The Solution to China's Energy Woes May Be With Coal, but Not in the Way You Think

Source: U.S. Bureau of Land Management.

It wasn't too long ago that the United States was on the brink of an energy crisis. In less than 10 years, we have gone from depending on imports for 60% of oil to less than 29% today, and natural gas production is the highest it has ever been. Today, though, as we become more and more self-sufficient, another country -- China -- is emerging as the world's most energy-desperate nation. Not only does it import 60% of its crude oil, but it also imports 30% of its natural gas as well as some coal imports. 

One way China is looking to ease its foreign dependence on energy is to dig deeper into its massive reserves of coal. Instead of actually mining for the coal, though, oil and gas producers such as PetroChina (NYSE: PTR  ) want to tap it to produce natural gas through coalbed methane. Let's take a look at this different take on coal and how China could use it to potentially be one of the largest energy producers in the world. 

Tapping coal... for natural gas
One of the things you may not know about coal is that it can be a huge supplier of natural gas. As coal matures underground from heat and pressure, methane gets trapped in the nooks and crannies of the coal deposit. When we mine coal, the drop in pressure releases this methane from the coal deposit. For years, this gas simply escaped into the atmosphere or, in many cases, was removed with ventilators. However, drillers have found ways to tap these coal deposits and release the natural gas without having to mine the coal at all.

This process has proven very successful in the United States. In 2012, the U.S. produced 1.5 trillion cubic feet-- over 5% of total gas production -- from coalbed methane, and energy giants around the world including BP (NYSE: BP  ) and Conocophillips (NYSE: COP  ) were implementing projects in some of the world's largest coal-producing nations, such as Australia and Indonesia as recently as five years ago.

Greater widespread development of coalbed methane production has fallen off in recent years, though, because of the boom in hydraulic fracturing. Hydraulic fracturing shale to extract gas has proven to be a cheaper method to extract gas, and the drop in prices has made many coalbed methane projects less economical than they were. 

Benefiting from coalbeds in uncommon ways
China is in a rather unique position when it comes to natural gas production from coalbed methane. Based on estimates from BP's statistical review of world energy and China National Petroleum Co. -- the state-run parent company of PetroChina -- China has almost 1,300 trillion cubic feet of natural gas in place as coal bed methane. On a barrel of oil equivalent, that is over 90% of Saudi Arabia's total proven oil reserves. In fact, the country's coalbed methane deposits are more than its recoverable tight gas and shale gas combined. 

The Beautiful Skyline in Beijing, don't mind the smog. Source: Marc van der Chijs via Flickr.

Utilizing coalbed methane has a wide variety of benefits to China, including:

  • Improved air quality: Coal mining in China emits 135 million tons of CO2 equivalent in methane gas every year from its traditional mining operations. This is over 40% of the total methane emissions from coal mining worldwide. Coalbed methane extraction would monetize this gas and reduce total methane emissions. Also, ample supplies of natural gas would allow the country to accelerate its shift away from coal as its primary energy source. According to a study by the European Environment agency, a natural gas fired plant will emit 40% less CO2, 68% less NOx, 85% less CO, 99.92% less SO2, and 99.992% less particulate matter per Joule of energy created versus a coal plant. If natural gas could spur a mass transition away from coal, it could have profound impacts on air quality. 
  • Cheaper energy: Coalbed methane production in the U.S. has been waning because of the cheaper costs associated with hydraulic fracturing. In the case of China, the cost for imported natural gas is over $15.25 per thousand cubic feet, more than triple the current prices in the U.S. At prices this high, it makes coalbed methane very economical and could significantly reduce prices. 
  • Replace more than just coal: One of the major advantages of natural gas is that it can compete with both coal and oil, and China is making a big push into natural gas vehicles to offset its dependence on foreign oil. In the past five years, China has installed over 1,500 compressed natural gas fueling stations, that is more than double what has been installed in the U.S. to date. Even with the high price of natural gas, it would still be cheaper to run on compressed natural gas than diesel in China.  

China's energy pipelines. Source: U.S. Energy Information Administration.

It wont be a walk in the park
If the case for coalbed methane was that simple, then there would have already been a much larger push. However, a lack of gas infrastructure and odd regulations will more than likely be problematic. There are about 32,000 miles of natural gas pipeline in China, and a majority of that is used to move gas from fields in Russia and countries near the Caspian Sea to centers of demand. This is about one-tenth of the total natural gas pipeline in the U.S. The one thing the country has going for it is the fact that over 90% of the pipelines are owned by China National Petroleum, which makes access for companies like PetroChina readily available. If China ever hopes to tap its coalbed methane resources -- or any of its unconventional gas resources, for that matter -- it will need to greatly expand that network.

Of all these problems, the one that will be the largest hurdle will be issue of water scarcity in China. For coalbed methane to get the needed drop in pressure to get natural gas to seep from coal seams, load of water needs to be drown out of aquifers. A majority of China's coalbed methane deposits and shale gas formations are in some of the most water scarce parts of the country. If aquifer draw-downs are limited, it would make coalbed methane extraction extremely difficult to implement. 

What a Fool believes
Unless China starts to find ways to better supply itself with domestic energy, it may find itself in many of the political and economical quagmires the US found itself in a decade ago. Of all the resources China has at their fingertips, coalbed methane is not only extremely abundant, it is a much more versatile fuel. Several oils services companies such as Halliburton (NYSE: HAL  ) and Schlumberger (NYSE: SLB  ) already have significant experience drilling for coalbed methane in both the U.S. and abroad, and their ties to PetroChina and other Chinese oil companies to do hydraulic fracturing could make them ideal partners to develop this resource. China has an opportunity to enjoy cheap energy just like the U.S. has recently, and it could have a profound effect on the global oil and gas markets.

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