China's Coalbeds Spur Unconventional Gas Supply Boom

After more than a century ripping out its insides to supply coal to the rest of the country, the heavily mined and polluted province of Shanxi in northern China is in the midst of a gas boom.

Under the spray of the Yellow River near the city of Jincheng, "nodding donkeys" bob in lines that stretch to the horizon, hitched up amidst precious farmland to feed on the gas streaming through the coal seams below.

Gleaming white storage tanks tower over the highways and dozens of drilling rigs dot the cliffs and valleys, some near the famed ancient cave settlements of Shanxi.

Gas output from the coal seams is rising fast and is set to hit 8 billion cubic metres (bcm) this year, up a half from 2011 - emerging from nowhere just six years ago to provide China with a cleaner, home-grown alternative fuel for the future.

China is investing 100 billion yuan ($16 billion) to double output again by 2015. Beijing wants coal seam gas output as high as 30 bcm by 2020, which would be 15 percent of China's total gas production, up from 5 percent of the total last year.

Beijing plans to double the share of natural gas in its energy mix by 2015 and reduce coal's role in a drive to ease pollution and slow greenhouse gas emissions. China will import more gas, but it also aims to boost output from domestic natural gas fields as well as unconventional sources such as coalbeds and shale.

Soaring coal output has powered China's growth into the world's second-largest economy. Now in Shanxi, it is the coal mines themselves that are providing the first big boost in the country's unconventional gas supplies.

British miners call it firedamp, pockets of gas that can cause deadly explosions in mines, and in China it has been one of the industry's biggest killers. Developers call it coalbed methane or CBM, and after a decade of missed targets, they say they have finally found the technologies required to bring large volumes of gas to market.

That is allowing for the rapid increase in supply from an industry which had been missing its targets. Beijing had hoped for as much as 8 bcm by 2010 from its coalbeds, but only reached 3.1 bcm.

"We have been at it for a decade, we are at a stage of maturity now, and we are optimally positioned to produce large volumes of CBM very successfully," said Randeep Grewal, founder and chief executive of Green Dragon Gas, a private CBM developer now producing gas in Shanxi.

Developers have been tweaking their rig technologies for years to try to coax the relatively low pressure gas out of unstable seams and, after two decades of experimentation, are now capable of constructing long and winding lateral wells that allow water to drain away and gas to flow out.

CBM could easily supply 15 percent of China's total gas requirements within a decade, Grewal said. Last year, CBM output was 5.3 bcm, just over 5 percent of China's total gas output of 102.5 bcm.

Producers are pumping from a myriad of coal seams in Shanxi estimated to hold as much as 10 trillion cubic metres (tcm) of gas. That is nearly four times China's proven gas reserves of 2.8 tcm. The country's total coal seam gas reserves could be much higher even than that - Beijing estimates as much as 36.8 tcm.

Within the next 10-15 years, China's CBM output could eclipse the annual output of top CBM producer the United States' of around 50 bcm, executives at companies involved in the sector say. The bulk of that output will come from Shanxi's old and perilous mines, and the estimates from developers are conservative compared to those coming from Beijing.

The increased domestic supply is a boon to China's government as it will help temper imports. Beijing is facing a rising gas bill as it builds pipelines from central Asia or liquefied natural gas (LNG) terminals along the coast to help meet its ambitious targets to increase the role of gas in fuelling China's economy.

TOXIC AREA

Coal production has turned Shanxi into one of the world's most toxic areas. The city of Linfen in the south of the province - known for its rich agriculture - is a global pollution blackspot choked by smoggy and sulphurous air.

Mining has damaged water tables in the rugged province of 36 million people and left swathes of land barren.

In Australia - which plans to drill as many as 40,000 wells - debate is raging over the risks to water supplies from exploiting coal seam gas. But Shanxi's - and China's - priority is to ease dependence on coal, the dirtiest of fossil fuels, and gas is seen as a cleaner option.

"Shanxi has become the epicentre of CBM development and it is also a province that is very short of gas, so there is plenty of long-term demand at prices that are increasing and that is an incentive for these CBM guys to keep going," said Tony Regan, expert at the Singapore-based Tri-Zen energy consultancy, which advises a number of companies in the industry.

With China's increasingly safety-conscious coal companies obliged to remove gas from their mines, exploiting CBM is also better for the environment than letting the methane - a greenhouse gas 20 times more potent than carbon dioxide - enter the atmosphere.

"It means somebody else will pay for degassing coal and will profit from it - it is a symbiotic process," said David Creedy, coal expert with Sindicatum Sustainable Resources in Beijing.

AMBITIOUS TARGETS

On one of the dozens of Green Dragon's rigs scattered across a 7,762 sq km (3,000 sq mile) concession in Shanxi, workers steer a drill made of diamond and tungsten through thin and heavily faulted seams of crumbly anthracite. Sensors mounted on the tip allow gas to be measured and logged while the drilling takes place.

Green Dragon will have a fleet of 32 rigs by May, with plans to expand by another 125. It aims to raise its output to around 500 million cubic metres per year by the end of 2013, selling 20 percent via the West-East Pipeline, which connects China's east coast to central Asia, and the rest through a local network.

Green Dragon is just one of a string of firms in Shanxi's Qinshui basin. A few kilometres away lies the Panzhuang CBM project run by another independent, Asian American Gas (AAG).

Regan of Tri-Zen said foreign operators have stolen a march on the country's state-owned giants such as PetroChina , China's biggest oil and gas producer. Foreign players got involved in the business in the early 1990s, before China restricted entry into gas development.

"It is now really down to the independents. Most of them are quietly persevering and we should see quite a significant flow starting this year and next year," Regan said.

Herds of sheep roam through the dry scrub as AAG's pumps draw low-pressure gas from the seams below. The company has been selling CBM through the city gas supplier Xin'ao for the last three years, and recently got permission to expand production at Panzhuang. It eventually aims to drill around 100 wells.

"China has been talking about CBM resources that are about twice the level of the United States," said chief executive Steve Zou. "U.S. CBM production reached 50-60 bcm so for China, double that - around 100 bcm a year - is possible."

While the independents now lead the way, their concessions are dwarfed by those held by big state-owned firms like PetroChina, which will eventually dominate the sector, Zou said.

PetroChina's president, Zhou Jiping, said last week that its second most important priority after tight gas was CBM and it aimed.