Green Dragon Gas
Green Dragon is the parent company of Greka China, and is exclusively focused in gas industry in China. Green Dragon operates within China under its subsidiary Greka China Green Dragon is a gas supplier based in China with a focus on the production, development, production, distribution and sales of natural gas from coal seams, commonly known as coal bed methane or CBM.
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Interview with Randeep Grewal
So, Randeep, why Coal Bed Methane and why China?
Well China, clearly in terms of the extensive, to a point of desperate, need of new energy sources to meet its booming demand as the country continues to expand exponentially year after year. Across the board it has an energy thirst which cannot be met exclusively by increasing exports. There is a much bigger push to increase domestic energy resources and Coal Bed Methane, because that clearly is a large resource that is untapped on shore at the right locations where the demand is being created. In other words, coal bed methane resources in China are located about one province inward from the coast, and clearly the next boom in demand is coming within the same area so you’ve got the resource and the demand exactly at the same place. Hence, coal bed methane forms an ideal area for concentrating if one wants to invest in a domestic energy play within china.
Talk us through the development of the Shizhuang South Block please Randeep.
The Shizhuang South Block, or as we commonly call it, the GSS Block is on the Southern Chiangxi basin in the Shanxi province, located quite close, just under 200km to the large city of Zhengzhou), so its ideally located close to a market. It’s the most prolific basin for Coal Bed Methane so far in China and definitely the one closest to a ready market. It has been an area for concentration now for just under ten years, the pilot production has been extremely productive and we’ve been very happy with the results. We’ve kept to different technologies completion techniques in this particular block, a very prolific block and clearly an area of concentration. So as it stands now for us, we’ve gone way past pilot production. On the block today we’ve got over a hundred wells and we continue to drill continuously on this block. An operational facility in terms of compression, gas being delivered and actually sold from the block as we speak. So; prolific, very successful and one block that we’re very proud of the work that the company’s done on the block for the past decade.
What is the expected productive capacity and productive life of the Shizhuang South Block?
The block is very prolific, as I’ve stated earlier, to do a complete development of the block one could envision drilling up to one thousand wells, or just over that. We are seeing that a vertical well has a capacity to produce somewhere around about 3,500 cubic metres per day, or approximately one million cubic metres per year, while horizontal wells that we have drilled on the block are showing production capacities of 15,000 cubic metres per day. So it’s a very large resource, I reckon a blended mix of one thousand odd vertical wells complimented by about one third of them being horizontally drilled. We expect the complete development to take probably another five to six years and we expect production to continue in excess of 25 years from the point production is on stream. So a very exciting play for Green Dragon and one that will clearly earmark us in terms of what Green Dragon can accomplish.
To what extent is the Shizhuang South Block a model of things to come on other blocks?
I think Shizhuang South will be a carbon copy for the other five blocks that we have. We have utilised our experience in Shizhuang South from its early days in the geological studies on the way to exploration and then drilling, completion techniques and then finally the way we are to develop our facilities, so we’ve done our testing in Shizhuang and at this point have a working model that has worked very successfully. We will duplicate it on the other five blocks. I would expect that all the other blocks will mirror the performance in terms of drilling techniques, completions and facility and production profiles.
How many blocks does Green Dragon Gas have rights over, and what idea do you have of their eventual productive capacity and productive life?
Green Dragon today has a total of six blocks with varying interest in that on all but one block our interest is 60percent with our partners, CUCBM, retaining 40percent of the interest. The conditions mirror each other, we’ve got the original five blocks and we obtained one additional block in the early part of this year. So, in terms of productive capacity we expect that all the blocks will actually be producing past their contract life with Green Dragon so we clearly expect development on all these blocks to take about another ten years in total and we’re really looking for a reserve life on a per well basis, on a horizontal well being 15 years and on a vertical well somewhere between 20 plus years. So in that spread is what we expect the reserve life to be on each one of the wells.
Are all your production sharing contracts in China with the same partner and on the same terms?
Primarily yes, I mean there are some changes within the agreements but fundamentally our partner is CUCBM, which is China United Coal Bed Methane Corporation, 50percent owned by Petro China and 50percent owned by the Coal Bureau. The partner retains a 40percent interest, we retain a 60percent interest in five of the blocks, in one of them they have a 51percent and we have a 49percent, while on some of them we have the right to increase our interest up to 70 percent. Fundamentally the terms are the same, normally 30 year terms. The fantastic additional policies passed by the Chinese Government as a further incentive to invest capital in Coal Bed Methane are that VAT is now fully refundable so 17.5percent is refunded back to us, we don’t have to pay VAT. On the taxation side, all the capital or all the capex deployed on a cumulative basis through the term can be expensed for tax purposed, so essentially a very highly incentivised programme developed by the Chinese Government to facilitate the development of Coal Bed Methane and we are very excited about the policy that the Chinese Government has implemented.
What is the financial position of Green Dragon Gas?
WE have been public now for just over two years and about two months at this point. We’ve done rather well in terms of being able to source capital for specific needs, so as we’ve seen opportunistic acquisitions we’ve been able to raise capital to facilitate them. Drilling is a requirement for the reserve development that is predominantly discretionary and hence we raised sufficient capital to support our programmes on an annual basis. With the cash on hand today, we can comfortably support our drilling programme through this year and early part of next year and we feel we are in a very good position in that regard. Many of our investments and our equity interest in acquisitions that we have done are all cash generating entities, so that facilitates our cash position.
What can we expect from Green Dragon Gas over the next 12 – 18 months Randeep?
Over the next 12 – 18 months one would expect Green Dragon to do some of the things as it has executed and demonstrated over the last 18 months. Specifically, we have been acquisitive synergistically to our core business. We are committed to being vertically integrated, we have executed that vertical integrated strategy specifically for Shizhuang South very effectively, with a slew of acquisitions this year that completes the strategy in the implementation of going from drilling for the gas to capturing it, processing it, delivering it to the end user through CNG Gas stations, if you will, directly to a consumer who is driving a car itself. Similarly, while we have done that in Shizhuang South, you will expect us to execute identical strategies in our other five blocks. So over the next 18 months you will see a continuous drilling programme across the five blocks that we have at this point, including the sixth one that we just acquired, you will see potentially additional acquisitions for one of our blocks that is nearing, quite similar to a Shizhuang South, a production level that we feel requires now a compressor facility to be built to start actually selling gas. And, we are earmarking Fengcheng Block, or GFC as we call it, as the next block that you would expect us to build our compressor station and start looking for acquisition potential to facilitate sales directly to the end consumer.
How is Coal Bed Methane production different from producing conventional gas?
Very different in its early stages. Unlike conventional gas where you might shoot seismic, run geological studies, drill a well and within the point of drilling the well you almost instantly realise whether you have hit a good productive structure, coal bed methane actually starts off very differently. It starts off as a mining deal in that you have to conduct all of your geological studies, including seismic if you so chose to, drill the wells - the wells are shallower normally as compared to conventional gas – however when we start our production we are actually going to start producing water. We have to de-water the coal or, if you will, the coal seam, before the trapped gas can be released. So, unlike conventional gas where you have production of gas on day one, we might get some small volumes of gas day one but normally it takes de-watering of the coal seam before the significant levels of gas are produced. Conversely, we would normally expect an inclining gas production flow rate - as the coal seam de-waters more gas flows – and a longer stable productive life because it continues to ooze out of the coal seams for a longer period of time. So, it comes on a little bit slower but it’s a lot more steadier for a longer period of time as compared to conventional gas which is a high pressurised gas reservoir that depletes immediately.
Are CBM and conventional gas interchangeable from the point of view of the consumer?
Completely interchangeable.
What technical advantages does Green Dragon Gas have over other operators?
Experience; hands-on technical and China operating experience for over ten years; specific knowledge of what technologies actually are both available and uniquely applicable to these specific coal seams - because each coal seam is a little bit different; we are the longest operating entity on the ground in China and quite candidly, it’s taken us just about seven years to commercialise Shizhuang South.
So, experience is the one word I would apply there, longevity would be the second. We’ve been there the longest, we’ve worked at it the hardest and I think that’s our single biggest advantage over the rest.
How is gas priced in China, and how is the gas market regulated?
Coal Bed Methane under contract and approval by the State Council is de-regulated, so one is able to sell the gas at any price that one can negotiate with a buyer. Having said that, all other commodities including gas is highly regulated in China and the cross over with Coal Bed Methane is that if a CBM producer sells gas into a regulated infrastructure then your gas ends up being regulated or, if you will, that is the market you’re selling to. However, if you sell it point to point it is de-regulated or is under market economy.
What is the fiscal regime in China for CBM projects?
Probably the best globally. CBM in China, the contract term is essentially the contract terms that Green Dragon Gas has, that we pay a very small royalty that ranges from zero to about five, in some cases as high as seven percent, besides that it’s a straight up deal. VAT of 17.5percent is refunded back to us and very, very importantly one hundred percent of the capital or capex deployed on a cumulative basis over your contract years is expensed for tax purposes. So, a very highly incentivised business, the gas as I said earlier is under market economy so you can sell it at any price that you can get a buyer to pay for it. Really the best conditions that I’ve seen across the globe at this point.
What is the free float of Green Dragon Gas shares these days?
The free float of Green Dragon is approximately 18percent of the outstanding today and if one of the convertible holders elects to convert that adds about another 7.5 or 7 odd percent which takes it up to about 23 -25percent of the outstanding shares.
What are your thoughts on the AIM market and the Hong Kong market?
We think AIM has been very productive for Green Dragon when we started off. We clearly believed that the Hong Kong market, you know - we’re based in Hong Kong, our entire business is exclusively in China - we think Green Dragon would be ideally suited to list in Hong Kong and we do have ambitions to do so once we see the capital markets stabilise again we will pursue a listing in Hong Kong.
Other Green Dragon Gas news
- Green Dragon’s Grewal speaks at prestigious Chinese conference
2011-08-31 - Green Dragon Gas chairman Grewal appointed to provincial gov't board in China
2011-08-03 - Green Dragon Gas says Chinese CBM contracts remain in ‘full force and effect’
2011-03-12 - Enter the Dragons: China's coal bed methane specialist prepares to do the splits
2011-02-16 - Green Dragon Gas to move ahead with Hong Kong IPO
2010-11-09
