Why are foreign investors pulling out of coalbed methane development?

By Xu Bin and Xing Liren, Concord & Partners
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Coalbed methane is a high-quality, clean energy source. Throughout the four revisions of the Catalogue for Guiding Foreign Investment in Industry, between 1997 and 2011, coalbed methane exploration and development have consistently been in the encouraged category. Nevertheless, according to reports, to date energy giants such as Greka, Shell, BP, Rio Tinto, BHP Billiton and ConocoPhillips have partially or entirely pulled out of their co-operation ventures in the coalbed methane sector in China, or are hesitating in projects currently being implemented, for reasons explained below.

Xu Bin Partner Concord & Partners Beijing
Xu Bin
Partner
Concord & Partners
Beijing

Overlapping mining rights

Since 1995, the total number of resource blocks held by domestic coal enterprises has continually risen. The speed of establishing new coal mining concession blocks has also far exceeded that of coalbed methane concessions, leaving coalbed methane co-operation enterprises with little recourse other than to establish coalbed methane concessions in existing coal mining concession blocks. According to reports, based on 2007 statistics, of the 98 coalbed methane exploration concessions nationwide, 86 involve overlapping concessions, and these 86 coalbed methane exploration concessions overlap with 1,406 coal mining concessions.

Coalbed methane exploration and development does not benefit coal enterprises, but impedes their extraction of coal. For their own efficiency, coal enterprises are not willing to co-operate with coalbed methane enterprises, and will use various means to impede coalbed methane enterprises in their work.

Delaying coal to secure gas

The 2006 Several Opinions of the General Office of the State Council on Accelerating the Extraction and Utilisation of Coalbed Methane specifies the policy that “extraction first, mining after must be adhered to” and requires that “where the gas volume per tonne of coal in a coalbed exceeds the specified standard, and where the conditions for surface development are satisfied, a unified coalbed methane and coal development and utilisation plan must be prepared, and surface extraction of the coalbed methane shall be selected preferentially”. Additionally, they specify that “enterprises are restricted from directly discharging coalbed methane into the atmosphere”.

These reasonable provisions have compelled coal mining rights holders to take a new look at the coalbed methane benefits in their blocks and strive for the right to be heard. After all, if a coalbed methane mining rights holder unhurriedly carries out its work, it will necessarily impede the coal enterprise in its coal extraction.

Xing Liren Intern Concord & Partners Beijing
Xing Liren
Intern
Concord & Partners
Beijing

Easing monopoly rights

China United Coalbed Methane Corporation (CUCBM) was formerly the only coalbed methane enterprise with monopoly rights to co-operate with foreign parties in the exploitation of coalbed methane. In September 2007, the amended Regulations on the Exploitation of Onshore Petroleum Resources in Co-operation with Foreign Parties granted monopoly rights to CUCBM and “other companies designated by the State Council”. In October 2007, the Notice of the Ministry of Commerce, the National Development and Reform Commission and the Ministry of Land and Resources on Matters Relevant to Further Expanding Co-operation with Foreign Parties in the Exploitation of Coalbed Methane (document No. 94) specified that the Ministry of Commerce (MOFCOM) and National Development and Reform Commission (NDRC), together with relevant authorities will “select several enterprises … for pilot projects to exploit coalbed methane in co-operation with foreign enterprises” in addition to CUCBM. In December 2010, MOFCOM, the NDRC and the Ministry of Land and Resources issued a notice consenting to CNPC, Sinopec and Henan Provincial Coal Seam Gas Development and Utilisation exploiting coalbed methane in co-operation with foreign enterprises. Document No. 94 further specifies: “With respect to the surface extraction and down-hole recovery of associated coalbed methane in the course of coal exploitation, the coal mining rights holder may co-operate with foreign parties and the same shall not fall within the scope of administration of the monopolies on co-operation with foreign parties in the exploitation of coalbed methane.” This provision has caused coal mining rights holders with overlapping coalbed methane mining rights to feel that they have gotten the short end of the stick, and has become the basis for their developing coalbed methane on their own and driving out their coalbed gas development partners.

In practice, coalbed methane mining concessions established under law are not protected. Encroachment by local enterprises and interference by villagers are frequently shielded by the local government and certain judicial authorities. If a foreign investor does not have the support and co-operation of the central government, the local government, the landowner, the relevant mining rights holders and the powerful protection of an impartial judicial authority, its work is impossible to carry out. Furthermore, there is a lack of mandatory regulations governing the construction and use of gas pipelines, and insufficient tax breaks and subsidies.

Recommendations

Due to these unfavourable factors, foreign investors are pulling out of the sector. In the past 10 or so years, foreign investors have contributed valuable technology and funds to coalbed methane exploration and development in China. If they pull out, this will seriously harm the credibility of the central government and enterprises, deflate enthusiasm from foreign investors, hamper the importation of relevant technologies, and ultimately harm the long-term development of the coalbed methane industry. We recommend:

  • With respect to key basins, the examination and approval of coal mining rights and coalbed methane exploitation rights should be unified under the Ministry of Land and Resources, and coal enterprises and coalbed methane enterprises should be encouraged to adopt the joint operation model. In areas with modest coalbed methane reserves, the coal enterprises should be given the preemptive right to exploit the coalbed methane to resolve the problem of exploitation being put on hold.
  • Large backbone pipelines for the transport of coalbed methane could be centrally planned and constructed by the state to avoid network monopolisation. For short-distance transport pipelines, the participation of private enterprises should be actively encouraged to bring in competition.
  • In order to promote the industry, the state should issue more preferential policies to encourage the development and utilisation of coalbed methane, particularly with regard to initial outlays.

Xu Bin is a partner at Concord & Partners in Beijing. Xing Liren is an intern at the firm

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