Royal Dutch Shell and a Chinese partner yesterday committed to a three-year study of a coal-to-liquid (CTL) fuel plant in western Ningxia province, which if it went ahead would be one of China's largest foreign investments.
Lim Haw Kuang, executive chairman of Shell in China, said a plant of the size envisaged would cost $5-$6 billion (€3.9-€4.7 billion) to build, although Shell said this was a preliminary estimate and should not be taken as a guide to the final cost.
The Shell joint venture is part of an investment surge into CTL plants in China, driven by a combination of the country's abundant coal, rising energy demand and record oil prices.
Under 30 such projects are in the detailed planning or feasibility stage, according to a report by Credit Suisse, with a projected output equivalent to 10 per cent of the country's oil demand. The costly, capital-intensive CTL plants are generally considered to be financially viable when oil prices are above $35-$40 a barrel, which the industry thinks is a good bet.
Coal is China's "real strategic (energy) reserve", says the Credit Suisse report, because it could all be sourced locally. China has another 30 coal-to-methanol plants under construction or going through the approval process.
Shell's partner in the Ningxia project is a unit of the Shenhua Group, China's largest coal company, which is growing rapidly on the back of booming demand in China for traditional fuels.
State-owned Shenhua has already announced plans to transform itself from a coal miner into a producer of power, oil, chemicals and methanol.
Shell, which is a leader in liquefaction technology, has licensed its technology to 15 projects 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, equal to about 1 per cent of Chinese oil demand, now just over 7 million barrels a day.
The technology to turn coal into gas and oil was invented in the 1920s in Germany.
