Page 1 PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB3099 Project Name Shanxi Coal Bed Methane Development and Utilization Project Region EAST ASIA AND PACIFIC Sector Oil and gas (100%) Project ID P100968 Borrower(s) PEOPLE'S REPUBLIC OF CHINA Implementing Agency Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared April 30, 2007 Estimated Date of Appraisal Authorization January 10, 2008 Estimated Date of Board Approval July 10, 2008 1. Key development issues and rationale for Bank involvement 1.1 Following two decades of high economic growth and rapidly rising energy consumption, China entered the 21rst century as the world’s second largest energy consumer after the United States. Between 1980 and 2005, China’s commercial energy consumption more than tripled, rising from 603 million tons of coal equivalent (mtce) to 2220 mtce. The rising energy demand has been met largely by the development of domestic resources, particularly coal. But oil import has grown rapidly and accounted for 42% of total oil consumption. The coal production increased from 630 million tons in 1980 to 2.25 billions tons in 2005. The contribution of coal to the energy mix has declined slightly, but still stands at 69% of the total energy consumption. The unchecked growth in the production and use of energy, particularly coal, is taking a great toll of the environment. The SO2 emitted from the use of energy is already affecting about one third of the nation’s land through acid rain. Two out of three cities fail to meet residential air quality standards. China currently is responsible for about 9% of the world’s greenhouse gas emission and its contribution is increasing rapidly. The indoor air pollution caused by the use of solid fuel such as coal and biomass is responsible for respiratory diseases and premature death. China’s energy demand will continue to grow due to a variety of factors, including rapidly increasing urbanization, sustained economic growth and improved way of life. Energy and environment constraints are increasingly becoming a bottleneck in sustainable growth. The increasing resource requirements and environmental consequences of China’s growing economy make it essential that rapid and balanced growth must also be sustainable. In particular, this demands policy actions that promote the development and utilization of new clean energy and minimize national as well as global environmental diseconomies. 1.2 The production of coal in China results in the emission of methane (CH4) as a greenhouse gas (GHG) into the atmosphere which could otherwise be used as a clean energy source. When released into the atmosphere, GHGs contribute to global warming and methane is approximately 21 times more potent as a GHG than carbon dioxide (CO2). Methane is released as a result of pressure drops when underground coal is mined or exposed to surface conditions. Page 2 Underground methane is highly explosive and to ensure that underground coal mines can be operated safely the methane needs to be removed during and sometimes prior to actual mine operations. Many coal mines in China have very high methane content and inefficient drainage is the main cause of frequent underground explosions, which in 2005 resulted in the death of nearly 2000 miners. On the other hand, the methane is a high quality and clean energy which could be recovered and utilized as a clean fuel by households, commercial and industrial establishment. It is estimated that in 2004 about 18 billion cubic meter of methane produced during mining operations was released. Only 4.3 percent of the methane was recovered and utilized, and the rest vented into air 1.3 China has realized that GHG emissions and other air pollutants will cause unacceptable local, regional and global environmental problems unless it makes a major effort to reduce them. The Bank has actively supported China’s energy and environmental sustainability objective for many years. The most recent Country Partnership Strategy (CPS), approved by the Board on May 23, 2006, focuses on supporting China’s efforts to build a people-centered harmonious society that balances economic development and ecological concerns. One key theme of the CPS is to manage resource scarcity and environmental challenges, especially through mitigation of air pollution. The proposed project will directly contribute to achieving these objectives through supporting the development of a clean energy and the reduction of local and global air pollutants. 1.4 The government is planning to increase the development and use of coal bed methane (CBM) and coal mine methane (CMM) to meet the growing demand for primary energy sources, contribute to improve the safety of mining operations and help to achieve significant reductions in China’s greenhouse gas emissions. The Shanxi province, which produces one quarter of the 2.2 billion ton China coal production and hosts one-third of the estimated 32 trillion cubic meter (TCM) CBM resource in China, in particular plans to scale up the development and utilization of CBM/CMM significantly so as to diversify its energy mix, promote local economic development and improve environmental performance. However, the commercial production and exploitation of surface CBM has so far been limited to a few sites where gas is compressed and transported by truck or piped a short distance to consumers. While CMM is used widely in some coal mining areas, only less than 5% of the total CMM released was captured and utilized. Further improvement is hindered by institutional, legal and regulatory barriers together with technical and technology barriers. 1.5 In order to meet its targets the government must improve the administrative framework for CBM resource management, introduce more effective CBM/CMM development incentives, raise the technical capacity, and promote gas market development. As part of the Bank’s overall efforts to promote the CBM/CMM industry development in China, the Bank has supported the central government to develop a comprehensive set of institutional and policy initiatives it must take in order to drive for results. The Bank directly supported the CMM capture and utilization projects in Shanxi to reduce greenhouse gas emissions through carbon finance. The Bank is also supporting the Shanxi Provincial Government to assess the development potential of CBM and CMM, evaluate the investment needs and develop series of actions which Shanxi Provincial Government needs to take to ensure its plan is optimized and implemented. Page 3 1.6 The proposed project is to capture the methane by drilling in advancing of mining and convert it to LNG so as to add value to the methane. The LNG will be sold to households and industrial and commercial users in villages, towns and medium cities in Shanxi and other neighboring provinces as the scattered nature of the market does not provide justification for a pipeline system. The LNG market also includes possible peak-shaving opportunities in Beijing and other big cities . This project will directly contribute to meeting China’s development challenges through tapping a clean indigenous energy resource which is now being wasted and reducing the global and local environmental impacts of energy production and use. 1.7 The involvement of the Bank in the lending project will provide a platform for the Bank to continue policy dialogue with Shanxi government for several years and increase the prospects for the implementation of the institutional and policy recommendations. A technical assistance component is envisaged to assist Shanxi in the development and implementation of an integrated development plan and policy framework and in capacity building to fill serious knowledge and technology gaps by government advisers and planners, mine designers, technical staff and mine management to help Shanxi meet its aspirations of a commercial and sustainable CBM/CMM industry. The investment component of the project directly addresses the strategic issues of promoting gas market development and enhancing the technical capacity of the sector. The Bank’s involvement will also bring knowledge and experience in market development, economic analysis of CBM project and best technologies in methane extraction through vertical and horizontal wells and in converting methane into LNG. 2. Proposed objective(s) 2.1 The development objective of the project is to further promote the development and utilization of CBM/CMM, by enhancing the policy framework and institutional capacity for CBM/CMM development and utilization, and by exploring and producing coal bed methane and converting to LNG for thermal use by residential households, industrial and commercial establishments to replace coal as a fuel. 3. Preliminary description 3.1 The proposed project would consist of the following three components: (i) a technical assistance component to assist the Shanxi government in developing and implementing policy and institutional changes, optimizing CMM/CBM development and utilization plan and strengthening institutional capacity so as to foster a sustainable CBM/CMM industry in Shanxi province; (ii) the exploration and development of 350 vertical production wells to produce coal bed methane with a CBM production capacity of 250-300 million Nm3; (iii) the construction of a LNG plant consisting of four modular, transportable liquefaction plants with individual production capacities of 50,000 ton/year for an ultimate LNG capacity of 200,000 ton/year. 3.2 The implementing agency of the physical component is Shanxi Energy Industrial Group Corporation (SEIG). SEIG is a large state-owned enterprise authorized by the Shanxi Provincial Government to develop coal bed methane and other energy resources in Shanxi. It has a large Page 4 operation in developing coal mines, sales of coal, methane development, processing and utilization, and other downstream coal businesses. SEIG will establish an independent subsidiary for the construction and operation of the gas production and liquefaction project. The implementing agency of the technical assistance component is the Shanxi provincial government. The organization for the proposed technical assistance component is yet to be determined. 3.3 The total project cost is estimated at $168 million including the foreign exchange cost of $80 million and local currency cost of $88 million. A Bank loan of $80 million is proposed to finance the direct foreign exchange cost and the remainder of the cost will be provided by an equity contribution of $42 million from project sponsors and a domestic loan of $46 million from local commercial banks. 3.4 A specific investment loan (SIL) is contemplated for the project, lent to Ministry of Finance, onlent to Shanxi Province which will thence lend to SEIG, against acceptable guarantees. 4. Safeguard policies that might apply 4.1 Two safeguards policies will be triggered: OP 4.01 on Environment Assessment and OP4.12 on Resettlement. An initial review of the safeguards issues suggests that safeguards issues will require attention during preparation, for both the drilling component and the LNG plant. 4.2 The proposed project will have significant net positive impact on environment by reducing methane emissions and reduce local pollutants such as particles, SO 2 through coal substitution. It will not produce any significant environment impacts besides common issues anticipated during the construction and operation phase such as noise, dust, waste water and soil erosion, which are site specific and can be mitigated with known measures and technologies. The exploration and production of gas wells and the construction of the LNG plant will involve a limited amount of land acquisition and no household relocation is anticipated. No minority people are known to live in the project areas and it will be confirmed during project preparation. RAP and EMP in compliance with both the government policy and Bank requirement will be prepared and implemented. 5. Tentative financing Source: ($m.) Borrower 75 International Bank for Reconstruction and Development 90 Total 165 6. Contact point Contact: Jianping Zhao Title: Lead Energy Spec. Tel: 5788+3060 Fax: 5788+7800 Email: Jzhao@worldbank.org Location: Beijing, China (IBRD) Page 5