A View into Coal Bed Methane in China
China has been forced to dig deep to meet its energy needs
It is hard to think of more awkward country in which to drill for gas than the craggy, creviced hillsides that rise up from the banks of China's turbid Yellow River in the northern province of Shanxi, the heart of China's northern coal belt.So steep are the sides of the valleys that local people are forced to tunnel their houses into the crumbly orange rock, sealing up the arch-shaped voids with neatly fitting windows and doors. Outside, crops grow on narrow terraces that skirt sheer-sided ridges and ravines.
But modern China's thirst for hydrocarbons is not to be deterred by mere geography, and pressure is increasing to develop additional homegrown gas reserves to help meet a newly urbanising country's insatiable demand for energy.
Among the energy targets in China's 12th Five Year Plan, released this year, is a scheme to significantly boost production of coalbed methane (CBM) which is found not in pockets, like natural gas, but actually absorbed into the coal at a molecular level.
Fortune Oil, a China-focused oil and gas explorer listed in London, is among a small clutch of foreign companies hoping to profit from a coming expansion in CBM production, which is being backed at central government level.
Although final targets have yet to be publicly confirmed, industry analysts say China aims to increase CBM production tenfold to 10bn cubic metres a year by 2015, a target that some describe as "very aggressive".
Michael Jones, Fortune's technology and development director who quit oil giant BP after 24 years to join a far smaller, but much nimbler, outfit, says the size of the China CBM is vast when set against the country's dizzying demand.
"In China only about 3.7pc of the energy mix is currently provided by gas, but its total consumption is already 110bn cubic metres. To put that into perspective, the UK gets 37pc of its energy from gas, and the European average is 25pc," he says, looking out over a flaring test well.
"The Chinese target is to have 10pc of its energy provided by gas by 2020, which would equate to 200bn cubic metres, and the word in the industry is that the government is pushing to hit that target even earlier now. The potential in those numbers is obvious."
Fortune Oil, which is exploring a 70 sq mile block in the hills outside the small Shanxi coke town of Liulin, has entered into a joint venture with China United Coalbed Methane Company (CUCBM), the country's largest CBM developer.
With an investment expected to reach up to £280m over the 10-year lifetime of the project, Fortune has already sunk 20 wells about 1,000m deep to explore the commercial viability of the deposits which it now hopes to be pumping into a local holding and delivery station as early as next year.
The company described 2011 as a "critical year" for the project, which it hopes can yield some 35m cubic metres of gas a year to be sold initially to the local market.
It is a drop in the ocean when set against China's overall projected gas consumption – of which less than 1pc will come from coalbed methane in 2011 – but also a testament to China's determination to explore all avenues when it comes to energy.
On a grander scale, China has signed natural gas pipeline deals with Burma, Russia and Turkmenistan. A network of Liquified Natural Gas (LNG) import terminals are also being constructed around China's coastline.
However, CBM is still expected to play its part and, because of its smaller size, throws up opportunity for smaller British oil and gas companies at a time when larger companies find it harder to substantially break into such strategic sectors.
As the foreign partner in Liulin, Fortune brings advanced technologies to the table just as officials tasked with developing strategic sectors – like energy – are under huge pressure to deliver results.
"This is a state pilot project which is being pushed by the central government which has helped to accelerate it. We are at the forefront of this process which should leave us well-positioned to understand the process when future development comes," adds Mr Jones.
"China needs this indigenous gas to come on-stream as it meets its energy demands going forward. It feels at the moment that it's 'all hands to the pump' and that support from overseas companies is critical to establishing growth momentum."
Extracting CBM sometimes requires two wells to be sunk; one goes vertically while another is driven down at an angle, intersecting with the vertical shaft before splaying out in "fingers" through the gas-bearing coal-seam.
In terrain as uneven as the Liulin block that can be both expensive and awkward, requiring two wells on separate hilltops, but by employing new techniques Fortune is able to dig the two wells almost side by side, saving time and money and increasing efficiency.
The risk is that once such technology is transferred, Chinese competition can find ways either to appropriate it for themselves or rely on government regulation to shut out foreign competition that has outlived its usefulness – as has occurred in parts of the windpower industry.
"There are no ultimate guarantees," Mr Jones admits, but adds that the scale of China's coming energy demand and solid personal relationships born from being an early entrant to the CBM market should afford Fortune protection.
"The Chinese know they need to develop their own resources, and we see them setting very aggressive targets. Our relationship with CUCBM is going to leave us very well placed for the future."
Source: The Telegraph