China's biggest coal company, the Shenhua Group, will start production at its first coal-to-liquid project at the end of next year, a scheme that will supply 1 million tons of oil products a year to north China.

 

The project will be the country's first facility producing oil from coal and has great market potential in China, which relies on coal for about 70 percent of its energy needs and aims to reduce its dependence on oil imports.

 

"Seventy-five percent of our factory facilities will be completed by the end of this year," Zhang Yuzhuo, vice president of Shenhua, told China Daily yesterday. Currently, 35 percent of the factory has been completed.

 

The project, located in the Ordos Basin, in Inner Mongolia Autonomous Region, which has rich coal reserves, will use Shenhua's cutting-edge technology to produce refined oil products, such as gasoline and diesel, from coal from the Shenfu Dongshen Mine, Zhang said.

 

Shenhua, which has spent about 300 million yuan (US$37 million) on the research and development of its coal liquefaction technology since 1997, began building facilities in August 2004, Zhang said.

 

The technology, to which Shenhua owns full intellectual property rights, will directly convert coal into oil products, without producing crude oil as the intermediate material.

 

Of the 1 million tons of oil products to be manufactured, 70 percent will be diesel. Other products include gasoline, naphtha and LPG (liquefied petroleum gas).

 

"We will sell our products to neighboring areas in north China," Zhang said, adding that Shenhua will work with the country's big oil companies, like Sinopec and PetroChina, to sell the products.

 

The economic prospects are impressive, Zhang said. "We will have good business returns if the crude oil price stays above US$30 a barrel."

 

The price of crude oil for April delivery hit US$60.80 a barrel on the New York Mercantile Exchange on Wednesday.

 

Even if the government continues to cap the prices of oil products in China, which leaves many of the country's oil refineries just profitable as crude prices soar, the Shenhua coal-to-liquid project will bring satisfactory returns, Zhang said.

 

The wholesale price of diesel is now more than 3,000 yuan (US$370) a ton.

 

The nation's top economic policy organization, the National Development and Reform Commission (NDRC), earlier said it was working to improve the current oil pricing mechanism by introducing a closer link between domestic and world prices.

 

That means the price of domestic oil, which is now more than 1,000 yuan (US$123) a ton lower than international prices, will be raised further, industry analysts said.

 

Shenhua last week signed a memorandum of understanding with the world's third-biggest listed oil company by market value, Royal Dutch Shell, to develop another coal liquefaction project in northwest China's Ningxia Hui Autonomous Region.

 

Zhang yesterday said its Ningxia project is still in the preliminary stage and will not start production for another four to five years.

 

(China Daily March 10, 2006)