BEIJING - Jiuquan Iron and Steel Group Co Ltd has signed a contract for a coal gas project with the municipal government of Zhangye, a city in Northwest China's Gansu province.

As a key clean-energy project in the province this year, it involves an investment of 22 billion yuan ($3.36 billion) and is expected to be completed within four years.

The annual coal gas production from the project is estimated to be 4 billion cubic meters. PetroChina Company Ltd has agreed to distribute the gas through its pipelines.

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The demand for natural gas has been increasing in recent years because of the Chinese government's encouragement of clean-energy use. Apart from chemical industry, the natural gas is widely used as an urban fuel gas.

The increasing demand for gas is prompting large-scale investments in the coal gas field.

Beijing Gas Group will cooperate with China Datang Corporation to provide the capital next year with 1.2 to 1.3 billion cubic meters of coal gas produced in the Inner Mongolia autonomous region. The group said by the end of 2015, the six main districts in Beijing will stop using coal at their power plants and will shift to natural gas.

Dai Bing, senior analyst at coal.com, said the steel companies can lower the production costs if they use coal gas instead of coal as raw material. Thus, the investment in coal gas industry is beneficial for the steel firms.

However, some experts said even though the coal gas business can bring profits to the companies, it is risky to flock into the industry at one time because the profits of the industry depend on the oil price. If the international oil price goes down, the profit could be limited.

Coal gas can be a supplement to the natural gas in the country, but it should not be encouraged to develop in a large scale, said Jiang Kejun, an official at the Energy Research Institute at the National Development and Reform Commission.

He said the coal gas industry is still at the beginning stage in China and it takes time to see its energy efficiency and environmental cost. "As a short-term supplement, it is pretty useful," said Jiang. "But in the energy strategic perspective, it is not a highly efficient energy resource that can be developed extensively in the long run."

According to Jiang, the research and development of coal gas technology will accelerate the technological growth of China's coal chemical industry.