Coal-to-Chemicals: Shenhua’s Water Grab
By Calvin Quek 7 August, 2013
Greenpeace's Calvin Quek explains why Shenhua could face significant financial & environmental headwinds
23 July 2013 – Greenpeace issued a report titled: “Thirsty Coal 2: Shenhua’s Water Grab” investigating the possible over-extraction of groundwater and illegal discharge of wastewater by Shenhua Group’s Ordos Coal-to-Liquid demonstration project. For our quick summary of this report, click here and for the full report, please click here. Calvin Quek of Greenpeace shares his view below.
Given China’s abundant coal reserves and its lack of oil, there has been keen industry interest in the coal chemical sector, where coal is used as feedstock to create petrochemical products such as olefins, ethylene and propylenes1. A key driver behind movement has been the lack of rail capacity to transport coal from the northwestern supply to the demand centers in the east, giving rise to stranded coal assets, and thus creating an interest by companies to convert coal into other chemical products2.
Unfortunately, this drive to expand the coal to chemical sector faces significant financial and environmental headwinds.
Headwinds to Expansion
First, coal chemical projects are extremely capital intensive with relatively long time horizons. Given that the government mandates very large capacity requirements for such projects3, only companies who have significant investment capital can embark on these projects4.
Second, coal chemical projects can be very sensitive to comparative global commodity prices. According to industry experts, coal is an advantageous feed only if international oil prices stand above USD 80 per barrel.5
Third, and most crucially, the expansion of the coal chemical sector is constrained by China’s water scarcity, as highlighted by Greenpeace, and other organizations such as HSBC6, Bloomberg New Energy Finance7, and CLSA8.
Work by China Water Risk9 suggests that given current thermal power capacity expansion, China will not meet its 2015, 2020, and 2030 targets to cap water consumption unless aggressive water saving and efficiency programs are enacted. The graph below shows a business-as-usual scenario.
Looking at a provincial level, there is a similar conflict with the water demand of coal power bases in 2015 actually meeting or exceeding current 2012 industrial provincial water consumption in Inner Mongolia, Shanxi, Shaanxi, and Ningxia.10
Indeed, some industry experts have gone so far as to say that “the ultimate constraint for coal chemical development in China is water”11. Taken together, given coal to chemicals projects’ high capital requirements, long time horizons, technology risks, and environmental factors, investors may do well to be wary. This view seems to be borne out by the results of a KPMG survey, in which around 50 percent of respondents described coal-based chemistry projects as ‘high risk’12.
The Extreme Water Needs of the Project
Emblematic of the coal industries headlong rush to the coal to chemical sector is Shenhua’s Coal-to-Liquids Project (hereafter referred to as “The Project”) located Ordos, Inner Mongolia. Commenced in 2002 and still under construction and expansion, the Project is the largest coal to liquids plant in China, and encompasses four coal operations – coal mining, coal-fired thermal power, indirect coal liquefaction, and direct coal liquefaction.
Currently, the Project consumes approximately 14.4 million tons of water annually, of which direct coal liquefaction accounts for the largest proportion (47%),
An environmental impact assessment done in 2003 estimates that the direct coal liquefaction operation of the Project consumes 6.65 million tons of water annually13. Indirect coal liquefaction, coal-fired thermal and coal mining, account for the remaining 7.75 million tons of water consumed annually.
Looking further ahead, Shenhua intends to expand the current direct coal liquefaction operations significantly, adding 2.12 million tons of additional annual capacity, lifting current annual production capacity of 1.08 million tons in 2013 to 3.2 million tons by 2016. This, in addition to a 2 billion m³/year coal-to-natural gas project due to be completed by 2016, will more than double Shenhua’s Coal-to-Liquid’s water consumption to 40.7 million tons. This water consumption is double the current design capacity of existing water extraction facilities in the Haolebaoji region14, and as a result, Shenhua intends to make up for this shortfall by extracting water from the Yellow River, which is about 130km away15.
By 2020, with the complete of phase two, which will add additional direct coal-to-liquids and coal-fired thermal power capacity, the Project’s water consumption is expected to increase to 53.63 million tons annually. These enormous water consumption levels are due to the high water intensity of the coal liquefaction process.
According to academic studies, it is estimated through the direct liquefaction process, for every 1 ton of oil produced, 3 – 4 tons of coal and 10 tons of water is required. And as a by-product, 9 tons of carbon dioxide, 4.8 tons of wastewater, and 0.7 tons of solid waste is emitted.
The Situation on the Ground
The Project is located in the Shendong coal mining zone, and as a result of the collective unmitigated excavation of coal resources in the region over past twenty years, the region’s water resources have been significantly impacted16. As a result, the Project, to secure the necessary water resources for coal liquefaction, has been controversially extracting ground water ever since 2006, through subterranean pipes from Haolebaoji, a region 100 kilometers away deep in the heart of the Mu Us desert.
There, the Project relies on 22 wells dug well over 300 meters deep, each with a maximum capacity to extract 58,000 m³ per day. In practice, they extract 14.4 million tons of water annually17, and 50 million tons of water to date.18
This massive ground water extraction has had an enormous impact on the local Haolebaoji environment.
First, groundwater in the region has dropped by about 100 meters compared with 10 years ago19. Since 2006, every single artesian well in the region has gone dry, and most wells less than 30 meters deep are abandoned. Now, new wells must be dug at least 100 meters deep to ensure the accessibility of water supplies
Second, there has been a clear decrease in the surface area of Subeinaoer Lake, the surface area of the largest lake in the region. Based on satellite imagery, the lake has decreased 62% (1.27 square kilometers) when compared with images from 2004 before Shenhua began extracting water.
Third, surface vegetation has significantly declined, while desertification has occurred with the expansion of sand dunes. This has had a significant impact on the rearing of livestock, affecting the basic living needs of 2,402 households (5,752 people) living in the region, as 80,000 hectares of land affected by severe water scarcity.
The combination of the above three factors, rampant desertification, the destruction of arable land, and the elimination of basic conditions needed for both agricultural-based livelihoods and drinking water, has elicited a sharp response from affected communities, and longstanding tug-of-war between various interests over the past 10 years.
A Murky Trail of Pollution Discharge
Greenpeace has also found that the Project is not only illegally extracting water at an unsustainable pace, but is also threatening the existing groundwater reserves and the natural environment through the discharge of industrial wastewater.
Greenpeace onsite investigations of the Project have revealed the potentially illegal discharge of industrial waste water into the surroundings20,at three different locations. Water and soil samples taken from all three dumpsites were found to contain large amounts of harmful and carcinogenic organic compounds.
Greenpeace estimates that given current petroleum productions rates (est. 1 million tons/year) coupled with equipment utilization hours, the total industrial wastewater discharged from the Project is estimated to be 4.79 million tons annually, or 4.79 tons of waste water discharge for every ton of product produced.
Putting the Project’s Environmental Impact in Perspective
The Project’s massive water extraction and illegal waste discharge run in direct conflict with a growing chorus of water and environmental-related policies and goals set forth by the central and provincial government, on a variety of dimensions such as National Management & Zoning Policies, National Water Resources Management, Water Extraction Policies, and Water Pollution Prevention and Control Laws.
At the same time, the Project also contravenes the governments coal industrial development policies
In July 2006, in recognition of the growing conflict between coal expansion and water resources, the National Development and Reform Commission issued a Notice on Strengthening Management of Coal Chemical Project Construction and Promoting Healthy Industry Development21 stating coal chemical development must be “in balanced with water resources”22 that “water resources are an important limiting factor in the development of the coal chemical industry”.23
It also added in article 3 point 1 that “The development of the coal chemical industry should be based on available water resources and should be prohibited from infringing on residential or agricultural water use to support development”24 and that “in areas where water is scarce, the construction of coal-to-natural gas and coal-to-liquid projects must be strictly controlled”25
These policies are in direct conflict with the Shenhua Coal-to-Liquids Project as well as other high water consuming coal liquefaction projects that are being built and expanded in Jinjie, Qingshui, Yuheng and along the Nalin River, many of which are likely to draw on tributaries of the Yellow River, and continue to exacerbate a severe water crisis in the region.
Key Conclusions and Recommendations
In view of the Project’s massive water extraction and illegal waste discharge which run in direct conflict existing government policies, Greenpeace makes the following recommendations:
- The Shenhua Group should halt further damage to the environment and water resources in the Haolebaoji region, and stop illegal discharge of polluted water. Furthermore, Shenhua Group should cease activities that will further damage both water resources and the environment in the remaining production lines of Phase One of the Ordos Coal-to-Liquid Demonstration Project, all of Phase Two, and the coal-to-natural gas project.
- In light of the massive water usage requirements and severe pollution inherent to coal chemical projects, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Water Resources and the Ministry of Environmental Protection of the People’s Republic of China need to set clear, scientific and applicable rules that truly adhere to the idea of limiting coal expansion based on water capacity. When coal chemical projects are in the application phase, strict reviews of water usage and environmental impact must be carried, out and projects that do not meet requirements must be rejected.
- With regard to the coal chemical projects that have already been approved, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Water Resources and the Ministry of Environmental Protection of the People’s Republic of China need to reevaluate their expected impacts to water resources and make adjustments, and release the results of such reevaluations.
1“Coal emerges as Cinderella at China’s energy ball” http://www.ft.com/intl/cms/s/2/b3dff99a-b2a0-11e2-a388-00144feabdc0.html#axzz2Z50ixFtx
3China’s government capacity requirements for coal chemical projects vary but are in general quite high. For example, MTO and MTP plants must produce more than 600,00tons/year. For more info see: http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Pages/China-Chemical-Industry-201109.aspx
4For example, according to IHS, the capital costs for a 600,000 ton/pa coal based olefin plan is RMB 20 billion
5Coal to chemicals gains upper hand, 5 Nov 2010, ICIS
13Liu, Baojun; Guan, Xiaofang. Economic and Technical Analysis of Water Supply and Waste Water Recycling at the Shenhua Coal-to-Oil Plant. Inner Mongolia Environmental Protection, 2003, 15(3): 24-27.
14 Qu, Jianhua; Hua, Haizhong; Liu, Jianxing; et al. Project Design for External Water Supply, Industrial-Use Water and Waste Water for the Shenhua Direct Coal Liquefaction Project. 2008, 39(5): 50-52.
15 Lan, Xuefeng. Initial Review by the Jungar Banner of the Southern Ordos Yellow River Diversion Project. Xinhua Net – Inner Mongolia Channelhttp://www.nmg.xinhuanet.com/nmgwq/2009-08/07/content_17337404.htm.2009-08-07
16 Research by the Yellow River Conservancy Commission has shown that between 1997 and 2006, coal mining has resulted in an average decline in the water resources of the Ulan Moron River of 2.9 ×108 cubic meters. This accounts for 54.8% of reasons for variations in runoff and for 1 ton of coal, 5.27 cubic meters of runoff is affected
17 熊静. 市委常委、副市长宫秉祥一行来我旗调研水源地工作. 乌审旗政府网站. http://www.wsq.gov.cn/tpws/201306/t20130608_877738.html. 2013-6-8
18 Proposal 2011 #49: Recommendation on Relocation of All Farmers and Herders in Water Source Area of the Shenhua Direct Liquefaction Project. Ordos People’s Congress Website.
19Interviews of Haolebaoji villagers by Greenpeace East Asia, March 2013
20 Greenpeace took nine liquid and sediment samples from three industrial wastewater dump sites, and sent to the University of Exeter for testing. Liquid samples were tested for volatile organic compounds, semi-volatile organic compounds and heavy metals. Sediment samples were tested for semi-volatile organic compounds and heavy metals.
22 In Chinese“水资源平衡”
25 “ 严格控制缺水地区煤气化和煤液化项目的建设。”
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- Groundwater Crackdown – Hope Springs:The economy slows down but the Chinese government speeds up groundwater crackdown with increased transparency, blacklists at both central and provincial levels.
- Chinese Utilities in Hot Water: BNEF’s Nathaniel Bullard shares key findings of their report including the exposure of China’s Big 5 power companies to water risk.
- China: No Water, No Power: HSBC asks if China has enough water to fuel its power expansion as China plans to add more than the total installed power capacity of the US, UK & Australia by 2030.
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