High Hopes for The Future of Chinese CBM

Robert Bearden, chief executive of Australian CBM developer Sino Gas & Energy Holdings, speaks to Li Xin about the company's development strategy and the strong growth potential of China's CBM market.

Interfax: Have you found any differences between operating in China and other countries?

Robert Bearden: Not really. I don't see much difference. Every country has regulatory agencies, which have the job of making sure their country's resources are developed in the most efficient manner. So I don't see much difference between our Chinese partners and regulatory agencies in China and those in other countries. As for the Sino Gas & Energy operations, the technical quality of the teams we have in place is superb. Also, one of the reasons that brought me to this company is its excellent safety record. Last year, we were able to drill our wells and run our seismic programme with zero accidents.

Interfax: What is Sino Gas & Energy's progress on the production sharing contracts (PSCs) for the Linxing and Sanjiaobei blocks in Shanxi province?

RB: We have got good conditions in the blocks. The Linxing and Sanjiaobei PSCs cover an area of approximately 3,000 square km in the Ordos Basin, which is the second largest gas basin in China. Also, we have fields very close to us that are on production, and that is an encouraging sign. And there are pipelines crossing our fields, both east-west going to Beijing, and a north-south provincial line.

We have 3.7 trillion cubic feet (104.78 billion cubic metres) of reserves and resources in the PSCs and this is an assessment from a third independent party. One thing I would point out is that 60% of our acreage has not been explored. Our plan is to mature our existing resources into reserves and also increase our resources through further.

exploration. In addition, we are planning LNG and CNG short-term pilot projects.

The biggest challenge that we have had up to this point has been funding. Now we have funds for the 2012, 2013, and 2014 work programmes. The whole purpose behind the 2012 work programme is to feed data into the Chinese reserve report. After the reserve report is approved, we'll take it, and along with some additional reports, submit the overall development plan (ODP). The 2012 work programme requires investment of $25 million and we will drill about 17 wells.

We drilled 13 wells in 2011 and 11 of them have been tested. The minimum commercial rate is 125 thousand cubic feet per day [3.5 thousand cubic metres per day] and all our wells tested are above that minimum.

Interfax: When do you think you will enter commercial production?

RB: After we get ODP approval, that is when. According to the work programme, we expect to get China reserves report approval for the Sanjiaobei Block in the first half of 2013. We also expect to get ODP approval later in 2013. The main thing is to work closely with our partner and the government.

Interfax: Sino Gas & Energy has a 64.75% stake in the PSC for the Linxing Block. How did you acquire such a high stake?

RB: These PSCs have gone through a series of owners. Prior to Sino Gas & Energy taking them over in 2006, they were owned by Chevron, and before that Texaco. So the PSCs have been here for quite a while. I don't know how they negotiated it but I am not going to complain about it.

Interfax: Have you secured any customers?

RB: No. We don't have a gas sales agreement (GSA) at this time. However, we will work with our Chinese partners to jointly secure the GSA. We feel confident because there is so much demand, and we have pipelines running across the property, which means we can get into the pipeline easily. The pipelines now are under-capacity, so there is plenty of room to put in our gas.

At present, we are focusing on pushing the PSCs to maturation. Our strategy is pure upstream. We are finding, we are developing, and then we put in the pipeline. We are not going to build our own CNG gas stations or anything else. We have a very lean team with 35 people. Our expertise, our skills, our experience is in finding, developing and producing, that's our specialty. We leave that downstream part to someone else.

Interfax: What is the potential of China's CBM market in the future?

RB: China is moving from coal to gas and the 12th Five-Year Plan encourages gas use. The demand is definitely growing.

The price is good and we feel confident the price is going to stay firm. The gas market is regional, not worldwide like oil, which is transported all over the world. You are not going to see much import and export of LNG out of the United States, and all the LNG that is tied up are in 15 year contracts dedicated to Japan and South Korea.

Also, China is conducting pricing reforms that tie gas prices with imported fuel and LPG. That will keep prices going up. If the conventional gas is sold between $7 and $8 per thousand cubic feet, that's going to make the price of CBM probably the same. We hope to sell at prices over that but I can't see a discount or a large discount off that.