* China coalbed methane output to surge 50 percent this year
* Industry sees CBM supplying 15 pct of China's gas needs
* Adaptation in technology sparks boom
* First big boost in unconventional gas supplies
* Coalbeds seen as better option for now than shale
By David Stanway
JINCHENG, China, April 11 After more than a
century ripping out its insides to supply coal to the rest of
the country, the heavily mined and polluted province of Shanxi
in northern China is in the midst of a gas boom.
Under the spray of the Yellow River near the city of
Jincheng, "nodding donkeys" bob in lines that stretch to the
horizon, hitched up amidst precious farmland to feed on the gas
streaming through the coal seams below.
Gleaming white storage tanks tower over the highways and
dozens of drilling rigs dot the cliffs and valleys, some near
the famed ancient cave settlements of Shanxi.
Gas output from the coal seams is rising fast and is set to
hit 8 billion cubic metres (bcm) this year, up a half from 2011
- emerging from nowhere just six years ago to provide China with
a cleaner, home-grown alternative fuel for the future.
China is investing 100 billion yuan ($16 billion) to double
output again by 2015. Beijing wants coal seam gas output as high
as 30 bcm by 2020, which would be 15 percent of China's total
gas production, up from 5 percent of the total last year.
Beijing plans to double the share of natural gas in its
energy mix by 2015 and reduce coal's role in a drive to ease
pollution and slow greenhouse gas emissions. China will import
more gas, but it also aims to boost output from domestic natural
gas fields as well as unconventional sources such as coalbeds
Soaring coal output has powered China's growth into the
world's second-largest economy. Now in Shanxi, it is the coal
mines themselves that are providing the first big boost in the
country's unconventional gas supplies.
British miners call it firedamp, pockets of gas that can
cause deadly explosions in mines, and in China it has been one
of the industry's biggest killers. Developers call it coalbed
methane or CBM, and after a decade of missed targets, they say
they have finally found the technologies required to bring large
volumes of gas to market.
That is allowing for the rapid increase in supply from an
industry which had been missing its targets. Beijing had hoped
for as much as 8 bcm by 2010 from its coalbeds, but only reached
"We have been at it for a decade, we are at a stage of
maturity now, and we are optimally positioned to produce large
volumes of CBM very successfully," said Randeep Grewal, founder
and chief executive of Green Dragon Gas, a private CBM
developer now producing gas in Shanxi.
Developers have been tweaking their rig technologies for
years to try to coax the relatively low pressure gas out of
unstable seams and, after two decades of experimentation, are
now capable of constructing long and winding lateral wells that
allow water to drain away and gas to flow out.
CBM could easily supply 15 percent of China's total gas
requirements within a decade, Grewal said. Last year, CBM output
was 5.3 bcm, just over 5 percent of China's total gas output of
Producers are pumping from a myriad of coal seams in Shanxi
estimated to hold as much as 10 trillion cubic metres (tcm) of
gas. That is nearly four times China's proven gas reserves of
2.8 tcm. The country's total coal seam gas reserves could be
much higher even than that - Beijing estimates as much as 36.8
Within the next 10-15 years, China's CBM output could
eclipse the annual output of top CBM producer the United States'
of around 50 bcm, executives at companies involved in the sector
say. The bulk of that output will come from Shanxi's old and
perilous mines, and the estimates from developers are
conservative compared to those coming from Beijing.
The increased domestic supply is a boon to China's
government as it will help temper imports. Beijing is facing a
rising gas bill as it builds pipelines from central Asia or
liquefied natural gas (LNG) terminals along the coast to help
meet its ambitious targets to increase the role of gas in
fuelling China's economy.
Coal production has turned Shanxi into one of the world's
most toxic areas. The city of Linfen in the south of the
province - known for its rich agriculture - is a global
pollution blackspot choked by smoggy and sulphurous air.
Mining has damaged water tables in the rugged province of 36
million people and left swathes of land barren.
In Australia - which plans to drill as many as 40,000 wells
- debate is raging over the risks to water supplies from
exploiting coal seam gas. But Shanxi's - and China's - priority
is to ease dependence on coal, the dirtiest of fossil fuels, and
gas is seen as a cleaner option.
"Shanxi has become the epicentre of CBM development and it
is also a province that is very short of gas, so there is plenty
of long-term demand at prices that are increasing and that is an
incentive for these CBM guys to keep going," said Tony Regan,
expert at the Singapore-based Tri-Zen energy consultancy, which
advises a number of companies in the industry.
With China's increasingly safety-conscious coal companies
obliged to remove gas from their mines, exploiting CBM is also
better for the environment than letting the methane - a
greenhouse gas 20 times more potent than carbon dioxide - enter
"It means somebody else will pay for degassing coal and will
profit from it - it is a symbiotic process," said David Creedy,
coal expert with Sindicatum Sustainable Resources in Beijing.
On one of the dozens of Green Dragon's rigs scattered across
a 7,762 sq km (3,000 sq mile) concession in Shanxi, workers
steer a drill made of diamond and tungsten through thin and
heavily faulted seams of crumbly anthracite. Sensors mounted on
the tip allow gas to be measured and logged while the drilling
Green Dragon will have a fleet of 32 rigs by May, with plans
to expand by another 125. It aims to raise its output to around
500 million cubic metres per year by the end of 2013, selling 20
percent via the West-East Pipeline, which connects China's east
coast to central Asia, and the rest through a local network.
Green Dragon is just one of a string of firms in Shanxi's
Qinshui basin. A few kilometres away lies the Panzhuang CBM
project run by another independent, Asian American Gas (AAG).
Regan of Tri-Zen said foreign operators have stolen a march
on the country's state-owned giants such as PetroChina
, China's biggest oil and gas producer. Foreign players
got involved in the business in the early 1990s, before China
restricted entry into gas development.
"It is now really down to the independents. Most of them are
quietly persevering and we should see quite a significant flow
starting this year and next year," Regan said.
Herds of sheep roam through the dry scrub as AAG's pumps
draw low-pressure gas from the seams below. The company has been
selling CBM through the city gas supplier Xin'ao for the last
three years, and recently got permission to expand production at
Panzhuang. It eventually aims to drill around 100 wells.
"China has been talking about CBM resources that are about
twice the level of the United States," said chief executive
Steve Zou. "U.S. CBM production reached 50-60 bcm so for China,
double that - around 100 bcm a year - is possible."
While the independents now lead the way, their concessions
are dwarfed by those held by big state-owned firms like
PetroChina, which will eventually dominate the sector, Zou said.
PetroChina's president, Zhou Jiping, said last week that its
second most important priority after tight gas was CBM and it
aimed to have an annual production capacity of 4 bcm by 2015.
According to a 2011-2015 Chinese government industry plan,
33 coal firms will build 36 plants to process CBM, while China
will also build 2,054 km of new CBM pipelines.
Regulatory issues have been partly to blame for patchy
progress to date. For years, the designated industry leaders -
PetroChina and the China United Coalbed Methane Corporation
(CUCBM) - were divided on how the resource should be developed.
Smaller firms were unable to persuade PetroChina to carry CBM
through its pipelines and had to set up their own liquefying
plants and retail stations. PetroChina has since made deals with
individual suppliers to transport the gas.
Suppliers also had to contend with powerful coal firms,
whose priority was coal, not gas. Mining firms were more
interested in ensuring the safety of mines, as required by law,
than whether the gas was allowed to escape or sent to market.
A lack of clarity around who has priority - the miner with
the coal mine or the developer with the gas concession - has
also hindered development. The government recognised resolving
these problems as a priority in its five-year CBM development
Technical problems have also dogged the sector. Drillers
have experimented with different mining techniques including
hydraulic fracturing or "fracking", vertical and horizontal
wells, U-shaped wells and cluster wells. Adapting techniques to
China's formations delayed development.
"While certain technologies do exist, none of them are off
the shelf, and sometimes catering a technology sitting on the
shelf to the geological conditions can take time," Grewal said.
CBM VS SHALE?
CBM's biggest unconventional competitor is potentially shale
gas. If it were to develop quickly, China's shale gas output
could price some CBM out of the market.
But for now that looks unlikely, giving CBM developers a
window of opportunity. Unlike CBM, developers have yet to adapt
shale gas production techniques to China's geology and there is
to date no commercial shale gas production in China, even though
the U.S. government estimates China sits on the world's biggest
shale gas reserves.
"China faces more challenges in developing shale gas than
the United States because China's geological structure is more
complicated and water shortages and potential environmental
impacts are also a big concern," said PetroChina's Zhou.
In the United States, where a rapid rise in shale gas output
has revolutionized the energy sector, concerns have been raised
about the leaking of toxic fracking fluids into water supplies.
An engineer told Reuters that he "wouldn't be surprised if the
technology is banned" in China given the country's geological
conditions and water shortages.
Bureaucracy is also still a hurdle to shale gas development.
Much of the progress in CBM has been made by independents, but
China is unlikely to allow minnows to bid for shale gas wells.
"We've now got around 15 foreign partners in CBM and most of
them are quietly getting on with something," said Regan. "At
least a third if not half will begin production fairly soon, but
they (the Chinese government) are approaching shale completely
differently. They said they wanted to fast-track it but then
seemed to do the opposite."
Grewal of Green Dragon said for simple technological
reasons, shale gas was likely to require another decade.
"Just because you have a shale deposit doesn't mean it is
commercial - it just means you have the license to spend a hell
of a lot of money to sort it out."
CBM has other advantages over shale: it is far easier to
find and located far closer to the surface.
ROOM FOR ALL
CBM already has considerable cost advantages over the gas
piped in from Turkmenistan or shipped to LNG terminals on the
east coast, even though it is selling at the same price.
"We love getting paid global international prices with
domestic costs - we will do that all day long," said Grewal.
China said at the end of last year that it would link
natural gas prices to the price of imported fuel rather than to
domestic production costs, boosting profits of CBM producers.
The sheer size of the Chinese market means that imports from
Russia or Qatar are not necessarily competitors. Deliveries from
overseas will also help to create the pipeline infrastructure
and downstream markets that will encourage development of CBM,
That same market could probably absorb a lot of shale gas in
the future without making too much impact on CBM, unlike in the
United States, where the shale revolution sent gas prices
plummeting and made it tough for CBM developers to justify
"In China the scale (of shale) would have to be massive to
start impacting fuel prices," said Sindicatum's Creedy.
Until a more extensive pipeline network is built, local
Chinese markets would also remain insulated from each other,
potentially limiting the impact of large increases in supply
from any gas source elsewhere, he said.
Raising the share of gas in China's total energy mix to 8
percent will already create a bigger market than the United
States, and China is unlikely to stop there. For at least the
next two decades, there is likely to be enough room for
"Right now China needs everything it can get - all the
conventional production, all the CBM, all the shale, all the LNG
and pipeline gas they can get, and that is going to continue for
the foreseeable future," said Regan.