BEIJING - China is drafting rules for coal bed methane (CBM) exploration involving participation by foreign partners in a bid to regulate the nascent industry.

The rules will include the required qualifications for foreign companies, as well as the minimum annual exploration areas and investment amounts, according to a source from the drafting team who declined to be identified.

The source said that the rules would be sent to the National Energy Administration by the end of the year for approval.

It is important that entry requirements for foreign energy companies' participation in the CBM sector rise, as "cutting-edge technology and management experience, rather than capital, are more critical" for the industry's growth, said Sun Maoyuan, a member of the National Energy Expert Consulting Committee under the National Energy Commission.

Experts said that having a few large companies involved in the sector, rather than many small ones, would make it easier to regulate and monitor.

CBM, a form of natural gas extracted from coal beds, has been widely tapped by Western countries, including the United States, as an emerging energy source.

According to figures from US Department of Energy, annual CBM production in the US rose from 91 billion cubic feet (bcf) in 1989 to 1,966 bcf in 2009.

Facing policy constraints and low demand in the domestic market, some major energy companies - including Chevron Corp and BP PLC - exited China's CBM market in the early 2000s.

Their place was taken by numerous small and medium-sized foreign companies.

Since China's CBM technology lags behind on a global level, the number of joint projects with foreign partners is "relatively high" at present, said Shen Hongwen, an analyst with the China Investment Consulting Corp. At present, Royal Dutch Shell PLC, which is jointly developing a CBM block in North Shilou, Shanxi province with PetroChina Co Ltd, is the only large multinational energy company in the field. Shell said the joint project is in the appraisal phase.

Changing conditions

"In response to changing industry conditions, we're trying to attract more large companies that have abundant experience and expertise", the source said.

China is stepping up investment in unconventional natural gas, including CBM and shale gas, to cut its carbon emissions and reduce its heavy reliance on coal and oil.

Under the 12th Five-Year Plan (2011-2015), the nation's CBM production is targeted to be 21.5 billion cubic meters (cu m) by the end of 2015. Production last year was 9.1 billion cu m.

"CBM exploration and development will be on a fast track during the period," said Sun, who is also the former chairman of China United Coalbed Methane Corp.

The company had exclusive rights to cooperate with foreign companies in domestic CBM projects until December 2010, when the government said that PetroChina, China Petroleum & Chemical Corp (Sinopec) and Henan Provincial Coal Seam Development and Utilization Co could cooperate with foreign companies on a trial basis.

To develop the industry, more policy support, including higher subsidies, is required, industry experts said.

Price reform

"If we want to encourage investment in unconventional gas supply, the policy needs to allow gas prices to reflect costs," said Zhang Chi, Chief Economist at BP Asia Pacific.

It's tough to entice multinational companies with track records in CBM development to enter the industry in China as the sector is unprofitable because of low gas prices, said Zhang Suian of China University of Petroleum.

Also, no blocks have become available for exploration since the Ministry of Land and Resources suspended exploration licenses for CBM in 2007.

He added that the country might adopt the procedures used for shale gas to auction CBM blocks to improve levels of transparency and fairness in the industry.