China bets big on coal-to-oil projects

To ease its increasing thirst for oil, China is throwing tens of billions of yuan into so-called coal-to-liquid (CTL) projects, which permit the conversion of coal into a liquid fuel that can substitute for crude-oil derivatives in many applications. If successful, this move has the potential to shake up the current energy markets greatly at home and abroad.

Analysts see China’s investment in CTL projects as a big gamble. If successful, the projects could reap staggering profits, provided crude-oil prices remain at today’s levels or higher (about US$70 per barrel) and coal prices remain low. However, if oil prices drop below $30, they will suffer losses.

It is true that China has a great deal of coal. According to a nationwide survey in 2002, China’s coal reserves could be as much as 188.6 billion tons. China produced 2.19 billion tons of coal in 2005, according to the National Bureau of Statistics. Therefore, CTL supporters say the reserves could support the nation for more than 80 years.

But such forecasts are static, and therefore questionable. China’s demand and hence its production of coal are also growing fast, as coal remains the country’s major energy source. For instance, the 2.19-billion-ton production in 2005 was up nearly 10% from the previous year.

According to official data, the total energy China consumed in 2005 was equivalent to the burning of 2.11 billion tons of coal (coal is so fundamental to the Chinese economy that all other forms of energy are calculated as “tons of coal equivalent” in government planning). Of the total energy China consumed last year, 68% was coal, 23.45% from oil, 3% from natural gas, and the remaining 5.55% from hydroelectric or nuclear plants.

Since coal is China’s major energy source, the demand for coal will continue to soar as China’s demand for energy grows. For instance, more coal-fueled power plants are expected to enter operation in the next few years.

So the seemingly abundant coal reserves may not be able to supply China for another 80 years after all. Massive CTL production will sharply increase the demand for coal and exhaust the country’s coal reserves sooner, as well as pushing up coal prices.

Asia Times