China faces its rising fuel demands

China is gearing up to use its huge coal reserves as a way to meet a rapidly rising demand for oil. It is building two new coal-to-oil plants, which together with an existing plant should replace about half of its current oil imports.

The country now imports about a third of the oil it consumes, but rocketing demand will push import figures to about half of its requirement by 2010, according to analysts. Given instability of supply and high per barrel prices, China has turned to its coal reserves, investing $24 billion (€20 billion) in technology to convert coal into liquid fuels.

Coal accounts for about 70 per cent of the world's fossil fuel reserves, but the hydrocarbons are locked up in a form that just doesn't suit transport or heating uses. Processes do exist however to "liquefy" the coal and derive conventional fuels from this source.

The Germans developed the "Fischer-Tropsch" process in the 1920s to derive synthetic fuels from coal. The technology was developed further by SASOL in South Africa during the apartheid years.

Shunned by the international community and unable to import sufficient oil, it turned to its coal reserves and a modified Fischer-Tropsch process to meet demand. SASOL still produces about 150,000 barrels of oil per day from coal, even though it can readily make this up by imports.

China entered the synthetic oil business in 2004 with the construction of its first production scale coal-to-oil plant in Inner Mongolia. The country's largest coal mining group built the plant, using indirect coal liquefaction technology originally developed by Shell. It is a modern version of the German process where hydrogen and carbon monoxide gases obtained by heating coal are made to recombine to form petroleum products.

Now China has reportedly signed an agreement with SASOL to build two more coal-to-oil plants. These will be huge, allowing a combined production of about 1.2 million barrels of oil per day, enough to meet about half of China's current oil imports.

Coal-to-oil production is dearer than pumped crude. Production costs associated with synthetic oil from coal are about $15 to $20 per barrel compared to $5 to $10 per barrel for onshore wells. However, the differential changes when compared to offshore wells.

The process is relatively simple to describe. It takes about three tonnes of coal to produce a tonne of synthetic oil.

Coal is combined with steam and oxygen and then heated to between 950 and 1,400 degrees Celcius to drive off coal gas, hydrogen and carbon monoxide, and to produce coke dust. An iron or cobalt catalyst is used to recombine all these inputs into a sulphur-free form of pure diesel, with waste products including sulphur, mercury and ash.

The process has been described as a "clean" technology given the pollutants taken out, but it still produces considerable amounts of carbon dioxide, a key greenhouse gas. The Kyoto Protocol was designed to bring down carbon dioxide emissions, but any concerted move towards coal-to-oil production will worsen the world carbon dioxide balance.

China is already an important source of carbon dioxide with a recent German report indicating its emissions rose 15 per cent between 2003 and 2004. The global average rise was only 4.5 per cent. The two new synthetic oil production plants will add to this output.