Insight: China's coalbeds spur unconventional gas supply boom

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JINCHENG, China (Reuters) -

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 meters (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 meters (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 sulfurous 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.

Date: 11 April, 2012

Author: David Stanway, Reuters