eyeing coal-to-liquid fuel projects in the US and India, according to South African media reports.