China's largest coal company, Shenhua Group, will produce the country's first barrel of oil converted from coal in September, a senior official of the company said yesterday, a newspaper reported yesterday.

The project will cost more than 10 billion yuan (US$1.39 billion), China Business National Daily said, citing Xue Jilian, deputy director of the company.

The first production line in its Ordos Coal Liquefaction Base in north China's Inner Mongolia Autonomous Region can produce more than one million tons of oil every year.

The base will have an annual production capacity of more than three million tons after completion in 2010, the report added.

About four tons of coal can produce one ton of oil. The cost of a barrel of oil converted from coal is only about US$23, much cheaper than the international oil price, a previous CBN report said.

Oil prices jumped to an inflation-adjusted record of US$103.95.

The company embarked on an ambitious coal liquefaction project, the world's first, in Ordos in Inner Mongolia as a key state project in August 2004.

A coal-to-oil project with a one-million-ton annual capacity will require 10 million tons of water, the CBN report said.

The central government issued a rule in 2006, banning all coal-to-oil projects with an annual capacity of less than three million tons to avoid overcapacity and the waste of water.

Oil imports have risen recently spurring the nation to look for technologies that can turn some of its coal reserves into fuel and other chemicals, a previous Xinhua report said.

(Shanghai Daily March 5, 2008)