Business review

REVIEW OF OPERATIONS

UPSTREAM

The upstream operational focus for 2016 was on the further development and optimisation of production and gathering infrastructure in the GSS Block. The current focus on infrastructure reflects the Group’s commitment to deliver value from investments through increased production and sales volumes.

During 2016, the gross production exit-rate across all licence areas was 12.05 bcf per annum (2015: 12.12 bcf per annum) with gross production in the period increasing by 9% to 11.22 bcf (2015: 10.31 bcf). The end‐of‐year gross production capacity exit rate calculation and gross production capacity calculations have been impacted by a change in measurement methodology by CNOOC in respect of their operated well stock where flared gas is excluded from capacity statistics. The figures reflect the Group’s focus on GSS and follow the delivery of significant investments made by our partner, CNOOC, which were agreed as part of the Framework Agreement in 2014. At the end of the year 795 wells were on line out of a total well stock of 2,037 across all licence areas. Of the wells on line, 568 wells were producing gas.

In 2016, the Group continued its exploration programme focused on the GSN and GGZ licence areas. This programme saw significant drilling progress on the GGZ Block as it moves toward submission of the Chinese Reserves Report (CRR). In addition, 2016 was marked by the initial bookings of both 2P and 3P reserves volumes on the GGZ Block. The migration of resources to reserves reflects the development work undertaken during the year where nine wells are now on production with six of those wells having reached commercial production levels. Guizhou is an important asset to the Group and an exciting prospect as it located in a market that is characterised by higher end user gas prices. Guizhou Province is located in Southern China and currently sources the majority of its gas needs by pipeline from other provinces. As such, prices in Guizhou attract a transportation premium to encourage the delivery of gas to the province. It is expected that gas sourced and produced directly in Guizhou will also benefit from this premium as the premium is a factor in determining city‐gate end user pricing.

A significant exploration milestone was reached on GSS where the Group booked 1P and 2P reserve volumes in respect of the deeper and technically challenging Coal Seam 15 for the first time. This seam is present in all of the Group’s Shanxi Province licence areas. Our success on Coal Seam 15 in GSS was matched by that of our partner in the GCZ licence area, where CNPC successfully completed an initial well in the seam recording commercial volumes of gas production. These successes raise the tangible prospect of future gas production from multiple seams in both GSS and GCZ.

Shizhuang South (GSS)      
GDG: 60% (op)      
CNOOC: 40%      
388 km2 2016
Net, bcf
2015
Net, bcf
+/-
1P 166 153 8%
2P 457 473 -3%

Location: Shanxi Province

Our primary focus in our operated GSS area in 2016 was the continued development of infrastructure to deliver gas volumes from investments already made. The infrastructure programme is aimed at increasing the number of well connections and making specific enhancements to surface production facilities to optimise the recovery of gas.

In 2016, 10 new LiFaBriC connections were made on GSS, increasing the number of producing LiFaBriC wells to 56 at the year end. This brings the total number of wells connected to infrastructure and producing gas for sale in the GDG operated area of the block to 101 from a total stock of 126 wells.

As part of the infrastructure programme we have also continued a compression upgrade project for the gathering system since 2015. The compression project is focused on realising the full production potential of the connected wells and improving the sales to production ratio by optimising gas flow and pressures across the gathering network. A total of 46 compressors have been installed resulting in an improvement in the sales to production ratio at year-end compared to year-end 2015. The compression project will continue into 2017.

In 2015, our partner, CNOOC, completed the construction and commissioning of two additional gathering stations in the GSS Block. This increases the total gas processing capacity at GSS to 22.7 bcf per annum.

In addition to supporting the GSS development activities, the installation of further pipeline and processing infrastructure across GSS is important for the development of the contiguous GSN Block situated directly north of GSS.

Coal Seam 15

Coal Seam 15 lies deeper than Coal Seam 3, at approximately 890 metres below the surface. Where Coal Seam 3 is capped by non-permeable shale rock, Coal Seam 15 is situated directly beneath a significant water-bearing limestone cap. In 2015, we successfully drilled the GSS 036-R well into Coal Seam 15. The well is the first LiFaBriC well drilled into the seam. The 036-R well encountered a four-metre thick section of coal and was successfully completed with no penetration of the limestone cap. Intersecting the limestone while drilling could cause water ingress into the coal section of the well, significantly hampering gas recovery. GSS 036-R is currently showing well head casing pressure consistent with gas desorption. Applying in-house drilling experience and proprietary technologies, we were able to successfully navigate in the lateral portion of the well, avoiding the limestone layer. This is a key success in terms of the future development of Coal Seam 15.

The successful drilling result in Coal Seam 15 is an important step in the development of GSS and brings forward the prospect of developing this seam concurrently with Coal Seam 3. Significant production infrastructure already exists across the GSS Block and it is expected that this will reduce the full cycle development cost of Coal Seam 15.

We continued to strengthen our relationships with our partner CNOOC, with the establishment of the Joint Operations Team (JOT) collocated in the Jincheng field office. The team comprises technical and financial representatives of both parties. The JOT is focused on the joint development of operations in the GSS Block. Together with our partner we intend to seek Overall Development Plan (ODP) approval in 2017. Approval of ODP is expected to widen available debt funding opportunities.

Chengzhuang (GCZ)      
GDG: 47%      
CNPC: 53% (op)      
67 km2 2016
Net, bcf
2015
Net, bcf
+/-
1P 14 15 -7%
2P 29 31 -6%

Location: Shanxi Province

GCZ is the smallest of our acreage, positions at 67 km2 and has been on production for the longest period. In 2015 CNPC successfully drilled an initial lateral well into Coal Seam 15 and after routine de-watering, the well is now producing gas at commercial rates. This is an important milestone on the route to full development of the GCZ Block, as all required infrastructure is already in place. Using the same infrastructure in a Coal Seam 15 development scenario will result in significant capex efficiencies.

We continue to work together with CNPC through the GCZ Joint Operations Team, focusing on potential infill drilling in Coal Seam 3 and the continued exploitation of Coal Seam 15.

In April 2017, that the GCZ Block Overall Development Plan was approved by the Consultation Center of China National Petroleum Corporation of CNPC and the Joint Management Committee for submission for further approval to National Development and Reform Committee of the State Council.

Shizhuang North (GSN)      
       
GDG: 50%      
CNOOC: 50% (op)      
375 km2 2016
Net, bcf
2015
Net, bcf
+/-
       
1P 5 5 n/a
2P 18 10 n/a
       

Location: Shanxi Province

A significant milestone was reached on GSN in 2015 with the first-time booking of 1P and 2P reserves. GSN is an important block for the Group given its geographic position relative to GSS. Coal Seams 3 and 15, present in GSN, are a continuous extension of the same coal seams in GSS. The nature and behaviour of Coal Seam 3 has been well defined through the extensive exploration and development work undertaken by the Group and its partner on GSS, experience which can be transferred to the development of GSN.

In addition, the pipelines and production facilities in place at GSS can be used to evacuate gas for sale from the GSN Block. The GSN area is currently being developed by CNOOC under the terms of the 2014 Framework Agreement where we exchanged a 10% interest for an additional US$100 million investment commitment from CNOOC.

Boatian-Quingshan (GGZ)  
   
GDG: 60% (op)  
CNPC: 40%  
947 km2 2016
Net, bcf
   
2P 30
Unrisked prospective resources, best estimate 106

Location: Guizhou Province

The GGZ Block was a major area of exploration focus in 2016, with well performance testing continued through 2016 as part of the reserve compilation process with 9 wells currently on production. Six of these 9 wells have reached commercial rates of production which fulfil the per‐well commercial production requirement for reserve certification. The objective of the exploration work undertaken in 2016 was to better define and understand the coal resource in place. Exploration wells were targeted to give sufficient well coverage and production data over the seam in preparation for the submission of the Chinese Reserve Report (CRR) planned for 2017. Submission of the CRR is an important exploration milestone and a precursor to the ODP.

While still at a relatively early stage, the Group sees significant potential in GGZ, which forms an important part of our strategy to develop the exploration portfolio into fully producing assets. This is building a tangible route to further long-term organic growth.

Other Exploration

The other exploration areas have been re-evaluated during the year, and work plans on exploration have been established for implementation in 2017.

PSC Location (province) Area km2 GDG share (op) Unrisked prospective resource
- best estimate Net, bcf
         
GQY A Shanxi 3,665 10% 951
GQY B     60%  
GFC Jiangxi 1,541 49% 116
GPX Anhui 584 60% 17

REVIEW OF OPERATIONS

RESERVES MIGRATION

The Group updated its estimates of gas reserves and resources at 31 December 2016 for each of the eight blocks that it is participant to. The estimates of reserves and resources have been provided by Netherland and Sewell and Associates Inc., an independent reservoir engineering firm. The estimates of reserves and resources have been prepared in accordance with definitions and guidelines set out in the 2007 Petroleum Resources Management System (PRMS) approved by the Society of Petroleum Engineers. The report includes all 2,037 wells operated by Green Dragon, CNOOC, CNPC and PetroChina across all blocks in which the Group has an equity interest.

Highlights from the reserves report include:

  • Net 1P reserves increase of 6% to 184 bcf (2015: 173 bcf)
  • Net 2P reserves increase of 2% to 559 bcf (2015: 549 bcf)
  • Net 3P reserves increase of 0.3% to 2,386 bcf (2015: 2,379 bcf)
  • Total Original Gas In Place increase of 6% to 27.1 tcf (2015: 25.6 tcf)

The results of the reserve report represent the eleventh consecutive increase in 1P and 2P reserve volumes and include the initial booking of reserves volumes on the GGZ Block.

The summary reserves report at 31 December 2016, with associated NPV 10 valuations, is below:

  31 December 2016
(Net, bcf)
31 December 2015
(Net, bcf)
PSC (Block) 1P 2P 3P 1P 2P 3P
             
Chengzhuang (GCZ) 14 29 52 15 31 52
Shizhuang South (GSS) 166 457 1,330 153 473 1,379
Shizhuang North (GSN) 5 18 686 5 18 721
Fengcheng (GFC) - 24 212 - 26 228
Baotian-Qingshan (GGZ) - 30 106 - - -
Total*  184 559 2,386 173 549 2,379

 

  31 December 2016
(Net NPV 10, USD $ million)
31 December 2015
(Net NPV 10, USD $ million)
PSC (Block) 1P 2P 3P 1P 2P 3P
             
Chengzhuang (GCZ) 116 233 376 124 238 362
Shizhuang South (GSS) 1,170 3,282 9,320 1,068 3,344 9,429
Shizhuang North (GSN) 37 125 4,221 36 121 3,754
Fengcheng (GFC) - 313 2,582 - 319 2,666
Baotian-Qingshan (GGZ) - 373 1,306 - - -
Total*  1,323 4,326 17,805 1,228 4,022 16,213

 

31 December 2016 PSC (Block) Contingent Gas
Resources Net, 2C, bcf
Un-risked prospective gas
resources Net, best estimate, bcf
Quinyuan (GQY) 18 951
Fengcheng (GFC) 5 116
Panxie East (GPX) - 17
Boatian-Quingshan (GGZ) 871 599
Total* 894 1,683

* Totals may not add due to rounding.

The estimates in the reserve report have been prepared in accordance with definitions and guidelines set forth in the 2007 Petroleum Resources Management System (PRMS) approved by the Society of Petroleum Engineers. The information in this announcement pertaining to Green Dragon Gas's China reserves have been reviewed by Hassan Sindhu, the Company's petroleum engineer who holds a Bachelor of Science degree from the China University of Petroleum.

Main NSAI assumptions behind the NPV10:

  1. Applicable well-head gas price (before subsidies) of US$10.19/Mcf (RMB2.499) (2017), increasing to US$12.38/Mcf (RMB3.037) (2021), and escalated 3% p.a. thereafter
  2. Operating costs relating to direct lease and field level costs - US$1,200 per well per month and US$0.054/Mcf of gas produced (no corporate G&A included), and escalated 2% p.a. from 2017

REVIEW OF OPERATIONS

DOWNSTREAM

The downstream operations of the Group are conducted by our Gas Distribution division, which is responsible for the management of the Group’s downstream assets and all downstream sales and marketing activities. The distribution division also purchases third-party gas to complement sales of own production volumes from the Group’s retail gas station network. Gross sales in 2016, including our 47% share of GCZ sales, were 3.73 bcf (2015: 3.71 bcf) of which 1.88 bcf (2015: 1.41 bcf) represented sales of GSS production and 0.32 bcf (2015: 0.47 bcf) representing retail sales made from market purchases of gas for sales.

The primary sales routes for the distribution division are:

  • pipeline natural gas (PNG)
  • compressed natural gas (CNG) for retail and industrial use
  • sales for power generation

The Group’s production operations are in close proximity to major pipeline infrastructure. PNG sales from GSS and GCZ are directly produced into the East-West pipeline. In addition, a number of customers operate in the area around the GSS processing facility and the CNPC processing facility at GCZ. The commercial focus of the downstream business in 2016 will be on the diversification of the customer base and routes to market to provide a variety of additional sales channels as production increases. We consider that the Group’s diversified sales channels represent a strategic advantage in a competitive marketplace and we intend to exploit that advantage further in future.

PNG

PNG sales are made directly into the national transmission network at both GSS and GCZ on a volume metered basis. The Group sells PNG gas at GSS under contract and invoices directly for sales. Sales at GCZ are managed by our partner, CNPC, with our share gross revenue distributed under normal joint operating procedures. There are de-minimis delivery quantities in the sales contracts in place for either GSS or GCZ.

Total PNG sales for 2016 amounted to 3.41 bcf (2015: 3.23 bcf) representing 91% of gross production (2015: 87%). PNG sales from the Group’s operated property on GSS were 1.47 bcf (2015: 1.07 bcf) representing an increase of 37% over 2015, reflecting the new well connections made in the year and the continued improvement in our sales to production ratio.

CNG

Bulk CNG sales are made to customers directly at our GSS IPF, which includes CNG compression and loading facilities. Total bulk CNG sales for 2016 amounted to 0.14 bcf (2015: 0.12 bcf).

Retail CNG sales are made from our own network of retail gas stations located in Henan Province and proximate to Zhengzhou. Customers comprise fleet users and mass market private customers. The Group currently owns eight retail gas stations. In addition, we are actively working with the airport authorities regarding the relocation of our airport station following significant redevelopment of the area around Zhengzhou airport.

CBM pricing is unregulated, with prices set on a market or negotiated basis. The exception to this is retail CNG pricing that follows the city-gate pricing levels set by the Central Government. In November 2015, the Central Government announced a reduction in the retail city-gate pricing structure resulting in a reduction in our forecourt prices from 4.2 RMB/m3 to 3.6 RMB/m3. Nevertheless, retail CNG continues to provide the highest margins of our available sales channels for equity gas.

Total retail CNG sales for 2016 amounted to 0.36 bcf (2015: 0.51 bcf). Of the total 2016 retail sales volume, 0.04 bcf (2015: 0.04 bcf) was sourced from equity production.

Sales for power generation

The distribution division also sells gas to Greka Technology and Manufacturing Limited (GTM), a related company under common control that operates and maintains the IPF facility and production infrastructure. Sales of gas for in-field power generation comprised 13% (2015: 12%) of total sales from the Group’s operated property on GSS.