Royal Dutch/Shell has signed an agreement with China’s largest coal producer to study coal liquefaction, as the Chinese Government scrambles for solutions to a growing energy crunch and sky-high crude oil prices.

The world’s third-largest oil group inked a pact Monday with Shenhua Group, which is planning an overseas IPO next year, and Ningxia Coal Industry Co., under which the trio would work to develop liquid fuel from coal, executives said Tuesday.

A Shenhua executive confirmed that agreement but would not comment further. A source familiar with the project said the government earmarked about 30 billion yuan (US$3.6 billion) of investment for every new coal-to-fuels plant.

China’s fast-growing economy is driving a rapid rise in energy consumption. The country, which mined 1.7 billion tons of coal last year, relies on coal for 70 percent of its energy needs, firing everything from power plants to home heaters.

“It is a pre-feasibility study. It’s the beginning of the process of looking at what the opportunities are,” said Nick Wood, Shell’s spokesman in Beijing. “It’s very early days.”

Shell could wind up providing technology if the project goes ahead after a nine-month feasibility study.

The main objective of coal liquefaction is to make synthetic oil to supplement natural sources of petroleum.

With crude oil at more than US$45 a barrel, China, the world’s top producer and consumer of coal, is intensifying efforts to exploit its hoard of the hard, dirty hydrocarbon — estimated by domestic media at some 1 trillion tons.

That would also help reduce a worrying dependence on imported oil from the Middle East. Crude oil imports leapt 40 percent in the first seven months this year to nearly 71 million tons, much of that from the volatile region.

But operating commercial coal-liquefaction plants is expensive, and the country is struggling with a dearth of capacity to transport heavy materials around the country.

Still, China planned to invest about US$15 billion in several new projects, Xinhua reported in August.

Chinese and South African officials had begun a feasibility study for two coal liquefaction bases in the northern province of Shaanxi and the region of Ningxia, Xinhua had quoted Commerce Ministry sources in August as saying.

Costing US$6 billion, those projects would use technology from South African synthetic fuels firm Sasol to produce about six million tons of fuel a year, Xinhua said.

Shenhua also planned to spend 60 billion yuan on a coal-liquefaction plant in the northern region of Inner Mongolia, Xinhua reported earlier.

It is planning to double output capacity to 200 million tons by 2010 as it pursues a US$1.5 billion overseas listing.

It plans to put its first liquefaction train in operation in 2007 with an initial annual capacity of one million tons of oils and chemicals, rising to 10 million tons yearly by 2010.

State-owned Shenhua was set up in 1995. It runs the Shefu Dongsheng coalfield in Inner Mongolia and Shaanxi Province — one of the world’s largest fields.

(Shenzhen Daily November 18, 2004)