3 ctg stakeholders final

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Caol-to-gas backgrounder 3: stakeholders in the coal-to-gas industry July 2014 At a time when the coal industry has hit an all-time low in China, coal-to-gas is touted as a beacon of hope for alleviating the industry out of recession as well as a solution for China’s ‘coal-rich, gas-poor’ situation. The increasingly serious problem of urban smog also drove the Chinese government to approve massive plans for coal-to-synthetic natural gas programs with the aim of controlling smog levels in eastern coastal cities.

However, there are also substantial doubts about the seemingly bright offered by this industry, particularly due to its environmental footprint. This document tries to analyze positions held by various key stakeholders in the coal-to-gas industry.

Primarily in support of coal-to-gas: National Energy Administration Overall planning and policy decisions for the coal-to-gas industry are directed by the Bureau of Energy Resources under the National Development and Reform Commission and come directly from the Department of Energy Conservation and Technical Equipment. In 2013 the development of this industry changed suddenly with new policies that primarily called for a speeding up of smog control measures, but also included considerations on resolving China’s lack of natural gas reserves.

In January 2014, Mr. Wu Xinxiong, Head of the Bureau of Energy Resources, said that output of the coal-to-gas industry would be 50 billion cubic meters by the year 2020, making up 12.5% of nationwide gas production.1 In the “Prospectus on Strengthening Control of Air Pollution in the Energy Resources Industry” released three months later, clarifications were made that annual production capacity would reach 9 billion cubic meters by 2015 and 32 billion cubic meters by 2017.2 However, there are only two plants currently engaged in active production – one operated

by Datang in Chifeng, Inner Mongolia and the other operated by Qinghua in Yili, Xinjiang. The 1

NDRC: By 2020, Domestic Production of Coal-to-gas to Reach over 50 Billion Cubic Meters, Xinhua Net, January 15, 2014, http://jjckb.xinhuanet.com/2014-01/15/content_487366.htm 2 “Prospectus on Strengthening Control of Air Pollution in the Energy Resources Industry”, Department of Environmental Protection, Bureau of Energy Resources, NDRC, March 2014.

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combined production capacity of these plants is a mere 2.7 billion cubic meters. To meet the Bureau of Energy Resources’ 2015 objectives, the 17 projects that have been approved must be completed and put into production by the end of this year. This means that in the near- and mid-term, coal-to-gas facilities will get a massive boom.

However, the Bureau of Energy Resources has maintained a more cautious attitude in public, emphasizing again and again that the prerequisite for developing coal-to-gas is to “maintain the strictest environmental standards and ensure the security of water resources”.3 However, the approvals process and the results of coal-to-gas development so far have not shown that the environment has been taken into full consideration.

Local Governments Local governments are main drivers in the wave of coal-to-gas development.

Different localities nationwide have made the conversion from coal to gas a key measure in their attempts to improve air quality. With the strict coal use restrictions put in place in eastern regions like the Beijing/Hebei/Tianjin area, the Yangtze River Delta and Pearl River Delta4, these regions put a great emphasis on ensuring a supply of natural gas and subsequently have invested a great deal of money in coal-to-gas.

For example, Beijing Gas Group and Tianjin’s Jinneng Investment Group have both invested in the Datang coal-to-gas project. Data collected by Greenpeace also shows that the Beijing Enterprises Group has invested in two projects in Ordos and Zhundong (Xinjiang); Hebei Construction and Investment has invested in two projects in Ordos and Hulun Buir (Inner Mongolia); Shandong Energy Group in two projects in Ordos and Ili (Xinjiang); Tianjin Energy Investment Group in a project in Hulun Buir (Inner Mongolia); the Xuzhou Coal Mining Group in a project in Yili (Xinjiang); and Zhejiang Energy in a project in Zhundong (Xinjiang). Synthetic natural gas products will mainly be transmitted to and consumed by the eastern coastal provinces that have invested in such projects.

At the same time, the price of coal continues to go down and western provinces that rely on coal for income are suffering. As a result, these provinces are eyeing coal derivatives as a potential way out, setting high goals for boosting coal conversion rates. For example, Ordos aims to convert half of all its coal output. In addition to Xinjiang and Inner Mongolia, provinces like Ningxia, Gansu and Shanxi have also expressed interest in coal-to-gas.

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ibid “The outcome of China’s explosive coal consumption – six facts you need to know”, Greenpeace East Asia Office, April 2014 2

However, in fact, Xinjiang and Inner Mongolia do not have the water resources to support such projects, contradicting a national policy of ‘moving forward based on water resources’. Take the Zhundong mining region in Xinjiang for example. It is part of the Gobi Nature Preserve, with no natural water body in its vicinity, and the coal-to-gas project would have to channel water from the Irtysh River 700-800 kilometers away from the project site. Ordos in Inner Mongolia is also facing a similar situation. For detailed analysis, see Appendix 1.

Oil and Gas Companies Sinopec and CNOOC have demonstrated apparent interest in coal-to-gas projects, as a measure of diversifying their scope of business and of gaining a competitive edge over CNPC. Of the two, Sinopec has been more proactive, investing in the Xinjiang-Guangdong-Zhejiang and Xinjiang-Shandong pipelines5 and the Zhundong coal-to-gas project in Xinjiang. Sinopec Group subsidiary Sinopec Engineering Incorporation (SEI) has also taken on a number of coal chemical design and construction projects while investing in two coal-to-gas projects in Ordos (Inner Mongolia) and Datong (Shanxi).

CNPC, on the other hand, has taken a cautious position on coal-to-gas and has yet to invest in any project, due to worries about competition and the technology. Head of the CNPC Economics and Technology Research Institute, Sun Xiansheng, has said that he does not strongly support developing coal-to-natural gas.6

Coal Companies With the price of coal hitting rock bottom, coal companies have thrown in their lot with coal-to-gas and other coal chemical projects hoping to find some room for profit in either coal or gas. Meanwhile, some coal companies set up coal chemical projects in the hope of gaining access to coal reserves.

Various sources show that coal companies including Qinghua, Guanghui, Shenhua, ChinaCoal, Yankuang, Kailuan, Shandong Xinwen Mining, Xuzhou Mining, Datong Coal, Henan Coal and Inner Mongolia Mining have all set eyes on coal-to-gas projects.

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Construction of Coal-to-gas Pipelines out of Xinjiang Speeds Up, China Energy, October 7, 2012 http://news.xinhuanet.com/energy/2012-11/07/c_123926010.htm 6 Sun Xiansheng, JPMorgan Chase China Summit 2014, June 11, Beijin0067 3

Electricity Companies Electricity companies are investing in coal-to-gas for two reasons: to diversify their offerings and hedge against the risk of lower coal prices, as well as to attract investments by local governments. According to Greenpeace data, electric companies that are currently investing in coal-to-gas include Datang, China Power Investment, Energyled, Huadian, Guodian, Shenhua and Hebei Construction.

However, problems and even backlashes have already appeared. Generally speaking, electricity companies lack experience in building and operating coal chemical projects, causing many problems.

On March 24, 2014, electric companies discussed their experiences at a forum during which the head of the China Electric Power Promotion Council, Li Bin, said “electric companies that have invested in coal chemical projects … must participate with a number of parties in this development, continuing to work with professional companies and technicians and working within their means. If a project is truly beyond your capabilities, you can still back out.”7 An example of backing out is Guodian, which has scrapped their original plan to build a 4 billion cubic meter/year coal-to-gas project in Xing’an, Inner Mongolia, for which it had obtained approval from the Bureau of Energy Resources in February in 2013.

Potentially opposed to coal-to-gas: Ministry of Water Resources Although a “red line” for water resources is something the Ministry of Water Resources upholds, the ministry has yet to make a public statement on the water resource problems facing coal-to-gas development.

As the main government agency responsible for the management of China’s water resources, the Ministry of Water Resources stated in a top level document issued in 2011 the ‘strictest management of water resources’ must be ensured. Currently most provinces have been charged with recording overall water usage, efficiency and water quality, with reviews to be carried out every five years starting in 2014.8 However, in practice, a ‘red line concept’ has yet to be established in China’s water resources 7

China Electric Power and Coal Chemical Industry Forum Held in Beijing, April 15, 2014, http://www.zdthebei.com/newsv.asp?nid=11946 8 Administrative Measures on Implementing Reviews in the Strictest Water Resource Management System, February 2013.

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system, and for industrial projects that will have no water to use, the most important measure the Ministry of Water Resources has put into action is the creation of a water rights exchange.9 Test programs for the exchange of water rights in the irrigation zone along the Yellow River in Inner Mongolia and Ningxia (industrial purchase of agricultural water rights) in place since 2003 have expanded into Shaanxi and Xinjiang.10 However, as industrial customers obtain water quotas, there remains a severe threat to ensuring the rights of agricultural users and water resources essential to the natural environment.

Renewable Energy Sector The end of the ‘golden age’ of coal should have been a big opportunity for renewable energy, but the rapid development of coal-to-gas, which has been described by supporters as ‘clean energy’, may block this transition. However, the renewable energy sector is relatively weak in influencing the discussions around coal-to-gas.

Ambiguous/divided: Ministry of Environmental Protection The Ministry of Environmental Protection appears to be ambiguous with its position on coal-to-gas.

On the one hand, it gets direct pressure from the top leadership to control smog, while coal-to-gas is identified by the State Council as part of the smog-alleviating package. In 2013, when State Council Deputy Premier Zhang Gaoli took charge, smog control quickly became a national political responsibility and the Ministry of Environmental Protection was most directly responsible for this work. In March 2014, Vice Minister for Environmental Protection Wu Xiaoqing said “Central and western China is rich in coal and their environmental capacity is better than the Beijing/Hebei/Tianjin region. This is why we are encouraging the development of coal-to-gas in

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Ministry of Water Resources Discussion on Speeding Up Creation of a Water Rights Exchange, Ministry of Water Resources Website, June 20, 2014 http://www.mwr.gov.cn/slzx/slyw/201406/t20140620_568729.html 10 Research on Trial Programs for Water Pricing and Water Rights Programs in Jizhou and Hami Regions by Xinjiang NDRC and Ministry of Water Resources, October 23, 2013, http://www.xjdrc.gov.cn/content.jsp?urltype=news.NewsContentUrl&wbtreeid=10508&wbnewsid=217191 5

these areas and replacing coal with gas in central and eastern regions.”11 It appears that the Ministry of Environmental Protection believes that coal-to-gas is a clean source of energy where gas is consumed.

However, recently, the Ministry of Environmental Protection has started to pay more attention to the problem of pollution in the production of coal-to-gas. On March 19, 2014, director of the Petrochemical and Textile Evaluation Department under the Ministry of Environmental Protection’s Center for Environmental Impact Studies, Zhou Xueshuang, said that “In comparing natural gas and coal, the key is to see whether we can avoid ‘coal pollution produced by the end user being transferred to the production stage of coal-to-gas’…and coal-to-gas must be directed by the environment! If it is not, then the outcome will be that ‘Beijing’s pollution will be transferred to Shanxi and Inner Mongolia’ and ‘pollution in eastern regions will move west’.”12 On June 9th, the Ministry of Environmental Protection Center for Environmental Impact Studies organized a forum on ‘coal-to-gas waste water treatment’ with the China Petroleum and Chemical Industry Federation (CPCIF), coal gas companies and research institutes.

According to Greenpeace statistics, as of June 2014, of the 17 coal-to-gas projects that have been given the green light, none have passed environmental impact assessments.

NDRC Department of Climate Change As the main governmental body in charge of climate change and greenhouse gas emissions in China, the NDRC Department of Climate Change is highly concerned about the carbon footprints of coal-to-gas, but not so much as to give up on the technology.

Because the projects that are soon to be put into operation will produce large amounts of carbon dioxide and will affect NDRC’s efforts to conserve energy and reduce emissions, in January 2014, the NDRC Department of Climate Change organized a panel of experts to discuss the ‘impact of coal-to-gas projects on the climate’.

Meanwhile, it is also understood that the Department of Climate Change is currently considering testing carbon capture and storage (CCS) technology to offset the carbon burden of coal-to-gas projects. In the “Response on the Agreement to Begin Initial Work on the Zhundong Coal-to-gas Project in Xinjiang Province” released by the NDRC Office of Public Affairs, it is stated 11

Wu Xiaoqing: “Encouraging the Development of Clean Energy Resources in the Beijing/Hebei/Tianjin Region and Coal-to-gas in Central and Western China”, People.com.cn, March 8, 2014 http://lianghui.people.com.cn/2014npc/n/2014/0308/c382339-24574875.html 12 Zhou Xueshuang: Current Status and Environmental Issues of Coal-to-gas Industry, China Chemical Industry News, March19, 2014. http://www.ccin.com.cn/ccin/news/2014/03/19/290491.shtml 6

that ‘high levels of carbon dioxide produced by coal-to-gas plants will be used in capture and storage testing in nearby oil fields’.13

Energy Experts Energy experts remain divided on the legitimacy of coal-to-gas. As the scope of coal-to-gas plans grows, a number of energy experts have expressed their concern about the speed and size of development of coal-to-gas. These include former head of the Energy Research Institute, Mr. Zhou Dadi, director of Xiamen University’s China Center of Energy Economics Research, Mr. Lin Boqiang and director of the National Center for Climate Strategy, Mr. Li Junfeng. These doubts expressed by these experts on the ability of coal-to-gas to reduce emissions center around efficiency and carbon emissions, especially nitrogen oxide.

(For a more detailed explanation, see Coal-to-gas backgrounder 2: expert opinions (as of July 2014))

Financial Investors The investors community has kept a wait-and-see position on coal-to-gas. Energy industries in China have been a hot sector for investment in recent years, and as an emerging industry, coal-to-gas has attracted the attention of many investors. However, while they may be interested, they are also paying very close attention to the direction China’s energy policy is taking and how it will impact their ROI. Data currently available show that the potential for profit in coal-to-gas projects is low and initial investment is high. There have also been no successful cases to put investors at ease. ============================================================================= There are three documents in Greenpeace’s series “Statistical Analysis of the Coal-to-gas Industry”. If you require more detailed information, data or contact information for a specialist, please feel free to contact us.

Media Contact: Tang Damin, International Media Officer, Greenpeace Email: tang.damin@greenpeace.org Mobile: (+ 86) 139 1152 6274

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NDRC Response on the Agreement to Begin Initial Work on the Zhundong Coal-to-gas Project in Xinjiang Province, September 22, 2013. http://www.sxnygs.com/Htmls/xinwenzhongxin/gonggaoxinxi/NF6TP20662J046F26P.html 7