Pacific Asia China Energy Moves Into China's Coalbed Methane Industry

| About: Pacific Asia (PCEEF)

2006 turned out to be a monumental year for Pacific Asia China Energy (OTC:PCEEF). It was the year PACE made its first footprints in the emerging Chinese CBM (Coalbed Methane) industry. Following a reverse takeover of China Canada Energy, PACE swiftly moved to acquire Asia Canada Energy and form a joint venture CBM-drilling company with Australia’s Mitchell Drilling. Exploration plan was executed effectively and a proprietary drill rig constructed.

Through its China Canada and Asia Canada acquisitions, PACE now holds two CBM Production Sharing Contracts [PSCs] with China United Coalbed Methane Corp. [CUCBM]. One PSC (through China Canada) is for the 305 km2 CBM concession in Huangshi, Hubei Province. The other PSC (through Asia Canada) is for the Baotian-Qingshan concession in the southwest province of Guizhou and covers an area of 970 km2.

Throughout the year, PACE’s management demonstrated its ability to execute its exploration plan through the on-time completion of six test wells (MY-01, MY-02, MY-03, ZY-01, ZY-02, ZY-03) on the Baotian-Qingshan concession (in Guizhou Province). The maximum deviation from the original planned completion date of the wells was only about three weeks (ZY-03). Gas content and coal thickness data from the six wells compared favorably to independent contractor Sproule International’s “mostly likely case” resource estimate of 5.2 tcf (trillion cubic feet). Based on favorable preliminary results, the Company commenced plans for a pilot production program (to study commercial viability) in late 2006. This pilot program involve drilling five vertical frac wells (three in Mayi East block and two in Zhongyi block) and two sets of horizontal drill holes.

Besides the exploration work in Guizhou, PACE also drilled two wells (HS-01, HS-02) on the Huangshi concession (in Hubei Province). The company reported the wells reaching a depth of 420m and 720m on July 17th, 2006. But it has not followed up on the two wells since.

The Huangshi PSC requires PACE to spend up to US $1.5 million on exploration and carry out a pilot production program. Should commercial viability be proved in the pilot production program CUCBM can opt to share 30% of cost and take 30% interest. The Baotian-Qingshan PSC requires PACE to spend up to US $8 million on exploration and also a pilot production program. CUCBM has the option to subsequently take 40% interest by sharing 40% of post-exploration cost.

PACE distinguishes itself from other PSC holders in that it has formed an alliance with Australia’s Mitchell Drilling and thus has exclusive access to a proprietary drilling system. The two companies hold equal interest in a joint venture named PACE Mitchell Drilling Corp. The joint venture has exclusive license to use Mitchell Drilling’s Dymaxion proprietary drilling platform in China. Dymaxion is a unique drilling system that combines oilfield and mineral drilling technologies to achieve highly efficient drilling at a lower cost. It combines horizontal and vertical drilling systems in one through a Surface to In-Seam [SIS] drilling method. It has proven advantages over vertical production wells completed by hydrofracturing or cavitation in degassing medium depth coal seams. It is also capable of drilling multiple coal seams from a single location and in a variety of patterns to intersect a single producing well, thus enhancing overall producibility.

Since Mitchell deployed the system in early 2000, more than 200 CBM wells have been drilled using the system worldwide. When Mitchell presented the system in the Guizhou Pre-Mining Degasification Symposium in Spring 2006, response from Guizhou’s coalmine participants was very enthusiastic. PACE Mitchell Drilling plans to use the Dymaxion system both for PACE’s own China CBM projects and as a commercial service to address Chinese coalminers’ pre-mining degasification needs. The later will serve to be an extra revenue stream for PACE and Mitchell drilling. PACE planned to use Dymaxion system to drill the two sets of horizontal drill holes in its pilot production program for the Baotian-Qingshan project. And of course, the Dymaxion system can also be offered as a service to other CBM companies in the future. PACE announced in June that it had contracted for the construction of its first Dymaxion drill rig which would be completed in September; a second rig was also ordered to address the high demand.

PACE has also made good progress on acquiring its third and fourth PSCs. Its China Canada Energy subsidiary has entered into a Memorandum of Understanding [MOU] with CUCBM on a PSC in Chenzou. And its Asia Canada Energy subsidiary holds an option agreement for another CBM concession in Jiaozuo. PACE’s PSC partner CUCBM has obtained preliminary governmental approval for both concessions.

Compared to Far East Energy’s (FEEC) three PSCs, PACE’s PSCs cover much smaller acreage, with its current two concessions (1275 km2) occupying about 23.8% as large as FEEC’s three concessions (5352 km2). However, when its upcoming third and fourth PSCs and its unique drilling platform are all considered there is no doubt PACE represents as strong a player as FEEC in China’s emerging CBM industry. PACE’s Baotian-Qingshan concession alone represents a likely 1.56 tcf of CBM interest when a 50% recovery rate is used and CUCBM’s possible 40% stake is factored in.

Disclosure: Author is long PCEEF.