China's coalbed methane industry development can benefit from US example

The biggest difference between CBM and conventional natural gas is that CBM is mainly adsorbed gas, while conventional natural gas typically is entrained within a reservoir with liquids or as free gas and thus is readily producible by conventional means.

But producing CBM is a complicated process that includes dewatering, depressurization, desorption, diffusion, and Darcy flow. Compared with sandstone, the permeability of coal seams is relatively low, so coal seams must be stimulated to increase the output of CBM and the connectivity between coal seam and well bore. So most CBM technology advances focus on how to find coal seams with high permeability and high gas content, completion technique, coal seam fracturing and dewatering, and the like. Some of the latest production advances include the cavity completion technique created in the San Juan basin, hydrofracturing, and the nitrogen and carbon dioxide injection techniques for enhancing CBM recovery that have been applied in the San Juan basin; at the same time, satellite remote sensing and orientation techniques and advanced reservoir simulations are being applied in CBM exploration of CBM.

Also contributing to the impetus for CBM development in the US has been the growing concern over the issue of catastrophic climate change. The US is a signatory to international protocols that call for it to reduce its methane emissions to 1990 levels by 2008-12. So the practice of extracting coalbed methane contributes to this initiative.

Developing China's CBM industry

The developing course of China's CBM industry may commonly be divided into three stages: underground drainage and venting of coal gas, surface drilling and exploration of CBM, and the formation and development of China's CBM industry.

Since the 1950s, China has been venting underground coalbed methane to the surface during coal mining. But this was only intended to avoid accidentally releasing the coalbed methane underground during mining operations and thus endangering the safe operation of the coal mine. Because of the low drainage yield and utilization rate, the underground venting and drainage of coal mine gas hardly warranted using coalbed methane as an energy source to any significant degree.

In the late 1980s, the US CBM industry successfully achieved commercial production and then rapidly developed. This precedent forced China and the world's other major coal-producing countries to consider that development of a large-scale CBM industry could be feasible.

Since then, China has aggressively promoted the surface exploration and exploitation of CBM all over the country. The Chinese government has placed great emphasis on CBM development, not only providing financial support for basic geological research and critical technology but also actively absorbing the aid from the international community. For example, the United Nations provided China with $12 million in funds in 1992 to help China implement CBM resource evaluation and demonstration projects.

During this stage, about 100 CBM surface exploratory wells were drilled, and it was preliminarily estimated that there exists 30-35 tcm of CBM resources in China, based on a nationwide CBM geological study and assessment (see map).

Simultaneously, successful pilot water-pumping experiments were undertaken in the infilled CBM well pattern located in the Jincheng and Liulin areas of Shaanxi Province. These resulted in output of 5,000-7,000 cu m/day of CBM from a single well.

These achievements not only point to the feasibility and promising prospects in exploiting and utilizing CBM resources in China, but they also lay down a solid basis for formation and development of China's CBM industry.

CUCBM

It is the establishment of China United Coalbed Methane Corp. Ltd. (CUCBM) that marks the formation and development of China's CBM industry.

Based on the achievements obtained during the nationwide CBM exploration and resource assessment study, and in an effort to continue on that success and accelerate the formation and orderly development of China's CBM sector, the State Council approved the establishment of CUCBM as a backbone enterprise of China's CBM industry in May 1996.

CUCBM has been put directly under the auspices of the State Council and is the sole state-owned professional company responsible for CBM exploration, development, production, sale, utilization, and transportation in China.

Moreover, CUCBM was granted the exclusive rights of exploration, development, and production of CBM in cooperation with foreign companies. CUCBM organizes all foreign joint ventures for CBM in China, carrying out the bidding, negotiation, signing, and implementation of contracts.

Policy support

Because development of a CBM industry is a key element of China's strategies for sustainable development of energy, environment improvement, and economic growth, the Chinese government has classified exploitation and utilization of CBM in the sector list for encouraging foreign investments and in the list of sectors and technologies receiving special support by the state.

In order to attract foreign capital, the Chinese government has been working on improving the climate for CBM investment.

Among the regulations formulated to govern CBM project management, effective investment procedures, contract patterns, and foreign investment incentives are the following:

• China's CBM resources are owned by the state, and the approval and licensing of the exploration and production of CBM resources are undertaken at the highest level of the State Council.
• The development of CBM is being undertaken along the same lines as the development of conventional oil and natural gas.
• CUCBM is an exclusive company that can participate in the negotiation of China's CBM cooperative projects on behalf of the Chinese government.
• The production-sharing contract (PSC) pattern is adopted in the foreign joint-venture projects involving China's CBM resources according to common international practice.
• Final contracts are examined and approved by the Ministry of Foreign Trade and Economics Cooperation.

These measures and procedures will enable the Chinese government to directly support the domestic CBM industry while providing reliable legal safeguards for CBM investors.

After CUCBM was established, the Chinese government formulated a series of incentives for the CBM industry:

• A 5% VAT (value-added tax) for onshore foreign joint-venture CBM projects is levied in kind, and a VAT for self-financed CBM projects with CUCBM will be set at 13%, with 8% reimbursed.
• Income tax on profits will be exempted in the first 2 years and set at only 50% of the full rate the following 3 years.
• Import duties and import-related duties will be exempted on imported materials, equipment, and ancillaries necessary for CBM exploration and development.
• The price of CBM will be determined by buyer and supplier through consultation based on world market principles.
• The royalty is levied based on the foreign joint-venture regulations for conventional natural gas; it is suspended for projects with an annual output of CBM not exceeding 1 bcm.

Chinese CBM industry status

By the end of 1998, CUCBM had drilled 19 CBM exploratory wells in self-financed projects in the Qinshui basin in Shanxi Province.

A stable output of CBM has been achieved from exploratory wells placed on production in the southern Qinshui basin, with the highest daily output, 16,303 cu m, produced from the TL-007 well.

About 100 bcm of CBM resources have been indicated within an area of 550 sq km in the southern Qinshui basin, which indicates good potential for exploring CBM in this area.

In the foreign joint venture CBM projects, by August of 1999, CUCBM and US oil companies, Texaco Inc., ARCO, Phillips Petroleum Co., and Saba Petroleum Co., had signed six PSCs for the cooperative exploitation of CBM.

The total area of the six contract concessions is 12,717.34 sq km, representing a potential CBM resource of 690.6 bcm.

The total investment of these six contracts provided by the foreign partners during the exploration period is expected to reach about $60 million.

If all six projects confirm their targeted potential resources and enter into the development stage, they could have a production capacity of about 35 bcm/year of CBM. At present, all six are still proceeding through the exploration stage.

It is expected that CUCBM will sign about another five PSCs for the joint-venture exploitation of CBM in the near term, which shows the broad developing prospects for foreign cooperation in China's CBM industry.

China's CBM industry is just unfolding and soon will be entering a strong growth phase. Plans call for a development goal for China's CBM industry, in the medium-to-long term, that entails 4-5 development and utilization centers in the next 5 years. By 2005, China's production of CBM is projected to be 3-4 bcm/year; by 2010, 10 bcm/year.

US vs. Chinese CBM

A number of key differences mark China's CBM industry vs. that of the US:

• China's CBM resources are owned by the state, and licenses of exploration and production of CBM and foreign joint ventures for CBM are reviewed and approved by the state's department in charge of mineral resources, while CBM resources of the US are owned by the local government or private enterprise.
• China's CBM industry is still in its infancy. But the US CBM industry has reached a mature stage and is large scale in scope, playing a significant role in domestic energy supply. Innovation in technology and enhancing CBM recovery have become the principal tasks of the developing US CBM industry.
• The geological characteristics of CBM are different in the two countries. The coalification of China's coal-bearing basins occurred earlier than that of the US. Because coal seams in China underwent more-complicated tectonic shifts or structural deformation than those of the US, the geological characteristic of coal seams in China and US are very different-thus China can't completely copy the US experiences in exploitation of CBM.
• The infrastructure and market conditions of CBM are very different. There is a developed and far-reaching pipeline transportation system available that provides convenience for marketing and downstream utilization of CBM in the US. But the pipeline system for CBM is very underdeveloped in China, even if the market potential of CBM is great and strongly state-supported.
• Economic supports provided by the US government for the CBM industry are mainly embodied by the tax credit, focused specifically on CBM as an unconventional energy sources. China's support for its CBM industry is mainly embodied by tax exemption and isn't more preferential than that of conventional natural gas.

Conclusions

In spite of many differences between the CBM industries of China and the US, China's CBM industry development can benefit from emulating some aspects of the US industry, notably on technology and management issues.

Some conclusions follow:

• At present, the proportion of CBM in total output of natural gas in the US is about 7%, and CBM has held an important position in energy supply and economic development.

China has more abundant CBM resources than the US, and the restrictive role of energy on economic development in China has not markedly improved; moreover, China's energy structure has to be improved urgently in environmental terms through the expansion of cleaner gas energy sources. Therefore, China has even stronger reasons than the US to develop its CBM industry.

• China's coal output ranks No. 1 in the world. It is well known that the exploitation and utilization of coal in China has caused very serious air pollution. Exploitation and utilization of coalbed methane in China is an effective way to cut down emissions of methane and reduce the waste of energy.
• In the light of the successful practices of the US CBM industry, strong support from government is necessary for the development of a CBM industry, especially in its infancy. The government should create a more preferential investment environment for the CBM industry.
• The Chinese government should intensify the investment in exploring and developing CBM resources, perfect a regulatory environment for CBM, issue more preferential incentives vs. those for conventional natural gas, and provide fair-market competition conditions for utilization of CBM.
• At the same time, attracting more foreign enterprises to join in cooperative exploitation of China's CBM and taking full advantage of foreign advanced technology, experience, and capital are also important measures to accelerate the development of China's CBM industry.
• President Jiang Zemin said, "Depend on the progress of science and technology to develop the CBM industry." In order to form systematic technologies and techniques consistent with the geological characteristics of China's CBM and set up China's own CBM industry with its distinctive national characteristics, we should increase investment in research of technology for the exploitation and utilization of CBM, manage to study the basic geological theories and key technologies, and work at constructing a CBM demonstration project.
• Another important reason why the US CBM industry greatly succeeded is that there is a well-developed pipeline transportation network for natural gas in the US; in China, instead, this is the weakest link. Therefore, China should both reinforce investment in infrastructure construction, including pipelines and intensify efforts to promote demand for CBM.

Bibliography

Bibler, Carol J, Marshall, James S., et al., "Status of Worldwide Coal Mine Methane Emissions and Use," International Journal of Coal Geology, 1998, (35) pp. 283-310

The authors-