Chinese government holds unconventionals key
The only independent oil and gas operator in China stresses the importance of policy and partnership with Beijing
"The government invited us alongside four heavyweights of the time — all now swallowed by mergers or no longer with us, whereas we are still here. We have done quite well in our niche; we started off in that pack, the pack has gone but we remain." So says Randeep Grewal, chief executive of G3 Exploration, operator and developer of eight Chinese coal-bed methane (CBM) licences, of his firm's journey that started with its first licence in 1997.
Grewal spoke to Petroleum Economist at the end of February, identifying a number of drivers for G3's longevity, not least patience and luck. But he stresses that the commitment of the Chinese government to unconventional gas resources in general, and CBM in particular, is a key factor.
Its policies offer stability, a long-term perspective and, crucially, the right incentives. They convince Grewal that the sector has a future whose scope may be widely under-estimated.
PE: How committed is China to developing its unconventional gas resources?
RG: Year-on-year, China breaks gas demand and gas import growth records. That growth is not going to stop, although it is going to stabilise. And there is no question that every molecule of gas that comes from our CBM fields avoids a molecule of gas that the country has to import. Unconventionals will therefore always be a relevant component in the energy mix.
PE: Do you expect China to make a success of both shale and CBM?
RG: China understands well what its shale deposits are. The difficulty in shale, as in CBM, is how do you balance the surface access, because where the shale is, is also where the population is? The country is very sensitive to that balance.
During earlier development phases, the concept of people moving to allow for large infrastructure projects was less of an issue. The world is very different now. There is no longer a big incentive to displace people. When you are trying to develop a resource, you have to take into account people and their continuing thirst for a cleaner platform, cleaner areas, more blue skies, cleaner air. They are very concerned about what you are doing. As developers, you have to respect that. The balance becomes ever more important.
"China will be the world's largest producer of CBM" — Grewal, G3
A very significant movement in China is the designation of environmentally sensitive areas (ESAs). These are coming very rapidly. Forest areas and greenbelt areas are getting very clearly defined. And once these are in place, you will not develop anything in those areas. As we overlay that with the existence of resources, the discipline will have to be to concentrate your presence — almost like an offshore platform — to have the right technology to extract the resources over large distances. Start thinking like the offshore, onshore. The faster the industry starts focusing on that, the more likelihood that the industry continues to be sustainable. If the industry continues to say, "I can do what I feel like," I do not think that works any more.
For China, compared to, say, the Texas shale plays, of course there is a difference, because there is a difference between 300mn people and 1.5bn people. But it is a core theme globally. Those places where population density is less, more resources can be developed more easily, and vice versa.
PE: And the support of the Chinese government is key to unconventional gas development?
RG: The government of China has been the most progressive in understanding the resource and its complexity and has a development policy that has been the cornerstone of [CBM's] success. As the technology matures, government policy continues to be stable and secure — the policy discussed and put in place all the way back in 1997 continues. Looking forward, this was the comfort I had developing a large asset, that I was doing it in conjunction with the central government in China, which genuinely believes in the longevity and sustainability of its existence. It is not in a rush, thinking it has to do something now before it gets voted out tomorrow. The government is focused on the overall well-being of society long-term.
PE: Is it easy to under-estimate the potential for Chinese CBM?
RG: China has the third largest CBM reserves globally, after Russia and Canada. But there is no need for it there, so it is not getting developed. Today it is the US, but China will be the world's largest producer of CBM, it will far exceed everyone else, because it needs it more.
There is massive CBM potential, because everywhere there is coal, there is CBM. And the country is constantly moving away from producing coal to degasifying it. There is a slew of companies that previously mined coal that are saying, "I do not want to do coal any more, I would rather focus on degasification." This is a China-wide movement. I do not think that the world understands just how much CBM can be produced in China, and will be produced, by a diversity of actors.
PE: What about the potential within G3's assets in particular?
RG: We have an area of 7,600km². We have currently developed only 380km², less than 5pc of the total. $1.3bn has been invested. We have drilled almost 1,500 wells, at depths of 400-750m. The planned capacity of infrastructure that is being built is about 50bn ft³/yr (1.4bn m³/yr, 3.9mn m³/d) from just this area of development. The sales last year were less than 10bn ft³ but that is simply because the wells are drilled but cannot be put into production yet, waiting for the infrastructure to be built, pipelines and compressor stations to be completed, in effect 'the last mile'. But our partners are building the infrastructure very quickly. We partner with Cnooc, Petrochina and CNPC. But we are the operator, that is a unique opportunity that does not exist anymore. When we started, China needed people like us to bring technology, aptitude and capital. Now China has all of that.
PE: So, how much could we be talking about going forward?
RG: Of the 1,500 wells we have drilled, less than 300 are actually selling gas. But less than a year ago, only a third of wells were even connected to processing. Now over 90pc are connected. In 12 months' time, everything will be done, because China knows how to build.
50bn ft³/yr — planned G3 infrastructure capacity
We have proven 25tn ft³, but there is a lot more out there. Chinese CBM is an asset base that could produce multi-trillion ft³/yr with no problem. That is real and, most importantly, it is where the consumer is. There are no logistics issues, no transportation issues, no currency issues, no intergovernmental issues. It is simply in the right place at the right time. The consumer is Chinese and the resource is Chinese. The consumer wants clean energy and this is the cleanest form there is.
It is the right convergence, not in a matter of weeks or months, but after years and even decades. If we had maybe developed the assets a lot faster, we would have had trapped gas which might not have had the same value. Conversely, if we were starting out today, we might get by-passed. We did not make this timing happen, that comes down to luck. But, for any big success you need to do all the right things, but you also need to be lucky.
PE: How do the economics stack up?
RG: Our all-in cost is around $2/'000 ft³. And there is an incredible policy from the Chinese government, very pragmatic and well thought through. Whatever price China pays to a foreign enterprise delivering energy to it, it pays the same to a domestic developer. If you are in Qatar, or North America, or Indonesia, or Australia, you have the cost of developing gas, transporting it to a liquefaction facility, liquefying it, shipping it to China and regasifying it. So, LNG is arriving in China at $8-10, $10-12, sometimes a whole lot more than $12. We are getting that price at the wellhead.
PE: And that applies only to CBM?
RG: Yes, just to CBM. It is an example of how government policy is a facilitator if thought through properly. China sat down and thought, "[CBM] is complex, it takes way too long, who on earth is going to do this? No-one. So how do we demonstrate that people should?" The rewards must be big enough to sustain you over the passage of time. There is no way we would have deployed our capital, or time, or effort, if the rewards were not as attractive as they are. Our view has always been, if we get wellhead pricing equal to delivered pricing, that is going to make for a very lucrative return. All-in cost of $2 and you are getting paid $8, or $10, it almost does not matter what the number is, that is a hugely profitable mark-up and a guaranteed return. Because where is our customer? At the wellhead, [the gas] does not travel far, it gets consumed as soon as we produce it.
PE: What is next for G3?
RG: How we see G3 today is as a technology-driven de-risker of CBM assets. Once we have de-risked the assets, we think there are others that are better suited to take what we have done and replicate it a thousand times. Most CBM developments are the same; you have a de-risker and then you have an IOC or NOC that comes in and scales it.
G3 has announced a dividend in specie, to be paid at the end of the second quarter. We are giving this dividend to our shareholders on being able to take the producing assets and either make a trade sale or list them in Hong Kong. We can then continue our focus on exploration, because we have another six blocks left to develop. We have a long way to go, we still have 95pc of the job left.
Huge potential: China's coal-bed methane reserves and infrastructure