A special information supplement COAL1T H E G L O B E A N D M A I LF R I D AY , S E P T E M B E R 15 , 2 0 0 6

BY LORI BAMBER

W hile researchers havebeen working since 1945to find new ways to

recover energy from Alberta’s mostabundant energy resource – coal –it’s only been in the last couple ofdecades that the focus has turned tothe natural gas trapped in the coalbeds that lay under most of theprovince’s geography.

Now, as domestic efforts toincrease coalbed methane (CBM)production in Western Canadaescalate, a B.C. company hasbucked the local trend by tappinginto a massive CBM opportunity inenergy hungry China.

Coalbed methane is the clean-est-burning fossil fuel, generallyconsisting of more than 90 per centmethane, but it was once tough torecover. According to the Canadian

Society for Unconventional Gas(CSUG), technical advances indrilling and production turned thetide.

In China, Kelowna-based Pacif-ic Asia China Energy Inc. (PACE)is at work. Its Guizhou Project insouthern China includes a 970-square-kilometre concession that arecent independent technicalreport by Sproule International ofCalgary suggests may hold as muchas 11.2 trillion cubic feet of gas.

The company is partnering withan Australian developer, MitchellDrilling Contractors to apply newhorizontal drilling techniques origi-nally developed to economicallyrecover natural gas.

Part of PACE’s advantage, saysCEO Devinder Randhawa, is dueto China’s concession awardprocess, an effort by China toencourage energy production that

makes CBM development vastlyless costly than Canada’s.

“We would have paid roughly$150 million for an equivalentresource here,” says Mr. Rand-hawa, “and we paid a fraction ofthat.”

In addition to the company’slow resource development costs,“There are 240 million people inan 800-square-kilometre range ofour operation,” says Mr. Rand-hawa, “and they need energy.”

In a recent interview withStockwatch.com, Sprott Asset Man-agement research analyst Eric Nut-tall said, “We are quite excitedabout the prospects for companieswith coalbed methane assets solong as natural gas prices remainabove $6 per Mcf (thousand cubicfeet).” Among its picks, Sprott hasinvested in Pacific Asia ChinaEnergy.

“I expect over the next yearthat China will become a hotbedfor natural gas exploration, andwould encourage investors to seekcompanies that have already signedproduction sharing agreements,”said Mr. Nuttall.

Closer to home, in Alberta,commercial production of 10 to 15million cubic feet per day of CBMwas established between 2000 and2002; drilling of more than 3,000

CBM wells was planned within theprovince in 2005.

British Columbia also has vastCBM resources: According to theB.C. Ministry of Energy and Mines,the Peace River and Fernie-Elk Val-ley areas, Vancouver Island andseveral interior coalfields all havehigh potential. On VancouverIsland, Hillsborough Resources has23,000 acres with coalbed methanedrilling rights, a resource that may

prove a tremendous asset in meet-ing the island’s growing power gen-eration requirements.

According to Michael Gatens,past chair of CSUG and chair ofQuicksilver Resources Canada,coalbed methane production in thewestern United States nowaccounts for up to a third of naturalgas production there, and similarproduction is possible in the west-ern provinces of Canada.

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BY RANDALL ANTHONY MANG

Once considered the darkhorse of power generation,coal-fired electricity is tak-

ing on a new green aura thanks toclean coal technologies (CCTs) thatnow enable this abundant fuel to beused more cleanly than ever before,in some cases causing near-zeroemissions.

For Canada, CCTs spell oppor-tunity. Not only may CCTs enableCanada to use its plentiful coal

reserves to meet energy demand inenvironmentally and sociallyacceptable ways, they may also addto Canada’s export capacity.

“There is certainly potential forCanada to prosper internationallyfrom clean coal,” says Bob Stobbs,executive director of the CanadianClean Power Coalition (CCPC).“The operating know-how and les-sons learned of companies that putthese technologies together willhave value. The best credibility willcome from real projects, not just

studies and research.”Much of Canada’s emerging

CCT prowess was spurred by theCCPC, a group of coal producersand energy companies formed in2002 to research, develop anddemonstrate commercially viableCCTs. A major CCPC goal is nowapproaching realization: the build-ing by 2012 of a full-scale clean coalplant that would include carbondioxide (CO2) sequestration.

While announcements of newCCT plants for Alberta are expected

soon, Saskatchewan utility SaskPow-er is well on its way to having theworld’s first near-zero-emissionCCT plant to include CO2 captureand storage.

SaskPower Clean Coal projectmanager Max Ball says the pro-posed co-generation facility will pro-duce and sell both electricity andCO2, a byproduct of the plant’soperations.

New Brunswick-based engineer-ing firm Neill and Gunter Limited ishelping SaskPower evaluate its CCT

options. Having worked with theCCPC and other utilities, the firmhas examined an exhaustive list ofpollution abatement technologies.SaskPower is considering two tech-nology pathways.

The first option, based on amodified conventional coal powerstation, involves CO2 removalthrough a post-combustion solventprocess. In addition to systems thatremove pollutants such as particu-lates, NOx and SOx, the plantwould incorporate an amine solvent

process to strip away the CO2. Thegas would then be converted intoliquid CO2 ready for geologicalsequestration, says Neill and Gunterpresident and CEO Donald Bel-liveau.

SaskPower’s other option is anOxyfuel power plant. Its technologyremoves nitrogen from the air priorto combustion, resulting in an oxy-gen-fired combustion process. Itsmain byproducts are CO2 and

IMAGE: GETTYCOAL POWER

Coal is Canada’s most abundant and lowest-cost fuel, not to mention a critical input in the manufacture of

steel. Including the energy resident in coalbed methane, Canada’s 6 billion tonnes of proven coal reserves

store more energy than all of our oil, natural gas and oil sands combined. Coal contributes in other ways

to Canada’s economy as well. More than half of all coal mined in Canada is exported, making Canada one

of the world’s leading coal exporters. ANY WAY YOU ADD IT UP, COAL HAS A POWERFUL PLACE IN CANADA.

PHOTO: PACE

Employees of Pacific Asia China Energy and Mitchell Drilling Contractors review coal samples fromPACE drilling operations in Guizhou, China. PACE’s assets in China are estimated to hold as muchas 11.2 trillion cubic feet of coalbed methane.

Kelowna-based company explores opportunity in ChinaCoalbed Methane – the new alternative fuel

See Power COAL2

A special information supplementCOAL2 T H E G L O B E A N D M A I LF R I D AY , S E P T E M B E R 15 , 2 0 0 6

water. Once the water is stripped,the remaining flue gas is com-pressed and liquefied.

Mr. Belliveau says while themajority of the equipment requiredfor clean coal applications is com-mercially available, SaskPowerwould be the first to assemble it in afull-scale plant.

Not only is SaskPower doing“the right thing,” says Mr. Ball, theproject is premised on a viable busi-ness case.

Whichever technology optionSaskPower chooses, nearby oilpatch operators are expected to beready customers for the plant’sCO2. Practically next door to theproposed plant, the WeyburnEnhanced Oil Recovery project isinjecting 2.5 million tonnes ofimported CO2 annually into adepleted oil well. The long-termproject is proving that CO2 can beused to push more oil to the surfacewhile safely and securely trappingthe greenhouse gas underground.

“We’re confident that we can sellthe CO2 for enhanced oil recoveryoperations with certainty that theCO2 will remain sequestered – anastounding opportunity to reducethe environmental footprint ofpower generation. And the com-bined revenues should add up to anappealing investment for Saskatch-ewan,” says Mr. Ball.

SaskPower expects to make adecision as to whether to proceedwith the $1.5-billion, 300-megawattproject by June 2007. The plan callsfor the plant to be in service by2011.

A recently announced coal-firedpower generation facility in B.C.will also employ innovative meth-ods to reduce its environmentalimpact.

The 184-megawatt AESWapitiEnergy Corporation facility, a col-laboration involving U.S.-basedpower company AES and B.C. coal

miner Hillsborough Resources, isbased on a combined coal-biomassconcept, using circulating fluidizedbed boiler technology.

AES project director TomKunde says, for starters, the plantwill utilize low-sulphur thermal coalmined from Hillsborough’s Wapitiproperty near Tumbler Ridge.

“This plant will burn coal in afluidized bed, removing in excess of95 per cent of sulphur in the com-bustion process,” he says, “beatingthe provincial standards for sulphuremissions,” while avoiding the useof water-intensive, post-combustionscrubbers.

He says an ammonia injectionsystem will reduce NOx emissionsand a “bag house” will capture vir-tually all of the plant’s particulates.A mercury scrubber will removemore than 85 per cent of mercuryfrom exhaust – meeting the provin-cial standard.

To help address CO2 emissions,20 per cent of the plant’s fuel will bewood waste – a carbon neutral fuel.

Like other coal projects,AESWapiti brings significant eco-nomic benefits. HillsboroughResources president and CEODavid Slater says, “This projectbrings significant value to sharehold-ers and the community. Between theplant and the mine, 100 stable, long-term jobs will be created.”

The future of clean coal in Cana-da? “We’re looking at what can bedone to improve the economics ofgasifying lower grade coal,” saysBob Stobbs. “This is importantbecause once you’ve got syntheticgas (from coal), you have the build-ing block for a wide variety of appli-cations including liquid fuels andnatural gas that can be shipped viapipeline.”

Mr. Belliveau says, “It’s impor-tant that policymakers take a long-term view, considering the needs oftoday and the future. Yes, it may bea little more expensive to buildclean coal plants now, but this earlyadoption will place Canada on themap as a leader in clean coal solu-tions among nations around theglobe.”

PowerFrom COAL1

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This report was produced by Randall Anthony Mang (www.randallanthony.com) in conjunction with the advertisingdepartment of The Globe and Mail, Richard Deacon, project manager • e-mail: rdeacon@globeandmail.com

COAL POWER

DON MACKINNONPresident, Power Workers Union

T oday’s energy debate ispolarized by simplistic viewsabout global warming and

inherently “good” renewable energytechnologies. To suggest that mattersare not that simple – that there mayyet be a place for coal – puts one inthe company of “Neanderthals” whoremain buried in the industrial agewhen “dirty” old coal was king.

But some key facts cannot beignored by even by the most anti-coal advocate.

Among the G8 nations, Canadais the largest, per capita, electricityconsumer for some very compellingreasons: a large geographic area andlow population density; a climatewith cold winters and hot summers;

a relatively high standard of living;and an economy heavily weightedtoward resource extraction andenergy-intensive primary industries.

In that context, coal-fuelled gen-eration of electricity should be partof this country’s energy mix. It has aproven track record, providingaffordable and reliable electricity inAlberta, Saskatchewan, Ontario,Nova Scotia and New Brunswick.Canada’s 8 billion tonnes of provencoal reserves – more than our oil,natural gas and oil sands combined– offer low-cost fuel security.

Naysayers believe that coal can-not be cleaned up. The exact oppo-site is true. Technologies, in usetoday, have achieved significantreductions in smog and mercuryemissions – quickly and affordably.European experiences demonstratethat greenhouse gas emissions canbe reduced through equipmentupgrades and by utilizing wasteenergy for residential heating; plus,

mixing biomass – such as wood-waste and straw – with coal canreduce CO2 emissions by 30 percent.

Canada should not ignore coal’sresurgence on the world stage as anacceptable form of electricity gener-ation. This has been driven by thevast reserves of coal that existaround the world, as well as coal’sversatility. New technologies offerinnovative ways of using coal to pro-duce electricity, both in its currentform and when “gasified.” In addi-tion, coal can be converted to liquidproducts such as synthetic crude oil,or used to create steam for ethanolproduction. CO2 emissions can beused to enhance oil recovery.

These opportunities are encour-aging utilities and governments inEurope, the U.S., India and Chinato invest billions of dollars inresearch and development on thenext generation of “zero emission”coal-generation technologies. Here

at home, our federal governmentand some provinces and utilities aresupporting similar research throughthe Canada’s Clean Coal Technolo-gy Roadmap.

In addition to the energy securi-ty coal offers, there are other poten-tial economic benefits in using coalin new and innovative ways. Meet-ing more of our energy needs withcoal could have a positive impact onrail and Great Lakes shipping rates.Benefits could accrue to Canadianmanufacturers of clean coal technol-ogy. New ancillary industries, relat-ed to biomass and district heating,could be created for our forestry andagricultural sectors. Experiences inother jurisdictions with market-based mechanisms, such as taxincentives and emission trading,need to be looked at as well.

An April 2006 report, “Coal:America’s Energy Future,” pro-duced by the National Coal Council,at the request of the U.S. Secretary

of Energy, suggests the economicbenefits could be substantial. Thatreport suggests that, were its recom-mendations accepted, “more thanone million new, high-paying ener-gy manufacturing jobs will be creat-ed, U.S energy costs would bereduced by 33 per cent and anaggregate gain of more than $3 tril-lion in Gross Domestic Productcould be achieved.”

Canada is blessed with signifi-cant hydroelectric resources, windpower potential and a world-classnuclear technology. However, tocontinue to have secure, affordableand reliable electricity, coal mustremain an integral part of the ener-gy mix. We have extraordinaryreserves of coal and the capability touse them in a sustainable manner.

It’s time to thoughtfully analyzehow this country can benefit fromcoal rather than aggressively ignoreit, as is happening now in Ontario,the nation’s industrial heartland.

Europeans among those putting clean coal to work

Consider coal power with an open mind

What economic drivers areinfluencing demand for coal?

Global crude oil production isplateauing and is now near its ulti-mate peak production rate. Emerg-ing market energy demand is surg-ing and has been driving not justenergy prices, but also many othercommodity prices higher in the lastfew years. Next to oil, coal providesthe lion’s share of our energy needs.Because of its low relative cost, coalconsumption has been rising thefastest over the last couple of yearscompared to oil, gas, hydro ornuclear.

What technological advancesare influencing coal’s potentialas a clean energy source?

Gasification with CO2 sequestra-tion is moving to the forefront asthe future of harnessing energyfrom coal. If you take the process astep further, you can turn the coal-generated syngas into liquid fuelssuch as cleaner burning diesel.The technologies are not new andhave been worked on for decades.For example, Sasol Ltd. in SouthAfrica has been producing oil fromcoal for over half a century. In addi-tion, Arch Coal has recently taken

steps to become a big player in coalto liquids.

Will coal’s abundant reserveskeep its commodity pricedown?

It’s our belief that the futuredemand for coal will be strongenough to allow for healthy marginsto be realized by many coal produc-ers the world over. As global crudeoil production begins its mercilessdecline down the back side ofHubbert’s peak, coal demand willremain well ahead of productiongrowth for years. As well, we expectthat the global energy shortage willbecome so acute that countries willattempt to better manage theirdwindling resources, therebyadding a further constraint to sup-ply. Also, coal, like most resources,is not nearly as abundant as it oncewas. In many parts of the world, thebest reserves are depleted. Miners

are now extracting lower qualitycoals with higher strip ratios, andare forced to ship product further tomarket.

Where are the best investmentopportunities for coal?

We have made coal investments onalmost every continent over the lastfew years. Our goal has been toacquire large resources at a reason-able price. Basically, we’ve beenbuying BTUs, energy in the ground.In terms of energy equivalentreserves, the market currently val-ues oil companies more than coalcompanies by a factor of 30 to 40times. When we invest in large coaldeposits, we are betting that thisspread will narrow over time.

What attributes should aninvestor look for in a coalequity?

Given that the company has goodresources, other factors to considerinclude operating and capital costs,management’s competency andexpected return to shareholders.

What are the advantages ofinvesting in an energy fund?

By investing in an energy fund,you'll own a ‘basket’ of energy equi-ties lowering your company specif-ic risk. A dedicated investmentteam, on your behalf, builds aninvestment portfolio of what theybelieve to be the best ideas in theenergy sector. The team continuallyevaluates the portfolio and adjusts itas market conditions change oropportunities arise. The SprottEnergy Fund tends to invest in coaland uranium equities to a greaterextent than most other energyfunds.

Among Sprott Energy Fund’s major coalholdings are Arch Coal, MacarthurCoal, Western Canadian Coal, CashMinerals, Fortune Minerals, and WestHawk Development Corp.Sprott Funds hold or may hold any of theabove-mentioned securities.

Q&A

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With Sprott Asset Management’s Market Strategist KEVIN BAMBROUGH

A special information supplement COAL3T H E G L O B E A N D M A I LF R I D AY , S E P T E M B E R 15 , 2 0 0 6

COAL POWER

BY TED DAVIS

A n ever-increasing demandfor electricity and steel bycountries around the world

is good news for the coal producersof Canada.

The different types of coal thatserve these industries are the mostabundant fossil fuels on earth. “TheNational Energy Board estimatesthat there is about 240 years’ worthof coal left in Canada alone at cur-rent consumption rates,” says AllenWright, the executive director of theCoal Association of Canada. Of thetotal fossil fuel reserves in this coun-try, about 66 per cent are coal, 24per cent are oil sands and theremainder are oil and gas, says theassociation.

Canada’s participation in thecoal markets, both domestic andinternational, is largely determinedby the type of coal mined. Thermalcoal is used to generate electricityand in the manufacture of cement.Metallurgical coal is used in themaking of steel.

What is driving the demand formetallurgical coal is the consider-able growth in steel production inChina, India, Russia and Brazil.“Blessed with vast reserves of cok-ing coal, Canada is a significantplayer in the international metallur-gical coal market,” says Mr. Wright.“Our traditional steel customerbase is in Europe, North and SouthAmerica and Asia – primarilyJapan and Korea.” Canada suppliesabout 26 million tonnes of metal-lurgical coal to the world exportmarket – or “seaborne hard cokingcoal” market – which totals about140 million tonnes. About 70 percent of the world’s steel productionuses coal in the manufacturingprocess.

One major Canadian providerto this industry is Elk Valley Coal ofCalgary. This company has, forinstance, struck a 10-year salesagreement with Nippon Steel Corp.and POSCO (signed in 2005) toprovide 6.25 million tonnes of met-allurgical coal per year.

While Canada consumes mostof its thermal coal productiondomestically, our place in the worldexport market for thermal coal is“barely on the radar screen,” saysMr. Wright. But then this is a muchbigger market. Canada contributesabout 5 million tonnes of thermalcoal to the total world export marketof 450 million tonnes. About 39 percent of the world demand for elec-tricity is supplied by coal-fired gen-erators. There is an estimated 20times more thermal coal than metal-lurgical coal in the ground.

China’s oft-cited economicemergence is playing an increasingrole in Canada’s coal industry, saysone company. “There is a hugedemand by China,” says DavidSlater, president of HillsboroughResources Ltd. of Vancouver, point-ing to China’s usage of 1.2 billiontonnes of thermal coal per year.

With its many hydro electricityresources, the usage of coal for elec-tricity generation in Canada is not ashigh as in some countries. Over 50per cent of electricity in the U.S. isgenerated by coal, versus about 18per cent in Canada.

To ensure that coal demands –both domestic and international –

are being met, coal explorations andmine openings in Canada continueat a steady pace. Some 12 new coalcompanies, primarily in WesternCanada, are now in various stages ofdevelopment, says the coal associa-tion.

Among these are the continuingdevelopments at the Quinsam minenear Campbell River, owned by

Hillsborough Resources. Newly dis-covered seams of this thermal coalmine stand to be “significant in vol-ume,” says company presidentDavid Slater – and the company is“90 per cent sure” that the newseams are connected to the existing,underground mine.

But it is cement, not power gen-eration, that largely drives the

demand for this coal on the westcoast. Two-thirds of the coal minedat Quinsam is used for generatingsteam in the process of formingcement. “There’s not one buildingon the west coast from Portland toAlaska that has been built withoutcement formulated with coal-firedsteam,” said Mr. Slater.

“Thermal coal has the greatest

potential for the demands of thefuture,” says Mr. Slater. “And it is thecoal that is in the greatest supply.”

In agreement is Michael Minnesof Sherritt International of Toronto.Says Mr. Minnes, “Seaborne ther-mal coal demand is increasingbecause the demand for electricity isgrowing internationally at close tothree per cent per year. New

seaborne supply is now beingbrought online worldwide to meetthe demands and prices have stabi-lized somewhat as supply anddemand are balanced.”

And Mr. Minnes anticipates continuing demand for both thermaland metallurgical coal, given therobust growth of the Asianeconomies.

In demand – Canadian coal suppliers seize opportunity

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• Canadian coal is exported to21 countries on 5 continentswith an annual value ofapproximately $2 billion.

• The international trade incoal has expanded fasterover the last decade thantrade in any other commodity.

• Coal is our single largest export to Japan, our secondlargest trading partner.

• Coal is the single largest commodity carried by Cana-dian railways.

• Electricity generation fromcoal is now 8 times moreefficient than at the turn ofthe last century.

Source: Coal Association of Canada

Coal facts