Coal bed methane – An answer to the energy supply crunch?

The current sky high oil prices and concerns over security of supply have focussed the world’s attention on a range of alternative energy sources. In the U.K., this has prompted energy companies to look again at our coal seams, not only as a source of coal, but also as an alternative source of gas.

The vast reserves of unworked coal in the U.K. give coal bed methane (CBM) the potential to become a long-term domestic supply of energy. CBM can be extracted by drilling directly into unworked coal seams to release methane that has been absorbed into the coal. This source of energy offers several benefits:

• Extraction can take place in coal seams that are otherwise unworkable, for instance underwater seams or seams that are too deep for conventional mining.
• CBM can complement traditional mining, by allowing the extraction of dangerous methane accumulations prior to mining the coal. Methane is also up to 20 times more polluting than carbon dioxide, so it is better to burn it than to release it directly into the atmosphere.
• CBM is of a quality that it can be fed directly into the gas distribution network.

The renewed interest in CBM is apparent from the recent 13th onshore oil and gas licensing round, which attracted 20 applications for CBM activities. BG Group teamed up with Composite Energy to obtain licences to prospect for CBM onshore. Access to Origin Energy’s CBM resources in Queensland also seems to be the principle motive for BG Group’s attempted takeover. Queensland’s CBM resources are even being targeted as feedstock for several LNG liquefaction projects, which have attracted interest from Shell and Petronas who have entered into joint ventures with Arrow Energy and Santos respectively.

In order to extract CBM in the United Kingdom a company must obtain an Onshore Petroleum Exploration and Development Licence (PEDL) from DBERR and a CBM Access Agreement from the Coal Authority. This is because, under the Coal Industry Act 1994 ownership of methane does not rest with the Coal Authority; it rests with the Crown as a petroleum product.

The onshore PEDL is broadly similar to the “Traditional” Seaward Production Licence, with model clauses and a three-term life. The differences are in certain details, for example the three Terms are of differing duration; in the PEDL there is a 6 year Initial Term, during which an agreed exploration work programme must be carried out; a 5 year Second Term, during which a field development must be approved; and a 20 year Third Term, for production. A PEDL licensee pays a rental fee in respect of the surface area covered by the licence.

In addition, the PEDL licensee must enter into an Access Agreement and a Supplemental Access Agreement in respect of each borehole it proposes to drill. The Access Agreement permits a party to affect the coal and other minerals at a depth of over 300m for the purpose of extracting methane. It must be noted that the Access Agreement specifically excludes underground coal gasification. The Access Agreement differs from an underground mining licence in many respects. It is not as onerous, for example, there is no obligation to provide security at the site and there is no requirement to deliver financial and corporate information. It aims to avoid harmful methods of working and ensure that no attempt is made to work any coal or other minerals in the area.

The Access Agreement will last for the duration of the PEDL. An applicant has two options regarding its application for an Access Agreement:

• The first option is to pay a fee calculated on the basis of surface area at a rate of £5 per hectare up to a maximum of 2,000 hectares (£10,000), subject to a minimum charge of £500. For areas in excess of 2,000 hectares the fee will be subject to site-specific consideration.
• The second option is to pay an initial fee of £5,000 and an additional fee of £1,000 per borehole.

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