It is not often that an oil or gas company finds third parties surreptitiously conducting material drilling campaigns on their acreage but that is exactly the position Chinese coal bed methane specialist Green Dragon Gas (GDG:AIM) is in.


Earlier this month (8 Oct) the company announced that, without its knowledge, Chinese state energy firms China United Coalbed Methane (CUCBM), China National Offshore Oil (CNOOC), CNPC and PetroChina have drilled a staggering 1,500 wells across its Chinese assets, and around 1,300 on the producing Shizhuang South (GSS) block alone, at an estimated cost of more than $500 million. This activity could lead to a significant upgrade in reserves and this week (21 Oct) the group said it will see it outpace its 5 billion cubic feet (bcf) year-end production target. Shares in the company have been volatile in response to this newsflow (see chart).


Web chart - Green Dragon Gas

Question marks over Green Dragon's Chinese assets were addressed in July this year when the authorities reissued its production sharing contracts (PSCs) in the country and the drilling came to light following this reissue. In order to get some answers on the unusual story, Shares spoke to Green Dragon's chairman and chief executive officer Randeep Grewal (pictured below).


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'Organically we are on plan with what we want to achieve and are on schedule for our 18 billion cubic feet output target (by the middle of 2015), in parallel this inorganic growth has happened without our knowledge,' he says. Describing the work as 'an unprecedented drilling programme in direct violation of the PSC' he nonetheless says the news is 'good for shareholders. In terms of the impact on reserves we hope to provide company estimates shortly and will get an independent estimate from Netherland Sewell as part of the usual year-end audit.'


Grewal admits the company's claim to have been unaware of the drilling has raised eyebrows but points to the size of the blocks (which cover a combined 7,600 square kilometres) as the reason such extensive work could be carried out unnoticed.


The group has also indicated that plans to secure debt financing to fund a planned 150 wells on GSS next year have been put on hold. The process has been suspended as it waits to receive monies owed from any gas which third parties have produced from its PSCs. Grewal says this 'prudent' move should not push the medium-term 18 bcf target back. Does he perceive any risk the Chinese firms will seek to undermine Green Dragon's title to the licences in order to spare their blushes? 'I think we're well past that hurdle point,' Grewal says, adding that although it will seek to resolve the situation in an amicable way, the company's first obligation is to shareholders.

Issue Date: 25 Oct 2013