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Oil & Gas Journal

Judy Clark
Associate Editor

China, where personal incomes have quadrupled in recent years while the country's burgeoning economy has grown fivefold, currently is consuming energy at a pace surpassed only by the US.
Holding the world's largest coal reserves, China burns it in abundance, with the result being that it also has one of the highest rates of pollution in the world. Because the Chinese government wants to clean up its air and increase the use of cleaner natural gas, it has budgeted more than $9 billion to boost gas usage to 8% by 2010 from 2% today. Part of that plan calls for natural gas to replace coal as the major source of electric power generation in Beijing by the 2008 Olympics.

Consequently, one of the fastest-growing sectors of China's energy industry is coalbed methane (CBM) extraction from its vast coal reserves. Among Western companies working with China in this pursuit are supermajors ChevronTexaco Corp., ConocoPhillips, and BP PLC.
And then there is the 2½-year-old, Houston-based independent, Far East Energy Corp., that currently holds a major interest in leases totaling more than 250,000 acres, making Far East Energy the third-largest holder of CBM acreage in China. Its holdings in northern and southern China could contain as much as 13 tcf of recoverable CBM.

Infant dragon moves
Despite its fairly new status as a corporation, Far East is governed by personnel having a wealth of experience in the energy industry, particularly in CBM production, said Mike McElwrath, the company's chairman and CEO, and they recognized an opportunity to promptly put that expertise to work in China.
Far East personnel were aware that the Chinese government had created China United Coal Bed Methane Co. (CUCBM), giving it sole rights to develop China's CBM, McElwrath said. "It is also charged with contracting with foreign companies for the joint development of that resource base," he added. "And we were aware, through contacts in China, that CUCBM was actively seeking out American companies and American technology to develop the CUCBM potential, primarily because the United States is way out front in technology in the development of coalbed methane."

Still, how did a start-up company with few assets and no production or cash flow secure such contracts?
"That's a good question," McElwrath said, citing three factors that drove that decision: "First of all, CUCBM was looking for a company in South China that was willing to come in, recognizing that there was not a fully developed pipeline infrastructure incentive. There's an enormous estimated CBM gas in place, but there's not an existing major pipeline in place," he said. "We were willing to go in and take a risk on the basis of what we saw to be a readily expanding demand for gas in the south that was fostered in part by the central government.
"And there was the factor that we were an American company that could bring American technology to bear."
The third factor was Far East's leadership and board of advisors that included a former vice-chairman of Bechtel Group, Don Gunther, and McElwrath himself, a former acting assistant secretary of energy in the administration of President George H.W. Bush, among other experience, all of which lent the company substance and leadership.
"Our senior vice-president [of China operations], Tun Aye Sai, was the one who led the primary negotiations. But Americans such as former [Far East] CEO Bill Jackson were involved in that as well, he said.
McElwrath, who has been on the company's board of advisors since its inception at yearend 2001, became chairman and CEO Oct. 13, 2003.