China Coal-Bed Gas Costlier Than U.S. to Drill, Standard Chartered Says

Extracting unconventional gas from coal seams in China is likely to be more expensive than in the U.S. because alternative drilling techniques are required, according to Standard Chartered Plc.

Companies must spend more to extract gas from China’s coal seams because they need to drill horizontal wells, costing about $2.3 million each, in a larger area and through dense deposits, Han Pin Hsi, a Singapore-based analyst, said in a report dated yesterday. U.S. explorers use vertical wells, costing about one- third of horizontal ones, with the fuel concentrated in deeper, smaller areas at a higher permeability.

“Due to geological differences, current economically viable vertical-well technology used in the U.S. is unsuitable for deployment in China,” Han said. “High permeability is required for gas to flow to the surface and low permeability in the China coal bed results in higher extraction costs.”

A typical coal-bed methane project in China, after including state incentives, should be able to generate an internal rate of return of 17 percent, according to the report. That compares with a cost of capital of about 12 percent.

To calculate the return, the bank used a finding and development cost of $1.27 per thousand cubic feet, a selling price of $6.55, and an estimate for drilling a horizontal well at $2 million, it said.

Different Course

China will take a different course from the U.S. in unconventional gas development because of “unique” geological, technical and commercial reasons, Gavin Thompson, director of China gas research at Wood Mackenzie Ltd., said last month.

The fuel source may account for more than a quarter of the China’s gas supplies by 2030, China National Petroleum Corp. said Nov. 19.

Gas trapped in shale, coal seams and impermeable sandstone, collectively known as unconventional gas, boosted proved reserves in the U.S. last year to the highest level since 1971, the Energy Department said yesterday. Reserves increased 11 percent to 284 trillion cubic feet, the department said in a report.

-Editors: Alexander Kwiatkowski, Clyde Russell

To contact the reporter on this story: Dinakar Sethuraman in Singapore at dinakar@bloomberg.net

To contact the editor responsible for this story: Clyde Russell at crussell7@bloomberg.net.

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