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Phasis | Consulting
P.O. Box 1581 Station MCalgary, Alberta T2P 3B9
Tel. (403) 542-3557Fax (403) 398-1331
E-mail: [email protected]: www.phasis.biz
Industry Report
The New Face of Coal: CBM an Emerging
Supply Trend
June 2006 Bettina Pierre-Gilles
SAM
PLE
�
“The New Face of Coal: CBM an Emerging Supply Trend” is a Phasis Consulting (Phasis) private publication. The views and information in this 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 Consulting does not accept liability, nor is responsible for any mistakes including mistakes and inaccuracies arising from the sources from which parts of this report may be drawn from.
The figures and tables contained in this report may be copied or reproduced without permission as long as any copy or reproduction includes the attribution to the organization. The preferred citation is: 2006, Phasis Consulting.
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For more information on this and other reports please contact us:
Phasis ConsultingP.O. Box 1581, Station MCalgary, Alberta T2P 3B9CANADA
Tel. (403) 542-3557Fax (403) 398-1331
Web: www.phasis.bizEmail: [email protected]
The New Face of Coal: CBM an Emerging Supply Trendby Bettina Pierre-Gilles, Chief Economist / Principal, Phasis Consulting
© 2006 Phasis Consulting
SAM
PLE
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The New Face of Coal:
CBM an Emerging Supply Trend
SAM
PLE
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Table of Content
The Need for Unconventional Resources in Canada 6
Conventional Production 6
Supply & Demand 7
Pricing 9
Unconventional Resources 10
Coalbed Methane (CBM) 12
Nova Scotia 12
British Columbia 12
Alberta 13
Licensing 15
Production 17
Horseshoe Canyon 20
Mannville 20
Ardley 21
Future Production 21
Drilling and Completion Technologies 23
US CBM Production 25
Economics of CBM Development in Canada 27
Horseshoe Canyon 27
SAM
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Mannville 28
A Model of CBM Commercial Production 28
Results of Forecast 29
Socioeconomics of CBM Development 30
Issues affecting CBM Development 31
Land 31
Conclusion 33
SAM
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Growing energy supply and demand has caused North American
natural gas prices to rise. At the same time crude oil prices, the main
switching fuel from natural gas, are also high.
Weather conditions also affect gas supply and pricing. The devastating
hurricanes that hit the Gulf of Mexico in 2005 shut down production
in the area and upset the delicate North American supply balance.
Storage, which also contributes to the movement of gas prices, was
affected by the warmer than normal winter experienced in usually
cold cities throughout Canada and the U.S.
Natural gas prices in North America are largely dictated by key pricing
hubs in the following areas: in Canada, the intra-Alberta (AECO), and
Dawn in Ontario; and in the U.S., the Henry Hub is the most important
market. With gas prices for these markets at their historical high, the
question begs: where will North Americans find new yet reliable gas
to add to the already tight supply?
Unconventional Resources As conventional natural gas
supplies dwindle in Canada and the U.S., industry is looking for new
sources of energy to boost current and future supply. One solution
is exploring for unconventional gas, which includes: shale gas, tight
gas, gas hydrates, and coalbed methane (CBM)1.
Shale gas is natural gas produced from the fractures, pore spaces, and
physical matrix of shales. In the U.S., where shale gas production is
around 600 Bcf/y2, and expected to increase at least 10% by 2025, this
resource could provide a substantial boost to energy supply, especially
with projects like the Barnett Shale in Texas. In Canada, where shale
gas is still in the early stages of the evaluation phase, it is believed
that more than 80% 3of the potential of the resource will be found in
the WCSB..
Tight gas is natural gas that is contained in low permeability
formations. This gas is generally located in deeper portions of
sedimentary basins, in rocks that are cemented. As is the case with
other unconventional gas plays, tight gas is difficult to produce
1 In Canada, coalbed methane is referred to as Natural Gas from Coal (NGC), and in British Columbia, it is referred to as Coalbed Gas (CBG). As this resource is known internationally as 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
5
10
15
US $
/MM
Btu
2000 2001 2002 2003 2004 2005
Year
© 2005 Phasis Consulting
Henry HubNatural Gas Prices
2
4
6
8
10
12
CAD
$/GJ
2000 2001 2002 2003 2004 2005
Year
© 2005 Phasis Consulting
AECONatural Gas Prices
Figure 7Henry Hub’s (US) natural
gas prices have risen substantially since 2002.
Figure 8AECO’s (Canada) natural gas prices have been in line with
Henry Hub’s due to both markets being integrated.SA
MPL
E
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Production
CBM 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
not at levels to justify economic drilling, there was no urgency to
replace depleting reserves; and the results from the test wells were
unsuccessful, so all plans were set aside. As well, further exploitation
projects were abandoned partly due to lack of understanding of the
coal characteristics; and prior to late 2000, the lack of the technologies
to extract the gas.
Given rising demand, high gas prices and the continued success of
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,
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
were around 75 million cubic feet per day (Mcf/d), from approximately
300 wells. Over the years, median daily production has remained
stable, with over 6,500 wells drilled cumulatively, and total Canadian
CBM production averaging over 150 Mcf/d as of the end of 2005.
0
400
800
1200
1600
2000
Wel
ls
0
40
80
120
160
Mcf
/d
0 12 24 36 48 60
Months on Production
Median Production Wells
Regression Line 95% Prediction Interval
© 2005 Phasis Consulting
Production Profile by Time on Production
Coal Formation Total(Tcf)
Scollard (ardley) 57
Belly River 147
Horseshoe Canyon 71
Mannville 239
Total 514
Table 4CBM resources of Alberta. The Mannville is estimated to contain as much as 239 Tcf of gas, but not all of it will be recoverable.
Figure 24Since most of the CBM wells
to date are located in the dry Horseshoe Canyon, the
production profile is not typical of wells requiring
de-watering stages. Overall production is in the range of
50 to 75 Mcf/d.
Notice that very few wells have been on production
beyond 4½ years (54 months); as a result, the
production estimates are not reliable beyond this
time point.
89.8%
5.9%3.0%
Horseshoe Canyon MannvilleArdley Undefined
CBM Zone
© 2005 Phasis Consulting
CBM Zones: Wells Activity2003 to 2005
Figure 23Most CBM activity to date is in the dry Horseshoe Canyon.
SAM
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US CBM Production
In the U.S., CBM has been in development since the late 1970s, with
the first exploration project developed in the Black Warrior Basin in
Alabama. CBM production in the U.S. got its start and its name from
the process of taking gas out of the mines to prevent dangerous and
fatal explosions to miners.
The 1973 energy crisis prompted the U.S. government to vow to
decrease dependence on energy imports by increasing domestic
supply and to fully back CBM exploration. This policy was short lived,
supply was critically disrupted and prices rose to new levels.
The energy industry responded by increasing exploration efforts
beyond the Black Warrior Basin. Then in 1981 the Iran-Iraq war
broke out and with it the potential to critically undermine energy
supply. U.S. consumption of energy products decreased substantially
and the government began to search for new incentives to support a
domestically led supply, boosting new exploration.
BlackHills
Region
NorthernAnthraciteF ield
Southern Anthracite FieldE . M iddle
Anthracite F ield
R hode IslandMeta-Anthracite
T erilinguaC oal F ield
C oos BayC oal F ield
Turtle M ontainC oal F ield
North C entralC oal R egion
San J uanB as in
G ulf C
oas tC oalR eg ion
F t. Un ion C oal R eg ion(Willis ton B as in)
No rthernAppalach ian
B as in
P owder R iverB as in
U inta B as in
C herokee P latfo rm C entralAppalach ian
B as in
G reater G reen R iv er B as in
TertiaryLake
B edsRegion
A rkoma B as in
P ic eanceB as in
B ig H o rnB as in
Wind R iverB as in
Raton
B as in
Black MesaBasin
T aylorvilleBasin
DeepR iver Basin
N. & M id.ParkBasins
Culpepper Basin
Hanna-C arbonBas in
JacksonHole
Coa l F ield
HenryMountains
Coal Field
Rock C reekC oal F ield
G lacierC oal F ield
G oshenHole
C oal F ield
DanR iver-DanvilleB as in
G ooseC reekF ield
R ichmondBasin
Rogue
River C
oal Fie ld
C entralia /C hahalisC oal F ield
S . P arkC oal F ield
ScotsvilleBasin
Nucla-NaturitaC oal F ield
C anonC ityF ield
T ongue MesaC oal F ield
CDX Gas2 wells planned
TXC OSacatosa O lmos C BM F ield,> 30wells, 6 7 MMC FG in 2002
Devon4 well pilot
Avg. IP F 3 1 7 MC FD + 450 BWD
Duncan O il1 0 wells drilled Duncan/E l P aso
8 wells drilled
Jordan E xploration3 wells drilled
Duncan/E l P aso4 wells drilled
Devon: 4 wells producing
Dudley: 8 wells
Williams/Metfuel:1 4 wells producing
Illino is B as in
Fores t C ity B as in
Michigan Bas in
DenverBas in
SouthwesternCoal Region
B lac k Warrio rBas in
Blackfeet-Valier R
egion
G reat FallsC oal F ield
BullMountainC oal F ield
KaiparowitsP lateau
North DenverC oal F ield
CahabaC oalF ield
DatilMountainsC oal F ield
G arfield C o.C oal F ield
Ham
sForkRegion
S anto T omasC oal F ield
E agle P assC oal F ield
RioPuerco
C oalF ield
WhatcomCo. Area
PlateauCoal Field
San C arlosC oal F ield
Kolob-AntonBasin
CoosaC oalF ield
LewistownC oal F ield
Valley Coal Field
C errillosC oal F ield
S ierra B lancaC oal F ield
FarmvilleBasin
IoneC oal F ield
M issoulaC oal F ield
C retaceous LigniteArea
Kelso-C astleRock Area
Livingston-T railC reek C oal F ield
P inedaleC oal F ield
SkagitC o. Area
North R iverC oal F ield
Jornada del MuertoC oal F ield
Horseshoe BendC oal F ield
PagosaSpringsC oal F ield
Una del G atoC oal F ield
NorthC entra
l Coal
F ields
S toneC anyonF ield
T ijerasC oal F ield
E agle S pringsC oal F ield
Summit C reekC oal F ield
C arthageC oal F ield
E den R idgeC oal F ield
LombardC oal F ield
E lectricC oal F ield
S tillwaterC oal F ield
S tewart R anch-D avis C reekC oal F ield
Deer C reekC oal F ield
Willow C reekC oal F ield
MoneroC oal F ield
C oaldaleC oal F ield
O rofinoC oal F ield
E ngleC oal F ield
Roslyn C leelum F ield
Austin
D allas
Boston
Houston
E l P aso
Phoenix
Memphis
C hicago
D etroit
Seattle
San Jose
C olumbus
New Y ork
Portland
San D iego
Nashville
C harlotte
Baltimore
M ilwaukee
San Antonio
Los Angeles
Jacksonville
Indianapolis
Philadelphia
San F rancisco
Washington D .C .
M ain Map Legend
C BM F ields
S ignif. C BM P ilots
C oal B as ins & C oal F ields
C oal R ank
A nthrac ite
L V B itum inous
MV-HV B ituminous
Sub-B itum inous
L ign ite
U nc las s ified
0 2 00 4001 00
M iles
Barrow
KanutiNat'l
WildlifeR efuge
Lake C larkWilderness
C hugachNationalForest
NORT HSLO P E
NORT HE RN
SE LAWIK
C OOKINLE T
SU S IT NA
MIDDLETANANA
NE NANA
KO BUK
YU KON F LAT S
NORT H
ALEU T IA
N
EAG LE
UP P E RKO Y UKUK
LOWE RKO Y UKUK
C H IGNI
K
C O P P E RR IV E R
RAMPART
BR OADPASS
HE RE NDE E NBAY
BE R INGR IV E R
E vergreen R es .8 wells drilled
Alaska D G G S/U SGSTest drilling planned
Alaska D G G S/U SGSTest drilling planned
Alaska D G G S/U SGSTest drilling planned
Nome
Homer
Kenai
Kodiak
Valdez
Seward
Palmer
Bethel
C ordova
Wasilla
Soldotna
Unalaska
Kotzebue
Anchorage
Fairbanks
Dillingham
North Pole
Yukon D eltaNational W ildlife
Refuge
ArcticNationalW ildlifeRefuge
Noatak Wilderness
Yukon F latsNat'l W ildlife R efuge
MollieBeattie
W ilderness
Gates of theArctic W ilderness
Katmai W ilderness
Koyukuk NationalW ildlife R efuge
Denali W ilderness
SelawikNat
Wildlife
Refuge
BeringLandBridgeNat
P reserve
DenaliNat P ark
NowitnaNat W ildlifeRefuge
Yukon-C harleyR ivers Nat.P reserve
Alaska P
eninsula
Nationa
l W ildlife R
efuge
Kenai Wildernes s
Kobuk V alley
Nat P ark
Coalbed Methane in the US
Figure 34:US CBM formations
SAM
PLE
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Based on our analysis, a CBM well could be
expected to produce gas for 30 years, whereas
a conventional well might produce for only 10-
15 years. As such, it takes several months and
sometimes up to a year, before any cash flow is
realized from the well, delaying the payback
period for several months. As a consequence,
payout can be delayed at least one to two
years, and Internal Rates of Return (IRR) are
very low.
Results of Forecast As the first
commercial project in Canada, the Horseshoe
Canyon formation, still offers producers the
best economics within the industry, mainly
because of its characteristics. As limited
acreage is still available for new projects in the formation, future
development beyond current projects may be minimal. What may
happen in the Horseshoe Canyon is potential development of the deeper
areas within the formation, where the gas concentration is higher
0
100
200
300
400
Mcf
/d
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Year
© 2005 Phasis Consulting
Mannville HorizontalType Curve
Figure 36This 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.
Assumption
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 variable
Table 8: Major assumptions for the Mannville (horizontal) Cost model.
SAM
PLE
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. 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.
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Phasis | Consulting
P.O. Box 1581 Station MCalgary, Alberta T2P 3B9
Tel. (403) 542-3557Fax (403) 398-1331
E-mail: [email protected]: www.phasis.biz
SAM
PLE
