UPDATE 2-China suspends all but two coal-to-oil projects

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By Rujun Shen

SHANGHAI, Aug 28 (Reuters) - China has ordered the suspension of all but two coal-to-oil projects as it strives to curb excess investment in the sector and ease tight coal supply, according to the planning commission of a coal-rich northwestern region.

The exceptions to the suspension are a project due for launch in Inner Mongolia this year by Shenhua Group, China's largest coal producer, and a second belonging to Shenhua's Ningxia Coal Industry Group and Sasol Ltd (SOLJ.J) which has yet to break ground, the Ningxia Development and Reform Commission said on its website (www.nxdrc.gov.cn).

Shenhua's project would be the first in the world to put direct liquefaction technology into commercial production. The second project will use indirect liquefaction technology, which South African Sasol, the world's largest maker of oil from coal, has developed and used for decades.

China, the world's largest coal producer and consumer, a few years ago began encouraging coal-to-oil projects to help ease its dependence on imported crude oil.

But tight coal supplies and surging prices have triggered the worst power shortages since 2004, and made water-intensive industrial projects that divert coal less attractive.

The National Development and Reform Commission, China's top economic planning agency, recently issued a circular asking local governments to tighten administration of coal-to-oil projects, the Ningxia bureau said.

Chen Liang, an analyst at Ping An Securities said: "Coal-to-oil projects are highly risky because of technology problems. And the planned projects are all in arid regions, and would be a big threat to the environment."