Futer Energy starts coal-oil project in Yuli

Amid the global fall in crude oil prices and a supply glut, a coal-oil project with an investment of 16.4 billion yuan ($2.58 billion) started production on Friday in Yulin, Shaanxi province, with experts expressing concerns about the economic efficiency of such industries.

Shaanxi Futer Energy and Chemicals Co Ltd, controlled by Yankuang Group, a State-owned coal producer headquartered in Yanzhou, Shandong province, is the owner of the project which makes oil from coal.

The first phase of the project has an annual capacity of 1.1 million metric tons, the company said.

Sun Qiwen, general manager of Shaanxi Futer Energy, said the company plans to have a capacity of 10.1 million tons when the second phase is complete, but no clear timetable has been charted yet.

Responding to concerns about the profitability of the coal-oil project due to low crude prices, Sun said though the coal chemical investments are high, the lower coal prices make it viable.

"Our unit production cost for each ton of oil is 3,300 yuan, including taxes," he said. "The international crude price is around $45 a barrel at present, which equals to 4,300 yuan for each ton of diesel in northern part of Shaanxi province."

Deng Shun, a senior analyst who tracks the coal industry at ICIS Energy, a Shanghai-based energy information consultancy, said due to the falling coal prices many companies have shifted to the coal chemical industry for growth.

However, due to the huge water consumption, economic efficiency and overcapacity issues, coal chemical industry, including the coal oil sector, does not have a bright future, he said.

"According to coal chemical experts, it is not profitable to have coal to gas or coal to oil projects when global crude prices fall below $60 a barrel. With most industry experts expecting prices to remain bearish over the long term, the future does not look bright," he said.

Another big problem is the limits on water use.

Jin Yong, an academic with the Chinese Academy of Engineering, said on Friday during an industrial conference in Taiyuan, Shanxi province－another big coal producer－that the industrial data show it needs 10 tons to 15 tons of water to produce one ton of oil from coal, which is the biggest limit for the industry.

"In China, most coal chemical projects are located in Central and Western China, regions that face severe water shortages," Jin said. "We need to be cautious while developing the coal chemical industry. It is still not that mature enough to be developed on a scale similar to petrochemicals."