Interview from The Wallstreet Journal with Nick Davies
BEIJING (Dow Jones)--Coal seam gas producer Arrow Energy Ltd. (AOE.AU) is in talks to expand its footprint in China, as it gears up for a drilling campaign in the province that accounts for a quarter of the country's coal output.
Arrow is negotiating to add two more blocks in China this year, at the same time as preparing to drill 11 exploration wells in the Qinnan block in China's coal-rich Shanxi province, chief executive Nick Davies told Dow Jones Newswires.
One of the new blocks being negotiated is Dajing in the northwestern region of Xinjiang, although talks are at any early stage, Davies said. He didn't specify the location or reserves of the other block.
Coal seam gas - trapped stores of methane in coal seams hundreds of meters below the Earth's surface - has become one of the world's hottest energy plays, with more than $15 billion spent on mergers and acquisitions over the past year in Australia alone.
Foreign firms have targeted coal seam gas as a route into China's tightly controlled onshore oil and natural gas sector, and currently operate many blocks on their own, utilizing advanced technologies for gas extraction.
Among those with coal seam gas assets in China are Chevron Corp. (CVX) and Royal Dutch Shell (RDSB.LN). Many smaller producers are active too, including Fortune Oil Plc (FTO.LN) and Hong Kong-listed Enviro Energy International Holdings Ltd. (8182.HK).
"Among all the countries where we are working in Asia, China we think is the most prospective as far as coalbed methane is concerned," Davies said.
"We think coalbed methane resources in China are around 1,000 trillion cubic feet, which is about three times the reserves in Australia."
Monopoly Broken
Davies said Arrow's Qinnan asset is a "very prospective" block.
Drilling in the Qinnan block will begin as soon as its partner on the block - PetroChina Co. (PTR) - gives its approval, Davies said.
PetroChina, the listed unit of China National Petroleum Corp., is building up an independent position in coal seam gas after CNPC sold a 50% stake in China United Coalbed Methane Corp., or CUCBM, last year.
Until Sept. 2007, CUCBM had a monopoly on joint ventures with foreign investors for coal seam gas exploration and production. Analysts interpreted the regulatory change as a sign Beijing was becoming impatient with the slow development of the domestic coal seam gas sector.
In contrast to the U.S where coal seam gas output went from zero in 1990 to more than 1.1 trillion cubic feet in 1999, accounting for 57% of the growth in domestic gas production over that period, China's coal seam gas output has consistently fallen short of government targets.
Now, it has a target of more than quadrupling coal seam gas output to 2.2 billion cubic meters this year and plans to inject up to CNY2 billion by 2010 in 17 research and pilot plant projects to give the sector a boost, Xinhua News Agency reported.
China also plans to build nine coalbed methane pipelines capable of transmitting 5.73 billion cubic meters annually by end-2009.
"We're looking to certify about 400 billion cubic feet of gas on the (Qinnan) block by the end of next year, provided we can get started with the drilling program quite soon," Davies said.
In March, the Brisbane-based company signed an agreement to buy into an existing project that U.S.-based Far East Energy Corp. has in the Qinnan block.
The total reserves of the Qinnan block are about 12 trillion cubic feet, and there is about 5 trillion cubic feet of gas above a depth of 1,000 meters, which can be extracted using Arrow's technology.
Xinjiang Campaign
Arrow also has an agreement with PetroChina to develop coal seam gas resources in Xinjiang. It received a license from the Xinjiang government last year.
"We have been negotiating a production sharing contract with them (PetroChina) for some time. Most of that work is now completed, so we are now waiting for final approval from the government," said Davies.
Arrow hopes to start a 12-well exploration program in Xinjiang in June once the contract is signed and government approval is received.
Davies added a potential partnership China Gas Holdings Ltd. (0384.HK) and India's state-run gas distributor GAIL (India) Ltd. (532155.BY) to co-develop coal seam gas resources in the northern region of Inner Mongolia is still under consideration.
"We are looking at it, but it has not really progressed too far at the moment. Technologically, it has some challenges," Davies said.
He added: "It's still a possibility, but not high on our priority list at this point."
Arrow now has six coal seam gas projects overseas: three in India and one each in China, Vietnam and Indonesia. The company plans to have 12 international projects across Asia by the end of this year.
-Wan Xu contributed to this story, Dow Jones Newswires; 8610-65885848; [email protected]
