Sino Oil to slow drilling of wells
Sino Oil and Gas Holdings, a mainland coal bed methane (CBM) projects developer 12 per cent-owned by billionaire Richard Chandler's Mandolin Fund, has slowed the pace of well-drilling to improve sustainability of future output.
The firm, which has a joint venture project with PetroChina in Sanjiao, Shanxi province to extract CBM - a natural gas that adheres to coal seams - will extend the time needed to remove water, known as dewatering, from its production wells from six months to one year, said chief executive Harry King Hap Lee.
'This will allow gas production levels to be more stable in the long term,' said King, adding the decision was made on the recommendation of PetroChina's engineers. PetroChina is the nation's largest developer of unconventional natural gas, which includes CBM. Conventional gas, pumped from sandstone structures, is easier and less costly to extract than unconventional gas.
Before CBM can be extracted economically, large amounts of water trapped in pores and fractures of coal beds need to be extracted, so as to lower the pressure for the methane gas to be released.
King said the venture's drilling timetable will also be extended by six months for future wells. It has drilled 33 multi-lateral horizontal wells in this year's first half. Each cost about 10 million yuan (HK$12.2 million) to drill.
Before the 70 per cent stake in the venture was acquired by Sino Oil and Gas last November, the seller, Beijing-based Orion Energy Holding, had drilled 19 wells since exploration began in 2006. Orion is majority-controlled by Sino Oil and Gas vice-president and chief geologist Yang Luwu, and part-owned by King.
Yang owns 5.59 per cent of Sino Oil and Gas and King 3.5 per cent. Through the Orion stake sale, they also hold a large amount of bonds convertible to its shares at 50 HK cents. Its share price closed on Friday at 35.5 HK cents.
Vice-president Volen He Hongbing said while the dewatering extension means next year's output will be less than expected, a target to produce five billion cubic metres of gas in 2015 had not changed.
Gas production started last year. So far, five million cubic metres has been produced, and is sold as compressed natural gas (CNG) to a Shanxi private firm via a long-term agreement. King said CNG will eventually take up only 5 per cent of total sales, with the majority sold via pipelines.
Sino Oil and Gas has yet to sign any agreement on pipeline sales. Mass production from the Sanjiao project is pending Beijing's approval of its development programme, which the firm expects to be obtained by the end of the year.
Next year the firm will invest no more than US$100 million to drill over 100 wells. Some will be conventional vertical wells which are much cheaper to drill than multi-lateral horizontal ones.
With cash of HK$24 million at the end of June, supplemented by a HK$468 million convertible bond issued in July, He said the firm will consider issuing more bonds in the second half to finance next year's drilling. It failed to raise some US$300 million through a share placement last year.
Drilling of 20 wells and the construction of above-ground facilities in this year's second half is expected to cost HK$150 million. A year ago, the firm had planned to drill 100 wells this year, almost twice the number planned now.
CBM drilling achieved major commercial success in the United States a decade ago, but commercial production is only beginning on the mainland, where geological structures mean different technologies are needed. China's low gas price also hinders the industry from faster development.
'Companies that will be successful are those which can deliver on production and drilling targets,' Sanford C Bernstein senior oil and gas analyst Neil Beveridge wrote in a research report. 'China is not the US. While the resource base could be enormous, technology, access and investment need to be increased significantly if unconventional gas is going to make the impact that it has done [in the US].'
Richard Chandler is a New Zealand-born, Singapore-based hedge-fund manager who has built up considerable personal wealth by making successful punts on the recovery of scandal-hit companies.
He has become the largest shareholder of Sino-forest, which has been suspected by Canada's top securities regulator, the Ontario Securities Commission, of having inflated sales.
The number of shares that Richard Chandler's Mandolin Fund has bought in Sino Oil & Gas since June