Are coal-to-chemicals projects in China a load of nonsense?

Maybe, if the mystery blogger at the excellent http://www.theoildrum.com/ site knows what he is talking about. I’ve pasted in his arguments below.
You need to register at this site, which takes only a few minutes, if you want to get into the wider debate about how energy issues will have a critical bearing on all those wonderful demand and supply predictions available at a high premium from petrochemical consultants.
And while we are on that subject, just how many of those predictions take into account a sharp decline in Chinese growth on the failure of its energy policy combined with the inability of the world to meet its crude oil import needs? This could occur as soon as 2010, say some crude oil exports, the year when Peak Oil is forecast to finally arrive.
Once you’ve registered at the oil drum, go to http://www.theoildrum.com/node/2270 for some miserable reading on this very topic.
Happy ‘Depression Economics’ – a new concept I think I’ve just invented.Having been involved in the Chinese oil industry for 25 years, I’d like to go on record to say that China’s peak production year was 2006. This is based mainly on two developments: one is an HL plot of China that points to a URR of 72 GB, China having passed the 50% mark sometime in 2006 or early 2007. Second is CNPC’s announcement that their production (nearly 60% of the total) would drop 100,000 b/d in 2007 (http://tinyurl.com/22srve). Part of this is due to the acknowledgment that the slow decline of Daqing can’t be maintained, and CNPC is now going to focus on natural gas production there (and tellingly, have started quoted production targets in toe). Neither Sinopec nor CNOOC have projects in the near term that could make up for this drop. Underlying depletion is running at 320,000 b/d, which puts China on par with a producer like Iran, but with only a fraction of Iran’s reserves.

I think the potential for CTL by 2015 is quite overstated. Although nearly 100 million tonnes of projects have been announced, and Shenhua itself targets 60 million tonnes of capacity by 2020, the obstacles–even beyond complex engineering and chemistry–is daunting. Water will be a problem. China’s coal centers in Inner Mongolia and Shanxi have few available water resources (one reason coal-by-wire hasn’t been an option), and CTL production requires 3-6 tonnes of water input for each tonne of output, depending on the method. Cost is an issue as well. Shenhua’s own estimate is that it will cost $6.25 billion per 100,000 b/d of CTL capacity (which I think is understated) putting it on par with tar sands, where costs have risen from $3 billion/100,000 b/d cap to over $12 billion). Finally, there is the issue of the coal resource base. CTL results in an enormous increase in primary energy consumption. In the case of 1 mmb/d production in 2015, this would require an increase in production of 180 million tonnes of Chinese raw coal per year–this on top of the 60-80 million per year needed for new coal fired plants constructed each year, and addition amounts of 50-80 million tonnes for iron & steel, cement, and other industry. A growth path of Chinese coal consumption to the IEA estimate of 3.5 billion tonnes in 2025 (which is very moderate and excludes CTL) would result in China’s consumption of half of its total remaining recoverable coal reserves by 2019. Since China’s coal reserves are only 45% bituminous (the balance being subbituminous and lignite), gross production will have to rise even further to deliver the same amount of energy. Moreover, China recently announced a national fuel standard for methanol from CTL (a result of the coal producers angling for subsidy money that went to the ethanol producers), but since methanol has only 48% of the energy content of gasoline, CTL output has to be discounted by such factors depending on what is produced.

China has sanely put a moratorium on food-chain grains being used in grain ethanol production, having seen prices on its own corn market in Dalian soar to new highs last year. I’m also skeptical of the speed at which jatropha plantings can offset oil as well. China doesn’t have large tracts of empty land to plant, so density of planting will be fairly low, and this has a strong impact on the energy return of any biomass-based project.

It’s also important to consider how oil is used in China. Adjusting the Soviet-style official energy consumption numbers to account for nature of use, and not sector of use, oil for transport (road, rail, air, water) now accounts for about 39% of the total, compared to 65% in the US. Although the growth of the vehicle industry is high, it is not the discretionary private user that is driving transport oil demand. In large part, the biggest growth is coming from road freight transport. China’s rail system, the largest in the world, is completely overwhelmed moving coal, and coal now accounts for 49% of all freight moved on the rail system, but this in turn accounts for only 55% of coal production, down from 80% of production moved by rail in 2001. What this means is that the road system (they now have pretty much the equivalent of a US interstate system in place and still expanding) has had to take up a lot of the slack, and story after story appears of overload coal trucks (30 tonne size) creating severe damage to highways which were not built to this weight specification. Similarly, the rail system has to refuse 60% or more of new freight transport requests, and this means that a manufacturer trying to move his freight to the coast to deliver to just-in-time export markets have had to shift to road transport as well. In China, the shift of one tonne-km of freight from rail to road increases energy use 8 times.

China uses very little oil for power generation, and that is mainly oil-fired plants in Guangdong province. The conditions leading to the jump in consumption to 14% in 2004 when thousands of diesel-powered generators were brought on line to deal with the electricity crisis have pretty much passed. In 2006 alone, China added 102 GW of new power capacity, or the equivalent of the UK and Italy grids in one year (which by the way, will emit 500 MT CO2 each year–the EU Kyoto reduction to 2012 in total was just 300 MT).

Oil is a vital fuel in the agricultural sector, where 60% of irrigation is run by diesel pumps. Another 15% is used in the petrochemical industry, vital to both domestic and export manufacturing. Construction account for another 10%–this is the diesel used to run the machines that have turned China into one huge construction zone over the last 20 years. Finally, industry uses about 20%, and possible savings can be had in this sector.

I often wonder who will be hurt more by liquids shortages…China or the US? The US has a lot of wiggle room in its consumption, given the domination of autonomous personal transport in total oil use. China has much less–oil is already being put to its highest value-added uses, and there is little room for fuel switching in the short term. The easiest efficiency gains have been had, after 25 years of concerted efforts in this regard, so even 1% per year would be difficult from efficiency alone–it may well mean absolute conservation, or going without.

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