AAG Energy cuts gas output target on poor weather and equipment failure

PUBLISHED : Monday, 05 September, 2016, 8:20pm
UPDATED : Monday, 05 September, 2016, 10:44pm

AAG Energy, the first non-state-owned coal bed natural gas explorer to get Beijing’s permission to enter into large-scale commercial production of the cleaner burning fuel, has cut its full-year output target by 14.4 per cent after a sharp fall in regulated gas prices.

The firm late last month said in its interim results filing that it was targeting production of 564.5 million cubic metres (mcm) of gas this year. While down from 659.4 mcm announced in March, it still represented 15.3 per cent growth from last year’s 489.5 mcm.

The reduction at its mainstay operational Panzhuang project in Shanxi province was 13 per cent to 529.2 mcm, while that of trial production-stage Mabi project nearby saw a 30.4 per cent reduction to 35.3 mcm.

Asked about the reason for the cutback, a company spokesman told the Post the Panzhuang curtailment was due to “delay of the planned drilling programme and surface facility build-up due to abnormal weather – heavy snow and rain – in the year’s first half”.

The Mabi cutback was due to “control of production due to several unexpected equipment failures from downstream customers” in the first half.

AAG is not alone in cutting back its natural gas production target. Oil and gas giant China Petroleum & Chemical (Sinopec) also cited gas production facilities maintenance at its Puguang gas field as a factor in a 6.4 per cent reduction in its full-year gas output targets announced in August compared to that in March.

But vice-chairman Dai Houliang said the main reason for the reduction was a lack of demand due to high regulated gas prices.

Although Beijing slashed the regulated non-residential wholesale gas price by 28 per cent last November, prices of the cleaner burning fossil fuel remained higher than crude-oil-derived replacement fuel such as liquefied petroleum gas, diesel and petrol, whose prices fell in tandem with international crude prices.

While producers of coal bed gas – an unconventional form of energy subsidised by Beijing to support the nascent industry’s development – are free to negotiate selling prices of coal bed gas with customers based on local demand and supply, coal bed gas prices are affected by changes in regulated conventional gas prices since they are substitutes of each other and can be mixed in pipelines.

Beijing lifted the subsidy for coal bed gas to 30 fen (35 HK cents) per cubic metre from 20 fen in February.

AAG recorded a 19.5 per cent year-on-year decline in net profit to 72.4 million yuan for the year’s first six months.

Revenue dropped 30.7 year on year to 193.29 million yuan as a 32.2 per cent decline in average gas selling price to 1.2 yuan per cubic metre was unable to be offset by a gas production rise of only 0.6 per cent to 251.8 mcm.

Production cost per cubic metre at Panzhuang, including assets depreciation and amortisation, fell to 47 fen in this year’s first half, from 65 fen for the whole of last year.

AAG on August 30 it had submitted a “definitive bid” to buy unspecified producing oil and gas assets outside China from an unnamed international oil and gas firm, with “solid cash flow and profits”. It had 2.33 billion yuan of cash at the end of June.

AAG’s share price closed 3.4 per cent higher on Monday at HK$1.20. They have fallen 14.3 per cent year to date, compared to a 7.9 per cent rise of the Hang Seng Index.