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Will China's CBM Help Make the Next Energy
Billionaire?
by James Finch 30-08-2006 |
page 3 |
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.
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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 Sp roule
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. |
