December 18, 2008 / 10:24 AM / 9 years ago

FEATURE-Europe drills coal to reduce Russian gas reliance

WARRINGTON, Dec 12 (Reuters) - 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 said.

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.

COMPLICATED PROCESS

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)

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