china

NEW YORK (Dow Jones)--China needs more foreign investment to speed up output of coalbed
methane to help satisfy the country's soaring gas demand, said a senior executive of
China United Coalbed Methane Corp.
However, foreign companies with expertise in that sector say that complex, cumbersome
and time-consuming rules that also require investors to take China United as a partner
are a barrier to their involvement.
China's government has an ambitious target to boost its relatively modest coalbed
methane production twenty-fold in the period 2007 to 2010, hoping to emulate explosive
growth seen in the U.S. a decade ago.
U.S. coalbed methane output went from zero in 1990 to over 1.1 trillion cubic feet in
1999, accounting for 57% of the growth in domestic gas production over that period.
China, however, has been held back by limited domestic spending and lack of experience
in coalbed methane extraction, so to meet the target, foreign investment and expertise
are needed, the China United official said.
"We are seeking more investment from foreign companies, particularly those big
companies which have strong financial power, technical expertise, and capacity to handle
risks on CBM exploration and development," said Lin Jianhao, deputy general manager
of China United in a recent interview.
The Chinese government wants domestic coalbed methane output to reach 10 billion cubic
meters in 2010, up from 500 million cubic meters expected this year, to address a growing
natural gas shortage, he said. China's estimated reserves of the fuel are 36.8
trillion cubic meters.
While foreign operators see potential in China, given expected gas demand and the size
of its reserves, there are problems.
One thing discouraging investment are inflexible procedures required by the government
and China United, according to a senior official with Far East Energy Corp., a U.S.-based
company which has signed a partnership deal with China United.
China asks foreign companies to submit a complicated overall development plan before
production, which can only cover areas of proven reserves, said Michael R. McElwrath, CEO
and president of Far East Energy Corp.
This means operators have to spend a lot of time to prepare this plan, and then they
are blocked from expanding into broader areas which haven't been established to have
proven reserves, he said. He was speaking at a U.S.-China Oil and Gas Industrial Forum
held recently in San Francisco.
He suggested China amend the process in order to get more blocks into development,
while at the same time ensuring foreign investors pushed ahead rapidly in drilling and
production.
China United's Lin said his company had asked the government to simplify the
process, but given Beijing's concerns that looser regulation could result in
dilution of foreign investment in areas with proven reserves and disorganized drilling of
wildcat wells, he didn't expect a rapid change in the near future.
The other worry is China United's limited ability to clinch partnership with big
foreign companies.
In the decade since it was founded, it has signed around 30 contracts, but only a few
with big companies, including with the then ChevronTexaco and ConocoPhillips (COP).
Big companies usually asked for large blocks, but China United has mostly small blocks
available, and the government is in charge of drawing up the blocks, said Lin.
"We are calling for the government to grant us more blocks with larger
areas," he said, without giving any hint as to when a response to that suggestion
might be given.
One of the big foreign players has since pulled out, said Lin, explaining: "We
licensed exploration rights of about five blocks to Texaco in 1998, but so far it
hasn't made big commercial discoveries, so it has been withdrawing from the
projects."
Other foreign companies involved, mostly small and medium-sized groups, including Orion
Energy International Inc. of the U.S., Canadian energy company Ivana Ventures Inc.
(ANA.V) and Hong Kong-listed China Leason Investment Group Co. (8270.HK).
"Small companies are more enthusiastic than big companies so we would like to give
them a try. But we are concerned about their financial power for sustainable
investment," said Lin.
So far China United's foreign partners have invested CNY2 billion ($266 million)
in China CBM projects, compared with domestic investment of CNY1.5 billion, he said.
The amount falls far short of needs, given the expense of coalbed methane well
drilling.
It cost around CNY1 million to drill a well, but drilling so far had produced only a
low yield of gas for each well, averaging 4,000-5,000 cubic meters a day, a specialist in
the sector said.
China United's big rival in CBM extraction is PetroChina Co. (PTR), which is the
country's largest oil and gas company by assets.
It has an advantage in that it has been allocated a lot of oil blocks, with some of
them are in the vast and gas-rich Xinjiang region in northwestern China, and it has
substantial financial and political clout.
That said, it doesn't, for now, have the right to develop those resources with
foreign partners.
PetroChina has applied to work with foreign companies in the domestic CBM sector, which
would break China United's monopoly, and the authorities are mulling whether it can
launch a pilot project with a foreign company, according to a Chinese industry official,
who declined to be identified.
PetroChina seems confident. In late July, it signed a memorandum of understanding with
Australian gas supplier Arrow Energy (AOE.AU) to develop coalbed methane in Xinjiang.
Other domestic companies are interested in developing this energy source.
On Thursday, urban gas distributor China Gas Holdings Ltd.(0384.HK) said it plans to
start coalbed methane exploration in China's Inner Mongolia by the end of this year.


-Renya Peng contributed to the story. [email protected], +852-97306071
-Edited By Simon Hall

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(END) Dow Jones Newswires
September 21, 2007 00:56 ET (04:56 GMT)
Copyright (c) 2007 Dow Jones & Company, Inc.

Friday 21 September 2007 14:56:04:760 AEST