New Drilling Technology Could Finally Make CBM Very Economic

In a previous interview about coalbed methane (CBM), Sprott Asset Management CBM analyst Eric Nuttall told us he would remain, “quite excited about the prospects for companies with coal bed methane assets so long as natural gas prices remain above $6 per Mcf (thousand cubic feet). The economics would be very skinny under $6.” That’s because CBM exploration and development can get pricey. What if there was a drilling firm regularly bringing gas out of the ground for under $1.50/mcf? There is and they’ve proven it with more than 250 wells in Australia. They’ve moved into India, where they drilled another 30 to 50 wells and another 70 wells to come. Mitchell has taken acreage in southern Kansas, where the company just finished its first CBM well. And the company formed a joint venture with Pacific Asia China Energy (TSX: PCE) to bring its Dymaxion® technology to China later this year. You don’t get to be Australia’s largest privately owned drilling company without timing your markets right. The Mitchell family’s great timing ability began in 1969, when company founder Peter Mitchell bought his first drilling rig at a repossession sale for $11,500. Parts of Queensland, Australia were in the grips of a drought. Mitchell put his rig to good use as he began drilling water wells for farmers in the surrounding rural counties. Just as the drought had ended, Mitchell caught the boom in coal. His growing company began drilling in the oil shale and coal fields around Moranbah, then a remote part of Queensland. They then caught the drilling boom in mineral resources through the 1980s. By then, the company was drilling oil, gas, uranium and coal reserves throughout Australia. In the 1990s, Mitchell Drilling got the first whiff of Coalbed Methane (CBM) exploration entering Australia. That is when the major U.S. oil companies, such as Amoco, Conoco and others, came to the country searching for new CBM fields. But, the major U.S. oil companies abandoned CBM in Australia because they soon discovered Australia’s shallow coal fields were too expensive for their big oil rigs. “The economics just didn’t work,” Nathan Mitchell told StockInterview. “They needed high gas flow, but the fracing technique just didn’t give them what they needed.” Still they persisted and asked Mitchell Drilling to run his smaller water well rigs. “That was the start of it,” Mitchell recalled. “We made CBM work with the water well rigs from an economics point of view, but they still weren’t making enough gas.” Still, the economics of the smaller rig made it work to a degree. Enter the politicians. “The Queensland government made a law that said five percent of all coal-fired power stations had to be run by gas,” explained Mitchell. “That spawned the industry and CBM really took off.” Mitchell continued with the vertical rigs, but it was the economics of the smaller rig that made CBM work. GETTING BLOOD OUT OF A STONE It was during the CBM boom when Mitchell developed the better mousetrap. Coal miners didn’t see the gas resource beneath their feet. “They just saw them as coal fields,” said Mitchell who knew there was “nuisance gas” there. “There was never even a thought there was enough gas there to make it viable.” With natural gas selling for $2/mcf in Australia, the economics didn’t make sense. Australian coal seams are found at shallower levels where greater pressures have to be created to liberate gas from the extended horizontal seams. The Australian one-two punch of shallow coal seams and low gas prices drove Mitchell to become innovative. “We’d seen in the coal business the underground in-seam drilling of horizontal holes and degasification,” Mitchell explained. “But, there was usually a lot of water involved and no way to get the water out.” Because of the company’s decades of experience in drilling water wells, Mitchell combined the vertical well with the horizontal well. Mitchell described the process, “The vertical well became the conduit for the coal mine, the gas and the water, and gave us a huge surface area. Suddenly, in areas where there wasn’t a resource, we could produce something like a million or up to 2 million a day from these Dymaxion® wells.” The technology was put to the test in central Queensland, Australia. An Australian newspaper reported in June 2004, “In an industry where tradition plays a strong role, innovative drillers Mitchell Drilling have chalked up the 100th example of their revolutionary Dymaxion surface to in-seam (SIS) methane gas drainage hole for gas producer CH4 Limited at their Moranbah gas project.” CH4’s website spoke highly of this gas project, “The Moranbah Gas Project will utilise innovative drilling and gas extraction techniques, allowing increased potential gas yields while leaving the coal resource undamaged.” How does this impact the industry? “We see this as revolutionary,” Mitchell cheerily remarked. “It has changed the face of CBM. It works in areas where people didn’t think it would work.” For example, the Dymaxion® drilling works in high permeability with low gas. “We can get such high gas from low gas content reservoirs, where people didn’t previously think there were reservoirs.” It has worked in Australia, where every penny counts. “Our price may cost around $1.25 or $1.10 (US$) per mcf so they are still making reasonable profits at around 50 percent.” How will it play outside of Australia? Mitchell shot back, “If you can imagine costs at $1.25 and you’re selling it for $6/mcf, that’s some pretty good bloody profits.” Drilling at reasonable profits for $2 gas, Mitchell said, “We are keen to take this technology around the world. Even if we were to double our costs, our clients would still be extremely happy.” USING BOTH VERTICAL AND HORIZONTAL WELLS When discussing the Dymaxion® technology with an oil and gas man, his puzzled response was, “Did I hear you right? You are using both a vertical and horizontal wells to get the gas?” There are the skeptics. “Contractors from the larger oil and gas companies came over to have a look,” Mitchell said. “Some people thought we were sliding by or sort of skimming costs.” He explained the procedure, “We have to intercept (the vertical) because we actually line up every one of our lateral wells with a slotted liner, a perforated liner. It is stacked into the vertical well, by the arrangement we’ve developed, so we know we’ve intercepted it.” Mitchell said the key is the ability to flush and know that the finds are coming out. “We can have a number of wells lined, going from one point to another,” he explained, “and we’ve got continuity of connection and flow between one well which is 1000 to 2000 meters away and the vertical well. We can flush between both.” He gave an example, “We can have three horizontals going into one vertical and two of the horizontals can be closed. Number one can be opened and flushed; then number two can be open, flushed and closed. So you have this over the 10 to 20 year life of the well.” How does the SIS hole de-gas a greater area than a regular horizontal? “When we put two wells into a chevron pattern, you start to get absorption between the V at the start of the well,” Mitchell said, describing the Dymaxion process. “Once you get the wells done, in a V with each other, you start to get better flows, a bit more gas and greater increasing gas in a slow decline.” Mitchell’s website does admit the old technologies may be suitable for deeper drilling, “In the case of very deep deposits, up to 3000 meters underground, a vertical well may be adequate to create sufficient water table pressure to liberate and bring to the surface large quantities of methane gas.” Because of the greater surface area draining the underground gas in the coal seams, the same website is quick to point out, “SIS drilling also provides valuable exploration data on seam rolls and faults, allowing greater certainty in mine planning and development.” The SIS process begins by using modified, multipurpose mineral drill rigs with specially designed bottom hole assemblies. In the SIS technique, a hole is drilled at 60 to 90 degrees from the surface. It is then steered through a medium radius bend to horizontally enter the target coal seam. The 96 millimeter hole is steered in the seam toward a previously drilled vertical production well. A homing device is lowered down the vertical well to the target seam, which helps the horizontal hole intersect the production well. The vertical well dewaters the seam. Once the hydrostatic head has sufficiently been lowered, gas flows to the surface. MITCHELL’S WORLDWIDE EXPANSION Developing the Dymaxion® technology in the late 1990s, the first test took place in Australia in the year 2000. Now, going on nearly seven years later, the company has drilled more than 250 wells in Australia, another 30 to 50 wells in India with another 70 more to drill, and has moved on to both Kansas and China. Mitchell talked about Kansas, “We finished our first well, but we don’t really want to be a contractor in the United States. We don’t see a lot of benefit to handing over our technology, but we would be interested in doing some sort of equity deal or partnership with clients.” He believes that in the right areas, what Mitchell has got is “exceptionally good.” So where did Mitchell first make an equity deal? “The two big powerhouses of the world for the future are going to be China and India,” he noted. “Both of them will have energy problems in the future. Mitchell’s first equity deal came about with Pacific Asia China Energy. “We just astounded them with what was happening in Australia,” Mitchell laughed, “to see this small compact rig drilling 2000 meter holes of a well and making it work at $2 gas.” He explained that although rigs were cheaper in China, the logistics, the costs of roads and access for trucks and pumps, gear and equipment, costs start to go up. “It like a U.S. aircraft carrier,” Mitchell compared with a drilling operation, “you have 40 planes on deck but it takes 70 people to run it.” Even in China, costs can go up when running these logistics. The deal with Pacific Asia China Energy involves reduced drilling costs and a 50/50 arrangement for income produced through the use of the Dymaxion® technology in China. The joint venture company has exclusive use to this technology in the world’s largest coal producing country, China. How does Mitchell see business growing in China? “Exponentially,” he quickly replied. “In China, there is a push to degasify their mines. There are some several thousand large mines, many with over one hundred million tons in reserves, and a lot of mines are being shut down because of degasification problems.” In an earlier interview with the Tunaye Sai, president of Pacific Asia China Energy, he reported that every single coal company at a recent symposium approached both Mitchell and himself about the Dymaxion technology for China. Was that true? “Very much so,” Mitchell confirmed. “Mine safety is now at the forefront of China and international observation. They’re looking forward to international help and technology to come to China and fix these problems. They’re looking at it from they want to sell coal, but they also want to sell gas. It worked well in Queensland and will apply to in China. That’s why we see such a growth for Mitchell.”

Earth’s Population to Drop by 80 Percent, Says Top U.K. Scientist

Some like it hot. According to environmentalist James Lovelock, we’ll get plenty of hot between now and the end of the century. “We are so far down the path toward the hottest we have been, since we were 55 million years ago,” Dr. Lovelock, who is also a leading atmospheric scientist, told StockInterview in a tape-recorded interview last week, “that as many of us look at it, it’s not going to make very much difference what anybody does.” In stronger commentary, which he wrote for England’s Independent newspaper, this past January, Lovelock warned, “The Earth is about to catch a morbid fever that may last as long as 100,000 years.” And we were worrying about another Ice Age? Skeptics might wonder if his 1200-word essay was just book publicity hype. Lovelock’s scathing our-world-is-doomed article was published about two weeks before Penguin Books (UK) began selling his latest work, The Revenge of Gaia, in bookstores across the British Isles. He did admit within his newspaper commentary, “This article is the most difficult I have written.” While interviewing Dr. Lovelock, during our transatlantic phone conversation, the octogenarian sounded sad with his prediction, but still optimistic, despite his ruthless appraisal of what may lay ahead for the rest of this century. “I see the crunch coming as an opportunity to improve ourselves in a way. Who knows? Man may have a better chance when he starts again.” ONLY ABOUT ONE BILLION HUMANS WILL SURVIVE What does he mean by starting again? “By the end of this century, there is a high probability that the bulk of our species on the planet will be eliminated,” the soft-spoken Lovelock gravely remarked. “There may be something, plus or minus, on the order of a billion left.” Is there much hope, we asked. “I don’t see our current civilization hacking it,” he lamented in his response. But, but, what if? “Enormous changes must be made,” he stressed. “Society is much too slow in cutting back.” He insisted these changes should have started at least 50 years ago. Later he added, as an afterthought, “If Europe and USA were trying to be good and cut back by 30 percent, it’s really not going to help much. I don’t think the public wants to do it.” In Lovelock’s forecast, he envisions, at the end of this century, the last few humans would be forced to rebuild the remnants of our civilization in the Arctic. It won’t be as cold up there by then, as you might think. He told us, “Within 25 years, most of the global ice in the Arctic will be gone. You will be able to take a sailboat to the North Pole.” How long before we begin to feel these changes? “In my own modeling, I rather think it is an unknown number of years,” Lovelock explained. “It may be five years or it may be 30 years.” He offered a visual, “Think of it as a rope or a string. Global warming may run up in a straight line or a curve lying a bit loose as the IPCC seems to project.” Lovelock summarized why his forecast is dire and probably irreversible, “Everybody forgets the greatest damage we’ve done to the earth is not so much the emissions from greenhouse gases, but taking away the natural resistance from the farmland ecosystem. By doing that, we have disabled the planet’s ability to regulate itself.” Lovelock does not enjoy painting a picture of what earth might look like several decades from now. He wrote in the Independent, in January, “Much of the tropical land mass will become scrub and desert, and will no longer serve for regulation; this adds to the 40 per cent of the Earth's surface we have depleted to feed ourselves.” Through his book and in various articles, Lovelock has repeatedly blasted environmentalists who gamble away earth’s future by campaigning for renewable energy sources. That’s when we began talking about environmentalists, especially the idealists who claim to be helping preserve the earth. So, we asked this leading environmental scientist what was really wrong with today’s environmental movement. Bitterness entered his voice when Lovelock answered, “It’s mostly made up of urban people, who know almost nothing about the countryside and still less about the ecosystem.” He scoffed, “Their solutions are basically urban-political solutions. They continue to insist on wanting to run their cars on bio fuels. This is one of the maddest ideas of the lot.” Lovelock cuts no slack for those championing the cause of bio fuels. He writes in The Revenge of Gaia, “It would require us to burn every year about two to three gigatons of carbon as bio fuel (a gigatons is one thousand million tons). Compare this quantity with our yearly food consumption of half a gigaton tons… We would need the land area of several Earths just to grow fuel.” Does he believe environmentalists are wrecking the environment? “I’m afraid I do,” he glumly responded. Because we know there remain several environmental groups who refuse to embrace nuclear energy as a much-needed solution to the planet’s energy mix, we asked what he would like to say about them. “They are being very foolish,” he quickly shot back. After a pause, he added, “They are living in a dream world.” Like the father figure he is, Lovelock is disappointed but tries to remain buoyant. He wrote in his recent book, “My feelings about modern environmentalism are more parallel with those that might pass through the mind of a head-mistress of an inner-city school or the colonel of a newly formed regiment of licentious, and naturally disobedient young men: how the hell can these unruly charges be disciplined and made effective?” LOVELOCK WANTS THE WORLD TO GO NUCLEAR NOW The headline of a recent editorial in a Boston newspaper asked, “Are Pro Nuclear People the New Greens?” We discussed that. “It’s a bit of an old term, really,” he grinned. “Nuclear has been around for more than 40 years at least. I suppose in some countries, like the United Kingdom, you will find some groups are looking more toward nuclear.” Make no mistake in thinking James Lovelock is anything but Pro Nuclear. His quote adorns the top of the front page of the World Nuclear Association’s website, “There is no sensible alternative to nuclear power if we are to sustain civilization.” Rightly so, the trade association refers to their proponent as the “preeminent world leader in the development of environmental consciousness.” In his book, Lovelock writes, “There is no alternative but nuclear fission until fusion energy and sensible forms of renewable energy arrive as a truly long-term provider. Nuclear energy is free of emissions and independent of imports from what will be a disturbed world.” Lovelock briefly analyzes the value and harm of each energy source in The Revenge of Gaia. He has a burning disgust for coal mining, and finds carbon-based fuels inefficient and dangerous, not only to humans but also to earth as a self-regulating system. He has frequently warned that renewables are insufficient to meet our planetary energy needs. In contrast to renewable advocates Amory Lovins or Senator Hillary Clinton, Lovelock sees little value in the immediate future for either solar or wind energy programs, and has harsh words for them, writing, “It will fail and bring discredit both to the greens and to the politicians foolish enough to adopt renewables as a major source of energy before they have been properly developed.” He believes their renewable energy solutions might only hasten our civilization’s demise. Because Lovelock strongly opposes widespread mining, and because nuclear power depends upon the mining of uranium, how does he feel about uranium mining? “I don’t think it matters because it will never be a very big operation,” he replied. “When you consider the ratio of the energy produced from uranium compared to coal, on a ratio of millions to one, the quantity of uranium being mined is trivial compared to coal mining.” We explained to Dr. Lovelock how U.S. uranium companies replaced conventional mining with In Situ uranium recovery. Lovelock thought the In Situ is “a good idea because it mobilizes the uranium with the oxygen in the water and doesn’t make a god-awful mess of the environment.” CALLS NAVAJO NATION URANIUM BAN ABSURD Because of our coverage regarding environmental developments in New Mexico for companies such as Uranium Resources (OTC BB: URRE) and Strathmore Minerals (TSX: STM; Other OTC: STHJF), we talked about uranium mining in that state. Given that it was such an odd event, we discussed the Navajo Nation ban on uranium mining in the four-state tribal reservation area, called ‘Four Corners.’ Puzzled ourselves by this, based upon the latest scientific developments of the in situ uranium recovery method, we discussed an earlier conversation we had with Dr. Fred Begay. This past November, while visiting Los Alamos National Laboratories (LANL), we had asked Dr. Fred Begay about the new face of uranium mining. Dr. Begay, who is both a nuclear physicist and a Navajo, was continuing his affiliation with LANL by conducting community out-reach programs on the Navajo reservation. He told StockInterview, “The Navajo don’t get it. They have illiteracy on mining and uranium.” We asked James Lovelock what he thought of the Navajo uranium ban in the context that the tribe also receives about $100 million annually from coal mining royalties. “Had there been no mining at all in the Navajo Nation, and they wanted to keep the deposits pristine as part of a natural ecosystem, I could understand their rejection to any mining,” he explained. “But if they allow coal mining, then it’s absurd to reject uranium mining.” What would James Lovelock say to Navajo Nation president Joe Shirley, Jr. or to any of the aborigine tribes in Australia and elsewhere, which dislike uranium mining? “Very little,” he abruptly replied. Then, he clarified his response. “It’s almost like trying to persuade any religious person that their belief is unfounded. I wouldn’t dream to explain to a devout Catholic that I’m doubtful about the virginity of the Virgin Mary.” He compared it to an article of faith, adding, “They don’t think about it. They don’t know that it is wrong. It is very difficult to deal with people like that.” Does that apply to the average anti-nuclear environmentalist? He explained how he does deal with the uninformed, “The only thing I found effective in this country, the United Kingdom, is to say, ‘Yes, it may be slightly dangerous, but nothing quite so dangerous as global warming. So, we may have to use it to overcome this.’” CHINA AND FINAL WORDS One can not talk about 21st century nuclear energy without bringing up China’s dilemma. The world’s largest coal miner and one of the worst air polluters, China is planning the most aggressive nuclear energy expansion program of the past thirty years. “The Chinese government is the strongest government in the world,” Lovelock began. “I have a friend that goes over there regularly to advise the Prime Minister on their environmental problems.” Thus began a classic Lovelock anecdote: “They say to him, ‘We’re all doing our best to have more renewable energy than anybody else. We are building nuclear power stations, as fast as we possibly can, so as to not add more carbon to the atmosphere. However if we can’t develop the resources for our people, strong as our government is, there will be a revolution tomorrow. We are in no position to stop using the coal resource until we build enough nuclear or other renewable sources to meet our needs.’” He concluded, “If the Chinese can’t do it, how the heck can the Western democracies do it?” Therein lies what some consider his fatalism about Earth’s health. Is he truly the pessimist some make him out to be? “Quite to the contrary,” he responded. “I’ve been accused of being a pessimist, but no, I don’t think that way.” Lovelock compared the current threat of global warming to his experiences as a student and young worker, during World War II. “In 1940, we were threatened by invasion by a very powerful enemy,” he reminisced. “Some people threw up their arms in horror and said, ‘There’s nothing we can do.’ But it was a very enjoyable time for those who worked hard and faced the threat.” Britain and Lovelock survived the threat, passing to the next generation what he learned from this experience, “It is terrible to think of Global Warming, but it is nevertheless challenging. It can be quite a wonderful time for a lot of younger people.” Some have reported The Revenge of Gaia is Lovelock’s last will and testament. We instead read Lovelock’s masterpiece in a different light. Our conversation with Dr. Lovelock led us to believe his book is his sternest warning to the world’s politicians and scientists to speed up their embrace of nuclear energy in order to avert a very possible series of catastrophic events, which may come to us in the decades ahead. He did say there was “a high probability,” but Lovelock never said “definitely.” In this broad difference, Lovelock yet looks into his cup and finds it half full, not half empty.