The Land of Lincoln would seem to be an ideal spot for coalbed-methane (CBM) development. A recent paper by the Illinois State Geological Survey (ISGS) reminds us that Illinois has the largest bituminous coal resources of any state in the nation. That is saying something, considering coal is the most abundant natural resource in the U.S. Based on gas-content measurements and the volume of coal in the basin, the potential in-place reserves could be as much as 21 trillion cubic feet (Tcf), according to published U.S. government estimates. The question operators must now answer: what amount can be recovered economically? Interest in answering that question is growing, according to David Morse, a senior petroleum geologist with the ISGS in Champaign, Illinois. He credits high natural gas prices and the fact that the state released new data that allow operators to learn more. "Activity seems to have increased in the last year. One reason is that the state completed a five-well drilling program between 2000 and 2002 and the data became public in the fall of 2002." He counts at least five companies actively drilling coalbed-methane leads today, apart from two assessment projects the state itself has undertaken. With a population of more than 12.6 million people, Illinois ranks fifth in the U.S. in energy consumption, according to the Energy Information Administration (EIA). Like many other states, its energy demand keeps rising while its indigenous oil and gas resources are declining. That's where coalbed methane comes in. The EIA projects that by 2015, unconventional gas will eclipse the lower 48 states' conventional onshore production to become the largest piece of the national gas supply pie, with coalbed methane being one of the top unconventional sources. Illinois is well-suited, from an infrastructure standpoint, to the scale needed for economic CBM production. The gas pipeline system in the area is extensive, as is the road network. The basin is near three major gas markets: Chicago, Indianapolis and St. Louis. The state of Illinois ranks first in the nation for per-capita residential gas consumption. CBM exploration and production in Illinois, western Kentucky and Indiana, which make up the Illinois Basin, has been erratic in the past few decades, mostly occurring at abandoned mines around the borders of the basin. Most of these projects failed due to having only modest gas production, or were the victim of low gas prices, and have been temporarily abandoned. Producers have feared the gas content of the Illinois Basin coals was too low for wells to be economic-but at one time, they thought the same of the coalbeds in Wyoming's Powder River Basin, until they figured out better ways to exploit the coals. Gas content Coal mining has occurred throughout the Illinois Basin for more than 100 years. It is estimated the basin contains 145 billion short tons of bituminous coal in deposits that are more than 42 inches thick. The percentage of the nation's coal that has been produced from the Illinois Basin has varied through the years, but most recently, the basin produced around 10%, down from 12% a few years ago. That percentage is expected to continue to decline due to technological restrictions related to producing and burning coals with high sulfur content, economic barriers in areas where the coal is less than 42 inches thick, or where the interburden between beds is too thin. The decline can also be attributed to obstacles like previous mining and land-use restrictions on Illinois' national forests and parks, cities, major roads, cemeteries and other environmentally protected areas. The major economic coals, for mining or CBM production, are the Springfield, Herrin, Danville, Baker, Briar Hill, Houchin Creek and Seeleyville coals. These cover nearly 37 million square miles in Illinois, as well as 6.5- and 6.4 million square miles in southwestern Indiana and northwestern Kentucky, respectively. The coals here are of high-volatile bituminous A, B and C ranks. The maximum thickness is in southeastern Illinois and the coals then thin toward the northeast, north and northwest. The coal-bearing rocks of the Illinois Basin are of Pennsylvanian Age and are divided into the Raccoon Creek, Carbondale and McLeansboro groups. The rocks were deposited between 325- and 290 million years ago. The DuQuoin monocline, the Cottage Grove-Rough Creek fault system and the La Salle anticlinal belt are the three major structural features in the Illinois Basin. The major coals crop out along the margins of the basin in Illinois, western Kentucky and Indiana. In the center of the Fairfield Basin, the coals dip to depths of more than 1,000 feet. Gas content numbers for the coals vary widely. Some estimates put the numbers from 10 to more than 250 standard cubic feet (scf) per ton. Morse says the ISGS estimates that typical coals range from 50 scf per ton to more than 150. He is quick to point out that the research is continuing. "Typically, deeper coals have greater content, which is what you would expect and there is quite a range of maturity of the coal across the basin," he says. "The high-volatile A, which is the more mature coal, occurs in the southeastern part of the basin; the least mature, the C, is in the northwest. Most of the basin is high-volatile B. The highest gas-content numbers that we've measured were in eastern Illinois in Clark County." The combined thickness of the CBM-producing coals can be greater than 25 feet in many areas. The coals are spread over huge areas of land and, according to the ISGS, more than half of the major seams are at less than 525 feet, with only a small fraction being at greater than 1,300 feet. Current activity Today, a number of companies are investigating opportunities in the basin but most of the activity has been limited to small five-well pilot projects. The ISGS is doing additional drilling in White County, Illinois, under a pair of new grants, in conjunction with the state geological surveys of Kentucky and Indiana, which are drilling in those states as well. It's part of a broader Illinois Basin consortium project, a three-year project not scheduled to be done until 2006. Some data will be released before that. "We work with local operating companies and the data remain proprietary to them for a time," Morse says. At least five companies are drilling or exploring for coalbed methane in the basin, apart from the government consortium. Specific production data or other results are hard to come by because Illinois is one of the few states not to tax oil or gas production, so companies aren't required to report their monthly production. Bakersfield, California-based Berry Petroleum Co. entered the basin when it acquired 55,000 acres in Illinois. It has drilled a five-well pilot on recently acquired acreage in Jasper County. Michael Duginski, vice president of corporate development, said in a press release last year, "This pilot is the next step in our technical and economic analysis of our acreage in Illinois. The wells will verify the gas content and permeability of the coals, and the economic potential of this basin." At press time, results were pending and the company declined to comment further. The dewatering phase was under way. If the project works, Berry could spend up to $3 million to drill as many as 20 coalbed wells. Known for years as a California oil producer, Berry is pursuing coalbed methane away from its home state as part of a plan to diversify its resource base into gas production. It also has overriding royalty interests in a coalbed project in eastern Kansas. Meanwhile, DeMier Oil Co. of Mount Vernon, Illinois, is currently producing methane from old mine cavities, collecting and processing the gas that is there. The company put in a pipeline and processing plant and is selling gas into a major pipeline. It has drilled a number of wells and has been selling significant amounts of gas since last September. Jeff Scarbrough, vice president, requested that no detailed information be released while the project is still in its initial phases. Another company, BPI Industries Inc., headquartered in Vancouver, owns a 100% working interest in approximately 43,000 largely contiguous acres in Saline and Williamson counties in southern Illinois. In the principal coal-bearing interval, seven extensive seams have been identified. To date, BPI has spent more than $4 million and drilled 20 wells and core holes in an effort to define the size and producibility of the reserves. BPI closed a private placement last year to raise an additional $400,000. The funds will be used to continue testing and development of its three Illinois Basin coalbed-methane projects as well as for further acquisitions and working capital. Another company excited about coalbed methane in the Illinois Basin is Layne Energy Inc., a service company headquartered in Kansas City. Layne is already active in coalbed methane in the Cherokee and Forest City basins by drilling wells in both southeastern Kansas and northeastern Oklahoma. It has established production in two of the Kansas projects and is in the process of dewatering and finalizing gathering systems. Layne Christensen Co., its parent, is the largest water-well drilling company in North America and many of the rigs used in water drilling are applicable to coalbed methane. This gives Layne Energy tremendous flexibility from an equipment and labor standpoint. Two years ago, Layne took the leap from service provider to being a working-interest-owner in coalbed projects. In June it acquired all the assets of Mohajir Engineering Group, a consulting firm with which it was associated for more than a year in an alliance dedicated to developing a position in coalbed methane. In August, Layne entered an agreement with Triple A Minerals LLC to develop a large project in Illinois totaling about 100,000 acres. Layne expected to drill several core holes and perform gas analysis on the rock samples with pilot well programs following. "We want to take our equipment, labor and technical resources, as well as our vast drilling experience, and leverage that into coalbed methane, and we like what we see in the Illinois Basin," says Colin Kinley, Layne Energy president. "The positive experience we're having with our geology and well fracturing in the Cherokee Basin, we believe will be analogous to Illinois. We feel that because we can control the entire process and are able to dedicate such significant resources to the field, we can compress time to achieve better returns on a project, once the production potential has been proven." Layne is actively seeking a large position in the Illinois Basin. Andrew Schmitt, Layne Christensen president and chief executive, says, "The geologic and engineering characteristics of the Illinois Basin fit with our overall view of coalbed-methane projects that can economically be produced. "We feel that we are well-positioned to adjust our experience to the local circumstances in Illinois to achieve success. If you believe projections regarding the increase in gas consumption and projections regarding the role that unconventional gas will play in meeting those future needs, it would be hard to ignore the potential for coalbed methane in the Illinois Basin." M Jeff Mohajir is past president of Mohajir Engineering Group Inc., which was acquired by Layne Energy in June 2003. He is chief operating officer of Layne Energy. TAX CREDITS The Internal Revenue Code Section 29 tax credits for unconventional gas production were in place at the outset of coalbed-methane exploration and exploitation activities in the Illinois Basin, and they may return. Section 29 tax credits were included in several versions of an energy bill that passed each house of Congress. Depending on which bill one reads, the tax credits might be extended through 2008 or 2011. It is important to remember that Section 29 tax credits are a dollar-for-dollar reduction in taxes and therefore are substantially more valuable than typical write-offs. They are applicable toward any and all income-active, passive, earned, unearned, capital gains, estimated quarterly taxes-in short, all income from any legal source. With Republicans in charge of both houses of Congress, many in the industry hope an energy bill that contains a Section 29 extension might finally be passed in 2004. If gas prices continue to remain high, producers will feel more confident in their ability to pursue coalbed-methane drilling in the Illinois Basin. But because the pilot projects are so new, it will take more time and more drilling to see if the coals here are economically viable.