You have to do some pretty basic arithmetic to get a handle on...

You have to do some pretty basic arithmetic to get a handle on things and why Camac said possible 300 BCF as the potential total recoverable gas from the Zijinshan license.

Were they being conservative ? or optimistic and talking up their asset before selling it ?

Well the Zijinshan Production Sharing Contract located on the eastern fringe of the prolific Ordos Gas Basin in Central China, has gas in place estimates in the range 1 to 3.8 Trillion Cubic Feet (tcf).

Tight gas reservoirs generally have average recovery rates of 6% to 10% of the Gas In Place (GIP) as recoverable gas (the gas that can be extracted, the rest stays is the ground and is not recoverable).


So, where did Camac get their 300 BCF from ?

It looks to me like they have used perhaps a 3 TCF gas in place figure and a 10% recovery rate - so you end up with 300 BCF recoverable from the whole Zijinshan license area. But thats using pretty much top line figures........... eg its being very optimistic imo.

Lets run through :

Worst case - nothing recoverable - zilch.

Cases using available figures and success in flow testing -

6% of 1 TCF so max production 60 BCF needing around 30 wells.

6% of 2 TCF so max production 120 BCF needing around 60 wells.

10% of 1 TCF would be 100 BCF needing around 50 wells.

6% of 3 TCF would be 180 BCF needing around 90 wells.

10% of 3 TCF would be 300 BCF needing around 150 wells.


Earlier calculations by me came to 1.2p per successful well for LRL, this is based on Sino figures who say each well can on average recover 2 BCF of gas (the draining area is very small per well due to the tight reservoir nature).

(2 BCF per well / After back in (if taken by PetroChina, LRL are left with 60%.
60% of 2 BCF is 1.2 BCF net to LRL.
Lets say taking off uplift costs they get 6 US$ per MCF.
1.2BCF is therefore worth 7.2m US$ before tax and royalty.
So lets say 5m US$ after tax/royalty which is 3.1m GBP or 1.2p a share.
So its looks that ZJS-05 success = 1.2p a share to LRL.)

But each well costs around 1.7m US$ to drill (100% basis) and then with corporate overheads, admin costs and any bonus payments, share plans etc... lets call it around 1.2m US$ per well net to LRL to drill taking in overhead/admin costs and a 60% cost contribution (PetroChina backing if for their 40% cut). Lets add this in to the equation.

2 BCF per well, after back in LRL have 60%.

60% of 2 BCF recoverable per well leaves 1.2BCF.
Lets say they sell this for 6 US$ per MCF after taking off uplift costs.
After tax, royalty lets say they are left with 5m US$, and now take off 1.2m US$ for costs of drilling the well, company overheads, admin, director salaries etc..
That leaves a pure 3.8m US$ profit per well which is circa 2.36m GBP.

2.36m GBP per well profit is 0.94p per share incremental rise in share price per successful well drilled (based on the assumptions stated).


So 12p cash in the bank.

If ZJS-05 well flows well it adds to this to give 12.94p valuation (12+0.94)

If the next 2 wells are also good this moves to 14.82p valuation (12+0.94+0.94+0.94)

If they just get 6% of 1 TCF then thats 12p cash adding on 30 wells at 1p each gives 28.2p extra totaling 40.2p a share after all the 30 wells on this case are drilled all over the license.

Their best case appears to be 150 wells drilled which would give 12p cash and then 150 x 0.94p per well totaling 153p a share, once 150 wells are drilled in ? years.

But at the early stage my my calculations each successful well is worth 0.94p to be added on to the cash of 12p a share.

And given this license already has had 4 non-commercial wells drilled on it, one success (if this well flows commercially) leaves it with a 20% success rate going forward, so assuming 30 wells or 50 wells or 100 wells in future would all be 100% success is rather optimistic.

Lots of assumptions and taking figures from Camac and Sino etc... but what else can you do when there is nothing else to use.

Key things moving forward to look for from LRL are :

Estimated Gas In Place on the license - upper and low GIP figures.
Recovery Factor estimates - 6% recoverable ? 10% recoverable ? Less ? More ?
EUR per well - do they think 2 BCF recoverable per well is about right ? Less ? More ?
Porosity figures - what are they ?
Permeability figures - what are they ?

The flow rate levels is not very important info, only commercial or not (unless of course the flow rate is very low in which case its a major issue imo), the key is the reserves, the recoverable gas and how much gas can be drained per well - that is the key to any valuation in my view. If you can only extract circa 2 BCF per well then it matters not too much if you get it out in 1 year or 5 years - only that the quicker you get it out then you have the cash to drill more wells, if its too slow in coming out then you will need to raise cash by fund raising to keep working cap up while you drill - so yes, it has some bearing to the overall economics and viability, but my case here assumes flow rates are very good and they can self fund the drilling from ongoing cash flow due to high flow rates - if thats not the case its not quite so positive.

If the currently being tested well yields commercial flow rates it will be positive, it will imo give a supported share price of 13p and open the door to a higher EV value - perhaps 18p to 20p a share will be supported taking into account the potential for future success.

However with presently a 0% commercial well rate in this license (0 commercial from 4 drilled) if this well does flow commercially then it moves to 1 success in 5 wells and that is not a very high success rate.

If they can move the success rate up to 60% or higher then its fair to say the market will start to value the share price higher - but that is going to take continued success, if they can get it with this first drill and carry on the run - and any failures will have a significant detrimental effect on confidence and sentiment.

All of course, IMO, NAG, DYOR !