Shanxi
China coalbed methane reaches turning point
Scott H. Stevens
Advanced Resources International
Inc. Arlington, Va. Oil&Gas Journal January 25, 1999
Phillips
Petroleum Co. conducts wire line coring operations
at the LXC-003 coalbed methane exploration well in Shanxi Province,
China.
Whereas
1.1 tcf of coalbed methane (CBM) was produced
in the U.S. during 1997, some 6% of total U.S. natural gas production,
E&P efforts overseas have yet to achieve a major commercial success
for this promising natural gas resource.
China's
conventional natural gas production is small,
about 2.0 bcfd.
Indeed, the 2.5 bcfd of coalbed gas
produced in the U.S.
San Juan basin alone in 1997 significantly outpaced China's total
natural
gas production (Fig. 1 [94,131 bytes]).
Yet China's CBM resource base is vast,
500 to 1,000 tcf
of gas in place,1 about twice U.S. levels, and if developed could
contribute to China's planned tripling of gas supply by 2010.
During
the past decade, China has promoted development
of its CBM resources. Over 100 test wells have been drilled by Chinese
and foreign operators in coal basins throughout eastern China. However,
most early efforts-clustered around gas-prone but low-permeability coal
mines-were not successful.
Despite the slow start, there is hope
that a new, more
focused phase of testing currently under way will finally succeed in
unlocking
China's sizable CBM potential.
During 1998, Arco, Phillips,
and Texaco signed CBM licenses
and initiated ambitious testing programs within their newly approved
exploration
blocks (Fig. 2 [171,793 bytes]). Chinese groups are now testing new
areas
using updated technology.
<>
<>Challenges
still face CBM developers in China, including
complex reservoirs, restricted permeability, and few gas pipelines. But
the upside includes favorable prices for clean-burning natural gas in
China's
growing cities, attractive resource concentrations, and limited
competing
conventional gas supplies. Local Chinese service companies have
improved
their ability to provide the specialized well drilling, completion, and
testing services needed to bring CBM onstream.
Will
China share in the impressive success of the U.S.
coalbed methane industry? Or will China turn to large-scale LNG imports
for its gas supplies, as other East Asian economies have? This
billion-dollar
dilemma will influence natural gas investment throughout Asia. Answers
could come soon from E&P testing now taking place.
Contract
terms
Prior to 1995, administration
of coalbed methane in China
was ambiguous, with several government organizations claiming control.
During this period, the Ministries of Coal Industry (MOCI) and Geology
& Mineral Resources (MGMR), and China National Petroleum Co.
(CNPC),
as well as several provincial and municipal entities, conducted
independent
CBM development programs and signed preliminary contracts with foreign
partners.
Finally
in 1995, the Chinese government resolved this
uncertainty by establishing the China United Coalbed Methane Corp. As
an
independent entity governed by the new Ministry of Land and Resources,
CUCBM administers coalbed methane production contracts with foreign
operators
and also operates its own active exploration and development
program.
China's CBM Contract is based on the
country's onshore
petroleum contract but features added incentives such as a 2 year
income
tax holiday and reduced value-added tax and royalty. Further favorable
measures are under consideration and were discussed by foreign and
Chinese
participants at a recent investment promotion seminar for coalbed
methane
in Beijing organized by CUCBM and the United Nations.2
CBM
exploration blocks range up to 2,500 sq km; multiple
blocks can be leased to cover larger areas.
Typical contract structure requires an
initial 1 to 3
year exploration period with a drilling commitment of several wells.
Minimum
expenditures total about $4 million over 3 years for a 2,500 sq km
block.
The
operator can then decide whether to proceed with further
work, which might involve long-term production testing of one or more
five
well pilots. If the project goes commercial, CUCBM has the option to
back
in for majority ownership by contributing its share of total project
costs.
Gas prices and fevelopment costs are market determined.
Uniquely
for China, foreign operators are free to identify
their own coalbed methane exploration areas. This process is more
flexible
than China's current conventional petroleum terms, under which only
areas
pre-selected by the government are offered for bid.
CBM
geology
The principal coal seam targets in
China occur within
the Permo-Carboniferous age Shihezi, Shanxi, and Taiyuan formations.3
These
units comprise a regressive depositional sequence that was laid down
over
much of northeastern China. Towards the north, individual coal seams
occur
lower in the section, and are fewer but thicker. A water-bearing
carbonate
interval interbedded with the coal seams can complicate well completion
and hydraulic stimulation.
Typically,
a total of 10 to 30 m of coal occurs within
a half dozen potentially completable seams. The coal is generally
bright,
rich in vitrain, and well cleated, unlike duller Gondwana coals of like
age. Gas content varies with coal rank and depth, from about 200
scf/ton
in sub-bituminous coals, to over 700 scf/ton in anthracites.
Additional
coal targets include the Jurassic Yanan formation
and equivalents, but seams in these units tend to be thinner and
stratigraphically
more dispersed, as well as lower in rank (sub-bituminous).
Some
exceptional Jurassic areas have 20 m thick individual
coal seams with gas contents of 200 scf/ton. Recent commercial
successes
in the low-rank Uinta and Powder River basins of the western U.S.
suggest
that China's Jurassic coal deposits deserve greater attention.
While
CBM resource concentrations can be favorable in
China, reaching 30 bcf/sq miles or higher, locating high permeability
is
challenging. Well testing in eastern China indicates widespread
restricted
permeability, generally well below 1.0 md. But most tests took place in
high-rank and structurally complex coal mining areas, such as the
Jincheng
coal field in Shanxi4 and Anyang coal field in Henan,5 where coal
mine degasification was a primary objective.
With
the exception of the Ordos basin, Chinese coal basins
are structurally more complex than the commercial U.S. CBM areas.
Faults,
some active, compartmentalize the coal reservoirs into isolated blocks
that are difficult to develop. In addition, erosion of the coal section
and re-burial during Quaternary time have affected gas saturation in
East
China coal basins.
However, China's complex geologic
setting may be managed
through a program of reservoir mapping and characterization. An
integrated
approach combining remote imagery, seismic, and corehole data analysis
can identify areas of favorable gas saturation and permeability,
reducing
exploration risk.6 Low-cost, slim-hole coreholes can be employed for
testing
reservoir properties to limit development risk.7
Exploration
targets
High-potential CBM resources are
concentrated in northeastern
China. The three major CBM provinces are the Ordos, Qinshui, and North
China (Huabei) basins. Geologic conditions for coalbed methane are
relatively
simple in the Ordos basin but become increasingly complex towards the
east.
Conversely, the gas market potential improves eastward and is most
favorable
within the densely populated and industrialized North China basin. As a
result, CBM projects in China offer diverse technical and market
characteristics.
Ordos
basin
The largest coal basin in China
(130,000 sq miles), the
Ordos offers favorable reservoir conditions for CBM. Of the Chinese
coal
basins, the Ordos most closely resembles the San Juan and other
commercially
productive coalbed methane areas in the U.S.
Much
of the central Ordos is deeper than 2,000 m, but
the perimeter of the basin is of suitable depth for CBM development.
Structure
is simple with few faults and shallow regional dip into the basin. Coal
rank increases gradually clockwise from the northeast, reaching optimal
bituminous rank along the basin's eastern edge. Accessible CBM
resources
from Permian coals in the Ordos are estimated to be 50 to 100 tcf;
Jurassic
coal targets could add further to this.
The
primary challenges to developing the Ordos basin are
poor infrastructure, rugged topography within the eroded loess plateau,
and a near absence of local natural gas markets. However, access to gas
markets improved recently with the completion of three major gas
pipelines,
discussed below.
Qinshui
basin
Located just east of the Ordos, the
smaller (40,000 sq
mi) Qinshui basin in Shanxi Province is China's largest coal producing
area. Like the Ordos, the Qinshui has a 500-1,500 m depth perimeter
suitable
for CBM development. But its structure is considerably more complex,
with
numerous normal faults and steeper dip angles. Coal rank is high,
mainly
anthracite, but bituminous coal is present in the southeast. Data
control is good. No foreign-operated production contracts have been
signed
in the Qinshui, although CUCBM and CNPC have focused their development
programs within this basin.
<>North China (Huabei) basin
This large coal region comprises
numerous small, fault-bounded
coal fields that stretch from Anhui Province in the south to Liaoning
Province
in the north. Coal rank varies rapidly, although most is of favorable
bituminous
rank. Structure is generally complex; closely spaced faults and steep
to
overturned dips occur locally.
Early CBM testing in China was
concentrated in this region,
due to the presence of numerous gas-prone coal mines.8
Surface conditions are quite favorable:
Gas markets are
abundant, infrastructure relatively advanced, and the topography is
level.
Areas tested included the Hongyang, Huainan, Jiaozuo, Pingdingshan,
Shenbei,
Tangshan, and Tiefa coal fields.
Texaco's Huaibei block is located in a
relatively less
complex southern portion of this basin.
CBM
testing
The "First Wave" of CBM
exploration in China took place
roughly between 1990 to 1996 (see table [73,236 bytes]). Chinese
and foreign companies evaluated a number of diverse areas and helped to
define the high-potential plays, although none of these projects
attained
commercial status. Early projects tended to focus on coal mining areas
with thick coals and high gas content; permeability in such areas
frequently
was poor.9
Enron
was most active, drilling or evaluating a total
of 16 test coreholes and production wells throughout North China.
Enron's
program helped to identify the eastern Ordos basin as a prospective
area.
Arco acquired this area from Enron in 1996 and continues to test.
Amoco also evaluated China's CBM
potential during this
period but drilled only one test well in the southeastern Ordos.
Chinese
operators during this first phase included the
Shenyang (Municipal) Gas Co., the Ministry of Coal Industry, Ministry
of
Geology and Mineral Resources, and CNPC. The largest project was MGMR's
six-well, hydraulically stimulated production pilot at Liulin in the
eastern
Ordos basin, which achieved peak gas rates of as much as 250 Mcfd/well
from shallow (1,100 ft) coal seams during long-term production
testing.10
First-wave
projects encountered numerous operational problems
as the Chinese oilfield services industry struggled to adopt modern CBM
drilling and testing techniques and adapt them to local geologic
conditions. A technology transfer program conducted by the United
Nations
Development Program helped equip Chinese operators and service
companies
with modern CBM test equipment and train their staff at U.S.
facilities.
Today, wellsite services such as wireline core retrieval,
injection/falloff
testing, and methane desorption are of higher quality and more widely
available.
The
"Second Wave" of coalbed exploration is currently
reaching a crest. With newly approved coalbed methane contracts in
hand,
Texaco, Arco, and Phillips have kicked off ambitious testing and
evaluation
programs in their respective blocks. These companies all operate highly
productive coalbed methane projects in the San Juan basin "Fairway;"
Texaco
is also developing the Ferron trend within the Uinta basin. And CUCBM
is
testing several of its own areas in China, applying U.S.-developed
coalbed
methane E&P technology.
Current
projects target the Permian coal seams and show
potential for multiple trillion cubic foot gas discoveries. However,
significant
variations exist among these projects in regard to local geologic and
gas
market conditions. Operators accordingly have adopted a range of
testing
strategies.
Texaco
was the first to sign a CBM contract with CUCBM,
commencing on Mar. 1, 1998.
Texaco has committed to drill three
wells within its
2,663 sq km Huaibei block in northern Anhui Province. The principal
coal
seams at Huaibei average 30 to 50 ft thick with gas contents of about
380
scf/ton at a depth of 2,000 ft.11 Data control is relatively good, with
hundreds of coal exploration coreholes drilled throughout the area.
Given
its East China setting, geologic conditions are fairly complex, but
potential
gas markets in this industrial area are attractive. Three wells had
been
drilled, with testing under way at press time.
Arco's
5,000 sq km CBM contract in the Ordos basin was
approved on Oct. 1, 1998, comprising three separate blocks. Previously,
Enron Exploration had drilled eight test wells in this area, reporting
favorable permeability in the Shanxi and Taiyuan formation coal
reservoirs.12
Since assuming control of the license
from Enron in 1996,
Arco has drilled and hydraulically stimulated nine production wells
that
are currently undergoing long-term production evaluation.
Phillips
Petroleum is testing the Hedong CBM Contract
area just north of Arco's lease in the Ordos basin. Following
acquisition
of high-frequency seismic data during 1997, Phillips has tested gas
content
and permeability at three wells within its 3,120 sq km block. Coal rank
and gas content are somewhat lower than in the southern Ordos, but the
coal reservoirs here are thicker. Phillips' block is located about 100
km south of the newly completed 36 in. Ordos-Beijing natural gas
pipeline
and 120 km west of Taiyuan, a major industrial city.
CUCBM's
operations group has drilled a total of 10 wells,
including two at Fushun mine in Liaoning Province and several each at
the
Jincheng, Tunliu, and Shouyang areas of Shanxi Province. These areas
range
from low-rank sub-bituminous coal at Fushun to high-rank anthracite at
Jincheng and Shouyang. CUCBM also employs a combination of test
coreholes
and hydraulically fractured production wells for low-cost evaluation
and
relies entirely on local supply and service capabilities.
CUCBM's areas are adjacent
to active coal mines and potential
natural gas consumers. CNPC is testing a five spot CBM pilot in the
high-rank
Jincheng mining areas of the southern Qinshui basin, close to CUCBM's
pilot.
Gas
markets promising
Coal accounts for over 75% of China's
primary energy
production and is likely to remain the dominant fuel well into the 21st
century. But this heavy reliance on coal has led to severe air
pollution
problems in China's cities.
China's
government is promoting natural gas fuel for certain
high-value uses, such as power generation in coastal cities. All of
north
China's CBM potential lies within 300 km of a major urban market.
Wellhead
prices will be market-driven and are likely to be favorable.
China's
gas pipeline infrastructure is concentrated in
Sichuan province, far from the CBM areas of north China. But three new
long-distance gas pipelines completed within the last year have
significantly
improved the marketability of CBM resources in the Ordos basin. These
lines
transport natural gas from CNPC's 7 tcf Shanganning low-permeability
gas
field in the central Ordos near Jingbian, Shaanxi Province (Fig. 2).
CBM in the northeastern Ordos basin is
now within reach
of the Beijing-Tianjin market, potentially China's largest, via CNPC's
new 900-km Ordos-Beijing gas pipeline. At current flow rates of 100
MMcfd,
this 36 in. pipeline is well below its capacity of around 500 MMcfd,
which
is the forecasted near-term demand for Beijing.
Southern
Ordos gas production could be transported to
the major city of Xian via a new 489 km pipeline that currently
transports
54 MMcfd. The third gas pipeline, a 293 km connector transporting about
50 MMcfd to the Ningxia provincial capital of Yinchuan, commenced
operation
in fall 1998. These lines operate solely on natural reservoir pressure
(600 psi initially), and capacity could be increased several-fold by
adding
compression.
Most
of China's largest cities-such as Beijing/Tianjin,
Shanghai, and Shenyang-have gas reticulation systems, although volumes
are small and many were designed for low-Btu manufactured coke
gas.
Marketing opportunities for coalbed
methane in China
abound in these coastal cities and also in the provincial capitals of
Taiyuan,
Xian, Zhengzhou, and Baotou. Many of China's mid-sized regional cities
(population 1 to 3 million) are growing even faster; some have gas
distribution
systems.
Contract
terms for natural gas sales are still evolving
in China. Once tightly regulated, administrative natural gas prices are
being phased out.
Delivered prices range
widely, from $1/MMBTU for heavily
subsidized fertilizer manufacturers to over $6/MMBTU for low-quality
methane
captured from coal mines for residential use. Urban residential
consumers
pay up to $7/MMBTU for LPG. High-value end-users in China are likely to
include urban industrial and peak-load power generation. Wellhead gas
prices
in China's coalbed basins are anticipated to be in the range of $1.50
to
$3/MMBTU. Should CBM development prove to be successful in China, the
marketing
outlook for this new gas resource is bright.
Acknowledgments
The author thanks the technical staff and
management
of China United Coalbed Methane Co., China National Petroleum Co.,
Arco,
Phillips, and Texaco for their numerous contributions to this article.
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The
Author
Scott H. Stevens is vice-president of
Advanced Resources
International Inc., where he performs geologic and financial analyses
of
petroleum projects worldwide, particularly for coalbed methane.
Formerly
an explorationist with Texaco and Getty International, he holds
graduate
degrees from Scripps Institution of Oceanography and Harvard
University.
E-mail: sstevens@adv-res.com
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