Synthetic gas specialist Cougar Energy Ltd (ASX: CXY) said on Friday that it has struck a partnership with China's Shanghai Limitedless Investment Group Co Ltd for up to three percent of interests in the company's business operations in China.

Cougar Energy managing director Len Walker said that the alliance was part of the company's business expansion plans in China as he reported that he will be visiting Western China later in October "to join SLI in assessing a series of sites for potential underground coal gasification (UCG) projects."

The deal calls for an initial placement of up to $1 million worth of Cougar shares at 3.5 cents per share which will then proceed to talks of cooperation agreement by January next year set to outline the two firms' blueprint for jointly developing and operating UCG projects in China.

Following the finalisation of the agreement between the companies, SLI would take up new rounds of Cougar shares placement for another $1 million, bearing the same value per share as in the initial placement.

Cougar said that up to $3 million would be allocated by SLI to the joint venture as seed capital and allow the Melbourne-based firm access to coal sites in China for identification of possible UCG projects.

On its part, Cougar Energy would share to the Chinese firm its operational and technical knowledge on UCG initiatives.

Prior to the announced collaboration with SLI, Cougar Energy has been battling operational and financial challenges following the water contamination scare that plagued its Kingaroy facility in Queensland.

That incident amounted to the depletion of its cash reserves, according to Cougar, though it was able to raise funds to finance its China UCG initiatives and some projects in the midwest region of Western Australia.

Cougar Energy shares have been trading steadily since its revelation of an imminent alliance on Thursday and as of 1221 AEST on Friday, company shares were trading at four cents, which saw a high of 15 cents trading mark in March this year.