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The Emperor’s New Clothes: Time To Spot The Obvious

China, Company Strategy, Economics, Methanol & Derivatives, Oil & Gas, Olefins, Polyolefins
By John Richardson on 30-Dec-2014

By John Richardson

EmperorIF enough of the right kind of people say something enough times then everybody starts believing what they say, regardless of whether or not they have done the right kind of research.

Part of this is down to a sense of insecurity – i.e. “why should I question what better-qualified people than me have said?” This is partly, also, because it is easier to agree with the accepted wisdom and go along with the crowd.

Thus for years most people accepted the notion that China was becoming largely a “middle class” country without questioning what this really meant in the context of this particular developing country.

They also failed to subtract the temporary credit-driven “wealth effect” from what it really means be a middle income earner in a country such as China (it is much better to use the phrase “middle income” than middle class, as using middle class can end up with erroneous comparisons with being middle class in the West).

Here is another piece of accepted wisdom for you: That the coal-to-olefins (CTO) process in China isn’t really viable because it consumes huge quantities of water when water is scarce in western China, where most of the CTO plants and projects are located.

But in October, Duncan Seddon, a Melbourne. Australia-based oil, gas and chemicals consultant told me that:

• The gasification of coal uses oxygen, which is produced from large air separation units. Virtually all of this oxygen is converted into water; this water can thus be used as process water with minimal clean-up. There is some requirement for make-up water (boiler quality) but this is not large.

• In addition, coal generally contains a lot of moisture (especially for sub-bituminous or lignite – Latrobe valley lignite – this is 60% water). There are technologies out there to extract water from this type of coal, which can then, of course, be used in further processes.

• But there is an issue around cooling when the methanol-to-olefins (MTO) stage is reached, as the MTO process works at 50% thermal efficiency. This means that 50% of the coal used is in effect burned and the heat generated has to be discharged to the environment.

• An easy, and cheap, way of doing this cooling is to use river water for cooling, and so this is where you can end up with huge consumption of water per tonne of olefins produced.

• But there is no reason, other than capital costs, to use river water as you can instead use:

1. A cooling tower, where a circuit of cooling water is used. Up to 15% of water can disappear into the atmosphere out of the top of these cooling towers, but it is also possible to further invest in a closed-loop system, which re-condenses the steam.

2. Another approach is to air cool plants, which means you would use no water for cooling at all in the MTO step. 

I have a confession to make. I, too, as a non-chemicals engineer accepted that water had to probably be  an insurmountable barrier for the CTO industry because I had heard this story so many times from chemicals engineers.

I will never make that same mistake again now that it transpires, following a survey by my colleagues at ICIS China, that:

• Most of the CTO plants in China make use of cooling towers or air-cooling systems. The same applies to the projects.

• This reduces water consumption from what would have been 18 tonnes of olefins of water per tonne of olefins produced at the methanol step of the production process to just 6-8 tonnes.

There other environmental concerns, though, relating to air pollution and the proper disposal of effluent water – plus whether or not some operators always bother to run cooling towers or air cooling systems (switching them off and just using river water has been cheaper in the past, but this might change as enforcement of environmental regulations is stepped up).

But this does mean that China’s hands are, in effect, not tied by the water consumption issue in the way that most people had thought.

There are, as a result, parallels but also differences with the purified terephthalic acid (PTA) story I outlined yesterday.

One of the parallels is that building CTO plants is also about job creation.

In the case of CTO, though, it is more about creating jobs in China’s less-developed inland provinces.

And, as I  have discussed before, these CTO plants and projects are part of much bigger complexes that make or will make other products such as synthetic natural gas (SNG). So it is about China using its coal reserves to replace oil imports and, in the case of SNG improving the air quality in the big cities by replacing the direct burning of coal to make electricity.

Sure, people will fall back on the idea that the collapse in oil prices will make it cheaper for China to import lots more polyethylene and polypropylene, instead of moving rapidly towards self-sufficiency in polyolefins via the CTO proces (naphtha has become more competitive versus coal as a feedstock).

But this ignores the longer term strategic thinking of the Chinese government.

This reminds me of the old Hans Christian Andersen children’s story, The Emperor’s New Clothes.

Here is a summary of the plot:

A vain Emperor who cares about nothing except wearing and displaying clothes hires two swindlers who promise him the finest, best suit of clothes from a fabric invisible to anyone who is unfit for his position or “hopelessly stupid”. 

The Emperor’s ministers cannot see the clothing themselves, but pretend that they can for fear of appearing unfit for their positions and the Emperor does the same. 

 Finally the swindlers report that the suit is finished, they mime dressing him and the Emperor marches in procession before his subjects. 

The townsfolk play along with the pretense, not wanting to appear unfit for their positions or stupid. 

Then a child in the crowd, too young to understand the desirability of keeping up the pretense, blurts out that the Emperor is wearing nothing at all and the cry is taken up by others. The Emperor cringes, suspects the assertion is true, but continues the procession. 

It is best not to continue the procession by over-investing in overseas polyolefins projects on the assumption that China will buy most of your surplus volumes.