High oil prices, a deteriorating environment and heightened energy security concerns are pushing China to explore cleaner and more flexible ways to exploit its massive reserves of coal. China has 11.6 per cent of the world's proved coal reserves but only 1 per cent of its natural gas reserves and 2.1 per cent of oil reserves, according to BP figures. Just 11 years ago, China produced enough crude to meet its needs. Flagging production and explosive economic growth have transformed it into a key global importer. It now buys at least 40 per cent of its oil overseas. Most comes by sea from the Middle East, making China's energy security increasingly dependant on the US navy, which polices the Persian Gulf shipping lanes. Meanwhile, emissions from power plants, industries, vehicles and agricultural activities create a thick blanket of haze over much of the country. China's filthy air constitutes the core of Asia's 'brown cloud': a region-wide layer of suspended dust and acidified precipitation that is altering the climate and exacting an enormous, if unquantified, toll on agriculture and human health. China's leadership is eager to explore ways to turn coal into clean diesel, petrol, methane and other chemical feedstock. These include coal-bed methane (CBM), gas-to-liquid (GTL) and coal liquefaction - sometimes called coal-to-liquid (CTL) - technologies. But their adoption has been limited by high investment and operating costs. With oil trading at US$40 to US$50 a barrel, however, coal alternatives may prove newly viable - if oil prices remain high. CBM is essentially natural gas trapped in coal seams. China's known CBM reserves are estimated at 31.46 trillion cu metres, almost as large as the nation's conventional gas reserves. The central government aims to have annual CBM production capacity of 3.25 billion cu metres by next year, rising to 10 billion cu metres, or about 9 per cent of annual natural gas production, by 2010. But harvesting CBM entails significant energy costs. 'With traditional natural gas wells, while the drilling cost is expensive, once it's drilled you have 20 years of gas flowing by itself,' said Albert Kwong, president of consultant PetroAsian Energy. 'With CBM, although the initial drilling cost is low, you need to drill many more wells and deal with the underground water all the time.' He believes that GTL projects - the production of diesel, petrol and chemicals from coal gas - have a better commercial future in China. 'GTL technology is starting to mature after a breakthrough a few years ago,' he said. 'In Europe and the US, GTL projects are now profitable so long as oil prices are above US$20 a barrel.' China to date has no GTL projects. 'It's a pity that China has chosen to burn away its minuscule gas reserve by encouraging city gas projects,' Mr Kwong said. 'It would add more value if China could adopt GTL technologies to make clean fuel and petrochemicals that can be recycled.' A PetroChina official, however, was less effusive about the prospects for GTL. 'Further studies are necessary to prove its commercial viability, and the equipment investment is relatively large. Ultimately demand and price will determine when GTL technologies will be deployed.' While GTL and CBM face hurdles in China, CTL is enjoying inflows of investment, and political support in Beijing. CTL turns coal into light hydrocarbon fuels and petrochemicals. Shenhua Group, the nation's largest coal producer, began building a liquefaction plant in Inner Mongolia in August. The facility involves investment of 24.5 billion yuan and is expected to come on stream in July 2007. Shenhua and Ningxia Coal Industry each have separate agreements with energy giant Royal Dutch/Shell and South African fuel producer Sasol to conduct pre-feasibility studies for coal liquefaction plants in China. Donald Chen Dong, China business development manager at Shell Gas and Power, said China's abundant coal reserves and low production and plant construction costs made it attractive for large-scale coal liquefaction projects. But the price of oil remained key, he said, and subsidies would be required to make the technology viable. CTL projects can be profitable as long as Brent crude stays above US$30 a barrel and coal costs less than US$12 a tonne, Willem Louw, a technology director at Sasol, told Bloomberg in October. Analysts project crude will hover between US$33 and US$43 a barrel next year, but coal is expected to rise from this year's ex-mine price of just over US$25 a tonne.