Interview with billionaire, Randeep Grewal, founder of Green Dragon Gas

Green Dragon Gas: Playing the long game in China 

An interview with Randeep Grewal, head and founder of Green Dragon Gas and Greka Group.

(first published in Gas Matters, 10/17)

Q. China is clearly pushing clean energy at the moment, it must be a good time to be involved in the gas business in China?

A. Absolutely, the Chinese are very focused on gas. When I first went to China there was no gas, there was coal only. So, I think it’s been an interesting journey since the mid-90s and to see how, regardless of who came to power in the central government, their commitment to gas has always been smack on. Since 2005, Beijing has offered unconventional gas producers preferential policies, including refunds on value-added tax collected from gas sales, exemption from equipment import duties, and free-market gas pricing.

Q. You say there’s been strong government support all the way, but hasn’t there been a step change in Chinese policy more recently? What about the deals that finally seem to be coming through for you? GDG has just signed a deal with CNPC at the Greka Chengzhuang block, and there has been another key deal with a subsidiary of CNOOC. Isn’t this related to the recent strong government push as part of their initiatives to improve air quality by replacing coal with gas and renewables – which is a great thing to be involved in?

A. Well, these supplementary deals that we’ve done basically are quantifying a carried interest/value from the wells CNOOC drilled five years ago. It’s not related to government policy – that has been consistently spot on. They provide a subsidy of $1.65/MMscf for gas produced from coal, which is almost half the Henry Hub price. This gives you an indication of how firmly the government is behind it.

Q. You said these deals this year would settle the upstream issues and allow you to get on with marketing the gas?

A. It will allow us to focus on selling more gas from the wells that are already drilled. We don’t need to market the gas, the market is at the wellhead. We now need to connect the wells to the trunk-lines so gas sales can kick off. The numbers that we published at Interims show a rising net income and EBITDA, but our revenue is fairly flat. So, this year we have concluded agreements with our partners and focused on cutting costs to become more efficient, so now gross profit is almost 55%, and EBITDA 65%. That is the economics of doing what we do now in China.

As we go forward, we are selling from less than 10% of the wells we have drilled. Our capex is already in the ground, and capex is now being deployed by our partner to connect the wells so we can fully monetise the block.

Q. So, what price do you get for the gas you sell?

A. We get $7.20/MMscf, which is a solid price, higher than in the UK at the moment.

Q. Is that below landed LNG at the moment?

A. Yes, but that’s effectively the well head price. You need to compare delivered prices. So, if you think about city-gate prices, they are around $10-12/MMscf today, and landed LNG closer to $9/MMscf. There’s a bit more demand for LNG in the coastal provinces, but by the time you add on the transportation costs to get it to say, Beijing, then we are at parity. Most of the markets we serve are further from the coast, so there’s no competition between the two.

Q. And the main buyer is CNPC?

A. Because CBM is open to the market by law, we can sell to whoever we choose to. So, we sell to CNPC, PetroChina, and local industry. We also compress some of our gas and sell it as transport fuel. Our CNG station sites are complementary to our operations in the Shizhuang South (GSS) in Shanxi, as well as to our distribution centre in Henan. And we take some of the gas and use it in a power plant. The national grid is very keen for us to expand our power plant capacity because of the stability of the gas flow, and the reliability of the plant. We have lots of outlets and we control where the gas goes.

Q. So what sort of rise in production do you expect over the next few years, with all these gas wells already lined up?

A. Well, the growth rate might well look a bit odd; you’ll have a step change. If you look at chart 11, you can see we have 1339 wells in the ground at our GSS block [by far GDG’s biggest venture], but of them only about 400 are currently selling gas. So, we’re going to have another almost 1000 wells coming onstream soon. This will mean a bit of a step change. There were many wells waiting for the agreements to be signed before coming onstream, and the agreement with CNOOC has just been signed. So, the next 12 months are going to be very exciting for us on this block alone.

Q. Looking at the broader picture for CBM, official 2016 figures show CBM output up only slightly on 2015 at 4.5bcm, still not far behind shale gas, although that jumped 76% to 7.9bcm. Shale and CBM were running almost neck and neck unlike the US. Could CBM still be as significant as shale in China, or is shale gas now overtaking?

A. I’ve been investing in CBM and shale since the early 90s. CBM predated shale, but shale benefited from some important new technology. But I don’t think there is another part of the world outside the US, apart from perhaps Africa, where shale can be successful. You need complete access to land, which in the States you can get by just signing a deal. Where there are large populations it doesn’t work, as we’ve seen in the UK. The US is different. And remember shale wells decline very quickly, which means you need an active drilling plan to be successful, and that requires clear access to land, otherwise your decline curve is going to hit you.

Q. You have another company in China though, Greka Drilling, that provides drilling services to the Chinese, including at shale formations. How is business there?

A. We don’t frack, we are a pure drilling service provider. We provide services to CNPC, and shortly we’ll be providing services in India to ONGC, which they may wish to frack. We promote our proprietary technology where you don’t use chemicals and you don’t have to frack the well. But we drill only in CBM, we don’t drill in any other reservoir, but in some cases our client may wish to frack the well. But our track record now goes back to 2007, with our technology able to produce low decline output curves. It’s a natural de-absorber of gas from the coal seems – no fracking, which gives you a peak and a trough. If you allow for a natural release, permitting the fractures to naturally interconnect, and then drain the water over time.

Q. So it’s really focused around draining, that’s the key, and most of that work has been done?

A. Yes, exactly. So today for example in GSS, one of our two commercial blocks, we look at the operation as a matrix production, not a well production. The matrix of wells has been drilled and the gas is migrating through the fractures; where it comes out we don’t really care. It produces a stable consistent production curve that continues to go up as we further drain the coal strata.

Q. The government appears to have a target for CBM production, but it keeps moving?

A. Yes, there’s always been a target, but the targets have been continually revised. As you can see from slide 28, gas rises from 7 to 11% of the mix and the targets for shale gas and CBM are roughly the same amount over the next 10-15 years. I’m biased… I think shale runs a bit quicker but won’t be able to hold the production levels because there are a lot of people where the shale is. You are asking them to move aside while the work goes on. We operate on coal board land so people are not affected. China-wide it is Sichuan where the shale is and most of Sinopec’s operations, but there are also a lot of people there. And while we hear of the odd successful shale operation, there are many unproductive wells we don’t hear much about.

With CBM we have been through the decades-long cycle of developing the right technology, we are now in the commercial period. We know how to drill the matrix, which way to drill, what type of drill to use and how to dewater quickly, and get the gas to market, including compression technology. The technology is mature today.

Q. What sort of cost levels are you getting now?

A. Our all-in cost is under $2/MMscf, so the government’s $1.65 subsidy is envisioned to cover your costs. The government is saying it wants the gas so much it’ll pay for the whole thing – here’s the cash subsidy and you get paid for the gas sold. You have to sort out your carrying costs to get in, but once in and running your costs are paid for – it’s a wonderful country to be in. Which other country would do that for you?

Q. Do you expect the average costs to come down over time?

A. As volume grows and fixed cost gets spread you get some relief on that. But when we are already making a $5/MMscf margin some cost spreading isn’t going to make that much difference. The main priority is to get the volumes up and connected, there is plenty of demand for the gas.

Q. So what are the major obstacles now, if there are any to your projects?

A. We’ve confronted many obstacles over the last 20 years, but knocked them out of the way one by one. If you haven’t sorted it out after 20 years you never will, and I think two weeks ago was the last item.

We are done with the commercial blocks that are working. Now we need to do the same with the other six blocks that we hold. They are currently under exploration and we will have to go through the same cycle as the first two, but hopefully we can do it a lot faster, because we are not going through a learning curve, it is more of an execution.

Q. Do you have plans to develop CBM programmes outside China?

A. Yes – there’s been an important upswing on CBM development in India, along with government policy changes last March. With the amount of development that CBM requires, government policy is key to supporting development – which has worked well for us in China. India’s now doing the same – opening CBM gas prices to market this March, the first time it has done this in history. In addition, state-owned ONGC has come out with its first development plan, and our contractor, Greka Drilling, won the tender to develop the first asset for them from a field of 17 bidders earlier this year. So, India looks like following China.

The other countries with significant resources that ought to be getting behind it are the UK and Poland. Both countries have significant domestic resources, and both countries like India and China are major gas importers. It’s far better to develop your domestic resources than to pay for imports of gas.

Q. You mentioned shale might be patchy in China – what about the US?

A. The US is different from China – the technology is developing well. I don’t see anything lagging.

Q. How do you see international oil and gas prices changing over the next few years and how might that impact your operations.

A. There continues to be a significant arbitrage between domestic and LNG production. I don’t see any price spiking in LNG over the next ten years. It’s a far more normalised price at this stage. And they’ll be more of a move towards pricing independent of Brent/crude. But anyhow, I don’t see their movements affecting CBM. CBM is a provider of domestic gas for domestic consumption where you are not competing with LNG. Plus, we are developing CBM in inner China and LNG is not going to compete with LNG from the coast brought inland. They are complimentary not competitors.

Q. So basically, the investment you’ve made looks pretty risk free now?

A. That hasn’t been the case for 20 years, but right now, yes.

Q. Do you think the authorities may see that as an opportunity to take back some of the revenue you are getting, and what about contract risk?

A. Quite the contrary. The central government in China is consistently eager to support companies that are producing CBM – so quite the opposite. A recent ruling on our contracts went in our favour, underlining the strong position we now have. China doesn’t have much conventional gas, but CBM reserves are large, [over 36 Tcm 2014], so the prospective prize for the Chinese government is huge. It’s been tricky getting it out though.

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