As announced in early December, preliminary test results from the first well were excellent, with strong indications of coalbed methane gas. Drilling of the second and third wells should be completed by early spring, with testing and analysis to determine sustained production rates completed by July. A fourth and fifth well will be drilled by late spring with de-watering and testing to take place during the second quarter.
"Assuming we get favorable results as we did with our first test well, we expect to drill eight more wells during the second half of this year, bringing the total to 13 wells in Yunnan Province," said Michael McElwrath, chairman of Far East Energy. We expect to expend approximately $1.1 million to drill and conduct desorption tests on these first three wells, as well as to pay expenses for CUCBM salaries, assistance fees, training fees, and other related expenses. Many of these expenditures have already been made."
He added that successful production from several wells will be required to attract a pipeline or LNG (liquefied natural gas) plant in Yunnan Province. "With the vast amount of positive technical data already available and reviewed, we believe Far East Energy will achieve that level of production. Furthermore, the demand for gas in south China is increasing at a rate sufficient to justify a pipeline or LNG facility in the area.
Meanwhile, the company is awaiting approval from the Chinese Ministry of Commerce relative to its farmout and assignment agreements with Phillips China, a subsidiary of Conoco-Phillips, in which Far East Energy agreed to acquire 40% of Phillips China's 70% interest in two Production Sharing Contracts (PSC) in Shanxi Province.
Currently, Phillips China, CUCBM (China United Coalbed Methane Company) and Far East Energy have a 30%, 30% and 40% interest in the projects respectively. "We are hopeful for approval by this spring," said McElwrath. Under the terms of the agreement, Far East Energy has committed to fracture, stimulate and production test the gas flows from three wells drilled by Phillips China. The initial technical data collected and analyzed by Phillips China is encouraging.
"We anticipate that by the end of the second quarter of 2004, the first five wells will be undergoing, or will have already undergone, dewatering testing. Full associated costs for the Enhong -- Laochang Project through the second quarter of 2004 (including drilling and testing the first five wells, plus associated CUCBM expenses) are expected approximate $2,500,000, including amounts already expended on the first well. In the last six months of 2004, provided the aforementioned operations proceed according to plan, and barring unforeseen funding difficulties, we expect to drill eight more wells on the Enhong and Laochang tracts, at an all-in cost of approximately $4,500,000. We expect to fund these activities with our existing capital, the exercise of warrants issued to investors in our recently completed offering, and new capital from third parties.
"We believe that we have sufficient cash to fund operating needs and financial obligations through mid-2004. We anticipate incurring approximately $4.6 to $5.1 million in exploration and development expenses in the first half of 2004. This figure could be as high as $6.5 million if we elect to post cash reserves in lieu of performance bonds as required by the ConocoPhillips agreements in Shanxi.
"Overall, we are very pleased with our operations in China," McElwrath said. "We are on schedule and gratified with our progress to date."
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