BP, Eni to Develop World's First Coal-Bed Methane to LNG Conversion Project in Indonesia

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Researched by Industrial Info Resources (Sugar Land, Texas)--BP plc (NYSE:BP) (London, England) and Eni SpA (NYSE:E) (Rome, Italy), through their 50:50 joint ventures--Virginia International Company Indonesia (VICO) and Virginia International Company (VIC)--have acquired a major share in a production-sharing contract recently signed with the Indonesian government to produce coal-bed methane (CBM) from the Sanga-Sanga block in East Kalimantan. The gas will be liquefied and in all probability supplied by pipeline to the Bontang liquefied natural gas (LNG) plant.

The consortium, which secured the contract, consists of VICO, which will hold a 7.5% stake and will operate the scheme; VIC, which holds a 15.625% stake; BP and Eni, which each hold a 26.25% stake; and CPC Corporation (Taipei, Taiwan), which holds a 20% stake through subsidiary Opicoil America Incorporated (Houston, Texas).

The 4.375% balance stake is held by a consortium consisting of Japan Petroleum Exploration Company Limited (TYO:1662) (Japex) (Tokyo, Japan); Osaka Gas Company (TYO:9532) (Osaka, Japan); Japan Energy Corporation, which is a subsidiary of Nippon Mining Holdings (TYO:5016) (Tokyo); and LNG Japan Corporation (Tokyo), which is a joint venture between Sumitomo Corporation (TYO:8053) (Tokyo) and Sojitz Corporation (TYO:2768) (Tokyo).

The contract covers an area of about 1,700 square kilometers in the Kutai Basin, and covers the same area as the existing Sanga-Sanga block, which means that extensive gas production facilities and access to international markets through the Bontang LNG plant will enable rapid development of the project.

Initial studies of the block indicate a potential CBM reserve of at least 113 billion cubic meters, while independent analysts have estimated that Indonesia has reserves of up to 13,000 billion cubic meters of CBM. The consortium has spent more than two years studying the area and, upon signing the contract, will pay an initial sum of $4 million. The entire project is expected to cost $38 million.

Sometimes referred to as coal seam gas (CSG), CBM is methane contained within the solid matrix of coal, where it is stored in near liquid form in the pores of the coal. CBM normally contains very little of the heavier hydrocarbon gases, such as butane and propane, and has a minimal hydrogen sulfide content. The gas has been known to cause severe explosions in coal mining operations.

CBM is normally extracted from coal seams by drilling into the seam, which releases CBM and water through the drilled hole. CBM wells often produce gas at pressures lower than conventional gas reservoirs, but the initial flow rates often increase as water is pumped out. CBM begins to desorb from coal and the pores in the matrix begin to shrink. This shrinkage has the effect of opening up spaces in the seam through which gas can flow, resulting in a higher flow rate.

With the decline in global reserves of natural gas, companies are increasingly turning to other gas-producing projects, previously considered to be too complex and not commercially viable, such as CBM and shale gas. The global market for LNG is expected to double by 2020, as consumers turn away from coal and look to LNG as an alternative fuel.

CBM has not yet been commercially produced in Indonesia, although BP has pioneered CBM technology and has more than 30 years of experience through the operation of more than 1,300 wells in the San Juan Basin, Colorado. CBM production recently commenced in Australia, Canada, China and India, although the Indonesian project will be the first integrated CBM-to-LNG operation.

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