Green Dragon Gas (AIM:GDG) has entered into an agreement with PetroChina Huabei Oilfield Company under which it will gain access to a key PetroChina pipeline, allowing it to distribute and monetise its growing gas production in China. Green Dragon will first need to construct a pipeline connecting its own integrated gas production facility (IPF) and the Huabei Oilfield Fan 4 station. The Huabei Oilfield is south west of the Green Dragon’s gas gathering station (the IPF) and is a connection point to PetroChina’s West East 1 pipeline, the focus of the access agreement announced today. The initial design for Green Dragon’s 7.5km pipeline connecting to Huabei's system is based on an annual capacity of 6.45 billion cubic feet. Subject to obtaining the relevant permission, the connection programme is expected to be complete by the end of 2011 at an estimated total cost to Green Dragon of US$2.5 million. The agreement is for 20 years, with gas contracted annually for the following year's volume and price. The first contract is for an annual production of 2.58 bcf of gas. It is envisaged that following additional construction approvals by the local government the pipeline will be expanded to receive the remaining 3.87 billion cubic feet. The West East 1 Pipeline is 4,000km long, running from Lunnan in Xinjiang to Shanghai. The pipeline passes through 66 counties in the 10 provinces in China and has a total capacity of 12 billion cubic metres of natural gas, annually. The pipeline is owned and operated by a subsidiary of PetroChina. Randeep Grewal, chairman and chief executive of Green Dragon Gas, said :"This agreement is a further demonstration of Green Dragon's commitment to monetise its assets as gas production increases to the initial target gas volume of 18bcf from the annualised rate of 1.3bcf as at 31 December 2010.” Green Dragon will continue to add strategic infrastructure that facilitates its capacity to efficiently monetise its increasing gas production in a timely fashion, he said. Grewal added: “Importantly for us, the West East pipeline can now function both as an entry point for our upstream gas and an exit point at our midstream Zhengzhou distribution facility." Broker Evolution Securities responded to the statement by leaving both its valuation and recommendation for Green Dragon shares unchanged. It rates the shares a ‘buy’ with a price target of US$17. The broker says that as a result of making the 7.5 km connection to Petrochina’s Huabei oilfield fan 4 station, Green Dragon “can grow its output considerably”. Green Dragon is one of the largest independent companies involved in the production of coal bed methane (CBM) gas and the distribution and sale of wholesale gas in China. CBM is a type of natural gas that was trapped when coal seams formed millions of years ago. In certain parts of the world it is abundant but getting it out of the ground is a complicated business, particularly in China where coal seams are brittle and highly faulted. Indeed the geological complexities of China’s coal beds had posed an almost unsolvable puzzle. But in 2008, Green Dragon – through its recently spun-out drilling division Greka - cracked it with some clever technology called “surface-in-steam” methodology. Now with Greka’s help Green Dragon is about to embark on a huge 100-well development programme to unlock this immense potential. The programme is targeting an 18-fold uplift in group CBM production.

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