When coal becomes a liquid asset
China's quest to secure reliable supplies of energy from abroad was in the spotlight again last week. Beijing signed a nuclear-safeguards treaty with Australia that is expected to pave the way for large-scale sales of uranium to the Chinese market in the next few years.
The deal gives China access to its 10th foreign source of uranium fuel for a big expansion of nuclear power plants it plans to build by 2020. But it draws attention away from Beijing's programmes for using domestic energy resources for future economic growth.
One of those programmes will turn Chinese coal into liquid-oil products, including petrol and diesel fuel. China is the largest consumer and producer of coal in the world, and coal supplies about 65 per cent of its energy needs. But the country's proven oil reserves will be exhausted within 25 years at the current rate of use, and it is becoming increasingly dependent on imported oil. However, the mainland has relatively abundant supplies of coal - over 120 billion tonnes, enough to last at least 75 years.
But this coal is 'dirty': burning unwashed coal in power and industrial plants fouls the air with dust and sulfur dioxide, creating unpleasant living conditions and serious health problems.
Last month, the state-owned Shenhua Group, China's largest coal company, said it was confident that Beijing would underwrite its plans to build five or six new coal-to-liquids (CTL) plants by agreeing to guarantee compensation if the oil price fell below a certain level. The current high price of oil makes the expensive CTL technology profitable.
The plants under construction or planned in China - including several in joint ventures with the Anglo-Dutch Shell Group and Sasol of South Africa - would make the equivalent of 10 million tonnes of crude oil annually by 2010. CTL output could rise to 30 million tonnes annually by 2020 - equal to about 16 per cent of the nation's current crude-oil production of 180 million tonnes a year.
Shenhua's first plant, in Inner Mongolia , is expected to begin operating by late next year. All the CTL projects undertaken by Shenhua and other Chinese firms are likely to be established at mines in the coal-rich areas of Inner Mongolia, Ningxia and Shanxi province . Two years ago, Shenhua and Ningxia Coal Industry signed separate contracts with Shell and Sasol to build CTL plants in Shanxi and neighbouring Ningxia.
Executives of the South African company have said that converting coal to diesel using Sasol's proprietary process - which first produces gas and then turns that into liquid fuels - is profitable as long as the oil price stays above US$30 a barrel and coal costs less than US$12 a tonne.
Shell licensed its coal-gasification technology to Shenhua in 2004. The Chinese firm's CTL plant that is under construction in Inner Mongolia will use a newer process than Sasol's. Developed by US-based Hydrocarbons Technologies, it converts coal to petrol and diesel without the intermediate conversion to gas.
Chinese companies and research laboratories are also developing their own CTL applications. China's choice of both nuclear power and CTL technology will be determined not just by the efficiency of the process, but also by the extent to which it is controlled by Chinese firms under an energy-security strategy set by the government.
Michael Richardson is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore. This is a personal comment