The Chinese coal major posted a profit of $US125 million in the first six months from its CTL project in Inner Mongolia, producing 470,000 tonnes of oil products from coal.

The Erdos project in Inner Mongolia is the first commercial CTL plant, with a production capacity of 1.08 million tonnes. Though the timeline of expansion is unknown, the plant is expected to be upgraded to a 3Mt per annum facility and ultimately to 5Mtpa.

Shenhua is also expected to move ahead with the construction, due to start later this year, of a 52 billion yuan ($A7.9 billion) 3Mt CTL project in the Xinjiang autonomous area. The group aims to increase its coal output in the region to 70Mt from the current 20Mt by 2015, with an overall investment of 110 billion yuan ($A16.3 billion).

The Shenhua expansion marks a resurgence in interest in CTL projects in China and comes even as South African CTL pioneer Sasol suspended its planned 50:50 joint venture project with Shenhua in the Ningxia province.

That project was planned to produce 3.16Mt of diesel and over 650,000t of naphtha per year. And though Sasol pulled out, citing regulatory approval delays, and is reallocating capital towards a gas-to-liquids project in the US, it is likely to continue to invest in other CTL projects in China.

At the height of the CTL investment boom in 2006, China was the market leader with over 27 projects either under construction or planned, for a total output of over 30Mtpa. In addition, it also had 30 coal to methanol and other chemical projects in the pipeline.

But after an initial flurry of activity in the CTL space, Chinese interest in developing projects became lacklustre as the National Development and Reform Commission blocked approval of any new CTL projects in 2008, citing environmental concerns and use of scarce water resources. Industry experts estimate that CTL projects use more than 19 litres of water to produce one barrel of oil equivalent.

While the NDRC cited environmental reasons for placing a moratorium on future projects, the GFC and plummeting oil prices also contributed to declining interest in the technology.

According to analysis by Noether Associates, CTL technology is economic only in a high oil price environment of more than $US50 a barrel. Noether estimates that as oil prices increase, worldwide CTL production is also expected to increase from 150,000 barrels per day in 2007 to 600,000 in 2020 and 1.8 Mbpd in 2030.

And even though coal liquefaction is seen as an alternative to high oil prices, it comes with high environmental costs. Industry experts say that one of the key constraints to making CTL more widely commercial is the CO2 emissions. While many projects use carbon capture and storage technology, it is prohibitively expensive, rendering future commercial scale CTL projects practically unviable.

CTL is also hampered by technology. Direct liquefaction, used at Shenua's Erdos project, involves dissolving coal in a solvent at high temperature and pressure. And while the process is efficient, it produces low grade fuel that requires further refining.

Instead, more companies are now focused on indirect liquefaction, which converts coal to synthetic gas, which is then condensed using the Fischer-Tropsch process to produce clean fuel.

Already small-scale demonstration projects are underway in China to improve upon both direct and indirect coal liquefaction technologies. Last month, US-based Syntroleum started an 80bpd CTL demonstration plant in collaboration with China's Sinopec. A large-scale commercial plant is expected to be built once the pilot plant is successful.

Accerlergy of US is also using a proprietary micro-catalytic coal liquefaction process to refine direct liquefaction technology, with a demonstration plant at the Beijing Research Institute of Coal Chemistry.

With the many technological innovations underway, CTL projects could be mainstreamed in just a few years.