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Killer Coalbed Methane Gas Powers Chinese Taxis
by James Finch02-01-2007 |
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Article:
The Chinese are now excited about natural gas. Coalbed methane gas (CBM) now
supplies more than 80,000 households and 1,000 taxis in China's Fuxin City. One
cubic meter of compressed CBM is the equivalent of 1.13 liters of gasoline, but
retails for less than one-half the price of gasoline.
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Successful investors can predict where the market is going years before the
rest of us. Like the clichés of selling ice to Eskimos (or the British version
of selling coal to Newcastle), Richmond, Virginia-based Coal Baron E. Morgan
Massey was five years ahead of the markets when he raised $75 million to develop
coal mines in China's Shanxi province in 2001.
As early as 1994, the seventies-something founder and chairman of A.T. Massey
Coal, which has since evolved into Massey Energy (MEE), began planning to bring
American-invented Longwall mining technology to China's coal mines in Shanxi
province. With his Chinese partners, Massey and Asian American Coal control
about two billion tons of coal reserves.
It is Massey's spin off coalbed methane (CBM) company Asian American Gas,
which caught our eye. According to Shanxi News, the CBM output of a pilot well
set a new national record, continuously producing 40,000 SCM per day (standard
cubic meters). The new technology which created the new national record is
something called "Multi-Lateral Drilling (MLD)."
Asian American Gas Chief Executive Zou Xiang Dong claimed the MLD technology
helped the methane gas output for his wells on his company's Panzhuang CBM block
in Shanxi province jump by more than 40 times that of conventional vertical
wells. Obviously the company is excited as four other MLD wells installed in the
latter half of 2006. The company believes those wells might also have the
potential to match the record production. The previous daily output record stood
at 16,000 cubic meters.
China Celebrates Coalbed Methane
An inside look at China's rapidly blossoming CBM industry is nothing if not
electrifying. The world's energy entrepreneurs have been rushing to China to
take up the country's state-owned methane gas company - China United Coalbed
Methane Co (CUCBM) - on production-sharing contracts offered to foreign energy
companies. Since its inception, CUCBM has signed 27 production-sharing contracts
with CBM developers from the United States, Canada, Britain and Australia.
The largest publicly traded company, and among the first to participate, was
Chevron Corp (CVX). But smaller firms have also joined in the hunt to develop
China's vast natural gas reserves. Far East Energy (FEEC) and Pacific Asia China
Energy (PCEEF), have been awarded massive land concessions - on the order of the
size of the state of Delaware. Many of these are home to rich coalbed methane
reserves with thick, multi-level coal beds with high methane content. For
example, U.S.-based Orion Energy was awarded a production-sharing contract on
more than 460 square kilometers in the Sanjiao region of coal-rich Shanxi
province. Volume is estimated at 60 billion cubic meters.
Typically, the foreign company assumes all the operational risk to verify the
quantity of coalbed methane gas. Costs from exploration through to commercial
production are borne by the foreign company. Pacific Asia China Energy vice
president of exploration Dr. Marchioni told us that the positive side of this
arrangement is that CUCBM would provide all of the coal exploration work, which
he called quite satisfactory, and that his company's main work was to confirm
the Chinese coal exploration. In a previous article we discovered that the gas
content both Far East Energy and Pacific Asia China Energy confirmed, during
their drilling programs, compared well against the top coalbed methane producing
regions in the U.S. and Canada.
The Chinese are not giving away their CBM reserves without taxation. The
Chinese-foreign joint ventures are subject to five-percent value-added tax when
they begin to exploit the coalbed methane gas. However, for the first two years
such joint ventures show a profit, the companies will be exempt from the
business income tax. For the third through fifth year, the tax rate will be cut
by half. In order to encourage new technology, such as the Multi-Lateral
Drilling Technology or Mitchell Drilling Services' Dymaxion® drill rigs, the
imported materials used for prospecting and development work are exempt from
customs duties and the import regulation tax.
According to Yang Jian, an executive at China United Coalbed Methane, "The
state encourages the development of this new energy, and there's no restriction
on foreign companies entering this field. With the good prospects, the expanded
production of coalbed methane can be expected to happen soon." Foreign companies
have spent about $160 million exploring the concessions they were awarded. Yang
pointed out that large Chinese companies, such as China National Petroleum Corp,
were now entering CBM exploration. Shanxi province's Eleventh 5-Year Plan is
forecast to exceed $15 billion for CBM exploration, development and utilization.
China's Killer Coal Gas Fuels Taxi Cabs
Holding the world's record for coal mining deaths annually, the Chinese have
looked upon coal gas as a dangerous nuisance. During coal mining, methane gas
can cause explosions resulting in death and injury to the miners. China United
Coalbed Methane Corp general manager Sun Maoyuan pointed out, "About 80 percent
of casualties are attributed to these gas explosions, causing direct losses of
$93 million each year."
By extracting the gas - simply de-gasifying the coal mine before producing
from it, deaths can be avoided and China can help power its economy with a 'new'
energy source. One Chinese newspaper beat the drum for coal gas, writing, "As a
'green' energy source of good quality and high efficiency, coalbed methane has a
promising future."
Fuxin City in China's Liaoning province is China's first city to replace
coal-made-gas with CBM. Coalbed methane now supplies more than 80,000 households
and 1,000 taxis. Twenty-three year-old taxi driver Li Gang is happy about using
compressed coal-bed methane in his cab. "I can save on half of my expenses for
fuel each day," he told Xinhua news service. One cubic meter of compressed CBM
is the equivalent of 1.13 liters of gasoline, but retails for less than one-half
the price of gasoline.
Starting in January, Jincheng City refitted about 90 percent of the city's
1300 taxis to use both compressed CBM and gasoline. At China's largest CBM
exploitation base, Quinshui Basin, wells are operating at full capacity to help
fuel factories, households and most importantly the city's growing dependency on
automobiles.
China hosts more than 30 trillion cubic meters of CBM reserves, according to
the China Coal Information Research Institute, and ranks behind Russia and
Canada for the world's largest reserves. This much CBM is tantamount of 45
billion tons of standard coal. Some sixty percent of the methane gas is stored
in coal beds below 1500 meters, which can easily be developed.
In 2004, China's coal mines polluted the atmosphere by pumping out 14 billion
cubic meters of coal gas. By accelerating coal mine development in China, the
emissions problem will worsen. Some experts estimate more than 17 billion cubic
meters will be released by 2020. Because of the global shortage of energy
sources, the Chinese are now turning to CBM as a reliable substitute for
conventional natural gas.
Following the extraordinary publicity about deaths from methane gas
explosions in China's coal mines, China's State Council, introduced measures in
2005, to harness gas by developing CBM projects and de-gasifying mines. To
intensify CBM exploitation, the State Council issued a 16-clause guideline, this
past Ju ne, offering a number of preferential policies on land use and access of
methane-generated electricity to local power grids. Because of the urgency to
get CBM in broader use, two months later, the National Development and Reform
Commission began measures to put the guidelines into practice.
New CBM Drilling Technologies Move China Forward
In the mid 1990s, China began exploring some of its vast CBM reserves.
Inadequate investment and technology led to the formation of CUCBM. The
state-owned CBM company began attracting foreign partners to invest in
developing China's CBM reserves and to bring with them new drilling
technologies.
In 2005, China consumed 1 billion cubic meters of coalbed methane gas and was
expected to use 1.4 billion cubic meters this past year. To date, more than 600
CBM wells have been sunk across China. Most remain in the exploration and pilot
stages. New technologies brought to China through joint ventures with CUCBM
could help accelerate development and dramatically increase the number of CBM
wells
As we mentioned earlier, new CBM drilling technologies have arrived in China
to advance many CBM projects more efficiently into production. With an eye to
reduce cost and maximize efficiency, drilling technologies from the U.S. and
Australia are being brought to China to expedite the emerging CBM sector.
Multi-Lateral Drilling Technology (MLT) offers solutions to tough economic
climates and rough operating conditions. MLT has been used to recover 'heavy
oil' deposits, such as those found in Canada or Venezuela. This technology has
also found its way to the hostile North Sea to increase recoverable reserves
from those oil fields.
Partly to reduce well construction costs, another advantage is to add
incremental reserves and production rates to a project. Uneconomic projects
could suddenly be made to work. When we spoke to Nathan Mitchell of Mitchell
Drilling (Brisbane, Australia), he told us many previously sub-economic projects
could become prof itable by using his Dymaxion® drilling technology. Mitchell
told us CBM extraction could drop to as low as $1.10/mcf, whereas others were
struggling to extract for more than three or four times the cost.
Mitchell was quite excited to import his drilling technology to China through
the company's joint venture with Pacific Asia China Energy. The joint venture
would have an exclusive to utilize the Dymaxion® technology in China for all CBM
drilling and coal mine de-gasification projects. At a coal symposium in Guizhou
province this past spring, Mitchell spoke of the numerous coal companies which
expressed a high level of interest in his company's drilling technology. From
what we understand, the first such drill rig should shortly arrive in China.
Most MLT has been used for oil exploration projects. Noted, however, is that
MTL may significantly impact reservoir spacing in deep, tight gas wells by
helping to achieve optimal drainage spacing, which is impeded when drilling to
deep reservoirs. By contrast, Mitchell has drilled more than 250 CBM wells in
Australia and had moved forward with CBM drilling in India. This is the
company's first entry to China, where rugged terrain could test the efficiency
of his system.
CBM Timing Coincident with China's Red Hot Stock Market
China's Shanghai stock exchange is now among the world's best performing
bourses. The Shanghai Composite Index now approaches 3,000, having hit a record
high last week. Millions of Chinese have exited the frothy real estate market to
trade stocks - more than triple the number of investment accounts were opened
last year compared to 2005.
In July, commodities guru and best-selling author Jim Rogers told
StockInterview he had cashed out of every other emerging market in the world and
had invested heavily in China. China's financial markets collapsed two years ago
and have now returned with a vengeance. Remember 1999? That's China today.
According to the New York Times, one mutual fund raised $5 billion in a s ingle
day and some mutual fund managers are annually making more than $600,000 - in
China!
What's that have to do with CBM? At some point, and we have already heard of
interest of such, Chinese investors could very well flock into the CBM companies
we've written about. There is an irrational exuberance vibrating across China's
financial markets. But, this is also a country now attracting foreign
investment. Asian Development Bank has injected $117 million into CBM
development projects, Japanese banks have invested $20 million and National
Investment Company of China has announced it would invest more than $300 million
over the next seven years.
As more foreign capital comes to China for CBM projects, a scarcity of the
best CBM projects could come about. As we have noted in previous articles,
China's race for energy security has become a global challenge for its economic
growth. We expect many of the local industries and prefecture level cities could
plan to deal directly with the Chinese-foreign joint ventures in securing their
own gas supplies by direct investment in the foreign-owned companies. By
partnering with the foreign-owned, publicly traded companies, their communities
would ensure a reliable energy source.
Nearly half of China's coal mines are rich in gas, but CBM remains
undeveloped and still in its infancy in the world's largest coal market. Last
May, China's National Development and Reform Commission approved a five-year
plan to exploit coalbed methane. They plan to dramatically boost CBM output to
10 billion cubic meters by 2010.
In the back of our minds, we wonder what would happen should the aggressive
Chinese investment community rush into CBM in the same way many North Americans
and Australians have embraced the shares of uranium mining companies.
COPYRIGHT © 2007 by StockInterview, Inc. ALL RIGHTS RESERVED
James Finch contributes to StockInterview.com and other publications. His
focus on the uranium mining and nuclear fuel sector resu lted in the widely
popular "Investing in the Great Uranium Bull Market," which is now available on
http://www.stockinterview.com and on
http://www.amazon.com
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