Beijing is trying to slow the push on water-intensive alternative energy on mounting signs that China might face a serious water shortage in the future. This may stymie the second-largest energy consumer's plans to turn its huge coal reserves and agricultural land into transport fuel, and lead it to continue relying on greater imports to fuel its booming economy, a bullish factor for global oil markets.

An official from the top policy-making body, the National Development and Reform Commission (NDRC), recently said China might halt coal-to-liquids (CTL) projects and stop ethanol production from corn. Industry officials later said there would be no changes in projects by state-owned companies building CLT demonstration plants, while authorised fuel ethanol plants would not be required to stop churning out fuel ethanol from corn.

 But analysts said the NDRC comment reflected a shift in Beijing's policy as droughts and pollution have led to hundreds of millions of people going without regular drinking water. "If there's any issue that can destroy China's march forward, it's water," said Michael Komesaroff, managing director of Urandaline Investments. "All the other issues, like social unrest, would feed into it. They want to manage the industries, particularly those that are polluting and consume large quantities of water," added Komesaroff, who specialises in China's capital-intensive industries.

 Many private Chinese CTL and ethanol projects have sprouted in the past few years, helped by crude oil prices that have more than tripled in a five-year rally, in a rush to make domestic fuels such as such as diesel, naphtha or liquefied petroleum gas. China's crude imports reached record levels in April and it now relies on foreign barrels for about half its oil.

ABUNDANT COAL, SCARCE WATER

China, home to the world's third-largest known coal reserves, has taken a global lead in pushing new CTL projects, with state-owned Shenhua Group Corp. Ltd saying in April it would have an annual CTL capacity of as much as 30 million tonnes by 2020. But some government officials are now questioning the drive, especially as it emerged the Shenhua's CTL plant in Inner Mongolia was costing more than 50 billion yuan (US$6.68 billion) -- a lot more than initially expected, analysts said.

 There are worries the plant, which uses direct coal liquefaction (DCL) technology developed by Shenhua, would need even more water than more mature indirect coal liquefaction (ICL) technology used by South Africa's Sasol.  James Brock, a Beijing-based energy consultant, said policy makers had told Shenhua not to expand the 1 million tonnes per year (tpy) Inner Mongolia plant to 5 million tpy before it proved the technology, including the amount of water it required.

Referring to Shenhua's claim that DCL needed less water than IDL, Brock said: "That's been challenged."  Analysts said the water problem was compounded by China's CTL projects being in the arid northwest of the country, such as Shaanxi and Ningxia provinces, which have abundant coal but little water. Shenhua has said its DCL facility, the first such plant in the world, would need 1 tonne of water for producing 1 tonne of oil products, though Komesaroff calculated CTL had a much larger net water consumption after recycling of between 7-10 tonnes. "Shenhua... will draw its annual requirement of 10 million tonnes of water from the Yellow River," he said. "Water levels in the upper reaches of the Yellow River have hit a historic low and officials have warned that China may run out of water by 2030."

FARMER COMPETITION

The Yellow River, China's second longest, supplies water to over 150 million people and irrigates 15 percent of the country's farmland. But in recent years, it has occasionally run dry before reaching the sea. China's increasing wealth and growing population means it faces an uphill task in managing its already scarce water. The country is home to one-fifth of the world's population but has only 7 percent of its water resources. This could also put a dampener on plans to boost production of farm-grown biofuels such as ethanol for blending with gasoline. China exports gasoline but a new car is sold every six seconds and demand is expected to grow near 7 percent this year.

An analysis by a number of experts, including Tadeusz Patzek from University of California at Berkeley, calculated each gallon of ethanol required 8.310 gallons (37.8 litres) of water for growing corn and another 30-37 gallons for conversion to fuel.  Four plants linked to China Agri-Industries Holdings Ltd. -- a unit of state-owned grain trader COFCO -- will not stop churning out fuel ethanol.  But industry officials in China said Beijing was already downgrading its target for annual fuel ethanol output to 3 million tonnes by 2010, compared with 5 million tonnes earlier. "Right now agricultural water is free or very cheap. What the government is saying is that if they are using corn for fuel, they are not going to get the water free," said Brock.

(By Nao Nakanishi, Planet Ark, 19/06/2007)