Yup its water soluable pencils with yellow highlighter as a base coat to make it shiny, if you really want to know. Also once the watercolor-pencils have dried gel pen for details and shading on tail.
If I can find my Camera's usb cable I will try doing tutorials for dragons and such, I need to make a tutorial for this colour pencil technique at some point http://www.artalleys.com/art/1590