Elmat, according to Stratfor, China is opting out of OPEC dominated world order, without commenting that China is one of the few nations that has both the imperative and the political wherewithal to do like so ...
China: The Costs of Using -- Or Not Using -- Alternative Fuel
stratfor.biz
Feb 02, 2005
Summary
China's Shenhua Group has partnered with U.S. company Headwaters Inc. to build a coal liquefaction plant, which will process coal into gasoline and diesel fuel. The plant is experimental and costly, but China is willing to make the investment to lessen the country's dependence on foreign oil. For an investment in China's long-term fuel supply, there is no time like the present -- when the country is not in a financial crisis.
Analysis
Production is expected to start this year at a coal liquefaction plant built by the Shenhua Group, China's largest coal company, and U.S. firm Headwaters Inc. As per the companies' agreement signed in June 2002, Shenhua Group put up the money for the $3.3 billion plant built in China's Inner Mongolia Autonomous Region, while Headwaters Inc. provided the catalyst technology to convert coal into gasoline and diesel fuel.
China sees this investment in coal liquefaction technology as imperative. The country was the world's third-largest oil consumer until 2004, but growing demand has pushed it into second place, behind the United States. With China's economy not in crisis, the time is ripe for investment in alternative energy technology that could provide more long-term economic stability and less long-term dependence on foreign fuels.
Construction of the coal liquefaction plant's infrastructure is nearly complete. Once it goes online, the facility is expected to produce 1 million tons of gasoline and diesel fuel a year. Until the experimental liquefaction process's success is determined, the project's second phase -- anticipated to bring total investment to $7.3 billion and include two more plants to be built in Yunnan and Heilongjiang provinces -- has been postponed. Should production continue according to plan, China will open four more production lines by 2008. Eventually, China hopes its coal liquefaction plants will produce 50,000 barrels per day (bpd) of gasoline and diesel fuel.
The coal liquefaction process breaks coal down into smaller molecules that are enriched with hydrogen to produce oil, which can then be refined into gasoline and diesel products. This process is extremely expensive, and in order to make the technology economically profitable, the price of oil must remain above $32 per barrel -- which the New York Mercantile Exchange futures index projects will be the case for the next 60 months. However, there is still much debate over whether oil prices will drop to more traditional levels of around $20 per barrel once the political and military situations in the Middle East are more stable and refining imbalances are more resolved.
China spends about $100 billion annually on oil imports, and for every $1-per-barrel increase in the price of oil, China's total import costs rise by about $1.6 billion a year. Therefore, while China is not facing any monetary crises in the short term, the experimental, expensive coal liquefaction technology seems like an investment in China's long-term ability to manufacture its own fuel -- an ability that could lend some stability to the country's economy while weaning China from imported oil.
Still, the Chinese are banking on the risky assumption that oil prices will remain above the break-even point of $32 per barrel and liquefaction will remain an economically viable option throughout a five-year projection. It costs about $25 per barrel to produce one ton of coal-liquefied oil, with 3 to 5 tons of coal used in the production. To compare, a project of similar scale upgrading tar sands (bitumen) to oil costs $970 million to produce 50,000 bpd. All told, the $7.3 billion coal liquefaction project is approximately seven times as expensive as bitumen refining.
The cost of China's coal liquefaction plants could be reduced by using domestically made equipment. About 60 percent of the equipment in the first phase of the plant's construction is domestically made; that figure is expected to increase to 80 percent when the second phase starts.
Copyright 2004 Strategic Forecasting Inc. All rights reserved.
Reprint Rights:
Articles from Stratfor may not be reproduced in multiple copies, in either print or electronic form, without the express written permission of Strategic Forecasting, Inc. For mass reprint permission or content licensing, please e-mail marketing@stratfor.com for more information.
|
