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.
James Finch contributes to StockInterview and other publications. Visit http://www.stockinterview.com to read his archived articles on coalbed methane. He can be emailed at jfinch@stockinterview.com
