The world's top coal producer Shenhua Group Corp Ltd said on Tuesday it planned coal-to-liquids capacity of 30 million tonnes per year by 2020, which would comprise more than half of China's projected total.

Yuzhuo Zhang, vice president and chairman of China Shenhua Coal Liquefaction Corp Ltd, said coal-to-liquid projects would help the country overcome its bottleneck in oil supply and ease constraints on transporting huge volumes of coal across China.

Shenhua has been developing a technology to directly convert coal into liquid fuels, known as direct coal liquefaction, which requires less energy and water than indirect liquefaction -- a more common technology used by South Africa's Sasol .

Zhang told a Coaltrans conference that Shenhua would complete a one million tonnes per year demonstration plant using direct coal liquefaction in the northeastern province of Inner Mongolia this year, and that it would be comissioned next year.

The company, parent of Hong Kong-listed Shenhua Energy Co. Ltd , plans to raise its capacity to 5 million tonnes later, though no date was set for reaching this target yet.

Fuelled by high international oil prices, industry officials at the conference said more than 80 coal-to-liquids plants are planned in China, with about a third already in construction.  

China, the world's top producer and consumer of coal, is encouraging such projects to convert domestic coal into liquid fuels such as gasoline, diesel or jet fuel, in an attempt to curb its dependence on imported oil.

Although coal-to-liquids projects meet China's energy security goals, they may increasingly clash with a push for greener growth, because of high water consumption and greenhouse gas emissions.

Zhang said the direct method would consume 8 tonnes of water to produce 1 tonne of oil products, compared with 12-14 tonnes with indirect technology.

Shenhua is currently working on three other coal-to-liquid projects -- two with Sasol and one with Royal Dutch Shell , both regarded as leaders in the technology of liquefaction.

Their total planned capacity was 12 million tonnes per year, with two located in Ningxia and one in Shaanxi, Zhang said. It was not immediately clear where Shenhua planned to build other plants to reach its target.

Last July, Beijing said it would ban small scale projects converting coal to liquids as excessive development of the fossil fuel pollutes the environment and strains water supply.

Asked about investment risk for coal to liquids projects, which require large fixed asset investment, Zhang said Beijing had promised support, without clarifying whether it would come in the form of subsidies, price guarantees or favourable taxes.

He said liquefaction required a unit investment of 8,000-13,000 yuan per tonne of product, which was 7-10 times as large as for oil refining.

Zhang said Beijing was also looking into reducing value-added tax (VAT) for the industry as it was currently taxed 7 times as much as normal oil refining projects, comprising more than 20 percent of production costs.