Check on China: The coal bed methane sector

A potential China play for the risk-taking small-cap investor is China’s coal bed methane (CBM) industry. There are a handful of publicly traded foreign firms that have been actively making inroads in the sector that could prove to make some big money in the future.

The CBM industry is involved in the capturing of methane gas that seeps out of coal deposits, which is then processed into natural gas. The sector has been growing steadily in the United States, Canada and Australia for the past few years, with China as the next frontier. China is particularly attractive because of its massive coal reserves – estimated to be over 1 trillion tons, of which 189 billion tons can be used. As a result, coal currently accounts for close to 70% of China’s energy production.

But with energy demand surging and its skies some of the most polluted in the world, China must find a way to utilize its coal - one of the dirtiest energy sources - in a more efficient and clean manner. In fact, scientists say that China has now surpassed the United States as the world’s largest greenhouse gas emitter. These developments bring opportunity for CBM. By capturing the methane, a potent greenhouse gas, that is emitted from the ground and also released from coal mines, which is known as coal mine methane (CMM), China could theoretically produce natural gas. The country is estimated to have up to 36.8 trillion cubic meters of methane in its coal deposits and mines, most of it in western China.

With such potential benefits, Beijing has made the development of CBM one of its top energy priorities. The government hopes that by 2010, methane gas production from CBM and CMM will reach 10 billion cubic meters. Last year, by contrast, CBM gas production was less than 100 million cubic meters, so there is much room for growth. To boost the sector, the government has promised subsidies and new rules to encourage investment, especially foreign money. It is also a sector that requires foreign imports because China lacks the sufficient technology to efficiently drill and capture the gas. In fact, during the Strategic Economic Summit with Washington in late May, Beijing pledged to jointly develop 15 CBM projects with U.S.-made technology, which included equipment from Caterpillar Inc. (NYSE: CAT).

For investors seeking to ride this potential, take a look at Far East Energy Corp. (OTC: FEEC) and Pacific Asia China Energy Inc. (CVE: PCE).

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