Shenhua nears deal on coal project with Sasol

PUBLISHED : Friday, 16 June, 2006, 12:00am
UPDATED : Friday, 16 June, 2006, 12:00am

Pact with South African firm expected to be signed next week

Shenhua Group Corp, the parent company of Hong Kong-listed China Shenhua Energy, is close to signing an agreement to co-operate with South African coal-to-oil producer Sasol on the construction of mainland coal liquefaction projects, according to a senior official of the company.

Group president Zhang Yuzhuo, on the sidelines of a Beijing energy conference, said: 'Our talks with Sasol are wrapping up. We expect to sign an agreement next week.'

Mr Zhang declined to elaborate but the two companies have been in talks on the transfer of Sasol's technology to Shenhua's planned coal-to-oil projects in Shaanxi province and Ningxia Hui autonomous region. Sasol has reportedly been asking for stakes in the projects in exchange for its technology.

A Sasol spokesman said Premier Wen Jiabao was scheduled to meet Sasol chief executive Pat Davies during his first official visit to South Africa next week.

Sasol general manager Lean Strauss last week said the company was looking to sign a memorandum of understanding with Shenhua to proceed with the second phase of a coal-to-oil project feasibility study. The first phase was completed in November last year.

When asked to comment on speculation that Sasol was asking for US$1 billion for its technology, Mr Zhang said: 'The licensing agreement is under negotiation but it is definitely much lower than US$1 billion.'

He said Shenhua planned to complete three of the five projects to turn coal into liquid fuel such as diesel and petrol by 2010. Shenhua Energy has the first right of refusal to buy into all of its parent company's projects.

Mr Zhang would not give a total investment figure for the projects but said the first one in Ordos, Inner Mongolia, would cost about 30 billion yuan. It is scheduled for completion late next year and will have a capacity to produce three million tonnes of liquid fuel a year, expandable to five million tonnes.

Shenhua also plans to build a six million tonnes a year coal-to-oil plant in Yulin, Shanxi province, and a three million tonnes a year plant in Ningxia using so-called 'indirect liquefaction' technology which first turns coal into gases before processing it to liquid fuel.

The firm is in talks with both Sasol and energy giant Royal Dutch/Shell on the transfer of the indirect liquefaction technology to its Ningxia project.

The mainland coal giant also plans to build a 3.2 million tonnes a year coal-to-oil project in the coal-rich but remote Xinjiang autonomous region, according to industry policymaker National Development and Reform Commission.

It has struck a preliminary agreement to build coal-to-oil and chemicals projects worth 70 billion yuan in Hulunbeier, Inner Mongolia, Xinhua reported.

Although conceding the projects' viability would depend on the price of oil, Mr Zhang said: 'As long as the oil price is at least US$30 a barrel, our projects' economics should be good and if the oil price remains above US$40 in the long term, our projects' pay-back periods should be less than eight years.'

Besides coal-to-oil projects, the company also plans to build coal-based chemical projects.

Mr Zhang said it had formed a joint venture to build a plant capable of producing annually 1.8 million tonnes of methanol, 300,000 tonnes of ethylene and 300,000 tonnes of polypropylene in Baotou, Inner Mongolia. It has started construction tendering.

Another project in Yulin under feasibility study will be able to make three million tonnes of methanol and one million tonnes of ethylene-based products.

Mr Zhang said the company planned to co-invest with international chemical majors. He did not elaborate.