Monash Energy's method of coal liquefaction, known as the Fischer-Tropsch indirect coal liquefaction process, first gasifies brown coal and converts resulting syngas into fuels and petrochemicals.

ESI chairman Murray D'Almeida said the announcement gave the strongest possible signal from the State Government that it was now closely examining the full economic potential of Victoria's most abundant mineral resource – beyond burning it for electricity generation.

"ESI is taking a strong interest in the development of a Victorian coal-to-oil industry as our company offers a highly cost-efficient process for dewatering brown coal for liquefaction," D'Almeida said.

The company's Bacchus Marsh pilot plant in the Gippsland Basin uses the Coldry Process – a dewatering technology creating high-energy, clean-burning pellets from lignite (brown coal).

D'Almeida said the dewatered brown coal pellets formed from ESI's process provided a high quality feedstock for coal-to-oil technologies, eliminating the need for coal slurrying and other costly front-end processes.

"With the present lack of stability in the Middle East, dwindling oil resources, higher prices and the supply and demand pressures coming from the emergence of China and India as global economic players, we expect national and international interest in oil derived from brown coal to rise significantly in the next few years," he said.

The coal-to-oil technology using brown coal is a highly attractive economic proposition given the current high cost of crude oil.

ESI's brown coal dewatering technology has attracted substantial interest from global resource companies since April this year, according to the company.

The company is now focusing on a new method of coal liquefaction called direct hydrogenation.

Direct hydrogenation, developed by NEDOL Japan, breaks brown coal down into small component molecules that can be refined into high demand liquid fuel products such as petrol and aviation fuel.

ESI said studies had shown that the "direct" method achieved a significantly higher oil yield per tonne of brown coal in a simpler way and at a lower cost than other processes, with fewer environmental impacts.