Ultra-clean fuels from coal liquefaction: China about to launch big projects

Diesel Fuel News, July 22, 2002 by Jack Peckham

Pending final government approvals, Shenhua Group -- China's largest coal producer -- just announced it aims to build a 50,000 barrels/day refinery to make ultra-low sulfur diesel and gasoline from direct coal liquefaction.

The $2 billion plant, to be built adjacent to coal mines at Majata, Inner Mongolia, will use coal liquefaction technology developed by U.S.-based Hydrocarbon Technologies Inc., (HTI) a division of coal-synfuels developer, Headwaters.

HTI developed the process in part with U.S. Department of Energy "clean-coal" liquefaction research in recent years, HTI president L.K. Lee told us in an interview. Shenhua spent the last five years evaluating technology options from vendors and conducting feasibility studies, before signing technology licenses with HTI last week.

Assuming that the Chinese government grants final approval, construction of Shenhua's first reactor train would start in early 2003, followed by plant start-up in 2005. A total of three licensed reactor trains would process about 12,800 tons/day of the local coal.

The finished fuels would be hauled from the plants in tank-cars via Shenhua's existing railroads adjacent to the mines. These trains already haul coal for later trans-shipment via watercraft to city markets.

* Three More Plants Could Follow

Shenhua also announced it intends to build three more direct coal-liquefaction plants in Shendong coalfields, which span Shaanxi Province and Inner Mongolia.

This relatively remote area lacks crude oil, but is abundant with coal, as in several other areas of China. Shipping crude oil long distances from the coast to remote Inner Mongolia for conventional fuels refining would be expensive, whereas producing coal-derived fuels via liquefaction would be relatively competitive.

Another key factor driving the project is China's interest in development strategic yet fairly cost-competitive alternatives to crude oil imports. While Shenhua officials believe the new project will provide a decent return on investment (close to 15%), this depends upon crude oil prices staying above $20/barrel.

In contrast, a similar project in the U.S. -- if ever attempted strictly on commercial terms -- would require long-term world crude prices to hover around $33 to $35/barrel, HTI's Lee explains. Such levels haven't been sustained for any lengthy period in world history.

However, depending upon variable calculations of military/economic costs of defending supposedly "crucial" Middle East crude supplies, it's possible to imagine coal-liquefaction fuels as competitive with crude-based fuels even in the U.S., Lee said.

Still, some free-market economists contend that the cost of Middle East defense is already included in world crude prices, especially since oil from that region comes mostly from government producers.

For example, the Saudis and Kuwaitis (which buy immense amounts of U.S. military hardware) also paid most costs of the last Persian Gulf war from their own pockets (see Diesel Fuel News 8/20/01, p4). Hence it can be argued that Mideast oil -- or all crude oil -- already includes a "war premium" in the price of the product.

If plentiful coal someday replaces potentially "scarce" crude oil, then perhaps a "war premium" will hit coal, too, as cheap-coal reserves -- like cheap oil -- are likewise unevenly distributed on this planet.

No matter the "security" arguments about imported oil versus domestic coal, perhaps an even more remarkable factor is the evolution of "clean-coal" technology and cost reduction for direct coal-liquefaction, as opposed to indirect coal gasification followed by Fischer-Tropsch (FT) conversion. Indirect coal conversion is the technology employed by Sasol for some 50 years in South Africa.

South Africa had the chance to choose between direct and indirect coal conversion 50 years ago. German scientists had developed both technologies, helping Hitler build conversion plants to supply fuels for the Nazi war machine.

After the war, the technologies became available to others. But at that time, indirect coal-conversion (gasification/FT) seemed more economic and practical than direct liquefaction for South Africa, at least for state-of-art technology in the early 1950s, Lee said.

However, if Sasol had the chance to do it all over again today -- and if the South African government still viewed coal-to-fuels as a strategic investment worth long-term subsidization -- then perhaps Sasol would view direct liquefaction as a more viable option compared to coal gasification/Fischer-Tropsch, Lee predicts. (But a Sasol official later told us the company doesn't agree with this claim).

Rationale: Direct liquefaction has evolved to a point where its capex would be about one-third less than gasification/FT, while opex would be about 40% less, partly because liquefaction requires about 1/3 less coal feedstock, as Headwaters CEO Kirk Benson told us in a separate interview.

On the other hand, the indirect (coal gasification/FT) method does yield a much higher cetane distillate than direct-liquefaction distillate, and indirect offers further opportunities for petrochemical specialties production, as Sasol is now pursuing in expectation of likely phase-down of government fuels subsidy schemes (see Hart's Gas To Liquids News, July, 1999, p1).