Under the general trend of “double carbon” in China, natural gas has become a key energy source for the chemical industry to address carbon emissions and energy consumption, and natural gas is playing an important role in the “coal to gas” change. Therefore, Chinese chemical companies are now entering the natural gas industry to seize natural gas resources and to achieve a first-mover advantage in the future development of low-carbon energy. In addition, as China’s natural gas industry grows at a rapid pace, its mission to protect people’s livelihoods is now basically complete, and the attributes of natural gas as an energy source are gradually decreasing, while its attributes as a chemical raw material are gradually increasing. It is basically impossible to approve natural gas chemical projects before 2 years, but China is now investing in natural gas chemical projects one after another. Therefore, after China’s crude oil and coal-based chemical industry production is restricted, the development direction of China’s chemical industry will gradually change to natural gas-based chemical industry in the long term. Translated with www.DeepL.com/Translator (free version)
In the future, the scale of natural gas chemical industry will gradually replace coal chemical industry, and has the trend of catching up with petrochemical industry. However, there is still a shortage of natural gas supply in China for a certain period of time, and it is expected that the development of natural gas chemical industry will not be fully liberalized in a short period of time at the policy level, and the conventional natural gas resources will continue to be mainly used to protect people’s livelihood. Chemical development is expected to carry the important responsibility of raw materials. Therefore, the production of natural gas from coal, and then the development of chemical downstream industry chain, or will become the development trend of China’s natural gas chemical industry in a short period of time.
One may ask whether coal gas is competitive. Does coal gas really have environmental attributes in the field of carbon emission control, which remains the essence of activating carbon dioxide that is buried deep underground?
First, is coal gas truly competitive? To address this question, we need to first examine the cost of coal-to-gas. Based on industry averages, it takes 0.0025 tons of raw coal, 0.0011 tons of fuel coal, 0.0683 degrees of electricity, and 0.0018 tons of water to produce 1 cubic meter of natural gas. Based on base case calculations for 2022, where coal is measured at $800/ton, the variable cost is approximately $2.96/m3. Then, based on labor, overhead, repair costs, depreciation, amortization and mainstream financial costs in the industry, the fixed costs are measured at approximately $1.27/m3. Based on this calculation, the cost of coal to natural gas is approximately RMB 4.23/m3, as measured by coal at RMB 800/ton. The price of East China pipeline gas in 2022 is in the range of RMB3.4-4.3/m3 to see, if measured according to the market coal price, coal to natural gas does not have any cost competitiveness. Therefore, if we follow the chemical production of coal to natural gas as raw material, there is also almost no competitiveness to study.
Secondly, is it competitive if the coal pit price is followed? In the Chinese coal market, there is a huge gap between coal prices in different regions, and although many companies own their own coal mines, it is not uncommon for group companies to settle their internal settlements according to market prices. Therefore, the most competitive way for coal chemical companies is to use pithead price as the settlement price for coal chemical production. At present, the Chinese market, Inner Mongolia, Shaanxi, Shanxi, Ningxia and other regions, coal mostly use the market price as the basis for settlement, where some large enterprises, state-owned enterprises will use the form of coal pithead price floating settlement. In Xinjiang, Shaanxi, Shanxi and Inner Mongolia, the pithead price is used as the basis for settlement, which is also directly related to the depth of the local coal mines and coal quality. Several regions in China have a wide range of pithead coal costs, where the cost range varies from 160 RMB/ton to 320 RMB/ton. If measured at a coal price of 160 RMB/ton, the cost of coal to natural gas is approximately 1.96 RMB/m3. If the cost of coal is measured at 200 RMB/ton, the cost of coal to natural gas is about 2.1 RMB/m3. If the cost of coal is measured at 300 RMB/ton, the cost of coal to natural gas is about 2.46 RMB/m3. If the cost of coal is measured at $320/ton, the cost of coal to natural gas is about $2.53/m3. Therefore, if pithead coal costs are used, the cost range of coal-to-gas is between RMB1.96/m3 and RMB2.53/m3. As can be seen, the cost of coal to natural gas is already significantly lower than the price of chemical pipeline gas, and will be significantly competitive if produced locally as a chemical feedstock.
Third, is it competitive if pit-priced coal is used as a feedstock to produce natural gas chemicals? We saw that if natural gas is produced from pithead-priced coal, the cost of natural gas is about RMB 1.96/m3 to RMB 2.53/m3, so is this cost of natural gas competitive? For this reason, we investigated the purchase cost of natural gas for chemical producers in the southwest market that use natural gas as a feedstock, which is $2.4 to $2.8/m3 due to the pricing principle of belonging to the off-peak season. In other words, the raw material price of natural gas-based chemical in the southwest is at a minimum of RMB 2.4/m3. However, it should be noted in particular that there is a certain policy window for natural gas-based chemical development in Southwest China, and the local government is making great efforts to attract investment, giving obvious policy benefits, such as guaranteeing a stable supply of natural gas and lower natural gas prices. Under such a premise, natural gas for chemical production in the southwest has certain cost competitiveness. It is easy to see that coal to natural gas also has a cost advantage over the cost of natural gas in the southwest, and production of natural gas using pithead-priced coal is competitive.
Fourth, is coal to natural gas not “low carbon”? Coal to natural gas is a process of converting “carbon-rich” raw materials from coal to “low-carbon” raw materials, which is a low-carbon conversion of high-carbon raw materials, and has certain low-carbon properties in comparison. However, both coal and natural gas are fossil-based energy sources, which do not have the property of clean energy in the strict sense, so they do not have the property of low carbon compared with non-fossil-based energy sources. In the long term, fossil energy is still the largest consumption trend in China, and natural gas, as a low-carbon fossil energy source, has an important role to play in the transformation of the energy structure.
Finally, coal-to-gas, as an important supplement to natural gas resources, is a key solution to the problem of coal abundance and natural gas shortage, and an important way to change the structure of chemical industry development. In a sense, the development of coal-to-gas is the driving force and lubricant for China’s energy structure transformation at this stage, and the extension of coal-to-gas chemical industry chain may become the biggest “dark horse” for the future long-term development of China’s chemical industry.
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