OREANDA-NEWS.  November 16, 2012. The town of Medicine Bow, Wyo., population less than 300, has become the unlikely location for the next phase of China's advance into the U.S. energy market.

An arm of state-controlled Sinopec Group, also known as China Petrochemical Corp., is planning to build an advanced facility there that will convert coal into gasoline, which will capture and reuse carbon dioxide otherwise emitted into the atmosphere.

Sinopec brings to the potentially expensive and complicated project less pricey Chinese components and materials. It may also open up the doors to attractive Chinese capital.

"What's important obviously is their ability to source internationally components here," said Bob Kelly, executive chairman of Houston-based DKRW Advanced Fuels, which contracted Sinopec and will own and operate the plant through a unit. "They have one of the most competitive procurement arms I think world-wide."

The company declined to disclose terms of its deal with Sinopec. It has previously said the project would cost about USD2 billion.

Sinopec, in a written response to questions, said high investment levels in the refining and petrochemicals sector would present strong overseas business opportunities in the coming years as it seeks to build up a unique Chinese engineering brand. "We expect to offer the U.S. energy market high technology value and high-quality engineering services for both sides to achieve a mutually beneficial win-win," the company said.

Sinopec, already involved in developing energy refining, transport and storage assets from Indonesia to Saudi Arabia, has its eyes set on the U.S. It comes as companies including Dow Chemical Co. DOW +1.04%plan new U.S. petrochemical facilities resulting from the country's natural gas glut. DKRW's Mr. Kelly said he believes his company is at the forefront of a bigger U.S. engineering push by Chinese companies.

Chinese energy firms are already active in North American oil-and-gas exploration. In January, Sinopec agreed to pay USD2.5 billion to Devon Energy Corp. DVN +0.05%of Oklahoma City for a stake in drilling property in Michigan, Ohio and elsewhere. Rival Cnooc Ltd. 0883.HK +0.25%reached a USD15.1 billion deal in July to purchase Canada's Nexen Inc., NXY.T -1.67%which holds sizable oil-and-gas assets in Canada and the U.S. Gulf of Mexico.

But their growth prospects in that area for now are limited because Chinese companies lack sophisticated extraction skills, while political concerns limit the opportunity for bigger stakes. Experts say those companies have more to offer the part of the energy industry called downstream—the business of refining, processing and distributing the fuels.

"You don't have expertise in unconventional oil, you certainly don't have a cost advantage and you come with political risk," said Trevor Houser, a partner at New York consulting firm Rhodium Group who previously advised the U.S. government on energy issues. "On the other hand, Sinopec could potentially have a cost advantage when it comes to downstream."

The work by Sinopec Engineering Group helps satisfy a key requirement of the Chinese government: developing new overseas markets to prop up domestic materials and component producers. A booming Chinese economy and high public-spending levels for decades supported industrial production, but Beijing worries those companies could suffer as economic growth moderates.

China has "so drastically built up domestic production in recent years they will need an outlet for industrial capacity," said Lin Boqiang, who runs the China Center for Energy Economics Research at Xiamen University. Mr. Lin, who has advised the Chinese government on energy policy, said Sinopec winning engineering work in the U.S. was important to establishing itself as a global brand. He said moves up the U.S. value chain would continue, and believed Chinese oil majors such as Sinopec could establish retail gas stations in the U.S. in the next few years.

"When you become more competitive you go into places with more competition," Mr. Lin said.

In the Wyoming project, some materials potentially including things like steel could be sourced from China as a way to keep costs down. "To compete in the world-wide market for this type of project you've got to be able to source it at the lowest cost," said DKRW's Mr. Kelly.

The company says the Medicine Bow project will also benefit the local economy, creating up to 2,300 construction jobs and 400 full-time jobs when the facility goes into operation. "Clean coal" facilities can be complicated by high project costs and promising but at times unproven technologies.

Sinopec has previously pursued similar work in the U.S. power industry. In September, Seattle-based Summit Power Group LLC said Sinopec Engineering will manage construction of a critical portion of the Texas Clean Energy Project, a planned power-generating facility near Odessa. The facility will be funded by state-owned Export-Import Bank of China, and is in line to receive USD450 million in U.S. federal funding.

Proponents of U.S.-China cooperation on energy and power projects argue even though some components will be sourced internationally instead of from U.S. workers, lower upfront costs to construct facilities could transfer into cheaper electricity and other end-products for consumers.

It's not clear whether a Chinese bank will help fund the Wyoming project. Mr. Kelly said DKRW hoped to finalize financing by the end of the year, and for construction work to begin in Medicine Bow in early 2013.

"It's important for us have banking relationships and investment relationships that have capital coming in to develop resources here and industries here," Mr. Kelly said. "And it's important for China as they grow their markets."