The environmental organization based its report on 11 field trips to Shenhua Group's coal-to-liquid demonstration project in Ordos, in northern China's Inner Mongolia autonomous region.
Shenhua, the world's biggest coal producer by volume, "is exploiting water resources in Inner Mongolia at a shocking scale," Greenpeace said in a release Tuesday.
The Ordos coal-to liquid demonstration project has been in operation since 2008.
In the area surrounding the Shendong mining zone, where the Shenhua coal-to-liquid plant is located, "surface and ground water have been completely used up and there is no water to be found," the report says.
"Shenhua claims its coal-to-liquid project has 'low water consumption' and 'zero discharge.' Our investigation proves these claims are false," Greenpeace East Asia campaigner Deng Ping said in the release.
Compared with traditional refining processes, direct coal liquefaction uses 12-16 times the amount of fresh water and produces 14 times the amount of carbon dioxide, the report notes.
The Greenpeace investigation found Shenhua has drilled 22 wells for the project, each more than 984 feet deep, extracting as much as 14.4 million tons of water per year. As a result, Greenpeace says, groundwater levels have dropped by as much as 328 feet.
Shenhua is also planning a second and third production line for its coal-to-liquid project. After completion in 2016, the total amount of water required will be three times the current level, Greenpeace says.
Greenpeace estimates the total amount of industrial wastewater produced by the Shenhua coal-to-liquid project could be as much as 4.79 million tons per year.
"Shenhua's plundering of water at the cost of the local population and the baseline needs of the environment is of such a scale that can only be described as a 'water grab' in the most ruthless way," the report states.
Greenpeace urges the government "to set clear, scientific and applicable rules that truly adhere to the idea of limiting coal expansion based on water capacity."
"Thousands of farmers and herders are being affected by Shenhua's shameless exploitation of groundwater for profit," Deng said. "Shenhua's practices are violating Chinese water resource principles and laws controlling industrial wastewater discharge."
Research by the China Environment Forum, an initiative of the Washington think tank Wilson Center's Global Sustainability and Resilience Program, shows China's total water reserves dropped 13 percent from 2000-09, with the water shortage being particularly severe in the north.