ADELAIDE clean fuel firm Syngas has signed an initial agreement with a Chinese company to develop its $3 billion clean diesel production facility at Clinton on the Yorke Peninsula.

Syngas today announced a memorandum of understanding with China National Electric Equipment Corporation (CNEEC) for an 18-month exclusivity period to sign a binding agreement over the engineering, procurement and construction for Clinton.

Syngas shares are trading 271 per cent higher at 5c - a 12-month high - on the announcement.

Once the binding agreement is signed, CNEEC will assist Syngas to identify Chinese sources to fund 85 per cent of the project capital.

Syngas managing director Merrill Gray said the step foreshadowed ``a long-term strategic partnership''.

"This is a very significant step forward for Syngas and the Clinton project. It establishes a clear pathway of development and a project capital funding option to enable the project to move forward.''

"This is now a very real opportunity and it will be much easier to look for 15 per cent funding than 100 per cent,'' Ms Gray said.

Syngas shares are trading 271 per cent higher at 5c - a 12-month high - on the announcement.

An expert working group has been established within CNEEC - which is building the $750 million Latrobe Valley power station near Melbourne, Victoria, with HRL Corporation - to work towards a binding agreements with Syngas.

Syngas, which reported losses of $1.09 million in the last financial year, is also in discussions with a number of private equity funds/potential investors for short-term funding.

The company needs $40 million to complete its bankable feasibility study on the project over the next 24 months.

Cash flow forecasts show the company will need additional funding to meet ongoing expenditure commitments for at least the next 12 months, independent auditor Ernst & Young said in Syngas's 2010 annual report.

The plant is expected to produce 14,600 barrels per day of mainly ultra clean diesel for over thirty years after commencing production in 2015/2016.