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The New Face Of Coal: CBM an Emerging Supply Trend
The New Face Of Coal: CBM an Emerging Supply Trend
The New Face Of Coal: CBM an Emerging Supply Trend
The New Face Of Coal: CBM an Emerging Supply Trend
The New Face Of Coal: CBM an Emerging Supply Trend
The New Face Of Coal: CBM an Emerging Supply Trend
The New Face Of Coal: CBM an Emerging Supply Trend
The New Face Of Coal: CBM an Emerging Supply Trend
The New Face Of Coal: CBM an Emerging Supply Trend
The New Face Of Coal: CBM an Emerging Supply Trend
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The New Face Of Coal: CBM an Emerging Supply Trend

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  • 1. Industry Report The New Face of Coal: CBM an Emerging Supply Trend E PL M SAPhasis | Consulting P.O. Box 1581 Station MCalgary, Alberta T2P 3B9 Tel. (403) 542-3557 Fax (403) 398-1331 E-mail: info@phasis.biz Web: www.phasis.biz June 2006 Bettina Pierre-Gilles
  • 2. The New Face of Coal: CBM an Emerging Supply Trendby Bettina Pierre-Gilles, Chief Economist / Principal, Phasis Consulting© 2006 Phasis ConsultingThe figures and tables contained in this report may be copied or reproduced without permission as long as any copy or reproductionincludes the attribution to the organization. The preferred citation is: 2006, Phasis Consulting.Selected portions of this report maybe quoted without permission as long as (1) they do not exceed 150 words, and (2) they includeattribution to the organization (see above for suggested citation).For more information on this and other reports please contact us: EPhasis ConsultingP.O. Box 1581, Station MCalgary, AlbertaT2P 3B9CANADATel. (403) 542-3557Fax (403) 398-1331Web: www.phasis.biz PL MEmail: info@phasis.biz SA“The New Face of Coal: CBM an Emerging Supply Trend” is a Phasis Consulting (Phasis) private publication. The views and information inthis report are solely those of the author and they are not intended to provide any financial, investment or operational advice of any kind.While considerable effort is made to ensure that the information in this report is accurate at the time of this writing, Phasis Consultingdoes not accept liability, nor is responsible for any mistakes including mistakes and inaccuracies arising from the sources from whichparts of this report may be drawn from.
  • 3. E PL The New Face of Coal: MCBM an Emerging Supply TrendSA
  • 4. Table of ContentThe Need for Unconventional Resources in Canada 6 Conventional Production 6 Supply Demand 7 Pricing 9 Unconventional Resources 10Coalbed Methane (CBM) 12 E Nova Scotia 12 British Columbia 12 AlbertaLicensing PL 13 15 MProduction 17 Horseshoe Canyon 20 SA Mannville 20 Ardley 21 Future Production 21Drilling and Completion Technologies 23US CBM Production 25Economics of CBM Development in Canada 27 Horseshoe Canyon 27
  • 5. Mannville 28 A Model of CBM Commercial Production 28 Results of Forecast 29 Socioeconomics of CBM Development 30Issues affecting CBM Development 31 Land 31Conclusion 33 E PL M SA
  • 6. Growing energy supply and demand has caused North American Henry Hub Natural Gas Pricesnatural gas prices to rise. At the same time crude oil prices, the main 15switching fuel from natural gas, are also high. 10Weather conditions also affect gas supply and pricing. The devastating US $/MMBtuhurricanes that hit the Gulf of Mexico in 2005 shut down production 5in the area and upset the delicate North American supply balance.Storage, which also contributes to the movement of gas prices, was 0affected by the warmer than normal winter experienced in usually 2000 2001 2002 2003 Year 2004 2005cold cities throughout Canada and the U.S. © 2005 Phasis ConsultingNatural gas prices in North America are largely dictated by key pricing Figure 7hubs in the following areas: in Canada, the intra-Alberta (AECO), and Henry Hub’s (US) natural gas prices have risenDawn in Ontario; and in the U.S., the Henry Hub is the most important substantially since 2002. Emarket. With gas prices for these markets at their historical high, thequestion begs: where will North Americans find new yet reliable gasto add to the already tight supply? AECOUnconventional Resources As conventional natural gas PLsupplies dwindle in Canada and the U.S., industry is looking for newsources of energy to boost current and future supply. One solutionis exploring for unconventional gas, which includes: shale gas, tight CAD $/GJ 12 10 8 6 Natural Gas Prices Mgas, gas hydrates, and coalbed methane (CBM)1. 4 2Shale gas is natural gas produced from the fractures, pore spaces, and 2000 2001 2002 2003 2004 2005 Yearphysical matrix of shales. In the U.S., where shale gas production is © 2005 Phasis Consultingaround 600 Bcf/y2, and expected to increase at least 10% by 2025, this SAresource could provide a substantial boost to energy supply, especially Figure 8 AECO’s (Canada) natural gaswith projects like the Barnett Shale in Texas. In Canada, where shale prices have been in line withgas is still in the early stages of the evaluation phase, it is believed Henry Hub’s due to boththat more than 80% 3of the potential of the resource will be found in markets being integrated.the WCSB..Tight gas is natural gas that is contained in low permeabilityformations. This gas is generally located in deeper portions ofsedimentary basins, in rocks that are cemented. As is the case withother unconventional gas plays, tight gas is difficult to produce1 In Canada, coalbed methane is referred to as Natural Gas from Coal (NGC), and in BritishColumbia, it is referred to as Coalbed Gas (CBG). As this resource is known internationallyas coalbed methane, we will refer to it as such in this report.2 http://www.aapg.org/explorer/divisions/2005emd.cfm3 http://www.gastechnology.org/webroot/downloads/en/4ReportsPubs/4_7GasTips/Win-ter04/GasPotentialOfSeclectedShaleFormationsInTheWesternCanadianSedimentaryBasin.pdf 0
  • 7. CBM Zones: Wells Activity Production 2003 to 2005 5.9% 3.0% C BM development and production in Canada lags behind the U.S. The first exploration for this unconventional resource in Canada began in the late 1980s, following the emergence of CBM drilling success in the U.S. However, given that domestic gas prices were 89.8% not at levels to justify economic drilling, there was no urgency to replace depleting reserves; and the results from the test wells were CBM Zone unsuccessful, so all plans were set aside. As well, further exploitation Horseshoe Canyon Mannville projects were abandoned partly due to lack of understanding of the Ardley Undefined© 2005 Phasis Consulting coal characteristics; and prior to late 2000, the lack of the technologies to extract the gas.Figure 23Most CBM activity to date is in the E Given rising demand, high gas prices and the continued success ofdry Horseshoe Canyon. CBM development in the U.S., a few pioneers formed joint ventures to evaluate and explore for CBM in the WCSB. Very few wells were licensed, Coal Formation Scollard (ardley) Belly River Horseshoe Canyon Mannville Total (Tcf) 57 147 71 239 PL and even fewer were producing at commercial rates until late 2001. The ‘dry’ coal formation in the Horseshoe Canyon is where most exploration occurred. The first commercial project from this formation was in 2003, operated jointly by MGV Energy Inc and EnCana (formerly PanCanadian Corporation). At that time, commercial production rates M Total 514 were around 75 million cubic feet per day (Mcf/d), from approximately 300 wells. Over the years, median daily production has remainedTable 4 stable, with over 6,500 wells drilled cumulatively, and total CanadianCBM resources of Alberta. TheMannville is estimated to contain CBM production averaging over 150 Mcf/d as of the end of 2005. SAas much as 239 Tcf of gas, but notall of it will be recoverable. Production Profile by Time on Production 160 2000 Figure 24 1600 Since most of the CBM wells 120 to date are located in the Mcf/d 1200 Wells dry Horseshoe Canyon, the 80 production profile is not 800 typical of wells requiring 40 400 de-watering stages. Overall production is in the range of 0 0 50 to 75 Mcf/d. 0 12 24 36 48 60 Notice that very few wells have been on production Months on Production beyond 4½ years (54 months); as a result, the Median Production Wells production estimates are Regression Line 95% Prediction Interval not reliable beyond this © 2005 Phasis Consulting time point.
  • 8. US CBM ProductionI n the U.S., CBM has been in development since the late 1970s, with the first exploration project developed in the Black Warrior Basin inAlabama. CBM production in the U.S. got its start and its name fromthe process of taking gas out of the mines to prevent dangerous andfatal explosions to miners.The 1973 energy crisis prompted the U.S. government to vow todecrease dependence on energy imports by increasing domesticsupply and to fully back CBM exploration. This policy was short lived,supply was critically disrupted and prices rose to new levels. EThe energy industry responded by increasing exploration effortsbeyond the Black Warrior Basin. Then in 1981 the Iran-Iraq warbroke out and with it the potential to critically undermine energysupply. U.S. consumption of energy products decreased substantiallyand the government began to search for new incentives to support adomestically led supply, boosting new exploration. PL Figure 34: US CBM formations M Coalbed Methane in the US Jordan E xplora tion 3 wells drilled G la cier C oa l F ield Whatcom C o. A rea S kagit M ain M ap L eg end C o. A rea C B M F ields S eattle S ignif. C B M P ilots Duncan/E l P a so 4 wells drilled North C entral C oal B as in s C o al F ields Black C entralia /C hahalis R oslyn C leelum F ield C oal R eg io n Duncan O il C oa l F ield C o al R an k feet-V 1 0 wells drilled Duncan/E l P a so 8 wells drilled T urtle M ontain A nth rac ite alier S ummit C reek C oal F ield C oal F ield L V B itum ino u s R egion K elso-C astle R ock A rea M V -H V B itu m ino u s M issoula O rofino C oal F ield G reat F alls S ub -B itum ino us P ortland C oal F ield C oal F ield L ig n ite Lewistown SA C oal F ield G arfield C o. U nc las s ified C oal F ield Willow C reek Lombard F t. U n ion C o al R eg ion C oal F ield C oal F ield (W illis to n B as in ) Bull T ert M ountain iar C oal F ield y La Livingston-T rail C reek C oal F ield ke C D X G as 2 wells pla nned S tewart R anch-D avis C reek B ed C oal F ield S tillwater sR C oal F ield C oos B a y eg ion C oal F ield P ow der R iv er E lectric B as in C oal F ield M iles E den R idge C oal F ield Horseshoe B end 0 1 00 2 00 400 C oal F ield R og ue R B ig H o rn Ja cks o ield iver C oa l F B as in Boston C oal n H ole F ie ld Black M ic h ig an B as in H ills R hode Isla nd R egion M eta -A nthra cite G oose W in d R iv er C reek B as in F ield M ilwaukee s F ield egion oal Devon: 4 wells producing lC tra D etroit C en F ork R rth Northern Dudley: 8 wells No Anthracite Williams/Metfuel: F ield Hams G reater G reen R iv er B as in 1 4 wells producing New Y ork H an n a-C arb on E . M iddle ld B as in Anthracite F ield F ie G oshen C hicago e cit Hole ra th R ock C reek C oa l F ield An rn C oa l F ield he ut So P hila delphia No rthern U in ta B as in N. M id. A p p ala c h ian North D enver P ark B as in C oal F ield Basins Ba ltimore Ione C oaldale C olumbus C oal F ield C oal F ield S a n F rancisco P ic ean c e B as in F o res t C ity B as in Wa shington D .C . India napolis D env er n B asi S a n J ose B as in er e pp North R iver C ulp C oal F ield S . P ark ea C oa l F ield Ar T aylorville ite H enry M ountains Basin L ign S cotsville C oa l F ield us Illino is B as in eo Basin T ongue M esa tac C oa l F ield C re Nucla-Naturita C anon C oa l F ield C ity F ield S tone K olob-A nton F armville R ichmond C a nyon Basin Basin Basin F ield K aiparowits P lateau d iel in C h ero kee P latfo rm C en tral lF B as oa P agosa A p p ala c h ian yC le lle vil S prings B as in Va an C oal F ield r-D R ive in D an B as on Black M esa M onero R at Basin C oal F ield S an J uan in Nashville as B as in rB R ive p C harlotte D ee Los A ngeles U na del G ato C oal F ield l F rco ield C oa P ue C errillos C oal F ield Rio T ijera s C oal F ield M emphis P inedale D a til F ield C oal F ield M ountains C oal F ield C oal A rko m a B as in au P late S a n D iego J orna da del M uerto P hoenix C oal F ield B lac k W arrio r d iel C a rtha ge B as in lF C oal F ield S ierra B lanca C oa C oal F ield sa C oo D eer C reek C oal F ield d iel E ngle lF C oal F ield oa aC ab C ah D allas io n R eg al Co E l P a so te rn es hw ut io n So R eg Devon al 4 well pilot Ba rrow E agle S prings Co Avg. IP F 3 1 7 MC F D + 45 0 B W D Alaska D G G S /U S G S C oal F ield st J acksonville T est drilling planned oa fC S an C arlos G ul C oal F ield NO R T H E R N NO R T H SLO P E Austin Noa H ouston tak T erilingua W ilde C oal F ield rne ss S a n A ntonio S E L A W IK Kob M ollie Nat uk Beattie P arkV alle K otzebue y W ilderness Arctic KO B U K National E agle P ass G ates of the Bering Arctic W ilderness W ildlife C oal F ield Land R efuge e e R Nat efug Bridge W ildlif wik Nat P res erve Sela TXC O S acatosa O lmos C B M F ield, Nome 3 0 wells, 6 7 M M C F G in 2 002 R efu tl ge e Na dlif ti S anto T oma s Wil anu UPPER Y ukon F lats C oal F ield K K oyukuk N ational KO Y U K U K Natl W ildlife R efuge W ildlife R efuge LO W E R KO Y U K U K Y U K O N F LA T S Alaska D G G S /U S G S Nowitna R AMP AR T T est drilling planned Nat W ildlife R efuge F airbanks E AG M ID D L E T A NA N A North P ole Y ukon-C harley LE R ivers N at. P reserve Y ukon D elta D enali National W ildlife Nat P ark NE NA NA R efuge D enali W ildernes s BR O A D Bethel PAS S E vergreen R es . 8 wells drilled S U S IT NA COPPER R IV E R P almer W asi Lake C lark Anchora ge lla Wilderness K enai S oldotna V aldez D illingham s nes C hugach der C ordova National Wil COOK Homer Forest ai INL E T Ken S eward BE R IN G R IV E R K atmai W ildernes s N U T IA ALE efug e eR K odiak TH ildlif NO R IG NIK iona lW CH Nat U nalaska sula P enin ka Alas H E R E ND E E N BA Y Alaska D G G S /U S G S T est drilling planned
  • 9. Based on our analysis, a CBM well could be Mannville Horizontalexpected to produce gas for 30 years, whereas Type Curvea conventional well might produce for only 10- 40015 years. As such, it takes several months andsometimes up to a year, before any cash flow is 300realized from the well, delaying the paybackperiod for several months. As a consequence, Mcf/d 200payout can be delayed at least one to twoyears, and Internal Rates of Return (IRR) are 100very low. 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25Results of Forecast As the first Year Ecommercial project in Canada, the Horseshoe © 2005 Phasis ConsultingCanyon formation, still offers producers thebest economics within the industry, mainly Figure 36because of its characteristics. As limited PLacreage is still available for new projects in the formation, futuredevelopment beyond current projects may be minimal. What mayhappen in the Horseshoe Canyon is potential development of the deeperareas within the formation, where the gas concentration is higher This is an average horizontal well’s production curve. This well came on-stream at 200 Mcf/d, and peaked to 420 Mcf/d by year 4. Note that after peaking, this well gradually declines, which is typical of the Mannville. M Assumption SA Wells per Section 2 Water Handling Costs (per Bbl) $0.50 Capital Cost per Well $1,650,000 Variable Operating Cost (per Mcf) $0.50 Well Operating Cost (per month) $5,000 Front Loaded Expenses variableTable 8:Major assumptions for the Mannville(horizontal) Cost model.
  • 10. A b out P h a s i s C on sult i ng Phasis is a strategic independent energy consulting firm. We provide interactive services that help our clients formulate strategic decisions for growth, investment and acquisition. E Phasis offers its clients comprehensive and in-depth analysis and research on energy economics, industry dynamics, energy markets, technology, geopolitics, environment, and other strategic services. PL Our clients value our independent studies and analyses, conducted with our many years experience in the industry. Our expertise covers most major energy sectors -unconventional and conventional- on a local, regional and global basis. MSA Phasis | Consulting P.O. Box 1581 Station M Calgary, Alberta T2P 3B9 Tel. (403) 542-3557 Fax (403) 398-1331 E-mail: info@phasis.biz Web: www.phasis.biz

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