China Economic Review spoke with Stephen Zou, the president, CEO and primary founder of Asian American Gas Inc (AAGI), by email. Including AAGI, Zou has founded seven companies focusing on developing coal and coalbed methane (CBM), an unconventional gas, and has also held a post at ConocoPhillips. AAGI holds production sharing contracts for two CBM concessions in Shanxi province’s Qinshui Basin with PetroChina, China’s largest national oil company, and China United Coalbed Methane Corporation, a subsidiary of China Coal and China’s largest producer of CBM.
State media reported in mid-April that China may issue a target as early as July for ramping up coal-bed methane production to 21 billion cubic meters by 2015. Though the figure doubles the target in the previous five-year plan, China CBM output and consumption lagged behind its 2010 targets. CBM output and consumption had reached 8.8 billion and 3.6 billion cubic meters, respectively, by 2010, compared with targets of 10 billion and 8 billion cubic meters.
Q: Is unconventional gas a promising energy source for China and why?
A: Unconventional gas is a promising energy source for China since the country lacks conventional gas resources. To deal with an extremely unbalanced energy mix, where coal dominates as much as 70% of the market, China has no choice but to develop its unconventional gas resources.
Q: Which sources look most promising – shale gas, coal-bed methane, tight gas, methane hydrates, shale oil?
A: I would say that all these unconventional energy sources are promising in China but that coalbed methane seems to be the most practical source of unconventional energy that can be explored and developed in the next ten years.
There are a few reasons for this: After more than 20 years of exploration, our understanding of reservoirs and exploration of CBM are far ahead of any other source of unconventional energy. The technologies to commercially develop CBM are there, as is the market. Additionally, the Chinese government plans to include targets to significantly increase the development and use of CBM in its 12th Five-Year Energy Development Plan.
Q: What is the cost structure of unconventional gas compared with other kinds of energy?
A: Take CBM, for example. Compared with conventional natural gas, the cost of development, especially in the initial stage, is very high, and projects require favorable policies such as subsidies and tax exemptions to reach economies of scale. This has been effective and successful in building a CBM industry in the United States, Canada and Australia.
Q: What technologies do you use for exploration and extraction?
A: Exploration and development technologies vary for different coal/CBM basins, since they all have different geological and reservoir conditions. We started to develop our technology with underground mine degasification in 2003, and then successfully drilled China’s first CBM well with multi-lateral drilling that proved suitable for commercialization.
Q: What are the challenges in extracting CBM in China? How permeable are China’s CBM deposits compared to those in North American and Australia?
A: To commercially extract CBM we need to both understand the geologic conditions of specific coal basins and develop applied CBM technologies to suit the local geology. This is the same everywhere in the world, and it’s a challenge for every CBM venture, especially in the early stages of exploration and development.
China has abundant CBM resources, in nearly every kind of coal basin there is. The permeability of coal seams is very different in some coal basins, while others are very similar to those in North America and Australia. We therefore need to apply customized CBM extraction technologies at each site.
Q: What other challenges are you facing?
A: One challenge is that the laws and regulations for CBM exploration and development need to be enhanced, and a system needs to be developed to ensure that laws and regulations are enforced.
Another challenge for the CBM sector is that China’s gas pipeline network is less developed than that of countries like the US. This has improved in recent years as PetroChina constructed a trunk natural gas pipeline across the country, but an extensive pipeline network in China will take some time to put into place.
Q: Are there other factors that influence the viability of this energy source – for example, energy and water use, environmental impact, or the cost of transportation and storage?
A: All these factors will have a certain level of impact on the development of energy sources, but the factor that impacts cost the most is the development of special technologies, and the high drilling and production costs associated with applying these technologies.
Q: What government policies will have the most impact on CBM production in the future?
A: The CBM industry boom in North America and Australia relied on government stimulus, including tax exemptions, subsidies and infrastructure support. To encourage CBM development, the Chinese government has also enacted certain policies like subsidies and tax exemptions in the past few years, and these have supported the growth of the industry to some extent.
We believe the most important factor is to acknowledge CBM as an independent industry and set policies to protect the industry’s development. Another important factor is to create a market environment and put in place mechanisms to support the CBM industry.
Q: Tell us a bit about your company, AAGI, and what you do.
A: AAGI is an international energy company focusing on the investment and operation of CBM projects in China. Our managers and key shareholders — Evan Energy, Baring Asia, WP Investment and Orion Gas — have been involved in CBM and coal ventures in China for over 17 years.
Q: How are AAGI’s coalbed methane projects going, and what are your plans for the next few years?
A: We currently hold two CBM product sharing contracts with CUCBM and PetroChina in the Panzhuang concession and the Mabi concession in the Shanxi Qinshui basin.
The Panzhuang concession has 20.4 billion cubic meters of proven reserves, and we had a breakthrough there in well production in 2006, producing the highest ever single well production rate of over 100,000 cubic meters day. Our pilot project currently produces about 100 million cubic meters annually, and we plan to develop capacity of 500 million cubic meters within two years of the approval of the Overall Development Plan by the National Energy Administration and National Development and Reform Commission – that’s in its final process now.
We’re currently exploring the Mabi Project. According to preliminary surveys, the Mabi concession has total gas in-place reserves of 200 billion cubic meters and has the potential to realize an annual CBM production of 5 – 10 billion cubic meters within the next five years.