China's coal-to-chemicals is a risky gambit

A leap of faith

13 March 2008 00:00  [Source: ICB]

Coal-to-chemical investors in China face the dilemma that while the feasibility of projects may not be positive, government support could offer excellent returns

John Richardson/Singapore

THE ECONOMICS of coal-to-liquid (CTL) and coal-to-chemical (CTC) projects in China can look very different for those sitting in the headquarters of a prospective Western investor, as opposed to a government-plan ning department in Beijing.

To begin with, logistics presents a major challenge. As many of these projects are in western China, where local markets have yet to really take off, product will have to be shipped to booming eastern or southern China.

Recent problems with a chronically overburdened rail network will not have increased the confidence of the average Western corporate careerist. These difficulties have included reduced operating rates among existing coal-based methanol and ammonia producers because of interruptions in coal supplies.

A US or European executive with an eye for a seat on the board, or even merely on continued employment, is hardly going to rush into his boss's office with a feasibility study containing nothing but vague promises that things will get better.

But while Western direct investments have so far been thin on the ground in the sector, there has been plenty of the somewhat less risky step of licensing technology.

COST OF CAPITAL

Financing might also be a problem because costs are soaring due to shortages of skilled labor and engineering and procurement capacity. Raw materials are shooting through the roof - one example is the recent big jump in iron ore and steel prices.

And some of these projects are big - really big. One foreign investor, for example, would need to raise $8bn (€5.2bn) to fund its plans for a CTL project.

"Bankers, like boards of directors, want to understand and to manage risks threatening cash flows," says Mark Berggren, managing director of the Singapore-based methanol consultancy Methanol Market Services Asia (MMSA).

"And you can hardly go to a financial entity and say: 'Hey guys, trust me - my Chinese contacts tell me all these problems will be sorted out.'"

Environmental concerns over the increasing use of coal as an energy source and the big volumes of water needed to operate these projects might also deter Western companies with an eye on ethical investors. Water is in particularly short supply in western China, where many of these projects are located.

A further deterrent lies in the doubt over the economics of methanol-to-olefins (MTO) technologies.

But for every one of these arguments, there are strong counterarguments as to why CTL and MTO projects could be economic.

THE GOVERNMENT PERSPECTIVE

Before tackling these arguments, it's worth noting that to a government planner, what matters above all else is energy security.

"From a Chinese perspective, what counts is substituting oil molecules with other energy molecules," adds Berggren. "This can be using methanol to make fuels through the direct blending of methanol into gasoline or through dimethyl ether (DME) production. It can also mean making olefins from methanol as this will free up naphtha that can be used to make gasoline."

One could also argue that if foreign direct investment is important for China to achieve its energy security targets, this will serve as a powerful motive for tackling logistics, financing and environmental concerns.

LOGISTICS COUNTERARGUMENT

A huge amount of money is being poured into improving China's infrastructure. For example, between 2001 and 2005, more was spent on roads, railways and fixed assets than during the previous 50 years, according to the UK's Economist magazine. From 2006-2010, $200bn is expected to be spent on the railways, four times more than 2001-2005.

Delays in such a huge investment program could be expected in other countries, but China has a strong track record in executing projects on time - confounding the skeptics.

And in some cases, infrastructure is being built ahead of demand. Highways have been constructed in areas that still have few cars.

Preemptive infrastructure can act as a trigger for demand by making car ownership more feasible because decent roads exist. This, in turn, might boost the viability of the CTL projects that are targeted at supplying transportation fuels.

There are serious concerns over the environmental impact of coal. "If you burn coal in homes or use it as a direct source of power generation, you produce a lot of particulate and other pollution problems," says Berggren.

The World Bank estimates that 17,800 people die each year from breathing in the pollution from burning coal in their homes.

According to Elizabeth Economy, environmental author and researcher, some 400,000 people die in China every year from airborne pollution, a significant source of which is coal.

"If you reform coal into fuels such as DME, which is cleaner-burning than petroleum-based alternatives, and you sequester the CO2 from the gasification process, there are clear environmental benefits," adds Berggren.

He notes that CO2 streams from synthesis gas (syngas) production are more concentrated than in refineries. As a result, he adds that it is more realistic than in the case of refineries to capture emissions for reinjection into coal beds and spent gas fields.

On water consumption, major coal producer Shenhua Energy says that after water is recycled in the syngas process, CTL technology consumes 7 tonnes of water for 1 tonne of production, compared with 6.5 tonnes of water required to process a tonne of crude oil into refinery products.

While MTO or methanol-to-propylene (MTP) processes might be seen by some as a little risky, others - most notably, of course, the suppliers of these technologies, such as Lurgi and UOP - strongly argue in their favor.

Lurgi is involved in an MTP project in China and further announcements by the suppliers are possible, as discussions are taking place in both China and the Middle East.

The Chinese are also developing a version of MTO through the Dalian Institute of Chemical Physics. "The next step is to scale this technology up," says Berggren.

This is all theoretical, however, as there is no MTO or MTP capacity operating in China, with the first plant at least three years away, according to Berggren.

But if one assumes that oil prices are going to stay high, coal-based MTO or MTP production looks increasingly attractive.

Berggren conducted analysis in early February which showed that an MTO plant in China, from the perspective of either a coal or natural gas owner, has never been more profitable, compared to a naphtha cracker, as it is now.

"Methanol prices will continue to ease faster than naphtha prices. Nonolefin cracker coproducts such as aromatics will also carry on declining.

"This will result in MTO production remaining more profitable than ever versus naphtha-based production for an owner of coal or natural gas molecules, promoting continued interest in MTO projects."

Investing in China has quite often been a leap of faith, as any Western player with well-established links in the country will admit.

Whether overseas players will take a leap of faith of $8bn or more remains to be seen, given all China's uncertainties, and the state of the credit markets in the West.

Berggren believes their decisions are likely to be slower than those of domestic project sponsors, mostly due to differences in what constitutes project risks.

He begrudgingly admits that "paralysis analysis" is the reputation of the non-Chinese, despite his belief in the importance of studying possible outcomes. While it is important to invest sensibly, for a country which has a long way to grow, and precious few resources, and the near-term prospect of wealth, he empathizes with the Chinese drive to CTC.

China has to improve on its energy security in order to sustain rapid economic growth - meaning that a leap of faith into the CTL and CTC sectors could reap tremendous rewards.

CONFERENCE DETAILS

MMSA, along with Jim Jordan and Associates, will host the 11th Annual IMPCA Asian Methanol Conference in Kuala Lumpur, Malaysia from May 20-22. This conference presents an unparalleled forum in which to discuss critical matters on methanol and its derivatives, such as coal-to-chemicals. Please visit www.jordan-associates.com/AsiaMethanol.htm for further details and registration information.

Read the ICIS Chemicals and the Economy blog





AddThis Social Bookmark Button

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly