Xinao said it is eyeing opportunities in new energy sources to help counter China's increasing reliance on oil imports and to make use of the country's massive coal deposits.

Coal is the most abundant indigenous fuel in China, and the country is the world's largest producer of coal, but it faces transportation problems. This creates opportunities for investors who are willing to explore the relatively new concept of coal gasification, according to a Xinao source.

Rather than burning coal directly, gasification breaks down coal into basic chemicals. The coal is exposed to hot steam and oxygen under high temperature and pressure, causing carbon molecules to break apart, setting off chemical reactions that produce a mixture of carbon monoxide, hydrogen and other gaseous compounds that can be used as a low-cost substitute for liquefied petroleum gas, diesel oil and other chemical products.

"There are more companies who are keen to explore this concept now, but given that investors may not understand its value yet since it is still new, we may invest through an independent company," the source said.

He said some companies in Shandong, Huizhou and Inner Mongolia are already exploring coal gasification projects but large-scale commercial projects have yet to be launched.

Much of the required technology will have to be imported, but the Xinao source reckoned it would be worth the cost. "Despite the difficulty, we still find that it is worth exploring coal gasification as we think the by-products can be sold for a decent margin," he said.

Xinao is following in the footsteps of electricity supplier Enerchina which plans to take majority stakes in three coal mining companies in Inner Mongolia, Yunnan and Heilongjiang to pave the way for coal gasification projects.

The company hopes that in the long term, these products could also be used at its affiliate Panva Gas' distribution networks as a substitute for LPG.

"Coal gasification is the best alternative to make use of China's coal reserves because currently coal is just used to produce enough heat to generate power but it does not extract the full value of coal," said Flora Fu, vice president of corporate development at Panva, adding that gasification is a more environmentally friendly way to use coal.

Shenhua Group, the country's top coal producer, is running China's largest coal gasification project.

Shenhua and Ningxia Coal Industry have signed separate contracts with Royal Dutch/Shell Group and Sasol to study building coal-to-liquids plants.

Coal liquefaction is a more complex and advanced process than coal gasification. The projects may cost up to 60 billion yuan (HK$57.57 billion) to develop. Shenhua is building a 24.5 billion yuan plant in Inner Mongolia.

The central government is pursuing coal-to-liquids projects as part of a national energy strategy.

China's crude oil imports have risen over the past decade from zero to 40 percent of local consumption, as demand more than doubled to more than six million barrels a day.

The cost of oil imports rose 65 percent in the first 10 months of this year to US$26.47 billion (HK$206.47 billion), according to Bloomberg.