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INFORMATION ON NATURAL GAS COMMODITIES Chinese Natural Gas Demand Moving CBM Exploration
Companies Forward
Warmer temperatures ahead for most of the United States this coming winter could spell doom and gloom for many speculative coalbed methane (CBM) companies. According to a recent forecast by the U.S. Department of Energy’s Energy Information Administration, “Natural gas prices this winter are expected to be significantly lower than last winter. Not only are there unlikely to be any hurricane-induced production losses, but the very high levels of natural gas in storage is expected to put downward pressure on natural gas prices this season.” They believe the Henry Hub natural gas spot price should average $5.40 mcf in October and might average $7.53 for 2007. Sprott Asset Management research analyst Eric Nuttall told us during a previous interview that the economics of coal bed methane (CBM) companies would be “very skinny under $6.” This past April, Nuttall cautioned that his money management firm was “quite excited about the prospects for companies with coal bed methane assets so long as natural gas prices remain above $6 per Mcf (thousand cubic feet).” Unfortunately, that hasn’t been the case. The natural gas supply glut and warmer weather might drive consolidation in the CBM sector. On the bright side, this is not the case for CBM companies who took a leap across the Pacific Ocean. Instead of joining the ranks of companies deferring exploration programs, as are some of their counterparts in Alberta, two CBM exploration programs are moving full steam ahead with development projects in natural-gas hungry China. Both Far East Energy Corporation (OTC BB: FEEC) and Pacific Asia China Energy (TSX: PCE; Other OTC: PCEEF) recently announced encouraging developments in developing their projects in the world’s most populous country. Far East Energy announced on Monday it had successfully achieved continuous gas flow in its third horizontal well on its Shouyang Block in China’s Shanxi province. Pacific Asia China Energy announced yesterday it had gotten favorable gas content from three of its six well testing program on its Mayi Block in China’s Guizhou province. While some of the Alberta CBM companies might fret about their very survival through the first winter of lowered nat gas prices since 2001-2002, these two CBM companies appear to be accelerating their development plans in China. Over the past year, we’ve been following the developments in both companies. On October 17th, Far East Energy is holding a conference call, and we hope to report upon developments with this company after that time. This past week, Dr. David Marchioni had presented developments in the exploration progress for Pacific Asia China Energy (PACE) at an oil and gas conference in Montreal, Canada. We conducted a tape-recorded telephone interview with Dr. Marchioni, who serves as the vice president of exploration for PACE. StockInterview: Can you update us on your progress on PACE’s Guizhou province project? Dr. Marchioni: The project is on schedule. It’s on expectations. We’ve validated data. We’ve got no surprises. I think we’ve established that we’ve got pretty good gas content at shallow depth. It’s something we thought we knew, but we validated that. This gives us increased hope for permeability at shallow depth. It’s also gives us two ways to access the basin. We will drill some vertical wells in the shallow area and horizontals in the deeper area. StockInterview: PACE has been drilling since last winter. What do you think you have in Guizhou province’s Baotian-Qingshan Basin? Dr. Marchioni: Basically, we believe we have a world-class resource here. The gas content, the coal thickness, the gas in place, and the resources per square mile would compare quite favorably with any of the more famous CBM plays. We’ve got up to 20-odd meters of coal. We’ve got up to 375 – 400 cubic feet per ton of gas. StockInterview: How does your property’s gas content compare with other CBM properties? Dr. Marchioni: It compares with the resources of some of the major plays, like San Juan (New Mexico) and Black Warrior (Alabama) or the Deep Mannville in Alberta (Canada). StockInterview: You had talked about getting good gas content at relatively shallow depths in the basin. Could you explain that? Dr. Marchioni: In any basin, gas content usually increases with depth. Permeability decreases exponentially with depth. Gas content is usually linear with depth, increasing. Permeability is exponentially decreasing. Typically, you have an optimum range where you are going to get acceptable, economic gas content and acceptable, economic permeability. Clearly, the shallower you go, the better the permeability is going to be. In most basins, the shallower you go, the less gas you get. In this basin, the gas contents are so high that even going shallow, we are still in the 175-225 range at 300 meters. What it means for us is that at 300 meters, based on a lot of other plays in the world, you can expect pretty good permeability. And getting 200 at that shallow depth is very encouraging. It gets higher down deep. StockInterview: What does getting good gas content at shallow depths mean in terms of producing gas economically? Dr. Marchioni: It means that you’ve got a much better chance of having economic permeability because you are at a shallow depth. The deeper we go, we know we are going to lose permeability with depth. That’s what happens in every basin. And we don’t just lose it linearly, we lose it exponentially. So the shallower you can produce, as long as you get decent gas content numbers, the better off you are because you’ve got much more chance of achieving good permeability. And also you are going to save money on drilling. It’s quite a bit cheaper to drill at 300 meters, than it is to drill at 800 meters. StockInterview: Have you found it difficult working with the Chinese-government’s CUCBM, which runs the show for CBM operations in China? Dr. Marchioni: Our relationship is very good. We’ve had no problems or disagreements. We see the relationship with CUCBM as a great advantage. Some people would probably suggest that working with the government might not be a great thing. But we find it extremely advantageous because they do a lot of the heavy lifting for us. They do a lot of the regulatory stuff. They get a lot of the clearances from the military, from the environment, and from the department of commerce. We don’t have to do that stuff. They do it for us. As an example, we’ve signed our Guizhou production-sharing contract in November (2005), and we had a hole in the ground in February (2006). That would even be hard to do in Alberta. StockInterview: Is it tough working in China with the Chinese? Dr. Marchioni: I would say it’s going very smoothly. The CUCBM has helped us with regulatory things. They put us in contact with drilling contractors, with seismic contractors. They have templates for the actual contracts. The Chinese drilling companies are all used to drilling coal. They have a lot of experience with coal. The seismic guys have done a lot of coal seismics. The first word in CBM is Coal. Working with people that are very familiar with coal is quite advantageous. StockInterview: When do you think PACE might be selling its gas? Dr. Marchioni: I don’t think we’ll have many problems selling it. We’ve got a lot of industrial users in the region. We have already been approached by people talking about investing in the company in order to get the first right of refusal. They are so desperate for gas. We haven’t cut any deals because we’re not producing any gas. Potentially, we could be selling by the end of 2007 if we are getting reasonable numbers. There is potential to have low volume sales by the end of 2007. If it’s successful, and it all depends on if it is successful, we’d be flaring gas from the middle of Q1 through the end of Q2 at least. StockInterview: In previous interviews, we discovered PACE might have cash flow through its joint venture with Australia’s Mitchell Drilling. Is that joint venture in progress? Dr. Marchioni: It’s progressing. We’ve got a country manager in place for China. We’re about to send people to Australia for training. The way it’s going to roll out is the joint venture is buying two rigs. We should get our first rig in December. We’ll either use it for ourselves or go straight into drilling for other people. Potentially, it could provide early cash flow. The second rig would arrive probably in January. That one we will definitely be using for ourselves because we’ve modified that specifically to access some of the fairly rugged terrain in our project area. StockInterview: How much do you charge for leasing our a drill rig, and what are the margins? Dr. Marchioni: Drills are over $1 million /month, probably $1.25 million per month. Good margins. I think probably 30 to 40 percent margins. StockInterview: Wasn’t there interest from China’s coal mines to degasify mines using Mitchell’s Dymaxion® drilling technology? Dr. Marchioni: The joint venture will be pursuing contracts to degasify coal mines. The Chinese government is pushing very hard to have coal mines drain the gas out of their mining blocks before they go and mine them. Mitchell’s has done that before. They are very experienced in this, and they are very good at extracting gas at fairly shallow depths and at a reasonable price. Nathan Mitchell and PACE President Tunaye Sai went to a one-day conference in the same province where we are operating in, talking about degasification. They got a great deal of interest. The government is pushing them very hard. COPYRIGHT © 2006 by StockInterview.com
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