Wednesday, June 19, 2002 05:19:04 AM

Australia spearheads Asia drive for coalbed gas

By Michelle Nichols

MELBOURNE, June 14 (Reuters) - Australia is leading the way in Asia in the production of coal seam methane (CSM) and is one of only a handful of countries to have begun commercial production, surmounting several obstacles along the way.

The need for new sources of energy is driving the process. "There is an impending gas shortage and people are now looking under rocks they didn't look under before," Bill Nagle, chief executive of the Australian Gas Association, said. As governments debate how to cut greenhouse gas emissions, coal gas offers two benefits -- extraction prevents the venting of methane into the atmosphere during coal mining, and replacement of dirtier fuels in power generation.

The Queensland state government's decision last week to award a A$500 million power infrastructure contract to a bid using coal seam methane, supplied by Macquarie Bank <MBL.AX> subsidiary CH4, will test the viability of Australia's industry. "The decision has to be viewed as extremely positive for CSM, particularly given the status of the industry at the moment where there is still operational risk attached to it," said Andrew Williams, senior oil and gas analyst at Auzeq Securities. "There is no doubt that you can put a well or a bore hole into coal deposits and extract gas. But its whether you can do it sustainably and economically which are the two key issues." The gas is found in coal beds and requires little processing to achieve pipeline quality. Australia's fledgling CSM industry hopes to follow in the footsteps of the successful CSM industry in the United States.

AUSTRALIAN POTENTIAL
Apart from technology and economics, Australian CSM developers also are faced with the challenge of breaking into a market monopolised by natural gas. 

But along with pressure to alleviate greenhouse gas emissions, projections for growth in gas demand are forcing suppliers to look at less conventional sources of gas. "Coal seam methane will have its place in the energy equation in the future. There are big, big reserves in the ground but how much of that can you actually recover -- that's the risk," said Gordon Ramsay, energy analyst at Salomon, Smith Barney.

Oil Company of Australia (OCA) <OCA.AX>, which is 85 percent owned by Origin Energy <ORG.AX>, is Australia's largest CSM supplier with a 60 percent cut of sales. OCA estimates that by mid-2002 it will be supplying 25 percent of Queensland's gas demand and plans to spend nore than A$200 million over five years develop resources.

"We're now starting to see the real demonstration of both the practical reserves and the commercialisation of coal seam gas, which has been promised for so long but up until recently has delivered so little," Origin spokesman Tony Wood said. 

CHINA, INDIA POTENTIAL
CSM production in the United States began more than 20 years ago and now accounts for seven percent of the country's total gas production -- more than Australia's total gas demand.
China, the world's largest coal producer, has estimated coal seam methane resources of between 1,000 trillion and 2,800 trillion cubic feet and has already signed 11 production sharing agreements with six foreign companies, including BP <BP.L>, Phillips Petroleum <P.N> and Chevron Texaco <CVX.N>. 

China's CSM projects are still in exploration and pilot development stages and first commercial production is not expected to begin for at least another year. In 1997, India announced a policy plan for eight years of CSM exploration and assessment, followed by a development phase of five years. It has approved a block in the Raniganj area in the eastern state of West Bengal for 
exploration.

About 18 companies in Britain are involved in extracting and using CSM from disused coal mines, while in Canada some 30 pilot projects are underway with decisions on commercial production to be made this year. In March, oil and natural gas-rich Indonesia said it would soon open up shallow blocks for CSM exploration in southern Sumatra and the eastern part of Kalimantan. Indonesia is the world's biggest supplier of liquefied natural gas and is Southeast Asia's largest crude producer.