China's biggest coal company, the Shenhua Group, will start production at its first coal-to-liquid project at the end of next year, a scheme that will supply 1 million tons of oil products a year to North China.

The project will be the country's first facility producing oil from coal and has great market potential in China, which relies on coal for about 70 per cent of its energy needs and aims to cut the import of high-priced oil.

"Seventy-five per cent of our factory facilities will be completed by the end of this year," Zhang Yuzhuo, vice-president of Shenhua, told China Daily yesterday. Currently, 35 per cent of the factory has been built.

The project, located in the north-western Ordos Basin that has rich coal reserves, will use Shenhua's cutting-edge technology to produce refined oil products, such as gasoline and diesel, from coal taken from Shenfu Dongshen mine, Zhang said.

Shenhua, which had spent about 300 million yuan (US$37 million) into the research and development of its coal liquefaction technology since 1997, began building facilities in August 2004, Zhang said.

The technology, of which Shenhua owns full intellectual property rights, will directly convert coal into oil products, without producing crude oil as the intermediate material.

Of the 1 million tons of oil products coming from the new plant, in the Inner Mongolian Autonomous Region, 70 per cent will be diesel. Other products include gasoline, naphtha and LPG (liquefied petroleum gas), the Shenhua vice-president said.

"We will sell our products to neighbouring areas in North China," Zhang said, adding that Shenhua will work with the country's big oil companies, like Sinopec and PetroChina, to sell the products.

The economic prospects are impressive, Zhang said. "We will have good business returns if the crude oil price stays above US$30 a barrel."

The price of crude oil for April delivery hit US$60.80 a barrel on the New York Mercantile Exchange on Wednesday.

Even if the government continues to cap the prices of oil products in China, which leaves many of the country's oil refineries just profitable as crude prices soar, the Shenhua coal-to-liquid project will bring satisfactory returns, Zhang said.

The wholesale price of diesel is now more than 3,000 yuan (US$370) a ton.

The nation's top economic policy organisation, the National Development and Reform Commission, earlier said it was working to improve the current oil pricing mechanism by introducing a closer link between domestic and world prices.

That means the price of domestic oil, which is now more than 1,000 yuan (US$123) a ton lower than the global level, will be raised further, industry analysts said.

Shenhua last week signed a memorandum of understanding with the world's third-biggest listed oil company by market value, Royal Dutch Shell, to develop another coal liquefaction project in Northwest China's Ningxia Hui Autonomous Region.

Zhang yesterday said its Ningxia project is still at the preliminary stages and will not start production for four to five years.

Source: China Daily