Enter the Green Dragon with coal-bed methane gas

Once signalling the fatal finale for coalmine canaries, today coal-bed methane is proving vital to China's fast-moving transportation sector, writes Patrizia Rossi.

Randeep Grewal smiles as he calls to mind the father-and-son expeditions of his childhood; the heat, dust, sand and the old green Land Rover in which he and his geologist father would rattle across the sub-Saharan plains in search of unusual fossils and stones.

“We would tear out the back seat, start a campfire, and sit and examine the rocks,” he recalls. Perhaps this is how his fascination with what lies below the earth’s surface began.

Today, as chairman and CEO of Green Dragon Gas, an AIM-listed investment holding company focused on the exploration, development, production and sale of coal-bed methane (CBM) in China, his approach is less hands-on and more of quiet observation.

Since Green Dragon Gas was incorporated in 1996, Grewal has been monitoring China’s growing energy needs carefully, predicting early that high oil prices would steer the domestic transport market towards natural gas.

“The oil market was saturated in terms of global production, leaving us with the question: ‘How would China as an industrial powerhouse fuel its expansion?’ Clearly there was a need for alternative sources of energy to fill the incremental demand,” he notes.

CLEAN energy

Coal-bed methane, also known as coal-seam gas, is trapped on the surface of coal and held in place by water pressure. It has been captured commercially for over 20 years and is considered a relatively clean technology as harvesting prevents it from escaping into the atmosphere and contributing to global warming.

CBM accounts for about two per cent of the world’s natural gas supply, and in the US, where the industry has matured, it accounts for closer to ten per cent. As one of the world’s largest coal producers, it would follow that China has massive CBM potential.

“My expectations are that natural gas will make up a total of ten to 12 per cent of China’s energy mix, and of that approximately half will come from CBM. “We are focused on CBM as a small, single-digit piece of China’s energy demands. It’s a very small piece of a very big pie, but coming from zero, it’s a high-growth piece and an important piece of the puzzle,” says Grewal.

Platform for growth

Based in Hong Kong, the Chinese CBM business is currently one of the largest companies on AIM by value with a market cap of $874 million (£494 million).
Since its float in 2006, which raised $22 million at $5.56 and valued the business at $525 million, Green Dragon Gas has shown the fire in its belly with a series of strategic moves and acquisitions.

The company used the AIM funds to finance its 2006/07 drilling programme across five CBM blocks held in joint ventures with the state-owned China United Coal Bed Methane Corporation (CUCBM).

Totalling 6,620 sq km, this amounts to the largest acreage that the People’s Republic has ever granted to a foreign CBM partner.

“When we listed on AIM, we started with a pilot project on one of our five gas blocks. We had the upstream part of the business in place. In two years, we have progressed into the midstream and are now reaching the end user with our compressed natural gas retail stations,” he explains.

fitting deal

Grewal describes each phase of his expansion plans for Greka China, Green Dragon Gas’ subsidiary focused on its CBM operations in China, as a puzzle with many pieces.

Six months after its capital fundraising, the CBM business hit the acquisition trail, grabbing a 49 per cent stake in Kesi Hengrun (Beijing) Technology Company in a cash-and-shares deal worth $26 million.

The deal enabled Grewal to expand the company’s distribution network through the Beijing gas distributor’s main asset – a 59 per cent stake in Beijing Huayou United Gas Development, the owner of 166 km of pipelines that run through the southeast of China’s largest city.

Grewal says: “Beijing Huayou is one of the main gas distributors in one of China’s biggest citigas consumption markets. The vast gas distribution network coupled with assured supply to Beijing lays the foundations for our expansion.”

Strategic moves

By issuing two convertible bonds totaling $95 million last year, the company was able to secure more pieces, fulfilling its ambitions of becoming a vertically-integrated business through organic growth and bolt-on acquisitions.

In addition to financing its continuous drilling programme in 2007, these funds were used to set up a drilling and technical services division, Greka Technical Services, last November.

The new company, which is the hub of its upstream operations, was a strategic move to cut contract-drilling services costs by bringing them in-house with its own fleet of CBM drilling rigs.

Acquisition trail

In March Grewal was drawn to an attractive proposition involving two crucial assets: a gas block and proprietary directional drilling technology. In simplistic terms, the deal provided the capability to drill horizontally as well as vertically.

He snapped up the Toronto-listed CBM business Pacific Asia China Energy (PACE) for C$35 million (£18.6 million) in a straight equity issue. The struggling Canadian gas business, with operations solely in China, was taken private in a transaction that would enable Green Dragon Gas to get its claws into the drilling technology.

Grewal says: “PACE had a very exciting joint venture with Mitchell, one of Australia’s largest horizontal drillers. It had a ten-year agreement to use Mitchell technology exclusively in China.”

The drilling technology, which had been tested extensively in Australia, was a big draw.

He adds: “The coal-seam gas industry is more established in Australia and there have been some interesting deals, such as Royal Dutch Shell’s acquisition of a small stake in Arrow Energy for $780 million.

“Australia and the US’ coal-seam gas industry matured in ten years and grabbed the world’s attention. I think China is pretty much on the same cycle with 2009 as its tenth year,” observes Grewal.

The PACE-Mitchell joint venture added two more rigs to the Greka Technical Services fleet, paving the way for further exploration of CBM assets and their eventual commercialisation.

Ready for market

Further evidence that Green Dragon is utterly focused on becoming vertically integrated – acquiring assets that expand its gas resources and prepares them for market – came in July with the acquisition of Giant Power International. The $12.5 million deal added midstream distribution facilities to the company’s offering and was funded through convertible bonds.

“This deal gave us a strategic interest in two distribution centres in the provinces in which we are currently operating our upstream gas projects,” adds Grewal

Last month the final piece of the puzzle was secured with the $9.25 million purchase of Zhengzhou Nanhai Gas (ZNG), Zhengzhou Clean Petro-Equipment and Zhengzhou Clean Technology from existing cash resources.

ZNG controls a compressed natural gas service station and holds licences and approvals to build three more. Grewal explains that this deal puts them on target for their first gas sales this year generated from the CBM drilling programme.

“The acquisitions we have closed in the last 12 to 18 months provide us with a fantastic platform for organic expansion because we have the right things in the right places. I expect our core focus on organic expansion rather than acquisitions this year.

Patrizia Rossi

Patrizia Rossi

Patrizia was Editor of M&A magazine, a sister title to GrowthBusiness, from 2006 to 2009.

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