What is China's strategy and intent regarding using coal to create liquid fuel? As often with the country, the reality remains unclear.

China is already the world's top producer and user of coal. While coal is fiercely criticized by many environmentalists for its disproportionate contribution to greenhouse gas emissions, the reality is that coal not only retains a strong share of global energy production, but actually is increasing that share - largely due to China.

According to the annual Statistic Review of World Energy 2010 from BP, coal accounted for 29.4% of total global energy consumption in 2009, its highest share since 1970. (See Summary of the Annual BP Statistical Review of World Energy.)

While most of China's use of coal is in traditional applications such as electricity production and some industrial usage, China perhaps has another vision in mind - coal as a source as diesel fuel. The so-called "coal liquefication" process was first developed in Nazi Germany and then improved by South Africa to overcome oil embargoes in the 1970s as pressure on its apartheid practices ratcheted up.

In the mid-2000s, China started a number of coal liquefication projects, only to pull back in 2008, suspending dozens of projects on concerns the technology was expensive and wasted too much water in already arid regions like Ningxia and Inner Mongolia.

Only two projects survived the ban, including a 1 million ton per year plant completed by state-owned coal giant Shenhua Group in Inner Mongolia at the end of 2009. The other, in Ningxia, is in partnership with South Africa's SASOL that uses the firm's liquefication methods. Both are near major coals reserves.

Some, however, believe that China has by no means abandoned coal-to-liquid strategies, and is instead hoping to maintain state control of the business and gain focused early learnings that will prove valuable down the road.

Low Cost, High Emissions

There are two drivers of coal liquefication programs. The first is potential energy independence. The second is cost. An official at the Shenhua Group said in 2009 that the price of liquid coal is competitive when the cost of oil is over $40 a barrel - and we are now at something like $80.00. The cost to product diesel from coal is likely to drop over time as the technology and yields improve.

But then there are the environmental costs. Experts say that for each ton of liquid diesel produced, 6-8 tons of water are required. This is likely to be an issue anywhere, but especially so in some areas of Western China that are coal rich but water poor.

The finished product raises greenhouse gas concerns, with coal-based diesel  generating 50% to 100% more GHG emissions as it is consumed than a comparable amount of oil. Whether that is really a concern of China or not is unknown, but it clearly is an issue with many of the developed economies that make up most of China's vast export market. Many of those countries would likely frown on the practice and potentially even think about "carbon tariffs" on goods imported from China if it is viewed as insufficiently focused on GHG emissions.

The reality is, however, that the Shenhua Group plant seems to be moving forward rapidly. According to a video article by Reuters this week, the refinery is already producing coal-based diesel at rate of 3000 tons per day. Other sources say there are plans for expansion of the operation.

"There are very few oil resources. But there are, relatively speaking, abundant coal resources worldwide," a spokesman at the refinery told Reuters. (The fact that Reuters was allowed in at all for the story is telling, in our view.)

"So in the future, when oil resources start to decrease, we will have to heavily rely on coal," the manager added. "Therefore, breaking this path open is not only beneficial in strategic terms for China, but for the entire world."

A senior official in China's coal research institute reiterated the concern about the amount of water required for coal liquefication  - but the concern seemed purely an economic one, not environmental.

There have been various factions in the US - notably coal producing states - lobbying for funding and support for coal liquefication here, but without much success to date. Coal-to-liquid programs were not funded in the House energy bill of 2009 as some hoped, though that Cap and Trade bill as written is not likely to become law given its failure to move forward in the Senate and new Republican-run House.

On the other hand, various bills have been introduced in Congress in support of coal liquefication, though they also have failed to make it into law.

What are your thoughts on coal to diesel technology? Benefits worth the environmental costs? On the other hand, what are the impacts if China does move aggressively foward? Let us know your thoughts at the Feedback button below.

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