Towering above the sweeping grasslands of Erdos, in north China's Inner Mongolia Autonomous Region, two 60-meter-high cylindrical structures stand out againstthe skyline.

The structures -- reactors for liquefying coal -- are part of aproject to mass produce desperately needed fuel oils from China's rich coal resources.

More than 10,000 workers from across China are constructing themassive project, the first industrial facility in Ejin Horo Banner.

"The project is in its final stage of construction and will start production late in the year," said Wang Yulong, deputy manager in charge of the coal liquefying arm of the Liquefied CoalOil Company of Shenhua Group Corporation Limited, the country's top coal producer.

Coal liquefaction is a process that converts coal from a solid state into liquid fuels, usually to provide substitutes for petroleum products. Coal liquefaction processes were first developed in the early years of the 20th century but progress was hindered by the relatively low price andwide availability of crude oil and natural gas.

The facility in Erdos will produce mostly diesel oil, plus liquefied petroleum gas (LPG), naphtha (a volatile, flammable liquid hydrocarbon mixture), and hydroxybenzene.

On completion, it will be the largest facility in the world producing liquids from coal using a technology known as direct gasification.

"Unlike South Africa's Sasol which produces transport fuel fromcoal in several stages, our project in Erdos will produce liquids from coal directly," said Wang, who remained tight-lipped about the technology his company is using.

Indirect liquefaction, the technology used by Sasol, calls for gasification of the coal in the first place, purification of the gaseous raw material before reaction takes place, and a series of adjustments to the proportion of hydrogen and oxygen monoxide before liquids can be produced.

Listed as a key state projectto 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 inJune 2006, Chinese Premier Wen Jiabao called the project a major scientific and technological experiment.

With a budget of 12.3 billion yuan and an annual production capacity of five million tons of oil, the project will be completed in two stages. In the first phase, three production lines will be installed.

"We're installing the first production line and its infrastructure," said Wang. "On completion, the line will be able to process annually 3.45 million tons of coal into 1.08 million tons of oil, including 720,000 tons of dieseloil."

Before starting the project, Shenhua successfully trialled technology ata specially built converter in Shanghai, according to Wang.

"The project in Erdos is about 1,000 times the size of the Shanghai model," said Wang, claiming it would be both environmentally friendly and lucrative.

Preliminary estimates show 3.4 to 3.5 tons of coal could produce a ton of oil, and if the price of a barrel of crude remains above 35 U.S. dollars, the facility will be profitable, said Wang.

The coal liquefaction project is big on recycling. Workers have constructed two 100,000-kw power plants for generating electricity from burning grease stain, and a sewage treatment plant that will go into servicein October.

Industry observers say the Erdos project is significant to China'sfood and energy security.

"The efficiency of conventional coal use is very low, but the profits from coal-oils can be much higher," said an expert surnamed Wu. "This takes away the need to process grain such as maize into ethanol."

Shenhua Group Corporation Limited is a 100 percent state owned venture that came into being in 1995. Its scope of business ranges from coal, power, heat, coal-liquefied oils, coal-based chemical industries and railways to ports.

It produced 203 million tons of coal last year and was the first enterprise whose coal output exceeded 200 million tons in China.

Coal accounts for more than 84 percent of China's energy reserves. Statistics provided by the Land and Resources Bureau of Inner Mongolia Autonomous Region show that proven coal reserves in the region exceed 500 billion tons, doublethat of Shanxi Province and elevating Inner Mongolia to the top rank in China in terms of coal reserves.

Many believe coal-to-liquid projects are the most practical way for China to achieve self reliance in oil supply.

In the meantime, constantly rising oil prices have prompted the coal-based chemical industry to flourish in a bid to find alternatives for petroleum in China, the world's fourth-largest economy.

Oil prices in the international market currently hover around 70 U.S. dollars a barrel.

To avoid a possible overheating in the coal-based chemical industries, however, China raised the threshold for projects converting coal to liquid fuel last year, for fear that excessive development of the fossil fuel will pollute the environment and strain water supply.

OnJuly 7, 2006, the National Development and Reform Commission(NDRC), China's industrial watchdog, issued a circular requiring local governments to tighten control of new coal liquefaction projects prior to the completion of the national development program for the coal liquefaction industry.

The government will not approve coal liquefaction projects with an annual production capacity under three million tons, said the commission circular.

(Xinhua News Agency June 22, 2007)