Coal seam gas seen as Asia's next hot energy play

By Fayen Wong - Analysis

PERTH (Reuters) - Surging gas prices are increasingly drawing new investors to Asia's nascent coalbed methane (CBM) seams, an underutilized energy source that analysts say could meet a sizeable part of the region's gas needs in coming years.

While the technology is still immature and governments in Asia have yet to put in place a policy framework to attract investment, the promise of a new frontier for energy production is forcing big firms, including UK gas producer BG Group Plc (BG.L) and Malaysia's state-owned Petronas PETR.UL, to take notice.

Also known as coal seam gas and once seen as a hazard for underground coal miners, it accounts for about 10 percent of gas output in the United States. But Asia methane stores, estimated at about 2,100 trillion cubic feet, have been largely untapped.

"The conventional source of oil and natural gas is getting harder to find. So as companies seek out unconventional sources of gas, coalbed methane is one of the most viable," said John Harris, director of global LNG at Cambridge Energy Research Associates (CERA) based in Beijing.

"And with gas prices at where they are now, the economics are also starting to look right."

With the region's appetite for gas growing annually at about 2 percent, CBM could be a viable option. Natural gas futures on the New York Mercantile Exchange have risen 54 percent this year to over $12 per million British thermal units (btu).

The new source of gas is being sought after not only as a source of pipeline gas but also as a feedstock for liquefied natural gas (LNG) plants in Australia.

Analysts see BG's proposed $13 billion takeover offer for Origin Energy (ORG.AX), Australia's largest producer of CBM, as well as Petronas' $2.5 billion investment in Australian Santos Ltd's (STO.AX) coal seam gas-fired LNG project as the biggest vote of confidence in the industry.

Experts say although it is early to forecast the percentage CBM would make up in Asia's total gas needs, they agree that with the right investment climate, its contribution would be significant.

For a graphic on world's leading coal producers, click on: here

CHINA, INDIA AND AUSTRALIA

In China, where there is about 1,000 trillion cubic feet (tcf) of methane gas, the government has targeted to produce 10 billion cubic meters of CBM by 2010, which would raise its share in total gas consumption to 10 percent from 3 percent in 2006, Merrill Lynch's analyst David Yip said.

Domestic and foreign firms pouring funds into China's coal bed methane sector include state-owned China United Coalbed Methane Corp, China National Petroleum Corp, U.S.-based Far East Energy Corp (FEEC.OB) and UK-listed Green Dragon Gas Ltd

(GDG.L).

Amid growing difficulties in securing access to conventional oil and gas projects globally, several of the energy giants, including Royal Dutch Shell (RDSa.L), Chevron Corp (CVX.N) and ConocoPhillips (COP.N) are also locking in CBM exploration rights in China to boost their flagging reserves.