Project Report

Transcription

Project Report

Anhui Coalbed Methane Project with
China United CBM
Project Report
CBM PRODUCTION SHARING CONTRACT
2014 PROGRESS REPORT
Table of Contents
Background
3
Cooperation Structure
5
Contract Area
6
Lu Ling District
8
Su Nan District
9
Logistics & Application
11
Compressed Natural Gas – Price
12
Prospective Sales Partners
15
Project Timeline
17
Recent CBM Development in China
18
Official Approval & Certifications
20
Principle Project Partners
22
China National Offshore Oil Corp.
China United Coal Bed Methane Corp.
Management Team
23
Technical Team
26
Media
29
Appendix: Independent Study by Guy C.K. Leung, PhD
32
International Standard Resources Holdings Ltd.
標準資源控股有限公司
HKEx Stock Code: 0091
Web:
Tel:
Fax:
Post:
www.intl-standardresources.com
+852 2802 0006
+852 2802 0368
Unit E, 29th Floor
Tower B, Billion Centre
1 Wang Kwong Road
Kowloon Bay, Hong Kong
INTERNATIONAL STANDARD RESOURCES
標準資源控股
Charles Chau
周世豪
Head of Investor Relations
[email protected]
Project Report
(Release Version: 2015iv13v01EN)
2
WWW.INTL-STANDARDRESOURCES.COM
HKEX STOCK CODE: 0091
Background
In year 1996, renowned American energy firm Texaco became the first foreign entity to
engage the coal bed methane (CBM 煤層氣, a form of natural gas) exploitation
business in China. By partnering with China United Coal Bed Methane Corp. (CUCBM),
USD 20 million was injected to the project as first-phase capital for the exploration of
CBM reserve in Anhui Province (安徽省).
In year 1998, Texaco and CUCBM, upon promising exploration findings, entered into
agreement to deepen the level of cooperation by a further investment of RMB 6.4
billion. Press releases were published and the project was officially announced.1
The Texaco-CUCBM cooperation represented an important milestone for the CBM
development in China. Such initiative at state-owned corporation level with foreign
capital and technical infusion was inline with the ongoing economic reform that
emphasized decentralization. The PRC Central Government prioritized this project with
highest regard; PRC Premier Li Peng (李鵬) and Vice Premier Zou Jiahua (鄒家華)
attended the agreement signing ceremony at the Great Hall of the People in Beijing
(pictured above) on 8 January, 1998.
1
Chervon, Press Release, January 8, 1998,
www.chevron.com/chevron/pressreleases/article/01081998_texacoisfirstinternationalfirmtosigncoalbedmethanecontractwithchina.ne
ws
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3
Background
In year 2001, Texaco was acquired by Chevron to form the second-largest oil company
in United State. Chevron subsequently reviewed and consolidated its offshore assets,
and the Texaco-CUCBM cooperation became a focus in the process due to its
significance not only in face value but also its geopolitical implications.
Since the beginning of the project, Texaco had imported all factors of production from
United State, including field specialists, exploitation techniques, and equipment. These
expensive imports however failed to apply effectively to the geological features in China.
Furthermore, the largely nonexistence of domestic natural gas infrastructures had
created additional pressure for Texaco to facilitate its core operations. Last but not
least, the market price of natural gas was range bounded at 35-50% when compared to
today’s prevailing rate; the slim profit margin was easily wiped out by the ballooned cost.
In the end, Chevron decided to withdraw from a number of operations in China
including the Suzhou project in Anhui with CUCBM.
Being fully aware of the collective shortcomings in the natural gas industry, the PRC
Central Government spent the next decade strengthening the general facilities of the
trade, and reformed the interests of involving parties such that the exploitation of CBM
and natural gas would become rational. In year 2012, China National Offshore Oil Corp.
(CNOOC) engaged ChinaCoal to acquire a 50% stake in CUCBM. Coupled with
directives from the Central Government to increase utilization of cleaner energy
sources, the interest complication between state-owned coal (ChinaCoal) and gas
(CNOOC) institutions was fundamentally resolved. Upon years of industrial progression
coupled with the substantially increased price in natural gas, the aforementioned
adverse scenarios are no longer applicable; the CBM exploration and exploitation
industry have become mature and favorable.
In year 2007 amid the CBM industry reform, Canadian energy firm Can-Elite Energy
entered into an exclusive 30-year Production Sharing Contract with CUCBM covering
CBM production in the captioned site area, aiming to advance the project state from
exploration to development and production as detailed in the Contract. The scheme
was approved by the PRC Central Government in March 2008.
International Standard Resources acquired Can-Elite Energy subsequently in year 2008.
Complete information on this transaction can be found in the company circular
released on 30th October 2008.2
2
www.hkexnews.hk/listedco/listconews/SEHK/2008/1030/LTN20081030269.pdf
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4
Cooperation Structure
•
CNOOC3 (state-owned parent company) with controlling stake of 70% is the
majority shareholder of CUCBM. CNOOC officially increased stake-holding in
CUCBM from 50% to 70% in February 2013.
•
ChinaCoal4 (state-owned parent company) has a 30% stake in CUCBM.
•
International Standard Resources Holdings (91.HK) has a 70% controlling stake
in the CBM Production Sharing Contract5, which granted the party a 30-year
production right in the Contract Area covering 567.843km2 in Anhui Province
until year 2038.
•
CNOOC and ChinaCoal, through their controlling interest in CUCBM, have a
combined 30% stake in the Production Sharing Contract.
•
CUCBM was established in 1996 with the cooperation of the Ministry of
Geology and Mineral Resources, the Ministry of Coal Industry, and the China
National Petroleum Corporation to more effectively develop China's vast coal
bed methane resources.
*Cooperation structure as of
31st December 2014
3
Hong Kong Exchange listed CNOOC (883.HK) is a subsidiary of the state-owned parent company.
Hong Kong Exchange listed China Coal (1898.HK) is a subsidiary of the state-owned parent company.
5
Hong Kong Exchange listed International Standard Resources Holdings (91.HK) effectively controls 70% of the Production Sharing
Contract through its wholly subsidiary company Canada Can-Elite Energy.
4
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5
Contract Area
The Production Sharing Contract, along with its supplementary amendment, has the
Contract Area bounded by the following geographical coordinates:
Coordinate
1
2
3
4
5
6
7
8
9
10
Latitude
33º37’15”
33º37’15”
33º40’00”
33º40’00”
33º39’00”
33º39’00”
33º37’00”
33º37’00”
33º34’00”
33º34’00”
Longitude
116º58’15”
117º02’30”
117º02’30”
117º08’00”
117º08’00”
117º09’00”
117º09’00”
117º10’00”
117º10’00”
117º14’00”
Coordinate
11
12
13
14
15
16
17
18
19
20
Latitude
33º29’00”
33º29’00”
33º23’00”
33º23’00”
33º26’00”
33º26’00”
33º30’00”
33º30’00”
33º36’00”
33º36’00”
Longitude
117º14’00”
117º10’00”
117º10’00”
116º57’00”
116º57’00”
116º58’00”
116º58’00”
117º00’00”
117º00’00”
116º58’15”
These coordinates outlined a total Contract Area of 567.843 km2 as shown on the next
page. The Contract Area is divided into two production districts; Lu Ling (蘆嶺, 211.041
km2) and Su Nan (宿南, 356.802 km2).
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Contract Area
Satellite image of the Contract Area:
The CBM reserves found in the
Contract Area are comprised of two
blocks, Lu Ling and Su Nan.
Hong Kong Island 78.6 km2 (Scaled for comparison)
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Lu Ling District ( 蘆嶺區 )
Accounted for 37.2% of the total Contract Area, the smaller Lu Ling District at
211.041km2 is the pilot site that completed exploration phase in early 2014.
Subsequently in June 2014, Certificate No.(2014)54 was issued by PRC Ministry of Land
and Resources for the registration of the proved reserve, summarized as below:
3.158 billion m3
1.50 billion m3
Proved CBM Reserve (Lu Ling District)
Economically Recoverable CBM Reserve6
Basic Financial Forecast
Revenue
CBM wholesale price7
Economical reserve for production
Revenue derivable from Reserve
RMB 3.98/m3
1.50 billion m3
RMB 5.97 billion
Total Cost
Taxation8
Exhaustive Fixed & Lifetime
Variable Production Cost9
After-tax profit
RMB 1.19 billion
RMB 1.37 billion
Subsidy
Subsidy from PRC Central Government10
RMB 0.60 billion
Net Profit
Attributable to the Production Sharing Contract
RMB 4.01 billion
Attributable to International Standard Resources
(@70% in stake in the Production Sharing Contract)
RMB 2.81 billion
RMB 3.41 billion
Proved CBM reserve in Lu Ling District represents an aggregated profit potential of
HKD 3.51 billion11 over the district’s production phase over 15 years.
6
Certified by PRC Ministry of Land and Resources on 4 June 2014. See section Official Approval & Certifications of this report.
Actual wholesale price in form of compressed natural gas (CNG), applicable in Anhui Province as of October 2014.
http://www.ahpi.gov.cn/uniscms/gnsc/155417.jhtml
http://www.ahpi.gov.cn/uniscms/shixian/162578.jhtml
http://www.ahpi.gov.cn/unisadmin/gc/cj/openContent?ids=87640&id=283
8
Competition exists among provincial governments for business operations; tax credit is often given as incentive. Figure quoted
here is estimated on a conservative rate at 20% with respect to revenue.
9
Estimated at present value over a 15-year production phase. Extrapolated from existing data from independent CBM projects
operated by CUCBM with third parties in PRC of comparable production scale.
10
See section CNG Price of this report.
11
Based on forex rate at RMB 1.00 = HKD 1.25
7
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8
Su Nan District (宿南區)
Accounted for 62.8% of the total Contract
Area, Su Nan District at 356.802km2 is almost
twice as large as Lu Ling District. However
due to a denser concentration of CBM deposit
in this larger district, the estimated reserve is
believed to be at much higher than that
proven in the Lu Ling District.
With respect to the exploration in Su Nan,
focus will be on the drilling works for the
additional proven reserves in the area, as well
as to investigate the overall geological
conditions and potential resources. To this
end, fracturing treatment will be completed
and CBM drainage and collection will be
started. Meanwhile, reserve reports are being
prepared as required; completion of 1 to 5
parameter wells and production wells for
reserve evaluation by 2015 in an attempt to
extend its proven reserves coverage to an
area of 30 km2. Upon reviewing the first round
of drilling, exploration, gas production, and
having considered the results of seismic
exploration deep under Su Nan, the engineers
will decide on a new round of exploration well
deployment with specific locations and
designated quantities. The effective coal area
within Su Nan will be larger than 200 km2,
representing more than 9 times of the areas
with proven reserves in Lu Ling.
Pictured to the right is a sectional-chart
created using three-dimensional seismic
imaging (三維地震造影) for a location-specific visualization of coal seams distribution in
Su Nan District. These vertical seismic profiles surveyed in the Contract Area are the
cornerstones of a comprehensive and detailed reserve report submission, of which a
copy (similar to the one submitted and approved for Lu Ling District) is scheduled for
official approval in year 2015.
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9
Su Nan District (宿南區)
Although exploration effort in Su Nan District began ahead of Lu Ling’s, the timeframe
set for a conclusive exploration work for the former would be longer due to its
significantly larger area covered. However, regardless of the difference in location, the
associated official approval and administrative procedures are identical to that of Lu Ling
District, which were completed in June 2014.
Pictured above is an excerpt from an independent report conducted by Netherland,
Sewell & Associates, Inc. showing the geographical distribution of coal seams (where
CBM can be extracted) in Su Nan District. For the complete report, please refer to the
Company Circular12 dated 31 October 2008.
12
www.hkexnews.hk/listedco/listconews/SEHK/2008/1030/LTN20081030269.pdf
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Logistics & Applications
Compared to traditional natural gas
sources such as those derived from oil
refinery process, CBM is cleaner for
its relatively high purity in chemical
composition.
Being mostly methane (CH4) at
extraction, the industrial process
required to further refine the raw
CBM for consumption at end-user
level is very simple. With this technical
requirement advantage, raw CBM is
described as “near pipeline quality”
right out of extraction.
Due to this relatively straightforward
production process, CBM can be
efficiently packaged in close range from the extraction points at on-site facilities. By
using traditional tank trucks, the processed CBM13 can be delivered up to an 800 km
radius (pictured below), including the following locations with high application demand.
Selected trucking route distance from
Contract Area, Suzhou:
Xuzhou
Suqian
Hefei
Nanjing
Shanghai
徐州
宿遷
合肥
南京
上海
80 km
190 km
240 km
290 km
580 km
The Contract Area’s proximity to a
vast number of populous cities are of
substantial value to the associated
supply chain; regional demand is
guaranteed.
The clean and efficient CBM enjoys
numerous commercial applications. One direct sales channel would be for commercial
and private vehicles through CBM-derived CNG (compressed natural gas) consumption.
A network of CNG refill stations is in rapid development in China and the PRC Central
Government, in effort to address the nationwide air pollution issue by utilizing cleaner
energy sources, has planned to have 12,000 CNG stations in service by year 2020, a 5fold increase from approximately 2,400 stations in year 201214.
13
In form of either compressed natural gas (CNG) or liquefied natural gas (LNG). CNG is suitable for short-range transport (sub250 km) whereas LNG is suitable for extended-ranged transport.
14
ClimateWire, November 13, 2012, “China’s Green Vehicle Revolution”, http://www.eenews.net/stories/1059972373
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11
Currently, Provincial Price Bureau ( 物價局 ) controls and adjusts the CNG
(Compressed Natural Gas) price at retail level according to the baseline given by the
PRC National Development and Reform Committee (NDRC, 國家發展和改革委員
會). However, it’s been made abundantly clear that the PRC Central Government is
aiming to reform the domestic natural gas market by a progressive approach toward a
market-driven model.15
Production Subsidy
A number of policy changes have been in place to incentivize the production of CBMderived natural gas; the existing RMB 0.20/m3 subsidy on CBM production is widely
expected to be raised to RMB 0.40/m3 or 0.60/m3 pending final approval by NDRC16.
This is a significant gesture by the Central Government in supporting the continuous
development of the CBM industry.
Price Hike
On the other hand, NDRC has been adjusting price at retail level to grant additional
pricing flexibility to the supply chains; on 10 July 2013, Anhui Price Bureau increased the
retail price of natural gas by RMB 0.40/m3. Then on 1 September 2014, adjustment was
made upward for another RMB 0.33/m3 to reach RMB 4.38/m3. These gradual,
controlled price increases are beneficial in two-fold. First, the Central Government can
curb demand at retail level for a more balanced growth. Second, the increased margin
allowed for the supply chain can promote general supply volume and in turn the overall
CBM industry development.
Persistent Demand in Natural Gas
As the CNG industry in China approaches a market-driven model, price level will
ultimately be determined by supply and demand. By general consensus and
expectations, growth in domestic demand for CNG is expected to be persistent for
decades to come. 17 With potential high-growth demand firmly in place, the critical
factor in forming a progressive and sustainable price level will rest on the supply
conditions.
15
SCMP, “Beijing on target to solve natural gas price reform and shortages”, November 28, 2013,
http://www.scmp.com/business/commodities/article/1366666/beijing-target-solve-natural-gas-price-reform-and-shortages
16
Takungpao, “Unconventional gas subsidy brewing for a raise”, September 29, 2014,
http://finance.takungpao.com.hk/q/2014/0929/2759694.html
17
Forbes, “BP Looks To Tap China's Growing Natural Gas Demand With A $20 Billion LNG Deal”, June 20, 2014,
http://www.forbes.com/sites/greatspeculations/2014/06/20/bp-looks-to-tap-chinas-growing-natural-gas-demand-with-a-20-billion-lngdeal/
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Location v. Pricing Flexibility
For the Contract Area jointly developed by International Standard Resources and
CUCBM, its geographical advantage cannot be understated; being relatively close to a
number of populous cities in eastern China, the location allows for a competitive and
flexible strategy in product monetization.
Traditionally, logistics of natural gas are very costly; this largely explains the retail price
level variation between eastern and western part of China, since the majority of natural
gas production is originated from western and central-northern part of the country. As
of today and in foreseeable future, the “west-to-east” supply chain is still very much the
norm. In fact, Anhui Province is one of the major natural gas “west-to-east” pipeline
interchange in China, this again highlights the strategic importance of the region.
Hence, any sizable reserve exploitable in the east would enjoy inherited strategic
advantage. The relatively shorter logistical reach allows the producer (International
Standard Resources and CUCBM in this case) to enjoy greater operational margin
against the competition. The much shorter delivery routes also mean lower risk of
operational loss. The comparative blanket advantage is invaluable.
Major natural gas pipeline network in China, 2013.
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13
Pictured above is a CNG refill station operated by China Resources Gas, one of many
CNG retailers targeting end-users such as local taxi fleets.
Infrastructure
The prospect in utilizing natural gas as a clean energy
source is very attractive, however certain infrastructures
must be in place to establish a mature market for the
associated price stability. While government encourages
supply with tax breaks and subsidies, demand is forming
at multiple fronts, noticeably in the NGV (natural gas
vehicle) market. As of 2013, China accounted for 1.57
million NGVs in operation, ranked fifth in the world and expanding at a fast pace.18 To
match growing demand, the number of CNG stations in China more than doubled
from 2,400 to 5,100 from year 2012 to 2013, and is on target to reach 12,000 stations
nationwide by year 2020.
Collectively speaking, we have sufficient evidences to support the case of a progression
toward a more mature natural gas market in China. Amongst other factors, the
sustainable long-term growth in CNG price level will continue to be an integral part of
the changing energy landscape in China.
18
Banner Vessel, “NGV Market Growth 2013 Analysis”, http://www.cng-tank.com/index.php/ngv-market-growth-2013-analysis/
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14
Due to the high CBM production rate expected of Lu Ling and Su Nan District,
International Standard Resources and CUCBM have been in framework discussions with
prospective buyers for the CBM yield. Located in close range to the Contract Area, it
will be economically ideal for these companies to engage a supply contract with
International Standard Resources.
Anhui Province Natural Gas Development Company Ltd.
安徽省天然氣開發股份有限公司
State-owned and founded in 2002 by Anhui provincial
government, Anhui Province Natural Gas Development
Company Ltd. (ANG) acts for the provincial government in
multiple business application, including investment, construction,
operation, and facility management of natural gas pipelines. ANG
also represents Anhui Province in bulk purchase of CNG directly
from producers. In August 2005, The Hong Kong and China Gas
Company Limited (香港中華煤氣有限公司) acquired a 27.5%
stake in ANG to facilitate strategic technical transfers and capital
involvement.
China Resources Gas Group Limited
華潤燃氣控股有限公司
Stated-owned China Resources Gas (1193.HK) is a major
downstream natural gas supplier for domestic applications in
China, including home use and refill-stations targeting CNG
vehicles. In year 2013, China Resources Gas achieved 12.1 billion
m3 in sales, reaching 18.4 million homes through its vast gas
distribution network, coverage including a number of populous
cities in Anhui Province. China Resources Gas makes bulk gas
purchase from third-party upstream suppliers.
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China Gas Holding Limited
中國燃氣控股有限公司
China Gas Holding Limited (0384.HK) is a natural gas services
operator. It engages principally in the investment, operation and
management of city gas pipeline infrastructure, distribution of
natural gas and LPG to residential, commercial and industrial
users, construction and operation of oil stations and gas stations,
and development and application of natural gas and LPG related
technologies in China.
China Gas Holding Limited possesses a number of exclusive
pipeline operation licenses in China, included Huoqiu County in
Anhui Province (安徽省霍邱縣).
Champion Building Materials Company Limited
冠軍建材集團
Founded in 1972, Champion is the leading ceramic tile brand in
Taiwan. With its industrial operation newly established in Suzhou
City19, Champion’s energy demand for ceramic manufacturing is
tremendous. International Standard Resources with its CBM
reserve positioned in Suzhou region will be of prime and unique
advantage in supplying wholesale natural gas to commercial
applications in the vicinity; Champion’s production facility in
Suzhou is merely 15 km away from the Contract Area.
19
http://jiaju.sina.com.cn/news/q/20140607/364301.shtml
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Project Timeline
With the certification and release of Lu Ling District’s proved reserve in June 2014, the
project has reached a critical milestone. The proved reserve represented that the
monetization of CBM in the Contract Area is no longer speculative; the critical path has
moved from planning to execution phase.
The following project timeline is updated with the latest assessments by the Group’s
management:
Year 2015
Lu Ling District:
(1) Proved economical reserve report (1.5 billion m3 CBM) to be pledged against international
format for accounting standardization.
(2) Completion of evaluation reports on the 15 test-wells and the associated assessments.
(3) Comprehensive site action plan to be adjusted for the residual Product Sharing Contract until
year 2038.
(4) To secure long-term gas supply agreements with regional prospective buyers.
(5) Monetization of small-scale test-well groups; production goal of 10,000 m3/day to fulfill sales
contract with regional buyers.
(6) ODP (Overall Development Plan) to be submitted for government official approval.
Su Nan District:
(1)
(2)
(3)
(4)
To install exploitation test-wells for yield measurements.
Begin regional 3D seismic imaging for site work preparation and engineering deployment.
To engage contractors for the planned exploitation and site engineering.
Compilation of reserve report (similar to the one completed on Lu Ling District), and its
submission to NDRC for certifications.
(5) Completion of geological assessment and execution plan to be released.
From End of 2015 to 2017
Lu Ling District:
(1) Closing of test-well groups for the transition to full-scale production phase. Projected
production goal of 120 million m3/year to be reached within 3 years. Sales agreement with
additional buyers will scale up accordingly.
Su Nan District:
(1) Proved reserve report expected to be certified by NDRC. Project cycle to be executed similar
to Lu Ling District’s starting from year 2014.
From end of 2017 to 2038
According to the approved exploitation schedule, at 3 years upon the initial exploitation, total
output is to reach a steady production state for 12-16 years, with Lu Ling District at 95 million
m3/year and Su Nan District at 750 million m3/year approximately.
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Recent CBM Development in China
Coal bed methane (CBM) is classified as “unconventional gas”, even though its chemical
composition is identical to conventional natural gas (methane mainly). CBM is
unconventional in the sense that it is often found in dense rock or coal beds, thus
requires special exploitation techniques for its extraction.
As its corporate title suggested, state-owned China United Coal Bed Methane Corp.
(CUCBM) was founded for the modernization of CBM in year 1996. As of year 2012,
CBM production in China reached 12.5 billion m3 from both surface well and coal mine,
and the PRC Central Government is aiming to increase production to 19.8 billion m3 by
year 2015 to meet heightened domestic demand for clean energy20.
On 14 March 2011, China’s
National
People’s
Congress
approved the “Twelfth 5-year
Plan” for year 2011 to 2015. One
of the main focuses would be to
reduce air pollution by utilizing
cleaner energy sources 21 . To
reinforce this directive, the State
Council in September 2013
recommended adjusting CBM
production subsidy from its
current level of RMB 0.20/m3 to a
higher level jointly determined by
the Ministry of Finance, the National Development & Reform Commission, and the
National Energy Administration. The adjustment is believed to set at RMB 0.40/m3 or
higher. 22 The State Council also suggested further preferential tax treatments and
corporate income tax policies to ensure the market-driven advancement of domestic
CBM development is encouraged23.
In year 2012, CUCBM signed an agreement with CNOOC to invest an initial amount of
US 1.56 billion on their CBM production business over a 30-year timespan.24 Such
state-owned investment is a strong indication that the CBM industry is in a state of
accelerated development.
20
US Energy Information Administration, www.eia.gov/countries/cab.cfm?fips=CH
KPMG, “China’s 12th Five-Year Plan: Overview”, March 2011,
www.kpmg.com/cn/en/IssuesAndInsights/ArticlesPublications/Documents/China-12th-Five-Year-Plan-Overview-201104.pdf
22
See section CNG Price of this report.
23
King & Wood PRC Lawyers, “New State Council Opinion Encourages CBM Development”, October 22, 2013,
www.chinalawinsight.com/2013/10/articles/energy-resource/new-state-council-opinion-encourages-cbm-development/
24
Reuters, “CNOOC Signs 1.56 bln Domestic Coalbed Methane Deal”, August 5, 2012,
www.reuters.com/article/2012/08/06/cnooc-coalseam-idUSL4E8J603Q20120806
21
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CBM Recent Development in China
On 5th March 2014, PRC Premier Li Keqiang (李克強) delivered the government work
report at the Great Hall of the People in Beijing. In the section of his speech Building
China into a beautiful homeland with a sound ecological environment, Premier Li
emphasized that “we will strengthen exploration, exploitation and utilization of natural
gas, coal seam gas (CBM) and shale gas.”25
On 5th March 2015, Premier Li reiterated in PRC’s Report on the Work of the
Government the need to vigorously develop shale gas and CBM. Government at all
levels take supporting and encouraging measures in respect of policy planning, pricing,
preferential tax treatment, and ancillary facilities, etc.. In order to resolve and control
environmental pollution, especially the continued severe smog problem, the State
Council of the PRC issued the “Air Pollution Prevention and Control Action Plan”
stating clear policies and measures to strongly promote the use of clean energy,
including natural gas, and to accelerate the implementation of “replacing coal by natural
gas” project.
The CBM production development in China has been progressive and successful in
recent years. The Central Government’s persistently supportive stance is of favorable
and crucial factor to the collective success CBM production development in China.
25
Xinhuanet, “Full Text: Report on the Work of the Government”, March 14, 2014,
http://news.xinhuanet.com/english/special/2014-03/14/c_133187027.htm
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On 4 June 2014, Ministry of Land and
Resources of the PRC approved of the
exploration work at Lu Ling District and
issued certificate No.(2014)54 to certify a
proved CBM reserve of 1.5 billion m3.
On 18 April 2014, Petroleum Division of
Ministry of Land and Resources of the PRC
commented on the reserve findings at Lu
Ling District. The positive remarks made by
the Division in Commentary No.(2014)159
provided a solid foundation for the
subsequent certification of the newly
proved CBM reserve.
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20
On 11 March 2009, the PRC Ministry of
Finance approved the Production Sharing
Contract amendment between China
United Coal Bed Methane Corp. (CUCBM)
and Can-Elite Energy, a wholly subsidiary of
International Standard Resources, by
releasing official document No.(2009)112.
This amendment enlarged the Contract
Area by 59% from 356.8km2 to 567.8km2.
On 21 March 2008, the PRC Ministry of Finance approved the original Production
Sharing Agreement dated, 9 November 2007, between CUCBM and Can-Elite Energy.
The Approval Certificate No.(2008)2 dated, 1 April 2008, was officially released by the
PRC Ministry of Finance on 1 April 2008.
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Principle Project Partners
China National Offshore Oil Corp. (CNOOC) is the largest offshore oil & gas producer
in China. By both reserve and production, the state-owned company is one of the
largest in the world. Core businesses in relation to oil and gas include exploration,
development, engineering, technical consulting, refining, and power generation. In year
2013, CNOOC operated in over 40 countries, with oversea asset allocation at over
40% of the group’s total. In the same period, over 30% of the group’s revenue was
derived from international operation outside of China; allowing CNOOC an
increasingly diversified asset and operational portfolio.
A major subsidiary of CNOOC is listed at Hong Kong Exchange under stock code 883.
The parent company has maintained an AA- credit rating with Standard & Poor’s since
year 2012,26 the highest rating given to a Chinese corporation to date. As of October
2014, CNOOC’s shares were trading at a market value of HKD 550 billion.
Additional information can be obtained at CNOOC website at http://en.cnooc.com.cn/
China United Coal Bed Methane Corp. (CUCBM) is a state-owned company controlled
by CNOOC and ChinaCoal on 70% and 30% stake respectively. CUCBM is the only
authorized body in China to award CBM projects (in form of Production Sharing
Contract) to foreign corporations.
As of 2013, CUCBM owned 24 explorations rights and 2 mining rights, covering around
20,000 km2 of site operations in ten provinces. Proved CBM reserve has amounted to
160 billion m3 with production output reaching 1 billion m3 per annum.
Currently, there are 30 active Production Sharing Contracts with foreign partners,
including the one between CUCBM and International Standard Resources.
26
Reuters, “TEXT-S&P summary: CNOOC Ltd.”, November 27, 2012,
http://www.reuters.com/article/2012/11/27/idUSWLB127320121127
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Management Team
Mr. Du Ming
杜明先生
Chief Technical Officer
International Standard Resources
Mr. Du has been working in the oil and natural gas industry for more than 45 years.
Currently, he is Chief Technical Officer of the Group. Prior to this, Mr. Du worked at
well-known oil and gas organizations including China United Coalbed Methane
Corporation, China National Petroleum Corporation and Sinopec Shengli Oilfield. He
took on important technological roles in these companies.
Mr. Liu Shaobin
劉少斌先生
Chief Technical Director
Can-Elite Energy
Mr. Liu is a field expert in Petroleum Science, and earned the highest academic regard
through his 45 years of industry experience, especially in exploration and exploitation
technique. Mr. Liu has been Chief Technical Director for Can-Elite Energy since year
2008, while concurrently serving as Honorary Director of China Petroleum Enterprise
Association, Vice-Chairman of China Petroleum Education Society, and Director of
Good Hope Energy Group.
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Management Team
Mr. Cheok Saychuan, Albert
卓盛泉先生
Chairman of the Board
Mr. Cheok was appointed as chairman and independent non-executive Director of the
Company in July 2013. He is also the chairman and a member of the Nomination
Committee and a member of each of the Audit Committee and the Remuneration
Committee of the Company. Mr. Cheok graduated from the University of Adelaide,
Australia, with a First Class Honours degree in Economics. He is a Fellow of the CPA
Australia and is a banker with over 30 years of experience in banking in the Asia-Pacific
region, particularly in Australia, Hong Kong and Malaysia. He was the chairman of
Bangkok Bank Berhad in Malaysia for the period from September 1995 to November
2005 and is currently a member of the Board of Governors of the Malaysian Institute of
Corporate Governance in Malaysia.
Mr. Cheok is currently the chairman and independent non-executive director of
AcrossAsia Limited and an independent non-executive director of Hongkong Chinese
Limited, both of which are listed on The Stock Exchange of Hong Kong Limited. He is
the independent non-executive chairman of Auric Pacific Group Limited and Amplefield
Limited, both of which are listed on Singapore Exchange Securities Trading Limited
(“SGX”). He is also the chairman of Bowsprit Capital Corporation Limited, the manager
of First Real Estate Investment Trust which is a healthcare real estate investment trust
listed on the SGX and the chairman of LMIRT Management Limited, the manager of
Lippo Malls Indonesia Retail Trust which is a real estate investment trust listed on the
SGX. Mr. Cheok is an independent non-executive director of Metal Reclamation
Berhad, a public listed company in Malaysia. He is also an independent non-executive
director of Adavale Resources Limited, a coal exploration company listed on the
Australian Securities Exchange. Mr. Cheok was formerly the independent non-executive
chairman of Creative Master Bermuda Limited, which was listed on the SGX, from May
to September 2011 and formerly the vice chairman of Export and Industry Bank, Inc.,
which is listed on The Philippine Stock Exchange, from February 2006 to April 2012. Mr.
Cheok was formerly the Deputy Commissioner of Banking of Hong Kong and an
executive director in charge of Banking Supervision at the Hong Kong Monetary
Authority.
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Management Team
Mr. Lyu Guoping
呂國平先生
Chief Executive Officer
Mr. Lyu joined the International Standard Resources as project consultant in January
2011 and was appointed as chief executive officer of the Company in July 2013. He
currently also serves as director and legal representative of High-Spirited Investment
Limited, and supervisor of Shenzhen Clouds Energy Technology Ltd, both companies
are subsidiaries of the Group in China. He graduated from the Wuhan Institute of
Geology (currently known as China University of Geosciences (Wuhan)) with a
bachelor’s degree in geology in 1983 and from the Nankai University with a doctor’s
degree in economics in 1996. He has over 25 years of experience in geology and
mineral exploration, gems and jewelry, journalism and natural resources management in
both private and public sectors in China. Prior to joining the Group in January 2011, Mr.
Lyu was the deputy general manager of China Resources Coal Holdings Co., Ltd. and
he has extensive experience in administration, law and policy, corporate management,
asset acquisition and energy exploration.
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Technical Team
The technical requirements for CBM exploration and exploitation are sophisticated.
International Standard Resources have deployed a sizable team of technicians and
specialists to ensure proper and timely delivery of project progress.
Together with Canadian Can-Elite Technology and China United CBM, International
Standard Resources has further mobilized additional manpower from Shenzhen Clouds
Energy Technology (a wholly subsidiary of the Group) for the advancement of the
Project Sharing Contract. Listed below are the technical team leaders overseeing
exploration and exploitation of the Contract Area.
Principle Group Technical Advisors
CUCBM Advisory Team
Mr. Du Ming
杜明先生
Chief Technical Officer of the Group, Can-Elite
Energy Executive Vice-president. Prior joining
the Group, Mr. Du provided his expertise to
multinational resources companies for over 45
years including Sinopec and CUCBM. Having
represented state-owned resources enterprises
for extended period, Mr. Du possesses
invaluable experiences in Chinese-foreign
business collaboration.
Mr. Liu Zongzhao
劉宗昭先生
CUCBM Deputy General Manager. Project
Director of Suzhou CBM Production Sharing
Contract. Served at CNOOC in multiple
disciplines. Renowned geophysicist with over 20
years of oil field exploration and exploitation
experience.
Mr. Fu Xiaokang
傅小康先生
CUCBM Assistant General Manager. Head of
Foreign Liaison, CUCBM Chief Representative
for Suzhou CBM Production Sharing Contract.
Exploration expert in coal bed methane.
Mr. Liu Shaobin
劉少斌先生
Can-Elite Energy Chief Technical Director. Mr.
Liu is expert in Petroleum Science, and earned
the highest academic regard through his 45
years of industry experience, especially in
exploration and exploitation technique. Mr. Liu
concurrently serves as Honorary Director of
China Petroleum Enterprise Association, ViceChairman of China Petroleum Education
Society, and Director of Good Hope Energy
Group.
Mr. Xu Wenjun
徐文軍先生
CUCBM Head of Unconventional Gas Research.
Cooperation Committee Chairman for Suzhou
Contract Area. Subject authority in exploration
and exploitation of coal and coal bed methane.
Mr. Tian Xitai
田希泰先生
Technical Advisor on exploitation and
outsourced operations. Graduated from US
Stanford University in geophysics. Previously
worked at PetroChina, ChevronTexaco, and
CUCBM.
Mr. Chai Zhaoxi
柴兆喜先生
Technical Advisor on coal mining safety and
administrative coordination. Served at the
Safety Bureau in PRC Ministry of Coal. Inventor
of Water Seal Drilling Field CMM Extraction.
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Technical Team
Specialist Advisory Team
Mr. Wang Xingjin
王星錦先生
Operation Director. SPE, AAPG, and PESA
member. Oversea Operation Manager at
Arrow Energy. Teaching tenure at China
University of Geosciences. Prior position at
Molopo Australia as China Chief Exploration
Representative, RISC Chief CBM Expert, Mosaic
Oil Reserve Chief. Academic publications
include Optimized Application on CBM
Exploitation.
Mr. Wu Jianguo
吳建國先生
Head of CBM Division at Huaibei Coal. Project
Coordinator. Extensive experience in Huaibei
CBM exploitation, including experimental
testing in early stage of CBM development.
Mr. Tang Xiuyi
唐修義先生
Senior Professor at Huainan Mining Institute
(now Anhui University of Science and
Technology). Specialized in study of flaxseed
coal distribution in Huaibei, optimized CBM well
location setup, and general exploitation method.
Mr. Zhang Suian
張遂安先生
Renowned CBM expert and technical advisor.
Teaching professor at, CBM Research Center,
China University of Petroleum. Served at
CUCBM as Head of Technology. Advised on
the first CBM exploitation exercise by CUCBM
as demonstrated case study.
Mr. Li Yukui
李玉魁先生
Renowned hydraulic fracturing specialist in
China. CEO of Beijing Jiuzun Energy, with over
30 years of drill-well and surface-well
experience. Directed numerous cooperation
projects as Chief Engineer.
Mr. Mo Rihe
莫日和先生
CUCBM Research Engineer. Cooperation
Committee Geophysics representative for
Suzhou Contract Area.
Mr. Yang Luwu
楊陸武先生
Former Deputy Head of CUCBM Exploration
Division. Specialized in coal and CBM research.
CEO of Beijing Orion Energy Technology &
Development Inc.. Pioneered the use of
horizontal drilling in CBM application. Per-well
daily output reached a record at 100,000 m3.
Mr. Liu Huamin
劉華民先生
Drilling Operation Chief. Served at Huaibei
Mineral Group as Chief Engineer. Head of CBM
Exploitation. Expert knowledge in coal seam
structure, distribution, and associated hydro
content in the Contract Area.
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Technical Team
Technical Team from Subsidiary Operations of
Mr. Yang Wei, Vivi
楊威先生
Operation Manager of Shenzhen Clouds Energy
Technology. Specialized in exploitation resource
management and investment analysis. Prior
position at China Resources Coal.
Mr. Wang Wengang
王文剛先生
CEO of Canadian Can-Elite Energy. Investment
Banker. Prior position at PRC State
Development & Investment Corporation.
Ms. Han Congrong
韓從容女士
Deputy CTO of Canadian Can-Elite Energy.
Experienced in top-tier gas projects in relation
to exploration, project administration and
management.
Mr. Meng Qingzhen
孟慶振先生
Technical Manager of Shenzhen Clouds Energy
Technology. Coal mine exploitation specialist.
Prior position at Luneng Group Heze Coal and
Electricity Development as Site Manager.
Mr. Li Junmin
李軍民先生
Project Manager of Canadian Can-Elite.
Experienced in top-tier gas projects in relation
to exploration, project administration and
management.
Mr. Wu Jianxin
吳建新先生
Technical Manager of Shenzhen Clouds Energy
Technology. Mine ventilation and safety
specialist.
Ms. Man Lili, Lilian
滿麗麗女士
Deputy Technical Manager of Shenzhen Clouds
Energy Technology. Administrative specialist in
relation to site operations.
Mr. Su Shangyou, Alfred
蘇尚有先生
General Manager of Shenzhen Clouds Energy
Technology. Specialized in exploitation resource
management investment analysis. Prior
investment and development position at ENN
Energy (Xinao Gas) and China Resources Coal.
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Media
The management team from both International Standard Resources and Can-Elite
Energy routinely inspected the exploration sites to ensure timely delivery of contracted
progress. All captioned photos were taken at Lu Ling and Su Nan District.
Pictured below, site engineer presents to Group Chairman Mr. Cheok an operational
pump-jack – the principle hardware of any scalable CBM exploitation exercise;
approximately 2,500 drill rigs will be deployed over the Contract Area to fully extract
the CBM reserve.
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Media
In May 2014, CUCBM and International Standard Resources together with local
government officials and representatives collaborated at a site conference in Suzhou,
Anhui Province. In anticipation of the proved CBM reserve certification by the PRC
Ministry of Land & Resource, the cooperation parties outlined and discussed forward
strategies and the associated execution plans.
Photo of exploration team-leaders taken with the management team; noted attendees
include Group Chairman Mr. Cheok, International Standard Resources CEO Mr. Lyu,
CTO Mr. Du, and Can-Elite Chief Technical Director Mr. Liu.
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Media
Videos captured on-site can be viewed at the following web address:
http://www.youtube.com/ISRHL
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Appendix: Independent Study by Guy C.K. Leung, PhD
International Standard Resources invited renowned scholar Dr. Guy C.K. Leung in year
2014 to conduct an independent review on the group’s CBM business case.
Dr. Leung’s highly decorated academic profile is available to the public at the following
web address: http://www.linkedin.com/pub/guy-c-k-leung/2a/173/2b2
Attached in the following pages is the full text of Dr. Leung’s independent review.
The CBM Projects of International Standard
Resources Holdings (ISRH)
Dr. Guy C.K. Leung
Research Fellow, Geopolitics of Energy, Belfer Center for Science
and International Affairs, J.F. Kennedy School of Government,
Harvard University, US
Visiting Fellow, China Center, Oxford University, UK
This short report consists of two parts:
Part I situates China’s CBM industry in the broader energy economy context in China
and explains why CBM, or natural gas in general, is set to play a significant role in the
decades to come.
Part II explains the prospects of the CBM projects of ISRH in non- technical terms.
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Part 1. China’s Entering into an “Age of Gas” and Inviting CBM Development
The Chinese natural gas market is bound to blossom, as this cleanest fossil fuel would help
overcome the country’s long-standing energy-economy dilemma – the one that seeks to
maintain economic growth without jeopardizing the environment – in a profound way. And
coalbed methane (CBM), along with other unconventional natural gas, including shale gas and
tight gas, will be essential to China’s low-carbon energy transition, which features a shift from
coal to gas and renewables.
1.1. Killing Four Birds with One Stone
China’s rapid economic development, to a certain extent, benefits greatly from the
country’s abundant coal resources. Cheap, widespread and domestically available, coal
has long served as an economically sound, and diplomatically simple, fuel to the growth
engine of China.
After more than six decades of development, coal has stubbornly remained the
cornerstone of China’s energy economy - even today, e.g. at 67% in 2013 (BP 2014).
But this dirtiest form of energy is no longer considered an option, for the fact that it has
mostly been responsible for the country’s severe air pollution, and carbon emissions,
which are condemned by both national citizens and international observers.
At the UN Climate Change Summit in New York in September 2014, Vice premier
Zhang Gaoli said in a speech that China will “make greater effort to more effectively
address climate change” so that China’s total carbon dioxide emissions will peak, in
absolute term, “as early as possible”. It is the first time such a high-ranking Chinese
government member mentioned a peak emissions target.
Replacing coal with natural gas kills four birds with one stone. When burnt, gas yields
higher energy efficiency, half as much carbon emissions as coal, less than a third as
much nitrogen oxides (which causes smog), and one percent as much sulfur oxides
(which causes acid rain) (US Environmental Protection Agency 2013).
1.2. A Bridge Fuel
Thanks to the shift from coal to gas in the power sector, for example, gas has also been
responsible for an absolute decline in U.S. carbon emissions, the largest drop among all
countries, for the first time after World War II (Chazan 2012). In his State of the Union
on 28 January 2014, President Barrack Obama described natural gas as “the bridge fuel
that can power our economy with less of the carbon pollution that causes climate
change”.
Natural gas and renewable technologies interact in ways that can be complementary.
Natural gas can play a supportive role by providing a backup for weather-dependent
renewable energies, such as wind and solar. Even green groups such as Natural
Resources Defense Council (2012) agree that gas-fired power plants can quickly
respond to signals in the market to smooth out load and help meet demand, given that
the output from renewable energy sources can vary. Gas is certainly not the only
option for providing such a backup. In Denmark, its famous wind power is backed up
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by large quantities of available hydropower resources in Norway and Sweden that can
be called upon when needed, constituting a perfect renewables-supporting-renewables
case. But not every country is as lucky as Denmark. In some extreme cases, renewable
power generation is ironically backed up by coal, as gas generation is not sufficiently
available but national planners still request installation of renewable energy
infrastructure. According to (Bryce 2011), in Gansu, China, for example, the local
government installed 12,700 megawatts (MW) of wind turbines, but along those
turbines, it also installed 9,200 MW of new coal-fired generating capacity “for use when
the winds aren’t favorable”. That newly installed capacity of coal-fried generation is as
large as the entire generating capacity of Hungary. Clearly, renewable power backed up
by coal defeats the purpose of carbon reduction.
Moreover, natural gas and renewable energy investment profiles are complementary.
Renewable energies typically have higher up-front capital requirements and low
operational costs, while natural gas generation has a low initial cost but high fuel-related
operational costs (Natural Resources Defense Council 2012).
Not all environmentalists agree, as they are worried that the cheap gas will crowd out
investments in renewable energies. This debate, while valid in North America, does not
apply to China, given that gas isn’t cheap or yet broadly used here (see below).
1.3. China’s Under-developed Gas Market
The Chinese gas market has been seriously under-developed by any international
standards. Natural gas accounted for only 4-5% of China’s total energy demand in 2013,
which was similar to the Africa but lagged far behind other regions (Figure 1), implying
an unprecedented opportunity for gas development.
Figure 1: Regional Gas Demand, 2013
Source: General Electric, 2013, The Age of Gas and The Power of Networks, p.17
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1.4. China’s Age of Gas
In June 2014, charing the Central Party’s Leading Group on Economic and Financial
Affairs, President Xi Jinping made a speech announcing his strategy of “energy
revolutions”, of which it promotes “revolution” in energy supply, with measures
including actively developing non-coal energy resources such as natural gas (Sandalow
et al. 2014). While Chinese gas demand, at 162 billion cubic meters (Bcm) in 2013 (BP
2014), is about the combined size of German and British markets, International Energy
Agency predicts that it will grow to about 530 Bcm by 2035 and match the size of the
entire European Union, or of Russia (Figure 2). General Electric even explicitly states
that China is entering into an “Age of Gas” (Farina & Wang 2013).
Figure 2: Regional Gas Demand, 2011-2035 (billion cubic meters)
Source: International Energy Agency, 2013, World Energy Outlook 2013, p.102
1.5. Concerns about Import Cost and Energy Security Risks
However, as China does not have abundant conventional natural gas, and domestic
outputs have thus grown more slowly than demand. As a result, more than 30 percent
of the gas consumed in China has to be imported mainly from countries such as Qatar,
Australia, Central Asian countries, Malaysia and Indonesia. Russia, Myanmar, U.S. and
Eastern African countries will also start selling gas to China before 2020. These foreign
gas sources are expensive (the weighted average price of China’s gas imports was
US$10.5/MMBtu in 2013, compared with US$3.7 in the U.S.) and complicates China’s
energy security (Chen 2014). China’s needs for gas are set to grow unless domestic
production of unconventional gas advances.
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1.6. Finally a Right Climate for CBM
Against these backdrops, the Chinese government urgently calls for the development of
unconventional natural gas including CBM. According to a recent study by Oxford
Institute for Energy Studies, China had “ticked all the boxes for CBM to take off in a
short period of time”: large resource base (the world’s third largest), preferential
policies (tax holiday, exemption and subsidy), accessible facilities and services and
foreign technology support, high expectation of central government (Gao 2012 p.8),
but the low domestic gas prices did not justify CBM development until recently. My
exchanges with industry leaders, both national and international, confirm that lack of
economic incentive was the key reason for the decades-long stagnation of China’s CBM
industry. An forthcoming policy paper on global shale gas and CBM by Holly Morrow at
Harvard University’s Belfer Center for Science and International Affairs judges that
these incentives mean that “CBM produced in China is competitive on a cost basis to
imported gas supplies”.
During the 12 Five-year Plan (2011-2015), the central government has carried out
pricing reforms that have adjusted domestic gas prices upward significantly, and allowed
CBM producers to freely negotiate prices with buyers. Note that if the CBM is pumped
into cross-province pipelines, its pricing will be subject to regulation; therefore, CBM
producers, such as ISRH, can maximize the revenue by selling gas without using these
pipelines, i.e., selling to buyers within the same region, and ensuring profits.
Part II. Can ISRH’s CBM Projects Thrive?
2.1. Access to CBM Resources through a Production Sharing Contract (PSC)
According to the documents on its official website, ISRH (via its wholly owned subsidy
Canada Can-Elite Energy Limited) has signed a 30-year production sharing contract
(PSC) with China United Coalbed Methene Corporation (CUCBM), now a subsidiary
of China National Offshore Oil Corporation (CNOOC), for a contracted area in Anhui.
Accordingly, ISRH accounts for 70 percent of the PSC.
In China, all oil and gas resources, including CBM, are owned by the state and are
mostly controlled by leading state-owned energy companies. A foreign enterprise can
participate in CBM exploration and production by entering into a PSC for a defined
geographic area referred to as a “block”. Under a PSC, the state company, on behalf of
the government, grants the foreign enterprise (referred to in the PSC as the
“Contractor”) exclusive rights, subject to supervision, to explore for CBM in a defined
contract area.
Forward-looking, ISRH managed to sign the PSC in 2008, when CBM was not a hot
commodity. In retrospect, they could acquire the CBM resources in part because
natural gas had yet become a globally sought-after commodity at that time. Now that
natural gas is wanted nation-wide, it is no longer likely for any independent corporates
to acquire a CBM project with a majority shareholding.
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As a side note, to some extent, the fact that CNOOC decided to acquire 50% of
CUCBM (once the only state CBM developer) in the early 2010s and raised its stake to
70% in 2013 reflects CNOOC’s positive assessment of China’s CUCBM prospects.
2.2. Profit Gas Confirmed
In June 2014, ISRH received a confirmation from the Ministry of Land Resources (MLR,
which has been in charge of managing China’s mineral resources since 1950) that one
of ISRH’s contracted block, Luling, contains 3.158 Bcm of proven geological reserves,
1.579 Bcm of technologically recoverable reserves, and 1.494 Bcm of proven
commercially recoverable reserves, respectively. ISRH predicts that its another
contracted block, Sunan, will hold as much as 30 Bcm of proven geological reserve, and
is still figuring out how much can be produced commercially.
Put aside the jargons, what investors need to know are:
a.
It is officially confirmed that the Luling block can be profitably developed
with a scale. The MLR states that 1.494 Bcm of CBM can be produced
commercially (i.e. with a profit), after taking into account current gas prices,
technology and other “above- ground” factors. While 1.494 Bcm of CBM
sound small in terms of national gas demand, at today’s profit margin, it
already represents a significant asset to an independent gas producer such
as ISRH;
b. It is probable that vastly more gas is sitting on the Sunan block. The Sunan
block is still in the early exploration stage, and it is not entirely certain how
much gas will be there. Factoring in the similar geological structure of the
two blocks, and the much higher coal content of Sunan, ISRH estimates
that it would contain about 30 Bcm geologically, and I think it is a fair
speculation, although more works need to be done to finalize the
profitable proportion. A reasonable speculation is that Sunan would
contain 10-15 Bcm of CBM that can be recovered commercially.
c.
With the expected significant increase in domestic gas prices, these figures
are bound to be revised upward:
§
Technologically and commercially recoverable gas reserves are not
physically fixed; instead, they are adjusted by the price movement. The
continuous increase in China’s gas prices will make affordable advanced
production technology, and in turn, increase the amount of gas that
can be commercially produced.
§
Similarly, proven geological reserves might sound like a physically
determined concept, but it isn’t the case. It is true that we cannot
change how much gas is under our feet, but with better technology
and more geological data (obtained by actual production), we often
can find previously unspotted gas reserves.
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2.3. No Mineral Right Conflict
Morrow’s report mentioned above ascribes the previous failure of China to meet
national CBM production target in 2010 (5 Bcm, but only 1.5 Bcm was produced) to
the overlapping licenses between CBM operators and coal miners.
In China, CBM licensing is done at the national level, by the MLR, while coal licensing is
done by local authorities, and the two often aren’t coordinated, and when duplicate
permits have been given, there is not clear guidance about how to resolve the issue.
These problems happen a lot in the traditional coal mining centers, such as Shandong.
Fortunately, ISRH will not encounter the problem of overlapping licenses, as the
contracted blocks are not traditional coal mining sites, and no coal company possesses
a mining licensee for those areas.
2.4. Adaptive Capacity for Innovation
China’s oil and gas industry is dominated by three giants, CNPC/Petrochina, Sinopec
and CNOOC. These companies has huge budgets and the financial resources to
deploy, but they are more interested in chasing elephant fields where they can leverage
their competitive advantage of scale. The company culture of these national oil
companies is not a good fit for the nimble, adaptive mindset required for
unconventional oil and gas, which requires a lot of creativity, fine- tuning and micromanagement on a case-by-case basis. They excel at deploying standardized processes
and best practices to maximize efficiencies, enabling them to develop a multi-billion
dollar project on time and on-budget, but they are less able or willing to develop
unconventional energy.
On a contrary, the shale gas revolution in the U.S., taking off in the mid-2000s, was
confined to independent energy companies with names we had not heard of - Mitchell,
Devon or Continental Resources. These independents work days and nights to tailormake solutions to tap into the gas in their own contracted blocks through a lot of
tweaking and testing. I trust that this is the best model for unconventional gas
development, and ISRH, technologically backed up by its wholly owned subsidiary
Clouds Energy, has a role to play in it.
2.5. Profit and Market
The above has analyzed why I think ISRH could produce CBM with a profit. Two
questions remained unanswered: how large is the profit margin, and to whom the CBM
is sold. The profit margin is determined by production cost and price. As a third party, I
possess no information on how their production cost is estimated, so what I can say is
price. Gas pricing, mostly regulated by the government, is very complex in China and
varies widely by locations, means of transportation, sources of gas and types of
consumers (If interested to know more, one can refer to Oxford Institute of Energy
Studies’ publication “The Development of Chinese Gas Pricing - Drivers, Challenges
and Implications for Demand”, which is the best introductory article on China’s gas
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pricing). But the consensus in the industry and academia is that domestic gas prices, set
by the government, have been under-valued, and the government will continue to
increase the city-gate gas prices in order to motivate gas firms to produce. In the case
of Anhui, city-gate prices had been increased from 0.98 Rmb per cubic meter in 2005
(on average) to 3.36 Rmb in May 2014.
ISRH’s CBM could, and in fact, should be sold to non-residential sectors, especially
industrial and transport users, as gas prices in these sectors are set highest, and the
residential gas prices are set lowest (a form of cross-sector subsidy). Gas mainly
compete with oil in these sectors, and is highly competitive in terms of pricing. For
example, although gas used for transport, like buses and trucks, is most expensively
priced, it is still significantly cheaper than petroleum transport fuels, such as gasoline,
diesel and LPG.
Coal is widely used in the industrial sector and is cheaper than gas. But industrial coal
consumption is increasingly prohibited for the environmental reasons, and a switch
from coal to gas is favored. Also, many industrial energy users, such as pottery makers,
have to rely on natural gas to obtain the intense heat they require for manufacturing. I
believe that ISRH’s annual CBM production will be effortlessly absorbed in the local
market.
References
BP (2014) BP Statistical Review of World Energy 2014. [Online]. London, BP. Available at:
http://www.bp.com/content/dam/bp/pdf/Energy- economics/statistical-review-2014/BP-statistical-review-of-world- energy-2014-fullreport.pdf.
Bryce, R. (2011) Power Hungry. PublicAffairs.
Chazan, G. (2012) Shale gas boom helps slash US emissions. Financial Times. [Online] 23 May. Available at:
http://www.ft.com/intl/cms/s/0/3aa19200-a4eb-11e1-b421- 00144feabdc0.html#axzz2dLbqzuLU.
Chen, M. (2014) The Development of Chinese Gas Pricing. [Online]. 31 July 2014. Oxford Institute for Energy Studies. Available at:
http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/07/NG- 89.pdf.
Farina, M.F. and Wang, A. (2013) China's Age of Gas: Innovation and Change for Energy Development. [Online]. Available at:
http://www.ge.com/cn/sites/default/files/GE-Gas-China-1015final.pdf.
Gao, F. (2012) Will There Be a Shale Gas Revolution in China by 2020? Oxford Institute for Energy Studies.
Natural Resources Defense Council (2012) The Role of Natural Gas in America's. [Online]. 14 June 2012. Natural Resources
Defense Council. Available at: http://www.nrdc.org/energy/files/energymixII.pdf.
Sandalow, D., Wu, J., Yang, Q., Hove, A., et al. (2014) Meeting China's Shale Gas Goals. [Online]. 12 September 2014. Center on
Global Energy Policy, Columbia University. Available at: http://energypolicy.columbia.edu/sites/default/files/energy/China%20Sh
ale%20Gas_WORKING%20DRAFT_Sept%2011.pdf.
US Environmental Protection Agency (2013) Natural Gas. [Online]. 25 September 2013. US Environmental Protection Agency.
Available at: http://www.epa.gov/cleanenergy/energy-and-you/affect/natural- gas.html.
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