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Green Dragon soars as Chinese energy demand grows

The coal bed methane company is looking to capitalise on China's soaring energy demands as the emerging superpower diversifies its energy mix

China may be experiencing some growing pains currently, but this will barely dent its demand for new sources of energy, which bodes well for the long-term future of Green Dragon Gas (LON:GDG).

To give a sense of the scale of its energy consumption, China used 2.6 billion tonnes of oil equivalent in 2011.

In doing so it overtook long-time frontrunner the US by as much as 15%, while the European Union consumed just 65% of that amount.

Green Dragon Gas aims to tap this soaring demand.

It works with coal bed methane (CBM), an unconventional form of gas where methane trapped within coal seams is extracted before the coal is mined.

This methane is in near-liquid state and lines the pores within the coal.

It can be extracted by drilling wells into and across the coal seam and pumping off the water. 

This ‘dewatering’ process is the important bit. It allows a drop in pressure which means the methane can ‘desorb’ from the coal and flow up the well as a gas, which is then compressed and piped to market.

Although this all sounds very complicated, it’s not.

In fact, compared to hydraulic fracturing or ‘fracking’ – the controversial method for extracting shale gas – the process is relatively simple.

Shale has turned the US gas market on its head in the space of just a few years and much has been spoken about it, both positive and negative.

The potential to tap into the rich resources trapped within China’s shale rock formations has gained traction recently, but Randeep Grewal, Green Dragon’s founder, chairman and chief executive, says the terms are more lucrative in CBM, its less well-known unconventional cousin.

“A shale investment is a venture capital investment, whereas CBM is a long-term investment. It takes a while,” said Grewal.

CBM may therefore take a little more time to get out of the ground, but the rewards can be well worth the effort.

Talking about China, Grewal called it “the toughest place in the world geologically” at the company’s AGM back in July.

While many companies chose to follow the herd to the US and Australia, oil majors and local E&P companies alike were put off by the geology they faced in China.

“However, no pain, no gain,” Grewal continued.

“The economics in China are better than in any other country in the world.

“They’ve got a very strong government policy supporting coal bed methane – so geologically the most difficult, but economically the most viable.”

Green Dragon hopes that domestic coal bed methane can eventually help China reduce its dependence on imported coal and oil, making the superpower more self-sufficient in energy.

While coal remains the dominant source of energy in China, Grewal is confident that the government is trying to move away from these “dirty” sources.

“I’m very bullish that China is forcing by policy their demand for energy to gas,” he added.

Natural gas currently makes up just 4.5% of the country’s fuel mix, but the government announced plans this year to increase this to 10% by 2020 in a bid to avoid having to import as much natural gas as it does.

US broker Goldman Sachs predicts China’s energy demand is here to stay and tips the natural gas sector as one of the main winners from the new government policy.

“Sectors that could stand to benefit from the country’s energy policy range from alternative sources such as nuclear power and natural gas, to efficient lighting,” the investment bank said in a 25-page document on energy in China.

CBM then could be – if not the answer – certainly part of the solution for China.

Broker Peel Hunt believes Green Dragon is blazing a trail for domestic CBM in the country.

“In our view Green Dragon Gas is the best way to gain direct, pure-play exposure to growth in Chinese natural gas demand via the UK-listed market,” analyst Werner Riding said in a note at the end of September.

“Green Dragon covers the full value chain. With a highly trained employee base of around 450 staff, and by applying a high-technology approach to its businesses, we consider the company to be ideally positioned to monetise the CBM resource potential within its PSCs [production sharing contracts].”

The analyst kicked off coverage of the stock with a ‘buy’ rating and a 579 pence target price – some way above the current share price of 251 pence – adding that Green Dragon has “significant growth potential”.

Rapidly increasing production from its upstream business – which comprises interests in six PSCs with Chinese oil giant PetroChina and China United Coalbed Methane – supplies the gas to drive Green Dragon’s other businesses.

It already has 3P reserves of 1.3 trillion cubic feet of gas (Tcf), which is expected to drive both reserves and production growth in the coming years.

Independent auditor Netherland, Sewell & Associates has ascribed a total of 25.5Tcf of in-place gas across all six of Green Dragon’s PSCs, which gives an idea of the potential scale of the opportunity once the other PSCs are up and running.

The company remains hopeful of hitting its “achievable” annual production target of 18 billion cubic feet (Bcf) for GSS by the end of 2014. 

“The building blocks continue to fall into place for us to achieve our 18 Bcf production target at the end of our capex programme from this block,” said Grewal.

While GSS is the focus for gas production, exploration at the other five blocks continues.

The plan is for an additional block to move into production next year.

Recent milestones included completing the pipeline from GSS to the PetroChina Huabei facility connecting onto the West East Pipeline Infrastructure, which will help it move gas production onto its wholly-owned retail stations in the form of compressed natural gas (CNG).

This focus on infrastructure means Green Dragon has continued its transition from explorer to producer and into sales thereafter within the GSS block.

With all this falling neatly into place, the company looks primed to reap the rewards of the emerging superpower’s soaring energy demands and its desire to switch to cleaner energy sources.

So as we approach the end of the Year of the Dragon, the company continues to work hard towards ensuring 2013 is the year of the Green Dragon.

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