Is this the end for alternative fuels? With oil sinking below $50 a barrel, it’s uneconomic for oil groups to sift through the shale sands of the Midwest, for example. And ethanol production is becoming an expensive nightmare – one of the largest operators in America, VeraSun, declared itself bankrupt recently. And who will commit capital to the bitter cold of Alberta’s tar sands in this economic climate?
But one unconventional fuel is still worth the effort: coal-bed methane (CBM). Long the scourge of the mining industry – gas explosions are responsible for 80% of casualties in Chinese mines each year – coal-bed methane is now an invaluable substitute for natural gas. It already accounts for between 15% and 20% of gas supply in America and Australia’s eastern states. The Australians are so enthused that they’re adding four coal methane power plants worth more than A$20bn before 2013.
However, China is the real frontier. Merrill Lynch estimates that there is around 30 trillion cubic metres of methane – the equivalent of 1.35 billion barrels of oil – trapped in China’s coal seams. And Beijing is keen to develop those reserves. That’s because coal-bed gas is not only an excellent substitute for natural gas, but in carbon emission terms it also burns more cleanly than coal or oil. Facing intermittent regional power cuts, overreliance on imports and deteriorating air quality, Beijing has made the development of the industry one of its top priorities. This year, China plans to extract 5.6 billion cubic metres of CBM, according to Huang Shengh, director of China Coal Information Institute. That’s a billion cubic metres more than last year. But under Beijing’s latest five-year plan, that’s set to rise to ten billion by 2010.
China’s main headache is that its reserves are tough to tap. One of CBM’s advantages over, say, oil, is the low exploration risk – predicted quantities of methane are usually found exactly where expected. But extracting the gas is tricky. CBM operators drill a huge number of wells. And these wells produce a large volume of dirty water that needs disposing of. Often lacking the right equipment, explains Tom Sieber in Shares magazine, Chinese teams take around 40 days to extract the gas, where the Australians could do it in ten.
Chinese infrastructure also hinders progress. Once extracted, the gas can be liquified and transported by truck. A quicker method, over vast distances, is to send it through pipelines to the major cities. In some parts of the country, pipelines are non-existent. However, Beijing plans to spend around $375m on four pipeline networks between now and 2010, so the country’s coalfields in central China will soon be connected to cities on the coast.
Meanwhile, the use of natural gas in vehicles is already booming. In Beijing 20,000 taxis and 30,000 buses run on it. Over the next two years, these numbers are expected to double. Producers are also allowed to sell natural gas at market prices – rather than lower, state-determined rates. And on top of that, analysts estimate that carbon credits earned from switching coal to methane could boost industry revenue by 20%. Below, we look at one of the few remaining hot energy plays around.
The best bet in the sector
One firm already selling liquefied natural gas to motorists in China is Green Dragon Gas (Aim:GDG). Green Dragon explores, drills and then processes the methane in China’s coal seams before selling the resulting gas to power plants and petrol stations. Of all the foreign firms operating in China, Green Dragon has the largest coal-bed deposit, providing 18 trillion cubic feet of gas, say Merrill Lynch analysts.
As Tom Sieber points out in Shares, Green Dragon has been reaping rewards as it sells its compressed methane at $13 per thousand cubic feet compared to a global natural gas price of $6.50. And the firm has stolen a march on its competitors by acquiring five state-of-the-art rigs from America this year to improve efficiency significantly.
However, Green Dragon is still a fairly young firm. It is also loss-making. But this pioneer is in a better position to benefit from Beijing’s plans than its rivals. And its compressed natural gas, 40% cheaper than petrol, is proving popular with taxis and motorists. The shares are also on a very low rating, says Investors Chronicle. If its reserves were valued using recent transactions – such as BG’s acquisition of Queensland Gas – as a point of reference, this $572m company would be worth $2bn. “This gap should narrow.”