The field that built a company

From small beginnings, great things can happen. For Mike McElwrath, CEO and president of Far East Energy, the small beginning was an overheard dinner conversation about a coalbed methane (CBM) project in China. The word on the street (or in the restaurant) was that Phillips China was planning to divest a significant piece of acreage in China during its parent company’s merger with Conoco in 2001/2002.

“It’s one of those unique instances that you hope will someday happen to you,” McElwrath said.

He promptly approached contacts at Phillips Petroleum Co. and inquired about the acreage.

“It helped when I overheard the dinner conversation because I knew the people at Phillips,” he said. “They weren’t thrilled that I overheard the conversation, but it worked out.”

Indeed. That overheard dinner conversation has resulted in Far East Energy, a small company with a lot of CBM acreage. McElwrath said his company’s holdings in the Shanxi and Yunnan provinces total approximately1.1 million acres with an estimated 21.3 to 29.2 Tcf of gross original gas in place. The coals in its Shouyang block exhibit both high permeability and high gas content, properties consistent with the most commercially successful CBM basins worldwide.

The fields also are ideally situated adjacent to large national pipelines to Beijing and Shanghai. Additionally, Far East has secured a pipeline offtake agreement with a 20-year gas pipeline sales agreement in place. Currently the company gets US $6.45 to $7.80/Mcf at the wellhead.

McElwrath (center) presides over the ribbon cutting on a rig in China. (Photos courtesy of Far East Energy)

Ramping up

The entire company has been built around its China holdings, which McElwrath describes as “the linchpin of our activities.” He assembled his company, including its board of directors, after securing access to the acreage.

We were a tiny start-up company, and yet we attracted a former head of research and development for Phillips, a former country manager for Burlington, and a guy who at one time was head of the Natural Gas Office of all oil and gas R&D for the Department of Energy,” he said. It helped to bring CBM experience to the company early – the gentleman from Phillips had been heavily exposed to Phillips’ CBM holdings in the San Juan basin and elsewhere, and McElwrath was acting assistant secretary at the Department of Energy when that agency incentivized the development of CBM through the Section 29 Tax credits.

Basing the company in Houston also was a strategic decision. “I like to say that all good oil men retire to start their second careers in Houston,” he said. “It’s a fairly common occurrence, and there’s an incredible amount of talent available here.” The excitement of a potentially enormous gas play in China helped the company attract top talent. One addition was Ken Ancell, who manages reservoir engineering for the company. He drilled the first commercial non coal-mine CBM well in 1980 and later went on to develop the first CBM reservoir simulation package and the first injection fall-off test. More recently he’s had experience in virtually all of the major CBM plays in the world, including China.

addition, Dave Minor, had 25 years of CBM experience before joining Far East. And the country manager, Bob Hockert, has more than 20 years of experience in CBM as well as a long stint in Russia as a manager for Halliburton.

Because of the attraction of a big project in China with some demonstrable potential, we were able to hire top-notch talent,” McElwrath said.

An aerial view of Far East’s activities in China shows the steepness of the terrain.

Acreage position

Far East currently has three blocks in China, two in central China, and one in southern China. The two fields in central China are the Shouyang contract area, covering 418,500 acres, and the Qinnan contract area, covering 572,642 acres. Shouyang’s primary coal seams exhibit both high permeability and high gas content, and McElwrath said coal seams with similar properties in the San Juan and Black Warrior basins initiated dramatic CBM production growth in the US. Indeed, CBM production may have the greatest potential for increasing China’s domestic gas supplies. While the country has staked its growth on unconventional gas, experts doubt the country can meet its goal of tripling gas use by 2020 based on domestic production. This makes CBM production desirable for a number of reasons:

Chinese coal has some of the highest gas content in the world. Not only is this desirable to the energy industry, but degasification in advance of mining also can prevent mining disasters;

has the largest CBM resources in the world – an estimated 1,305 Tcf of gas in place; and

CBM burns much more cleanly than coal, which is currently a major fuel source in China and has led to serious environmental problems.

main reason that the CBM market .has not taken off in China, McElwrath said, is that most of the coals are very low in permeability, making it much more expensive to access.

You certainly can get some nice horizontal wells, but it’s not the kind of robust play that causes a company to go to China,” he said.

the Shouyang block, however, the permeability is actually higher than that found in the San Juan or Black Warrior basins in the US. And that makes Far East unique.

None of the state-owned companies, and certainly none of our western counterparts, have found high perm on this order of magnitude across a broad geographic area,” he said. “We think it’s a breakthrough for China.”

coal seam has been delineated across a large portion of the block, and McElwrath said he is confident that at least half of the block – 200,000 acres – exhibits this high permeability. And while the company currently enjoys its unique status, he does not expect that to last long.

People thought the Black Warrior basin was unique, but then we found the San Juan basin and the Raton basin. This will not be the only high-perm area in China.

But it’s nice to be in China right now with the excitement of perhaps discovering a prospect that will jump-start CBM when gas prices are three or four times higher than the rest of the world” he said.