G3 Exploration Regulatory News (G3E)

21 May 2013

GREEN DRAGON GAS LTD

("Green Dragon" or "the Company")

Continuation of Shareholder Value Focused Business Plan to Monetize Upstream Growth

The Board of Green Dragon Gas Ltd. (AIM:GDG), one of the largest independent upstream companies involved in the production of CBM gas in China, is pleased to announce that it has concluded a comprehensive business review and is implementing a strategically focused growth plan.

The Company is committed to be a focused upstream (E&P) business through the continued divestiture of the ancillary businesses developed and acquired by Green Dragon out of necessity to achieve the growth as a pioneer in the Chinese CBM market. At the conclusion of this plan, the Company will be a high growth E&P business within the exponentially growing unconventional gas market in China with reduced fixed costs.

Highlights

·; Continuation of plan evidenced by the successful demerger of Greka Drilling Limited and proposed demerger of Greka Engineering and Technology Ltd.

·; Appointment of Morgan Stanley as financial adviser in relation to the proposed sale of the Company's 29% effective interest in Beijing Huayou United Gas Development Co. Ltd, the downstream wholesale gas distribution business in Beijing

·; Completion of divestment plan will result in a focused exploration and production company with reduced fixed cost base which is already operationally cash flow positive

·; Production growth of 61% achieved in Q1 2013 with production of 7,516 Mcf per day (212,908 cubic meters per day) compared with 4,660 Mcf per day (132,022 cubic meters per day) at the end of Q1 2012

·; Planned redemption of the convertible bond

·; Plan to progress a Hong Kong Main Board Listing for Green Dragon in late 2014 or early 2015 in addition to its existing listing on London's AIM market

Randeep S. Grewal, CEO and Founder of Green Dragon, commented:

"I started this venture in 1997 following an early entry into China in 1993. Through the evolution of time and some challenges, we have been steadfast in executing a logical progressive balanced plan that would reward the shareholders for their risks, patience and support. Initially the sole shareholder was our family estate and since August 2006 an increasing number of highly supportive institutions and individuals. The Board has continued its methodical leadership to retain and protect the shareholder value and management and employees have worked relentlessly to execute a niche business plan. We turned the corner from investing to be a sustainable business last year and will now focus on scaling it into a materially large self sustainable business over the next 15 months. We have reached the final stretch of the marathon; the finish line and the rewards are in sight. We are confident of our entitlement to the PSCs, comfortable with our production targets from drilling an additional 150 LiFaBriC wells, resolved in being a high growth E&P company focused on shareholder value. We plan on adding a Hong Kong Main Board listing that will serve to complement our existing and continued listing in London and our wider growing shareholder base."

Wholesale Gas Distribution Divestment

The organic development of the business was complemented by the acquisition of an interest in Beijing Huayou United Gas Development Co., Ltd ("BHY"), a wholesale gas distribution business in China's largest market - Beijing. This acquisition was envisioned to provide a route to market the Company's produced gas. The intention was to swap the gas volumes supplied by the Company to the CNPC west-east infrastructure in Shanxi for volumes into the Beijing joint-venture and thus realize a market rate for the produced gas without the need to develop own end markets. Evolution of CNPC over the last decade has created many independent companies with fragmented asset ownership eroding any potential for gas swaps. Whilst the wholesale business has been a steadily growing business, profitable, debt free and dividend paying, it adds no accretive value to the upstream core business. The wholesale gas distribution business, like many listed companies within this market, will provide a low to mid-teen yield (compared with upstream yields which are materially higher) and continue to expand its footprint within different cities.

The Company has now decided to divest the wholesale gas business to focus on the higher margin upstream business, and has appointed Morgan Stanley to manage the sale of its interest in BHY. In the year ended 31 December 2012 BHY in which the Company has an effective interest of approximately 29% generated profit before tax of US$10.5m on turnover of US$109.5m.

Green Dragon Gas - focused E&P Company

The pioneer will continue as a focused play into the exponentially growing energy hungry domestic Chinese market.

The Company's forward execution is supported by a mature proven drilling LiFaBriC methodology under commercial term contracts from Greka Drilling. The Company expects to continuously drill additional LiFaBriC wells through year end 2014 at a cost of US$1.5m each. The engineered drilling plan for 150 such wells is targeted to achieve an annual gas production rate of 18 BCF entering into 2015.

Click on, or paste the following link into your web browser, to view the associated PDF document.

http://www.rns-pdf.londonstockexchange.com/rns/1841F_1-2013-5-21.pdf 

The Company is able to collect its gas production through infrastructure owned and operated by Greka Engineering under commercial contracts paying on a usage basis. This allows the Company to reduce its capex requirements for expanding the infra-structure on increasing volumes and enables a stable cost of operations.

As a focused upstream company with large proven reserves, which are growing and can be produced profitably, the Company would be ideally placed to progress with a main board listing, in addition to its existing quotation on London's AIM market, in late 2014 or early 2015.

Q1 Operations Update

Upstream - E&P

·; Production grew 61% in Q1 2013 with production of 7,516 Mcf per day (212,908 cubic meters per day) compared with 4,660 Mcf per day (132,022 cubic meters per day) at the end of Q1 2012.

Greka Engineering and Technology

·; GET has assumed the processing and transmission functions on the surface and has begun charging per cubic meter delivered since 1 January 2013.

Downstream - CNG/ PNG

·; PNG sales were 169MMcf (4.8 million cubic meters) in Q1 2013, an 11% increase on Q4 2012 (153MMcf / 4.3 million cubic meters).

·; CNG sales volume was 182 MMcf (5.1 million cubic meters) in Q1 2013. This includes 3 million cubic meters from 3rd party sources. A 31% increase from Q4 2012 (139 MMcf / 3.9 million cubic meters).

·; 2 Newly constructed retail CNG stations are now operating on trial basis.

Downstream - Wholesale Gas

·; Quarterly sales in Q1 2013 were 4.7 Bcf, a 12.6% increase on a year earlier (4.2 Bcf / 119 million cubic meters in Q1 2012) and a 26% increase on Q4 2012 (3.75 Bcf / 106 million cubic meters in Q4 2012).

·; At 31 March 2013, the business had 79,428 customers, representing a 16.2% increase compared to the same time last year (68,364).

Funding

The original IPO share price in London was at US$5.56 in 2006. The Company issued convertible bonds with a strike price of US$6.25, both of which were repaid without dilution, and then issued convertible bonds with a strike price of US$9.10 (later adjusted to US$8.00 because of the dividend of Greka Drilling). Further new shares were subsequently issued at US$11.68 and then again at US$14.88. Green Dragon began with founder equity and moved onto public equity, mezzanine funding, convertible bonds and has recently stated that it plans to conclude its current capex funding requirement with long term capital in the form of a reserve based loan. This is expected to be concluded by this year end.

The Company is currently in discussions with the holders on the redemption of the outstanding convertible bonds. So far, an option has been exercised by a bondholder for US$50m in principal of the bonds scheduling their repayment on 10 June 2013. The Company expects, subject to the finalisation of financing arrangements currently under discussion, to repay all outstanding bonds on 10 June 2013 in an amount of US$84.2m principal plus accrued interest. The Company currently has a number of options available to settle the bonds in-line with its strategic business plan from which it expects to pick and conclude an option by month end.

Pioneering History

The Company's roots are in the exploration, development, and production of CBM gas in China. Entering China's CBM industry as a pioneer over 15 years ago, the Company signed six production sharing contracts, covering over 7,600 sq km, and since inception applied a systematic development approach. During this process a vast 25.2 TCF gas resource was discovered and, despite encountering and overcoming the challenges of under-saturated coals in heavily faulted seams, the high gas content and favourable gas pricing policies, by the Chinese government, ensured the economics of development remained favourable.

Core Assets - Six Production Sharing Contracts (PSC)

The government-induced entry of foreign participants to the Chinese CBM market in 1997 provided a lucrative fiscal environment for the PSCs which are protected, in the Company's case, by a bi-lateral Netherlands-China treaty. These agreements continue to be in full force and effect.

As evidenced by the Company's growing independently audited gas reserves, the core of which has grown substantially in volume (net of production) and value since 2006, the year of the Company's listing on AIM.

Greka Drilling Dividend

To successfully overcome the geologically challenging faulted coal seams, the Company developed the LiFaBriC drilling methodology to achieve material success where others failed and gave up or have continued to drill inconsistently performing vertical wells with frack completions. The first successful LiFaBriC GSS008 drilled in March 2008, in the GSS production block, continues to produce in excess of 400 MCFPD (31 March 2013). That initial well cost US$1.5m approximately to drill. It has yielded 542,798 Mcf (15,376,714 cubic meters) in gas production (as at 31 March 2013), with a value of US$5.8m at contracted prices, representing an IRR of 72% till date and continues to produce at stable rates. Commerciality was demonstrated and the geological challenge was overcome.

Once the Company had matured this drilling technology, Green Dragon's focus no longer needed to be on the operation or ownership of the service business. Following repeated success and stability of the LiFaBric methodology, the Company distributed this proprietary focused drilling business to its shareholders. The Greka Drilling dividend in specie was provided to Green Dragon shareholders on 8 March 2011 which successfully monetized shareholder value.

Greka Engineering Dividend

Following the successful sub-surface technology development and commercial production being demonstrated in Q1 2008, the Company pioneered surface technology developed for infra-structure. The Company acquired an information technology and equipment manufacturing business in Q2 2008 and re-directed its efforts into CBM technology and infra-structure. The successes of this engineering and technology development resulted in 9 patents and 9 registered designs and continues to be a pioneer within the niche of CBM infra-structure development. The success of the business unit is demonstrated through the supply of services to 74 clients in addition to Green Dragon, including the largest Chinese companies, Petrochina and Sinopec, and various independent gas distributors.

Following the successful implementation of the various proprietary technological solutions, Greka Engineering, like Greka Drilling, is to be distributed to shareholders in a further in specie dividend. Once again, the Company benefits from using these technologies rather than from such ownership. As an independent service provider, Greka Engineering will be able to expand within the booming unconventional gas markets within China and Asia in the future.

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