China resumes environmental approval of coal-to-gas projects

BEIJING (Reuters) - Chinese regulators have approved three new coal-to-gas (CTG) projects, ending a suspension lasting more than a year amid doubts about pollution risks as well as the economic viability of the technology.

Coal fields are seen in Hegang, Heilongjiang Province, China, March 16, 2016. Picture taken March 16, 2016. REUTERS/Brenda Goh

The three projects, approved in March and April, will produce 4 billion cubic meters (bcm) of synthetic natural gas a year. They are located in the coal-producing regions of Shanxi, Xinjiang, and Inner Mongolia, which have borne the brunt of a slowdown in coal demand and lower prices.

The Shanxi project, a joint investment by state-owned CNOOC and the Datong Coal Mine Group, is expected to cost 26 billion yuan ($3.97 billion). It was shelved for three years until winning approval in March from the Ministry of Environment Protection (MEP).

China has pledged to reduce its coal dependence, a major source of air pollution and greenhouse gas emissions. However, policymakers are also trying to secure a soft landing for a sector that employs more than 5 million people, and coal-to-gas has the potential to be a new opportunity for mining firms.

China aims to raise gas consumption to 360 bcm by 2020, but domestic output is only expected to reach 190 bcm, meaning it will need to boost imports or find alternative sources.

But the government is still struggling to find a compelling economic and environmental rationale for the technology, especially as oil and gas prices fall.

China has an unofficial CTG output target of 15 bcm a year, state media reported last year. The country originally planned to raise CTG production to around 50 bcm a year by 2020, but cut back after a flood of new project approvals raised the concerns of regulators.

“The market is not on the side of CTG producers, and the projects remain costly,” said Liu Guangbin, a gas analyst with SCI International.

China has three CTG projects in operation and another four under construction, and there are 17 additional projects undergoing “preparatory work”, according to environmental group Greenpeace.

The projects will cost 456 billion yuan and add 68 bcm a year of gas if they all go into operation, Greenpeace estimates.

CTG production may also drain water supplies in coal-producing regions that are already dangerously arid.

“Waste water handling remains a unsolved problem,” said Gan Yiwei, energy and climate campaigner with Greenpeace. “CTG can’t be seen as a way out to help with coal overcapacity, and it is not the clean utilization of coal.”

($1 = 6.5424 Chinese yuan)

Reporting by Kathy Chen and David Stanway; Editing by Christian Schmollinger