China's largest coal company Shenhua Group will produce China's first barrel of liquid fuel from coal in 2008 using self-owned technology known as direct coal liquefaction.

We have finished 95 percent of the engineering projects at the first production line in Erdos of north China's Inner Mongolia Autonomous Region. The line will start making liquid products next year in trial operation," said Zhang Yuzhuo, who is in charge of Shenhua's coal liquefaction business, at the ongoing China International Coal and Energy New Industry Expo 2007.

Zhang said the first production line would use 3.45 million tons of coal every year to make 1.08 million tons of liquid products including diesel oil, plus liquefied petroleum gas (LPG) and naphtha, a volatile, flammable liquid hydrocarbon mixture.

Oil imports have been increased in recent years to fuel China's booming economy, spurring the nation to look for technologies that can turn some of its coal reserves, one of the world's largest, into fuel and other chemicals.

The indirect liquefaction technology was first developed more than 70 years ago. It has been commercialized by South Africa's Sasol Ltd, the world's biggest producer of motor fuel from coal. The direct liquefaction technology, however, is yet to be industrialized.

On the basis of imported technologies, Shenhua has optimized the production flow, built larger facilities and developed new generation activators to create its own technologies, said Zhang.

"There are no impassable obstacles in developing technologies for converting coal into oil, but the effect of such technologies should be tested with small trial operations because they cost much money and call for sound risk-control abilities," he said.

Listed as a key state project to help deal with China's petroleum security concerns, the massive Erdos coal liquefaction facility began construction in August 2004 with the blessings of China's top leaders.

During an inspection tour in June 2006, Chinese Premier Wen Jiabao described the project as a major scientific and technological experiment. With a budget of 12.3 billion yuan and an annual production capacity of 5 million tons of oil, the project will be completed in two stages. In the first phase, three production lines will be installed.

Chen Liming, executive vice president of Sasol China, congratulated Shenhua on its latest improvement. He also said the direct and indirect liquefaction technologies should not be simply compared as they have different evolution paths.

"Our coal-to-liquids technology (CTL) is commercially proven, "said Chen, whose company planned to develop two CTL plants in cooperation with Shenhua Ningxia Coal Group and Shenhua Coal Group using Sasol's Fischer-Tropsch technology, each with a capacity of about 3 million tons of products per year.

The company and its Chinese counterparts are carrying out feasibility studies, said Chen.

Royal Dutch Shell Plc, Europe's second-biggest oil company, and Shenhua Ningxia Coal Group have also agreed to study the feasibility of a plant in China with a daily capacity of 70,000 barrels of products.

In fact, many Chinese coal companies are keen to develop plants to make liquid products. But the Chinese government raised the threshold for projects converting coal to liquid fuel last year, for fear that excessive development of the fossil fuel would pollute the environment and strain water supply.

Chen said he was optimistic about the prospects of the CTL application in China because the International Energy Agency had predicted liquefied products would take up 29 percent of the 10-million-barrel daily capacity of all non-petroleum alternative energies by 2030.

"And for such a country rich in coal resources as China, the CTL industry would be encouraged by the government,"said Chen.

Experts estimated that by 2020, coupled with an annual capacity of 20 million tons of bio-oil, China's coal industry would be able to produce 50 million tons of oil products every year to help reduce the nation's oil import rate from current 60 percent to 45 percent.