Green Dragon in talks with Chinese state-backed firms over fruits of disputed drilling

HK natural gas explorer and mainland energy giants are caught in a rights dispute over production work in wells amid a central government push to secure fuel reserves

PUBLISHED : Wednesday, 27 November, 2013, 11:17am
UPDATED : Thursday, 28 November, 2013, 4:04am

A dispute between a Hong Kong-based natural gas explorer and the mainland's energy giants over drilling rights underscores the growing priority Beijing is placing on securing fuel reserves to power its growing economy.

Green Dragon Gas, an explorer for natural gas trapped between coal seams, is trying to resolve a disagreement with state-backed partner CNOOC and its China United Coal Bed Methane (CUCBM) unit on the sharing of reserves and output from drilling done allegedly without its consent.

Randeep Grewal, the chairman of Green Dragon, which is listed on London's Alternative Investment Market, said the company was "owed" reserves and output from drilling done by CNOOC and its 70 per cent-owned CUCBM.

Grewal, the founder and owner of a 58 per cent stake in Green Dragon, said about 1,500 wells had been drilled in six areas where it had exploration rights.

He said "a significant portion" had been done by CNOOC and CUCBM, while the rest was carried out by PetroChina and its parent China National Petroleum Corp.

Beijing is eager for energy firms to boost the production of unconventional gas such as coal seam gas, as well as tight gas and shale gas - gas trapped deep underground that requires sophisticated drilling technology to extract. This is because the mainland has only 1 per cent of the world's easy-to-get conventional gas reserves, and demand growth far outstrips production, prompting rapid growth and dependence on imported gas that makes up of about 25 per cent of consumption.

Grewal said Green Dragon was surprised to learn that so many wells had been drilled without its consent, despite it being the majority owner of the exploration rights, with stakes ranging from 60 to 70 per cent.

An oil and gas analyst at a European brokerage said many foreign coal seam gas explorers had failed to meet the minimum exploration requirements set by the Ministry of Land and Resources after failing to find enough economically recoverable resources to justify commercial production.

"Some have given up or sold their exploration permits, while others had to renegotiate their production sharing contracts so that they were allowed to work on smaller acreage or on less favourable terms," he said. "It is not clear whether the state energy giants would do a better job at commercialising the resources, but one thing is clear: the foreign firms have not delivered and Beijing is now urging the state oil and gas firms to give it a go and see if they can do better."

The majority of the wells were drilled after March 2011, when CUCBM ended its co-operation on four production-sharing contracts with Green Dragon by posting on its website a statement that the contracts had been cancelled, Grewal said.

He said Green Dragon had not accepted the cancellation. "Our production-sharing agreements were in full force … they were bilateral agreements," he said. "Any modifications or terminations have to be agreed upon mutually."

The deals were also protected by a bilateral treaty between the Netherlands and China, which offered mutual protection on investments by companies from each country, Grewal said. Green Dragon signed the deals through a Dutch-registered subsidiary.

Grewal said talks were continuing to resolve the dispute and hopes they would conclude by February next year.

CUCBM's spokesman did not respond to queries on why it cancelled its contracts with Green Dragon, whether the latter had fulfilled its minimum exploration investment as required by the contracts, and whether they were in talks on how to deal with reserves and output from wells allegedly drilled without Green Dragon's consent.

Grewal said Green Dragon had exceeded the minimum annual exploration investment - 10,000 yuan (HK$12,700) per square kilometre as required by the Ministry of Land and Resources - and that CUCBM had no right to unilaterally cancel the agreements.

Green Dragon said in July exploration licences on the four projects were "reissued" to Green Dragon by the Ministry of Land and Resources, following CUCBM's withdrawal of "the erroneous notices" on its website in March 2011.

Grewal said the reissuance came after intense lobbying to Beijing, including the legal office of the State Council, which had approved the original contracts signed as early as 1998.

The contracts govern the investment commitments and entitlements to reserves and outputs between the two companies.