Coalbed Methane (CBM) is methane extracted from coal beds. In a conventional oil or gas reservoir, production is from oil or gas located above a water contact. CBM production is different. Water completely permeates coal beds, and its pressure causes the methane to be adsorbed onto the grain surfaces of the coal. To produce CBM, the water must be drawn off first, lowering the pressure so that the methane will desorb from the coal and then flow to the well bore.

CBM production is attractive due to several geological factors. Coal stores six or seven times as much gas as a conventional natural gas reservoir of equal rock volume due to the large internal surface area of coal. Much coal is accessible at shallow depths, making well drilling and completion inexpensive. Finding costs are also low since methane occurs in coal deposits, and the location of the Nation’s coal resources is well known.

CBM production was initially spurred by a tax incentive. Internal Revenue Code Section 29 provides a non-refundable tax credit for sale of CBM (as well as other qualified alternative fuels) from wells drilled between 1980 and 1992 inclusive, for sales of fuel between 1980 and 2002 inclusive.

1.3 trillion cubic feet (Tcf) of CBM was produced in 1999, representing 6.7 percent of the 18.6 Tcf of U.S. dry gas production. There were 13.2 Tcf of CBM reserves in 1999, representing 7.9 percent of the 167.4 Tcf of dry gas proved reserves. Undeveloped resources of CBM have been estimated at 60 Tcf.

New Mexico, Colorado, and Alabama hold 75 percent of proved coalbed reserves (see Figure 7 entitled, "U.S. Lower 48 Coalbed Methane Basins"). Emerging CBM areas are located in Appalachia and the Rocky Mountain region.

CBM production entails both environmental benefits and concerns. Air quality benefits arise from (1) substituting clean-burning methane for dirtier fuels and (2) the burning, rather than venting into the atmosphere, of coalbed methane released as a result of coal mining activities (methane is 21 times more potent a greenhouse gas than is CO2). However, disposal of the large volumes of water that are produced from CBM wells, in a way that is environmentally acceptable and yet economically feasible, is a concern. Depending on the characteristics of the site and the chemistry of the produced water, it may be reinjected into the subsurface, dispersed on the surface, pumped into evaporation ponds, or released directly into local streams.