CNOOC & CUCBM Accelerate Green Dragon's Development via Binding Agreement

Source: 4/2/2014, Location: Asia

Green Dragon Gas Ltd., one of the largest independent companies involved in the production and sale of CBM gas in China, is pleased to announce that it has entered into a binding agreement with China United Coalbed Methane Corporation (CUCBM), a subsidiary of China National Offshore Oil Corporation (CNOOC), regarding five of its Production Sharing Contracts (PSCs) in China.

Randeep S. Grewal, Founder and Chairman of Green Dragon Gas, commented:

"This agreement substantially de-risks the Company's assets, paving the way for us to rapidly build on existing production and sales and to fully realise the market potential for our gas in China. The agreement also allows the Company to open a cooperative and positive chapter in relations with CNOOC and CUCBM. We now have a well-capitalised, supportive partner committed to developing our vast acreage and producing the substantial multi-TCF gas resource with us over the next 20 years. While our GSS block is already in commercial and profitable production, we expect GSN to follow shortly. GDG can now look forward to the continued successful execution of our business plan as the pioneering CBM developer in China.

Nine months of continuous negotiations has resulted in a historic and materially accretive conclusion to the Company and its shareholders and opens a very rewarding chapter. Green Dragon has delivered on its commitment to protect Shareholder value and rights. Throughout the negotiations this objective was adhered to and successfully delivered.

The Company has a direct equity interest in over 1,800 drilled wells. The equity interest varies between 47%-70% and the total invested capital exceeds US$1 billion. We have indeed migrated from an exploration company to a production company with a substantial proven reserve and a large acreage to develop. We expect to participate in cash flows from 2013 onwards from existing legacy wells and continue a robust development plan with our cooperative partner CNOOC and CUCBM.

Given the extent of the drilling already undertaken over the last two years, which had not been accounted for in our previous reserve audits, as previously estimated by our in-house engineers, we would expect to see a significant migration of reserves. Following the audit of our reserves, we will focus on our 150 LiFaBriC well drilling programme at GSS, which will be drilled by Greka Drilling.

Finally, we thank all the Shareholders and employees who have supported the Company since inception. The Company has always been very consistent and clear of its bi-lateral treaty protected PSCs right, title and interest and are pleased to conclude this matter amicably in finality."

Details of Binding Agreement

Shizhuang South Block (GSS)

·Under the agreement, operatorship of the GSS block will continue under the Company except for the wells drilled by CUCBM in Coal Seam 3
·The circa 1,300 legacy wells drilled by CUCBM will be operated by them, with the remainder continuing to be operated by GDG
·GDG equity participation in the entire block increases from 60% to 70% following the cost recovery to CUCBM of US$13 million (as provided by the PSC) which will be paid from the GDG operated wells
·GDG and CUCBM to each be entitled to cost recovery at a preferential rate from wells they operate - percentage of gross profit to cost recovery, will increase from 75% to 90%
·Option for GDG to deliver gas directly into CUCBM infrastructure
·GDG to continue as Operator in the remaining block including the entire second Coal Seam 15 which is prevalent in the entire block below Coal Seam 3. Coal Seam 15 lies approximately 150 meters below Coal Seam 3. Legacy wells (as referred to above) have been confined to Coal Seam 3 as have the agreements relating to carried interest and non operated interest
·The Government has approved two ODPs within the GSS Block
·CUCBM expected to invest an additional US$250 million to complete offtake infrastructure, enabling gas sales - bringing the total estimated investment to US$700 million (subject to audit), inclusive of the 1,300 wells drilled

Shizhuang North Block (GSN)

·CUCBM has committed to invest an additional US$100 million towards exploration and production in exchange for a further 10% interest in GSN, resulting in each company holding a 50% participating interest
·CUCBM has already invested an estimated US$100 million in GSN to drill 250 wells and PSC extended by two years with additional period extensions subject to Government approval

Qinyuan Block (GQY)

·Sub-divided into two equal sized blocks, A & B, under the original PSC framework, with each operator bearing all exploration expenses in their respective areas
·Block A to be held 90% by CUCBM and 10% by GDG, with CUCBM as operator
·Block B to be held 40% by CUCBM and 60% by GDG with GDG as operator

Fencheng (GFC) and Panxie East (GPX)

·Status quo
·GDG participating interest to remain unchanged for both PSCs
·GDG to continue as operator with both parties agreeing to perform their respective obligations under both PSCs

GDG and CUCBM will convene JMC meetings for each of the five PSCs. Each party shall further disclose to each other all technical information and related Overall Development Plans under the PSCs, followed by a third party audit with respect to certain cost recovery aspects of the parties' respective investments in each of the PSCs.

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