Coalbed methane: China brings fresh source of domestic supply onstream

Satisfying China’s boundless energy needs has become an all-consuming task for the country’s planners, who have seen oil demand double in the past decade.

In recent years, oil and gas companies have been given hundreds of billions of dollars to go overseas and sign exploration and supply deals, including in some of the most volatile parts of the world.

It should come as no surprise that Chinese energy officials have also been casting around for domestic solutions to their supply dilemma. A massive expansion in the nuclear industry is under way and the government has given huge support to solar and wind power, to the extent that the country is now the biggest manufacturer of solar panels and wind turbines.

Much less remarked upon, however, are the sizeable investments in unconventional gas sources, particularly coalbed methane, where natural gas is extracted from coal beds, and shale gas.

China has been developing coalbed methane for at least a decade and has put in place ambitious production plans. The country is the largest coal producer in the world as well as the biggest consumer, and its proven reserves of coalbed methane have reached 170bn cubic metres, the Ministry of Land and Resources announced in December, 70 per cent higher than its 2005 estimate and the third largest in the world.

“We have abundant coal reserves and as a result coalbed methane production is set to grow rapidly,” says Che Changbo, a senior official at the Ministry of Land and Resources.

The government has been trying to stimulate investment, offering a string of tax incentives and reduced tariffs on important components.

In 2008, it ended the monopoly of state-owned China United Coalbed Methane Company, in what was considered a sign of impatience at the slow rate of investment. This has allowed PetroChina to become the biggest company in the field.

Earlier in the decade, the government set a target of output of 10bn cu m this year, rising to 40bn cu m by 2020, although this year’s production capacity is likely to be closer to 2.5bn cu m.

Foreign companies such as Shell and ConocoPhillips are among the big oil and gas groups with coal seam gas projects in the country, along with a group of smaller companies including London-listed Green Dragon Gas.

As well as providing a new gas source, coalbed methane could bring the further advantage of improving mine safety. Gas build-ups are one reason for China’s high tally of mine accidents, so the creation of commercial incentives to release accumulated gas could bolster the industry’s safety record.

China is also starting to develop deposits of shale gas, although the sector is still in its infancy. PetroChina, which estimates China may have as much as 45,000bn cu m in shale gas – more than Russia’s proven gas reserves last year – has a joint-venture to develop the resource with Shell and has begun to drill wells.

The two have combined in a $3.2bn bid for Arrow Energy, an Australian company that specialises in coal seam gas.

BP has a shale gas joint venture with Sinopec, China’s second-largest oil and gas group. During a visit to Beijing last autumn, Barack Obama, US president, signed an agreement to transfer US shale technology.

Despite the big push from Beijing, there are still plenty of obstacles to developing unconventional gas supplies in the country. To obtain the necessary approvals often means dealing with several levels of local government and with state-owned mining companies, some of which might have a different agenda from the central government’s energy planners.

Despite the huge interest from many international companies in the gas sector, Chevron last year pulled out of a series of coalbed methane projects.

Transporting the gas from its source, mostly in north and western China to the big industrial markets on the east and south coasts can also be a huge logistical challenge, although a PetroChina coalbed methane project last year began to feed gas into the country’s mammoth east-west gas pipeline which stretches from Xinjiang province on the north-western border to Shanghai.

Regardless of these obstacles, the likely expansion in unconventional gas supplies is giving China leverage in its projects for other gas supplies.

As part of their plans to make natural gas 10 per cent of the national energy mix by 2020, China is building terminals for the import of liquefied natural gas – providing a boon to Australia which wants to expand its LNG export business.

However, in January Petro­China let a deal to buy LNG from Australia’s Browse expire. It had been signed in 2007 when prices were considerably higher.

It has also been negotiating hard with Gazprom of Russia over a supply deal that was signed in principle last year after several years of talks. However, pricing has not yet been agreed.

The growth of its supply of unconventional gas is allowing China to drive a tougher bargain in international markets.