In the US, shale gas production has come to dominate not only unconventional gas production, but also gas production as a whole. However, elsewhere in the world this success has so far not been replicated. In some of the few other areas where shale production has begun – such as China – it has yet to even dominate unconventional production, with coal bed methane (CBM) output running a close second. Given ambitious CBM plans both inside China and in countries where there is no shale gas output so far – such as India - CBM could yet become the main unconventional source of gas in some parts of the world.
“I don’t think there is another part of the world outside the US, apart from perhaps Africa, where shale can be successful,” Randeep Grewal, CEO of China’s biggest private CBM producer, Green Dragon Gas, said in an interview in late September. “You need complete access to land, which in the US you can get by just signing a deal. Where there are large populations near shale deposits, such as in China, it doesn’t work… Decline rates mean you need an active drilling plan to be successful, and that requires clear access to land. We produce CBM on coal-board land in China, so people are not affected.”
Official 2016 figures show CBM output in China up only slightly in 2015 at 4.5bcm, but this is still not far behind shale gas production levels, which jumped 76% to reach 7.9 bcm last year. Output from both is expected to ramp up over the next 5-10 years, with China currently short of gas, particularly in the winter as it transitions away from coal to a less polluting energy system – which is leaving it reliant on expensive seasonal LNG imports. As a result, there are subsidies for producers on both shale and CBM ($1.65/MMscf).
In terms of proven reserves, CBM comes way out on top, with resources in China estimated to exceed 36 trillion m3. China’s proven shale gas reserves have reached just 764 bcm, according to Zhang Dawei, Director of the Reserves Evaluation Center of China’s Ministry of Land and Mineral Resources. The large CBM reserves mean the prize for the Chinese government is potentially huge, but geology and other conditions make monetizing the gas difficult.
The Chinese government is hoping to see gas’ share of the energy mix rise from 7% now to 11% by 2025, and expects CBM to play an important role in this. Its’ targets for shale gas and CBM are roughly the same over the next 10-15 years, according to Mr Grewal, who pointed out that while a lot had been made of the few shale output successes, “there are many unproductive wells we don’t hear much about… I think shale won’t be able to hold the production levels – because there are a lot of people where the shale is. You are asking them to move aside while the work goes on.”
Zhang Yousheng, Deputy Director of the Energy Research Institute at National Development and Reform Commission, echoed this concern in comments earlier in the year: “Some of the [shale] areas don’t create high economic value — many projects have seen losses… Many private enterprises have just entered the shale gas industry and the cost will be high initially, as will the need for a suitable market environment for further development,” he said.
CBM in China has been difficult to get going, as much of the coal is extremely wet, and the porosity is low, meaning a lot of water pumping is required to get at the gas. But CBM has lower decline rates than shale wells, according to Mr Grewal. CBM wells are installed in a matrix, and once drilled, the gas migrates through the fractures, producing a stable, consistent production curve that can be maintained as the coal strata is drained. PetroChina is China’s biggest producer, with other independents including AAG Energy - the first to get permission for large-scale commercial production in 2011 - Far East Energy, Sino Gas and Energy, Sino Oil and Gas, and Asian-American gas.
Mr Grewal said he currently received $7.20/MMcft3 for CBM in China, including a state subsidy of $1.65/MMcft3 – which equated to a 55% profit margin. He added that, at these prices CBM was still very competitive against imported LNG, particularly away from the coast. “$7.2/MMcft3 is effectively the well head price. You need to compare delivered prices. So, if you think about city-gate prices, they are around $10-12/MMcft today, and landed LNG closer to $9/MMcft3. There’s a bit more demand for LNG in the coastal provinces, but by the time you add on the transportation costs to get it to say, Beijing, then we are at parity. Most of the markets we serve are further from the coast, so there’s no competition between the two.”
Outside China, Mr Grewal said there had been an important upswing in CBM development in India, along with government policy changes last March. “With the amount of investment that CBM requires, government policy is key to supporting development – which has worked well for us in China. India’s now doing the same – opening CBM gas prices to market this March, the first time it has done this in history. In addition, state ONGC has come out with its first development plan… So, India looks like following China.” Plans for shale development are less developed in India, so CBM is likely to lead unconventional development there.
Other countries with significant CBM resources that could be developed include the UK and Poland, and neither of these countries currently have any shale output either. “Both countries have significant domestic resources, and both countries – like India and China – are major gas importers. It’s far better to develop your domestic resources than to pay for imports of gas,” said Mr Grewal. While public opinion in Europe has largely balked at fracking for shale gas, it could well find CBM more palatable – especially if prices rise above expectations over coming years.
In China, India and Europe, where population densities are far greater than the US, CBM could vie with shale to be the unconventional option of choice. But, whether or not shale or CBM leads unconventional development outside North America, there is clearly more gas readily available close to major markets today than has been the case in the past – for those who can get at it, at least.