Coal liquefaction is a process whereby China can transform something it has plenty of - coal - into something it lacks - oil.

Though unproven on a large-scale commercial basis, transforming coal into oil through liquefaction has been technically feasible for decades.

Nazi Germany and apartheid-era South Africa, both of which were rich in coal, experimented with the technology when war and embargoes limited the availability of petroleum.

As international crude prices hover near a 10-year high, China is desperate to escape the energy squeeze brought about by its rapid development in the past 20 years.

US crude oil for November delivery yesterday fell as much as 72 US cents, or 2 per cent, to US$34.52 a barrel.

Output from the mainland's own sizeable, but remote, oil reserves has failed to keep pace with rising domestic demand. The country has been a net importer of oil since 1993, with imports growing larger each year. It is estimated that China will import 70 million tons of oil this year, rising to 100 million tons by 2010.

The two coal-liquefaction projects - in Yunnan and Shaanxi provinces and requiring a total investment of about 20 billion yuan (US$240million) - will do little to transform the country's ugly energy equation.

It is estimated that the projects will produce two million tons of oil a year, which will not make much of a dent in China's growing oil deficit. But they could provide a model that, if commercially successful and subsequently copied on a larger scale throughout the country, might eventually make a difference.

Xinhua, which reported the news of the projects, said China economic conditions were perfectly suited for coal liquefaction, which the China Coal Scientific Research Institute began to investigate in the early-1980s.

With annual coal production being more than one billion tons, and proven reserves totalling one trillion tons, coal in China is cheap. In Yunnan, coal costs only 80 yuan a ton.

The Yunnan Xianfeng Coal Mine, which is hosting one of the two liquefaction plants, estimates that with coal prices so low, it will be able to produce one ton of oil for just 1,500 yuan. At present, one ton of imported oil, including duty, costs 1,900 yuan in the mainland.

The mine also estimates that, given the existing price of oil, it can earn back the liquefaction plant's 10.4 billion yuan investment in six years.

Six years, however, is a long time. And though it is easily forgotten in the present environment, not-so-distant experience has taught that oil prices can go down as well as up.

(eastday.com 09/23/2000)