HOHHOT, April 5 (Xinhua) -- Chinese coal enterprises have made strides in coal to liquids (CTL) projects, using both direct and indirect methods, despite difficulties in the market and policy environments.
    The pressures they face include sharply lower oil prices and a surge in coal prices, which together can change the economics of many projects, and policy changes at the national level.
    The latest success story took place in North China's Inner Mongolia. On March 23, Yitai Group announced a successful test run with its 160,000-tonne indirect CTL facility, producing quality diesel oil and naphtha.
    Based in Jungar Banner, Inner Mongolia, Yitai Group has an annual output of 100 million tonnes of coal. Its CTL project was approved by the central government in 2005 and began construction in 2006, with an investment of nearly 2.7 billion yuan (395 million U.S. dollars).
    "The Yitai facility is China's first industrial-scale CTL line and it means China has made substantial progress in independent industrialization of coal to oil using the indirect method," said Li Yongwang, chief scientist of the coal-to-oil task force of the Shanxi Coal Chemical Research Institute (SCCRI), under the Chinese Academy of Sciences (CAS).
    Direct coal-to-oil production involves mixing heavy oil with coal to produce coal slurry and converting that mix into diesel oil and other products via hydrocracking. China's Shenhua Group was the first in the world to achieve industrial-scale direct production.
    The indirect technique requires gasifying and purifying the coal, then adding activators to synthesize diesel oil and naphtha. Yitai uses this type of technology, as does Lu'an Mining Group.
    Before Yitai's project took off, Shenhua -- China's top coal producer -- conducted trial operations of a 1 million-tonne direct CTL production line on Dec. 31, producing quality diesel, naphtha and oil. This trial run made China the only country in the world to have achieved key technologies for 1 million-tonne-scale direct CTL production.
    The trial ended after 300 hours, but Shenhua is making improvements so it can conduct a 1,000-hour trial next month.
    As a key component of the national energy strategy, the Shenhua direct CTL project, also based in coal-rich Inner Mongolia, officially kicked off in May 2005.
    Also, on Dec. 22, north China's Shanxi Lu'an Mining Group successfully experimented with a small-scale indirect CTL facility, developed by SCCRI. It will conduct a trial of its 160,000-tonne indirect CTL facility in the near future.
NEW LIQUID ENERGY SOURCES
    Coal accounts for more than 70 percent of the energy mix in China, which has abundant coal reserves but poor oil and natural gas resources.
    Over the past five decades, China has tapped several large oilfields, such as Daqing and Shengli. But discoveries and production can't keep up with demand. With rapid economic growth, China became a net oil importer in 1992 and has increased oil imports every year since.
    According to Liu Keyu, vice president of the China Petroleum Economy and Technology Research Institute, China's oil consumption reached 389.3 million tonnes in 2008, up 5.1 percent from the previous year. But during 2008, net oil imports approached 200 million tonnes, up 9.2 percent.
    Thus, a little more than one half of oil consumed had to be imported.
    Liu warned that China, which was expected to continue raising its oil imports, would meet increasingly tough energy-security challenges.
    High and volatile prices are among those challenges. During the four years before the financial crisis erupted with full force in late 2008, world crude prices soared. Prices reached a record high of 147.27 U.S. dollars per barrel on July 11, 2008. These high prices meant that many areas of the country lacked enough oil.
    Price changes affect the economic viability of CTL projects, but the issue of energy security persists.
    In 2003, when world oil prices were high and supply was tight, Chinese companies crowded into CTL projects. The central government called for a series of pilot CTL projects during the 11th Five-Year Plan period (2006-2010) to lay the foundation for industrial-scale production.
    "It is very important to promote industrial-scale coal liquefaction," said Zhao Shuanglian, vice-chairman of the Inner Mongolia Autonomous Region. With CTL projects, "we can turn coal mines into oil fields to ensure energy security for China."
    Take the Shenhua direct CTL facility. The project, which will have an annual capacity of 5 million tonnes, will be implemented in two stages.
    In the first stage, there will be three production lines with combined annual capacity of 3.2 million tonnes. The first pilot production line, which proved successful in the December trial, will be able to convert 3.5 million tonnes of coal annually to 1.08 million tonnes of diesel oil and naphtha, equivalent to a 100million-tonne oilfield in annual output.
    According to Zhang Xiwu, board chairman of Shenhua Group, if everything goes smoothly with the first 1 million-tonne pilot production line, the business will build two more lines of about the same size, for a planned total of 3.2 million tonnes.
SPEED UP INDUSTRIAL-SCALE OUTPUT
    Li Yongwang said technology and demand in China had matured enough to support CTL projects. The country had also independently developed direct and indirect CTL technologies.
    Li Shuangwang, board chairman of Yitai Group, said the business would continue to run trials and make improvements, given the success of its trial run.
    "We'll work to get the production operating stably in September. After that, we will officially turn it into a fully-loaded operation. We will upgrade the equipment and apply new-generation liquefaction technology to lift output to 600,000 tonnes a year.
    "If it goes smoothly, we will expand the coal-to-oil base to an annual output of 5 million tonnes in three stages," said Li.
    He said the Yitai Group also planned to extend the industrial chain by cracking naphtha from the CTL facility into ethylene, which was a higher value-added product.
    The other CTL projects are also moving ahead. Lu'an plans to expand its 160,000-tonne indirect CTL facility into a 3 million-tonne project, if it conducts a successful trial in the near future. Ultimately, it intends to develop a coal-to-oil base with a gross annual output of 15 million tonnes by 2020.
    Yanzhou Mining Group and Xuzhou Mining Group, in eastern China, also plan CTL projects.
    Yanzhou began work on a 1 million-tonne indirect CTL plant in February 2006 in Yulin City, Shaanxi Province. It has conducted environmental reviews and is awaiting approval from the National Development and Reform, China's top planning agency. The Yanzhou project would have two stages, each with annual output of 5 million tonnes, the group said.
    Also, about 10 provinces or autonomous regions, including Xinjiang, Shandong, Shaanxi, Guizhou and Ningxia, are planning CTL projects.
    Taking all these plans into account, industry analysts estimate China will have an annual CTL capacity of 30 million tonnes to 50 million tonnes in 2020.
WORLD CONDITIONS CHANGE
    However, oil prices are far off their mid-2008 highs, hovering at about 50 U.S. dollars per barrel now, and lower prices can change the economics of these capital-intensive projects.
    To reduce the risk of having excessive, uneconomic capacity, the NDRC announced policies as early as 2006, banning projects with annual output below 3 million tonnes. In September 2008, the NDRC followed up with a circular, ordering a halt to almost all projects except for the Shenhua Group's direct CTL project and an indirect CTL plant proposed in northwest China's Ningxia.
    The directive, combined with the impact of the global financial crisis, cooled enthusiasm for many CTL projects in China. However, Yitai Group and Lu'an managed to keep their projects on the list.
    NEW ECONOMIC REALITIES
    According to Li Yongwang, it takes 3.5 tonnes of coal to produce 1 tonne of oil under the direct process and 4.02 tonnes under the indirect process, at least in the pilot projects.
    However, it's not just oil prices that have changed. Domestic coal prices have doubled since some of the pilot programs got under way, meaning that CTL project costs have also surged. Li said the higher coal price would make it tough for many CTL projects to be profitable.
    Based on current coal prices, the costs of an indirect CTL plant would be about 50 U.S. dollars per barrel. Larger production scales and better technology could, in time, help reduce the volume of coal needed. In that case, the cost might fall closer to 40 U.S. dollars per barrel, said Li.
    DOWNTURN WON'T LAST
    Zhao said he still believed in the future of the CTL industry.
    "It is widely acknowledged that oil prices will rise again in the long term, because oil is a strategic resource," said Zhao.
    He added: "Chinese companies building coal-to-oil projects are strong, with large coal reserves, and they can be competitive. If they can increase their economies of scale and extend their production chains to produce higher value-added products such as ethylene, the coal-to-oil projects have a good chance to be profitable."