China’s growing energy crisis is one reason the price of oil, natural gas and other commodities has sustained at higher levels. The country’s mushrooming middle class, now numbering more than 300 million, was strongly responsible for the red-hot GDP growth in the first half of 2006, which increased its demand for more energy. After a decade of searching for new energy sources around the globe, the world’s second largest energy consumer is now trying to also develop its resources by further opening its doors to foreign companies.
Because China draws about 70 percent of its energy for powering the country’s economy from coal, the Chinese are turning more heavily to unconventional gas, known as coalbed methane (CBM). More than 30,000 coal mines releasing methane gas are responsible for about 40 percent of China’s air pollution. Methane gas explosions cause the deaths of more than 6,000 Chinese coal miners every year. Until recently, the methane was a nuisance byproduct recklessly vented into the atmosphere. By capturing the gas, before mines start producing coal, the world’s largest coal producer hopes to save lives and reduce air pollution while using methane as another energy source.
Integral to China’s 11th five-year plan is the doubling of natural gas use in the energy-mix by 2010. Aggressive Chinese policies and plans hope to boost more gas consumption by the end of the decade. By awarding foreign companies large coalbed methane concessions to explore in Chinese provinces, China hopes to accelerate development of this energy source. After attracting the likes of Chevron and ConocoPhillips, China’s state-owned China United Coalbed Methane Company (CUCBM) began offering production-sharing contracts with lesser known names.
Although much smaller companies – for example, Far East Energy Corporation (OTC BB: FEEC) – each one had connections within China to obtain massive CBM gas concessions – some about one-third the size of Rhode Island. Far East Energy, deceivingly tiny as an energy company (market cap: $136 million), developed its relationship with CUCBM through previous political connections. Chief Executive Michael McElwrath served briefly as Acting Assistant U.S. Secretary of Energy for Fossil Energy under President George Bush, Sr. Chief Financial Officer Bruce Huff was formerly President and Chief Operating Officer of Harken Energy, a company with which President Bush, Jr. was involved. A technical advisor, Don Gunther, was formerly Vice Chairman of the Bechtel Group, a company whose alumni populated the Reagan and Bush administrations.
In Far East Energy’s case, the plum award was a 1.3-million-acre concession in China’s coal rich Shanxi and Yunnan provinces. The properties have potential recoverable CBM resource of between 9.2 and 12.5 trillion cubic feet. They are situated near two major national pipelines running to both Beijing and Shanghai. According to the company’s website, when the Shanxi project is fully developed, it could sustain an estimated 3,000 horizontal gas wells. If that’s the case, this might become one of the world’s largest CBM projects.
Chairman John Mihm had been a senior vice president for Phillips Petroleum, prior to the company’s merger with Conoco, and was involved in supplying technical support for the ConocoPhillips Shanxi project before it was farmed out to Far East Energy. If ConocoPhillips participated only on an overriding-royalty basis, then Far East would partner with CUCBM and own 66.5-percent of Shanxi. If ConocoPhillips participates, Far East would retain a 40-percent interest.
Test wells drilled on two of the company’s blocks have so far indicated gas contents ranging between 280 and 650 cubic feet per ton of coal. These initial results compare favorably with two of the most prolific CBM basins in the United States, New Mexico’s San Juan Basin (300 – 700 cu ft/ton) and Alabama’s Black Warrior Basin (250 – 500 cu ft/ton). According to Far East Energy, internal ConocoPhillips documents demonstrated strong promise and said the “coal was well cleated and coal samples have high gas contents.” One key factor in evaluating a CBM play is the thickness of the coal seams. At Shanxi, four coal seams average 9 feet thick with total of 60 feet in coalbed thickness.
James Finch contributes to StockInterview.com and other publications. StockInterview’s “Investing in the Great Uranium Bull Market” has become the most popular book ever published for uranium mining stock investors. Visit http://www.stockinterview.com | 
