UCG: Deeply Green Coal

| About: VanEck Vectors (KOL)

The coming of age of an old concept has huge potential for China’s coal sector.

I may wear an investment professional’s suit on the outside, but I’m a true techie on the inside. As a former software entrepreneur, I must admit that investing in core Chinese industrials—manufacturing, energy, food processing—leaves a certain part of my soul wanting. Don’t get me wrong; crisscrossing the Middle Kingdom in search of solid growth companies is plenty exciting, what with all the colorful characters and cultural nuances that come into play when doing business in China. But rarely do I get involved with a new idea that evokes the effervescent inspiration that drives technology entrepreneurs. That was, however, until I was introduced to underground coal gasification (UCG).

The name sounds more industrial than high-tech and it’s hard to imagine anything related to the coal industry that would inspire a technology entrepreneur, but UCG is a truly compelling concept striving to come of age. And nowhere is its potential bigger than in China.

Most of you—save those who are coal mining history buffs—are probably wondering: What in the h___ is UCG? Quite simply, it’s the process of burning coal directly in the ground and extracting methane (and other gasses) as a source of fuel. The method is relatively straight-forward. Two holes are drilled into a seam of underground coal using equipment that is nearly identical to that used for oil drilling. In one hole a drill-string with a burner at the tip and an oxidant are inserted. The other hole serves as a vent to extract the “syngas” (which in most cases is mostly methane) that is produced from the combustion process. Simple enough, but the potential benefits run deep.

Traditional coal mining becomes prohibitively expensive and very dangerous at depths greater than a few hundred meters, leaving nearly 85% of the world’s known coal resources inaccessible. UCG on the other hand can be conducted at depths of 1000 meters or more. This alone has potential to increase recoverable reserves by as much as 400% according to a recent study by Lawrence Livermore Laboratories. Moving coal resources into mine-able reserves will immediately increase the balance sheets of coal companies around the world.

Another benefit is the cost. Simply put, it’s much cheaper to burn the coal in the ground than to dig it out, wash it, and ship it someplace else to be burned. In fact, the current cost is about US $2.00 per thousand cubic feet of methane gas, which is about 50% the cost for an equivalent amount of natural gas. Another way to look at it: coal that is consumed via UCG will produce about 85% the caloric value had it been consumed with traditional mining, but at a fraction of the cost.

And then there’s the environment. The CO2 that is produced during the UCG process can be easily captured and sequestered back in the ground, or sold for other industrial uses. Additionally, there is no coal dust or ash floating around the neighborhood, and the UCG footprint is far smaller than an open-pit or underground coal mine. Hard as it is to believe, UCG is a “green” technology.

The concept sounds so simple that you may be wondering why it hasn’t come to light earlier? Well, it has. The basic concept for UCG was conceived more than 100 years ago, and was pioneered by the Russians during the 1930s, and later by the US in the 1970s. But only now is the combination of advanced directional drilling technology, efficient burners, and economics conspiring to make UCG economically and practically beneficial.

And nowhere is the potential for its benefits greater than in China. China consumes 35% of the world’s coal and relies on coal for 70% of electric energy. Furthermore, much of China’s coal resources lie deep in the ground, and Chinese mines are among the most deadly in the world. And with the Chinese government under extreme pressure—both internally and externally—to find greener solutions to its growing energy problem, UCG has found heavy support from the Chinese government and industry alike. China now has the largest UCG development program in the world.

From an investor’s perspective, UCG and the early players that bring the technology to the Chinese market have enormous potential. Regulations make it difficult for foreign investors to own stakes in coal mines, but foreign UCG providers like the UK’s Clean Coal Ltd. will find it easy to set up JVs to supply their technology to the owners of coal mines and share the profits from the sale of gas. So I may just have to ditch the suit and don a pair of work scrubs on my next due diligence trip.