Green Dragon’s CBM Concessions
While Green Dragon Gas is blessed with early production-sharing contracts it negotiated through Greka Energy, and those offer the hope of several trillion cubic feet of coalbed methane gas, there could be serious obstacles in extracting the methane gas. In a May 2006 research report, the underwriters warned GDG “faces a combination of undersaturation, low permeability and low coal seam thickness that makes much of this resource challenging to commercialise.” Any versed CBM investor would look the other way after reading this string of hurdles GDG must overcome to commercially produce the methane gas.
Despite this bleak assessment, Smith & Williamson endorsed and backed Green Dragon Gas. Research analyst James Elston wrote, “However, innovation by Green Dragon and its world class Chinese contractors should allow significant upgrades in recoverable reserves through time especially with rising gas prices.” That’s the blue sky aspect of Green Dragon – making an uneconomic, but very large, project bear fruit. Because the coals are undersaturated and because there is low permeability, conventional wells would bring low productivity of methane gas.
A big vote of confidence, and which resulted in our writing about this company, came after noticing two big names which appear on the company’s board of directors: John Turnbull and Stewart John. Formerly the Chairman of the Swire Group and Cathay Pacific airlines, Turnbull was once a Hong Kong “Taipan.” Stewart John has been awarded Order of the British Empire (OBE) and had been part of the Turnbull executive team at Hong Aircraft Engineering Company and Cathay Pacific. Mr. John has also been a non-executive director of British Aerospace and Rolls Royce.
A glance at the GDG technical team shows strength. Not only are all the senior technicians Chinese, but they are proven engineers, drillers or geologists with ties to the oil, gas and/or coal sectors. The chief engineer, Zuo Kefeng, has 23 years of drilling experience with vertical, horizontal and multi wells. The chief geologist has 20 years of CBM experience at the coal bureau level. Operations manager Mel Lone has been chief representative and general manager for Greka Energy in China since 2001. Ostensibly, Grewal recruited the crème de la crème.
Of the five production-sharing contracts, which comprise more than 1.6 million acres, some parts of their concessions may be sub-economic. Smith & Williamson created a base scenario between 592 and 1,000 bcf net, which would corroborate their valuation of the company of just under $1 billion. The research analyst voiced, “Further successful appraisal and testing together with greater optimization of development techniques could make increasing amounts of this vast in-place reserve economically developable.” We would hope so.
The brokerage firm’s valuation was reached on the basis of between three and six percent of the GDG’s touted gas-in-place. Why is that? Of the five concessions, the most advanced block is Shizhuang South. The research analyst reported the “appraisal of the other licenses (are) being relatively immature.” Shizhuang South is currently producing about 265 mcf per day from pilot wells which feed into a gas-fired electricity generator. The current estimated recoverable reserves from this block stand at 417 bcf (gross), which comprises most of the brokerage firm’s valuation of Green Dragon.
It is anticipated by late 2006 or in early 2007, Green Dragon will have gotten approval an overall development plan to commence full scale development. Further exploration and development may potentially show a larger number Spud in ceremonies were held for single wells on the Quinyan and Fengcheng blocks during July so additional exploration and development activity may help boost the recoverable reserve number and, in turn, the company’s valuation.
Two Key CBM Competitors in China
Partially surrounding one of GDG’s Shizhuang properties is a much larger block held by Far East Energy. Partnered with ConocoPhillips, Far East Energy’s share could reach up to 6.9 tcf. Exploratory drilling on the company’s Shanxi project is reportedly advanced, but requires a production test. As with GDG, Far East Energy has a massive one million plus block. According to the Yunnan Provincial Coal Bureau, there are four coalbed seams averaging nine feet in thickness. The total coalbed thickness is 60 feet. While recoverable reserves for GDG range between 16 and 28 percent, according to the research analyst reporting on Green Dragon, Far East Energy notes on their website that a recovery of 50 to 65 percent is possible. Previous tests have shown an economic gas content of 200 to 500 cu ft gas per ton of coal.
Far East also boasts the company could have one of the largest CBM projects in the world during full development. The company believes the Shanxi project could sustain an estimated 3,000 horizontal gas wells. Investors should note that unlike the “drill and forget” development of conventional natural gas reserves, where one or two wells can recover 30 bcf of gas, CBM is different. Hundreds of wells may be required to horizontally extract coalbed methane gas. While drilling and casing the wells cost less, maintenance and operations cost more. CBM production can extend for a longer period, sometimes over a number of decades to deplete the reservoir.
Another key competitor, and potentially a partner to other CBM companies in China, including coal companies who are also producing methane gas, is Pacific Asia China Energy (PACE). As with Green Dragon and Far East Energy, PACE has a very large property position with an estimated gas in place of up to 11.2 trillion cubic feet. PACE holds two licenses, the same number as Far East Energy. Exploration drilling to confirm China’s coal bureau data is ongoing.
PACE hopes to commence a pilot production project in late 2006 should current drilling confirm an independent technical report, which was prepared by Sproule International. News releases updating the company’s progress indicate good permeability and thickness in coal seams. News over a month ago reported the company’s drilling confirmed the “most likely case scenario” for the Guizhou project of 5.2 trillion tcf.
However, what will probably create a strong momentum for PACE is its joint venture with Mitchell Drilling Services of Australia. Both Green Dragon Gas and Far East Energy are likely to require something on the order of this joint venture’s proprietary Dymaxion® drilling technology to increase recoverability. While PACE has the smaller acreage and the lower gas-in-place of this trio of CBM companies, the company holds a strong edge: PACE may be capable of extracting a larger amount of gas more economically. In a previous interview with Nathan Mitchell, head of the drilling company, he was confident he could extract CBM gas at a cost which might transform even the most uneconomic projects into a commercially viable one. According to previous interviews with Mitchell and Steve Khan, executive vice president of PACE, the first Dymaxion® drill rig should arrive in China later this year.
By 2020, China hopes CBM can provide up to 10 percent of the country’s gas production. CUCBM will continue to lead China’s coalbed methane development. But, others who are currently developing their production-sharing contracts could also become strong methane gas suppliers in China.
Europeans appear to appreciate CBM in China more so than North American funds. A great deal of western hemisphere funding is earmarked for western Canada’s CBM exploration and development. Bloated gas storage numbers hit the CBM stocks very hard this past June and caused the sector to disappoint investors.
While CBM companies developing their projects in Alberta or elsewhere in Canada may have to wait until natural gas prices recover, or become part of the consolidation process, CBM companies in China are in an entirely different marketplace. Aside from being the world’s largest producer of coal, China has massive CBM gas-in-place. Unlike Canada, China is frantically negotiating to import more natural gas to keep its gas-fired plants running. The addition of coalbed methane gas would be welcome. According to industry insiders we’ve conversed with, China’s state-owned CUCBM has been bending over backwards to make CBM projects in this country come to fruition. Investors should realize that CBM in China is a completely different world than CBM in Canada.
One industry insider explained to us, “Green Dragon Gas will probably lift up the entire CBM sector in China.” With these three CBM companies already in the game, another two or three Canadian CBM development companies may soon commence exploration on their projects. And sooner rather than later, more will join in. And who knows? Randeep Grewal might join the billionaire’s club next year. Of one thing we are certain, if he does reach that premier status, CUCBM will have more foreign investment rushing in to capitalize upon China’s CBM production-sharing contracts.
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