WARRINGTON Dec 12 The drilling rig at Doe Green
rises 70 feet above the surrounding flat green fields but
appears tiny against the backdrop of the Fiddler's Ferry power
station a mile away.
The coal-burning plant -- one of the largest in the UK --
has run on imported coal since pits in nearby Lancashire closed
in the 1980s but if the men in orange jump suits manoeuvring
drilling pipe into the well are successful, local coal will soon
be a source of electricity in this part of Britain again.
Canadian oil and gas company Nexen NXY.TO is drilling into
deep seams of coal to try and release methane, or natural gas.
Previously fatal for miners, this gas may soon be used to heat
homes and fuel power stations.
Coal bed methane (CBM) is big business in the U.S., where it
accounts for around 10 percent of gas production, and in
Australia, where oil majors like Royal Dutch Shell (RDSa.L) are
sinking tens of billions of dollars into CBM projects.
Little, if any, CBM is produced in Europe but high gas
prices and the EU's desire to improve energy security -- through
cutting its reliance on Russia -- is spurring governments from
London to Rome to promote this energy source.
"There is a massive potential in Europe," said Richard
Benmore, UK CBM Project Manager at Nexen, which also has CBM
operations in North America.
The latest UK licencing round attracted bids from a wide
range of players including startups, international oil groups
like Nexen and U.S. oil explorer Marathon Oil TGOGF.PK and
British utility Centrica (CNA.L).
Companies are also competing fiercely for resources in
Poland, Germany, Ukraine, the Czech Republic and elsewhere.
"There's a bit of a land grab going on across Europe," one
senior executive at a large international oil and gas group
Europe has recoverable CBM reserves of about 59 trillion
cubic feet, according to industry consultants Wood Mackenzie --
enough to supply the continent with all its gas needs for over
three years. Some executives say the resources are much bigger.
Traditional gas production involves drilling into a
reservoir of permeable rock to release the gas which is
contained at high pressure within. CBM is more complicated.
When coal is under pressure, under the ground, it
accumulates methane. If the pressure is reduced, namely by
drilling into the seam and pumping out the water within, the
coal cracks and releases the gas.
Disposing of the water, which is saline and so cannot be
poured directly into streams or onto land, is a problem.
Nexen is working to convince the local utility the water is
safe to put into sewers but for now, the water must be treated
as hazardous waste.
The need to store the water in two large vats that are
emptied weekly by road tanker for disposal by a specialist waste
company, raises costs.
Another challenge with CBM is that gas flows less freely
within a coal seam than within a traditional reservoir,
requiring wells to be drilled in close proximity.
High well counts and webs of access roads have caused severe
landscape damage in parts of Western Colorado and elsewhere that
were early adopters of CBM, making U.S. environmentalists
hostile to the energy source.
Gas executives say new technologies, such as lateral
drilling, mean wells no longer need to be so close together. At
the 70 by 100 metre, gravel-covered Doe Green site, Nexen hopes
to access gas up to 1 km from its well.
If the industry cannot crack this problem, CBM will not work
in densely populated Europe, executives say. While CBM sites in
the U.S. or Australia operate in largely uninhabited areas,
factories and homes sit atop Europe's potential drilling sites.
CLOSE TO MARKET
If the technical challenges can be overcome, Europe's dense
population will work in favour of CBM producers. Unlike in the
U.S. or Australia, expensive pipelines or liquefied natural gas
terminals will not be needed to bring the gas to market.
Indeed, much of Europe's energy-intensive industry is
located near coal deposits, reflecting how the continent's
industrial revolution was fuelled by coal.
Europe's concerns about its growing reliance on Russia for
energy supplies, heightened by the invasion of Georgia in
August, has also boosted interest in CBM.
Over a quarter of the EU's gas is imported from Russia and
this is expected to grow to around a third in coming years.
"The particular thing about Europe is the (proximity to)
market and European countries want to become less dependent on
imported gas," said Alistair Scott, CBM Business Manager at
British gas producer BG Group.
This aim may prompt governments to follow the U.S. example
of offering tax breaks to encourage CBM.
"There's relatively few tax breaks for companies in Euorpe
to invest in CBM but that might change," said Rhodri Thomas, a
senior analyst at Wood Mackenzie.
Executives are confident the challenges can be overcome to
allow CBM to play a major part in Europe's energy supply but it
will take time, perhaps extended by the credit crunch, which is
forcing oil and gas companies to cut capital expenditure.
Experienced CBM players say getting started is never easy.
"You need stamina. It's the second wave of players that is
usually successful in this game. Often, the first wave just
gives up," Benfield said.
(Editing by Chris Wickham)