Infrastructure construction of the US$3.3 billion coal liquefaction project in North China's Inner Mongolia is almost complete, laying the foundation for commercial production in 2005.

The project, which processes coal to produce oil, plans to commence operation of its first production line by 2005 to produce 1 million tons of gasoline and diesel fuel a year.

By 2008, it is expected to process 15 million tons of coal to produce 5 million tons with four more production lines in operation.

Although the production cost is relatively higher than that of normal gasoline and diesel fuel, experts said the project is strategically important for China to take the advantage of its rich coal resources, and, at the same time, reduce its heavy reliance on imports.

The clean fuel technology will also help reduce air pollution from burning coal directly.

Under the so-called coal liquefaction process, coal is broken down into small molecules with hydrogen to form oil molecules that are then refined into diesel, gasoline and other petroleum products. Sulfur, nitrogen, ash and other impurities are removed from the liquid fuel in the process.

Shenhua Group Corp Ltd, China's largest coal company, is building the project - located about 130 kilometres south of Baotou in Inner Mongolia - with technology from US-based Headwaiters Inc.

Shenhua is planning the second phase, which is expected to raise production to 10 million tons with a total investment of 60 billion yuan (US$7.2 billion).

The company said it plans to build three more coal liquefaction plants in the Shengdong coal field, which spans Shaanxi Province and Inner Mongolia.

Shenhua produces about 60 million tons of coal per year; and has reserves of more than 220 billion tons.

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