CEO of Green Dragon Gas Makes Speech at Natural Resources Forum Presentation
The theme of the Forum was 'Gas: Where is the growth and where is the glut: What do coming years hold for global gas markets?'. Mr Randeep S. Grewal's presentation discussed the dynamics of the Chinese gas market and the Government's motivation to deliver a cleaner energy mix in the coming years, with a particular focus on gas.
The key messages of the speech were:
· China is acting to cut pollution and reduce its reliance on coal, which currently accounts for 70 per cent of power generation in China, by switching to alternative fuels including natural gas.
· Natural gas use is currently low in China compared with many developed economies in the West, but the country is actively seeking to increase the proportion of gas within its energy mix from 4-5 per cent to 10 per cent by 2020.
· Beijing's Five-Year Plan and stable regulation of the sector mean gas prices in China for domestic suppliers are decoupled from global oil and commodity cycles.
· As a key part of the domestic gas industry and leading independent business, Green Dragon is helping to provide the answers to China's energy challenge and giving the country what it needs - cleaner and more efficient energy.
· Green Dragon is increasing production capacity to 16 Bcf in 2016, a 33 per cent increase from last year.
Full speech:
"Good morning. Thank you for the invitation to talk to you all today.
In a departure from the other distinguished speakers - from the likes of BP, Genel and Seplat - I will be coming at things from a completely different perspective.
I have been in the Chinese energy market for 20 years. In that time I've witnessed a country bursting into life economically.
In two decades China has truly emerged to become a major force on the world stage vying with the US for the world's largest economy and the main driver of the global commodities market.
Yes it has been an exciting time. And it will only get more interesting as China continues to grow. And it will continue to grow even despite the doom and gloom about a 6 per cent rate of expansion - something most countries can only dream of.
I said just now I would be coming at this from a very different point of view. So what I want to talk to you about is the different dynamics driving the gas market in China compared with the West.
To date the country's economic expansion has been fuelled by coal.
And this has led to the country literally choking on its growth.
I'm sure you've all seen the pictures of pollution in Beijing, Shanghai and Hong Kong.
The problem is that China's industrial revolution has largely been powered by King Coal.
Millions of tonnes of coal are mined every year and hauled to power stations to keep China's factories running at full tilt.
Some 70 per cent of power generation capacity is currently dependent on coal.
More than 80 per cent of the growth in global coal consumption between 2003 and 2013 was down to China alone, according to some estimates.
The newly sprawling heavy industrial base has - of course - transformed the lives of millions of people and turned China into the world's biggest manufacturer and a gigantic exporter of goods.
But it is clear the recent pollution problems have caused the Chinese government to act and it has openly declared its determination to reduce the country's reliance on coal before it becomes an environmental crisis.
It is notable that in late 2015, for the first time, air quality warnings were officially issued to residents in Beijing putting the environment and air quality firmly on the Government agenda.
It has stated that CO2 levels will peak in or around the year 2030 and accordingly wants a shift to more efficient energy sources.
China has laid down a marker. Beijing has demonstrated that it is not prepared to put economic further growth before all else if it means the lives of its citizens or the global environment are put at risk.
Recently we have seen four major city based coal fired power plants shut down by the Beijing Government and replaced with cleaner burning gas generation, a trend that is surely set to continue.
We have also all heard the phrase 'peak coal' - it is already within sight. According to BP's Energy Outlook, China's use of coal will peak in or around the year 2027.
China is already weaning itself off the fossil fuel - one of the country's biggest natural resources - and turning increasingly to alternatives such as natural gas.
The Government has declared its intention to reshape China's energy mix by 2020.
It wants a cleaner and more balanced range of fuels.
This will force the introduction of alternative fuels to coal, within which the target share for natural gas would account for 25-30 per cent., a figure in line with the gas burn in developed economies
With natural gas usage currently around approximately 7 per cent in China, that would mean more than doubling current levels of gas consumption at a time when the wider economy is expected to grow at 6 per cent a year.
China is already the fastest growing gas market globally.
It is the fourth-largest gas consumer in the world.
But an increasingly urban population means even more people turning to gas to cook their meals within towns and cities.
The impact on London's famous smog when domestic gas pipelines were first introduced here in the UK capital was incredible.
Gas meant an immediate drop in the amount of coal that was being burned for heating and cooking, leading to cleaner air.
The same is happening in China. What we are witnessing now is a China "dash-for-gas" like that seen in western economies in the late 1990's.
But in China in 2016 this is happening against a backdrop of continued industrialisation and urbanisation and at a time when environmental issues are far more widely recognised and are firmly on the agenda of the Beijing Government.
Another important factor is that at present 50 per cent of China's gas demand comes from industrial customers.
Analysts believe this market will be one of the key drivers of growth in the next decade.
And as you all will know China's demand for gas is outstripping current domestic supply and the country is importing more and more.
Per-capita energy consumption in China is just 10 per cent of that in the UK.
And with the largest population in the world - some 20 per cent of the global population - with a fast-growing middle class it clearly means big opportunities for businesses such as Green Dragon Gas, the company I head.
Gas demand could easily quadruple by 2020, particularly if the Beijing Government embraces even more aggressive anti-pollution measures in its next Five-Year Plan.
Not only is it cleaner but Gas is a more efficient fuel than coal. In other words, it is less energy intensive.
China's 12th Five-Year Plan for 2011 to 2015 clearly prioritised cutting carbon emissions by reducing use of coal and oil.
Natural gas is the preferred energy source for a cleaner and more balanced fuel mix.
Of course our optimism is boosted by one clear advantage - that is China's incredibly stable political environment.
The energy industry is state run and state regulated.
So we have the huge benefit of a long-term view on energy policy. Something that I'm sure many of my colleagues here with businesses in Europe and the States would love to have - visibility!
The Chinese central government has implemented some fantastic policies that are intelligent both in terms of stimulating domestic production and for levelling the pricing playing field. We have regulated prices determined by Beijing. By the central government.
One of the great things China has done is make a simple but very important policy.
The gas price that we receive from the Chinese government has been partially decoupled from global commodity prices. The Government policy view is that whatever the government pays third parties to deliver gas to China, it is happy for a domestic producer to be paid the same.
In practice this means the price that we receive is directly correlated to the weighted average, long term-contract price for landed gas in Beijing.
We work in an environment where national policy provides the stability for us to do what we do best - get the gas out of the coal. Hence the gas pricing in China for a domestic producer provides the highest net margin in this space and has been for some time.
I have said many times before that I am not concerned about what happens to the price of Brent crude in terms of the operation of our own business.
By the way that does not mean that I'm not fully sympathetic to those highly talented engineers and oil workers who are sadly being affected by the current retrenchment in the oil industry. I personally have a number of investments in oil and fully understand the uncertainty that comes with the current turmoil in oil markets.
However, the amazing volatility we have seen in 2015 and continue to have today does not affect domestic Chinese producers for the reasons I have already outlined.
The oil price is, nonetheless, a factor for the wider gas industry, for those that produce in one country and have to transport it to another.
But companies like Green Dragon - who produce exclusively for domestic consumption - are unaffected by what's happening to the price of Brent crude.
In addition to the pricing policy laid down by Beijing, domestic CBM producers are being also receive a subsidy which reduces the cost of extracting the gas and makes our margins amongst, if not the, highest in the world.
I mentioned earlier the importance of stable energy policy and clear Government planning.
China's famous five-year plans give industry greater certainty and financial markets a clearer medium-term view in stark contrast to the obsession in western capital markets often plagued with short-termism.
The next - the 13th - Five-Year Plan is expected to be finalised in March and will cover the years 2016 to 2020. It will be the first presented under President Xi Jinping.
A core part of the plan, the broad direction of which has already been decided, is expected to renew Beijing's commitment to a cleaner economy even though growth has slowed somewhat. This commitment is expected to include an annual tonnage cap on the amount of coal burn permitted in China and will also see measures around the new build construction of gas fired power stations.
So how does the situation with gas compare to what we are seeing in oil markets?
Just last week we heard OPEC reached an agreement to freeze production at January levels.
The thinking seems to be that this will stabilise the market, which has seen the price of a barrel of crude slump to around \\$30 - a level not touched since 2003. Iran meanwhile says it will increase production.
The picture is far from clear.
So if I was investing in the gas market at the moment - I may be biased because I've been there for 20 years - I would be buying into the Chinese gas market.
I can't miss an opportunity like this to shamelessly promote Green Dragon Gas.
Green Dragon is the biggest independent gas company in China in terms of acreage and reserve potential. Importantly, we entered China when the country was beginning to emerge and seeking international investment.
Our PSC contracts reflect that and provide economic protection that could not be obtained today. Indeed, as others have come and gone we are one of the few, if not the only, company still operating under the original 'tier 1' PSCs.
We moved from the junior AIM market to the main list of the London Stock Exchange in October 2014.
Our ambitions to develop the company significantly will remain exclusively focused on China. That is where the capacity is and that is the jurisdiction we know so well.
What we specialise in is extracting coal bed methane, a natural gas stored in and around coal seams.
We recover this by drilling a series of vertical or horizontal wells directly into the seam, drawing water first to reduce pressure.
This gas is 98-99 per cent methane and requires no secondary processing other than dehydration.
Our proprietary LFB completion technique means we can extract the gas from China's heavily faulted anthracite coal seams. Our LFB technique allows the seam to naturally desorb its gas without the need for frac'ing or the use of chemicals.
By allowing the seam to behave in its natural state the process of desorption takes marginally longer however the resultant production is far more consistent and does not exhibit the 'peak-and-decline' seen with vertical fractured wells.
It produces a high quality gas which can be used instead of conventional natural gas in pipeline networks or for power generation.
So yes while I would say invest in Green Dragon Gas, it would be almost impossible for anyone else to come in and set up a company like ours now.
The barriers to entry are too high and it would be difficult to establish the kind of relationships with Chinese companies that we have as an early entrant to this fantastic market.
As an insider, we know that China's gas industry is helping to provide the answers to the country's energy problems.
We have eight blocks with 2037 drilled wells, and \\$4.3billion of proven and probable reserves.
Because we work so closely with local partners we know that demand will continue to grow rising to 315Bcm in 2020 by some estimates.
We, meanwhile, are increasing production - up from 12 bcf last year to 16 bcf in 2016 - that's the equivalent of three million Chinese households or 300,000 in the UK.
And because there is a growing market we can be confident in ramping up our output because there is inherent demand - in other words sufficient buyers - for our gas.
In conclusion, then, there are three messages I would like you to take away from today's presentation.
Firstly, that China knows it has an energy challenge and that it is taking measured and state planned action to address issues including pollution and its reliance on imported supply to meet its voracious demand.
Secondly, that gas prices in China for domestic suppliers are decoupled from the global oil and commodity cycles thanks to Beijing's Five-Year Planning and the stable regulation of the sector, particularly around pricing.
And thirdly, China's domestic gas industry is helping to provide the answers to these problems. We are tapping into the growth opportunities by giving the market what it needs; cleaner and more efficient energy.
Ladies and gentlemen, I believe what we are witnessing is the end of King Coal in China.
But I am also confident that what we are also seeing is the acceleration of a new golden age of gas.
Gas in China is a good bet and Green Dragon is well positioned to capitalise.
Thank you."
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