For important disclosure information please refer to the last page of this presentation. Young pretender Coalbed methane faces challenges Kevin Garner.

For important disclosure information please refer to the last page of this presentation.

Young pretenderCoalbed methane faces challenges

Kevin Garner

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Introduction

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Kevin Garner is a chartered engineer with in-depth knowledge and experience of the origination and execution of clean-coal energy projects in Asia, including coalbed methane opportunities in China under the current production-sharing contract (PSC) mechanism for foreign companies. He has assessed the development, risk profile and performance-related issues of unconventional resources in Asia, having been actively at the fore of coal and clean-energy projects for the past 25 years with a focus on Asia since 2000. He brings a wealth of local knowledge of doing business in the region. 

Young pretender: Coalbed methane faces challenges - An overviewFor more than 15 years the international energy majors, followed by the junior explorers, have been looking at the opportunity to exploit the reported vast coalbed methane resources in China. Progress to date has disappointed despite significant sunk-exploration costs, with commercial exploitation limited to two specific coal basins.

What remains unclear for many is whether the difficulties experienced to date and what is seen by many as lack of progress and underperformance are a result of government policy, local administrative barriers, limited end-use opportunities and access to infrastructure, or a result of difficult geological conditions, unsuitable technical solutions and inadequate and inexperienced service providers. As is similar to developing new unconventional energy sources elsewhere, the answer is likely to be all, to one degree or another, of the above.

Kevin Garner provides a comprehensive overview of the coalbed methane sector in China, concluding that while coalbed methane has made significant progress in line with industry norms, it still faces significant challenges if it is to make a meaningful contribution to the clean-energy mix in the country.

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What is coalbed methane

Source Acronym Description Properties

Coalbed methane CBM Gas recovery from in-situ coal seams outside a defined mining area.

High methane content akin to natural gas.

Coal-mine methane

CMM Gas recovered either using pre- or post-drainage methods linked to an operational coal mine.

Gas drained in advanced of mining (pre-drained) similar to CBM, gas captured after mining (post- drained) typically 20-40% methane and 60- 80% air.

Abandoned-mine methane

AMM Gas recovered from a closed/abandoned coal mine.

Gas composition variable from high methane concentration (80%) to low as diluted with deoxygenated air and carbon dioxide.

It is likely that some 50% plus of CBM reported as captured and utilised in China is CMM.

This report focuses on CBM captured under a PSC where the definition of CBM is:

‘Any gas, mainly consisting of methane stored in coal seams and/or adjacent strata (including overlying and underlying strata) within the contract area.’

Source: Gartner

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Gas storage in coal seams

Coal has the ability to store a significant volume of methane whereby the gas is adsorbed within the internal coal structure allowing methane molecules to be densely packed into the coal substance.

Source: British Geological Survey, Creedy, Garner

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Gas stored in hydrocarbon reservoirsSource Description Production

Conventional Gas held in the pore spaces between particles.

Often in geological trap and under high pressure.

Dynamics of gas production understood and modelled.

Reservoir modeling can predict likely production profiles.

Tight gas sand

Same as conventional reservoirs, but with reduced porosity (storage volume).

Reservoir often less homogenous than conventional.

Same as natural gas but with reduced production rates.

Requires additional drilling per metre per of gas flow.

Drilling and completion in competent strata.

Coalbed methane

Gas predominantly absorbed into the internal structure of the coal.

Dynamics between dewatering and gas desorption and flow.

Challenging drilling conditions in comparison to other sources.

Production well failure and blockage issues.

Shale gas fraccing completion in horizontal boreholes is unsuitable.

Shale Low percentage of gas held due to dense strata.

Requires induction of fracture system in the strata for gas to flow.

Drilling and completion in competent strata.

Predictable gas-production profile with shorter well life than conventional or tight gas sands (TGS) wells.

Source: CLSA

Source: Gartner

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CBM reservoir producibility

PermeabilityCleat

development

Coal lithology and depositional

setting

Reservoir saturation and hydrodynamics

Tectonic and structural setting

Gas contentCoalbed reservoir

producibility

Source: CLSA

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CBM production profile

A typical production life for a CBM well is 5-15 years with maximum gas production within the first 12 months. Gas flow can be described as:

Initial high-water make from the formation and free-gas migration from the fracture and cleat systems.

Reducing water make as the gas is desorbed from the coal matrix and shrinkage occurs.

Stable/declining gas flows with minimal water.

Source: US Environmental Protection Agency

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CBM well drilling methods

When considered the most suitable drilling option the underlying consideration is what is the volume of gas recovered per cost per meter drilled, eg, for every dollar in the ground how much gas is recovered.

Type of well Gas flow Revenue¹ US$ well/annumm3/day m3/annum mscf/day mmscf/annum

Simple vertical 2500 900,000 90 32.5 340,000Single lateral 10,000 3,600,000 360 130.0 1,360.000MLD 25,000 9,000,000 900 325.0 3,400,000

¹ Assumes US$10/GJ or US$9.1/mmbtu. Source: AAGI, SGE, Gartner

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Estimating CBM reserves

Coal permeability Other reservoir parameters

Geological control Drill logs and geophysical data

Gas sales price Gas content measurement

Increase in gas price Gas quality

Gas flow Actual gas lifting costs

Multi-seam completion Well-maintenance costs

Well performance Water recovery and pumping

Well-decline curve Interaction between wells

Local infrastructure Well contingency

Drilling and completion costs Local services and support

Reproducibility for field development Wastewater treatment and disposal

Permits and approvals Opex costs

Gas content sampling Environmental compliance

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CBM resources in China

Reported CBM resources are of a similar order of magnitude to that of natural gas @ 38tcm with CBM resources reported as surface to <1,000m @ 39%, 1,000-<1,500m @ 29% and 1,500-2,000m @ 32% with about one third found in the Ordos and Qinshui basins. However, only about 50% of those classified as resources are within the normally accepted window of surface to 1,200m.

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58

76

95

99

166

171

180

438

0 100 200 300 400 500

Others

Yili

Halar

Erlian

Tuha

Dianqiangui

Qinshui

J unggar

Ordos

(tcf)

Source: Facts Global Energy, CLSA

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The Qinshui basin

Resource estimated at just under 400bn m3 consisting of free gas in the coal fractures and also that adsorbed within the coal matrix.

The basin has two main target coal seams the No.3 and deeper No.15.

The cumulative target coal seam thickness increases from circa 5-10m to 10-20m as we move from north to south.

Gas content is reported to reduce from a maximum 15 m3/t plus to less 5 to 10m3/t as we move towards the centre of the basin.

High coal permeability is reported in the northern Shouyang block at depths greater than 1,000m. A number of international experts suggest the permeability is in the order of 100mD with a value of 10-300mD with an average of 50mD reported recently.

Elsewhere, a figure of 1-10mD appears more the norm.

Some potential CBM areas are not reported on as these are subject to mining licence and outside the PSC framework. Source: FEEC

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The Ordos basin

The coal along this eastern margin can be described as thermally mature coal with a gas content ranging from less than 5m3/t in the Zhungeer PSC (north).

Gas content increases towards the south to over 15m3/t in the Shilou PSC block.

This increasing trend in gas content north to south is mirrored by a reduction in coal permeability and associated increase in gas saturation.

Target coals seams are the No.4/5 and No.8/9 and these vary over the basin with cumulative coal targets of 5-20m and individual coal seams of up to 10m in places.

CBM exploration and production has examples of free gas that has migrated from the coal seam to the surround strata and held in what would be described a TGS reservoir. These gas resources the target for some operators.

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Gas production in China

In 2013 gas consumption was 5.3tcf (150bn m3) with some 25% coming from imports.

Gas consumption is set to increase about 5% YoY until 2040 culminating in an annual demand of 15tcf.

Natural gas production has risen from 1tcf in 2000 to 3.8tcf in 2013 but the gap between domestic production and consumption is increasing YoY.

Anticipated unconventional gas sources will contribute circa 25% of gas production by 2020.

In 2012 CBM production was 12.5bn m3 with utilisation of 5.2bn m3 or 42%.

The government’s CBM target is 30bn m3 (1tcf). To meet the target this would require about 8,500 STIS lateral wells producing 10,000m3/day (353mscf/day).

It is expected CBM and other unconventional gas sources will increase as a percentage of domestic production, although the likelihood of meeting the government targets remains slim based on current results.

The lack of success in CBM recovery in China are not only related to geological, regulatory, cultural and gas price issues but also the availability, suitability and compatibility of technologies and infrastructure.

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Gas pipeline infrastructure

Existing major pipelines for natural-gas supply in China at end-2011

China’s natural-gas market

China natural-gas transmission network

Source: CLSA, NDRC, PetroChina, companies

Source: Facts Global Energy

Source: BP Statistical Review

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Leading CBM operators - progressOperator PSC Basin Gross CBM

reserves (bcf)Positive Negative

AAGI/

CUCBM

Panzhuang Qinshui 1P@86

2P@242

3P@547

High number of production wells drilled using different drilling

and completion methods.

Adjacent to Jincheng Sihe mining area.

Favourable gas content/depth setting.

Concern over suitability, cost and performance of STIS multilateral design.

Lack of confidence in long-term well performance.

AAGI Mabi Qinshui 2P@254

3P@3,333

Large area.

Progress in reporting large reserve potential.

Concern over suitability, cost and performance of STIS multilateral

design.

No details of well performance.

FEEC Shouyang Qinshui 1P@415

2P@621

3P@790

High number of exploration wells drilled with good

coverage over the PSC.

Use of exploration wells for coal and other geological

characterisation testing.

1.8 mmcf/d of production and sales

Target coal seam No.15 at depths >1,000m.

(Current production about 600m.)

Modest to low gas flow per well for reported coal permeability.

STIS activities appear unsuccessful in higher target coal seams.

Modest coal seam thickness.

Fortune Liulin Ordos 2P@29

3P@49

Good drilling design and execution through former

partner Dart Energy.

Coal at shallow depths compared with other tier-1

PSC areas.

Loss of Dart Energy as active partner.

Access and potential issues with mining interaction.

Small PSC area limited reserves.

More than two target coal seams.

GDG Shizhuang

south

Qinshui 1P@180

2P@504

3P@2457

High number of production wells drilled leading to the

design of the LiFaBriC well.

Good initial gas recovery rates, in-house method to

enhance gas recovery rates.

High number of production wells drilled and ready

to connect.

Minimum testing of coal for geological control.

Uncertain well production profile over time.

Activities concentrated on limited area within the PSC, issues with

adopting positive results obtained to date to the whole PSC.

Local partner cooperation issues.

SGE Linxing Ordos P1@466

2P@1068

P3@ 1786

Exploration data reported in the public domain.

High number of wells drilled over the PSC block.

Predominantly a TGS play.

Well flow testing is short term; unable to fully evaluate long-term

production trends.

Cost of drilling and completion higher than standard CBM wells.

SGE Sanjiaobei Ordos Exploration data reported in the public domain.

High number of wells drilled over the PSC block.

Predominantly a TGS play.

Well flow testing is short term; unable to fully evaluate long-term

production trends.

Cost of drilling and completion higher than standard CBM wells.

SOG Sanjiao Ordos 1P@79

2P@406

3P@1022

Over 30 STIS wells drilled, significant geological and flow

data available; this can be evaluated against historic

exploration data.

Well-understood reservoir characteristics.

Lack of production well drilling in 2013.

Reported change of well design from multilateral to parallel laterals

(similar to LiFaBric).

Assuming 50% wells connected, gas flow per well averages 5,000m3/day

(100,000m3/day for 20 wells).

Source: Gartner

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Leading CBM operators - reserves

Basin 1P(bcf)

1P of total (%)

1P/2P/3P(bcf)

1P/2P/3P of total (%)

Principal CBM blocks 681 55 9,428 64

Other CBM blocks 0 0 979 7

TGS under CBM 0 0 0 0

Qinshui total 681 55 10,407 71

Principal CBM blocks 79 7 545 4

Other CBM blocks 0 0 700 5

TGS under CBM¹ 466 38 2,941 20

Ordos total 545 45 4,186 29

Combined total 1,226   14,593  

Source: CLSA, NDRC, PetroChina, companies

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Leading CBM operators - approvals

Block Operator Basin Chinese Reserve Report

Overall development programme

Panzhuang AAGI/CUCBM Qinshui

Mabi AAGI Qinshui Anticipated 2015

Shizhuang South GDG Qinshui

Shouyang FEEC Qinshui Preliminary approval September 2015

Sanjiao SOG Ordos

Preliminary ODP approved in August 2012 and EIA approved in March 2014. Final approval anticipated in 2015

Linxing East SGE Ordos Anticipated 2015 Anticipated 2016

Linxing West SGE Ordos Anticipated 2015

Sanjiaobei SGE Ordos Anticipated 2015 Anticipated 2016

Luilin Fortune Oil Ordos Anticipated 2015 Anticipated 2016

Source: Gartner

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Understanding the challenge

The release of data into the public domain - this is considered vital to attracting investment into an emerging sector.

Timeline for approval of the CCR and ultimately the ODP - this is not transparent. The process appears more aligned to the needs of the domestic partner and little to do with commercialisation but more a process of allowing the Chinese partner to secure and commit its investment.

Partner investment - as shown by FEEC the Chinese partnered may not take up its working interest post ODP. This may impact on community relationships, land access, gas sales and overall funding needs and risk.

Administrative costs - how much investment is allocated to local interests rather than the drivers for commercialisation? The issue of administrative burden post ODP also remain unclear as does the full structure of execution.

Day to day management - the operator needs full control of all technical and financial decisions; this is not unreasonable given the operator carries all the investment risk in the exploration phase.

Early gas sales - clarify/defining the process of early gas sales and open access to market opportunities. Commercialisation requires these actions are not be constrained by any the local participating SOE’s interests.

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In summary

No one drilling and completion method has been widely accepted. Encouragingly different methods have been applied and local knowledge and skills developed that will assist in unlocking the coal reservoir.

Geological data confirms the coal reservoir as “tight” with well-developed fracture systems in CBM hotspots; additional dollars in the ground for exploration will assist in advancing the understanding of these issues.

Access to long-term gas flows remains the most effective way to assess long-term commercial production and the suitability to drilling and completion methods to deliver a reproducible result over the PSC.

Access to gas distribution infrastructure and gas sales. Operations appear currently on hold in part on some advanced PSC waiting both approvals and infrastructure/sales contracts.

Gas flows are the most reliable indicator of actual commerciality rather than classified reserved and are needed prior to investing in infrastructure. But without sales the operator may not be in a position to continue drilling and may find it difficult to attract investment.

What additional discount factor should be applied to booked reserves when considering investment returns remains unclear and would be considered on a PSC by PSC basis.

So the young pretender is likely to remain a bridesmaid for some time to come.

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