Coal seam gas: broadening the energy mix

MOSCOW, 24 August 2011 - Coal seam gas (CSG) is seen in many countries as an extremely promising source of energy, according to the findings of Ernst & Young’s study “Coal seam gas: broadening the energy mix”. The potential economic benefits from CSG are significant, but a rigorous quantitative assessment of the resource base has so far been done in only a handful of countries.

The field is led by the US, where industrial production began in the 1970s. Strong growth in commercial production of CSG is being seen in Australia, which accounted for 9% of total CSG production in 2009 – up from 2% in 2002.

Canada, China and India are also major producers. Limited quantities of CSG are produced in other countries, where it is used, as a rule, for power generation and the needs of nearby industrial facilities.

The global gas market has mixed prospects for development in the medium term (3-5 years). The principal trend on international gas markets is steady growth in excess supply, which is only exacerbated by rapidly developing production of shale gas and liquefied natural gas as well as the construction of new pipelines linking major gas fields with European and Asian markets. The potential for stimulating demand remains limited.

Alexey Kondrashov, Partner, Head of Ernst & Young’s Moscow Oil and Gas Center, and Global Oil and Gas Tax Leader, emphasizes that “the prospects of CSG production depend in large part on the practice of state regulation, including mineral rights, land use, current tax regimes and financial incentives. The latter may prove an important factor in increasing production. Environmental constraints should also be taken into account.

“Producers of coal seam gas need to utilize the considerable amounts of produced water in ways that are environmentally and economically sound. And this brings up a more serious concern – whether large-scale production of CMG will result in shrinking freshwater resources and deteriorating water quality” - said Andrey Kobzev, Ernst & Young Director, Moscow Oil and Gas Center.

Another problem area involves operating challenges and risks, e.g.: complicated drilling technology (depending on geological conditions) and a lack of drilling rigs and qualified personnel. Account should be taken of infrastructure constraints (including the capacity of pipelines, storage facilities and export terminals). Economic risks include a low liquid fraction content in gas (making production less profitable), artificially low or controlled prices for natural gas in a number of countries, predicted resumption of growth in costs and a limited quantity of proven reserves. As a result, producers may have to provide incentives for consumers to sign long-term contracts by offering them a share in such projects.

The development potential of unconventional hydrocarbons in the CIS was analyzed and presented in detail in the “Coal seam gas”, a study put out by Ernst & Young in July 2011. The study found little interest in CSG production projects on the part of CIS companies, and this has to do with the enormous reserves of traditional hydrocarbons. This factor will continue to discourage investments for a long time to come.

About Ernst & Young
The development potential of unconventional hydrocarbons in the CIS was analyzed and presented in detail in the “Coal seam gas”, a study put out by Ernst & Young in July 2011. The study found little interest in CSG production projects on the part of CIS companies, and this has to do with the enormous reserves of traditional hydrocarbons. This factor will continue to discourage investments for a long time to come.

Ernst & Young expands its services and resources in accordance with clients’ needs throughout the CIS. 3,500 professionals work at 18 offices in Moscow, St. Petersburg, Novosibirsk, Ekaterinburg, Kazan, Krasnodar, Togliatti, Yuzhno-Sakhalinsk, Almaty, Astana, Atyrau, Baku, Kyiv, Donetsk, Tashkent, Tbilisi, Yerevan, and Minsk.

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