The plant would be one of the largest coal-to-natural-gas plants in the United States and would be fuelled by a coal mine in the Illinois Basin.

Two gasifier trains could produce more than 35 billion cubic feet of synthetic natural gas.

"This partnership combines the strength of industry leaders in advancing a major Btu conversion opportunity that provides an alternative to scarce US natural gas," said Gregory H Boyce, Peabody president and chief executive officer elect.

"Btu conversion technologies will significantly expand the market for coal and more fully utilise America's 200-year supply to improve energy security."

The initial project would be designed with ConocoPhillips' "E-Gas" technology, featuring an oxygen-blown gasification system that would combine a coal-water mixture with oxygen and steam to produce a synthesis gas.

ConocoPhillips and Fluor have begun preliminary engineering design work for the project.

"The agreement with Peabody represents a major step in bringing to reality the development effort initiated by ArcLight several years ago," said Robb Turner, senior partner at ArcLight.

"We look forward to a successful partnership with Peabody that will result in an environmentally friendly coal-use project."