Felicia Ruiz, Candice L. M. Long and Raymond C. Pilcher
Over the past decade, China has taken a proactive approach to regulating and promoting development of coalbed methane (CBM) and coal mine methane (CMM) resources. Government policy has shifted from viewing methane liberated by coal mining from primarily a mine safety concern to a significant component of natural gas development in the government’s 13th Five-Year Plan. As China plans to mine 4.3 billion t of coal in 2016, the 13th Five-Year Plan calls for a renewed focus on CBM and CMM, through an increase in the quality of gas output rather than quantity, and promoting the co-extraction of coal and gas resources. The plan calls for the produced gas to be shipped to market via newly constructed pipelines and integrated into the natural gas market. On the mine safety front, the central government continues to emphasise closing small, insufficiently regulated coal mines and consolidation of the coal mining industry.
Thus far, China’s achievements in CMM development can be seen through the rapid growth of CMM drainage. In 2015, CMM drainage in China reached 13.6 billion m3, an increase of approximately 517% between 2005 and 2015. During the same period, China’s utilisation also increased by 496%, reaching 4.8 billion m3.1
In support of the Global Methane Initiative (GMI), an international voluntary partnership to promote recovery, use and reductions of methane, and to promote sustainable development of coal-associated methane resources, the United States Environmental Protection Agency’s (EPA) Coalbed Methane Outreach Program (CMOP) published an updated version of the China Energy Market Report entitled, ‘Energy Markets in China and the Outlook for CMM Project Development in Anhui, Chongqing, Henan, Inner Mongolia, and Guizhou Provinces’ in April of 2015.2 This paper presents a high-level summary of that report, which encapsulates energy market analyses of coal, electricity and CMM within five coal producing provinces – Anhui, Hunan, Guizhou, Inner Mongolia, and Chongqing Municipality (a provincial level city). These energy-producing provinces could prove to be attractive to investors seeking potential avenues to investing in the integrated development of coal and methane resources.
Nationally, coal provides an estimated 69% of China’s energy needs. Although coal’s share of total energy is projected to drop to 63% by 2020 and 55% by 2040, the total consumption of coal will still rise, reflecting an overall projected increase in energy consumption. The projected drop in reliance on coal to generate electricity can be attributed to increased efficiency and China’s goal to increase environmental sustainability. Consumption still outpaces production, however, and China continues to be a net coal importer, importing 204.1 million tons in 2015.3 The top two consumers are thermal power generators, using half of all resources, and steel and cement manufacturers, which use one quarter of resources.
Despite the national trend of increased coal consumption, coal production in certain provinces performed independently of that trend. Due to the deceleration of economic growth throughout China, many coal mines have no longer been able to sell their production. For example, Guizhou Province continued to see growth in coal exports, bolstered by its favourable coal quality, yet Inner Mongolia has been impacted quite differently. Inner Mongolia produces nearly 30% of the coal market share in China, fuelled by the Chinese government’s financing support for development of these deposits. The national economic slowdown has affected Inner Mongolia’s coal mines severely, with many mines reducing production or shutting down part time.
Nationally, growth of China’s electricity market continued, with consumption rising 9.7% between 2007 and 2012, surpassing overall economic growth by an average margin of 19% on the national level. This growth has primarily been driven by industry, which accounted for 73% of total electricity consumption in 2012. Electricity generated domestically has provided for the increase in demand, with a generating capacity of 1500 GW, and output of 5618 TWh in 2015.4 However, with the recent downtrend of steel production, the primary driver for industrial use, national power generation showed a slight decline.
Provincially, electricity demand is more tightly controlled by its regional setting. As an example, national and regional planning authorities established a programme to transform Anhui, a relatively rural province, into a power supplier to the Yangtze Delta provinces, as it is the largest coal producer in the east China region. In Chongqing, the momentum towards urbanisation in the municipality continues to support electricity growth, despite a slump in industrial use. Henan, one of China’s most populous provinces, consumes the overwhelming majority of the power generated in the province. Although Guizhou is one of China’s smallest, poorest, and least urbanised provinces, its grid interconnections to the rest of the country led to increased annual power generation of 5.4% between 2009 and 2012. In spite of the recent economic downturn, Inner Mongolia remains as a significant net supplier of electricity to other provinces based on its abundant coal resources, sparse population and modest internal demand, and relative proximity to the Beijing-Tianjin load centre.
The Chinese government has expressed its intent to promote natural gas as an important resource. Despite years of double digit growth in the natural gas market, natural gas fuelled power generation accounted for only approximately 2.2% (116.4 TWh5) of the nation’s electricity supply in 2013, primarily because it is more expensive to produce than coal-fired power. To increase the gas market, the government has made investments in production facilities, long distance pipelines, as well as liquefied natural gas terminals. To date, the primary demand for natural gas is driven by residential and commercial use, and for industrial purposes.
The provincial markets show varying degrees of gas supply and utilisation. High prices for electricity at mine sites make onsite CMM power projects look attractive. Even with areas of well-developed natural gas distribution infrastructures, supply of natural gas has been the most important constraint to more rapid growth in consumption and will likely continue for the rest of the decade. Currently, in some rural parts of Guizhou, natural gas supply is limited to LNG trucked in and used for a small number of residential and automotive customers. Guizhou’s pipeline network is expanding, creating additional potential to increase the viability of different kinds of CMM projects.
In Inner Mongolia, low sales prices at the wellhead, gas transmission and retail levels sales prices prevail in the region surrounding the Chongqing gas field, presenting barriers to the sale of purified CMM to either China National Petroleum Corp. for pipeline injection or for sale to local distribution companies. Given the relative abundance of available conventional gas, it is unlikely that a pipeline would be extended dozens of kilometers to absorb small volumes from producers. LNG presents a much more feasible prospect for CMM producers in southwest China.
CBM and CMM producers in China have benefited from government incentives established since the implementation of the Clean Development Mechanism (CDM) in 2005. The promise of carbon credit revenue spurred utilisation of CMM; 92 CMM projects in China were developed and registered under CDM. Current government incentives established include monetary support, preferential tax regulations, and financial subsidies. However, CMM consumption still lags behind production due to the lack of utilisation infrastructure and the subsequent failure to penetrate the mainstream natural gas market.
In addition, despite the incentives, power grid companies are not eager to manage the complexities of dispatch, namely the fluctuating output from small CMM plants and the lack of policies to pass on any additional costs to consumers. Despite its slow growth, CMM supports 1600 MW of power production through CMM drainage. Through annual government subsidies of 36.8 million Chinese yuan (US$ 5.5 million), Chinese mines have produced 182 million m3/year of CMM and CBM, equivalent to replacing 291 000 thousand t of coal.1
Increased national attention to the potential of utilising methane liberated by coal mining as a significant component of natural gas development, including a proactive approach to promoting and regulating development of CBM and CMM resources, provides a unique opportunity for CMM project developers in China. However, the push for ongoing development of CMM resources nationally and the different impacts at the provincial level must be understood within the context of provincial markets in China. Knowledge of these differences is critical for project developers to determine the most effective approach for the development of successful projects that produce energy, yield economic benefits and reduce methane emissions. International collaboration under the framework of the Global Methane Initiative continues to advance methane capture and use projects that bring more gas to market, and reduce methane emissions associated with coal mining.
For more information on the EPA’s Coalbed Methane Outreach Program and its activities in China under the auspices of GMI, or to download the China Energy Markets Report, please visit the EPA website or the GMI website.
Felicia Ruiz, Coalbed Methane Outreach Program, US EPA; Candice L. M. Long, Geoscientist, Raven Ridge Resources; and Raymond C. Pilcher, President, Raven Ridge Resources.