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The U.S. Experiences in Coal-based Synthetic Natural Gas and Lessons for China

The U.S. Experiences in Coalbased Synthetic Natural Gas and Its Lessons for China Chi-Jen Yang 3/F, Julong Office Building, Block7, Julong Garden, 68 Xinzhong Street, Dongcheng District, Beijing, China. 100027 Tel: (86)10 65546931 Fax: (86)10 65546932 www.greenpeace.cn Greenpeace is an independent global campaigning organisation that acts to change attitudes and behaviour, to protect and conserve the environment and to promote peace.

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Recently, the Chinese government is including coalbased synthetic natural gas (‘SNG”) in its policy agenda to mitigate smog problems in eastern Chinese cities. In 2013, China’s National Energy Administration suddenly accelerated the approval of many coal-based SNG projects. According to statistics gathered by Greenpeace, as of June 2014, there were a total of 50 coal-based SNG projects in different stages of development throughout China with an annual production capacity of 225 billion cubic meters. Currently, the rapid development of coalbased SNG is being intensely discussed by different stakeholders.

In a recent Nature Climate Change article “China’s 1 2 Synthetic Natural Gas Revolution” , Dr. Chi-Jen Yang of Duke University, a renowned expert on energy and environmental policy, expressed his concerns on the rush development of coal-based SNG in China. Through the media, Dr. Yang has also warned that “China is currently repeating the mistakes that the United States made in the 1980s, but what’s different is that the United States only built one coal-based SNG plant, which made it easier to control emissions and deal with bankruptcy, but things are 3 very different in China today.”

The U.S. Experiences in Coal-based Synthetic Natural Gas and Lessons for China

Greenpeace invited Dr. Chi-Jen Yang to prepare this report, which aims to provide a detailed overview of the history and lessons of the Great Plains Synfuels project, which can serve as a cautionary tale for the coal-based SNG development in China.

A History of CoalBased Synthetic Fuels To date, outside of China, there have been only three examples of scaled production of coal-based synthetic fuels in the world – coalbased liquid in Nazi Germany, coalbased liquid in South Africa and the Great Plains coal-based SNG plant in the United States – all of which were developed under very unique historical conditions. Nazi Germany developed coal-based liquid fuels for war. South Africa’s venture into coal-based liquid came from severe sanctions and its achievements rested on unwavering government support, the cautious strategy without rush investment, and low environmental standards.

The U.S. government had also supported the development of coalbased liquid and gas for a long period of time. However, those developments

were plagued by pork-barrel politics, which placed little emphasis on economic and technical feasibility.

Most projects had failed. The Great Plains Synfuels was the only one to achieve scaled production. However, Great Plains Synfuels was a huge financial failure and its massive losses resulted in bankruptcy and the U.S. government’s bailout.

Many other countries, including Japan, New Zealand, Australia, the United Kingdom and Canada have attempted to develop coal-based synthetic fuels, but none were successful. There are five major explanations for the failures: pluralistic democracies, fiscal difficulties, premature technologies, changes in the global energy market and increased emphasis on environmental protection.

Strictly speaking, there has never been a commercially successful example of coalbased liquid or SNG in a free market.

Bankruptcy, Restructuring and Financial Analysis of the Great Plains Synfuels Plant From a financial perspective, the Great Plains Synfuels was a huge failure. The

[1] http://people.duke.edu/~cy42/ [2] http://www.nature.com/nclimate/journal/v3/n10/full/nclimate1988.html [3] http://www.infzm.com/content/95124

U.S. government had to bailout the project and assumed over $1 billion in losses. In the over 20 years since the Basin Electric Power Cooperative (“BEPC”) took over, BEPC was able to make some small profits mainly thanks to the previous bankruptcy and government bailout, which freed BEPC from the construction costs of the plant. If not for the early bankruptcy, even if we estimate the debt with the most conservative interest rates, this project would never be profitable.

The outright economic failure of the Great Plains Synfuels is mainly due to the unexpectedly low prices of natural gas in the United States following deregulation. In 1978 the United States passed a law phasing out natural gas price controls and completed marketization in 1987. Price decontrol drove exploration of new gas deposits and development of new drilling techniques, which led to abundant supply of natural gas. By 2009, the United States had become the world’s largest producer of natural gas.

Pollution and Pollution Control at Great Plains Synfuels After more than a decade of violation and many upgrades to pollution treatment facilities, the Great Plains Synfuels finally comply with environmental standards.

In terms of air pollution, the Great Plains Synfuels struggled to meet emissions standards since the beginning, especially in desulfurization.

It was once noticed for severe environmental violation with massive fines. After over ten years of continued investment and improvements in environmental facilities, the Great Plains Synfuels finally met emissions standards.

In terms of wastewater, local residents repeatedly complained about the odors from the plant for over 20 years.

Recent and considerable investment in the installation of new equipment has reduced the number of complaints.

As a part of its zero-discharge policy, the Great Plains Synfuels plant injected condensed liquid waste into deep wells, with risk of polluting groundwater, prompting the plant to build a network of ground water monitoring wells.

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The U.S. Experiences in Coal-based Synthetic Natural Gas and Lessons for China

Lessons from Great Plains Synfuels and Warnings for China The Great Plains Synfuels has also installed carbon capture and storage (‘CCS’) facilities and sells captured carbon dioxide to oil fields in Canada.

However, the plant’s CCS facility only captures up to 50% of its emissions.

Even with the Great Plains Synfuels’ CCS, the carbon intensity of SNGfired electricity would still be twice as that of conventional natural gas-fired electricity. Furthermore, there is also the risk that stored carbon dioxide may leak out, which means that those storage facilities must be monitored over very long term.

From the perspective of energy efficiency, using coal-based SNG to generate power is inefficient. According to actual operational data from the Great Plains Synfuels facility in recent

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years, the energy conversion efficiency of coal-to-SNG-to-electricity is around 30%, while the energy efficiency for large-scale coal-fired power plants is generally over 40%. To generate the same amount of electricity, SNG-fired power will consume one-third more coal than a coal-fired power plant.

The Great Plains Synfuels enjoys abundant water resources nearby, but water resources in China are not nearly as plentiful. To make things worse, those planned coal-based SNG projects are all located in arid regions of China. Therefore, in China’s SNG plans, water conservation should be a major focus and water efficiency standards should be much stricter than those for Great Plains Synfuels.

Overall, China should learn the following lessons from the Great Plains Synfuels: Determination on the Maturity of Technology – Chinese policymakers mistakenly view coal-based SNG as a mature technology.

They are indeed confusing the length of its development with maturity.

The maturity of a technology should be assessed based on the amount of experience and the extent of its use. After the Great Plains Synfuels, no other country (except China) has achieved scaled SNG production.

The Datang SNG plant in China was shut down only after a month of operation due to technical failures, proving again that this technology is not yet mature and is not ready for widespread adoption.

The Dilemma of ‘Too Big to Fail’ – The massive investment in

coal-based SNG has a long-lasting impact on local economies and employment. Once projects fail, the government has to step in to prevent social repercussions. The U.S. government’s bailout of the Great Plains Synfuels after its bankruptcy was an example. Therefore, massive investment projects like coal-based SNG are often ‘too big to fail’, which makes it difficult to hold investors accountable.

Governments and the public should be cautious with investments of such large projects.

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The U.S. Experiences in Coal-based Synthetic Natural Gas and Lessons for China

Concern over Sunk Cost and Technological Lock-in – The fact

that the Great Plains Synfuels went bankrupt but did not stop production is an important reminder for China’s path of energy development. The upfront capital investment in coal-based SNG are considered to be sunk cost and are not usually considered when deciding whether to continue production after bankruptcy. Therefore, they remain in production despite bankruptcy.

However, coal-based SNG consumes huge amounts of water, emits high levels of carbon dioxide and is very polluting in many ways. In continuing production, it continues to pollute.

Once China completes the large number of coal-based SNG projects, high-carbon energy production will inevitably continue in the next several decades. This will lock China’s energy infrastructure into a high-carbon path.

Even if these coal-based SNG plants all go bankrupt, China will find it difficult to revert to a low-carbon path.

The Importance of Transparent Information in Demonstration Projects - China has a lot to learn

from the United States in terms of transparency. Transparent information not only benefits academic research,

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but also provides an objective perspective on the experiences and lessons, helping people to avoid making the same mistakes. It also provides accurate data to support meaningful policy discussions. A lack of transparency can result in blind investment, which increases the risk of mass bankruptcy. Ultimately, the government will have to step in and clean up the mess and the loss will be transferred to the taxpayers.

low return. Global energy prices over the long-term are unpredictable. The United States misjudged price trends for natural gas in the 1980s. In the 2000s, China’s expectation of rising coal price caused over-investment and a precipitous price drop after 2011.

These are both obvious examples.

Whether natural gas prices in China will follow this same path will depend on whether China’s government and its investors can learn from history.

Long-term Energy Prices Difficult to Predict, Resource Endowments Are Changeable -

Energy Infrastructure Must Be Planned with Long-Term Vision

The natural resource endowments of a country are not only defined by their geological or natural environment, but also by technological development, their political and economic systems and social preferences. After the United States decontrolled natural gas price in the 1980s, natural gas has occupied an increasing share in the overall U.S. energy portfolio. China’s pricing and institutional reforms on natural gas have just begun. Both conventional and unconventional natural gas are only in the initial stages of exploration. China has just signed a long-term natural gas import agreement with Russia. Massive investment in coal-based SNG at this moment is a risky gamble with

- Investment in energy infrastructure must never expect quick returns.

Investors of energy infrastructure must look to the long-term and consider

the global trends, national policy and the overall directions of technological advancement. A global consensus has been reached on the need for low-carbon development and China’s environmental standards are becoming increasingly stringent, while new technologies may enable development of an even wider range of resources.

Investment in coal-based SNG must look at least forty years into the future.

The ongoing massive investments in coal-based SNG are extremely risky for China’s long-term development. We hope that government and investors alike will reconsider this choice and not push ahead blindly along a dangerous path for the entire nation.

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