BEIJING—It was first criticized by environmentalists. Then it was reined in by government officials. Now, China's coal-fueled synthetic natural gas industry faces another blow as a group of energy experts raise doubt over its economic viability.

In a meeting recently hosted in Beijing, researchers from Chinese and Western think tanks opened fire on a long list of business risks in China's synthetic natural gas industry, including reliance on immature technologies and their rising environmental costs and dim market prospects. If more projects are launched, the researchers asserted, it could put a dent in the nation's financial projections.

Coal-based synthetic natural gas—a product of converting coal to natural gas through a gasification process—barely existed in China until 2013. However, as the country's demand for cleaner fuels soared last year, in line with mounting pressure to clean up air, the development of Chinese coal-to-natural-gas projects accelerated.

According to a 2014 study from Greenpeace, China currently operates two coal-to-natural-gas demonstration projects, but there are 48 other plants under construction or in planning. Once completed by 2020, those plants will produce 225 billion cubic meters of coal-fueled synthetic natural gas annually.

That could provide a quick fix for China's smog-choked east, potentially replacing fuels from coal-fired power plants and petroleum-driven automobiles. But it could also create an environmental nightmare.

Greenpeace calculates that if all the Chinese coal-to-natural-gas plants currently in the pipeline are built as planned, they will emit more than 1 billion tons of carbon dioxide each year, equivalent to one-eighth of China's carbon emissions in 2011.

Besides that, producing natural gas from coal requires significant amounts of freshwater supplies. Four out of five coal-to-natural-gas plants are or will be located in Xinjiang, Inner Mongolia and other northwestern regions, which are among the country's driest lands.

Unexpected costs mushroom
In the meeting in Beijing, researchers also described economic reasons associated with China's synthetic natural gas projects.

Chen Dan, a senior analyst at the Beijing office of the Natural Resources Defense Council, compared the business proposals with the actual operation of existing Chinese coal-to-natural-gas projects.

She found that the real projects cost more time and money than projected and that the projects' earnings fell behind expectations.

One acute case that stood out is a project carried out by Datang International Power Generation Company Ltd. in Inner Mongolia.

It was China's first synthetic natural gas project, and the power producer poured billions of dollars and four years into the plant design, construction and testing. However, its progress is behind schedule due to technical obstacles and other problems.

Earlier this year, technical failures led to an explosion that killed two workers and injured four. In the wake of that tragedy, the company had to freeze its production for months, placing another financial burden on an already troubled operation.

And that only takes into account financial surprises caused by immature technologies. For most of China's synthetic natural gas plants that are planned in arid areas, Chen said, the costs will multiply, as the plant operator will have to pay for water-saving projects in exchange for water usage rights.

Then, if China puts a price on carbon emissions—which has already been the case in seven pilot regions—producing natural gas from coal will become still more costly.

Planned capacity outgrows demand
The growth pace of natural gas sales in China has already slowed down, partly because of rising gas prices. As Zhou Shuhui, deputy director at the Beijing-based PetroChina Planning & Engineering Institute, explained, Chinese factories that once replaced their coal-burning power units with natural gas ones are now reviving their interest in coal because it's cheaper.

Zhou predicted that this trend is likely to grow as China begins reforming its pricing mechanism, aiming to let sales prices for natural gas fluctuate with the market demand. For years, the country's gas prices have been fixed by the Chinese government to keep them low.

The increase in the gas prices would have an impact on China's planned natural gas market development. Although China's National Energy Administration set a gas consumption target of 400 billion cubic meters per year in 2020, Zhou said that only 350 billion will likely be realized.

Domestic gas fields and international sellers will supply the majority of that, Zhou said, adding that less than 10 percent, or 30 billion cubic meters, is expected to come from Chinese coal-to-natural-gas projects.

But the planned coal-to-natural-gas project capacity in China already goes beyond that scale. Greenpeace's study shows that in the period between August 2013 and February 2014 alone, Chinese developers signed deals with a total production capacity of 78 billion cubic meters—more than double the size Zhou thinks reasonable.

Bullish local views ignore dismal economics
In July, the Chinese central government issued a statement to require local authorities to tighten up land resources, bank loans and other support given to coal-to-natural-gas project developers, in hopes of cutting down the massive expansion underway. But some industry players doubt how effective this effort will be. They say that pro-development local authorities continue to push China's synthetic natural gas boom.

"When companies negotiate with local authorities to seek the right of mining coal, local authorities often require them to develop coal-to-chemicals projects in the region," said a researcher whose institute is affiliated with a state-owned coal producer that has experienced such requests.

Local authorities did that, according to the researcher, lured by the billions of dollars of investments they felt the project could bring in. As a result, companies are often left with little choice but to build coal-fueled synthetic natural gas plants, despite their dismal economic prospects.

The researcher asked to not be identified, as he is not authorized to discuss the matter publicly.

The strong motivation from local authorities toward coal-to-natural-gas projects was also mentioned by other energy experts in the meeting. To solve this, they called for tightening requirements for entering the sector and improving government supervision.

Reprinted from Climatewire with permission from Environment & Energy Publishing, LLC., 202-628-6500