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Coal bed methane set to plug gap in UK

Created:
17 June 2009
Written by:
Martin Li

Aim-traded Island Gas (with Canadian partner Nexen) has made the UK's first commercial sale into the national grid of electricity generated from coal bed methane (CBM). It is selling electricity generated from CBM at its pilot Doe Green site in Cheshire under a three-month fixed contract; gas production is expected to increase over the coming months to a volume capable of powering some 1,200 homes.

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Unconventional gas has already become very important in the US and Australia, but is at a much earlier stage of development in the UK. Approximately 10 per cent of US gas is derived from CBM, and in some parts of Australia the proportion is even higher. According to energy consultant Wood Mackenzie, CBM could provide up to 50 per cent of the Australian east coast gas supply by 2020.

CBM is natural gas that has been trapped in coal seams by the pressure of underground water. Production requires the release of this pressure by pumping out the water, which then lets the gas flow. Dr Rhodri Thomas, project manager of unconventionals research at Wood Mackenzie, commented that while quite a few hurdles still need to be overcome before it can make a significant contribution to the UK's energy supply, CBM offers much potential. He described Island Gas's initial sales as "looking encouraging". In addition to Cheshire, Island Gas also has projects in Staffordshire, Yorkshire and North Wales.

In a recent report on unconventional gas, Wood Mackenzie confirmed that CBM production in the UK has the potential to be commercial at current and anticipated gas prices. The report also estimated the resource potential in the Cheshire Basin alone (Island Gas's principal operating location) to be around 4 trillion cubic feet based on initial analysis. Dr Thomas also observed that the 13th UK onshore licensing round was for the first time dominated by companies picking up CBM acreage rather than conventional oil and gas licences.

IC VIEW:

Buy

CBM could ultimately supply a significant proportion of the UK's gas requirements, providing a timely offset to declining North Sea gas production and helping reduce the reliance on gas imports. Many hurdles remain to CBM commercialisation and investment timeframes could be long. But Island Gas is well-placed to benefit with its early mover advantage, and its shares remain a buy at 69p.

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