China's coal-to-liquid (CTL) frenzy has cooled after it exposed the country's many coal-rich provinces to huge investment risk. As a result, the government has called off several controversial projects.

"Although CTL was widely considered as a good way to expand the coal industry chain, it was still uncertain that the massive investment would be worthwhile in commercial operation," Zhou Dadi, the former director of the Energy Research Institute under the National Development and Reform Commission (NDRC), told Xinhua at the ongoing China International Coal and Energy New Industry Expo 2008 here.

Early this month, the NDRC issued an order that all CTL projects except two involving the Shenhua Group should be stopped. "It aims to control the business risk of the country's CTL industry, which was still in an experimental stage," it said.

"Coal liquefaction is a technology-, talent- and capital-intensive project, but most domestic enterprises lack advanced technologies, management experience and equipment."

Zhou added the "technology bottlenecks many small CTL projects, of which many were financed by bank loans. It will be troublesome if the loans default, which will hurt the interests of many depositors."

"Small investment in CTL projects does not make sense. Heavy investment, however, is likely to turn sour if the mid-and-small enterprises cannot be freed from the technology obstacles."

He also expressed doubt about its profitability as coal prices continued to surge and oil began to plummet from its peak of US$146.50 per barrel in July.

Shenhua Group, the nation's largest coal company, announced at last year's expo it would produce China's first barrel of liquid fuel from coal in 2008. It would use self-owned technology known as direct coal liquefaction.

During an inspection tour in June 2006, Premier Wen Jiabao described the project as a major scientific and technological experiment. His comments came against a backdrop when oil imports had soared in recent years to fuel China's booming economy, spurring the nation to look for technologies that could turn some of its coal reserves, one of the world's largest, into fuel and other chemicals.

After that, the CTL craze swept the nation as many coal-rich provinces rushed to pour billions of yuan to commercialize the projects without necessary risk assessment.

As insiders have estimated, the output capacity of the existing and the planned CTL projects combined at 16 million tonnes, with investment planned at 120 billion yuan (US$17.55 billion).

As Wen warned: Enterprises should not rush to commercialize the CTL projects blindly before the test projects are proved successful. NDRC then issued a circular urging for the "healthy development" of the CTL industry and raised the threshold for coal liquefaction projects to a minimum annual output capacity of 3 million tonnes for fear of excessive production. The construction frenzy showed no signs of abating.

"We fully understand the NDRC's decision since CTL is restricted by many factors, including huge demand for water and massive money input," Chen Liming, Sasol China executive vice president, told Xinhua on the sidelines of the expo.

The company has partnered with Shenhua Ningxia Coal Group and Shenhua Coal Group to develop two CTL plants, which was exempted from the NDRC ban. South Africa's Sasol Ltd. is the world's biggest producer of motor fuel from coal.

"It takes time for government to adjust the industry pattern," Chen said.

China is not the only country suffering from the CTL dilemma, said Sun Qingyun, assistant to governor of West Virginia. Speaking at the expo, he said the only two CTL projects in the U.S. state were also challenged by many potential risks in the coal-abundant area.

"People are frustrated with the hefty CO2 generated from the liquefaction process, which is the main obstacle hindering the expansion in "the Almost Heaven" state, referring to the old John Denver song.

"Everybody knows CTL is a good thing, but no one wants a plant built near his backyard."

Sasol's Chen, however, remained optimistic about the future of the CTL application in China. "It is an unstoppable trend as China is rich in coal but strapped for oil. CTL will surely partly ease the oil imports pressure."

(Xinhua News Agency September 19, 2008)