Green Dragon Gas plans production hike to deliver 12 BCF exit rate by year-end 2015

By Amy McLellan

Green Dragon Gas plans to deliver a 50 per cent uplift in gas production this year as it steps on the gas with an aggressive drilling campaign across its acreage in China. As we reported earlier this month, the Hong Kong-based company has hired AIM-quoted Greka Drilling, in which it has a 66 per cent stake, to drill 30 wells on its flagship GSS block in Shanxi Province.

Importantly, these will be LiFaBriC wells, the proprietary well process designed by the CBM specialist to unlock the gas from the faulted anthracite coals of the Qinshui coal basin. These wells are low cost, about US$1.5 million each, and deliver compelling economics: paying back within 18 months, delivering an IRR of 78 per cent and, over a well life of 15-20 years, can recover 2.6 BCF and carry an NPV10 per well of US$13 million.

Last year the £555 million market cap company, which trades on London’s Main Market, produced 8.2 BCF of gas (gross). This year it is targeting year-end production of 12 BCF and the LiFaBriC wells will be key to achieving this: the 30 wells already announced are just for starters with the company planning to drill 150 wells on the GSS block.

Green Dragon drilled just 10 LiFaBriC wells in 2014 as operations were on hold over the first half as it sorted out legal title and entered into agreements with powerful state-owned partners CNOOC/CUCBM and CNPC/PetroChina. Those 10 wells are “already showing positive results” said founder and chairman Randeep S Grewal this week.

Two of these are connected up to existing infrastructure, four are in production and six are dewatering. In all, there are 1,938 wells drilled across the blocks, of which 87 are LiFaBric (although just 26 are in production and connected to infrastructure).

Critically, last year’s agreements with the state companies will unlock a significant infrastructure spend across Green Dragon’s flagship GSS block; indeed block pipeline and gas gathering capacity is set to increase to 53 BCF, up from 10 BCF.

The new infrastructure to be funded by CNOOC/CUCBM will include two gathering stations with 13 BCF of gross capacity, already under construction, and three more planned with an expected 30 BCF of gross capacity.

While the company has had a history of missing targets in the past, the hope must be that it now has the funds, the partners and the technology to start to ramp production from its blocks and start to realise the potential of its first mover position in China’s fledgling CBM industry.

Strong cash flows will be critical for a company that carries a significant debt burden – the company issued its first public corporate bond in November, raising US$88 million with plans to place more debt before mid-year – and analysts at SP Angel Corporate Finance this week said now is the time for Green Dragon to plan to restructure its debt.

Importantly, this is a business that is currently resilient to the oil price slump. Last year the company’s CNG production realised a gas sales price of US$18.6 per MCF.  “Chinese government policies towards gas utilization objectives and prices are unaffected by the drastic fall in crude prices,” said Grewal.

“I am pleased to confirm that our realised gas prices remain stable, as forecasted, putting us in a very strong position for the year ahead.” Shareholders will be watching carefully to make sure the work programme is delivered in a timely fashion to hit that 12 BCF exit rate in 11 months time.