China raises coal bed methane gas subsidy to help fight air pollution

Country is rich in unconventional gas but poorly endowed in conventional gas

PUBLISHED : Tuesday, 01 March, 2016, 6:40pm
UPDATED : Tuesday, 01 March, 2016, 6:40pm

Beijing has raised the subsidy for coal bed methane (cbm) production by half from this year to 2020 in a move to encourage exploration and production of the cleaner-burning fuel as part of its air pollution control initiatives.

The subsidy for each cubic metre of cbm – natural gas trapped among coal seams – has been raised to 0.3 yuan in the five years to 2020 from 0.2 yuan in previous years, the Ministry of Finance said in a statement posted on its website on Tuesday.

The move is expected to help struggling producers of the greener but more challenging and expensive to extract natural gas, after Beijing slashed non-residential wholesale natural gas prices by an average of 28 per cent from November following a crash in global energy prices.

Many cbm projects are no longer profitable following the recent domestic gas price cut
Gordon Kwan, Nomura Asia-Pacific

“Many cbm projects are no longer profitable following the recent domestic gas price cut amid slowing demand growth,” Nomura Asia-Pacific head of oil and gas research Gordon Kwan said. “This is why China is lending a helping hand to the producers to motivate long-term investment in cbm.”

Cbm and shale gas – natural gas trapped between shale formations – are unconventional forms of gas that are free from state pricing, but they have not been immune from price reduction pressure since conventional gas has similar properties to and competes with unconventional gas.

China is rich in unconventional gas but poorly endowed in conventional gas.

Hong Kong-listed and Shanxi province-based AAG Energy, the first non-state-owned cbm explorer to get Beijing’s permission to enter into large-scale commercial production in 2011, said in January competition from the expected conventional gas price cut forced it to lower its own cbm prices as early as September.

As a result, its average selling price fell 11.9 per cent to 1.56 yuan per cubic metre in the second half of last year from 1.77 yuan in the first half.

The latest 0.1 yuan per cubic metre subsidy increase is not sufficient to offset the price decline.

Since 2005, Beijing has offered conventional gas producers preferential policies to entice companies to invest in the nascent sector, including refunds on value-added tax collected from gas sales, exemption from equipment import duties, and free-market gas pricing.

Last May, the National Energy Administration said the shale gas subsidy would be cut from 0.3 yuan between 2016 and 2018 to 0.2 yuan between 2019 and 2020, as production costs were expected to fall with technological improvement and rising production scale.

Kwan said “there is a good chance” Bejiing will cancel the cut given the sharp fall in energy prices in the past 18 months.

“Policies in China do change in exceptional times and no one anticipated earlier that global oil and gas prices could collapse to such depressed levels,” he said.