China's Environmental Initiatives Spurring Ascendance of Local Clean Tech Companies

 |  Includes: CSUAY, GEX, KOL, USO
by: Rob Abbanat

Chinese car manufacturer BYD (OTCPK:BYDDF) is hardly a household name, but it plans on being the largest auto company in the world by 2025. Ambitious? Yes. Impossible? Warren Buffett was sufficiently impressed to hand over US$230 million for a 10% stake in BYD in 2008.

The company has leveraged an early expertise in battery technology to evolve into one of the global frontrunners in the market for electric vehicles. Many, including myself, believe this market represents the green future of automotive transportation.

BYD may be the principal headline maker, but it is not alone. As China’s economy continues its ascendance, there are a host of industries within which local firms will soon make their grand entrance as world-class competitors. Given the scale of funding and policy support that Beijing has put behind environmental initiatives, many of these industries involve clean technology. Coal-to liquids (CTL) is a case in point.

Simply put, CTL is the process of converting coal into synthetic liquid fuels. Without getting too deep into the chemistry, coal can be converted directly into liquid fuels via a process called pryolysis. There is also an indirect method whereby the coal is first gasified and the resulting synthetic gas, or syngas, can be converted into a variety of fuels such as methanol, diesel or jet fuel. It is the indirect way that is emerging as a big winner globally, but particularly in China.

It’s worth noting that coal gasification also comes in two flavors: above ground gasification and underground coal gasification (UCG). With above ground gasification, the coal is dug up just as with traditional coal mining, but rather than being burned it is processed via large gasification equipment. UCG gasifies the coal in situ.

Back in vogue

While the concept of converting coal to fuel via syngas has been around since the 1930s – the Germans invented the Fischer-Tropsch process to fuel their armies during World War Two – coal to liquids has only just re-emerged as an industry-changing technology. Until recently, the process was too expensive and oil was too cheap to justify widespread commercial adoption of CTL. All that all changed last summer when oil peaked at US$145 per barrel.

Creating fuel from coal has two other key benefits: It has the potential to reduce a country’s dependence on oil imported from the Middle East; and it can be a more environmentally friendly energy source than oil and traditional methods for burning coal. In both above ground gasification and UCG, over 90% of the carbon dioxide, sulfur and nitrogen oxide produced during the coal gasification process can be captured and sequestered. Were the coal to be mined and burned the old-fashioned way, these pollutants would be released into the atmosphere.

First-mover advantage

In coal-rich, oil-poor China – which relies on coal for 70% of its electricity generation – CTL has great potential. Under tremendous pressure to take a leadership role in cleaning up the environment and highly aware that oil is a dwindling resource that largely derives from politically difficult countries, Beijing has begun to take notice.

Shenhua (OTCPK:CSUAY), the country’s largest coal producer, took the first step by developing the world’s first commercial CTL production facility. Currently in the trial phase, this facility will eventually produce 5 million tons of liquefied petroleum gas per year. The Yitai Group recently completed a test run with its 160,000-tonne indirect CTL facility, which produces diesel oil and naphtha, while China Coal is working on facilities for producing liquid fuels. Many others are also beginning to jump into the game. China’s oil majors, which see the production of liquid fuels by coal companies as a potential competitive threat, are following the industry closely. Not to be outdone, China National Offshore Oil Corp recently invested in the development of an Australian CTL manufacturer to secure a sizeable take-off of fuel to bring back to China.

The day may not be far off when a large portion of our fuel for transportation and electricity derives from CTL production. Thanks to the pioneering role China is taking, it wouldn’t be a surprise if domestic firms emerged as the market leaders – drawing the revenues and public profile that come as part of the package.

Disclosure: No positions