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Interview

with Randeep Grewal, Founder & Chairman, Green Dragon Gas

07.09.2012 / Energyboardroom

Mr. Grewal, when you founded this company in the late ‘90s, CBM was a mismanaged industry in China. Majors like Chevron and BP exited the sector in the ensuing years, believing it would not be lucrative. China’s CBM legislation, and its focus on CBM development, have greatly changed today—especially with the rollout of the 12th 5-Year Plan. Why did you believe in this sector when others did not, and how difficult was it to grow the company to its present point, where it finally seems to be in the right place at the right time?

Why did I believe in the sector? Having a technical background and seeing a successful development in the US, in which I have participated, it was clear to me that the unconventional nature of CBM creates a unique paradox: it is neither oil & gas nor is it mining. It is a cross between the two. This provides an interesting dilemma: what is the right skill set you need to develop this unconventional resource. You have to have a good understanding of coal and a very good understanding of infrastructure cost. Moreover, in the case of CBM the development of infrastructure is completely different than in the case of oil & gas. The hybrid nature is a specialty and when the industry first started globally in the US I was fortunate enough to be part of it, as an investor, witnessing the success history in the US. Therefore, I was resource competent.
In terms of why did I maintain my conviction: when I first came to China in 1992 I took a bet, that worked out very well, that the Central Government is going to execute successfully and do the right things. And I must admit that Chinese policies are clear, consistent and stable. As an investor you are provided with 5 years in advance, you have a plan which is very clear and predictable and the wonderful news is that it actually gets done. It is not a political statement to get elected, it is simply an execution plan that this entire machinery is committed to deliver.
These two things together gave me the conviction to continue with CBM. The first companies ever to sign CBM contracts in this country were Enron, Phillips, Arco, Texaco and Greka. Four majors and unknown Greka. We were the only ones who have been on the ground from day one, every day. We are still here and we are the only ones who are successful out of the first pack. And yes, everybody else did pack up and leave. And in the last 15 years we have seen a lot of people come and lot of people leave. CBM has a regional technical development; you cannot migrate the aptitude and skill and expect to achieve success; you have to understand the region and cater technologies to produce this resource commercially. And that takes time and conviction and it takes a lot of capital…and we have done all that.
Last month, Green Dragon announced that it was on track to reach a production rate of 18 billion cubic feet of gas—compared with just 1.5 bcf produced in 2011, which was itself a 150% increase over 2010! Can you give our readers an overview of your current operation, and what your latest successes mean to the growth of your bottom line?

The exponential growth we are forecasting is predicated on a very well defined historical performances. We have now developed the right approach towards execution and we have a track record of the wells, in terms of what they cost, how long it takes to drill and how stable the production is. We have produced at a stable rate over 4 years already. Our forecast is simply replicating what we have done for the last four years; we shall not create something new. It is time to start manufacturing what we have been delivered. The forecast is pure mathematics.

How has your drilling division, Greka, managed to solve the unique challenges of China’s CBM geography, with coal seams that are notoriously brittle and highly faulted?

The brittle and highly faulted coals is precisely the reason for which CBM development has been so slow here in China. It is a unique geography that you cannot find in any other part of the world, so it has been incredibly complicated. We have been able to resolve it from an engineering perspective: we started with a basic approach, by drilling vertical wells. Over the last 10 years we have done progressive changes to the drilling programme to arrive where we are today. But because we changed one parameter each time we knew what was working and what was not working. We focused on our coals in our regions, we made one change and we waited for its response. We had the patience to wait for that. I was deploying my own capital, I wasn’t using somebody else’s money so we did not have the same pressure of time. Today we have a very successful drilling methodology, realizing the world’s most famous rigs, manufactured in Italy. They are unique semi-automated rigs; to give you an example, usually in the industry there are 25 people working on one shift. Due to our technology, we have only 3.

Other CBM companies we have spoken to have noted the difficulties they have experienced in getting access to a pipeline. As a result, their CBM sales have often been restricted to small volumes to the local transportation sector. Do you find any challenges in distribution?

I think that Greka is the only non state enterprise in China that is producing domestic gas and selling it directly to the consumer. We worked very hard for a very long time to produce a very difficult resource. Therefore, we want to sell it for the optimal value and our contracts allow us to do that.
So no, we are not facing any challenges of utilizing pipeline infrastructures, because we are building our own. We are an integrated gas producer and we sell directly to the end consumer, therefore we face no problems regarding distribution.

How do independents like yourself compliment your partners and state players like PetroChina and CUCBM?
We used to have a hot and cold relationship. It all depends on what the current agenda is. We have been the same organization, same management, same structure from day one, but over this decade we have seen a lot of evolution. Every management team that comes in has new views, new ambitions, new things that they want to accomplish. Our approach to this is very simple. Where we operate we have 6 blocks with the largest acreage holder in China, we have invested more capital than everybody else put together and we are doing exactly what the agreement calls us to do: produce the gas commercially and sell it to the optimal price.
To conclude, sometimes the relationship is fantastic, other time there are elements that you have to manage. We are working in China, and that’s the way it is. No relationship in life is always the same: it goes up and then it goes down and it is important to find that balance to keep it going.

In a recent interview, you were quoted as saying, “We love getting paid global international prices with domestic costs—we will do that all day long.” Do you believe the market will remain this attractive for the foreseeable future?

The market is actually going to get better. We have no worries regarding the inflationary pressure, for example. The inflationary pressure is for that people that are not using the extent of domestic resources as we are using. All of our men power is domestic and we own all our equipment. There is yet a continued discount of gas versus gasoline where we operate. My view is that the Government will allow that discount to come to parity, because if there was in the past a reason to create incentives, the reasons are not valid anymore. Another reason for which the market is getting better is the appreciation of RMB.
To summarize, it is more that “I will do it all day long”, actually “I will do it lifelong.” There is no reason to stop; we will keep doing it until the end of time.

While CBM is a strong focus in China today, much of the global oil and gas community is more excited about China’s potential for the commercialization of shale resources. What are your views on the practicability of shale exploitation in China? Do you feel threatened, as a CBM company, by what some see as an inbound ‘shale boom’?
I don’t respond to vogues and shale gas right now is just a vogue: people are excited about it and that’s all. This excitement comes from massive success of shale gas in the US. But what people should remember, and most of us in the energy sector know this, is that shale gas history in the US has been constant in the past 25 years. So the fact that US is producing very large volumes very successfully is because there is a long track record of getting there. And China needs to start this track record.
By contrast, CBM is already mature, because we have spent the decade developing the technology to produce it. Shale gas needs to go through its own development cycle. There is no magic switch. If you sign a shale gas agreement today you are 5 years away from making it matter from a production point of view. The technology needs to be developed, the geology needs to be understood, the infrastructure needs to make its way through. It will get there, there is no question about it. But at the same time it is not a simple switch, it needs time.
Moreover, I do not see the resources in competition, I see the resources complimentary, just like they were in the US. And in the US the CBM was produced very profitably volumetrically in the ’90 and 2000; then we have done a lot of shale talk in 2005 and it really became prolific in 2008. But 18 years prior to that there was CBM production.
I think that the discussion about shale is mostly media driven. As a developer, I see shale as a long term investment and we have been evaluating it for a while; but for now we want to capitalize the success we have with CBM, while continuing to evaluate shale while it goes through its evolution process.

Mr. Grewal, when you founded this company in the late ‘90s, CBM was a mismanaged industry in China. Majors like Chevron and BP exited the sector in the ensuing years, believing it would not be lucrative. China’s CBM legislation, and its focus on CBM development, have greatly changed today—especially with the rollout of the 12th 5-Year Plan. Why did you believe in this sector when others did not, and how difficult was it to grow the company to its present point, where it finally seems to be in the right place at the right time?

Why did I believe in the sector? Having a technical background and seeing a successful development in the US, in which I have participated, it was clear to me that the unconventional nature of CBM creates a unique paradox: it is neither oil & gas nor is it mining. It is a cross between the two. This provides an interesting dilemma: what is the right skill set you need to develop this unconventional resource. You have to have a good understanding of coal and a very good understanding of infrastructure cost. Moreover, in the case of CBM the development of infrastructure is completely different than in the case of oil & gas. The hybrid nature is a specialty and when the industry first started globally in the US I was fortunate enough to be part of it, as an investor, witnessing the success history in the US. Therefore, I was resource competent.
In terms of why did I maintain my conviction: when I first came to China in 1992 I took a bet, that worked out very well, that the Central Government is going to execute successfully and do the right things. And I must admit that Chinese policies are clear, consistent and stable. As an investor you are provided with 5 years in advance, you have a plan which is very clear and predictable and the wonderful news is that it actually gets done. It is not a political statement to get elected, it is simply an execution plan that this entire machinery is committed to deliver.
These two things together gave me the conviction to continue with CBM. The first companies ever to sign CBM contracts in this country were Enron, Phillips, Arco, Texaco and Greka. Four majors and unknown Greka. We were the only ones who have been on the ground from day one, every day. We are still here and we are the only ones who are successful out of the first pack. And yes, everybody else did pack up and leave. And in the last 15 years we have seen a lot of people come and lot of people leave. CBM has a regional technical development; you cannot migrate the aptitude and skill and expect to achieve success; you have to understand the region and cater technologies to produce this resource commercially. And that takes time and conviction and it takes a lot of capital…and we have done all that.
Last month, Green Dragon announced that it was on track to reach a production rate of 18 billion cubic feet of gas—compared with just 1.5 bcf produced in 2011, which was itself a 150% increase over 2010! Can you give our readers an overview of your current operation, and what your latest successes mean to the growth of your bottom line?

The exponential growth we are forecasting is predicated on a very well defined historical performances. We have now developed the right approach towards execution and we have a track record of the wells, in terms of what they cost, how long it takes to drill and how stable the production is. We have produced at a stable rate over 4 years already. Our forecast is simply replicating what we have done for the last four years; we shall not create something new. It is time to start manufacturing what we have been delivered. The forecast is pure mathematics.

How has your drilling division, Greka, managed to solve the unique challenges of China’s CBM geography, with coal seams that are notoriously brittle and highly faulted?

The brittle and highly faulted coals is precisely the reason for which CBM development has been so slow here in China. It is a unique geography that you cannot find in any other part of the world, so it has been incredibly complicated. We have been able to resolve it from an engineering perspective: we started with a basic approach, by drilling vertical wells. Over the last 10 years we have done progressive changes to the drilling programme to arrive where we are today. But because we changed one parameter each time we knew what was working and what was not working. We focused on our coals in our regions, we made one change and we waited for its response. We had the patience to wait for that. I was deploying my own capital, I wasn’t using somebody else’s money so we did not have the same pressure of time. Today we have a very successful drilling methodology, realizing the world’s most famous rigs, manufactured in Italy. They are unique semi-automated rigs; to give you an example, usually in the industry there are 25 people working on one shift. Due to our technology, we have only 3.

Other CBM companies we have spoken to have noted the difficulties they have experienced in getting access to a pipeline. As a result, their CBM sales have often been restricted to small volumes to the local transportation sector. Do you find any challenges in distribution?

I think that Greka is the only non state enterprise in China that is producing domestic gas and selling it directly to the consumer. We worked very hard for a very long time to produce a very difficult resource. Therefore, we want to sell it for the optimal value and our contracts allow us to do that.
So no, we are not facing any challenges of utilizing pipeline infrastructures, because we are building our own. We are an integrated gas producer and we sell directly to the end consumer, therefore we face no problems regarding distribution.

How do independents like yourself compliment your partners and state players like PetroChina and CUCBM?
We used to have a hot and cold relationship. It all depends on what the current agenda is. We have been the same organization, same management, same structure from day one, but over this decade we have seen a lot of evolution. Every management team that comes in has new views, new ambitions, new things that they want to accomplish. Our approach to this is very simple. Where we operate we have 6 blocks with the largest acreage holder in China, we have invested more capital than everybody else put together and we are doing exactly what the agreement calls us to do: produce the gas commercially and sell it to the optimal price.
To conclude, sometimes the relationship is fantastic, other time there are elements that you have to manage. We are working in China, and that’s the way it is. No relationship in life is always the same: it goes up and then it goes down and it is important to find that balance to keep it going.

In a recent interview, you were quoted as saying, “We love getting paid global international prices with domestic costs—we will do that all day long.” Do you believe the market will remain this attractive for the foreseeable future?

The market is actually going to get better. We have no worries regarding the inflationary pressure, for example. The inflationary pressure is for that people that are not using the extent of domestic resources as we are using. All of our men power is domestic and we own all our equipment. There is yet a continued discount of gas versus gasoline where we operate. My view is that the Government will allow that discount to come to parity, because if there was in the past a reason to create incentives, the reasons are not valid anymore. Another reason for which the market is getting better is the appreciation of RMB.
To summarize, it is more that “I will do it all day long”, actually “I will do it lifelong.” There is no reason to stop; we will keep doing it until the end of time.

While CBM is a strong focus in China today, much of the global oil and gas community is more excited about China’s potential for the commercialization of shale resources. What are your views on the practicability of shale exploitation in China? Do you feel threatened, as a CBM company, by what some see as an inbound ‘shale boom’?
I don’t respond to vogues and shale gas right now is just a vogue: people are excited about it and that’s all. This excitement comes from massive success of shale gas in the US. But what people should remember, and most of us in the energy sector know this, is that shale gas history in the US has been constant in the past 25 years. So the fact that US is producing very large volumes very successfully is because there is a long track record of getting there. And China needs to start this track record.
By contrast, CBM is already mature, because we have spent the decade developing the technology to produce it. Shale gas needs to go through its own development cycle. There is no magic switch. If you sign a shale gas agreement today you are 5 years away from making it matter from a production point of view. The technology needs to be developed, the geology needs to be understood, the infrastructure needs to make its way through. It will get there, there is no question about it. But at the same time it is not a simple switch, it needs time.
Moreover, I do not see the resources in competition, I see the resources complimentary, just like they were in the US. And in the US the CBM was produced very profitably volumetrically in the ’90 and 2000; then we have done a lot of shale talk in 2005 and it really became prolific in 2008. But 18 years prior to that there was CBM production.
I think that the discussion about shale is mostly media driven. As a developer, I see shale as a long term investment and we have been evaluating it for a while; but for now we want to capitalize the success we have with CBM, while continuing to evaluate shale while it goes through its evolution process.

As a man that has founded businesses across the world, from the Western to Eastern Hemisphere, how would you describe your approach toward the management of Green Dragon Gas? What can you communicate to other entrepreneurs about the greatest mistakes to avoid as the founder of a company?

I would sum it up in a few words. First of all, if you are going to develop something from the scratch…I am actually very biased being an engineer… you have to take a very logical step and commit to the logic until the end and not get detoured from the logic because of external factors. When you develop a resource company the resource drives your decision and regardless the pressures around the resource, the resource deserves a logical development.
And the second thing is patience, which is a painful process, because you want to start running faster.
If you want to know what my decision is going to be, follow the logic. Probably the biggest challenge for me here was to respect the commitment I have made. It was difficult because the geological conditions. I saw around me the majors going out and this action discredited the entire industry. I have understood that to make it commercial, one has to develop proprietary technology for this geology. Everybody knew that the coal was under saturated, brittle and it was sitting relatively deep. What we did not know from the beginning was how deeply faulted the coals are; and I must admit that they are terribly faulted.
In my case the attraction was represented by the stable policies of the government. Than the bad news came: everybody was going away. So do you stay or do you follow the flock? You said that I have been at the right place in the right time. But I also have been here a decade. But I had the conviction to stay. There were two things to protect: the commitment to the central government and the big challenge I had to face and I was not willing to give up. Now we are 100% in the right market, at the right time, in the right place, with the right technologies.
What is your final message to the readers of OGFJ?

For those that are looking at China: you need 10 years for the understanding of technology, developing the system and developing the relationships. The key word for me is “10 years” This is not a quick go. Green Dragon Gas is the only company with the 10 years continuous experience. We have been out of vogue for such a long time and we are in the vogue after so much time of patience. What distinguishes us: we have been on the ground and we have accomplished.
I would sum it up in a few words. First of all, if you are going to develop something from the scratch…I am actually very biased being an engineer… you have to take a very logical step and commit to the logic until the end and not get detoured from the logic because of external factors. When you develop a resource company the resource drives your decision and regardless the pressures around the resource, the resource deserves a logical development.
And the second thing is patience, which is a painful process, because you want to start running faster.
If you want to know what my decision is going to be, follow the logic. Probably the biggest challenge for me here was to respect the commitment I have made. It was difficult because the geological conditions. I saw around me the majors going out and this action discredited the entire industry. I have understood that to make it commercial, one has to develop proprietary technology for this geology. Everybody knew that the coal was under saturated, brittle and it was sitting relatively deep. What we did not know from the beginning was how deeply faulted the coals are; and I must admit that they are terribly faulted.
In my case the attraction was represented by the stable policies of the government. Than the bad news came: everybody was going away. So do you stay or do you follow the flock? You said that I have been at the right place in the right time. But I also have been here a decade. But I had the conviction to stay. There were two things to protect: the commitment to the central government and the big challenge I had to face and I was not willing to give up. Now we are 100% in the right market, at the right time, in the right place, with the right technologies.
What is your final message to the readers of OGFJ?

For those that are looking at China: you need 10 years for the understanding of technology, developing the system and developing the relationships. The key word for me is “10 years” This is not a quick go. Green Dragon Gas is the only company with the 10 years continuous experience. We have been out of vogue for such a long time and we are in the vogue after so much time of patience. What distinguishes us: we have been on the ground and we have accomplished.

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