Shenhua Group Corporation Limited, one of China's largest coal producers, launched the coal liquefaction project in 2004 in Erdos, a city in the Inner Mongolia Autonomous Region.

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"The project transforms coal into refined oil. When the second phase is completed in 2010, the plant will produce 6 million tons of oil products each year and help reduce China's reliance on crude oil imports," said Wang Pinggang, vice president of Shenhua Group.

According to Wang, Shenhua will invest 24.5 billion yuan (3.2 billion U.S. dollars) to build three production lines in the first phase of the project.

The first line, currently under construction, will enter trial production at the end of the year and be able to convert 3.45 million tons of coal into around one million tons of oil products.

When the other two production lines come onstream in 2009, the plant will be able to produce 3.2 million tons of oil products.

"More than 60 percent of the equipment we are using is domestically-made and we also own the intellectual property rights for the manufacturing technology," said Wang.

The coal liquefaction technique has drawn increasing attention in recent years as international oil prices have shot up.

"The Shenhua project is of great importance to China, the world's fourth largest economy, both in terms of energy safety and economic development," said Li Kejian, head of the coal liquefaction technology research center of the Beijing Research Institute of Coal Chemistry.

Statistics from the National Development and Reform Commission show that oil consumption increased 9.3 percent in China in 2006 to top 346 million tons, with net imports growing 19.6 percent to 163 million tons.

According to the Ministry of Land and Resources, China's coal reserves are around one trillion tons.