Datang International Power Generation Co. Ltd., a listed state-owned enterprise with core business in electricity generation, signed an agreement with a subsidiary of the country's state-owned assets watchdog on July 7 to separate itself from its coal-to-gas project in the northern region of Inner Mongolia.

The project, which converts coal to synthetic natural gas (SNG) in Keshiketeng Prefecture, had been in production for more than six months when Datang signed the agreement with the State-owned Assets Supervision and Administration Commission's (SASAC) China Reform Holdings Corp. Ltd.

The latter was set up on December 22, 2010, making it the watchdog's third company. Its task is to help manage state-owned assets that are separated from enterprises undergoing reform and restructuring.

The agreement allowed Datang to transfer five companies from its non-core businesses, including coal-to-gas projects in Keshiketeng and in Fuxin, in the northeastern province of Liaoning, and related facilities and projects to the regulator's subsidiary.

A senior manager at Datang said move would allow Datang to restructure its businesses. "It mainly reduces the burden of investment," the source said.

A 2013 report by Datang showed its coal and chemical businesses had pre-tax losses of 2.2 billion yuan.

The day the move was announced, Datang's share price in Hong Kong closed at HK$ 3.73, the highest for the year and up 23.1 percent from the previous day. Its share price in Shanghai also rose.

The increase in Datang's share price shows the move involving the SASAC subsidiary gave investors confidence, something they lacked when it came to its coal-to-gas projects.

The coal-to-gas industry faces problems related to air pollution, water consumption and wastewater disposal, industry insiders say. Most of the projects are in coal-rich regions of northwestern China, which suffers from water scarcity problems.

The government knows this. After taking the unprecedented step of approving 20 coal-to-gas projects in 2013, the National Energy Administration recently published a document saying it wanted the industry to cool down.

The Keshiketeng project is the first in the country to get government approval and the first to start producing SNG. Datang faced many difficulties with the project, including with management, technology and sales, industry insiders said.

Kicking off Keshiketeng

Datang started work on the Keshiketeng project in August 2009, with total investment of 25.71 billion yuan and plans to produce 4 billion cubic meters of gas a year. Production started on December 18. By June 3, the project had sent more than 200 million cubic meters of gas to Beijing.

Gas is flowing, but Datang has had problems with the project involving technology and management, a manager of another coal-to-gas project said.

Personnel from Datang power plants are managers at the coal-to-gas project, something that has caused problems, the manager said. Also, chemical technicians that came from other companies were not being listened to, the manager said.

The managers who came from power plants thought the investment would provide quick returns, as in their industry, but running a large chemical factory requires more time, the manager said.

The gasification furnace used in Keshiketeng project has presented another problem for Datang because the coal from the eastern part of Inner Mongolia corrodes its internal parts, a problem that caused production to stop for two months, the manager said. "This was because project managers did not consider the traits of the coal at the beginning," the manager said.

Power plants use standard equipment, but chemical plants have to choose their equipment due to various factors and improve equipment during production, he said. Datang bought three production lines at the start, and did not consider the need to improve equipment.

A coal-to-gas project required a huge investment and is technology intensive, said He Zuoyun, deputy director of the coal-to-gas project office of China Petroleum & Chemical Corp. (Sinopec). A project must have a strong team of technicians with experience in chemical industry, and those that lacked this would pay for it, He said.

Transport Troubles

Producers have to transport their SNG to consumers, of course, and this presents a problem. SNG producers either are either using pipelines owned by giants like China National Petroleum Co. (CNPC) and Sinopec or their own pipelines.

Datang planned to build a pipeline to Beijing for the Keshiketeng project. The pipelines would have had a length of 359 kilometers and cost 16.5 billion yuan.

But then the Beijing city government signed an agreement with CNPC on gas supply, and Datang had to work with CNPC. This meant the last section of the pipeline to Beijing had to be built by CNPC, but land acquisition problems delayed this.

"The Keshiketeng project was able to produce gas in July 2012, but only in December 2013 was gas sent to Beijing," a Datang manager said. "We have to cooperate with CNPC on the pipelines in Beijing. It is a problem the non-oil and gas companies have to face."

SNG producers, including Sinopec and China National Offshore Oil Corp., plan to build their own pipelines. For instance, Sinopec cooperated with producers in the northwestern region of Xinjiang to build pipelines with total investment of 159 billion yuan.

Before the pipelines and affiliated storage facilities were finished, Sinopec would not start its SNG project, He said. If production did not start in two years, the losses will be huge and cause the failure of the project, He said.

Environmental Concerns

SNG is seen as an alternative to coal and as much cleaner. But experts point out that although particle emissions are lower, that for nitrogen oxides and carbon dioxide are higher.

"Coal-to-gas will help reduce haze, but it increases carbon dioxide from 10 to 270 percent," said Li Junfeng, director of the National Center for Climate Change Strategy and International Cooperation, an advisory body under the National Development and Reform Commission.

Qian Yu, the president of the School of Chemistry and Chemical Engineering at the South China University of Technology, also cited problems with emissions during production and burning of gas, and the wastewater from production.

There are three technologies for producing SNG, and Datang is using the cheapest one – fixed-bed gasification technology – for the Keshiketeng project. This technology produces wastewater that is hard to get rid of.

Datang is only running the Keqiketeng project at one-third of production capacity because it wants to find better technology for disposing of wastewater, Li said.

The government says companies have to produce 1,000 cubic meters of SNG using less than six tons of fresh water, but most of the coal-to-gas projects are in regions that lack water.

The government set overall water consumption for Xinjiang at 51.56 billion cubic meters in 2015, but the figure was already at 61.7 billion last year, according to a report from the international environmental protection organization Greenpeace. If all coal-to-gas projects in Xinjiang were in production, another 680 million cubic meters of water will be used per year in the region, the Greenpeace report said.

On July 17, the National Energy Administration issued a circular on the development of the coal-to-gas industry, saying regions and provinces could not use groundwater to produce SNG.