Feb. 1 (Bloomberg) -- Far East Energy Corp., a coalbed methane gas developer, expects to start production and sales in China this year as demand for clean fuels rises because of policies to cut pollution.

The company will begin output from a joint-venture project with ConocoPhillips in northern Shanxi in 2007, Michael McElwrath, chairman and chief executive of the Houston-based company said in an interview on Jan. 30. Output from an adjacent field in the southern part of the province will start a year later, he said. Shanxi is China's largest coal production base.

Natural gas prices are three times higher than during the 1990s, making production of coalbed gas, or methane deposits in coal seams, economically viable. China, the largest user and producer of coal, is tapping its energy resources for gas as the fuel emits 29 percent less carbon dioxide than oil and 45 percent less than coal burned in power stations.

`` We are at the very early stage but the potential is enormous,'' McElwrath said in the interview in Shanghai.

China, which relies on coal and oil for 90 percent of its fuel, wants gas to account for 8 percent of energy supply by 2010 from about 3 percent now.

Far East Energy has another joint venture project with state-owed China United Coalbed Methane Co. in southwestern China's Yunan Province. The field together with its joint venture with ConocoPhillips, the biggest refiner in the U.S., may recover about 12 trillion cubic feet (340 billion cubic meters) of coalbed methane, according to the company's Web site.

Far East Energy will spend around $25 to $50 million annually in next two years to speed up exploration and production, McElwrath said.

``We will reach the lower range of the amount this year and will target something much more aggressive next year depending on our production and sales this year,'' he said. Annual investment in the projects will reach $100 million eventually, he said.

China's coalbed methane output may top 10 billion cubic meters a year in 2010, the National Development and Reform Commission said Jan. 22.

To contact the reporter on this story: Winnie Zhu in Shanghai at wzhu4@bloomberg.net; Stephen Engle in Shanghai at sengle1@bloomberg.net

Last Updated: January 31, 2007 20:06 EST