Carbon Traders Find Extra Value in China's Vast Methane Reserves

Americans, the world's largest polluters, consumedThere are negotiations for 60 CDM projects
almost four tons of coal per person in 2006.currently underway. Of the twenty approved by
Every ton of coal burned sends more than twothe state government, most are coalbed
tons of carbon dioxide into the atmosphere.methane recovery projects.
By 2009, experts believe China will overtake theChina hopes to double the sale of the country's
United States as the world's largest emitter ofcarbon credits. The next five years could show
carbon dioxide.intensified activity in carbon trading as Japan and
According to the country's National Reform andEurope rush to the 2012 deadline for meeting
Development Commission (NDRC), China willtheir emission reductions targets. Using the
produce 1.45 trillion kWh of electricity in the firstpresent rate of China's market share as a
half of 2007. About 75 percent of the China'syardstick, this could mean more than US$7 billion
energy is generated by coal. By 2050, to servein 'foreign aid' in 2007.
China's growing population, the country isFinancial institutions are scrambling to deal with the
expected to add the sum total of Canada'strading action. Fortis Bank, a Belgian Dutch financial
generating capacity every four years!group, which has carbon trading desks in Europe
While China hopes to rely more upon nuclear, coaland the United States, plans to expand its
is continues taking its toll until the country solvesHong-Kong trading desk this year to capitalize
its energy quandary.upon the 'easy pickings' of methane projects.
On Tuesday, China's state environmentalFortis ranks 18th on Fortune's Global 500 list with
watchdog reported that more than 62 percent of2006 revenues of more than US$112.3 billion.
the country's cities suffer from air pollution.Fortis' Asian carbon market director Shane
Thirty-nine cities were placed on the StateSpurway said, "Methane will probably be one of
Environmental Protection Administration's 'Blackthe most popular projects in the next three to
List," because they suffered severe air pollution.four years."
Seven of those cities are located in China'sWhile degasifying China's coal mines helps save
northern Shanxi province, the country's largestlives, the financiers aren't attracted to methane
coal supplier. Coal-fired power plants areprojects for humanitarian reasons. Because
reportedly the major culprit. Many were givenmethane gas is far more potent a greenhouse
preferential pricing terms to install sulfur removalgas than carbon dioxide, every ton of methane
systems. Some took the pricing, but skipped thegas captured and utilized is the financial trading
systems.equivalent of twenty tons of CO2.
China's runaway pollution has become anAs a result, we believe China's coalbed methane
international problem.gas should become a very valuable commodity
In early April, an American satellite spotted aand attract widespread foreign capital to those
dense yellow cloud of gases, chemical and desertcompanies developing CBM in China. We also
sands floating across Seoul (Korea) - emissionssuspect that foreign-owned CBM companies
from China's coal-fired smokestacks. Thisdeveloping these projects could become
weekend, the Korean government retaliated bybeneficiaries of carbon trading credits - potentially
launching Greenbelt Plantation Project. The Koreanadding cash to their revenue streams.
forestry service plans to plant 1.5 million trees inUntil now, coalbed methane projects have lagged
Mongolia to help reduce sandstorms waftingin development. The CER mechanism in the Kyoto
across the Yellow Sea, which bring its residentsProtocol shoots them to the top of the list.
respiratory illnesses.Carbon traders make money so the CBM
It is not that China is ignoring the problem, butprojects will become easier to finance. They
that the country's breakneck GDP growth rate isneither require the capital-intensive component of
not only impacting global commodity prices (oil,nuclear energy power plants nor the gamble of an
copper, nickel, uranium, etc), but could also beoffshore natural gas discovery.
accelerating the effects of abrupt climate changeKyoto's CERs and China's CBM projects appear to
and global warming.be a banker's dream project, for at least the
Just Bad Weather?next few years as the world's richest nations rush
One can politely compartmentalize the disrelatedto capitalize upon those carbon trading credits.
weather events which occurred over the pastChina's Guizhou Province
seven days and call those a coincidence, or oneChina hopes to reduce greenhouse gas emissions
can imagine the horrors Dr. James Lovelock hasby phasing out many obsolete thermal power
warned could occur as this century unfolds, as heplants and replacing them with small-scale natural
told us a year ago.gas or coalbed methane electric power plants.
A week ago, Cyclone Gonu was recorded as theHolding one of the world's top coal reserves, and
strongest tropical storm since 1945 in the Arabicthe world's largest producer and consumer of
Gulf region. It peaked as a Category 5 along thecoal, China relies upon coal for its energy. The
coastline of the Gulf of Oman. At the time, manycountry's top experts know coal better than any
worried it might disrupt oil exports from theother energy source.
Middle East. It was the first cyclone in recordedConsequently, China's turning to CBM gas as one
history to enter the Gulf of Oman. Easternmeans of reducing air pollution and continuing to
Australia was battered by heavy rains andpower its double-digit GDP growth is a natural
suffered major flooding and landslides this pastextension for its scientists, miners and
weekend. So great was the impact that someenvironmentalists.
compared it to 1989's earthquake, near the sameAfter researching Shanxi province, which hosts
location.one-third of China's coal reserves, we began
There have been other firsts over the past fewstudying comparable coal provinces and regions to
years. In 2004, Cyclone Catrina became the firstfind which areas had prolific CBM reserves.
cyclone to form in the South Atlantic and also hitGuizhou province stood out. It is also about 400
Brazil. In 2005, Hurricane Vince became the firstmiles northwest of Hong Kong.
cyclone to hit the Iberian Peninsula. In 2006, superIn the course of researching the U.S.
typhoon Chanchu formed in the South China Sea,Environmental Protection Agency's Coalbed
hitting China, Taiwan, the Philippines and Taiwan.Methane Outreach Program, we were fortunate
Many have concluded these could be earlyto uncover an analysis released in late 2005 jointly
warning signs of much greater catastrophespublished by the China Coal Information Institute
expected as sea waters further warm up.and the US EPA.
China Aiming for Solutions"Guizhou province has the largest coal reserve in
Electricity growth has been the global driversouthern China as well as rich CBM resources. The
toward more nuclear and more environmentallyCBM reserve in Guizhou is 3.1KB m3, accounting
friendly methods of power generation. Forfor 22 percent of the total in China."
example, the U.S. Department of Energy (DOE)Guizhou ranks second behind Shanxi province.
forecasts an additional 90 gigawatts of electricityThe report continued, "The CBM resources in
would be required over the next twenty-fiveGuizhou are not only rich but of high quality as
years in the United States. To generate this newwell, with the CBM reserve 29KB m3 in the
capacity, the DOE calculated it would take 151methane-rich areas of over 8 m3 methane per
coal-powered plants, 100 mid-sized nuclear plantston coal, accounting for 94 percent of the total
or 60,000 wind turbines.amount of local CBM resources."
China's problem is magnified to accommodate itsThis government report also noted the plan was
higher energy intensity per unit of GDP growth.utilize the 'local rich CBM resources on a large
Not to mention its whirlwind growth.scale.'
While we discussed several coal-replacementAs a result, we anticipate Guizhou province may
developments in our recent publication, "Investingbe one of the targets of the certified emission
in China's Energy Crisis," one has piqued ourreduction credits. The high quality and abundant
interest as more easily implemented. And it is alsoCBM reserves could help develop the small-scale
one where China has focused.CBM plants now operational or under construction
Kyoto Protocol Drives CBM Projectsto the east and north. The regional population is
Clean coal technology is being rapidly advanced inequivalent to more than 80 percent of the U.S.
China because of the Clean Developmentpopulation.
Mechanism (CDM), which is an integral componentIn April, China announced Guizhou province would
of the Kyoto Protocol and which China signed inutilize 100 million square meters of CBM this year.
1998 and approved in 2002. The CDM allowsLater that month, the NDRC announced it would
developing countries to sell their 'certified emissionencourage coal mine investors to exploit CBM. In
reductions' (CERs) to the wealthier nations.May, a new preferential policy to promote CBM
By trading CERs, China has developed an additionalexploitation was announced.
revenue stream to fund local emission reductionTo our knowledge, only one foreign-owned
projects. According to the World Bank, Chinacompany holds properties in Guizhou province.
obtained 62.5 percent of the total UN-certifiedPacific Asia China Energy is presently developing
carbon credits in 2006. This amounted to US$3its Boatian-Qingshan property in the Longtan coal
billion.formation in this province.
One such project benefiting from the CERIn summary, we don't believe the high-pitched
mechanism is the Jincheng coalbed methaneexcitement for the next few years will be about
(CBM) power plant, which is scheduled to beginChina's nuclear power plants. Certainly there will be
operation this August. At 120,000 kw, it will begrowth in China's nuclear, and over the next
the largest of its kind in Asia. Annually, the powerdecade, nuclear could represent a higher level of
plant is expected to transform 180 million cubicelectrical capacity. And China has announced it
meters of CBM gas into 730 million kWh ofplans to build a strategic uranium reserve. But, the
electricity.country has also limited the amount of
The power plant is attached to the Sihe coal minemolybdenum it exports (effective earlier this
from which the intense greenhouse gas will nowmonth). Of course, this should drive those metal
be used to provide electricity. Jincheng Anthraciteprices higher.
Mining Group, which owns the mine and the powerHowever through 2012, China's coal mines and the
plant, received US$150 million in funding inmethane contained in those mines is more likely
exchange for certified emission reduction credits.to be a major energy driver in attracting foreign
On June 1st, Jiangxi province's first coalbedcapital. After all, carbon trading credits can't be
methane (CBM)-fired power station wastaken lightly. The CERs are attracting foreign
successfully connected to a power grid in thisinvestment, bringing the country new technologies
southern Chinese province. It had gone throughand gifting the Chinese government billions of
two months of trial operations. This CBM plantdollars for trying to reduce their air pollution.
could become a model for similar plants in otherCOPYRIGHT © 2007 by StockInterview.
Chinese provinces.