Doubts over Chinese coal-bed methane FT.com / Companies / Oil & Gas –

Doubts over Chinese coal-bed methane

By Leslie Hook in Beijing

Published: August 29 2010 22:22 | Last updated: August 29 2010 22:22

China’s ambitious targets for the commercial production of coal-bed methane need “a reality check”, according to a consultant’s report into the country’s efforts to extract the high-energy gas trapped in coal deposits.

This autumn marks the fifth anniversary of China’s first commercial CBM production, which prompted Beijing to announce aggressive targets – 5bn cubic metres a year by 2010. However, production of the gas is currently just a quarter of that.

China will soon announce ambitious targets of 10bn cubic metres a year by 2015, and double that for 2020, according to a report from Wood Mackenzie.

“A reality check is needed,” the report warns. “CBM is still far from providing another major source of gas supply.”

China has massive reserves of unconventional gas — forms of natural gas such as shale gas and coal bed methane – which could supply as much as 12bn cubic feet per day by 2030, playing a crucial role in meeting China’s huge gas needs. Coal bed methane alone could account for 14 per cent of domestic gas supply by 2030, according to the consultancy.

But key questions remain over how the unconventionals sector will develop, and whether government policies will move fast enough to open up the sector.

China’s oil companies have planned huge investments in the sector, with PetroChina announcing a $1.5bn CBM investment plan this year and ambitions to produce 4.5bn cubic metres of the gas a year by 2015. Sinopec, which announced a new CBM discovery in Shanxi province last month, aims to produce 2.5bn cubic metres of unconventional gas by 2015. And China United Coalbed Methane is planning for 10bn cubic metres a year by 2020.

Some are optimistic that production will soon pick up, thanks to government subsidies and the end of the government-granted monopoly of China United Coalbed Methane in 2008.

“We are bullish on CBM,” said Sharad Apte, head of Bain & Company’s Asia-Pacific Energy practice. “The Chinese government is currently trying to eliminate a lot of the hurdles, particularly regionally, for CBM development.”

But develop of CBM has been challenging over the past five years. Of ten CBM pipeline projects scheduled to be completed this year, only two will be finished and pipeline access is a major issue for non-Chinese producers.

PetroChina and Sinopec have virtual monopolies over China’s pipelines, but “Third-party [pipeline] access is not supported,” the report notes. “As a result, CBM sales from parties such as Asian American Gas and Green Dragon Gas have been restricted to small volumes to the local transportation sector.”

The government-granted monopoly held by China United Coalbed Methane has also held back CBM production. Last year the State Council stripped CUCBM of its monopoly, opening up the sector for direct development by CNPC, which was formerly part of CUCBM.

“PetroChina is emerging as the likely dominant player in the next phase of CBM development,” says Wood Mackenzie.

Now that the dust has settled from the restructuring, China’s miners are set to become more involved with the sector, a natural fit given the presence of methane in coal deposits.

Jincheng Mining corporation acquired several CBM licenses in May, the miner to do so without the involvement of one of the major state-owned oil companies.

Foreign groups have long been involved in China’s CBM industry, providing about 70 per cent of the funding for early CBM exploration. This summer, PetroChina announced a joint effort with BP to look at a CBM field in Xinjiang province. Meanwhile, Shell is working on a site in Ordos, Inner Mongolia.

“Unconventional gas is a very important, cleaner and abundant energy resource for China that requires advanced technology and project management where Shell has rich experiences,” Lim Haw Kuang, executive chairman of Shell Companies in China, said in an e-mail.

China’s total gas demand last year was about 9bn cubic feet per day. By 2015, gas demand is expected to reach 20bn cubic feet per day and import dependency will increase to about 30 per cent, according to Wood Mackenzie.

FT.com / Companies / Oil & Gas – Doubts over Chinese coal-bed methane

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