PETROLEUM EXPLORATION AND DEVELOPMENT Volume 36, Issue 3, June 2009 Online English edition of the Chinese language

journal Cite this article as: PETROL. EXPLOR. DEVELOP., 2009, 36(3): 403407. RESEARCH PAPER

Analysis on economic benefits of coalbed methane drilling technologies

Luo Dongkun1,*, Chu Wangtao1, 2, Wu Xiaodong1, Li Weichao1
1. China University of Petroleum, Beijing 102249, China 2. Sinopec Exploration & Production Research Institute, Beijing 100083, China

Abstract: The coalbed methane (CBM) development activities in China are concentrated in the regions with low-permeability coal reservoirs. There are two kinds of drilling technologies: one is the conventional vertical well technology, the other is multi-branch horizontal well technology. Based on these two technologies, firstly, without taking account of the production capacity replacement and aiming at the same well-control area, the economic benefits between the development plan with whole vertical wells and the one with entire multi-branch horizontal wells were compared; and then the comparison of the economic benefits between the whole-vertical-well development plan and the mixed-well-type one was also made, considering the production capacity replacement and aiming at the same designed production capacity. IPP and NPV methods were used to calculate the economic evaluation indices of application of each plan in different CBM prospects, and the technical and economic potentialities of these two technologies were analyzed. The conventional vertical well technology can realize certain economic benefits and it is the preferred technology now, even for some time in the future; the multi-branch horizontal well technology is more suitable for low permeability coal reservoirs and can increase CBM production in these reservoirs, but the risk is high due to high drilling investment, and it cannot be popularized soon until the drilling equipment and technicians are localized gradually. Key words: coalbed methane; drilling technology; vertical well; multi-branch horizontal well; economic evaluation

Introduction
It can be concluded from the successful CBM practices in the world that CBM drilling technologies play a decisive role in realizing production breakthrough and promoting industry development. Under different geological conditions, CBM drilling technologies often have great difference in production effect. In the course of industry development, all of the CBM production countries are developing the CBM drilling technologies which can be increasingly suitable for their geological conditions through technical tests and appraisals. The CBM reservoirs in China feature low reservoir pressure, low permeability, low gas saturation and high gas content, namely three lows one high. Referring to the domestic conventional oil and gas drilling technologies and the successful CBM drilling technologies abroad, China has introduced and tested some sets of CBM drilling technologies to explore the most suitable one. The practice results show that under current technical conditions, each drilling technology has its own comparative advantage on production and investment, and therefore it is necessary to compare the economic benefits of different drilling

technologies to lay a good foundation for optimizing CBM project development plan and CBM drilling technologies research.

Analysis on CBM drilling technologies in China

Due to late starting of CBM drilling technologies in China, the conventional oil and gas drilling technologies have been used in China for a long time. With the increasingly high demand to improve the CBM exploration and development level, enhance production, decrease drilling costs and protect reservoirs, some successful CBM drilling technologies from other countries have been introduced and used in China. According to the survey, by the year of 2007, there have been two main kinds of drilling technologies for CBM in China: one is conventional vertical well technology and the other is multi-branch horizontal well technology [1-4]. The vertical well technology is widely used in Shanxi Qinshui Basin, which has not only achieved a production breakthrough, but also formed a set of matched drilling techniques aiming at the geological characteristics of high rank coal reservoirs in this area: near (under)

Received date: 12 August 2008; Revised date: 25 February 2009 * Corresponding author. E-mail: ldkun@sina.com Foundation item: Supported by EU-China Energy and Environment Program (EuropeAid/120723/D/SV/CN) Copyright 2009, Research Institute of Petroleum Exploration and Development, PetroChina. Published by Elsevier BV. All rights reserved.

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wide application prospect, but its related investment is comparatively high at present. Thus now it is one crucial problem to promote Chinas CBM industry development by comparing the economic benefits between the vertical well and multi-branch horizontal well technologies, analyzing the relative influence factors, and exploring the development direction to economical and high efficient.

2 Comparison on economics of CBM drilling technologies

Comparing the economics of the development plans adopting the vertical well technology or the multi-branch horizontal well technology in different CBM targets can have a better understanding of the economic benefits of these two technologies. This comparison needs to design development plans aiming at these CBM targets and then calculate the evaluation parameters and indices based on these development plans. During the design of development plans, first, without taking account of the production capacity replacement and aiming at the same well-control area, the economic benefits between the development plan with whole vertical wells and the one with entire multi-branch horizontal wells are compared; and then the comparison of the economic benefits between the whole-vertical-well development plan and the mixed-well-type one is also made, considering the production capacity replacement and aiming at the same designed production capacity. The mixed-well-type development plan adopts both the vertical well and the multi-branch horizontal well at the same time. There are two mixed-well-type development plans based on different number proportions of these two well types. The well number proportion of the No.1 mixed-well-type development plan is 20:1 (vertical well number: horizontal well number) and that of the No. 2 plan is 10:1. In comparison, if the economic evaluation outcomes of the multi-branch horizontal well development plan and the mixed-well-type development plans are better than that of the whole-vertical-well development plan, it will mean that the multi-branch horizontal well technology has economic advantage; if not, it will means that the vertical well technology has economic advantage. The geologic conditions of the selected CBM targets must be suitable for both of these two drilling technologies. Because the vertical well technology can be applied in almost all regions and the multi-branch horizontal well technology is mainly applied at the coal reservoirs featuring structural integrity, low permeability and low pressure[6], there are 4 satisfying CBM targets for the comparison through analyses, including Hancheng, Ningwu, Jincheng and Dacheng targets areas [7-11]. In fact, the analyses on the economic benefits of the CBM drilling technologies are that, firstly, based on the production prediction for the development plans, resources conditions and market conditions of these 4 targets, the production capacities of the development plans are decided

Fig. 1 Development trend of China CBM drilling number (Data from Ye Jianping, Coalbed Methane Specialized Committee, China Coal Society. Private communication)

Fig. 2 Comparison on the number of the two well types by the end of 2007 (Data from Ye Jianping, Coalbed Methane Specialized Committee, China Coal Society. Private communication)

balanced vertical drilling and cased hole completion. The multi-branch horizontal well technology is successfully used to develop the CBM in low permeability reservoirs in the United States and Australia. Since 2004, using the mature horizontal drilling equipment and technology in the oil and gas industry as well as introducing the abroad advanced equipment and services, China has successfully implemented some multi-branch horizontal well tests[4-5]. Before the end of 2003, Chinas CBM industry developed extremely slowly, with the accumulative total drilling number of less than 250 wells. Then due to the governments focus, the CBM industry has achieved development by leaps and bounds. The drilling number of 2005 has exceeded the accumulative number before 2003 (Fig. 1). By the end of 2007, China has drilled a total of 2 446 CBM wells. Among them, the number of the vertical wells is 2 417, which are the main well type; the number of the horizontal wells (the majority is the multi-branch horizontal wells) is only 29, so the proportion is pretty low (Fig. 2). According to the current situation of Chinas CBM drilling technologies, the vertical well technology is the most mature technology and widely applied, but it doesnt thoroughly eliminate the adverse influence from low permeability and low pressure of reservoirs yet, and its production still needs to be improved. The multi-branch horizontal well technology can enhance single-well production, gas recovery speed and rate; therefore it has

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Table 1 Production prediction for CBM targets

Target Hancheng Ningwu Jincheng Dacheng Daily production of the vertical well/ m3 Peak Average 2 434.37 1 473.78 2 957.04 1 911.59 2 733.26 1 655.54 2 730.24 1 812.40 Daily production of the multi-branch horizontal well/ m3 Peak Average 25 582.20 18 535.49 35 512.47 23 530.70 32 016.79 21 559.16 29 922.74 19 822.52

Table 3 Investment and cost parameters of the development plans under the same well-control area
Variable investment Variable investment of the whole Fixed of the Operating multi-branch Prospect investment/ whole vertical well cost/ horizontal well 104CNY development plan/ (CNYm-3) development plan/ (104CNYkm-2) (104CNYkm-2) Hancheng 5 400 2 754.40 5 148.21 0.384 Ningwu 1 500 1 940.00 4 042.36 0.320 Jincheng 1 500 1 868.00 4 027.96 0.320 Dacheng 1 500 2 212.00 4 096.76 0.352

Note: Production period of the vertical well is 15 a and that of the multi-branch horizontal well is 9 a

Table 2 Market demand prediction for the CBM targets

Present demand Urbanization speed /% /108 m3 Hancheng Hancheng, Xi'an, Weinan 17.3 0.65 Ningwu Datong, Shuozhou 5.6 0.50 Zhengzhou 7.9 0.63 Jincheng Changzhi, Jincheng, Jiaozuo 3.8 0.50 Dacheng Langfang, Tangshan 10.5 0.68 Target Target market

in the evaluation period, then the investments and costs of the development plans are predicted, at last referring to the fiscal and taxation system and the subsidy policy for Chinas CBM industry as well as the CBM commodity price, the economic evaluation indices of the development plans are calculated and compared [12-13]. 2.1 2.1.1 Basic data Production prediction for CBM target areas

Chinas CBM exploration and development activities are mainly concentrated in the Qinshui Basin, so based on the analyses of the economic parameters from some test projects in the Qinshui Basin, and considering the differences in investments and costs of different enterprises, the investment and cost parameters of the CBM development in the Qinshui Basin have been obtained. Except for the Jincheng target, the parameters of the other 3 targets (Hancheng, Ningwu and Dacheng) are obtained by analogy. The parameters of the Qinshui Basin are regarded as benchmark standard, and the analogy coefficients are estimated based on the investment and cost differences of the oil and gas fields close to each CBM targets. The investment and cost parameters of each CBM target are listed in Tables 3 and 4. 2.1.4 Other parameters or their estimation methods

According to the effective gas drainage area for different drilling technologies, and through optimization, the vertical wells adopt the rectangle well network pattern with 350300 m well spacing; the multi-branch horizontal wells adopt one major branch and four pairs of symmetrical distributed sub-branches. Each side of the major branch has four sub-branches, the angel between the sub-branch and the major branch is 45, and the distance between the adjacent sub-branches is 150 m. The length of the major branch is 800 m, the length of the sub branches is 500 m, 400 m, 300 m and 200 m respectively[14]. According to the design mentioned above and the geological parameters of the 4 selected CBM targets, the daily single well production of these two well types is predicted (Table 1). 2.1.2 Market demand prediction for CBM prospects

Considering the present CBM transportation condition in China, the market demand prediction takes the target area and their surrounding cities and towns as the target markets. On the basis of the current natural gas consumption of the provinces and cities with a balance between supply and demand, combined with the current status of the social-economic development of the target area, the present demands are predicted. At the same time, the future demands are predicted based on the present demands and the urbanization speed of the target area[15]. The present demands and urbanization speed concerning the CBM target areas are listed in Table 2. 2.1.3 Investment and cost parameters

Through the analyses on the economic evaluation practices of the available CBM projects and the current status of the CBM fiscal and taxation system, other parameters or their estimation methods are established. The CBM initial station price is taken as 1 CNY/m3, the sale subsidy from the government is 0.2 CNY/m3, the income tax rate is 25%, the commodity rate is 95%, the basic earning rate is 12%, and the total evaluation period considering the production capacity replacement is 31 a. The estimation methods of other indirectly determined parameters are: the sum of the construction land fee, the management expense, the patent and technology usage fee, the production preparation fee and the initial expense, the basic preparation fee and the working capital, is estimated in accordance with 5% of the fixed assets investment; according to The Notice on Tax Policy Issues to Accelerate the CBM Extraction published by the State Ministry of Finance and State Administration of Taxation states in China that the VAT rebate-after-imposition policy is carried out aiming at the VAT ordinary taxpayers of the CBM extraction enterprises, the fixed assets can adopt the sum-of-the-years-digit method to accelerate depreciation. The urban construction and maintenance tax, the education surcharges and other local taxes are estimated totally as 10% of the value added tax (VAT) payable. 2.2 Comparative analysis of economics

Based on the basic data above, we adopt the IPP and NPV methods to calculate and compare these economic indices

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Table 4 Investment and cost parameters of the development plans under the same production capacity
Variable investment of the whole Variable investment of the NO.1 Variable investment of the NO.2 vertical well development plan/ mixed-well-type development plan mixed-well-type development plan Fixed investment/ Target (CNYm-3) /(CNYm-3) /(CNYm-3) 104 CNY Replacement Replacement Replacement New investment New investment New investment investment investment investment Hancheng 5 400 4.11 2.89 3.97 2.79 3.87 2.72 Ningwu 1 500 2.39 2.11 2.29 2.03 2.24 1.99 Jincheng 1 500 2.49 2.18 2.43 2.15 2.39 2.12 Dacheng 1 500 2.95 2.65 2.79 2.50 2.70 2.42 Note: No.1 mixed-well-type development plan -- the well number proportion of the vertical wells and the multi-branch horizontal wells is 20:1; No.2 mixed-well-type development plan -- the well number proportion of the vertical wells and the multi-branch horizontal wells is 10:1

Operating cost/ (CNYm-3) 0.384 0.320 0.320 0.352

Table 5 IPP and NPV comparison under the same well-control area
IPP/a The whole The Whole Target vertical well multi-branch development horizontal well plan development plan Hancheng 6.9 6.7 Ningwu 3.4 2.6 Jincheng 3.2 3.0 Dacheng 4.0 3.2 NPV/104 CNY The whole The Whole vertical well multi-branch development horizontal well plan development plan -11 122.58 -25 813.38 23 141.10 22 422.91 17 443.18 10 609.82 12 754.81 4 723.60

Note: Assuming the well-control area is 20 km2

Table 6 NPV comparison under the same production capacity

The whole vertical well development plan 45 628.12 139 574.52 260 321.21 194 396.20 NPV/104 CNY The No.1 mixed-well-type development plan 29 696.65 132 311.52 246 925.53 169 165.11 The No.2 mixed-well-type development plan 15 839.94 131 603.38 241 911.17 168 420.56

Target Hancheng Ningwu Jincheng Dacheng

solve the low production problem facing the vertical well technology while developing CBM in low permeability and low pressure coal reservoirs; compared with the vertical well drilling technology, its single well production can be increased by 10-20 times[6]. as for investment, because the multi-branch horizontal well technology is an emerging technology in Chinas CBM industry, although many mature experiences can be learned from Chinas oil and gas industry, some core equipment, tools and matched technical services needed by drilling cannot be provided by domestic enterprises. Introduction of them from abroad will cause over-higher drilling investment. Above all, as to the production effects, the multi-branched horizontal well technology tested in China can be compared with the same technology abroad. Because of the high investment, satisfying economic benefits are difficult to achieve.

Conclusions and suggestions

relating to the development plans in the Hancheng, Ningwu, Jincheng and Dacheng target regions. The results are listed in Tables 5 and 6. From the results of economic evaluation, it can be found that the IPPs of carrying out the whole-multi-branch-horizontal-well development plans are lower than those of the whole-vertical-well development plans. Meanwhile, the economic profits of carrying out the whole-multi-branch-horizontal-well development plans and the mixed-well-type development plans are also both less than those of the whole-vertical-well development plans. Namely, under present conditions, adopting the multi-branch horizontal well can enhance production recovery but cannot achieve higher economic benefits than those of the vertical well. Compared with the vertical well technology, although adopting the multi-branch horizontal technology can increase CBM production of the same gas-bearing area, it increases investments at the same time. Therefore, the reason of decreasing profits is that new adding investment cannot be paid back by new adding production effectively. The analyses on China CBM exploration and development practices indicate that, as for production, the multi-branch horizontal well technology can effectively

Adopting the conventional vertical well technology to exploit CBM can achieve certain economic benefits, and can be considered as the preferred development technology at present and even in a period of the future. However, the production of this technology is not satisfying, and cannot meet the demand of CBM exploitation in low permeability coal reservoirs. Researches indicate that, the multi-branch horizontal well technology is suitable for the exploitation of CBM with three lows one high geological characteristics in China. Compared with the vertical well technology, it has the advantages of high single well production and high recovery rate. However, as the drilling investment of this technology is so high that its economic benefits of exploiting CBM at present are lower than that of the vertical well technology. Thus it cannot be promoted widely yet. Decreasing the drilling investment of the multi-branch horizontal well is the major path to improve the economic benefits of CBM exploitation and to promote the large-scale application of this technology. Researches of matched drilling equipment and tools should be strengthened to basically realize domestic production as soon as possible. Moreover, drilling investment should be decreased by carrying on field test successively and cultivate a group of domestic qualified personnel to master the multi-branch

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horizontal well technology.

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