The two liquefied coal projects, one in Yulin in Northwest China's Shaanxi Province and another in Northwest China's Ningxia Hui Autonomous Region, will each produce 3.6 million tons of oil a year.

Sasol will hold a 50 percent stake in each project. The total investment in the two projects will be $10 billion to $14 billion. Construction could begin in 2013.

While Shell and Sasol have made the largest foreign investment to date, other multinationals are working with Chinese companies to produce coal chemical products.

Dow Chemical said it is exploring a CTO program in China, and has signed an agreement with Shenhua to study the feasibility of using coal gasification in a large-scale olefin plant.

"Coal chemical projects always require a lot of money, and high standards for coal resources, water resources, environment and technology," said Zhang.

Potential investment risks

The industry may show enormous promise to foreign multinationals, but the sector has huge potential risks, analysts said, noting their investment comes when China's coal chemical industry is still in its infancy.

Zhang said that blind construction is unsustainable for the healthy development of the industry.

In July the National Development and Reform Commission, China's top economic planning body, issued regulations on the coal chemical industry, urging local governments to tighten control over new projects.

The government will not approve coal liquefaction projects with an annual production capacity under 3 million tons, coal methanol, or DME projects under 1 million tons and CTO projects under 600,000 tons.

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