BLOOMBERG: China May Spend $10 Bln to Turn Coal Into Auto Fuel (Update1): “Shell, the world's third-biggest publicly traded oil company, and the Chinese companies on Nov. 15 signed an agreement to complete a so-called pre-feasibility study on the market, economics, technical solutions, regulations and possible sites for projects, Shell said in a statement on Nov. 16.”: ``The Chinese government is pursuing coal-to-liquids conversion programs as part of its national energy policy,'' Shell said. (ShellNews.net) 22 Nov 04

Nov. 22 (Bloomberg) -- China, the world's largest coal producer and user, plans to spend $10 billion over the next decade on plants that turn coal into motor fuel, as the government struggles to contain a ballooning oil import bill.

Shenhua Group Corp., China's largest coal producer, and Ningxia Coal Industry Co. signed separate contracts with Royal Dutch/Shell Group. and Sasol Ltd. to study building coal-to- liquids plants. The projects would cost 60 billion yuan ($7.2 billion), said Lei Xiangqing, an official at Shenhua, which is already building a 24.5 billion yuan plant in Inner Mongolia.

China, which sits on 12 percent of the world's coal reserves, is failing to find enough oil to meet demand. Coal-to- fuels plants may help meet the shortfall while curbing the pollution from burning 1.4 billion tons of coal a year.

``The country has no choice -- either source more supplies abroad or find oil substitutes,'' said Gideon Lo, an analyst with DBS Vickers Hong Kong Ltd.

China's crude oil imports have risen over the past decade from zero to 40 percent of local consumption, as demand more than doubled to over 6 million barrels a day. The cost of oil imports rose 65 percent in the first 10 months of this year to $26.47 billion, Customs General Administration of China said today.

Coal for Cars

Demand for gasoline and diesel in the nation is predicted to rise 58 percent by 2020 as vehicle sales soar, China Petroleum & Chemical Corp., Asia's biggest oil refiner, said last week. Even so, two-thirds of China's energy last year came from its coal mines, which have about 130 billion tons of recoverable reserves, according to the U.S. Department of Energy.

Shenhua and Ningxia Coal will evaluate and compare the competing feasibility studies by Sasol and Shell, Shenhua's Lei, a spokeswoman for the team handling the coal-to-liquids project, said in a telephone interview in Beijing last week.

The aim is for Shenhua to build one coal-to-liquids plant in the central province of Shaanxi and for Ningxia Coal to build the other in neighboring Ningxia province, she said. Each plant would produce 3 million metric tons a year, or about 65,000 barrels a day, of gasoline and other fuels, she said.

Shell, the world's third-biggest publicly traded oil company, and the Chinese companies on Nov. 15 signed an agreement to complete a so-called pre-feasibility study on the market, economics, technical solutions, regulations and possible sites for projects, Shell said in a statement on Nov. 16.

Oil Aversion

``The Chinese government is pursuing coal-to-liquids conversion programs as part of its national energy policy,'' Shell said. Shenhua and Ningxia Coal are members of a team tasked by the National Development and Reform Commission, China's top planning ministry, to research China's coal-to-liquids program, Shell said.

Shenhua and Ningxia Coal signed the feasibility study with Johannesburg-based Sasol in September.

The plans tie in with the Chinese government's drive to cut the nation's reliance on crude oil, said Wu Guihui, an official with the National Development and Reform Commission. Those plans, which include building more nuclear power plants, finding and importing more natural gas and building the world's biggest hydropower plant -- the Three Gorges Dam -- have been given added impetus by the gain in oil prices.

Brent crude oil futures in London surged as much as 71 percent this year to a record closing price of $51.56 a barrel on Oct. 26, partly because of China's increasing demand. On Friday, January Brent closed at $48.89 a barrel.

Room for Growth

China's crude oil consumption may more than double in the next 22 years to 12.8 million barrels a day, according to a forecast by the U.S. Energy Information Administration.

Vehicle sales in the nation in the first 10 months rose 18 percent to 4.13 million units, the National Bureau of Statistics said. The rapid pace of growth is likely to continue as China has about two vehicles per 100 households, compared with an average of two per household in the U.S.

Converting coal to diesel using Sasol's process, which first produces gas and then turns that into liquid fuels, is profitable as long as Brent stays above $30 a barrel and coal costs less than $12 a ton, Willem Louw, managing director of Sasol's technology department, said in a telephone interview in October.

Sasol began the world's first commercial production of gasoline and other fuels from coal in the 1980s, backed by the South African government, as the anti-apartheid campaign against white minority rule led to embargoes on oil shipments to the nation.

New Technology

Shenhua's plant in Inner Mongolia will be completed as early as in 2007 and use a newer technology developed by U.S.-based Hydrocarbons Technologies Inc. that converts coal to liquid fuels without the intermediate conversion to gas.

The plant would initially produce 1 million tons a year of liquid fuels and may be expanded fivefold to 5 million tons a year by 2010, Shenhua's Lei said.

Shenhua expects to produce 15 million tons of oil products a year by 2015, and 20 million tons by 2020, according to a presentation given by Shenhua in April.

The pioneering plant may prompt other Chinese companies to enter the fuel-making business.

Shandong Lueneng Group, a power producer in eastern China, may build a coal-to-liquids plant in the western province of Xinjiang, Fu Shaohao, an official involved in the project team, said in a telephone interview.

The company will conduct a two-year feasibility study into the plant, which would make 9.6 million tons of oil products annually by 2020 in the city of Hami, near a 75 million ton-a- year coal mine, he said. No budget has been set, he said.

``This is still at a very early preparation stage,'' Fu said. ``Formal government approval hasn't come yet.''

To contact the reporter for this story:

Le-Min Lim in Hong Kong at lmlim@bloomberg.net

and Loretta Ng in Hong Kong at

6612 or lng13@bloomberg.net

To contact the editor responsible for this story:

Reinie Booysen in Singapore at rbooysen@bloomberg.net

http://www.bloomberg.com/apps/news?pid=10000080&sid=a5EQh6QBQGtY&refer=asia