OREANDA-NEWS. November 02, 2012. The Chinese natural gas industry has grown rapidly, overtaking Japan in 2009 to become the largest market in Asia. According to a report published by Argonaut Securities Research Aug. 29, 2012, China is at present the fourth largest consumer of natural gas in the world. The country consumed 12.6 billion cubic feet per day (Bcf/d) of gas in 2011, up from 10.4 Bcf/d in 2010.

China's natural gas consumption is set to increase as the country has pledged to reduce its reliance on traditional sources of energy. According to China's 12th Five-Year Plan (2011 to 2015), natural gas consumption is targeted to double from the current 4.4 percent of national energy usage to mitigate the effects of rapidly rising energy demand.

In China's 12th Five-Year Plan, much emphasis has been placed on the development of unconventional gas assets such as shale gas, tight gas and coalbed methane (CBM).

"The focus will primarily be on the CBM industry as the shale gas and tight gas industries are still in their infant stages of development," an industry watcher told Rigzone in an interview early September. CBM, also commonly known as coal mine methane (CMM), falls under the category of non-conventional natural gas. Non-conventional natural gas refers to the occurrence of natural gas that cannot be exploited - either commercially or technologically - by current extraction methods that are used for conventional gas reservoirs.

The Importance of CBM in China's Energy Landscape

China's National Energy Administration (NEA) said in a detailed Dec. 31 release that the Chinese government will focus its developmental efforts on two commercial CBM bases: the Qinshui Basin and the Ordos Basin. The NEA projected that the production capacity of CBM in the Qinshui Basin and the Eastern Ordos Basin should reach 16 billion cubic feet (Bcf) by 2015.

The Ordos Basin – the second largest sedimentary basin in China – is particularly noteworthy as it is the eighth largest gas play in the world. The Ordos Basin is also China's largest CBM basin. Argonaut Securities Research stated that the basin currently accounts for more than 30 percent of Chinese domestic gas production and also hosts major resources of coal, petroleum, natural gas and CBM. Developing the Ordos Basin is high up on the NEA's agenda as the basin is recognized for its competitive well costs relatively to its large resource potential and recoverability.

CBM Takes Priority in Developing Shanxi Province

Industry watchers said that foreign companies who have CBM plays in the Ordos Basin and the Qinshui Basin are getting signals from the Chinese government to accelerate the preparation work on their Chinese Reserve Reports (CRR) and their Overall Development Plans (ODP).

The CRR is the first of a two-step approval process, which requires approval by the Ministry of Land and Resources. After the foreign operator receives its CRR approval, it moves on to prepare its ODP. The ODP has to be confirmed by the Production Sharing Contract partner, and then approved by the NEA and the National Development and Reform Commission (NDRC).

Obtaining the ODP approval is the most important step for a foreign company with CBM plays in China as the approval allows the company to move from the exploration phase to the development phase.

"Obtaining ODP approval used to be a difficult process, in part due to the structure of the Chinese government and in part due to the country's inexperience in this industry," a second industry watcher told Rigzone.

"There are a lot of details that need to go into the preparation of the ODP, such as describing the geological features of the block, the development strategy for the project, the gas pool model, the drilling and completion design, the transport pipeline net design and so on. It is a very complex document to prepare," Sino Gas & Energy's Managing Director and CEO Rober Bearden told Rigzone.

"But I feel that there is a lot of support from the Chinese government, especially from the second half of this year. As for Sino Gas & Energy, once we gain approval for our submitted CRRs, we should not expect any difficulties getting ODP approvals," Bearden added.

From 2010 to present, there have been several ODP awards by the NDRC such as the:

CNPC-led Yuedong natural gas Production Sharing Contract (PSC1) in Bohai Bay in October 2010

Jiuqian natural gas PSC5 in Xinjiang Province in July 2011

China United Coal Bed Methane (CUCBM)

Privately held Asian American Gas (AAGI) CBM Project in the Ordos Basin in December 2011
Foreign-listed Companies Not Far Behind

This year is a significant turning point as the Chinese government granted it first ever ODP to a foreign-listed company, Hong Kong-listed Sino Oil and Gas Holdings.

Sino Oil and Gas received a green light Aug. 24, 2012 from both the NEA and the NDRC on its Sanjiao block project– which straddles the Ordos Basin and the Qinshui Basin. In a statement, the company added that in preparation for commercial CBM production at the end of this year, a total of 25 wells within the Sanjiao block have already been connected to the pipeline network, which is expected to be commissioned by the end of this year initiating the Group's piped CBM sales.

In the case of Australia-listed Sino Gas & Energy, the company is aiming to receive CRR approvals for the Linxing East and Linxing West PSCs sometime next year. Pilot production will be on-going until the company obtain its ODP approvals in the Linxing PSCs. The company is looking at the same time frame for its PSC in Sanjiaobei. All of Sino Gas & Energy's PSCs are sited in the Ordos Basin.

Bearden said that he is confident that Sino Gas & Energy could receive three ODP approvals as soon as year-end 2013 to early 2014. This implies that Sino Gas & Energy could be on its way to start commercial production of CBM by 2014.

The Road Ahead

The events unfolding in the second half of this year are significant milestones for the Chinese CBM industry. With Sino Oil and Gas Holdings obtaining ODP, the company is on track to become China's first foreign-listed unconventional gas producer through its Sanjiao block.

Industry watchers meanwhile remain optimistic about China's CBM prospects. With Sino Oil and Gas leading the race, it is only a matter of time before other foreign operators obtain approvals and advance their projects to commercial viability.