China granted initial environmental approval to an $8.8 billion project by South African petrochemical firm Sasol and China's top coal producer Shenhua Group to turn coal into fuels.

The environmental clearence put the project, potentially one of the largest foreign investments in China, a step closer to final approval from the top economic steering body, the National Development & Reform Commission (NDRC), after nearly a decade of talks between the two companies.

The project, to be built in north China's Ningxia region, plans to make 3.16 million tonnes of diesel and 655,500 tonnes of naphtha a year, according to a post published on the website of China's Ministry of Environmental Protection (www.mep.gov.cn).

After backing coal-to-liquid (CTL) investments as a way of improving energy security and easing its growing dependence on foreign oil, China went cold on the technology in 2008, cancelling dozens of projects amid concerns about high costs and the impact it would have on scarce local water supplies.

The country's massive coal industry has also been developing its own coal liquefying technology, which has become a drag for the government to rush approving projects like this one by Sasol, which emerged from discussions with Shenhua back in 2000.

The Chinese government obviously favours domestically grown technology when its comes to approvals, given that Shenhua already started a similar plant based on pure Chinese know-how, said a Beijing-based oil industry official.

Shenhua Group, parent of Shenhua Energy Co Ltd, has built its first CTL plant in the northern Inner Mongolia region expected to reach 3 million tonnes a year by 2015.

It seems a big reason why the project got the final go-ahead was the potential for technology transfer from Sasol to Shenhua. Its a very important consideration given how new this sector is in China, said Shi Sijin, an analyst at Hawker Capital.

But Shi said the approval shouldn't be interpreted to mean Beijing is shifting its cautious position on the sector and that the Chinese government is unlikely to encourage more CTL projects.

Sasol CEO Pat Davies told analysts in December that the firm was expecting a positive outcome from the Chinese government early this year and hoped to make the investment decision during this calendar year.