China Pledges $24B For Coal-to-Oil Infrastructure To Reduce Oil Imports – Peabody Energy (NYSE:BTU), Alliance Res Partners (NASDAQ:ARLP)

The largest Chinese coal producer, CHN Energy Investment Group, has announced a $24 billion investment in a coal-to-petroleum facility in Hami, Xinjiang. The project, scheduled to begin production in 2027, aims to convert excess coal into petroleum products.

The plant should produce synthetic fuels like gasoline and diesel using cutting-edge liquefaction technology. According to Bloomberg’s report, this would reduce China’s reliance on imported oil and manage the surplus coal production.

China produced a record 4.7 billion tons of coal in 2023, while its coal consumption in electricity generation has begun to decline due to an increased focus on renewable energy.

President Xi Jinping has committed to reducing coal use starting in 2026, pushing coal producers to explore alternative uses, like petrochemical feedstocks. Such efforts continue the trend, which shows a 24% growth of coal-to-oil production from 2019 to 2023, reaching 11 million tons annually.

The Hami facility will employ both direct and indirect coal liquefaction technologies. Direct liquefaction converts coal into liquid hydrocarbons by applying heat, hydrogen, and catalysts. It is relatively simple but requires high-quality coal.

Indirect liquefaction, on the other hand, first gasifies coal into syngas, which is then transformed into liquid fuel, offering greater flexibility in the types of coal used. Both methods will be powered by renewable energy sources, such as wind and solar, which aligns with China’s green energy transition efforts.

Wang Lining, director of the oil market department of the Economics and Technology Research Institute, said that this project sets a precedent for large-scale application of such technologies, per China Daily.

Such projects could shield China from oil price volatility, as it is the world’s largest importer of crude oil. In 2023, its imports reached 11.3 million barrels per day, growing over 10% compared to 2022.

Still, the profitability of coal-to-oil conversions often depends on a wide gap between coal and oil prices. When oil prices fall or coal becomes more expensive, margins can shrink significantly.

China has been ramping up its coal-to-oil projects. From 2019 to 2023, coal-to-oil production capacity surged by 24%, reaching 11 million tons annually.

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