BUSINESS:

Gas technology deals emerge from aggressive pursuit of partners in China

A gasification process developed decades ago by the Gas Technology Institute near Chicago is helping China solve an industrial riddle: How does it convert the nation's low-quality coal and ash into a useful energy source?

Earlier this month, west of Shanghai in the central plains of the Henan province, a $250 million plant started producing methanol from coal. Houston-based Synthesis Energy Systems Inc. (SES), which developed a gasification technology based on the Gas Technology Institute's original research, partnered with China's Yima Coal Industry Group Co. Ltd. to build the coal-to-methanol plant.

As U.S.-China energy industry deals go, the SES-Yima agreement seems clear-cut. The Houston entrepreneurs hold a 25 percent stake in the project, and their Chinese partners control the rest.

If all goes well, one possible outcome is the wider use of advanced U.S. coal gasification technology in China, a goal that General Electric Co. covets at a larger scale in the power sector.

The SES-Yima partnership cut through a nagging issue weighing on U.S.-China dialogues about how to bring energy technology to bear at China's industrial plants and in its oil and gas fields. Concern about the theft of patented technology is an elephant in the room when business deals are negotiated, and it is an issue that the Obama administration has tried to address with limited success.

"Those pressures exist," SES CEO Robert Rigdon said, referring to patent protections. "But there are ways I've learned to deal with that. When you partner in China and put a Chinese face on your business, the pressure to copy technology is significantly minimized."

Rigdon, who had been a coal gasification engineer for GE earlier in his career, said he tried to put the coal-to-methanol project ahead of legal and commercial differences that can shackle negotiations among U.S. and Chinese companies. He said a nonstop Houston-to-Shanghai travel schedule that kept him in constant dialogue with project managers and ongoing talks with potential Chinese partners have kept the business on track.

For Rigdon, completing the Yima joint venture meant going it alone. He didn't enlist his company in the assortment of government-led dialogues under the Obama administration that revolve around developing joint U.S.-China energy projects and prying open markets for U.S. companies.

President Obama and China's president, Hu Jintao, in 2009 created the U.S.-China Clean Energy Research Center, an umbrella for developing joint technology projects targeting greenhouse gas emissions. The clean coal, advanced battery and energy efficiency projects were slow to get off the ground in the first two years as officials negotiated a deal on intellectual property protections.

The collapse of the U.S. financial sector in 2008 and 2009 dampened the appetite of banks and venture capitalist firms that might have supported the deployment of high-risk, high-reward energy technology in the United States.

Out of that, SES and other small energy technology firms emerged, opening offices in Shanghai or Beijing.

A 'right partner' in China

Multinational energy companies are also pushing the envelope in their pursuit of business in China.

China's economy is slowing, and the attitudes and policies of China's new leadership are unclear. But the next five-year plan, rolled out by Beijing last year, emphasizes energy diversity. Natural gas will take a larger share of the energy pie, and costly projects to expand China's conversion of coal into diesel or gasoline still appear to be on the drawing board.

Honeywell International Inc., the industrial conglomerate, is investing more resources into selling gas processing technology to China and other countries in Asia. Oil and gas field service companies Halliburton Co. and Schlumberger Ltd. also have strengthening partnerships in China's oil and gas fields. Their hope is to help China crack the geological codes in its unconventional natural gas fields and, in doing so, to cement long-term commercial relationships.

China Petroleum and Chemical Corp., or Sinopec, cut a deal with ConocoPhillips in December to jointly explore for shale gas in central China. Last fall, Schlumberger signed a joint venture with China's Anton Oilfield Services to participate in the development of onshore fields.

China is grappling with how to divvy up its shale gas reserves among dozens of potential drillers, including Western energy giants. China opened the bidding process to private domestic companies for the first time in its second auction for exploration blocks last fall. The top state-owned producers dominated the first round. It was also the first time China allowed foreign companies to participate in the bidding through a minority stake in a Chinese company. Most Western multinational oil and gas companies remained on the sidelines.

"There's a perception of China that they don't want to pay for anything," said Trevor Smith, unconventional gas program manager at the Gas Technology Institute. "That has to be weighed against the sheer scale of the market in China. Companies have to be smart. They have to find the right partner."

Oil and gas technology is becoming a bigger market, he noted. "For the past 30 years, it was all about economic production of natural gas," Smith said, adding that there is a growing component of technology around the sustainable development of natural gas.

The hurdles to tying up partnerships in China are significant for U.S.-based oil and gas companies. But gas experts say the challenges in China are as much about adapting advanced drilling technology to tougher geological environments than in U.S. shale formations.

"There are a lot of logistical challenges," said Guy Lewis, global marketing strategist for gas processing at Honeywell UOP. Before joining Honeywell, Lewis had been a managing director at the Gas Technology Institute, where he had been an expert on unconventional energy development in China.

"The technologies are not necessarily yielding production rates from the shale," Lewis said. "Just like they needed to be adapted here in the United States, adaptation will be required in China, as well."

Lewis said companies are hot in pursuit of technology that cuts the cost of processing natural gas so it can be shipped safely and used by industrial plants to make plastics and chemicals. Gas producers struggling to make money on the gas itself are shifting production to areas richer in gas liquids. Ethane, for example, can be separated from oil and gas through processing and sold to chemical makers at a higher price.

In October, Honeywell agreed to purchase a $525 million majority stake in Thomas Russell Co., an equipment provider for natural gas processing. The purchase expands Honeywell's window into the gas liquids market.