With growing interest from the major oil and gas players and increased focus on security of energy supply, the development of the coal bed methane industry (CBM) has drawn greater attention from coal rich Asian governments. As the home of one of the largest combined pools of CBM resources in the world, China, Indonesia and India in particular, have in recent years introduced new CBM specific regulations and policies to help boost their growing CBM markets. In this e-bulletin we will look at recent developments in the CBM sectors in each of these countries.
China boasts 37 trillion cubic meters of CBM reserves, the third largest in the world after Russia and Canada. Output is planned to be 10 billion cubic metres by 2010, 30 billion cubic metres by 2015, and more than 50 billion cubic metres by 2020. So China's CBM industry is set to expand rapidly in coming years and CBM production is one of China's 16 major projects under its 11th "5-Year Programme".
Recent developments are encouraging:
- a production sharing contract (PSC) structure is used for foreign investment in upstream CBM. This is similar to the structure widely used in the upstream oil and gas industry. Initially, foreign investors could only enter into PSC partnerships with monopoly holder China United Coal Bed Methane Corporation (CUCBM). However, the Chinese government amended regulations in October 2007 to allow other entities to apply for rights to partner foreigners. Hence the following July 2008, PetroChina sold its half stake in CUCBM and applied under the new regulations. The ability of other Chinese entities to partner foreigners should provide them with more choice for local partners in future;
- since 2007, the Chinese government has introduced a raft of preferential policies to help develop its CBM industry and encourage foreign investment. These include tax concessions, subsidies, waivers on import duties for CBM equipment, priority rights for power developed from CBM and preferential pricing for such power. The result has been greater foreign interest in both upstream CBM participation and establishing power plants by co-operating with local coal mining companies;
- the Kyoto Protocol has created financial incentives for power plants to switch from coal to CBM, a clean fuel. Subject to certain conditions, Chinese CBM power plants are eligible for carbon credits under the Clean Development Mechanism (CDM). The availability of CDM credits has made many otherwise marginal Chinese CBM power plants profitable;
- clean CBM is also eligible for other benefits. In May 2009, the World Bank approved a loan of US$ 80 million to the Shanxi Coal Methane Development and Utilisation Project to help increase China's development of CBM and reduce green house gases and other air pollutants associated with coal combustion; and
- perhaps the biggest bottleneck for China's CBM industry has been the lack of a natural gas pipeline infrastructure, particularly as the CBM is centred in the Northern coal belt but the demand centre is along the Southern and Eastern coasts. Without this, investors have been unwilling to invest in exploration. As companies are starting to extract CBM from virgin coal beds and coal mines, the government and state owned enterprises are building a web of pipelines connecting CBM sources in Central and Western China to cities along the coast.
Of course investing in China's energy sector is always risky - it is highly regulated and fragmented, and clear cut guidance is often not readily available. This is particularly so with regard to China's coal and CBM industries which are controlled by provincial and central governments that tend to be more bureaucratic. The approval process for CBM projects can also be lengthy and problematic. For example, issues arise where there are overlapping coal and CBM tenures that are both subject to PSCs with different PSC holders. In the absence of cooperation between the PSC holders, the Ministry of Land and Resources will mediate and allocate the overlapping area to one party. The regulation's guiding principles regarding how a decision is made are unclear and leave much room for officials to exercise discretion. However, it seems that the Ministry will generally support the coal mining enterprise to exploit CBM as well as coal.
The potential for commercialising the CBM reserves of Indonesia is well recognised. Indonesia's vast coal reserves are mainly located in South and East Kalimantan and South and Central Sumatra which make them ideally placed to provide feedstock for major gas project developments (such as the South Sumatra pipeline and the Bontang LNG project). Indonesia's existing gas transportation infrastructure should also help facilitate the exploitation of its CBM reserves.
Despite this potential, Indonesia has been relatively slow to develop a CBM industry by comparison to other countries with CBM resources such as the United States, Australia, India and China. One of the main reasons for this has been the uncertainty of the legal and regulatory framework governing Indonesian CBM operations. This uncertainty has led to reluctance on the part of foreign companies to make the considerable investment required to commercialise CBM reserves.
The Government of Indonesia (GOI) has now sought to address this uncertainty by issuing its first CBM-specific regulations (Government Regulation No. 33 of 2006, subsequently replaced by Government Regulation No. 36 of 2008 in November 2008, referred to collectively as the CBM Regulations).
The new CBM Regulations provide greater certainty to CBM project developers in a number of key areas. In particular:
- a new type of tenure for CBM, distinct from conventional oil and gas and coal concessions has been created;
- exploitation of CBM resources must be within the framework of the "New" Oil and Gas Law (Law No. 22 of 2001);
- the holders of oil & gas PSCs will enjoy primacy over coal concessionaries in the event of overlapping oil and gas and coal tenures;
- the legal arrangements for the exploitation of CBM are now set out in standard form PSCs between BPMIGAS (on behalf of the GOI) and CBM Contractors; and
- CBM blocks will be awarded through a competitive "direct offer" and open auction process.
These CBM PSCs follow the latest generation of conventional oil & gas PSCs very closely although the profit split under the CBM PSCs is more generous than that of the conventional oil & gas PSCs. As with other conventional PSCs, certain key commercial terms of the CBM PSC may be negotiated as part of the bidding process. Importantly, a domestic market obligation (DMO) has been included in the CBM PSCs which follows similar principles to that in conventional oil & gas PSCs.
The response to these developments from industry has been very positive so far, with a number of CBM PSCs being signed with the domestic companies since mid-2008. International companies with existing onshore oil and gas acreage are also well placed to take advantage of CBM opportunities, including the possibility of obtaining carbon credits through the Kyoto Protocol's Clean Development Mechanism. However, the challenges of CBM operations are likely to necessitate changes to the economic model deployed in conventional oil & gas PSCs. Also, the recent overhaul of the Indonesian mining tenure system in the form of the so-called "Minerba Law" (Law No. 4 of 2009 Regarding Mineral and Coal Mining) and issues stemming from Indonesia's laws on regional autonomy means that legal uncertainty will still surround CBM projects in Indonesia for some time yet.
India has the fourth largest proven coal reserves in the world which provide immense potential for the exploitation of CBM. India formulated a policy for the development of CBM in 1997. The Ministry of Petroleum and Natural Gas is the designated administrative agency for CBM and the Directorate General of Hydrocarbons acts as the upstream advisory and technical regulatory body.
A recent estimate put India's demand for gas at 115 to 135 BCM by 2020. The share of LNG in India's gas consumption mix has jumped from marginal levels in 2002 to 22% in 2007. Domestically produced CBM could have a price advantage over LNG, providing impetus for the further growth of CBM in India. However, the domestic gas transportation infrastructure is poorly equipped to cope with a rapid growth in domestic CBM. On 6 July 2009, the government of India announced that it will develop a blueprint for long distance "gas highways" for a national gas grid. This is a positive step towards the development of much needed gas infrastructure to help CBM producers access the domestic market.
In the three CBM licensing rounds so far, 26 blocks have been awarded. Great Eastern Energy, (an AIM listed company) has commenced commercial production of CBM from its block in West Bengal. The gas-in-place is estimated at 1.92 TCF. Other foreign companies have also formed partnership with domestic companies in relation to CBM exploration.
India launched its fourth CBM licensing round in April 2009 (but the round is now delayed), with 10 blocks on offer amounting to the total area of 5,000 sq. kms. The blocks will be awarded through an international competitive bidding process and a CBM PSC will be signed with the successful contractor.
Some of the attractive fiscal and contractual terms on offer are a fiscal stability clause, exemption from customs duty for equipment and machinery imported for CBM operations and no minimum expenditure obligations or signature bonus are prescribed. There are no government participation rights. 100% foreign direct investment is permitted in the CBM sector.
The latest Indian CBM PSCs also contain a DMO such that only gas in excess of domestic demand can be sold outside India. Also, the marketing of gas is subject to the government of India's gas utilisation policy.
On 6 July 2009, India reintroduced an income tax holiday for the first seven years of production from natural gas fields. This had been controversially withdrawn in 2008. The withdrawal is still the subject of a number of disputes. The policy will be applied from the current upstream bidding round but no mention is made of the treatment of CBM acreage awarded in previous bidding rounds.
These are early days for India's CBM industry and a number of issues need to be resolved to the satisfaction of the gas producers. Whilst there are encouraging signs of more favourable commercial terms and improved nationwide gas transportation infrastructure, the DMO and potential restrictions on gas marketing may have implications for the CBM industry in India.
Although the development of CBM in Asia is still relatively new, with increased investment from both domestic and international investors the industry is blossoming. The CBM potential in Indonesia, China and India is very significant, and while incentives and regulation have improved the attractiveness of certain developments in the region, there is still work to be done: Whilst Indonesia benefits from a strong gas transportation infrastructure, India and China have some way to go in their development of a similar network. Whether any of these countries will be able to fully realise their CBM potential, however, will ultimately depend on the development of a regulatory structure that is sufficiently robust to secure large-scale investment in the sector.