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Royal Dutch Shell Plc .com: Shell commits to coal in China oil joint venture

FROM THE FINANCIAL TIMES
By Richard McGregor in Beijing

Published: July 12 2006 03:00 | Last updated: July 12 2006 03:00

Royal Dutch Shell and aChinese partner yesterday committed to a formal study of a coal-to-liquids facility in China’s western Ningxia province, a project that would represent one ofthe largest foreign investments in the country if it proceeds.

Mr Lim Haw Kuang, the executive chairman of Shell in China, said at a ceremony to launch the project that a plant of the size envisaged by the partners would cost $5bn (£2.7bn) to $6bn to build.

The study will take three years.

A Shell spokesman said that this figure was only a preliminary estimate and should not be taken as a guide to the final cost of such a project.

The Shell joint venture is part of an investment surge into CTL plants in China, driven by the conjunction of the country’s abundant coal, rising energy demand and record oil prices.

Just under 30 coal-to-oil projects are in the detailed planning or feasibility stage in China, according to a report by CSFB, the international bank, with a projected output equivalent to 10 per cent of the country’s present oil demand.

The costly, capital-intensive CTL plants are generally considered to become economic with the oil price above $35 to $40 a barrel, something that the industry thinks increasingly is a good bet.

Coal is China’s “realstrategic (energy) reserve”, said the CSFB report, because it could all be sourced locally rather than imported.

China also has another30 coal-to-methanol plants under construction or going through the approval process as well.

Shell’s partner in the Ningxia project is a unit of the Shenhua Group, China’s largest coal company, which is growing rapidly onthe back of the boom in China in demand for traditional fuels.

State-owned Shenhua has already announced plans to transform from a mere coal mining company into a producer of power, oil, chemicals and methanol.

Shell, which is a leader in liquefaction technology, has licensed its technology to 15 projects already in China and has one plant with Sinopec, part of China’s leading petrochemicals group, under construction.

“We have proven technology that converts coal to gas and then gas to liquids – we believe this technology is important to China,” said Mr Lim.

The proposed Shell-Shenhua plant in Ningxia would produce the equivalent of about 70,000 barrels a day, about equal to 1 per cent of Chinese oil demand, now slightly more than 7m barrels a day.

The technology to turn coal into gas and oil was invented in the 1920s by the Germans, who used it to power their military during the second world war.

More recently, it was refined by South Africa in the 1980s when the country was under apartheid-era sanctions.

Copyright The Financial Times Limited 2006

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