Thursday 29th September 2016

Resource Clips

Fracking The Future

CBM Asia Develops Indonesia Coalbed Methane

By Ted Niles

Indonesia’s abundant coal deposits have long been exploited, but it was Scott Stevens—in a 2004 paper published by the Society of Petroleum Engineers—who identified their coalbed methane potential. The Chairman of CBM Asia Development Corp TSX:TCF explains, “Indonesia is already the biggest exporter of coal in the world. The coal is beautiful quality; it’s very low in ash and really good for power generation. The industry is just booming.”

Stevens continues, “When these coals become deeper they become very gas charged; they pick up a lot of natural gas. We mapped that out, and we found that south Sumatra, east Kalimantan and south Kalimantan have really huge deposits. We estimate about 453 trillion cubic feet (TcF). That’s the number I developed 10 years ago, and the government still uses it.”

CBM Asia Develops Indonesia Coalbed Methane

Previously known as the stuff that, when detected, sends coal miners running for their lives, coalbed methane (or CBM) is an unconventional form of natural gas that is stored at high pressure in coal beds. Unconventional because of the process required to extract it (safely, that is), called hydraulic fracture or “fracking.” Hydraulic fracture, in the case of coalbed methane extraction, consists of drilling into the water-saturated rock to release the water and the gas. The gas rate increases the more water is extracted until the well reaches peak-gas production when, needless to say, it begins to decline. Estimates for average CBM well life range anywhere from 10 to 40 years.

Stevens’ discovery of Indonesia’s coalbed-methane potential came as welcome news to the country, whose increasing energy demands drove it, in 2008, from net-exporter of petroleum to net-importer, precipitating its withdrawal from OPEC. That same year the government introduced the Coalbed Methane Regulations giving CBM producers a considerable enticement by offering them a much larger share in production sharing contracts (PSCs) than their counterparts in oil and natural gas. The first such license was granted to CBM Asia in May 2008 for a 12% interest in the Sekayu PSC—located in the South Sumatra Basin—with an option to acquire an additional 12%. Included among those in possession of the 30 PSCs granted since then are multinational petroleum giants BP, Exxon Mobil and Total.

“We’re in this very interesting food chain here where they’re probably going to buy us out if we get to a certain point,” Stevens remarks. “And that’s a very valid strategy. I consult for the majors a lot around the world, and they know they’re not very good at discovery. In fact, they never discovered any of these CBM or shale plays. They only bought in after.”

CBM Asia announced its first NI 51-101 resource estimate for Sekayu PSC November 2. Gross prospective gas resources at the project have a low estimate of 319,051 MMcf (million cubic feet), a best estimate of 1,061,983 MMcf and a high estimate of 2,056,266 MMcf. Stevens comments, “There are a lot of tonnes there—millions and millions of tonnes—so that adds up to a lot of gas. We found 500 millidarcies of permeability, which is really good. And Medco [i.e. PT Medco Energi Internasional Tbk], the operator, also found they had gas flowing to the surface right away. So the indications look really good at Sekayu, and Medco is really excited as well. They’ve decided to fast track and move up the production pilot to probably 1Q 2012.”

According to the company, Sekayu’s geology is similar to that of Wyoming’s Powder River Basin (PRB), which currently produces 1.5 Bcfd of CPM and could produce as much as 30 Tcf.

The pilot will consist of a cluster of wells, spaced about 1,000 to 1,500 feet apart. Once running, the most likely method of transport for sale of the gas would be for project operator, Medco, to build a short pipeline to connect with the Trans Sumatra Gas Pipeline—located 10 kilometres from Sekayu—which is currently functioning at 65% capacity. “That pipeline goes up to Singapore, where it gets $12 gas,” Stevens reports. “Of course, we don’t get that $12, but we would very likely get much better than four dollars. That’s the near-term commercial plan. That would allow us to get proved reserves on a small portion of the block; it would give us more confidence that this is real; and it will give us a little cash flow to help get things going.”

We’re in this very interesting food chain here where they’re probably going to buy us out if we get to a certain point —Scott Stevens

He continues, “We’ll hopefully have four or five wells in a cluster sometime in 2Q and then put it on production. So maybe by mid-year we could be flaring enough gas to give [Medco] the encouragement to build that pipeline connector. That might be in 3Q 2012, and then we’ve got cash flow for that quarter.”

Moving forward, the objective is for the company to build multiple pilots on the 58,349-hectare property, and Stevens is hoping to be started on the next in the second half of 2012. In the event that CBM Asia has two pilots by the end of next year, they would undertake a reserve update. “The numbers will be much bigger and promising at that point,” Stevens says. “Solid, tighter numbers. It’s a gradual ramp up over time. At some point, let’s say, in early 2013, when we de-risk the project significantly, it’s possible that a company might want to buy us out.”

The company took a drubbing November 3 from 321 Gold’s Bob Moriarty over the apparent disparity between its market capitalization and the estimated value of its resource. To be sure, Stevens himself admits that he was expecting a stronger reaction from the market after the release of the NI 51-101. A 24% interest in Sekayu—which contains a best-estimate resource of over 1 trillion cubic feet, at a ball-park natural gas price of $0.50 per thousand cubic feet—has a present value of approximately $120 million. Which is more than seven times CBM Asia’s current market cap.

Stevens maintains, however, that this has less to do with the company than it does with the relative newness of the industry in Indonesia. “Things don’t move as fast in Indonesia as they do in North America at the moment because it’s a new industry. And the service sector is learning, and the government is learning, and everybody is really cautious. That’s been very frustrating for us. Companies like Core Laboratories and Weatherford International weren’t even set up in Indonesia until Exxon and BP got going. But it’s much better today.”

Long term, while Stevens doesn’t discount the possibility of full-scale production, he considers CBM Asia’s strengths to lie in exploration. He concludes, “We have a unique knowledge about the geology of Indonesia and CBMs specifically. I’ve been there for 15 years, and I first identified the potential. I’ve been involved with all the other projects as a consultant, and the government knows me well. If someone came along, and we had de-risked these projects, and they were willing to give us 10 times what we’d put in, we would say sure. Then we’d go out and do it again. If for some reason that doesn’t materialize, we’re certainly capable of developing the fields.”

CBM Asia currently has 70.6 million shares trading at $0.23 for a $16.3 million market cap. Its other projects in Indonesia include Kutai Basin, Kutai-West PSC and Kutai II. The company will be hosting a conference call and live webcast about the Sekayu resource estimate Thursday, November 10, at 9:00 AM PST.

Disclaimer: CBM Asia is a client of On Page Media.

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