13 January 2016
Carl, very pleased to have you with us today. For those who are unaware of AAG Energy can you give us a brief overview of the company?
AAG is the leading independent CBM producer in China, focus on the development and value optimization of unconventional gas resources to supply clean energy to the Chinese economy.
AAG currently operates in two CBM concessions in the Shanxi Qinshui Basin: the Panzhuang concession and the Mabi concession, which based on the signed PSC contracts are approximately 67.4 km2 and 898.2km2 respectively. The Panzhuang and Mabi concessions are located in the southern Qinshui Basin, which contains the largest amount of proved CBM geological reserves of any basin in China and is the most active CBM producing basin in China. The Panzhuang concession is the most commercially advanced Sino-foreign CBM asset in China and is the first and only Sino-foreign CBM concession in China to have received overall development plan approval. The Panzhuang concession has the highest average per well production rate of any CBM concession in China as of December 31, 2014. In November 2013 we received preliminary approval for the Mabi ODP I from the NEA, which covers an annual capacity of 1 billion cubic meters from a total area of 131.7 square kilometers.
There are many reasons for companies to be in China, what is your number one driver for investing in the country?
It would be China’s strong long term demand for clean energy natural gas. As one of the world’s largest economies China has strong energy needs and will be shifting towards greener mix of energy sources in the coming years. Natural gas is still less than 10% of the energy mix in China and well below other developed economies around the world. Consumption of natural gas in China is projected to reach 270 BCM/year by 2020, and potentially to near 500 BCM/year by 2030. These numbers are substantially higher than current domestic gas production of roughly 150 BCM/year. These figures give us confidence that China will continue to lead world natural gas demand growth over the next fifteen years.
What are the strategic priorities and growth targets for AAG Energy in the next 12-24 months?
After the recent IPO of AAG Energy holdings was completed in June, our priorities are to continue to raise production capacity for Panzhuang and have Mabi ODP I approved by NDRC and start the commercial development there. Our third area of focus will be seeking new investment opportunities on unconventional upstream assets. We continue to believe that we will be a growth leader, in China, among foreign operated unconventional gas companies in the coming years.
Where do you see the greatest opportunity in the Chinese O&G market and how are you positioned to capture this opportunity?
It begins with China’s strong long term demand for clean energy natural gas. Second, we think that NDRC’s recent decision on price reform towards market driven non-residential pricing is a healthy development and should help in 2017 and beyond as these new policies are implemented.
Our Panzhuang and Mabi concessions are located close to established gas transportation and processing infrastructure. This infrastructure was constructed and connected to our concessions by third parties who were attracted by the quality and significant potential volume of the CBM in the Qinshui Basin.
This infrastructure provides us with access to gas distribution facilities and our markets and customers, which include industrial users, city gas distributors, pipeline gas distributors and LNG producers in Shanxi, Henan and Shandong provinces and in other coastal regions in China.
With the expectation on long-term demand growth for China’s natural gas resources and AAG’s experience on managing upstream development, technology, regulatory approvals, and strong financial capability, combined with geological proximity to the Chinese market, we remain confident that AAG is well positioned to capture future opportunities.
What do you foresee as the greatest challenge to our industry’s future growth?
We face several challenges; First, the recent pricing reform in China negatively impacts our price for natural gas for 2016 and 2017. Conversely, it likely helps enable fuel switching to natural gas which should enable faster demand growth than was possible before the price adjustment. Talent acquisition and retention are always key challenges in our business. Finally, deployment of suitable technology in different geological conditions will always be a challenge to be accepted and ultimately mastered.
You have a proud reputation of working alongside Chinese companies and government (regional and provincial); what is the secret to successful guānxì in China?
We try hard to understand and follow the rules and regulations. Beyond that however it is important to build good mutual trust and understanding with your partners and counterparts. This has been, and will continue to be fundamental to be successful in China. This is the way we interpret the term of “Guanxi”. We have a special local community coordination team to identify the local community key needs, as we believe that building and maintaining a mutually beneficially relationship with the local community where we run our operation is one of our key missions. Our coordination team has regular dialogue with the local government to ensure that our operations are conducted in a social, responsible, safe and environmental sound manner.
These are tough market conditions with depressed oil prices and global reductions in capex and workforce, what measures and practices are you putting in place to adapt to this new (but not unknown) working environment?
You are correct that these market conditions are not new to our industry. We still believe that we operate in one of the premier natural gas markets in the world. AAG is responding to these recent market challenges in a focused but not unexpected way.
First we will strive to mitigate the impact of gas price erosion with production volume growth from Panzhuang. Second, we will maintain our focus on our cost structure to preserve as much of our cash operating margin as we can. Third, in terms of capital deployment, we will drill in Panzhuang in 2016 about 30 new horizontal wells, In Mabi we will spend to continue to evolve our technology and work with our Partner to achieve ODP Phase 1 approval in 2016. Lastly, we will continue to evaluate opportunities to acquire new projects for the continued growth of AAG.
If you could wave a magic wand over the global industry, what would you change and why?
This is too sweeping a question to have only one answer. There are many things that a magic wand could do for the benefit of the oil & gas industry. If I am to offer only one answer, it would be to create regulatory reform that levels the playing field better between National energy companies and those of private enterprise.
How would you describe your company in once sentence to a new investor/client?
AAG one of the leading independent CBM producers in China, focused on the development and value optimization of unconventional gas resources to supply clean energy .
You are attending our 2016 Asia Pacific Assembly, what is your goal at this event and what take-away(s) do you want attendees to go home with regarding your company and your work in Asia Pacific?
We hope to show why we think AAG is a solid investment choice in the Hong Kong market.
How did you come to be in the O&G industry?
I am a Petroleum Engineer by education from Colorado School of Mines in the US. I have worked in the oil & gas industry since graduation in 1985. First with Mobil, then ExxonMobil, later El Paso E&P, and Delta Petroleum and for the last two plus years with AAG.
What is your proudest work-related achievement to date?
There are many but most have a common thread that is to be able to take on a new project or assignment and improve the business results.
What one businessman/women do you admire most and why?
Too bad I can only mention one. There are so many! If only one that I have met, I would choose Doug Foshee the former CEO of El Paso. He inherited a distressed company and with leadership guided it to a successful outcome while still resecting strong personal and corporate values. I have high respect for Doug.
What was the wisest advice you received from a mentor?
You have two ears and one mouth, use them proportionately.
What advice would you pass onto a recent graduate embarking on a career in O&G?
Embrace change. Personal change, technical change. Change is what creates opportunities.
How and where do you prefer to spend your spare time?
At my apartment home in Hong Kong. When I holiday, I will choose either a beach or mountain location. I have many personal favorites.
What is your all-time favourite book?
In business, I like “Leading Change” by Kotter, and “Good to Great” by Collins. For enjoyment, that is classic and still fun I like Ian Fleming and the James Bond series.
What is you all-time favourite film?
“Major League” and a close second is “Replacements”. They are both sports comedies. But more touching is the story of tapping and development of individual genius to the benefit of the team.
What three items would you take with you to a desert island?
The lady I love, some water, and my IPOD. I love my music too!
About Carl Lakey
Mr. Carl Lakey, is Co-CEO and COO. Mr. Lakey has been the chief operating officer of our Parent Company since October 2013. He has also been the chief operating officer of AAGI since October 2013. He is primarily responsible for Group’s overall development and growth strategies, operations, the technical group and environmental, health and safety matters.
Mr. Lakey has over 29 years of experience in oil & gas operations, engineering and management. Most of this experience was onshore in the USA, with the recent remainder being in the PRC.