LRL Leyshon Res

TIDMLRL

RNS Number : 8868N

Leyshon Resources Limited

04 October 2012

LEYSHON RESOURCES LIMITED

4 October 2012

Commences Drilling for Gas in China's Prolific Ordos Basin

Leyshon Resources Limited (AIM/ASX: LRL) ("Leyshon" or the "Company") is pleased to announce that the recently appointed management team at Pacific Asia Petroleum Limited (PAPL), which Leyshon acquired in July, has commenced drilling at the 708 km(2) Zijinshan block located on the Eastern flank of the prolific Ordos Basin, China's second largest and one of the world's major gas producing basins.

The new management team, which successfully drilled and appraised the recent multi-Tcf gas discoveries on the adjacent Sanjiaobei and Linxing blocks, has designed an initial three well programme to test for gas in similar formations over a 600 metre interval to a depth of approximately 2.4 kilometres.

The first two wells are expected to be completed by the end of November with completion of the third expected early in the new year. The total cost for drilling, logging, casing, fracking and flow testing the three wells is estimated at around US$ 5 million.

The wells are located within 10 kilometres of a tie in point on the Lin-Lin pipeline which supplies the growing demand in Shanxi Province where well head contracts have recently been struck in the US$ 6 - 7.5 per mscf range.

PAPL has a 100% interest in the exploration phase of the Production Sharing Contract (PSC) with PetroChina, which has the right to buy back a 40% interest at the development stage.

The Company has A$ 47.8 million in cash (approximately A$ 19 cents per share and 12 pence per share) and has extended and expanded the on-market share buy-back up to 24 million fully paid ordinary shares in the Company over the next twelve months.

Managing Director Paul Atherley Commented: "The Ordos Basin is the beating heart of Central China, the world's fastest growing major economy and is one of the best places in the world to be exploring for gas right now. It's a major gas basin which has seen some spectacular recent discoveries. Any commercial gas discovery at Zijinshan will be hooked into one of the nearby pipelines and sold into one of the world's fastest growing markets for gas."

New Management Team

The Company is pleased to announce that PAPL has recently appointed an experienced local management team with extensive operational, geological, contractual and subsurface experience in the Ordos Basin. The team, which is based in Beijing and on site, is led by new Chief Operating Officer Frank Fu who has 20 years' experience with ConocoPhillips in Shanxi province and more recently oversaw the drilling and testing of the nearby Sanjiaobei and Linxing gas discoveries.

Zijinshan Gas Project

Respected industry advisor RISC has advised that in its view PAPL's Zijinshan Gas Project, located on the eastern flank of the Ordos Basin, contains gross prospective resources that are potentially large due to the confirmation of the presence of unconventional gas, with gas in place estimates in the range of 1 to 3.8 Trillion Cubic Feet.

The main analogous discoveries are at the adjacent Sanjiaobei and Linxing fields, which Frank Fu and his team have successfully drilled and tested with eleven vertical wells that have flowed gas at impressive rates. The gas has been reported to be very clean and dry, with low impurities and therefore can be connected straight into local pipelines.

RISC does however caution that whilst the opportunity appears attractive it contains significant risk which must be mitigated via the acquisition of appropriate data and completion of a pilot plan. The Company plans to retain RISC as its advisor in the exploration and development phase

of the project.

Well Established Pipeline Infrastructure and Strong Demand

The Ordos Basin has well established gas pipeline infrastructure with substantial excess capacity and strong and rapidly growing local demand for gas. Recently contracted well head gas prices have been in the US$ 6 -7.5 per mscf range, and the Board expects these prices to rise. The first of the three Zijinshan wells is located within 10 kilometres of a tie-in point on the Lin-Lin pipeline, which was completed in 2011.

The combination of lower drilling and lifting costs, established infrastructure, strong prices and rapidly growing demand makes the Ordos Basin one the most attractive places in the world to explore for gas right now. RISC has confirmed this view and advised that the Ordos basin generally offers one of the highest potential IRR's in China.

Great Wall Drilling Company

The Great Wall Drilling Company, which has been contracted by PAPL to undertake the drilling programme, is a subsidiary of PetroChina and employs over 30,000 people in 28 countries, providing services to more than 100 companies all over the world including many international companies. It owns a fleet of more than 430 drilling rigs with a rated drilling capacity up to 9,000 metres and provides integrated solutions from well design to completion in various surface and subsurface conditions.

China Oilfield Services Limited

China Oilfield Services Limited, which has been engaged to provide technical services to the programme, is the leading integrated oilfield services provider in the China market. Its services cover each phase of oil and gas exploration, development and production. Its four core business segments are geophysical services, drilling services, well services, marine support and transportation services.

Well Placed to Benefit from Growing Demand for Gas in China

China is already the world's fourth largest gas market. The Government is now targeting to increase domestic production over the next five years more than 2.5 times to meet growing energy demand, especially from Central China, to meet near term clean energy targets by reducing the proportion of coal used and to improve the country's energy import dependency ratio.

To achieve this target the Government is actively investing in infrastructure and is offering a range of incentives for foreign as well as domestic producers to explore and develop unconventional gas assets in these basins and elsewhere.

By way of example, Shanxi Province's current Five Year Plan includes a major city gasification programme which will increase gas demand by 2.5 times.

Gas Pricing and Regulation

The International Energy Agency in conjunction with others and sponsored by the British Embassy in Beijing has recently published a report titled "Gas Pricing and Regulation, China's Challenges and OECD Experience" which highlights that in the current 12(th) Five-Year Plan (2011-15) the Chinese government plans to double the share of natural gas in primary energy consumption and reach consumption levels of up to 260 bcm per year by 2015, twice the level of gas consumed in 2011.

Amongst the opportunities highlighted in the report, three are specifically relevant to the Company's investment in the Ordos Basin, namely gas market liberalisation and hub development; enabling third party access to infrastructure along with the development of storage; and liberalising the upstream sector to allow for the development of China's substantial resources in unconventional gas.

The Board is of the view that these represent rare opportunities for the Company, which is well established in China and has a management team and advisory board with the necessary experience and relationships to participate in the development and liberalisation of a world class energy sector.

Central China

The Eastern Flank of the Ordos Basin is located in Shanxi Province, which is one of eight Provinces that make up the economically defined Central China. Central China has a population of over 423 million people (i.e. larger than that of the United States and similar to that of the 27 countries that make up the European Union).

Despite the decade long spectacular growth, Central China's average GDP per capita has only recently reached US$ 5,000 compared with US$ 48,000 for the United States and US$ 35,000 for the European Union. Similarly, its energy consumption per capita remains less than one fifth of that of the United States.

Shanxi Province itself has a population of 35 million with a per capita GDP of less than US$5,000 growing at 13% per year.

The Board is strongly of the view that Central China, which is often referred to as the world's fastest growing major economy, will grow rapidly into one of the world's major markets for gas.

A Strategic Focus on Building an Increased Presence in China's Energy Space

As the Chinese economy rebalances away from a heavy dependence on fixed asset expenditure towards a more consumer driven economy and in doing so makes the transition away from a mineral intensive phase towards a highly energy intensive phase of more mature growth, the Company intends to acquire and invest in energy related assets in and around China.

Primarily, the focus will be on developing oil and gas assets that supply the China market via infrastructure located either within China, its neighbours or its supplying countries.

The strategy draws heavily on management's experience, contacts and established presence in China over the past eight years and it recognises that China has an energy deficiency even whilst its economic growth matures.

The heavy focus on unconventional gas by the Chinese government in the current Five Year Plan is to make up for a growing shortfall of conventional gas, to reduce the country's dependency on coal to meet the self-imposed 2015 carbon targets and to reduce the country's increasing dependence on imported oil and gas.

Advisory Board

The Company has recently made two appointments to its Advisory Board who hold senior positions in the Government and state-owned petroleum enterprise, respectively. Their addition will strengthen the Company's strategic and decision making processes and assist with maintaining relevant relationships in Beijing.

Xinjiang Coal

The recent 30% fall in domestic thermal coal prices has materially impacted the near term economics and potential financing arrangements of the thermal coal project located in the Western Chinese province of Xinjiang that the Company has been pursuing over the past twelve months.

The National Development and Reform Commission (NDRC) has recently announced that it will now take more control over thermal coal prices by intervening in the spot market whenever the price movement in any cycle is more than 10%. Whilst this is positive in terms of price stability it is however a potential cap on price recovery as the NDRC is expected to attempt to converge the more volatile spot prices with longer term contract prices.

The project remains an important part of the country's energy plan and development is expected to commence shortly. Management continues to monitor developments and to assess whether there is an attractive entry point for the Company.

Mt Leyshon

The ball mill scats drilling and preliminary testwork programme has indicated that the project is viable but requires significant capital for a relatively modest return, even at current gold prices. Management's view is that in light of focus of the Company's strategy and given the scarcity of risk capital of this nature the returns do not warrant the investment at this stage but will review the project's development in the event that the price of gold should continue to rise. The Company continues to review high quality gold investment opportunities in China and elsewhere.

Buy Back

The Company has 251 million ordinary shares on issue. It purchased 5.2 million shares on market in the previous on market share buy back (Buy Back) at an average price of A$ 19 cents per share.

The Company has extended the Buy Back for a further twelve months and will increase the maximum number of shares to be bought to 24,000,000. The Buy-Back will resume immediately and no shares will be bought beyond September 12, 2013.

For further informationplease contact:

Leyshon Resources Limited

Paul Atherley - Managing Director

Tel: +86 137 1800 1914 admin@leyshonresources.com

Seymour Pierce

Jonathan Wright (Nominated adviser)

Richard Redmayne (Corporate broking)

Tel: +44 (0)207 107 8000

Pelham Bell Pottinger

Charles Vivian - Director

Tel:+44 (0)20 7861 3126

James MacFarlane - Account Director

Tel: +65 9450 7574

Background

http://www.leyshonresources.com

Leyshon was on the ground in 2003 when China opened its mining sector to foreign investment. It has been fully engaged in China since then and has its main operating office located in Beijing.

China's latest Five Year Plan emphasizes the planned urbanisation of a large number of Central China's rural population into second and third tier cities lifting the urbanisation rate to 51.5% of the overall population.

This will result in significant increases in infrastructure spending and energy demand. The Company is planning to invest in high quality energy assets in China to meet this growing demand.

Managing Director Paul Atherley is an Executive Committee member of the China Britain Business Council and serves on the European Union Chamber Energy Working Group.

The statements of resources in this Release have been independently determined to Society of Petroleum Engineers (SPE) Petroleum Resource Management Systems (SPE PRMS) standards by internationally recognized oil and gas consultants RISC Operations Pty Ltd and NSAI.

This information is provided by RNS

The company news service from the London Stock Exchange

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