Synthetic Gas: False Friend for China’s Clean Air Drive?

Nationwide, officials have been handed sweeping new enforcement tools in what Bloomberg calls the most significant overhaul to China’s environmental regulations in more than 25 years.

May 21, 2014 at 9:15AM

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Beijing's city hall recently ordered 300 industrial polluters to relocate outside the city by October as part of a campaign to clean up its notoriously bad air.

Nationwide, officials have been handed sweeping new enforcement tools in what Bloomberg calls the most significant overhaul to China's environmental regulations in more than 25 years.

Beijing was even overtaken by New Delhi in the World Health Organization's latest sampling of cities with the highest levels of tiny, airborne disease-causing particles in the air.

One method Chinese officials have prioritized in their campaign to clean the air looks promising because it exploits coal, a resource China has in abundance. The coal-to-gas technology, in use since the 1980s, produces synthetic natural gas, a much cleaner burning fuel than raw coal. The government believes it can ramp up production to 50 billion cubic meters (bcm) a year by 2020 from around 2 billion bcm this year, according to a Platts report published in January.

But if the payoff is potentially huge, so are the pitfalls. Dozens of synthetic gas plants must be built and pipelines lain to send the gas from coalfields to distant cities where it is needed. Another concern is the enormous amounts of water such plants require, some of which are set for regions where water is already scarce.

Finally, some experts say, synthetic natural gas production may actually increase carbon emissions -- not welcome news for a country that already produces a quarter of the world's greenhouse gases.

Coal is facing a raft of competitors in today's China, from natural gas to nuclear. About 75 percent of the country's electricity comes from coal currently, but that is certain to change as new cleaner-burning plants come on line.

For now, though, coal's primacy is uncontested. One reason is the need to convert countless factories and homes to burn cleaner energy sources. The city of Tianjin, Beijing's 11-million-strong neighbor, will fail to meet its target of 60 percent of heat from natural gas this year, in part because there is not enough gas available, the city's environmental protection manager told China Radio International.

Hundreds of polluting companies from the two cities have been ordered to relocate to the surrounding Hebei Province, but there, too, lack of infrastructure is hampering the shift from coal to gas.

The government last year approved 18 synthetic natural gas plants with total annual capacity of 75 bcm, according to the World Resources Institute. For comparison, that is not much more than the amount of traditional gas China expects to import from a single supplier, Turkmenistan, by 2016. This shows that coal-to-gas is just one strand in a grand scheme to diversify China's energy supply and reduce its dependency on coal.

Natural gas in various forms is crucial to the government's energy strategy. The government foresees continued steep rises in gas consumption and production curves. Forecasts for gas demand in 2020 range from 300 bcm to 400 bcm. The International Energy Agency estimates domestic production will rise from 103 bcm in 2011 to 178 bcm in 2020, according to Platts.

As for coal-to-gas production, it could reach 20-30 bcm by 2020, less than the government forecast, Platts reports, citing the Economics and Technology Research Institute of state-owned CNPC.

The CNPC experts said "severe environmental protection problems and lack of pipeline networks" would keep all but a few government-approved coal-to-gas projects from coming on stream by 2017 or 2018 as planned.

Those environmental problems probably include water stress and greenhouse gas emissions.

Most of the proposed synthetic gas plants are in China's parched Xinjiang and Inner Mongolia regions, and their planned water consumption is almost 20 percent of those regions' total industrial water use, according to the World Resources Institute, which argues, "The plants would therefore significantly exacerbate stress in areas already experiencing chronic water shortages."

Inner Mongolia is set to supply at least 4 bcm of synthetic gas to Beijing annually – consuming a phenomenal 32 billion liters (8.45 billion gallons) of water in the process. The institute estimates that synthetic gas production consumes roughly 12 times as much water as is needed to extract the same amount of energy from coal.

The effects on the global climate, although hard to measure, could be worrying. One study found that producing electricity from synthetic natural gas could release 82 percent more carbon emissions than burning coal directly.

Another study by two Duke University researchers reached even more alarming conclusions. It warned that coal-generated gas plants could produce seven times as much greenhouse gases as conventional natural gas plants and use 100 times more water than shale gas production.

Yet after several embarrassing public protests against Beijing's choking air, officials may see the distant risk of a small increase in global warming as an acceptable price to pay for better air in the capital within a few years.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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