Chairman's statement

2016 was a year of stabilisation and renewed focus on our core operations. With unprecedented volatility in the global E&P market it was important that GDG focused its attention to its core value – the upstream assets.

We continue to optimise production on our commercial assets (GSS and GCZ) and are pleased to have migrated another exploration block into production. The undertaking of the CNOOC audit is significant, as it will demonstrate the value to the Company’s shareholders from the 1,388 wells drilled by CNOOC. The approval of our first Overall Development Plan on GCZ is a key milestone for a UK listed company operating in China.

GDG’s commitment to evolve into an upstream E&P was implemented with the downstream assets being marketed for sale. With these assets held for sale, my commentary will focus on the upstream operations which better reflects our recurring business.

The Company continues to make progress on its two Shanxi commercial production blocks, Chenzhuang (GCZ) and Shizhuang South (GSS). In both blocks the shallower Coal Seam 3 has been commercially producing with significant additional potential from the hundred-meter deeper Coal Seam 15.

On the GCZ Block, 2017 and 2018 will see significant activity with the recently approved ODP, approving the drilling of an additional 147 wells to complete the commercialization of the block. Previous investment in the GCZ block was repaid within three years and has been net cash flowing to the Company since September 2015. The upcoming drilling programme aims to expand commercial operations over the remaining 75% of the block. GDG has an option under the PSC for operator CNPC to carry the Company for its share of capex.

Regarding our other commercially producing GSS block, net gas sales increased 34% in 2016 as well head compression stabilised the gas flow through the existing infrastructure. The current level of gas sales will be further increased as the infrastructure development is completed and additional producing wells are connected. Additionally, following the CNOOC audit and the related execution of the CNOOC Supplementary Agreements, we expect a collective focus on connecting over a thousand existing drilled wells to infrastructure and materially increasing sales.

Exploration progressed across the other six blocks with a focus on our southern China block in Guizhou (GGZ). Following commercial production levels being attained during the year on the GGZ block, we concluded the year for the first time with 2P and 3P reserves of 30 BCF (NPV10 US $373 million) and 106 BCF (NPV10 US $1,306 million) respectively. We expect GGZ to certify Chinese Reserves during 2017 and progress onto developing the ODP plan for approval in 2018.

GDG established its downstream business in order to provide a route to market for its gas where previously there were limited options. With a number of entities developing downstream operations within the Qinshui basin adjacent to our GSS block this optionality is no longer needed.  Consequently we have taken the decision to focus on our core upstream assets with our downstream assets non-core and held for sale. Upon completion of the sale, GDG’s evolution to a pure play upstream E&P company will be complete. We expect the sale to be agreed within the first half 2017 and look forward to updating the market in due course.

The audit by CNOOC of the GSS block was successfully undertaken with a focus on the supplementary agreements which are expected to be finalised in the second quarter 2017. Once these agreements have been executed, we would expect an acceleration of the CNOOC built infrastructure being brought on-line and the development of the GSS ODP. Furthermore, this conclusion will also bring collective focus on the other four cooperative blocks.

Government Policy was steadfast regarding its continuing support for CBM development and production. This Policy provides for a cash subsidy of approximately US $2 per mcf at the current exchange rate. In developing the large asset base across 7,600 sqkm, with over c.25 TCF of original gas in place, the Government’s continued support throughout the two-decade development cycle has been a key ingredient to the successful de-risking of CBM projects. The large de-risked assets with mature technology are now ready for significant commercial monetisation.

In conjunction with work on the ground, we are focused on concluding the debt refinancing discussions with a number of options available to us, including mezzanine finance and reserve based financing. The Company is currently evaluating the multiple term sheets on hand. These initiatives are at an advanced stage and we expect to update the market in the next quarter.

While 2016 was a year of stabilisation, I expect 2017 to be one of conclusions and monetisation.

Randeep S. Grewal
Founder & Chairman