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Strategic options for dealing with methane in coal seams

Summary

Managing the methane contained in coal seams is important for mining companies to maintain operational safety, as a potential source of energy and to minimise greenhouse gas emissions. This case study outlines how a mining company examined options for dealing with the gas associated with mining coal, including capturing the methane and using it as an energy source.

The case illustrates a structured process for collecting and classifying information, and using it to identify the components of decisions and develop options for subsequent evaluation.

Background and approach

Coal seams contain gas, primarily methane and carbon dioxide, that is released when the coal is mined. Gas associated with coal mining is important for several reasons:

  • Safety and effects on operations: methane mixed with air is highly flammable, and explosive in the right concentrations. Managing methane is critical to safe underground coal mining operations.
  • Potential source of energy: coal mining and coal processing operations are energy-intensive. If methane can be used as a source of energy, it can contribute to reduced operating costs and an increase in the security of energy supply.
  • Greenhouse gas emissions: methane is a potent greenhouse gas, with a global warming potential calculated by the US Environmental Protection Agency that is 28 to 36 times that of carbon dioxide. Emissions would be expensive for coal miners if there were a cost on carbon, as well as contrary to the sustainability targets of many of them.

This case study outlines how a mining company examined options for dealing with the gas associated with mining coal, including capturing the methane and using it as an energy source.

This process used the structure outlined in Figure 1. It had several benefits:

  • It allowed important detail to be disentangled from a large mass of data and assumption, thus providing clarification about the setting and context in which decisions must be made
  • It supported the identification and description of options, enabling decision makers to better understand and take account of the major factors that influence those options
  • It rationalised the wide range of possible options into a smaller and more manageable set for rigorous business and financial analysis, including risk assessment.

Context information, Step 1, was compiled first and provided as briefing material for participants in a workshop process that covered Steps 2, 3 and 4. Steps 5 and 6 were conducted later and are not discussed in detail here.

Figure 1: Strategic options process

Context information

The mining company

The company operates underground coal mines at several sites. It is acutely aware of the importance of the gas that is associated with the coal it produces.

Energy supply and waste gas removal are linked closely for this company:

  • While their predominant business is mining coal, dealing with methane is a day-to-day activity because gas must be removed from underground areas to allow mining to proceed safely
  • The company plans to grow but projected regional energy generation capacity may not be sufficient to support current plans, so locally produced methane may provide a useful alternative energy source
  • If a carbon pricing mechanism is introduced, permits will have to be purchased to allow waste gas venting or flaring
  • Electricity prices are likely to rise significantly if a carbon price is introduced and in response to a shortage of supply, which is a foreseeable scenario
  • Generating revenue and creating carbon credits by using waste mine gas for local electrical generation may make economic sense.

However, the company does not want matters associated with gas to distract it from its core business of mining.

Company strategy

When considering gas emissions associated with mining, the company is seeking a strategic approach that contributes to long-term growth and value creation, generates an appropriate return on capital, and enhances the profitability and sustainability of the business. The relevant objectives for the company are summarised in Table 1.

Table 1: Objectives

Objectives

Resource utilisation

Maximise the use of resources, primarily coal, but also any readily-exploitable gas resources associated with coal

Energy supply

Ensure a stable and reliable supply of energy to support mining operations

Reputation

Enhance the company’s reputation by minimising its environmental footprint and demonstrating good community citizenship

Cost offset

Where possible, minimise operating costs by better management of waste gas, which is currently extracted and either vented to air or flared

Selected technical topics

Gas can be collected before mining starts (pre-drainage), during mining operations from the ventilation system, and after mining has been completed from residual underground voids (called the goaf). Some options are summarised in Table 2.

Table 2: Potential gas collection options

Collection option

Notes

Underground pre-drainage

Surface to inseam (SIS) drilling, often using directional drilling or coiled tube drilling, is well understood

Ventilation air capture and treatment

Several methods are being tested, but there are concerns about the ability to deploy current technology safely for full treatment of mine ventilation air

Underground post (goaf) drainage

Drainage via vertical holes is a mature, well understood process

Potential options for using gas are summarised in Table 3, but not all options are viable at all sites. There are three key parameters:

  • Gas quality: gas composition varies between sites, and some technologies are not tolerant of a high carbon dioxide content
  • Gas quantity: the flow rate determines the capital investment required, the returns on that investment and the payback period; in most cases gas is produced in relatively small quantities that limit what can be done, a factor that distinguishes waste mine gas from coal seam gas (CSG), also called coal bed methane (CBM)
  • Variability and reliability of supply: most gas use options need a reliable and consistent supply of fuel to be viable, but mining activities are subject to unplanned interruptions so secondary fuel supplies may be needed.
Table 3: Potential gas use options

Use option

Notes

Sell gas under a supply agreement

Any supply agreement must be flexible enough to match changing mining conditions

Gas sales may be uneconomic due to the capital costs of cleaning and compression

In-house power generation

The company could generate electricity itself (there are some small pilot plants), but it is not in the generation business so fresh skills would be required

There are environmental implications, particularly noise and visual impact

Reciprocating gas engines – moderate cost, tolerant to variable gas quality but may not be tolerant to variation once set up

Turbines – high cost, require large volumes of high quality gas and a consistent feed

Flaring

Low cost, tolerant to variable quality gas, and can be deployed rapidly; relatively lower carbon cost associated with emitting carbon dioxide instead of methane

Flaring may not be acceptable from a regulatory and a reputation perspective, and may be prohibited in the future except for emergencies

Ventilation air methane (VAM) to internal combustion engine

VAM is a technology for burning gas in low concentrations in internal combustion engines; it works well in high gas mines with pre-drainage and in mines with low potential for drainage

VAM systems have a high capital cost and need > 0.3% methane to be self-sustaining

Pipeline

A pipeline requires a consistent high quality supply that is reliable and in reasonable volumes

Options: separate pipelines for pre- and post-drainage, or a single pipeline for blended gas

LNG

High capital costs mean that very large volumes are required to make gas liquefaction economic

Chemical conversion

This requires a guaranteed consistent high-quality feed; conversion usually produces ammonia, which has a variety of uses, for example in explosives and fertilisers

Context

Information was compiled about the company’s current and planned operations, the stakeholders that might have an interest in or an influence over the options it considered, and a set of specific technical topics listed in Table 4. There were many pages of information about each of these topics; only a small selection of the technical matters are summarised here.

Table 4: Context technical topics (key elements)

Topic

Detailed subject matter

Gas utilisation

Gas collection (ventilation and drainage), treatment, compression, flaring, energy generation

Carbon price

Implications, permits, credits, offsets

Energy supply

Current and future energy use, availability, price, reliability

Commercial

Arrangements with gas, energy supply and coal companies

Reputation

Community impacts, environmental impacts, opportunities

Mining operations

Operational implications, optimisation, removal of constraints

Workshop activities

Overview

The workshop reviewed the context material summarised in Section 3, covering Steps 1 and 2 in Figure 1. The key element structure in Table 4 was used as the basis for brainstorming issues.

  • Each element was presented and the relevant context information was discussed to stimulate the identification of issues and ideas
  • Issues and ideas were written on Post-it notes™ and displayed on a wall.

Issues and ideas were combined and grouped, in the process indicated in Figure 2.

Figure 2: Workshop structure

Defining the problem

Initially issues and ideas were grouped according to whether they were facts, uncertainties or decisions:

  • Facts are known pieces of data or background information
  • Uncertainties are inputs over which the company has no control at the moment
  • Decisions are choices that can be controlled, are measured by value-based decision criteria and have objectives related to a desired level of performance.

Reviewing the facts, uncertainties and decisions allowed two related problem statements to be specified:

  1. The company needs to decide how to protect its current operations and its planned growth from future electricity price rises and shortages and interruptions in supply. There will not be sufficient base load generation to support growth plans, and the company can expect a substantial increase in energy costs in the next few years.
  2. The company needs to decide how best to deal with waste gas: to respond to future carbon pricing, to reduce emissions of greenhouse gas, to optimise production and to use the gas to generate power where possible. This will include decisions on whether it generates electricity or supplies the gas to others under some form of contractual arrangement. Identifying the strategic decisions

The ‘decisions’ generated in the previous step were then sorted into those that concerned policy, those that were tactical and those that were strategic:

  • Policy decisions are taken as given at this stage and cannot be changed by the team
  • Tactical decisions affect strategy implementation and can be deferred
  • Strategic decisions, the focus of this exercise, affect the scope, timing and value of the opportunity.

Some of the key areas in which strategic decisions were required are noted in Table 5.

Table 5: Strategic decision topics

Topic

Focus

Specific questions

Scope

Resource use

Should the company generate and supply electricity using both coal and methane, or restrict the strategic focus to gas alone?

Generation arrangements

Should the company generate electricity itself from gas, sell the gas or enter a joint venture?

Generation scope

Should the company only generate for its own needs, or trade on the wider electricity market?

Physical scope

Should the company focus on local site-specific opportunities or take a broader regional focus?

Flaring and venting

Should the company continue to flare or vent gas, given community and regulatory responses?

Operations

Should gas drainage be treated as core business to be retained in house, or could it be outsourced?

Timing

Act or wait?

Should the company act now, or wait for more clarity about carbon pricing, electricity supply and new technology?

Contingency planning

What are the options for dealing with future energy shortages?

Value

Gas resources

How should the company’s gas resources be valued?

Metrics

How should investments with non-quantifiable benefits, such as improving environmental performance and community perceptions of the company, be evaluated?

Defining the strategic options as a ‘strategy table’

Strategic options were developed, based on gas collection (Table 2), gas use (Table 3) and commercial options, and the questions in Table 5. The advantages and disadvantages of each option were likely to vary from site to site, and the company could adopt a portfolio of approaches across its operations. In practice, several pages of detailed description and explanation accompanied each option, with links as appropriate to the context information.

Combinations of options were aggregated into a strategy table of example business cases. The table did not include every combination of technical and commercial options – the aim was to develop a range of representative business cases for high-level filtering, with additional detail included as necessary during evaluation and testing in Steps 5 and 6. Table 6 summarises three of the cases, labelled ‘clean’, ‘green’ and ‘dirty’.

Table 6: Three illustrative business cases

Options

‘Clean’ case

‘Green’ case

‘Dirty’ case

Operational

Gas use

Gas sold on lowest cost, highest return basis

Gas used for in-house energy generation

Gas vented or flared, using lowest cost option

Flaring

Only in operational need

Only in operational need

Flare or export, paying carbon cost if necessary

Operational efficiency

Low impact, clears waste product to facilitate mining

New operational unit to capture opportunities, with new skills

Low impact, clears waste product to facilitate mining

Commercial

Energy security

Medium- to long-term concerns

Fair; contingency plans needed, including alternative sources

Medium- to long-term concerns

Energy supply

Purchase externally, subject to market prices

Effectively insulated; also supplies local communities

Purchase externally, subject to market prices

Electricity trading

Not needed

Some exposure to trading risk, needs new operating unit

Not needed

Carbon price

Liability transferred on gas sale

Low volume; methane exposure reduced, only carbon dioxide released

High volume; methane exposure reduced if flared, only carbon dioxide released

Sustainability

Climate objectives

Not aligned with gas use strategy

Aligned with company climate change policy

Not aligned with company climate change policy

Sustainability objectives

Aligned with company sustainability policy

Aligned with company sustainability policy

Partly aligned with company sustainability policy

Financial

NPV outcome

Gas sale revenue

NPV positive

NPV positive

With carbon price

No impact

Upside from future energy price projections

Must pay carbon price

Steps 5 and 6

Some of the options in the left-hand column of Table 6, plus the company’s objectives, were used to generate evaluation criteria for the set of business cases. Some financial criteria were readily quantifiable, but many others were ranked initially on ordinal preference scales. The evaluations provided the basis for informed judgements about preferred options and the best way forward for the company.

From these the company was able to develop a broad strategy that could be applied at a number of mine sites for waste gas management and power supply security, to feed into broader planning and prefeasibility analysis of major investments.

Lessons

There are often many complex and interlinked factors that have to be understood and rationalized when complex investment decisions must be made. It can be difficult to know how to identify concrete options and select the best of them. The filter of facts, uncertainties and decisions, followed by the identification of policy, strategic and tactical matters, allows the information to be simplified and structured, producing discrete business cases that can be evaluated on their own merit. Often, the go-head case will be a composite of two or more of the cases studied.

In this case, matters associated with energy and energy security were best considered in conjunction with options for dealing with waste gas from mining. These areas could have been addressed independently, or in sequence, but core inter-relationships would have been lost and the outcomes would have been significantly sub-optimal.

In addition, most strategic decisions involve matters about which a lot is known. Often the information available, or collected to support the decisions, is technical and specific. Pre-screening is important, to remove some of the detail that may not all be needed at strategic level because, while it is important for other reasons, it does not affect the decisions being made. Step 1, Compile context information, is critical for this, complemented by the grouping in Step 2, Define the problem.

The ‘uncertainties’ generated in Step 2 of the process can also be the subject of further, detailed study to ensure that the eventual go-ahead business case is as robust as possible.

The structured process used here facilitated the development of a clear company strategy. It does this by enabling complex, multifaceted decisions to be rationalised into a small number of discrete business cases, which can then be tested, evaluated and compared.