Methane gas in coal mines - that causes explosions claiming thousands of lives every year is expected to soon become a lucrative option that will supplement China's energy mix.

"The development of coalbed methane (CBM) exploration and production can not only prevent gas explosions in the collieries, but also help diversify the energy consumption mix, and we should intensify efforts to research, explore and utilize CBM resources," said Premier Wen Jiabao in a statement last December.

China, the world's second-largest energy consumer after the United States, is also believed to have the world's second-largest coal and CBM reserves, with the latter being an estimated 27 trillion cubic meters, say industry sources.

Each 1,000 cubic meters of CBM can generate heat equivalent to that produced by about one ton of petroleum.

Methane gas can be used either as a fuel for cooking, power generation or as high-quality raw material to produce fertilizer and formaldehyde.

Largely due to a lack of technology, there has been no commercial production in China; and most of the underground gas is either vented into the open air as a major green-house pollutant or even worse, causes many fatal mine explosions.

Official statistics show that 6,027 miners were killed last year in 3,639 colliery accidents, most of which resulted from methane explosions.

China wastes at least 6 billion cubic meters of CBM gas a year which is vented from the coalmines, equivalent to some 6 million tons of petroleum for heat generation.

"We have abundant CMB resources - almost the same amount as that of natural gas, and methane gas will bring a fortune for both operating companies and local residents. Otherwise it only remain a threat to our environment and coal miners" says Huang Teng, a senior analyst with Beijing LT Consultants Ltd, which specializes in the coal industry.

Several oil and coal companies, such as PetroChina and CUCBM, have already started some pilot projects to develop CBM resources, say market observers.

To tackle the technology problems of large-scale production, the country will introduce foreign expertise and then absorb the advanced technologies on a gradual basis.

PetroChina, which is a major natural gas producer in China, in late April signed a construct with Dallas-based CDX Gas Company of the United States to explore CBM reserves in North China's Shanxi Province.

According to the agreement, PetroChina will use CDX's technology to drill two horizontal wells and extract CBM in Qinshui Basin of Shanxi, which has estimated reserves of 75.4 billion cubic metres.

PetroChina is targeting 1 billion cubic metres of CBM production at Qinshui by 2008, and the nation's largest oil and gas producer has set an ambitious goal to produce 1.5 billion cubic metres the end of 2008, according to a report in Upstream, an industrial newspaper in oil and gas.

PetroChina is currently focusing its CBM exploration efforts in three regions in Shanxi Qinshui basin, Daning-Jixian Basin and the southern part of Ningwu Basin, say sources.

PetroChina declined to comment on the figures, but said the company is making intensified efforts to tap CBM resources, and will still concentrate its core business on oil and gas exploitation and pipeline construction.

Another key player in China's CBM development, CUCBM, has joined forces with two US companies, Far East Energy Corp and ConocoPhilipsto develop the Shouyang CBM block in Shanxi, one of China's largest proven CBM gasfields boasting some 200 million cubic metres of reserves.

When put into commercial operation, the project will be able to generate US$200 million annually, and start supplying clean energy to a host of major cities such as Beijing and Shanghai, and alleviate gas shortages in these fast-expanding regional economies.

State-owned CUCBM was established in 1996 as China's largest CBM outfit. It has been focusing efforts on exploration and production in major basins in Shanxi, Anhui, Guizhou, Yunnan and Gansu provinces and plans to establish four pilot production bases, industry sources said.

The CBM company intends to produce 3 billion to 4 billion cubic metres of CBM per year by 2006, rising to 10 billion cubic metres by 2010.

The hurdles to large-scale production, industry analysts say, are investment risk and unknown market demand besides technological disadvantages.

"Companies will take great risks in exploring, producing and marketing the CBM resources, and the government should provide some low-interest-rate loans to encourage the fast growth in China's CBM production," LT Consultants' Huang says.

Sources suggest some banks including Asian Development Bank have granted several million in for CBM exploration and enhancing the pipeline network primarily based on PetroChina's West-East Gas Pipeline.

Another four gas pipelines are to be built in Shanxi Province, to create a six-line gas transport network in the region based on the existing West-East Gas Pipeline and the Shaanxi-Beijing Gas Pipeline, according to Louis Yang, president of Virginia, US-headquartered Orion Energy International Inc, a compnay specializing in CBM exploration and production. It provides technology and consulatancy to both PetroChina and CUCBM.

CBM gas can be transported in a mixture with natural gas as they have the same composition.

Yang's company began its first CBM project in Shanxi last October through a partnership with a local coal firm, and will further invest some 100 million yuan (US$12 million) this year to explore six CBM wells by working with the Chinese companies.

On the demand front, Yang said there will be an increasing demand for the alternative to natural gas, which falls far short of demand, as the massive construction of major gas transport facilities in recent years has greatly improved the public awareness of clean energy.

"There will be a surging demand for CBM gas from industrial users driven by the fast-growing economy in China," says Yang.

The country is now expanding the area for CBM pilot projects beyond Shanxi to include Shaanxi and Liaoning province which are also rich in CBM reserves, according to Yang.

(China Business Weekly July 12, 2005)