About 30 CTL projects have been proposed, but only three have won government approval. These three are controlled by Shenhua Group, Yanzhou Coal, and Lu’an Group.

It shouldn’t be surprising that Shenhua is leading the way. China’s biggest coal producer, state-owned Shenhua (2005 revenue: $153 billion) is planning eight CTL projects. In mid-July, the company signed agreements with Royal Dutch Shell and the South African mining and synthetic fuels giant, Sasol, to build CTL plants. Shenhua and Shell have agreed to conduct a three-year study on a 70,000 barrel-per-day plant in the Ningxia Hui autonomous region in northwestern China, for possible start-up in 2010. Also, Shenhua is pursuing two 80,000 barrel-per-day CTL projects with Sasol, in Shaanxi province and Ningxia. And Sasol is in talks with Chinese officials to try to win tax incentives, excise rebates, measures to guard against low oil prices, and direct capital injections for the projects. By 2020, Shenhua expects to be producing about 600,000 barrels of motor fuel per day from coal.

Shandong Yanzhou Coal Group, in eastern China’s Shandong province, has initiated two CTL projects: in Yulin in Northwest China’s Shaanxi province, and in Guizhou province. The two-phase Yulin project started in April involves a total investment of $12.5 billion. The project is expected to produce about 200,000 barrels per day by 2020. The first phase of the project will be completed in 2013. Other major coal producers have followed suit. Lu’an Group in Tunliu, Shanxi province launched a CTL project which is expected to produce about 100,000 barrels per day by 2015.

China has been flirting with CTL since 1999, with its first CTL project in Henan province. However, that 10,000 barrel-per-day project ended once it was discovered that the coal being used was unfit for liquefaction. The current rush toward CTL has led to activity in Shanxi, Anhui, Ningxia, Henan, and Xinjiang provinces, all of which have plans to build CTL plants over the next five years. In Shanxi, the country’s top coal-producing province, officials plan to invest up to $25 billion on CTL projects. If all goes according to plan, these projects could add one million barrels per day of oil products by 2013, accounting for 10 percent of China’s current oil-products demand. Another plan calls for China to spend up to $60 billion on CTL by 2020.

The environmental issues associated with CTL have led the central government to freeze the approval procedure for new CTL projects. The government is developing a new policy on CTL, expected to come out in early 2007. It will likely push investors to apply sophisticated technologies, stricter environmental rules, and cost reduction for any CTL projects, and the government will continue to pursue foreign investment and technology. This take-it-slow attitude was enunciated by Chinese premier Wen Jiabao in June when he visited China’s largest coal producer, Shenhua. Wen said that CTL projects should be done “on a trial basis” and that “coal liquefaction projects should not be carried out in a rush.” Further, the Chinese government is worried that the CTL plants will add yet more pollution to the country’s coal-producing regions. In some areas, air pollution is so bad that cars must use their headlights during the day. Sasol officials at the Secunda plant in South Africa told ET last year that visiting Chinese delegations had expressed great admiration for Sasol’s technology, but their recurring questions focused on the emissions problem.

Capital and technology issues are also of concern. CTL projects are extremely expensive. One unit capable of producing about 200 barrels per day would cost an estimated $12.5 million to build, about seven times the cost of an oil refinery. The profit margins of CTL projects are closely linked to the fluctuating international price of oil. Some CTL projects can offer an acceptable return on investment when oil is between $30 and $35 per barrel. But few Chinese companies are willing to bet on future prices. Another potential problem is the lack of oil distribution channels, as most of the developers are new to the oil industry. That means they need help from established oil companies to distribute their products. Thus, Shenhua is in talks with Sinopec to distribute CTL fuel. Sinopec owns a small stake (less than 10 percent) in Shenhua’s CTL project in Shaanxi province. Yanzhou Coal has also expressed an interest in cooperating with an oil company on its Yulin CTL project.

Clearly, CTL has great allure for China. Over the coming decades, it will add significant amounts of new supply to the country’s ravenous motor-fuel market. The rest of the world will be watching closely as the economics – and more important, the environmental impact – of CTL developments play out in China.

Gas to Liquids

While CTL is expected to mushroom in China, the country has yet to become serious about gas-to-liquids. A year ago, Shell formed a partnership with the Shanghai Science and Technology Commission, Tongji University, and Jiaotong University to develop GTL technology. Shell introduced its GTL fuel to the Chinese market on buses owned by Shanghai’s Pudong Bus Transportation Company. The Shanghai trial involved eight buses, fitted with local engines running on a 70-30 mix of oil-based diesel and GTL diesel.