By Chen Aizhu and Wan Xu
BEIJING, Oct 8 (Reuters) - China is spending $14 billion onpilot projects to turn coal in remote parts of the country intonatural gas, a risky bet that could help meet the country'ssurging demand for the cleaner fuel.
As China triples natural gas use to around 10 percent oftotal energy demand by the end of the decade, it needs to findfresh sources of supply if it wants to avoid costly imports fromAustralia, Indonesia, Qatar and Turkmenistan.
The first of four pilot coal-to-gas (CTG) projects shouldship gas by the end of the year, ramping up to 15 billion cubicmetres (bcm) a year by 2015, or around 7 percent of China's gasdemand.
If achieved, this level of output would put CTG on par withChina's booming coal-seam gas sector and ahead of nascent shalegas. It could also give Beijing an advantage in marathon talkswith Russia to secure gas from the Siberian basin.
The costly experiment relies on technology similar to thatused in apartheid-era South Africa to produce oil from coal, butwhich has seen few commercial applications.
It is cheaper and easier to burn the coal directly, butChina, which overtook the United States as the world'snumber-one energy guzzler and greenhouse gas emitter, strugglesto move coal from remote western and northern regions to theeast and south, where the bulk of its energy is consumed.
"With the Russian gas negotiations proving no easier thanever, Central Asian gas not cheap, and some of the LNG importdeals needing tax sweeteners to break even, coal-to-gasdefinitely has room to grow," said Mao Jiaxiang, a seniorresearcher with Sinopec Group.
"Otherwise China will become highly dependent on gasimports, similar to oil."
Imports now meet a quarter of China's gas demand of some 120bcm last year, a share industry experts forecast to expand to 40percent by the end of the decade.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Chart of China's gas supply: Factbox of China's coal-to-gas: China's fledgling shale gas: Insight on China's coal bed methane: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> GOVERNMENT COOL ON APPROVING
Leading the CTG foray are a state-owned power firm and twoprivately-run, unlisted coal miners.
Datang Power, parent of Datang International PowerGeneration Co Ltd , in 2007 startedbringing in gasification know-how from Europe.
It started up the country's first CTG plant in July, a 1.33bcm/year facility in Inner Mongolia that will pump gas toBeijing, the 20-milion-population capital that has over theyears experienced gas shortages when heating demand peaks inwinter.
Over 30 firms proposed a total of about 125 bcm of CTGplants by 2020, but Beijing approved only four.
"The top guideline is we allow CTG investments only incoal-surplus regions and where water is also plentiful," saidZeng Yachuan, head of policy and regulation with the NationalEnergy Administration, the nation's top energy body.
For each 1,000 cubic metres of CTG gas, 5-6 tonnes of wateris needed.
Zeng said the northern provinces of Shanxi, Shaanxi andInner Mongolia, and Xinjiang in the far west, are potentialareas for CTG development.
ECONOMICS, PIPELINE ACCESS
China's surging gas demand and a liberalisation of gaspricing should mean the economics of CTG make sense, at leastbefore 2020 when China starts to unlock its potentially hugeshale gas resources.
A CTG plant, costing 4-6 billion yuan ($630-$950 million)for every bcm of gas capacity, can break even with a pipelinefeed-in price of $6.5 per million British thermal unit (mmbtu)in Xinjiang and under $8 for Inner Mongolia, according toindustry officials and Wood Mackenzie.
That compares with an average of $10-12 for importedliquefied natural gas (LNG) and close to $12 at China's borderfor Turkmenistan gas.
The challenge for investors is more about access topipelines, industry officials said, as three-quarters of China's50,000 kilometres of gas grid are owned by top energy giantPetroChina , which has shown scant interest inunconventional alternatives.
"Striking a good gas price (with PetroChina) is key for CTGbuilders," said an official with Datang Power.
SINOPEC WADES IN
That is where Sinopec Corp , China's number-twoenergy firm, could potentially make a difference.
Sinopec is proposing two giant pipelines, each able to carry30 bcm/year, from Xinjiang to the east and south of the country.The pipelines would span 12,000 kilometres, nearly a quarter ofChina's current total.
The firm in late 2011 agreed framework deals with half adozen companies - utility operators and coal miners with plansto build CTG in Xinjiang - to supply the pipelines.
The pipelines, if approved, would establish Sinopec as acompetitor to PetroChina in China's rapidly expanding gasmarket.
For now, three-quarters of China's gas production comes fromPetroChina. Sinopec makes up 15 percent, and number-three energyfirm CNOOC Ltd the remaining 10 percent.
"If Sinopec fails to grab a stake in China's surging gasmarket over the next five to ten years, it would be a story offailure for the company," said Sinopec researcher Mao.
(Editing by Michael Urquhart)
Keywords: CHINA COAL/GAS