RISKY BUSINESS

Growth of Water-Intensive Coal

Conversion Projects in Western China
BY ZHOU YANG & XINZHOU QIAN

November 2019
Senior Editor: Jennifer L. Turner
Managing Editor: Richard Liu
Research & Editing Assistants: Zizhu
Chen & Samuel Moore
Infographics: Siqi Han & Xinzhou Qian
Designer: Amanda Mei

A GLOBAL CHOKE
REPORT
POINT
 PUZZLING SUCCESS OF oil to address vehicle fuel shortages and decrease
A FAILING INDUSTRY dependence on foreign imports.8 Local governments
in coal-abundant but impoverished western regions

I n July 2016, one of China’s largest power generation

groups, China Datang Corporation (CDT), sold its
entire coal-to-chemical company for a single yuan.1 CDT
quickly invested in this new industry. Coal-to-oil
projects mushroomed in over 10 provinces. According
to University of California researchers, planned and
had invested 60 billion yuan in the petrochemical industry newly constructed plants could produce 16 million
in 2005, anticipating a windfall from converting coal tons of oil annually by the end of 2007.9 At the time,
into feedstock chemicals for China’s fertilizer and other China’s provincial governments planned investment
industries. But the anticipated boom never panned out. into proposed projects totalled 120 billion yuan or 18
CDT offloaded the coal conversion company, Datang billion USD.
Energy Chemical, after three years with an estimated 11.6
billion yuan in losses. Alarmed by the blind investment and over-development
of the sector, in 2006 the central government banned
While China is projected to fulfill its 2015 Paris the approval of coal-to-oil projects with an annual
commitment to reduce the proportion of coal in its energy output less than 3 million tons.10 Two years later, no
mix to below 58 percent by 2020—a full 10 years ahead new construction of coal-to-oil projects was permitted
of schedule—the country remains the world’s largest except for two Shenhua Group mega projects.11
producer and consumer of coal.2 3 As China’s government
1

has promoted policies curbing coal-fired power out of Learning lessons from the hasty and unsustainable
air pollution and climate concerns, the coal industry and development of the coal-to-oil sector, the Chinese
subnational governments have searched for alternative central government initially kept a tight grip on coal
sources of demand. Thus, we have seen a slow but steady gasification technologies that local governments started
rise of coal conversion to chemical industries. building in 2009. However, a mere three years later,
central policymakers started to loosen restrictions on
As an alternative form of coal demand, coal-to-chemical coal-to-gas (Syngas) plants in western China.12 The
(CTC) threatens China’s climate commitments and quick shift came after Beijing and many other east
perpetuates coal reliance. Yao Wu, energy market coast cities were engulfed in smog from coal-fired
analyst at Energy Security Analysis Incorporated notes, power plants and cars. Central policymakers saw an
“China is serious about its Paris commitments in terms urgent need to push coal power out of the east.13
of transportation and power. But the petrochemical
industry receives national support because China wants Policymakers were also driven by the desire to reduce
to boost domestic chemical production to avoid import over-dependence on imported natural gas. The Air
dependency. Because chemical production emits carbon, Pollution Prevention and Control Action Plan released
supporting the industry contradicts China’s climate goals.”4 2013 and the National Energy Administration’s 2014
Instructions on Energy Work paved the way for the
China now has the largest coal conversion industry in the accelerated coal-to-gas development.14 15 Most recently,
world. Industrial-scale coal conversion emerged in China in the National Energy Administration released 13th Five
the early 1900s turning coal into coke, a feedstock for iron, Year Plan for the Demonstration of Coal Conversion
steel, and plastic production.5 Half a century later, another Industry which was the first national strategic paper
coal conversion technology arose in coal-to-synthetic for the CTC industry. The plan stipulated that coal
fertilizers.6 (See Figure 1). Coal-to-coke industries expanded conversion must become safer and environmentally
most rapidly in the 1990s to fuel China’s industrialization viable.16 (See Map 1).
boom. Due to overcapacity and environmental concerns,
in 2006 the Chinese central government instituted policies, “THE MOUNTAINS ARE HIGH AND
7
with little success, to slow coal-to-coke production. THE EMPEROR IS FAR AWAY”

SHAKY START TO
MODERN COAL CONVERSION T
he fluctuating policies for the coal-to-oil and
coal-to-gas projects reflect intensifying divergent
priorities of central and local governments regarding

I n 1998, the Chinese government started pushing coal conversion development. Local governments in
the development of more modern coal conversion China’s coal-rich regions are desperate to find markets
technologies such as liquefaction to turn coal into for coal overcapacity and create job growth.17 To reap
Figure 1: Explaining Traditional and Modern Trees
China has two “trees” of coal conversion technologies: traditional and modern. The traditional coal conversion industry primarily produces
coke, synthetic ammonia and fertilizers. Despite the lack of market demand, the sector boomed for decades. In recent years the utilization rate
of coke, calcium carbide and methanol dropped below 70 percent, making overcapacity a problem. The central government has been working
to phase out this now backward industry. The modern coal conversion industry primarily produces oil (through direct or indirect liquefaction
of coal), natural gas, and a variety of industrial chemicals, most importantly aromatics, ethanol, and olefins. According to Dr. Tian Yajun, coal
conversion expert from the National Institute of Clean and Low-Carbon Energy, coal-to-olefins (used to produce plastics) has been the best
coal conversion industry in terms of profit.18 After years of demonstrations, projects, and research, modern coal conversion industries are still
not mature and do not meet the requirements for industrial-scale development. 19

the economic rewards from modern coal conversion WHAT ARE THE RISKS?
technologies, some local governments and companies
dashed forward like wild horses to build plants. In
certain cases, local governments have set policies C
oal conversion industries pose a troika of
environmental threats: wastewater discharge,
requiring that 50 to 60 percent of coal produced should water overconsumption, and greenhouse gas emissions.
be locally converted into value-added products.20 As an alternative form of coal demand, coal conversion
undercuts China’s aspirations to curb coal dependency
Though local governments have chomped at the bit to and become a leader on climate change.
invest in modern CTC plants, Beijing policymakers
are still trying to rein the sector in. Economically, Water Consumption in Water-Scarce Areas
CTC technology is only profitable when the price of
foreign oil and natural gas is high.21 Additionally, poorly Water is the top environmental concern of the coal
regulated CTC poses environmental risks. (See Figures conversion industry. When producing chemicals and
2 & 3). fuels from coal, coal gasification and cooling consumes
 Map 1: Mapping China’s Coal-to-Chemical Projects
approximately 5 to 30 cubic meters of water for every
ton of product produced.22 Many of the existing or
under-construction coal conversion projects are
located in water-thirsty northwestern provinces in
China—Xinjiang, Inner Mongolia, Shaanxi, Ningxia,
Gansu, and Qinghai. According to the World Resource
Institute’s Aqueduct water mapping tool, the majority
of northwest provinces are rated as “high risk” or
“extremely high risk” of water shortage.23 (See Map 2).
Based on the records of the operating coal conversion
projects in the western provinces, the top five water-
consuming industries are methanol-to-olefins (MTO);
coal-to-oil (indirect and direct); coal-to-gas; coal-to-
ethylene glycol; and coal-to-methanol. Based on 2017
coal conversion statistics, approximately 422 million
cubic meters of fresh water is consumed for CTC
industries annually in western China.24 By the time
all planned and under-construction projects are put
into operation, total water usage from coal conversion
is estimated to reach 3.2 billion cubic meters annually,
approximately 230 times the water in Hangzhou’s
West Lake.
The expansion of all planned projects would put
considerable pressure on China’s arid northwestern
region. For example Ningxia, which hosts the Ningdong
Energy and Chemical Industry Base, is the driest region
in China with water resources per capita only 30
percent the national average.25 The Ningdong Base was
established under Ningxia’s 12th Five-Year Plan as an
engine for local economic growth, but has been driving
up water demand and over-extracting or polluting
local water resources. By 2020, water consumption at
Ningdong Base will increase 4.3 times its 2011 level,
reaching over 17.5 million cubic meters.26 Increased
water consumption will exacerbate Ningxia’s risk of
drought.
Responding to these challenges, the central government
has put forward regulations on water usage in the coal
conversion industry to ease the pressure on local water
supplies. In 2015, the Ministry of Environmental
Protection (renamed in 2018 as the Ministry of Ecology
and Environment) released the Environmental Entry
Conditions for Modern Coal Conversion Construction
Projects (Trial), tightening requirements on water
usage in the sector.27 Currently, mining drainage and to-oil project in Ordos Inner Mongolia disregarded
recycled water should be used before fresh water while wastewater discharge regulation, degrading local water
groundwater usage is prohibited. quality.31 In 2014, Keqi coal-to-gas project of Da Tang
International, the first coal-to-gas demonstration project
Furthermore, an innovative water rights transfer in China, secretly discharged harmful sewage using a
program has been piloted in provinces including soakaway pit.32 Wastewater discharge poisons the soil
Ningxia, Inner Mongolia, Gansu, and Jiangxi.28 In with harmful chemicals, killing nearby vegetation and
Ningxia, new industries invest in agricultural water potentially contaminating local drinking water.33
efficiency in exchange for usages rights to the Yellow
River. Treatment of heavily polluted wastewater from coal-
conversion projects remains a technical challenge.34 At
Central government planning documents set standards present, the most common and cheapest solution is to
for best practice water consumption in coal conversion feed wastewater into open air evaporation tanks. Such
projects. However, according to Yang Youlin, deputy facilities demand heavy investment into waterproof tanks
director of China’s Society of Systems Engineering, to prevent leakage into soil and groundwater. In addition,
actual water consumption in these projects is often the approach requires considerable land to treat the massive
greater than these standards.29 amounts of wastewater generated in the coal conversion
process. Thus for companies, the cost of violating
Wastewater Leakage environmental regulation of wastewater discharge may
dwarf the investment in developing wastewater treatment
Apart from water usage, wastewater discharged from capacity for coal conversion projects.
coal conversion projects poses a serious threat to the
local environment. For a coal direct gasification project, According to Mingxuan Wang, water risk analyst at the
producing one ton of petroleum emits 4.8 tons of Institute of Public & Environmental Affairs, China’s
wastewater and 0.7 tons of waste residue.30 leading water pollution nongovernmental organization,
insufficient supervision and limited transparency in
Several coal conversion projects in Western China the home provinces of coal conversion projects, such
have been violating wastewater discharge regulations. as Shaanxi, Shanxi, and Henan, further undermine the
Greenpeace reported that in 2013 the Shenhua’s coal- effective regulation of wastewater discharge.35

Map 2: Mapping Water Risk of China’s Expanding Coal Conversion Industry

*Author modified Aqueduct Water Risk Atlas

from the World Resources Institute
Figure 2: The Ups and
Downs of China’s
Coal-to-Gas Policy
 Figure 3: Tracking
China’s Fluctuating
Coal-to-Oil Policy
Figure 4: Comprehensive Overview of Coal Conversion Environmental Challenges

*Author’s Note: All figures are based off of 2017 coal conversion statistics.
Carbon Emissions and Air Pollution
Though the cost to society is high, the financial
burden of wastewater and water usage is low to
companies. A World Resources Institute study of
coal conversion projects uncovered that water
only accounts for a small proportion of total cost
for coal conversion projects.36 Despite stronger
regulations around water usage and pollution,
water is not the Achilles heel of the industry.
Researchers Jiang, Kahrl, and Ouyang at the
California-based E3 consultancy argue that
air pollution and CO2 emission regulations
rather than water regulations will brake coal
development in northwestern China.37 The 2013
National Action Plan for Air Pollution Prevention
and Control required all provinces to incorporate
the substantial reduction of air pollution and
CO2 emissions into their economic and social
development plans.38 Ningxia targeted a 17
percent province CO2 emissions per unit of GDP
reduction from 2015 to 2020.39
Coal conversion, as a huge source of CO2
emissions and air pollution, may bar local and
central governments from reaching those targets.
Greenpeace estimates that the coal conversion
industry will emit 409 million tons of CO2 in
2020, quadruple levels in 2015 and equivalent
to 105 coal-fired power plants.40 In addition,
coal conversion emits particulate matter, a major
source of China’s smog outbreaks.41 Tightened
emissions and air quality standards could be
a force that imposes limits on coal conversion
development. (See Figure 4).
CHINA’S CHOICES
T wo decades of policy fluctuation around coal
conversion has finally settled as the central
government hesitantly accepts the modern coal
conversion industry. Chinese policymakers see
coal conversion as offering potential solutions to
critical problems from reducing coal overcapacity
by creating new forms of coal demand to increasing
energy independence.
Yet even Chinese analysts agree that coal
conversion does not make fiscal sense for large-
scale implementation. Researchers from Tsinghua
University and the University of International
Business and Economics found that substituting
imported oil with coal-to-liquids leads to a net
energy loss due to coal energy conversion
inefficiency. 42
Coal conversion is also a capital-intensive
industry with a long payback period. When oil
prices drop, China’s coal conversion industries
are not cost competitive. An increasingly shaky
relationship with the United States and the
recent trade war have exposed China’s lack
of oil pricing power. It is encouraging that
China’s government is investing in technological
innovation to ease the environmental impact
of coal conversion. However, the fixed costs of
such R&D and technology development will
increase the capital requirements, making coal-
conversion even more unprofitable.
In addition, Dr. Tian Yajun, coal expert from
the National Institute of Clean and Low-Carbon
Energy points out that, “The central government
controls the price of natural gas making profits
from coal to SNG low. Additionally, the price
of refined oil (gasoline, diesel) is linked to the
international crude oil market, making the profit
from coal to liquids vulnerable. Combining this
factor with the impact of China’s refined oil
consumption tax policy leads to a precarious
situation for coal-to-liquids profitability.”43
China’s accelerating coal conversion development
is trapped in environmental and economic
dilemmas. China cut its coal consumption
to reduce CO2 emissions and fulfill its Paris
Agreement commitments. However, coal
conversion could undercut China’s effort to limit
greenhouse gas emissions.
Planning certain demonstration coal to liquified-
fuel or oil projects is reasonable in the context
of China’s energy security—China was over
70 percent oil import reliant and almost 50
percent natural gas import reliant in 2018.44 But
this should be a strategic option, not a massive
investment. To push chips in on coal conversion
would be betting on a risky business.
Acknowledgements
This special Chokepoint China report was made
possible because of generous support provided by
the ClimateWorks and Energy Foundation China.
Special thanks to Yao Wu and Tian Yajun for their
contributions.
ENDNOTES
1
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2
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3
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4
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5
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6
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7
Libra, J. (2014, February 8). China’s Coke Problem. The University of Texas at
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8
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9
Ibid.
10
Yan, Y. (2006, July 15). China regulates coal-chemical industry. Retrieved from
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11
Minchener, A. J. (2011). Coal-to-oil, gas and chemicals in China. IEA Clean
Coal Centre. Retrieved from https://www.usea.org/sites/default/files/022011_
Coal-to-oil,%20gas%20and%20chemicals%20in%20China_ccc181.pdf
12
Ibid.
13
Wong, E. (2014, July 23). China’s Energy Plans Will Worsen Climate Change,
Greenpeace Says. New York Times. Retrieved from https://www.nytimes.
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14
Qiyue, Z. (Trans.). (2013). National Action Plan of Air Pollution Control.
State Council. Retrieved from http://www.sustainabletransport.org/wp-content/
uploads/2017/08/National-Action-Plan-of-Air-Pollution-Control.pdf
15
Instructions on Energy Work. (2014). National Energy Administration.
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16
13th Five Year Plan for the Demonstration of Coal Conversion Industry. (2017).
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gjjgh/201708/W020170809558346660884.pdf
17
Minchener, A.J. (2011). Coal-to-oil. IEA Clean Coal Centre.
18
Liu, R., Yajun, T. (2019). Interview with Tian Yajun, Coal Expert from the
National Institute of Clean and Low-Carbon Energy. Phone Interview.
19
China Coal Cap Plan and Policy Research Project. (2015). China Coal
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20
张 磊. (2018, December 24). 鄂尔多斯现代煤化工年产能超1500万吨跻
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21
Minchener, A.J. (2011). Coal-to-oil. IEA Clean Coal Centre.
22
Chan, W.-shin, Pappu, S., Knight, Z., & Kapoor, M. (2014). Coal-to-chemicals
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World Resources Institute Aqueduct Team. (2013). Aqueduct Water Risk Atlas.
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25
Zhong, L., Fu, X., Shiao, T., Luo, T., & Wen, H. (2015). Water Stress Analysis
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26
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27
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杨友麒. (2014, August 14). 大幅大降低煤化工水耗的神奇三部法.
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Chan, W.-shin, Pappu, S., Knight, Z., & Kapoor, M. (2014). Coal-to-chemicals.
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