Sino Oil and Gas plans to succeed where foreign companies failed

PUBLISHED : Monday, 11 October, 2010, 12:00am
UPDATED : Monday, 11 October, 2010, 12:00am

Sino Oil and Gas, which has agreed to buy a coal bed methane (cbm) project in Shanxi province for HK$2.34 billion, plans to spend 2.5 billion yuan (HK$2.9 billion) by the end of 2012 to develop the resources that foreign firms have not exploited.

The company was also in talks with the Shanxi provincial government and other parties on potential investment in a 200-kilometre, 200 million yuan pipeline that would link its project in Shanjiao, western Shanxi, to large industrial customers near the provincial capital Taiyuan, executive director Dai Xiaobing said.

'Shanxi, despite being a huge energy production base, has been under-supplied since the state gas allocation system favoured big coastal cities at the expense of interior provinces,' he said. 'Many Shanxi industrial customers are willing to pay for cleaner natural gas to replace increasingly costly coal, but can't be served at the moment.'

The company has already signed a non-binding letter of intent to sell its gas to the province's government-controlled distributor Shanxi Guoxin Coal Bed Methane Distribution at 1.5 yuan per cubic metre, but it wants to be able to sell the gas to major industrial end-users at much higher prices.

It could only do so if it had some control over the infrastructure of the pipeline.

Dai said Sino Oil and Gas was also in talks to invest in another pipeline as well as cbm projects on its route.

'We want to be a shareholder of a north-south pipeline that crosses our project and other projects under development,' he said.

Dai said many such projects had been abandoned after foreign firms had found exploiting the resources uneconomic.

Cbm is natural gas trapped among coal seams. The mainland has the world's third-largest reserves of this unconventional form of energy, which has remained largely untapped due to technological problems.

Although many foreign companies had formed partnerships with PetroChina and China National Coal Group seeking to extract the gas, most had left without proceeding to commercial production.

While cbm extraction technologies in Australia and the United States were advanced, they had not been that successful when applied to the mainland, assistant general manager Volen He Hongbing said.

'This is because China's geological structures are 150 million to 200 million years old, compared to 60 million years in the US and Australia. It's like drawing blood from an 18-year-old girl versus a 60-year-old lady. It would be an easier task on a younger person.'

He said the mainland's older geology meant coal seams got crushed and compressed more, making them denser and less permeable for gas to be brought to the ground.

One way to improve permeability was to drill 'multilateral directional wells' that allowed greater surface areas for gas to be sucked up, compared to conventional vertical wells.

He said each multilateral directional well required 15 million yuan of investment. The firm planned to drill 20 more wells this year, 100 next year and 50 in 2012, at a total cost of 2.5 billion yuan.

Although multilateral directional wells had been used in overseas cbm drilling, Dai said they had only been successfully deployed on the mainland by Beijing Orion Energy Technology Development, which supplies services to PetroChina and China National Coal.

Enron and Royal Dutch/Shell have drilled in the Shanjiao area but failed to find it economically viable.