Industrial giant China is leading the way and others may follow since oil has hit records above US$70 on strained supplies that may last around 40 years, whereas the world may have ample coal for a couple of hundred years if it can be converted to clean fuels cheaply enough.

"In the light of very high oil prices and slowing coal prices, coal-to-liquids technologies are becoming a burning issue in developing Asia and the United States," said Alexandre Kervinio of SG Commodities.

China's largest coal producer Shenhua Group Corp. Ltd. and South Africa's Sasol Ltd. say their coal-to-liquids technology is worthwhile if oil stays above US$30 or US$35 a barrel, half its current price. New York oil futures for December 2012 delivery are above US$66

High oil prices have also made clean renewable energies such as wind competitive, but these cannot deliver liquid fuel to power cars. Biofuels are booming but are likely to remain limited in volume, and a wide network of hydrogen gas filling stations for fuel cell vehicles is not considered viable before 2020.

However, other technologies such as coal gasification and gas-to-liquids (GTL) are currently cheaper than coal liquefaction and so firms worried about a downturn in oil prices and seeking the best investment returns may opt for those instead.

Sasol, which runs a 160,000 barrel-per-day (bpd) coal-to-liquids plant in South Africa, says capital costs for an 84,000-bpd plant are around US$60,000-$80,000 per barrel.

"It still looks rather expensive and these days GTL or Canadian tar sands are attracting the big bucks," said Tony Regan of energy consultancy Tri-Zen.

So a drive to turn coal into oil is likely to be limited at first to countries with huge and cheap domestic supplies, such as China and the United States, which together hold about 40 percent of world reserves, according to BP

Shenhua is expected to start production at its first coal-to-liquids plant at the end of 2007, with annual output of 1 million tonnes of oil products including diesel, gasoline and naphtha for petrochemicals.

Beijing is encouraging development of coal liquefaction to help curb a growing reliance on oil imports. Analysts say within a decade it could be making up to 1.2 million bpd of coal-based synthetic fuel, or nearly 50 percent of 2005 imports.

Last month it signed a memorandum of understanding with energy major Royal Dutch Shell to develop a coal liquefaction project in the Ningxia region.

"It's an area where China thinks it can take a technological lead. This is probably the main driver rather than whether or not it works at US$30 barrel," said Regan.

ASIA PACIFIC MAY FOLLOW

Unlike coal gasification, an old technique for which China is ploughing ahead with a dozen plants expected to come onstream, economics for liquefaction are less certain since it requires another process after gasification and hence extra cost.

Chinese miner Ningxia Coal Industry Group Ltd. is looking at a liquefaction plant, needing more than US$3.6 billion in investment, with Sasol. South Africa developed such technologies to tap its large coal reserves and during apartheid sanctions.

These kind of start-up costs may require government help. But the attraction is clear for the Asia-Pacific region, which holds 3.5 percent of global oil and 8 percent of natural gas reserves but about a third of proven recoverable coal reserves.

Studies are underway in India and the Philippines. Australia is the world's top coal exporter and the second is Indonesia, whose largest miner Bumi Resources has said it is studying liquefaction investments.

"Much of Indonesia's is low grade in terms of heat content and therefore not such an attractive coal for export, so it could find coal gasification/liquefaction attractive," said Andrew Symon of Singapore's Institute for Southeast Asian Studies.

AMERICAN RESERVES

The United States is building a fleet of new coal power plants to use the world's largest reserves, but only a fraction will gasify coal and have the ability to capture emissions of greenhouse gases, blamed for global warming.

However, the US government is hoping to wean itself off Middle East oil dependency and is providing tax and loan incentives. This has spurred five projects expected to be onstream by 2010, said SG Commodities.

"Converting just 5 percent of the US coal reserves to Fisher-Tropsch fuels would equate to the existing US crude reserves of 29 billion barrels," said a spokesman for Canadian company Syntroleum, refering to liquefaction technology.