Strengthening Foreign Cooperation, Accelerating Development of Coalbed Methane Industry

By Sun Maoyuan
ProfessorChina United Coalbed Methane Corporation

1 Future Position of Coalbed Methane in China’s Energy
The energy sustainable development is of the most importance with regard to strategies of the sustainable development in the national economy. From the point of view of long term development, two issues may obstruct the sustainable energy development in China: the first is unreasonable energy mix and the second is big shortage for the clean energy demands and supply.

Currently, the world energy consists of coal, petroleum, natural gas, hydropower and nuclear power. In 1998, in the world energy consumption mix, coal, petroleum and natural gas account for 26.2%, 40.0% and 23.8% respectively. The relevant figures in China are 71.6%, 19.8% and 2.1% respectively. Observing the trend of the world energy consumption mix, it is tending towards the clean energy. For instance, it is predicted by International Energy Agency that by 2020, in the world energy consumption, coal consumption would drop to 22.6%, petroleum and natural gas would be 36.7% and 29.0% respectively. Based on the policy for the energy sustainable development, by 2050 the Gross Domestic Product (GDP) will be 28.4 folds increase than that in 1990. The total energy will be 3.7 folds increase. Per capita energy will be increased by two times. Coal will account for 47% to 50%, i.e. coal will be still the main energy in China. Predicted by a certain international organization, based on the economic workable reserves and the current output, China’s coal economic workable reserves are 92 years. Those for the petroleum and natural gas are 24 years and 58 years respectively. It is predicted that by the year of 2010 China’s crude oil demand will be approximately 296 million tons, among which the domestic oil output will be approximately 160 to 170 million tons. By 2010 and 2020, the shortage for the natural gas supply in China will be 30 billion to 40 billion cubic meters and 90 billion to 100 billion cubic meters respectively.

Coalbed methane is a resource generated together with coal. China is rich in coalbed methane resource. It is estimated that the coalbed methane resource is between 30 trillion and 35 trillion cubic meters, which is equivalent to the resource of natural gas. In China’s 13 major coal-bearing basins, 10 coal-bearing basins are located in North China with 22.27 trillion cubic meters of coalbed methane resource, accounting for 68% of the total coalbed methane resource in China. The population is concentrated in the region of North China. There are developed economies and excellent market conditions in the region. Such a nice geographical advantage could make up for the shortage of conventional natural gas resource.

The tentative plan to the development of coalbed methane industry in China is, by making every effort, to achieve an annual output 3 billion to 4 billion cubic meters by the year of 2005, by 2010 to reach 10 billion cubic meters, by 2015 to reach 20 billion cubic meters, which will achieve a industrial production in scale. It is estimated conservatively that coalbed methane will account for 20% to 25% of the gas energy. Thus, coalbed methane will hold an important position in the energy of China.

2 Strategic Position, Current Status and Experience to Coalbed 
Methane Foreign Cooperation
In the beginning of the founding of China United Coabed Methane Corporation, President Jiang Zemin made with pleasure the inscription: “ Depend on the progress of science and technology to develop coalbed methane industry and benefit the people ”. It is President Jiang who at the first time addressed the coalbed methane to a height of industrialized development, which has become the guiding principle of our work. The United States is the first to be successful worldwide in the coalbed methane industry. In 1999, its coalbed methane output reached 35 billion cubic meters accounting for about 7% of the output of the conventional natural gas. Up to now, the coalbed methane industry in USA has still been vigorously developing. Someone in this field foretells that it will enter the "Coalbed Methane Era" in the 21st century.

It isn’t easy to create a new industry at any time. The development of coalbed methane industry in USA has undergone a long way. It took 30 years for USA to set up the first coalbed methane production well in San Juan basin in 1953, till 1998 the construction of Oak Grove coalbed methane field located in the Black Warrior basin in Alabama was completed and put into operation, and till the year of 1983, the coalbed methane output in USA reached 173 million cubic meters. During 12 years period from 1983 to 1994, the coalbed methane output in USA increased sharply to 24.3 billion cubic meters forming a large production in scale. During this period, the investment for the CBM basic research reached US$430 million, the development fee was close to US$4 billion.

From the end of 1980s China restarted the test of surface drilling to extract coalbed methane. Until the end of 1990, total 168 CBM wells had been drilled. The distribution of CBM resources in China has been roughly known. Some pilot well tests have achieved success. However, so far there is no commercialized production base to be set up in China. It is attributed to the following reasons: CBM geological conditions are complicated, lack of enough input, the scientific research is far behind and technologies are backward, etc. The solution to the above problems should be to seize dominant issues and to definite the target so as to further development.

Take China’s Ocean Petroleum Industry as an example. Its foreign cooperation has been intensified. Under the condition of fund shortage and lack of technologies, within over 10 years such a short period, it makes China establish a new and ripe ocean petroleum industrial complex. Its experiences are worth to make use of. At present, the coalbed methane industry in China is in the beginning stage. It is also lack of capital, technologies and management experiences. If the policy “combine enterprise-run CBM project with foreign cooperation, take the foreign cooperation in the dominant position and strengthen opening-up and oversea funds introducing” is carried out, it will reap the effect of getting twice the result with half the effort and accelerating the industrialization of CBM development. In other word, during more than 10 years to come, in the strategies for the CBM industry development, the foreign cooperation must be put in the most important position.

By the first half of 2000, China United Coalbed Methane Corp.(CUCBM) has signed 7 PSC (Product Share Contract) contracts with the American Texaco, Arco, Phillips and Greka Oil Companies, and the Australian Lowell Oil Company to cooperatively extract coalbed methane. Among 7 PSC contracts, 5 are located in Hedong coal field in Shanxi province, one is located in Huaibei coal field in Anhui province and one in Fengcheng mining area in Jiangxi province. The 7 contracts cover a total area of 13,000 km2. It is estimated that total CBM resource is 700 billion m3. 5 projects are now in the second phase of the exploration period and the trial of de-watering and gas production is or will be performing. It is expected that by the end of 2000, total 35 CBM wells, which belong to the current foreign cooperative projects, will be drilled and nearly 200 km of seismic exploration will be completed. The risky investment of foreign sides will be up to US$67 million, which is 6 to 7 times as much as the investment of domestic projects run by CUCBM. At present, CUCBM is authorized the CBM exploration rights. The area of cooperative blocks, which is allowed or will be cooperated with foreign companies, is over 30,000 km2. 

From 8 January 1998, the first CBM PSC contract was signed with the American Texaco Company, up to now, in the period of more than two years China side has learnt from foreign partners many experiences including construction technologies, research, testing, assessment and management, etc. Technical personnel of the China side has been abroad three time for the training total 31 people excluding trainees in 2000. During the collaboration, China side cooperated very well with the foreign side and something new has been created in the following two aspects:

The first is to attach importance to build up and make sure the market for CBM utilization. Without the market support, CBM development will be no any economic value. Without fixed market, it will be the biggest risk for CBM development. Nanhaiya No.13 natural gas project jointly run by China Ocean Petroleum Corporation and American Arco Company, after the completion of the gas field development, it took 8 years for them to fix users. This is a warning for us. At present, both Chinese and foreign sides attach importance to build up and fix the CBM market. For instance, at the beginning of the signing of Huaibei contract, the American Texaco Company investigated the potential of the CBM utilization market. After the completion of the first phase of the exploration period, a 17-people united investigation team, organized by CUCBM, Huaibei Mining Group and Texaco Company, made a comprehensive investigation to the State Planning Commission, the Planning and Design Institute of China National Petroleum Group Company, Langfang Pipeline Company, the Planning Commission of Anhui province, Oil and Chemical Industry Bureau, State Power Company, Bangpu Municipal Planning Commission, Suzhou Municipal Planning Commission, Huaibei Municipal Planning Commission and the potential users under the jurisdiction of above 4 cities. The potential of CBM market in Anhui province including the relationship of demands and supply vs. the gas price, energy demands and utilization methods and something about the pipeline net construction were all found out. The team also signed memorandums for the CBM supply and demands with 7 users. Through the investigation, we have preliminarily defined the priorities in regions and industries of CBM users with the advance of the rolling-type development. Meanwhile, both our determination and confidence have been heightened for the exploration and development of Huaibei CBM resource. It has also helped formulate the preliminary development strategy.

The second is that both Chinese and foreign sides had a joint geological study, which yielded notable effect. The foreign cooperation of the CBM development is different from that of conventional oil and gas. China side owns more detailed data on CBM fields and has more experiences in the geological condition analysis. Combining Chinese experts with foreign experts will achieve the effect of “1+1 more than 2” and superiority complemented one another. Concerning the Huaibei project, it was not so good in the well position selection during the first exploration phase. There was igneous rock intrusion in the main coal seam of Well SN-1. No.10 coal seam of Well SN-2 was washed by river bed sandstone. The coal seam where Well NP-2 is located was shallow buried leading to a low gas content. In order to accurately find out the geological features in cooperative blocks and reasonably choose the exploration target areas, CUCBM enthusiastically initiates a joint research in collaboration with foreign sides. As the first party, CUCBM and Texaco have signed the contract with Anhui Coal and Geological Bureau (the second party) the "Joint Geological Study on Huaibei Coalbed Methane Project in Anhui Province, China". With the assistance of and in collaboration with Huaibei Mining Group Company, during 120 days period, China side cooperated very well with the foreign side. The research task has been completely fulfilled. During the study period, 1634 wells were utilized. Seismic survey line 996 km, 31 electric well test points, the survey length 53 km, 202 pieces of CBM well test data, 8 geological reports, 16 drawings were finally made and a study report was formulated. The priority regions and blocks selected in the Study report and the proposal on the well position selection have played a positive role in the layout of prospecting wells in the second phase. The joint research method has brought forth new ideas to the CBM foreign cooperation. Foreign sides are very satisfied with such a method. Comparing with the conventional method used in the oil and gas industries that solely sell data package to foreign sides, the new method can not only save the research fee and time of foreign sides, but can also obtain detailed and reliable results from the research, and has given full play to Chinese experts’ professional knowledge. Texaco is planning to continuously adopt this method in the future cooperative block such as Zhunge'er block in addition to purchase the data package.

3 Preliminary Prospect on Strengthening Foreign Cooperation
First of all, we should seriously carry out contracts signed for CBM foreign cooperation. In the course of performing contracts, it is expected to strong our teams and raise step by step the professional level of Chinese technical personnel, and create an external environment favorable to operators in order to make the cooperative blocks achieve commercial development as soon as possible. 

Secondly, create conditions and expand opening up to sign 5 to 7 PSC contracts recently. CUCBM has gained CBM mining exploration rights of 8 new blocks in Ningxia, Shanxi, Inner-Mongolia, Shannxi and other regions, etc., and is applying for opening up to foreign countries. The application report has been submitted to relevant governmental department. Meanwhile, CUCBM has reached agreements of intent on CBM cooperative development with Texaco, Phillips, Virgin companies and other foreign enterprises. Recently it is expected to sign 5 to 7 new contracts for foreign cooperative development. In Guizhou province, the energy base located in southwest part of China, the reliable CBM resource reached to 3.2 trillion m3 accounting for about 22% of total CBM resources in China. The coal seam here is thick and has high gas content. The overburden condition is good. And the potential of the market is also very nice. Both Guizhou provincial government and CUCBM hope to select favorable targets from the local 15 coal-bearing basins to draw foreign cooperative partners to jointly develop and utilize CBM resources. CUCBM is now still searching for some new blocks of foreign cooperation in Yunnan, Shannxi, Xinjiang and other regions, etc.

Thirdly, expand foreign cooperative fields and pay attention to introduction of scientific and technical collaboration. Geological conditions of CBM resources in China are rather complicated. It is necessary to develop the production increasing technology suitable to China. The joint research project ”carbon dioxide injection to raise CBM extraction rate “ undertaken by CUCBM and Canadian Arbert Research Institute has obtained supports both from Chinese and Canadian governments. We cordially hope to get more supports and concerns from the international society in the respect of CBM science and technology. 

Finally, perform the policy “priority project breakthrough”, strive for making the cooperative blocks suitable for development achieve commercial production as soon as possible. The Panzhuang Block in Jincheng of Shanxi province covers an area of about 150 km2. 7 CBM wells have been drilled. The well group water drainage and gas production started from 1994. The average daily output for a single well is 1000 m3 to 4000 m3. This block belongs to the coal precision survey region with detailed geological data. Around the block there is a number of high production CBM wells run by CUCBM and CNPC. Based on that, a favorable development block, which takes Panzhuang and Fanzhuang coal fields as its center and covers an area of 550 km2. The block's reserves are up to 100 trillion m3, can be formed. CUCBM, Jincheng Coal Mining Administration and Geomet Company intend to make Panzhuang block take the lead to achieve commercial development within a short period. It is expected to form the CBM production base in south part of Qingshui through rolling-type development and by means of the way of joint development.

Concerning the Liulin Block of Hedong coalfield, judged by the recent drilling results, the CBM reservoir condition here is nine. It is possible to start gas production earlier than the expected time. Panzhuang and Liulin block covers a small area and has good geological conditions. It is easy to become commercial production. Its successful operation will increase the confidence for people investing in CBM development.

4 Striving for Appropriate Encouraging Policy
Generally speaking, compared with the conventional natural gas, the CBM development requires a big investment on the initial stage. The operation cost is high and single well output is low. The investment return period is long, which make it in the inferiority position in economic competition. CBM development and utilization has huge economic and comprehensive social results. During a certain period, appropriate adjustment and control exerted by the government and financial support from the government will be the essential condition for development of CBM industry.

As everybody knows, the American CBM industry, which started in early 1980s and has got a rapid development, was benefited from the government encouraging policy. In later 1970s, US Department of Energy and Environment Protection Agency respectively submitted special topic reports on the issue of CBM development to the Congress. The Senate had a congressional hearing on CBM taxation subsidy. In 1979, the American government issued “ Energy Unexpected Profit Act”, among which Article No.29 law of taxation subsidy in “Domestic Taxation Regulation” had greatly enhanced the enthusiasm of US enterprises for CBM development. The purpose of the regulation is to create a fair competition environment in economy between CBM production and conventional natural gas. The American experts’ study report thinks that if CBM price increases by 1.5 to 2 folds, in other word, the cost of CBM production is reduced by 50%, coalbed methane will not be defeated by conventional natural gas in the competition. This is also the reference value for defining the taxation subsidy. Thus, according to the regulation, coalbed methane produced from wells drilled from 1980 to 1992 can enjoy the taxation subsidy and can keep enjoying till 31 December 2002. The taxation subsidy rate will be adjusted with the rate of inflation each year. The subsidy rate in 1980 was US$0.2513/MBTU and by 2002 it will be US$1.385/MBTU. After taxation subsidy, the internal profit rate of the CBM project can be higher than 22%. Therefore, it has greatly stimulated the enthusiasm of the CBM producers. For instance, in late 1980s, the well mouth price of the conventional natural gas went down. However, CBM wells run by Amoco Company in San Juan Basin still keep increasing in quantity.

The Chinese government attaches importance to CBM development and utilization. The Coal Law stipulates that the State shall encourage coal enterprises to comprehensively develop and utilize coalbed methane. Coalbed methane exploration, development and utilization were formally listed in the “Catalogue of the Industries, Products and Technologies Currently Encouraged by the State for development” and the “Catalogue of Industries and Products Encouraged by the State for Priority Development”. In the strategy of China’s West Part Development, 5 provinces in the west part of China have put CBM development and utilization into the priority industrial projects.

Since the founding of CUCBM, the Chinese government has issued a series of economically preferential policies, such as (1) for CUCBM’s CBM foreign cooperation projects, the value-added tax rate levied is 5%. The value-added tax of self-run projects will be levied first and returned later on. 13% is levied and 8% returned making the actual tax 5%; (2) for the imported equipment, material and goods needed by CUCBM’s CBM projects, the Customs tax and import tax can be free; (3) the gas price can be based on the principle of market economy. The State will not limit the price; and (4) the royalty will be paid in accordance with the regulation for the foreign cooperation of the land conventional natural gas (calculated according to gas field), for the annual output less than 1 billion m3, free of royalty. The royalty will increase a little bit according to the annual output. The maximum will not be higher than 3% of the annual output. 

Except for the gas price, so far the Chinese government drew up the preferential policy for CBM foreign cooperation in the light of that of the conventional natural gas. I think that according to experiences from USA, coalbed methane should be given higher preference especially in taxation than that of conventional natural gas. Only in this way can the enthusiasm of both foreign and domestic enterprises be fired for CBM development. We should conduct a carefully study on how much taxation is appropriate for the CBM preferential policy. We are approaching the issue. Some experts suggest that currently we can strive at least for the following policies from the government: (1) for the foreign cooperation of CBM development, the value-added tax rate is hopefully zero; (2) Development of coalbed methane enjoys a preferential policy of free income tax for 5 years and pay 50% income tax for 3 years; and (3) free of the use fee of exploration rights and mining rights. 

5 Conclusions
The sustainable development of the society and economy in China sets a higher demand on the clean energy. The superiority of CBM resource and potential of the market in China make coalbed methane together with conventional natural gas occupy a certain position in the strategies of the sustainable development of China’s energy as reliable clean gas energy. The CBM industry is vigorously developing. It has a bright future. The foreign cooperation of CBM development will play a great role in the development of CBM industry in China. Expanding opening-up, drawing up more preferential taxation policy and creating more favorable investment environment are full and essential conditions for a healthy and vigorous development of foreign cooperation in CBM development.