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Sino Gas & Energy Holdings outlines path to major gas producer status

Published: 16:15 30 Oct 2017 AEDT

Project location map in China
Low project costs and increasing demand for gas will support high margins

Sino Gas & Energy Holdings (ASX:SEH) has submitted for approval its first overall development plan (ODP) for its Linxing gas project located in China’s largest gas producing basin, the Ordos Basin.

This marks a significant advancement in unlocking the material value of this asset, which has a first phase production target of 350 to over 550 million standard cubic feet per day.

A new US$100 million debt facility with Macquarie is expected to provide adequate funding for full field development in combination with existing cash and projected cash flow from operations.

The development plan outlines a phased capex strategy with short well payback periods to support a target to deliver free cash flow from 2020.

Not only will Sino be one of the lowest cost natural gas producers in China but it will become one of the largest producers in its ASX-listed peer group.

Glenn Corrie, managing director, commented

“Our proposed development plan, prepared with the benefit of not only significant appraisal and production data but also invaluable knowledge transfer from analogous fields, clearly demonstrates the substantial underlying value of our Ordos Basin gas assets.

“With targeted production of 350 to over 550 million standard cubic feet per day by 2022, Sino Gas is set to become a material contributor to China's domestic natural gas supply while targeting significant free cash flow from 2020.

“The plan showcases the large scale, low cost nature of the assets and the proven technology necessary to maximise the value of the fields.”

Background

Sino is a natural gas producing company that holds interests in two onshore Chinese gas fields, the Linxing (31.7%) and Sanjiaobei (24%) projects.

The company has production sharing contracts (PSCs) with a separate major Chinese partner at each project.

The partners are entitled to participate upon ODP approval up to their PSC working interest by contributing their future share of costs.

Linxing ODP background

The first submitted ODP focuses on core development and pilot production areas accounting for ~20% of the current discovered area of the Linxing East and West blocks.

The submission to its partner, China United Coalbed Methane Limited (CUCBM), represents a key regulatory milestone in the development of the Linxing PSC.

During January 2017, Linxing was designated as a strategic project for prioritisation under the 13th Five Year Plan and is a priority for CUCBM who support a staged approval approach.

The staged approval approach facilitates continued ramp-up of production in parallel with accelerated approvals.

Macquarie debt facility

Sino has entered into a committed letter of offer with Macquarie Bank (ASX:MQG) for a new five year senior secured US$100 million debt facility.

US$68 million is fully committed and, subject to Macquarie credit approval, an additional US$32 million is available to potentially further accelerate project development.

The committed US$68 million, along with cash on hand and expected cash flow from operations is anticipated to fully fund Sino’s share of the development of the Linxing and Sanjiaobei projects.

The debt facility is subject to final documentation and completion of customary conditions precedent.

Current gas pilot production

Through Sino’s pilot program, it achieved an average production rate in the third quarter of circa 13 million standard cubic feet per day from Sanjiaobei and Linxing.

Sino plans to bring online 15-20 additional pilot production wells in the fourth quarter with full-year gross production expected to average 16 million to 18 million standard cubic feet per day.

Construction of the new Linxing North central gather station (CGS) is on track for commissioning around the end of 2017 to early 2018 as originally planned.

Once completed, gross installed processing capacity across the Linxing PSC will double and total capacity across both the Linxing and Sanjiaobei PSCs will increase to over 40 million standard cubic feet per day.

Future production profile

With China’s gas import dependency currently over 35% and gas demand expected to triple by 2030, Sino is well positioned and supported by government policy to grow its production profile.

Development plans for both Linxing and Sanjiaobei are major catalysts in realising the value of Sino’s delineated top-tier gas resources across its 3,000+ square kilometre land position.

Phase 1 of the Linxing ODP focuses on the 1,131 square kilometre discovered area and Phase 2 will focus on the prospective area.

The ODP’s Phase 1 includes ~1,600 wells that will produce 350 to over 550 million standard cubic feet per day.

Sino is targeting full-cycle operating and capital expenditure of less than US$2 per thousand standard cubic feet per day making it one of lowest cost gas producers in China.

Sanjiaobei ODP submission on track

The Sanjiaobei ODP remains on track for submission to PSC partner PetroChina before the end of 2017.

Other priorities for 2017 include:

- Achieve average gross full-year production of 16-18 million standard cubic feet per day;
- Install new CGS on Linxing North; and
- Further well performance improvements.

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