China Converts Coal into Oil, Gas, and Chemicals

China is converting millions of tons of coal into oil and natural gas, and chemicals for plastics production every year. A $6.7 billion plant turns the country’s abundant coal into oil, natural gas, and chemicals, reducing the need for energy imports and increasing the country’s energy security. In 2024, 276 million tons of coal — about equal to a year of Europe’s coal use — were converted to chemicals, oil, and natural gas, according to the China National Petroleum and Chemical Planning Institute. As reported by Reuters, if all planned projects proceed, the industry could double over the next five years, with most projects producing synthetic natural gas or liquid fuels. The fastest-growing sector in the industry is coal-to-gas.

Coal-to-Gas Conversion

In 2024, China imported 43% of its natural gas supply (182.2 billion cubic meters), with over half (105.6 billion cubic meters) supplied by liquefied natural gas (LNG), despite China increasing its domestic gas production by 28% between 2020 and 2024 to 246.4 billion cubic meters. China’s coal-to-gas capacity under construction is around four times what was built over the past decade, which would more than double annual capacity to 19.5 billion cubic meters, or about a fifth of China’s LNG imports last year. According to Reuters, most of the new plants are located in coal-rich northwestern China, where 12 billion cubic meters of coal-to-gas capacity is under construction, and another 10 billion cubic meters are planned. Gas produced from coal is currently almost a third cheaper than imported LNG, at less than two yuan per cubic meter compared to 2.87 yuan for LNG excluding regasification and transportation costs. Imported pipeline gas, however, is still cheaper.

Coal-to-gas conversion is expected to replace some imported LNG. Russia was China’s largest source of imported natural gas last year, supplying 22% (38 billion cubic meters) from pipeline gas and LNG combined. In 2024, China’s imports of LNG from Russia were about twice the amount of LNG it imported from the United States. (See chart below.)

China plans on increasing its pipeline imports from Russia with Russia’s oil and gas firm, Gazprom, signing a memorandum for the construction of the Power of Siberia 2 pipeline, a 2,600-km (1,615 mile) gas pipeline that will run between Russia and China, transporting an additional 50 billion cubic meters of gas annually from Russia’s Arctic Yamal regions to China through Mongolia. Besides the new pipeline, China has agreed to increase its gas imports through the existing Power of Siberia pipeline to 44 billion cubic meters from 38 billion cubic meters. Russia will also increase its gas deliveries to China via a pipeline from Sakhalin Island in Russia’s Far East by 20% to 12 billion cubic meters annually.

Gazprom, blacklisted by the United States, received a AAA grade from the Chinese rating agency CSCI Pengyuan, which could allow Gazprom to issue debt in China’s domestic bond market. The financing is expected to help Gazprom, and possibly other Russian energy companies, to develop new resources in Russia.

Favorable Coal Economics Aid Coal-to-Chemicals Conversion

Coal prices, at four-year lows this year, have made conversion of coal to chemicals cheaper. In late July, coal-based olefins generated margins of $112 to $126 per ton, compared to losses of $28 per ton for olefins using oil-based ingredients naphtha or propane. According to Reuters, at a plant in Ordos, Inner Mongolia, coal is heated to around 1300 degrees Celsius (2372 degrees Fahrenheit) to produce synthetic gas, which is transformed into methanol and olefins, a building block for plastics.

Feasibility of the Sector Growth

Last year, China’s coal-to-gas liquids and chemicals production capacity hit 38 million tons of oil and gas equivalent — just 6% of the 685 million tons of gas and oil imported last year. If oil prices fall next year, as forecasters are predicting due to an expected supply glut, the economics could lead to coal conversion project cancellations. The industry’s growth in the early 2010s was disrupted by an oil price collapse after 2014. When oil prices were in the $70 a barrel range and coal was cheap, the economics improved. Notably, China is concerned about the security of its energy supply due to the risk of a maritime blockade of its energy imports because it is the world’s largest importer of oil and LNG, supporting its decision to increase domestic production and coal conversion projects.

Coal-to-gas projects, however, emit nearly three times as much carbon dioxide during conversion as is released when the gas is burned, which is the main reason China is behind on its 2025 carbon intensity target. Because China prioritizes energy security over its carbon dioxide emissions growth, the conversion sector is likely to continue to grow.

Analysis

Lacking the oil and gas reserves of countries like the U.S. and Russia, China is attempting to make the best of a bad situation by converting its vast coal reserves into synthetic oil and gas. As the world’s largest coal-producing country, it’s prudent for China to find cost-effective ways to utilize this production advantage to move away from oil and natural gas imports for economic and national security reasons, especially since it relies on choke points such as the Malacca Strait, through which it receives about 80% of its oil imports.

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