Coalbed Methane in Asia

8/2/2019 Coalbed Methane in Asia

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ABU DHABI BRUSSELS DUBAI FRANKFURT HONG KONG LONDON MADRID MILAN MUNICH NEW DELHI NEW YORK PARIS SINGAPORE STOCKHOLM TOKYO

Coal Bed Methane in Asia

Partner, Ashurst LLP

Ashley Wright


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Contents

Introduction to Ashurst

Coal bed methane Overview of CBM potential in Asia

Regulatory overview

- Indonesia

- China

- India Practical and legal issues

Summary

Q&A


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Ashurst an international law firm

Over 1000 lawyers including 220 partners

Managing Partner of the Year 2008 - Legal Business Awards Project Finance Law Firm of the Year (Singapore) 2008 - ACQ Finance Magazine Middle East Power Deal of the Year 2008 (Ras Laffan C) - Project Finance Magazine European LNG Deal of the Year 2008 (GATE LNG) - Project Finance Magazine Law Firm of the Year 2007 - The Legal Business Awards Infrastructure Team of the Year 2006 - The Lawyer Awards


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Ashursts global energy practice

80 specialist lawyers worldwide dedicated to energy and resources

Core teams in Abu Dhabi, Dubai, London, Singapore and Tokyosupported by specialists in other offices

Genuine industry experience a number of our lawyers have

practiced in-house for global energy companies/key institutions(e.g. Shell, BG, International Power, OFGEM, JBIC, Mitsui)

Key strengths in upstream oil and gas, pipelines, LNG, refining,petrochemicals, power, mining, green energy, water, nuclear andCBM

Commentators were united in praising this groups energyexpertise across the board... Lawyers here possess genuinespecialisation in their field."Chambers Global


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ABU

DHABI

BRUSSELS

DUBAI

FRANKFURT

HONG

KONG

LONDON

MADRID

MILAN

MUNICH

NEW

DELHI

NEW

YORK

PARIS

SINGAPORE

STOCKHOLM

TOKYO

Coal bed methane

Coal bed methane is an energy resource which is alreadywidely used in North America, where it accounts for about

10% of U.S. natural-gas production. Asias CBM stores,however, have been largely untapped because of logistics, alack of industrial development and extraction costs.

Utilisation of CBM has three major benefits:

bridging the global energy shortage;

lowering emissions (thereby enabling countries tocomply with Kyoto requirements); and

improving coal mine safety.


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CBM market trends

change in perception increasingly mainstream

convergence in technology pricing market discounts, government incentives,

emissions credits

increased market share

certification of reserves

innovations enhanced CBM, CBM to LNG

M&A activity Origin, Pure


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Global estimated coal reserves and CBM resources

35078,500Australia

905,147242,722

157,011

4,968

92,445

114,701

Total (million tonnes)

-700

700-3,000

450

300

1,000

CBM reserves(TCF estimated)

China

World totalUnited States

Russia

Indonesia

India

Country

Source: International Energy Annual 2005. U.S. Energy Information Administration (EIA)

By mid-2008, only 15 TCF of CBM had been produced worldwide


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Indonesia

Indonesias potential CBM gas reserves are twice that of itsproven and probable natural gas reserves, at an estimated450 TCF.

There are no active CBM recovery projects yet in operationin Indonesia.

However - several PSCs have recently been granted Medco, Ephindo, PT Ridlatama Mining Utama, PT SamantakaMineral Prima, CBM Asia Development Corp with many ofthe other major energy players expressing interest.

Oil and gas infrastructure exists in several coal basins withsignificant potential - existing extensive pipelineinfrastructure in the many major target basins could beused to move produced gas to domestic or export markets.


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China China is the worlds largest producer and consumer of coal. China currently relies on coal to generate three-quarters of

its electricity. In 2006, China produced 1.4 billion cubic meters of CBM, or

3% of the countrys total natural gas consumption. Beijinghas recently set an ambitious target to increase CBM outputto 10 billion cubic meters annually by 2015.

By the end of 2007, China had 2,446 CBM wells, withseveral CBM mines in the Shanxi, Liaoning and Xinjiangprovinces having achieved commercial production.

2 major pipelines planned for CBM transportation.

Chinese CBM market dominated by domestic players butincreasing foreign involvement.

By mid-2006, CUCBM signed contracts for 26 CBM blockswith foreign companies.


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India

Coal is the most important source of energy for electricpower generation in India.

There is currently only one operational CBM recoveryproject (a 210 km2 coal field operated by GEEC in theDamodar Valley, West Bengal).

Between May 2001 and June 2006, the Indian governmentoffered 26 prospective CBM blocks for exploration. Thesewere won by Reliance Industries, Essar Oil and the ONGC.

These 26 prospective CBM blocks cover an area of around13,590 km2 and are estimated to contain 50 TCF of CBMresources. Expected total production from these blocks isestimated at 1,400 million cubic foot per day at their peakproduction level.


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Regulatory overview: Indonesia

Key legislation Law No. 22 of 2001 for Oil and Natural Gas

Governmental Regulation No. 35 of 2004 on Upstream

Oil and Gas Activities Ministry of Energy and Mineral Resources (MEMR)

Regulation No. 35 of 2008 on Procedures for Oil and GasBlocks Allocation and Offering

MEMR Regulation No. 36 of 2008 on BusinessUndertakings of Coal Bed Methane

Key regulatory authorities MEMR

Badan Pelaksana Kegiatan Usaha Hulu Minyak Dan GasBumi (BPMIGAS)


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Regulatory overview: Indonesia contd.

Management of overlapping rights CBM open areas (no preferential right given) CBM located in oil and gas working areas (preference given to

the oil and gas contractor) CBM located in coal mine working areas (preference given to

coal miner) CBM located in overlapping areas with both oil and gas as well

as coal mine operations (preferential right given to the oil andgas contractor)

Other key points exploration area cannot exceed 3000 square kilometres for

each block development only through a separate special purpose vehicle production sharing contract to be entered into with BPMIGAS as

government agency


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Regulatory overview: Indonesia contd.

Key commercial terms of CBM PSC term of the cooperation: typically 30-35 years

firm commitment: for the first three years of the exploration phase signature bonus: typically of USD 1 million payable on signature of PSC

performance bond: to be equivalent to approximately 15% of the firmcommitment or USD 1 million

domestic market obligations: around 25% of contractors share ofproduction

production bonus on sliding scale depending on production level

first tranche petroleum: preferential right to BPMIGAS to take around10% of the production prior to cost recovery

production split: around 45% to contractor

right for Government participant to take 10% participating interest


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Regulatory overview: China

Key legislation Mineral Resources law Coal Law Regulation for Registering to Explore for Mineral Using Block

System Regulation for Registering Mine Mineral Resources Regulations For Transferring Exploration Rights And Mining

Rights

Main regulatory bodies Ministry of Land and Resources

Ministry of Commerce Chief commercial agency China United Coal Bed Methane Company Ltd (CUCBM) CUCBM Monopoly ended in 2007: possible entry of Designated

Enterprises (China National Petroleum Corporation and Sinopecin the race)


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Regulatory overview: China contd.

Application process

setting up of project team by foreign collaborator

survey of resources

submission to CUCBM/ Designated Company of letter ofintention for carrying out cooperative developmentactivities

CUCBM/ Designated Company to make application:

to Ministry of Land and Resources for mineral explorationrights; and

to Ministry of Commerce for opening-to-outside right

CUCBM/ Designated Enterprise and the foreign collaborator toenter into a production sharing contract


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Regulatory overview: China contd.

Key terms of the production sharing contract

exploration risk with the foreign collaborator Chinese party cannot have less than 30% participating interest

2 year tax holiday

5% value added tax applicable after commencement of gasproduction

typically 70% cost recovery is allowed


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Regulatory overview: India

Key legislation:

CBM Policy,1997 Oilfields (Regulation and Development) Act, 1948

Petroleum and Natural Gas Rules, 1959

Key regulatory authorities:

administrative: Ministry of Petroleum and Natural Gas

implementing agency: Director General of HydroCarbons.

Model contract for exploration and production of CBM


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Regulatory overview: India contd.

Key features of the CBM policy

CBM (virgin coal fields) allotment is through biddingopen to both foreign and Indian bidders

CMM (existing mine fields) preferential rights are givento the coal miners

payments to be made

10% royalty payable to the state government

additional production linked payment

commercial bonus of US$300,000 on declaration ofcommerciality


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Fiscal benefits:

no participating interest of the Government no signature bonus

7 year income tax holiday from CBM production date

freedom to market in domestic market at marketdetermined prices

imported equipment for CBM development exemptedfrom customs duties


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Key terms of the cooperation agreement

parties to the contract: Government of India and the company four phase plan: exploration; pilot assessment; development

and production

firm commitment: minimum work program is applicable to thefirst two phases

expenditure obligations: no expenditure obligations

gas marketing: free domestic gas marketing performance bonds: bank guarantee equivalent to 35% of the

estimated annual expenditure (in the work programme) for thefirst two phases

100% cost recovery


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Practical and legal issues

CBM compared to conventional natural gas

Nature of CBM exploration and operations- different technology and economics

- multi-phased development

- shallow depths, multiple wells and closer spacing

- water production/contamination issues

- related infrastructure

- calorific values, processing, gas flow

- pricing and gas marketing arrangements


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Practical and legal issues contd.

Interface with existing coal mine operations

Interface with overlapping conventional oil and gasoperations

Overlapping/competing interests

Land access rights

Safety issues

Common/shared infrastructure and information


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Practical and legal issues contd.

Terms of production sharing agreements

- production splits, cost recovery and taxation- expenditure obligations

- domestic market obligations

- environmental obligations

Terms of joint operating agreements

- plans of development

- sole risk

- technology transfer


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Summary

CBM becoming increasingly mainstream and is well-developed in US and Australia, with significant potential in

Asia. Indonesia, China and India have each put policies and

regulatory frameworks in place for CBM, including fiscalincentives to encourage development and foreigninvolvement.

CBM regulations have been largely based on existing oil andgas regimes, but the nature of CBM projects gives rise to

certain practical and legal issues. The way in which these issues are addressed (whether

through regulations or by contractual arrangements)impacts on project risk assessment, gas marketingarrangements and market valuations.


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Thank you!

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Coalbed Methane in Asia