Factbox: Coal-to-gas, China's novel way of boosting gas supply

Sun Oct 7, 2012 5:16pm EDT

(Reuters) - China, the world's top energy user, wants to turn coal in remote areas into gas and then pipe it to cities, where residential and industrial use for the fuel is growing rapidly.

From coal miners to power producers, from private firms to state energy giants, companies are in a push to convert China's abundant and cheap coal into gas, using a mix of locally developed and imported technology similar to that used to produce synthetic fuel in apartheid-era South Africa.

Beijing has approved four pilot projects able to supply 15 billion cubic meters of natural gas a year by 2015.

The following are some facts based on interviews with CTG players and a report by consultancy Wood Mackenzie.

GAS SUPPLY, COAL USE

The four pilot projects, in northwest Xinjiang northern Inner Mongolia and northeast Liaoning, will pump a total of 15 bcm of gas by 2015, nearly 7 percent of China's gas demand then.

To produce each bcm of gas, 2 to 2.4 million tonnes of coal is burned, meaning some 36 million tonnes of coal would be consumed to make 15 bcm gas a year. That would be less than one percent of China's coal production in 2015.

Consultancy Wood Mackenzie forecasts China's total CTG output at 27 bcm by 2015, taking into account projects proposed but yet to win official nod.

EARLY INVESTORS

Datang Energy Chemical Company Ltd, a subsidiary of state-run power firm Datang Group, is building the country's first CTG plants. In July it started a pilot facility in Inner Mongolia with annual capacity of 1.33 bcm by end 2012, and full designed capacity of 4 bcm by 2014.

The other two pilot plants are being built by two private firms, both of them coal miners - China Kingko Group and China Huineng Group.

Kingko plans a 5.5 bcm/year plant in northwest Xinjiang. Huineng is building a 2 bcm/year facility affiliated with a 1 bcm/year gas liquefaction plant.

THE PROCESS

Toasted under high pressure and temperature in 70-80-metre tall gasification towers, the coal turns to a mix of CO2, sulphur and methane. It then goes through a purification and methanation process. The coal-to-gas conversion rate is roughly 30 percent.

The technology is similar to that used in South Africa to produce oil from coal.

The gasification and purification parts of the technology are mostly developed domestically, while the final part of methanation - carbon oxides react with hydrogen to form methane - is supplied by foreign developers such as the U.K.'s Davy Process Technology, Denmark's Topsoe and Germany's Lurgi Group.

GreatPoint Energy, a Massachusetts-based alternative energy start-up, has developed a coal-to-gas process called bluegas technology, which uses a patented catalyst that reacts coal and steam to produce gas in a one-step process. Gas is then separated from other pollutants.

The firm announced in May a $1.25 billion deal to build a CTG plant in Xinjiang, via a joint venture with privately-run China Wanxiang Holdings, an industrial conglomerate.

THE ECONOMICS

For each bcm of gas, the building cost is 4-6 billion yuan ($630-950 million). The first four plants will cost up to 90 billion yuan, or $14 billion.

Experts estimate that a feed-in price at 1.50 yuan/cubic meter, or about $6.4 per million British thermal units (mmbtu) would be break-even level for CTG projects in Xinjiang.

Woodmac estimates breakeven levels for plants in Inner Mongolia at under $8/mmbtu and nearly $10 in Liaoning.

That compares with $10-12/mmbtu for imported liquefied natural gas (LNG) and close to $12 for central Asia gas.

The economics are also dependent on access to pipeline grids. More than 70 percent of China's combined total of 50,000-kilometres of gas pipelines are owned by PetroChina (0857.HK).

ENVIRONMENTAL CHALLENGES

For each 1,000 cubic meters of gas production, 5-6 tonnes of water is required. And at the same time, 3.5 tonnes of carbon dioxide is emitted, if not captured or used.

That compares with 6-7 tonnes of emission if the equivalent amount of coal is burned directly, but does not take into account the CO2 emitted when the gas is burned.

One of the popular ways to utilize captured CO2 is to inject it into oilfields to enhance recovery.

GOVERNMENT POLICY

The government is cool on CTG investment, having approved just 4 out of 30 proposed plants due to concerns about coal supply, strain on already scarce water resources and the large emissions of carbon dioxide.

The government has identified four regions - Shanxi, Shaanxi, Inner Mongolia and Xinjiang - as the only potential areas for CTG plants. These regions have abundant coal deposits which are far from the consuming areas and lack the infrastructure for transport, plus water supplies are relatively plentiful.

Price competitiveness of CTG gas against future shale gas development is another reason to be cautious on approvals.

BIG OIL AND CTG

Both Sinopec Group and CNOOC are looking to invest in CTG, with Sinopec proposing to lay two trunk lines to pipe 60 bcm/year gas, or nearly 60 percent of China's total current output, from Xinjiang to the country's south and east.

The two pipeline projects, including branches, would be about 12,000 km long, two and half times the length of pipelines Sinopec now operates, giving the No.2 state energy giant a substantial foothold in China's gas distribution.

Sinopec Group in December 2011 signed framework pacts with state-run power firms Huaneng, Huadian, Guodian, China Power Investment as well as coal mining firms to send gas converted from coal in Xinjiang via the two trunk lines.

The Xinjiang-Zhejiang-Guangdong project composes one trunk line and 5 branches, with total length of 7,373 km. The Xinjiang-Shandong project covers one trunk line and 2 branches, 4,463 km in length. The two will cover a total of about 20 provinces/municipalities.

CNOOC is working with miner Tongmei Group for a 4 bcm/year plant in the northern coal province of Shanxi, estimated to cost 30 billion yuan including two coal mines and a power plant.

Longer-term, CNOOC wants to double that capacity to 8 bcm and lay a gas pipeline along the Yellow River that extends to Bohai Bay, the company said in a brochure published by CNOOC New Energy Investment Co. Ltd.

PetroChina, which controls nearly three quarters of both China's natural gas productions and pipelines, has so far had limited exposure to CTG. It is only involved in building short connection pipelines to allow CTG investors, such as Datang and Kingho, to access its gas grids.

In September it built a 64-km pipeline to link a CTG project in Yining with Khogos in Xinjiang, linking the CTG plant with the third West-to-East trunk line.

Source: Wood Mackenzie, company websites (Editing by Michael Urquhart)