Far East Energy seeks refinancing to boost drilling

PUBLISHED : Monday, 20 February, 2012, 12:00am
UPDATED : Monday, 20 February, 2012, 12:00am


Far East Energy, a United States-based developer of coalbed methane gas projects in Shanxi province, is seeking to refinance a project loan it obtained in November from Standard Chartered Bank, to finance a ramp-up in drilling.

The nine-month US$25 million loan carries a steep effective interest rate of 9.8 per cent, or the London interbank offered rate (Libor) plus 9.5 per cent.

'We are working on a longer-term financing that will last several years,' said the firm's chief financial officer, Bruce Huff.

'The US$25 million loan is pretty large for us, but we would love to be able to close out another facility and replace it with something more long-term and in a much higher total amount.'

Far East Energy, whose chief executive is Michael McElwrath, a former US acting assistant secretary of energy, was among the earlier foreign firms to venture into China's nascent coalbed methane industry.

The industry started commercial-scale production in the United States a decade ago after about 10 years of development.

China has the world's third-largest geological reserve of coalbed methane, but the industry has yet to achieve large-scale commercial success like the US has.

That's because of geological difficulties, a lack of investment, and conflicts arising from overlapping mining rights for coal and coalbed methane.

Even so, Beijing has set the industry an aggressive target of raising output to 30 billion cubic metres (bcm) in 2015, from 1.5 bcm in 2010. That will require an estimated investment of 120 billion yuan (HK$147 billion).

Coalbed methane has a similar energy content and chemical composition to conventional natural gas, which occurs alongside crude oil.

The use of coalbed methane helps reduce coal mining casualties due to methane explosion. Its cleaner-burning nature also helps to reduce pollution.

In 2002, Far East signed two co-operation agreements with state-owned China United Coalbed Methane to explore and develop coalbed methane projects in Yunnan province. In 2003, it acquired rights from US-based oil and gas major ConocoPhillips to develop other projects in Shanxi province.

The firm has since lost more than half of the acreage in areas where it has exploration rights, either because it relinquished them or because the government did not extend its exploration licence after its expiration.

But the firm said it believed the relinquished areas had low prospective value.

Huff said the firm had been drilling extensively in the Shouyang area in Shanxi, including 26 wells in 2010 and 33 last year. But he said it hoped to increase drilling to between 200 and 250 wells this year, 300 to 400 next year, and 500 in 2014.

Although he declined to give an estimate of the investment required, Huff said it costs about US$300,000 to US$350,000 to drill an exploration well, compared with US$450,000 for an appraisal well, which is deeper and is used to confirm discoveries.

A rough calculation suggests at least US$60 million is needed to drill 200 wells.

Huff said some appraisal wells had shown promising results, but for large-scale commercial production to begin, a certification of reserves by Beijing was required, as well as the compilation of a comprehensive well-development plan.

At the end of September, Far East had US$12.6 million of cash. It posted a net loss of US$14.5 million on sales of US$549,000 in the first nine months of last year.

Huff said Far East had been in talks with several international oil-and-gas firms for joint development of its projects, which would help raise funds for its drilling programme.

However, detailed discussions could not begin until Beijing approves the renegotiated co-operation contracts for its projects.