Methane gas – the source of dozens of fatal mine explosions each year – has long been the curse of the coal mining industry. As the gas ghosts through the coal beds to the surface, miners can be oblivious to the dangerous gas build-up in the tunnels until a rumble alerts them to an imminent explosion. In China, more than 250,000 miners have died as a result of such explosions since the Communist Party took power in 1949. In fact, some of China’s coal deposits are so rich in the gas that they have remained unexploited despite the country’s insatiable appetite for energy.
But they may not go untapped for long. Coal-bed methane, as it turns out, is an excellent substitute for the natural gas we use to heat our homes. With more than 30 trillion cubic meters (the equivalent of 1.35 billion barrels of oil) of clean-burning methane buried deep inside China’s coal beds alone, says Jane Spencer in The Wall Street Journal, “coal-bed methane could be shaping up as the next hot energy play”. The US has already latched onto the promise of the fuel, where it accounts for 10% of gas production. The Chinese and Indian governments are now hoping to follow suit. China has made the development of the industry one of its top energy priorities, hoping to deliver 10 billion cubic metres of methane a year by 2010, from the 100 million cubic metres it currently produces. India is already on target to produce one million cubic metres per day of coal-bed methane by the first quarter of next year. The oil majors are also lining up to get involved; BP plans to invest up to $2.4bn over the next 13 years to tap 1.9 trillion cubic feet of the gas in Colorado’s San Juan Basin.
One of the main benefits that coal-bed methane holds over energy sources such as oil is that there are few exploration risks – methane is usually found exactly where you’d expect it to be. But extracting the gas is less simple, says Spencer. One reason it has been slow to take off in China, for example, is due to the slow approval process in its heavily regulated coal industry, and the difficulty of finding access to local pipelines to transport the methane to the processing plants. Low natural-gas prices are also a problem at the moment, says Ray Cheung on Small Cap Investor, making current investment returns on coal-bed methane “less than ideal”. However, Beijing is “raising consumer natural-gas prices annually by 10%”. And it is also looking at reducing extraction taxes on the technology.
It’s no surprise that China is keen to promote coal-bed methane – as well as being plentiful, its other big advantage is that it is also a much cleaner fuel than coal or oil. This has endeared it to a Chinese government struggling with chronic pollution problems. It also means firms will have a second source of revenue: carbon credits. Western firms that have had their carbon emissions capped have been buying up credits from developing countries to offset their carbon footprint. Because methane is a far more potent greenhouse gas than carbon dioxide, firms that trap and use it will receive substantial numbers of carbon credits to sell on Western markets. China hopes to double the sale of the country’s carbon credits in the coming years, says James Finch on Seeking Alpha, and analysts reckon this could bump coal-bed methane industry revenues up by 20%.
This revenue from carbon credits and ongoing investment in building pipelines means drilling for coal-bed methane in Asia is very economically viable, says Shane Spurway of Fortis Bank in Hong Kong. And as easily available oil dries up and pressure grows on natural gas supplies, it will only look more attractive. We have a look at some of the companies set to profit from this “hot new energy play” below.
The two best bets in the sector
One company heavily involved in the extraction of coal-bed methane in China is Canadian-listed Pacific Asia China Energy (CDNX:PCE). The company’s pilot project in the Guizhou province could potentially produce about 1.8 trillion cubic feet of methane, estimates Eric Nuttall of Sprott Asset Management. “At today’s prices, that is a value of close to $1bn for a company whose market capitalisation is about $47m.” The company has also started to receive payments from its share of an $8.3m gas processing plant in Northwest China and is currently trading well below its 52-week high of C$1.04 a share on C$0.42, says Ray Cheung on Small Cap Investor.
Aim-listed Green Dragon Gas (GDG) is one of the companies closest to commercial production, says Jane Spencer in The Wall Street Journal. Of the foreign companies operating in China, Green Dragon has the largest coal-bed deposit at its disposal with five production-sharing contracts providing 18 trillion cubic feet of gas, according to Merrill Lynch. “It represents the purest clean energy play on China,” says Merrill Lynch analyst David Yip. Energy research group Netherland, Sewell & Associates estimates the recoverable methane deposits at about $4.7bn for the company, which has a market capitalisation of $620m.