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Upsurging Coal-to-Gas Fervor in China analysis
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Summary

While running wild world oil prices, soaring up gas demand, incentives of central government’s “developing the West” policy, and cheap coal are heating up coal-to-gas investment excitement in China, uncertainties will be around including rising coal costs, CO2 emission regulations, and a lack of gas transmission infrastructure.

Analysis

Over the recent two year, investment in coal based chemicals has been heating up in China, particularly in those coal rich provinces in North and Northwest. Among other coal based chemicals, coal-to-gas has increasing become the most favorite.

Based on incomplete information collection of investment projects announced, there are around three dozens of coal-to-gas projects either under construction or in plan throughout the country, with more concentration in Xinjiang Autonomous Region . Investors are from all the spectrum of energy companies, mainly state-run enterprises of coal, electric power, oil and gas.
Running wild world oil prices, soaring up gas demand in China, incentives of central government’s “developing the West” policy, and cheap coal are among the major elements behind coal-to-gas investment excitement.
Although central government has repeatedly tighten project approval procedures of coal based chemical investment, the strict policy is much discounted or exempted for minority regions such as Xinjiang and Inner Mongolia autonomous regions.

Except for a few plants using low cost brow coal as the feedstock, which could put the complete cost of coal-to-gas under 1.2 Yuan per cubic meter, average manufacturing costs of majority of the propose coal-to-gas projects will likely be higher than 1.5 Yuan per cubic meter, higher than wellhead prices of domestic field produced natural gas, but could be competitive to high cost imported gas. Many investors in fact bet on future up-adjustment to domestic natural gas prices.

However, uncertainties are around coal-to-gas projects. Coal prices will be rising in certain, being driven not just by demand but also environmental and CO2 emission concerns. While potential demand for gas is enormous, gas produced requires pipelines to deliver to consumers. It is estimated that around 4 billion cubic feet per day coal based gas could be manufactured by 2015, and the amount might reach 10 billion cf/d by 2020. While many investors are focused on manufacturing plants, CNOOC and Sinopec has committed to construct coal gas dedicated long distance pipelines from Inner Mongolia to North China; and from Xinjiang to East and South China respectively. These might be much wiser strategies.