BEIJING, May 26 -- Turning China's abundant coal reserves into oil to help close a widening supply gap might once have seemed little more than a dream, but synthetic fuels may soon be a key part of the country's energy mix.

    Optimists say China could be making up to 1.2 million barrels per day (bpd) of liquid fuel from coal in 10 years, equivalent to more than a sixth of current demand, as high prices and a growing import reliance renew interest in the process.

    Pessimists say uncertainty over the price of oil and that of coal, which has also surged, will impede development.

    Output is now little more than a dribble, but with crude prices as much as double the cost of producing oil from coal, the industry is gaining traction.

    At least eight projects are now either under construction or expected to get government approval, says Beijing-based CERA analyst James Brock.

    Not all of them are designed to promote conventional fuel replacements. Their diverse output includes petrochemical feedstock and dimethyl ether, touted as a potential alternative to diesel. But they will all sap demand for oil.

    ¡°I see them substituting for 20 to 60 million tons (in a decade),¡± said Brock.

    Liquefaction ¡ª in which coal is crushed and heated to produce gas, then concentrated into liquid fuel ¡ª was once seen as an expensive fallback.

    But crude oil prices, which rallied to more than US$58 last month and are seen averaging above US$40 through to next year, have spurred new interest from businesses.

    It is among a host of oil alternatives ¡ª such as ethanol and gas-to-liquids projects ¡ª that have been given new life by oil's two-year boom that has doubled crude prices.

    The Chinese Government is prepared to stump up cash as it worries over reliance on oil from potentially unstable regions ¡ª last year, China imported more than 40 percent of its needs ¡ª and the prospect of a global race for resources.

    Li Yongwang of Synfuels China, part of the Institute of Coal Chemistry, sees viably priced output reaching 10 million to 30 million tons a year within a decade.

    Li's institute, kept afloat by government funds during the 1990s when cheap oil dimmed interest in liquefaction, now gets about 60 percent of its funding from industry.

    ¡°With coal at about US$10 a ton, we are very confident we can get oil cost at about US$25 per barrel,¡¯¡¯ he said.

    Crude prices have averaged over US$50 a barrel this year compared with under US$20 a barrel from South Africa's Sasol, which produces around 160,000 bpd of coal-based liquids.

    Although foreign players are moving into China, domestic investment is the main driver, with local governments, businesspeople and even coal mining firms interested in projects. Coal already provides up to 70 percent of China's energy needs, mostly for the power sector and steel industry.

    (Source: China Daily)