As China works to grow and diversify its energy sources to meet growing demand, focus has turned to developing coalbed methane.

The country’s basins are believed to hold between an estimated 30 Tcf and 35 Tcf of CBM resources, according to the World Coal Association. But technical obstacles stand in the way, hampering the government’s efforts to encourage CBM exploration and development.

“Company developers face regulatory hurdles, technical challenges, lack of pipeline infrastructure from linking coal­mining areas to gas markets, high development costs, and competition with other forms of natural gas supply,” according to the U.S. Energy Information Administration (EIA).

Yet, EIA figures show production grew to about 584 Bcf in 2014 from about 475 Bcf in 2013.

The GlobalData consultancy, however, pointed out that progress in China has been slow compared to other countries with large CBM resources, namely the U.S. and Australia. This comes despite fiscal incentives and tax breaks.

China’s government offers a subsidy at a rate of $0.03 per cubic meter (cm), possibly doubling in the near future, Will Scargill, GlobalData’s senior analyst covering upstream fiscal and regulatory regimes, said in a statement. Plus, value-added tax rebates are available and import duties waived on related equipment.

“Despite such efforts to encourage Chinese CBM development, the inability to reach markets through a lack of infrastructure is a major obstacle,” Scargill said. “Until this issue is overcome, restricted sale prices will impact profitability and investment, increasing the importance of additional fiscal incentives.”

Still, some companies are up for the challenges, realizing the potential.

Sino Oil and Gas Holdings reported in March that its Sanjiao CBM project, located in the Erdos Basin in the Shanxi and Shaanxi provinces in China, produced about 47 MMcm of CBM in 2014, up slightly from about 45 MMcm in 2013. But CBM sales of about 44 MMcm, up nearly 14 MMcm from the previous year, resulted in a gas sale-to-production rate of 93.6% in 2014. The rate was 67% in 2013.

Earlier this month, Xinhua Finance reported that China’s National Energy Administration appears likely to approve the overall development plan for the northwest China Sanjiao-Qikou CBM block, which could produce about 500 MMcm of CBM annually within the next four years. Sino subsidiary Orion Energy Technology and Services Co. and China National Petroleum Corp. hold interest in the block.

As development plans progress, so does work on infrastructure.

China has three CBM pipelines under construction capable of handling up to 3.4 Bcm, industry veteran Sun Maoyuan said in the article. Currently, five such pipelines are operational with a capacity of 10.2 Bcm.

China’s National Energy Administration hopes to produce 1.4 Tcf of CBM by 2020, providing an alternative energy supply.

Besides China, the world’s largest CBM resources lie in Australia, Canada, the former Soviet Union and the U.S., according to the World Coal Association, which pointed out that worldwide most CBM remains untapped due to lack of incentives.

Those sentiments were shared by Scargill. He pointed out that CBM development in Russia, Indonesia and India have also been slow to progress. Singling out Indonesia, where there is not enough service capacity and expertise, he said more incentives may be needed to offset high development costs.

“Overall, such incentives implemented globally have had varied success, with their effectiveness highly dependent on infrastructure status and reservoir quality,” Scargill said. “Where conditions are conducive to development and production, such as in the U.S. and Australia, minimal incentives are sufficient. However, more extensive government support is still needed for other Eastern Hemisphere countries with CBM aspirations.”

Contact the author, Velda Addison, at vaddison@hartenergy.com.