Sino spruiks LNG-scale potential

THE offer by a Hong Kong-based group to buy out Sino Gas and Energy's partner in the Ordos Basin for $US220 million has not only revealed now much the Australia's junior appears to be undervalued, but has woken interest in the company's LNG-scale gas project that is delivering into the Chinese gas market.

Sino spruiks LNG-scale potential

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China New Energy Mining's entry into the project by taking over MEI Holding's interest values SinoGas' 49% stake at $US210 million, which was significantly above SinoGas' valuation of around $71 million immediately before the sale closed.

The company's shares have since soared to better reflect the offer price, helped by the news that the company has successfully repatriated cash from China for the first time, and managing director Glenn Corrie told Energy News the market has finally woken up to the fact that, in macro-economic terms, his company is unbeatable for anyone interested in playing the Chinese gas market.

Sino is developing an "LNG-scale" gas conventional gas resource in the Ordos Basin, with a share of two trillion cubic feet of 2P reserves and a further 2.8Tcf in 2C contingent reserves that won't take much effort to drill out.

Given the project sits in one of the most well connected areas in China, the commercialisation risk is minimal. And the company is well travelled in China, having operated in-country for a decade, and is developing conventional gas targets, not the more problematic CSG or shale resources.

"The resource is big, and it is in one of the fastest growing gas market in the world, and the world's second largest economy, and it is a market where gas demand outstrips supply by close to two times by 2020, when 40% of its gas will be imported," Corrie told Energy News.

"Having a domestic asset in the world's fasted growing markets is perfect."

Gas demand is being driven by China's desire to keep a cap on pollution, even with tepid economic growth, and Corrie said Sino has developed a solid business with robust margins.

Its cost of production is around $US2 per million cubic feet compared to a landing price of LNG at the coast of around $8.50.

The company and its partners have drilled up an asset the size of Woodside Petroleum's Pluto field, but its costs are well below Pluto or PNG LNG, which are around $6/MMcf or even Darwin LNG which is a mere $4/MMcf, and it is delivering into the world's most voracious market.

"We are in the league of these big projects, who are actually selling gas to China, and they have to transport it at $3000-5000 per tonne, but we are right in the middle of market, and our costs are less than $1.50/MMcf under full field development compared to $6-10/MMcf for imported gas.

"We sell gas at the same price, but our costs are so minimal."

Payments

Corrie admits the company's payment issues over the past year, which are still to be fully resolved, have acted as a dampener in interest, but he says issues like that are common in China for new developments, and were expected.

Payments from gas pilot production from the Sanjiaobei and Linxing PSCs have been held back, but Corrie said that was just a bump in the road.

"The money was always there, it had been paid by the customers, it was just sitting in joint accounts, it was just there are a lot of checks and balances for every stage of the approvals," he said.

"We've had our full entitlement from Linxing and we'll get it from Sanjiaobei. Most companies that operate in China experience payment delays at the early stages," he said.

Further, over the past few weeks Sino has not only been able to remit funds out of China to its bank account in Hong Kong for the first time, cash generated from its pilot gas sales, but it has finalised a new gas sales agreement with Shanxi gas distribution company Huasheng.

The two year agreement, for up to 10.5MMcfpd on a best endeavours basis, is priced at $US7/mcf for the first few months, and will send gas into a spur line Huasheng will build to Sanjiaobei from a 100MMcfpd pipeline it is finalising nearby.

It gives Sino more options to sell even more gas beyond its pre-existing deal to sell gas via the Yuji pipeline.

Development

From August, Corrie expects the new partner will be bedded in and the Chinese Reserves Report will be nearing completion.

On the base case plan, with $60 million cash with a $40 million undrawn facility, future operations are expected to be funded from cash and the balance sheet towards the Overall Development Plan, which is required to proceed to the next development phase.

It hopes to complete its ODP approvals next year and hit plateau production in 2020, simply harvesting its acreage after that.

At full field development, Corrie says Sino and its partners should be meeting 2-3% of Chinese gas demand, in part because the asset keeps growing as it has drilled development wells.

The completion of the CRR and ODP mean the company will slip into a new mode, simply monetising the resource, after a marathon effort over the years.

And there's plenty of upside, because around one third of its acreage hasn't seen a drillbit.

Partner

The addition of China New Energy Mining into the PSCs is likely to see the pace of the development increase, because MIE has suffered cashflow problems of late, and that has slowed work.

"Together with the money flowing from gas sales we have a very clear runway," he said.

The aim is to reach a year-end target of 25 million cubic feet per day by the end of 2016, with around 17MMcfpd from Linxing, and it will then work up accelerated plans for 2017.

"They want to run faster than us. It's nice to have a partner that's aggressive," Corrie said.

"I have spoken to the CNEM CEO. He called the day after the deal was announced, and the plan is to get the two of us seamlessly integrated once the deal closes in August, and we're agreed that we can deliver the 25MMcpd this year.

"The well stock is in place, although we are drilling a few other wells, and as soon as we get the payment from Sanjiaobei, which is imminent, work should restart there and we should double production to 14MMcfpd."

Around 120 wells have been drilled and 90 have been tested, and the company has a year's worth of production data.

Corrie believes that as long as Sino can keep producing gas at the levels it is today, it will be always have an edge over pipeline gas and LNG exports.

Record flow

The company styles itself as more production than exploration focused at the moment, because it has gas to monetise, but that doesn't mean it doesn't take a few risks, which resulted in the 2.7MMcfpd LXDG-08 well, a phenomenal result in a field where a vertical well just needs to come in the low six figures to make payback within about a year assuming an average flow rate of 700,000cfpd.

The well flowed unfracced over a single 5m zone.

"This is not an offshore turbidite reservoir, this is an onshore tight gas. And we have 1000m of shows in the system across multiple formations.

The well, drilled in the Linxing East permit, flowed the record rate from the upper Heu upper formation, and there could be other sweet spots around in the fluvial deltaic play, containing five reservoir units, and sometimes up to 100 zones with gas, pure methane generated by the deep coals.

The company feels it understands the reservoir and can find the sweetspots, with seismic helping it target new wells.

"Linxing East has surprised to the upside. We thought it was a bit tighter, but these well results are good," Corrie said.

The eastern block has seen fewer wells than the Linxing West or Sanjiaobei blocks, and contains exploration upside.

Sino expects to focus on vertical wells, which can be drilled at $1 million a pop, with a few more costly horizontal wells as needed.

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