Coal conversion concerns piling up

Mainland energy companies are stepping up their investment in projects to turn coal into liquid fuel, chemicals and natural gas, as tumbling coal prices caused by oversupply make such processes more lucrative.

They had already been experimenting with such projects as a way to meeting rising demand for energy and chemicals, since the mainland is rich in coal but poor in oil and gas.

Now, with prices of imported oil and gas staying high, replacing them with cheap domestic coal - particularly coal from remote regions - to produce downstream fuel and industrial chemicals makes economic sense.

However, analysts warn, concerns about the depletion of scarce water resources in most of the mainland's coal-rich regions and carbon dioxide emissions from such water-intensive and emission-heavy projects mean they face big environmental challenges and uncertain returns.

China Coal Energy, the listed unit of the mainland's second-largest coal producer China National Coal, said late last month that its budget for coal-to-chemical projects this year - 17.4 billion yuan (HK$21.9 billion) - had for the first time surpassed the 3.2 billion yuan set aside for developing coal mines.

Its enthusiasm for such projects, to add value to coal and reduce the impact of volatile coal prices on its bottom line, is shared by bigger rival China Shenhua Energy, which plans to buy parent Shenhua Group's coal-to-liquid fuel and chemicals businesses.