China in the Driver’s Seat on Direct Coal-to-Liquids Production

Coal is here to stay. More in some countries than others. In places like China, while coal is still king, its role appears to be slowly morphing to liquid fuels such as gasoline and diesel. With the world’s third largest reserves of coal after Russia and the U.S., China sees the future in coal-to-liquids (CTL) fuels in order to reduce dependence on foreign oil and to maintain robust domestic CTL production as an alternative to petroleum. Despite environmental and economic costs of producing liquid fuels from coal, China’s state-run Shenhua Group began profiting from its first direct coal-to-liquids (CTL) facility in Inner Mongolia Autonomous Region, China, and producing 216,000 tons of refined oil products in the first quarter of 2011. Although China wavered to use the CTL technology in 2008 due to high production costs and concerns with water use, its push forward resulted in stable production for the past nine months, bringing in 100 million yuan ($15.38 million) in earnings in the first quarter of 2011 to Shenhua.

Direct-liquefaction CTL, which converts coal to liquid fuels by way of heating finely ground coal above 400 degrees Celsius with hydrogen and a suitable catalyst and further processing to obtain naphtha and middle distillates, has not been widely used in the world yet. The reasons include high production costs, technical challenges, comparatively cheap global oil prices that make it difficult to invest in expensive CTL technology, as well as its carbon footprint, which would not be insignificant due to emissions from hydrogen production and thermal loss. There have been long-standing concerns with toxicity and carcinogenicity of liquids produced from direct CTL fuel production, which still warrant detailed studying. For these reasons, the CTL industry has not developed in the U.S., another country with vast coal supplies.

It is unlikely that CTL will gain much traction in the U.S. in the near term, particularly given its massive shale oil and gas production that have further displaced coal in its energy mix. But China’s continued experimentation with direct CTL production to make it economically viable and less taxing on the environment, or failure to do so, would be worth monitoring and taking a note. The true cost-benefit analysis of the direct CTL technology and any serious attempt to develop or invest in it in the U.S. might occur when domestic natural gas prices begin to rise from their current historic lows as well as sustained high crude oil prices.