international energy focus: CBM in China

Michael R. McElwrath,
Far East Energy Corp.

The booming Chinese economy is now old news-so much so that recent word that the Chinese economy expanded by 9.5 percent in 2004, the fastest rate in 10 years, hardly raised an eyebrow. While economic growth may moderate, if one can call it that, to 8 percent in 2005, there is really no end in sight. Massive energy consumption is required to fuel the racing economic engine, and then, as the economic growth creates more purchasing power for 1.3 billion people, they buy appliances and cars, thus compounding spiraling energy demand.

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The task confronting China’s leadership is daunting: producing and importing sufficient energy supplies and infrastructure to fuel sustainable economic growth (and the political and economic muscle that comes with it) while at the same time addressing severe pollution problems that arise largely from burning the fuels that enable that growth.

China is tackling the challenge: grudgingly producing more coal and building more coal-fired plants because it must to avoid economic disruption and rampant power shortages, but emphasizing increased exploration and production of gas and cleaner burning fuels in an effort to at least slow the increase in coal utilization. China is also phasing out the heaviest-polluting plants, and speeding construction of cleaner gas-fired, hydropower and nuclear-fueled power plants. Perhaps the most intriguing new weapon in China’s struggle to produce more energy while battling pollution is the production of coalbed methane, a plentiful resource that may ultimately prove to be second only to coal in energy production potential and a fuel that not only burns cleaner, but one that in its very production markedly improves the environment.

China has become the world’s third-largest energy producer (9.5 percent of total energy production), and the world’s second largest energy consumer (over 10.5 percent of energy consumption); and its energy demand is expected to grow at more than 5.5 percent per year through 2020. All this growth and demand for energy has come at considerable cost to the environment. Coal accounts for 63.25 percent of China’s energy production and fully 77 percent of its power generation. Remaining energy balance data is as follows (from IEA 2002 statistics).

“- energy production:
“- oil 13.7 percent
“- gas 2.8 percent
“- nuclear 0.5 percent
“- hydro 2.0 percent
“- other (combustibles, renewables, waste) 17.8 percent.

“- power generation:
“- oil 3.0 percent
“- gas 1.0 percent
“- nuclear 1.5 percent
“- hydro 17.2 percent
“- other 0.1 percent.

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The over-dependence on coal has resulted in China having the dubious distinction of laying claim to seven of the 10 most polluted cities in the world according to the World Health Organization, and 30 percent to 40 percent of China now experiences acid rain (U.S. Dept of Energy-Fossil Energy). Add to that more than 6,000 fatalities annually from methane explosions in China’s coal mines, and one can see why Chinese planners have a love-hate relationship with their most plentiful resource.

China is now second only to the U.S. in electricity generation capacity (384.5 GW in 2003, probably 415 GW now) and accounts for 10 percent of the world’s total annual generation. Power consumption grew 7.8 percent annually throughout the ’90s and by a breathtaking 15.4 percent in 2003 and 14.9 percent in 2004. As a result, in 2003, 21 out of 34 provinces (and cities with provincial status), suffered large-scale electricity shortages, and 24 were short of power in 2004, when the shortage reached an astounding 30 GW. The shortage for 2005 is expected to be 25 GW and will persist into 2006 despite the fact that 50.55 GW of capacity was added in 2004 (a new world record).

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Interestingly, at least 8 GW of this new power plant construction was not even approved by the powerful National Development and Reform Commission (NDRC). and most of it came in the form of new coal-fired facilities, some of which might not have withstood NDRC review. Perhaps in reaction to this unapproved construction, in March of this year, Ma Kai, chairman of the NDRC, stated that, henceforth, China would limit construction of certain coal-fired plants to reduce the strain on coal supplies and cut pollution, while seeking to address the power shortage by accelerating construction of nuclear power plants and generators that use cleaner-burning fuels such as natural gas, wind and solar.

The Central Government is vigorously pushing gas production, infrastructure and utilization. China’s Tenth Five-Year Plan (2001 to 2005) called for the output of natural gas to nearly double, and China’s State Council is pushing for quadrupling gas production (from 2000 levels) by 2010. Given the voracious energy appetite of China’s robust economy, not even this enormous growth in gas production, and corresponding increases in nuclear capacity and hydro, will keep China from burning more coal, but at least the emphasis on gas will lessen the absolute growth in coal usage.

In the power sector, where growth in consumption is forecasted to be 8 percent to 9 percent per annum though 2010, and 4.3 percent per year through 2025, the largest growth in terms of fuel share is projected to be natural gas, largely because of its relatively clean-burning nature (EIA-DOE July 2004). Although IEA analysis suggests that gas may not be cost-competitive with coal for baseload power generation in China, because of feedstock price, Chairman Ma recently told the National People’s Congress that China plans to institute a pricing system charging different rates for power generated by different resources to favor cleaner fuels and promote energy conservation. Such a step could have a very positive impact on the competitiveness of gas as a fuel source for generation. If China truly wants to hasten the development of its gas resources and market, it certainly should seek to create a level or favorable market for gas-fired power generation since larger power plants create the kind of demand that justifies upstream investment in gas exploration and production and in transportation and distribution infrastructure. For example, it might take twice the capital and fully 10 years to create the same gas demand in the residential sector as that created by a 600 MW power plant that can be built in three years (Jones Day Publications, Dec. 2003).

In fact, the State Development and Planning Commission projects that the share of China’s power produced by gas will grow from 1 percent in 2001 to over 5 percent by 2010 and 10 percent by 2020. Challenged to achieve what may appear to be unrealistic goals of quadrupling gas production and growing its share of power generation to 10 percent from 1 percent, China’s ace-up-the-sleeve may be its enormous, but virtually untapped, coalbed methane (CBM) resources estimated to comprise 31.46 trillion cubic meters (about 1110 TCF) of gas. CBM now accounts for almost 10 percent of all U.S. gas production, and by 2010 could account for 10 percent of China’s gas production. What makes CBM a silver bullet in China’s quest to quench its energy thirst while simultaneously combating pollution is that it (a) represents a tremendous domestic energy resource, that (b) burns substantially cleaner than coal, and (c) actually accomplishes a net reduction in the emission of methane into the atmosphere. Methane is a potent greenhouse gas with more than 20 times the heat-trapping potential of carbon dioxide, and 10 percent of the human-originated emissions of methane into the atmosphere are derived from coal mining, with fully one-third of that coming from coal mines in China. Producing CBM in advance of mining operations not only converts to fuel gas what would otherwise be vented into the atmosphere, but could also save many of the 6,000 miners’ lives lost each year in Chinese mine explosions.

Another factor making CBM so attractive to Chinese energy planners is its location in central China, making it relatively closely located to China’s major markets and infrastructure. For instance, Houston-based Far East Energy Corp. is exploring two tracts of roughly 500,000 acres apiece estimated to contain between 13.1 and 19.6 TCF of total gas-in-place. The two tracts, acquired under a farm-out agreement from ConocoPhillips sit nearly astride two of the largest pipelines in China (the famous West-East Pipeline and the Shanjing II Pipeline) running to two of the largest cities in China (Shanghai and Beijing). So while there is some disappointment that proven gas reserves are only 53.3 TCF to date, with the largest fields located in western and north-central China, far from the commercial centers; there is a growing belief that CBM may more than make up for lowered conventional gas projections and make possible the rapid growth in gas utilization that is urgently desired for both energy supply and environmental reasons.

McElwrath is CEO and president of Far East Energy Corp.

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