Wall Street Journal (pg. A9)  [Printer-friendly version]
December 31, 2007

COAL-TO-CHEMICALS PROJECTS BOOM IN CHINA

Western Firms Fight to Keep Edge Among Asia Counterparts, Ease
Natural-Gas Dependence

By Ana Campoy in Dallas and Shai Oster in Beijing

For years China has been a magnet for the chemicals industry,
attracting European and American companies with its cheap production
costs and growing market.

Now China has another attraction for the energy-intense chemical
industry: vast supplies of coal that can replace oil and natural gas
as raw materials for chemical production.

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CHEMICAL ATTRACTION

** The News: Western companies are investing in coal-to-chemicals
plants in China.

** The Background: European and U.S. firms are fighting to remain
competitive amid competition from Asian companies.

** What's Next: Attempts to offset, store or reduce global-warming
emissions generated by the projects.In the last two years, China has
built nearly 20 plants that convert coal into a gas that can be used
to make such things as plastic and pharmaceuticals, according to the
Gasification Technologies Council, an industry trade group. The new
plants draw on technology developed by companies such as General
Electric Co. and Royal Dutch Shell PLC.

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Now, Western chemical firms are getting in on the action. Celanese
Corp. opened a plant this year that uses coal-based feedstock to make
a chemical used in paints and food sweeteners. Dow Chemical Co. has
partnered with Chinese energy company Shenhua Group Corp. to study a
project to convert coal into plastics. Mining company Anglo American
PLC is also looking at a coal-to-chemicals project. Suppliers to the
chemical industry, such as Praxair Inc., are vying to open accounts
with the new coal-to-chemical plants.

"Coal to chemicals is an opportunity that's literally exploding [in
China] right now," says Timothy Vail, chief executive and president of
Synthesis Energy Systems Inc., a company that builds coal-gasification
plants.

Launching their own coal-to-chemicals projects in China represents one
way Western companies are fighting to keep their competitive edge. In
the past decade, chemicals makers based in Europe and North America
have lost market share to their counterparts in Asia, where demand for
chemicals is rapidly growing.

China's government, meanwhile, has orchestrated the buildup of the
coal-to-chemicals industry in an effort to reduce the nation's growing
dependence on imported natural gas. Using China's vast coal deposits
to make chemicals and plastics provides a more reliable source of raw
materials that can feed the expansion of China's main economic growth
engine, its manufacturing sector. The new plants also replace older,
soot-belching chemical factories that have earned the government a bad
reputation for the pollution they create in Chinese cities.

Gasification technology, which uses high temperatures and pressure to
break the molecular bonds in coal to produce gases that can be
recombined into a variety of fuels and chemicals, has existed for more
than a century. Germany gasified coal to fuel its planes during World
War II. China has made fertilizers through gasification for decades.
But there had been little incentive for the global chemical industry
to gasify coal until prices began soaring for natural gas and oil.

North America has its own huge reserves of coal, sparking interest in
gasification plants in that continent as well. But development has
been slowed by concerns that the projects would contribute to growing
emissions of the gases that cause global warming. Among fossil fuels,
coal emits an especially large amount of carbon dioxide when being
burned, and man-made carbon dioxide is one of the most prevalent gases
that human activities are contributing to earth's rising temperatures.
Gasifying coal to produce chemicals emits less carbon dioxide than
does burning coal as fuel, but the process still ejects more carbon
dioxide into the atmosphere than using natural gas would produce, says
Eric Larson, a research engineer at the Princeton Environmental
Institute.

The U.S. government doesn't yet limit nationwide the amount of global-
warming emissions industry can release into the air. But the future
prospect of such rules, along with coal's dirty reputation, has kept
coal gasification from catching on in the U.S. on the same scale as it
has in China, analysts say. "There is a stigma about coal because of
its historical environmental and safety concerns," says Edward
Glatzer, director of technology at Nexant Inc., a San Francisco-based
consulting firm.

Some of the Western companies planning to jump into the sector in
China, including Dow Chemical, are considering ways to offset or store
the global-warming emissions their projects will generate. One
possibility -- a process that would inject carbon dioxide deep
underground for storage -- is a largely untested technology that is
likely to be very expensive. In the meantime, gasification projects
are getting speedily green-lighted in China without concern over
emissions.

China is poised to surpass the U.S. as the No. 1 emitter of greenhouse
gases in the world. Studies show that about one-fourth of China's
global-warming emissions are released in the process of making the
tennis shoes, toys, computers, shirts and other products that the
country exports abroad.

While the Chinese government agrees on the need to reduce carbon
emissions, it prefers to achieve that through increased energy
efficiency and by using more alternative energy. It has no plans to
cap carbon emissions because it believes such a move would limit
economic growth.

Government officials have smoothed the way for gasification projects
by fast-tracking permits and helping companies to secure capital,
industry executives say. "In anywhere between 24 to 32 months they
have [plants] built and operating," says John Lavelle, general manager
of GE Energy's gasification business. "It's pretty remarkable."

Cheap labor and minimal regulations mean coal-gasification plants in
China can be built for about two-thirds to one-half the cost of a
project in the U.S. or Europe. Coal-to-chemical plants built in the
last two years have expanded Chinese capacity by 45 million cubic
meters of gas a day that can be used as chemical feedstocks, according
to the Gasification Technologies Council. The plants slated for
construction in the next four years will double that capacity.

Western companies involved in China's coal-to-chemical industry argue
that coal gasification has the potential to be environmentally
friendly. Because the gasification process separates out carbon
dioxide, the global-warming gas can be more easily captured and stored
once an affordable technology is developed. Dow, for example, says it
is studying ways to sequester carbon dioxide -- or to offset its
environmental impact by reducing emissions elsewhere through projects
such as planting carbon-dioxide-consuming trees.

Celanese says it is committed to controlling greenhouse-gas emissions
in all its operations, reducing them by 30% from 2005 to 2010.
"Reducing emissions means you are more efficient," says David Weidman,
the company's CEO and also a member of the board for environmental
group the Conservation Fund.

Chinese companies aren't sweating the issue, say analysts at the China
Petroleum and Chemical Industry Association. Only China's two biggest
oil and chemical firms, the state-owned giant China Petroleum &
Chemical Corp., known as Sinopec, and China National Petroleum Corp.,
parent of the listed PetroChina, are studying how to store carbon
emissions.

--Ellen Zhu in Shanghai contributed to this article.

Write to Ana Campoy at ana.campoy@dowjones.com and Shai Oster at
shai.oster@wsj.com

Copyright 2008 Dow Jones & Company, Inc.