G3 Exploration Regulatory News (G3E)

16th February 2010

GREEN DRAGON GAS LTD

("Green Dragon" or "the Company")

Reserves Upgrade and Operations Update

Green Dragon, one of the largest independent companies involved in the production of CBM gas and the distribution and sale of wholesale gas in China, is pleased to announce its 2009 year end gas reserves and value estimate conducted by NSAI and to provide the following operations update.

Reserves Highlights:

·; Total gas in place of 25.5 Tcf

·; Net 1P reserves increase to 32.9 Bcf - increasing the 1P NPV 10 to US$168.2m

·; Net 2P reserves increase to 261.3 Bcf - increasing the 2P NPV 10 to US$1.25bn

·; Net 3P reserves increase to 2,333.1 Bcf - increasing the 3P NPV 10 to US$9.35bn

·; Reserves & value increase based on:

o Employment of SIS technology - increasing coal in-seam drilling efficiency

o Improving gas pricing environment in China

Operational Highlights:

·; Production:

o Gas production was 131,750 mcf in the fourth quarter of 2009, representing an increase of 120% over the same period in 2008

o Gross gas production expected to exceed 1 Bcf in 2010

·; Drilling:

o Five of the ten wells drilled in 2009 were drilled using proprietary 'Dymaxion' SIS technology. SIS drilling technology is being deployed in 3 blocks in 2010

o 100 additional wells planned for 2010

·; Distribution Infrastructure:

o Footprint of pipeline and sales network now expanded beyond Beijing Development Area and now includes additional surrounding industrial districts on the outer perimeter of the 5th ring road in Beijing and one location in Shandong Province

o Plans to add 100km of distribution pipeline in 2010 - bringing total to 321km by end 2010

o 27km of additional pipeline being laid in producing Shizhuang South Block ("GSS") to expand gas sales in Henan, China's most populated province

o Access to 20 additional refuelling stations planned in 2010 in Henan region with proximity to gas producing block - GSS

·; Sales:

o Company's CBM gas is being sold downstream at market prices of $13.82 per mcf through wholly owned CNG retail stations 

o Gas sales from midstream distribution stations targeted to be 6 Bcf annually

o Gas sales in Beijing are expected to be 10 Bcf with growth in line with the market

·; Financials:

o Total discretionary growth capex targeted at US$250m over the next two years

o Capex funding through:

§ Current cash position

§ Debt

§ Gas sales

§ PSC partner participation

§ ConocoPhillips option to farm-in for US$120m by the end of December 2010 and a resulting revised capex split in 2011 and beyond

Overview:

·; Two year development programme aimed at:

o Gross gas production of 18 Bcf 

o Demand for gas in China expected to increase to 9.7 Tcf by 2020 

§ Gas supply today is 4% of overall energy mix

o Strong national and local government support for the development of CBM in China

Commenting, Mr. Randeep Grewal, Chairman and CEO of Green Dragon Gas, said:

" Today's reserve report reflects Green Dragon's exceptionally strong asset position in China. Today the Group is the one of the largest independent CBM companies in China, with a resource base of over 25.5 Tcf of gas in place. We already have the drilling technology, distribution and sales infrastructure in place which will allow us to fully exploit our strong asset position and dramatically increase production and sales 18 fold over the medium term. The Company remains financially well positioned with all the key foundations in place to achieve its ambitious growth plans".

Reserves Report

Total gas in place of 25.5 Tcf, 1P reserves increased to 32.9 Bcf, 2P reserves increased to 261.3 Bcf and 3P reserves increased to 2,333 Bcf. The estimates and evaluation of the reserves and resources contained in this announcement were prepared by independent reserve engineers, Netherland Sewell & Associates, Inc.

* The estimates shown above do not reflect the option held by ConocoPhillips to farm-in to the Shizhuang South, Shizhuang North and Qinyuan blocks pursuant to the agreement announced in August 2009.

This increase in reserves, and in particular the increase in proven reserves, is largely due to the employment of the Company's in seam SIS drilling technology over the past year. Green Dragon drilled its first SIS well in the Qinyuan block commencing on November 20th 2009. This well successfully completed with the horizontal well being drilled in-seam for a total distance of 1,330m.

The success of this well is a breakthrough for the Company. It proves the technology can be deployed to the Company's other blocks which are now piloting the technology.

The SIS technology has enabled Green Dragon to substantially increase the accuracy of its drilling programme, allowing a far greater percentage of productive metres drilled in-seam successfully. Not only does this technology make drilling far more efficient but also significantly increases the gas production potential of individual wells. As an example, drilling a 600m vertical well may open a 6m coal seam, whilst drilling a 1,500m SIS horizontal well could open 1,000m in seam; thus increasing the productive drilled meters from 10% to 66%. 

Green Dragon gained the proprietary SIS technology as part of the PACE acquisition made in May 2008 and intends to remain at the forefront of deploying the technology in China. In August 2009, the Company also entered an agreement with ConocoPhillips that is funding a programme aimed at proving that SIS wells can lead to a significant rise in gas recovery rates within the anthracite coals in China.

Operations Update

Production

Gas production from Shizhuang South increased by 120% in 2009 over 2008 to 48 million cubic feet per month. This block, which has been producing commercial gas since 2008, continues to improve its production profile in-line with expectations. Gas produced is currently being flared and choked ahead of the wells being connected to the Company's distribution infrastructure in the second quarter. This increase in production was as a result of additional wells drilled coming on stream quicker than initially expected and the increase in the total in-seam metres drilled. 

Drilling Activities

The Company drilled 10 additional wells in 2009, bringing the total number of wells drilled to 203. The additional wells drilled were within the Shizhuang South and Qinyuan Blocks.

As a result of the introduction of the SIS drilled technology in 2009, drilling efficiency improved significantly, with the percentage of metres drilled within the productive coal seams increasing from 10% in 2008 to 37% of the 14,794 metres drilled in total during 2009.

To date, the Company has drilled a distance of over 95 km. In 2010, that number is expected to increase by up to 70km, through 100 additional wells. The capital expenditure estimated for this drilling programme is approximately US$100m. Individual SIS wells are currently taking 29 days to drill.

 Infrastructure

Through the Company's 29% interest in Beijing Huayou, a gas distribution Company operating in the Beijing Development Area, Green Dragon has access to a pipeline network covering 221 km. Over the last year, the footprint of this network increased and now also includes locations in Shandong as well as additional locations along the 5th ring road in Beijing.

Green Dragon also plans to add a further 27km to the existing pipeline network in the producing Shizhuang South block, which will improve significantly our ability to target gas sales into China's most populated province, Henan.

In addition to the pipeline network, Green Dragon also has an interest in 2 CNG distribution stations, both profitable and annually dividend paying. Gas sales from the two profitable distribution stations are forecasted to be 6 Bcf annually.

Sales and CBM Market

Unlike other gas markets in China, CBM is deregulated, allowing Green Dragon to sell gas at market prices. The price being achieved through its wholly owned CNG refuelling station is currently US$13.82 per mcf.

Sales through CNG retail stations are made through two Company owned stations and third party owned stations. Green Dragon also provides third parties with CNG dispensers and currently has a contract to provide Petrochina with 38, of which 14 have been delivered.

Green Dragon currently supplies gas to 20,000 taxis in Shakou and a further 13,000 in Jiyuan on a monthly basis. The initiative, as mentioned above, to develop gas sales in the Henan region is expecting to add access to a further 20 CNG retail stations. The internal cost for this is estimated at US$1 million approximately per station not including the land costs which can vary.

In addition to Vehicle sales, Green Dragon also supplies gas to 26,076 residential customers.

Outlook

Over the next two years, total discretionary growth capex is targeted to be in the region of US$250m. This capex programme is aimed at achieving a substantial increase in upstream CBM gas gross production to 18 Bcf annually and total group gas sales, including gross wholesale gas of 6 Bcf in midstream and gross sales of 10 Bcf in downstream. This capex programme will be funded through a combination of existing cash, gas sales, PSC partner participation, debt and the agreement put in place with Conoco Phillips.

The market for gas in China remains extremely robust, with expectations of growth in the region of approximately 10% per annum. Currently, gas represents only 4% of the total energy mix in China. 

With this positive increase in reserves, proven technology, an established distribution network and a strong discretionary targeted growth capex programme in place to grow production into an expanding market, management considers Green Dragon to remain extremely well placed for the future.

The estimates in this announcement have been prepared in accordance with definitions and guidelines set forth in the 2007 Petroleum Resources Management System (PRMS) approved by the Society of Petroleum Engineers. The information in this announcement pertaining to Green Dragon's China reserves has been reviewed by Mr. Craig H. Adams, a Vice President of Netherland, Sewell & Associates, Inc. He is a registered Professional Engineer in the State of Texas and is a member of the Society of Petroleum Engineers.

For further information on the Company and its activities, please refer to the website at www.greendragongas.com or contact:

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