Zhang said the base is designed to add value to the region's vast coal reserves. "We can't just dig the coal and sell it. Chemical processing of coal is a way to upgrade the local coal industry and make best use of the energy source," he said.

Zhang said the company has also taken measures to minimize the impact on the environment, including recycling sulfur dioxide using German technologies, and reducing emissions by liquefying them within the mines.

Ninety-four percent of China's fossil fuel is from coal and boosting liquefied coal production is seen as a practical way for the country to become less dependent on oil imports, according to Feng Shiliang, deputy secretary of China Petroleum and Chemical Industry Association.

Although liquefied coal fuels are seen as viable alternatives to crude oil, many worry about the enormous costs involved. Lin Boqiang, an energy professor in east China's Xiamen University, said it takes about four tons of coal to produce one ton of oil, and such projects will more rapidly deplete the country's coal resources.

The Ningxia coal chemical base is the second major liquefied coal project in China. The other is being built by China's top coal producer Shenhua Group in Erdos, Inner Mongolia Autonomous Region. Construction started on that project in 2005.

Ningxia, which covers about 60,000 square kilometers, has 31.1 billion tons of recoverable coal reserves. It is estimated to have unexplored coal reserve of 200 billion tons, ranking it sixth in China behind Shanxi, Shaanxi, Inner Mongolia, Xinjiang and Guizhou.

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