Three energy and industrial companies--Shenhua Group, Shanghai Huayuan Group and Shanghai Electric Group--jointly invested more than 100 million yuan (US$12 million) in China's first coal liquefaction research center, according to an engineer with the China Coal Research Institute.

Shenhua, one of the nation's largest coal companies, has taken an 80 percent stake in the center. Local industrial companies Shanghai Huayuan and Shanghai Electric have taken 10 percent each.

The center mainly explores and develops direct and indirect coal liquefaction technologies, said the engineer. With this technology, coal is broken down into small molecules with hydrogen to form oil molecules that are then refined into diesel, gasoline and other petroleum products.

The center will also become a research headquarters providing technology support and engineer training for China's first coal liquefaction project in north China's Inner Mongolia Autonomous Region. Shenhua Group is the investor in the US$3.3 billion coal liquefaction project.

Because production costs are far higher than those for conventional oil products, commercial coal liquefaction projects have all but buckled elsewhere.

Still, the Chinese government wants to increase research as it faces a growing oil supply shortage. The government hopes the technology may be used for short-term supply supplements if oil imports slow or prices surge.

China is now the second-largest oil consumer in the world, after the United States. It is widely expected to import half of its oil by 2010.

Sources said the research center was originally to be built in Tianjin, in northern China. But Shanghai offered ready access to the necessary industrial gases.

Shenhua has almost completed construction of the Inner Mongolia coal liquefaction project's infrastructure, reports say.

Operations of its first production line are expected to commence by 2005 to produce 1 million tons of gasoline and diesel fuel a year.

It is expected to process 15 million tons of coal to produce 5 million tons of oil products, with four more production lines becoming operational by 2008.

Shenhua is planning the second phase of the project with a total investment of 60 billion yuan (US$7.3 billion).

Shenhua's project is the only coal liquefaction project that the government has approved for trial operation.

Plans for two similar coal-to-oil projects in southwest China's Yunnan Province and northeast China's Heilongjiang Province have been shelved until the government evaluates the performance of the Shenhua project.

(China Daily March 12, 2004)