Shenhua seeks investors for coal-chemical plants

Shenhua Group, parent of listed China Shenhua Energy, is seeking strategic investors for two coal-to-chemical projects estimated to cost about 16 billion yuan each, to share risks and rewards in the nascent but potentially lucrative industry. The success of the projects is key to the nation's efforts to lower reliance on imported crude oil, the primary raw material for the production of many downstream chemicals. Demand for chemicals has been surging in tandem with the boom in manufacturing and construction. This is despite the fact that such projects have yet to be proven on a commercial scale in the coal-rich but oil-poor mainland after record high crude oil prices made them attractive to pursue. Shenhua Group was looking for investors that had chemical expertise for the projects in Baotou, Inner Mongolia and Ningxia autonomous regions, vice-president Zhang Yuzhuo said. However, the nation's largest coal producer will keep controlling stakes in the projects. With equipment procurement completed, Mr Zhang expected construction to be finished by the end of next year, with commissioning in 2010. The project in Baotou has a designed capacity to produce from coal an annual 1.8 million tonnes of methanol, 300,000 tonnes of ethylene and 300,000 tonnes of propylene. Methanol is a fuel as well as an industrial chemical, while ethylene and propylene are key building blocks of many plastic products. Shenhua Group has been in talks for more than a year with Shanghai government-owned chemical firm Shanghai Huayi (Group) on co-investing in the project. The other project in Ningxia will be capable of turning coal into methanol and then to 520,000 tonnes of propylene annually. 'We are hoping to co-operate with a foreign company on this project,' Mr Zhang said. 'We are not only looking for funds, but more importantly industry expertise.' Separately, Shenhua Group is working with Dow Chemical of the United States on a feasibility study to build a bigger plant in Yulin, Shaanxi province, that aims to produce from coal three million tonnes of methanol and one million tonnes of ethylene and propylene. Mr Zhang said Shenhua Group had completed 99.5 per cent of construction work in the nation's first coal-to-liquid fuel project in Inner Mongolia, which was estimated to cost 24.5 billion yuan when work began in 2004. Trial runs and commissioning are expected this year, although he would not specify a timetable. Built entirely with domestic resources and expertise, it will be capable of producing one million tonnes of fuel annually in the first phase of development, rising to five million tonnes in phase two. Free of sulphur, the fuel will help the nation combat worsening acid rain caused by the burning of too much coal. Shenhua Group is also doing feasibility studies with South Africa's Sasol and Anglo-Dutch oil major Royal Dutch/Shell on co-operating on coal-to-liquid fuel projects in coal-rich Shaanxi and Ningxia. Mr Zhang said all of Shenhua Group's projects under construction had received approval from the central government. Beijing two years ago suspended approval of new coal-to-liquid fuel and chemical projects after scores of companies raced to invest in them on learning that they will be profitable as long as the price of crude oil stays above US$40, causing great concern on the potential impact on the environment. Yue Laiqun, research fellow at the Ministry of Land and Resources' Strategic Research Centre of Oil and Gas Resources, said the biggest bottleneck for the sector was water resources as most of the coal-rich regions were in the arid north and west. 'As it takes five to seven tonnes of water to make one tonne of liquid fuel from coal, the impact on the drought-hit Yellow River from such water-intensive projects is definitely a big concern for the central government,' he said. Beijing said it would approve new projects only after assessing their environmental impact and coming up with a detailed plan for the industry's development. 'The central government has been working on the plan for about two years now; multiple meetings have been held between government and companies, but it has yet to be unveiled,' Mr Zhang said. 'I think it will include some limits on the industry's development, taking into account availability of water, power, transport, environmental protection issues and society's acceptance.' However, he said Beijing had made it clear in energy industry policy documents that it supported the sector's development, although it had also spelled out that projects must be majority-controlled by mainland enterprises.