"This is the moment that we have been waiting for," said Mike McElwrath, Chairman and CEO of Far East Energy. "The two blocks of the Dragon Project have enormous potential, even more than our Yunnan projects, and located as they are astride the two largest pipeline projects in China, serving the two largest cities in China, we have been anxious to get our drilling program in Shanxi underway."
The lower-end projection for gas-in-place in the area covered by the Shanxi PSCs, based upon data gathered by ConocoPhillips, is 13.096 trillion cubic feet. The West-to-East Pipeline to Shanghai runs very close to the southern portion of the Shanxi Project and the Shanjing II Pipeline to Beijing is approximately 40 kilometers from Far East's northern block in Shanxi. Based on ConocoPhillips' and the Yunnan Provincial Coal Geology Bureau's estimates, all of Far East's project areas combined contain 19.5 to 26 trillion cubic feet (Tcf) of CBM original gas-in-place.
Meanwhile, Far East continues to build up favorable results in its ongoing drilling program in Yunnan Province. Its third well, the FCY-EH01 well, was completed on April 7, 2004, to a total depth of 435 meters (1,436 feet), and preliminary gas content estimates are very good.
A total of 42 coal seams with a thickness 0.5m and above were penetrated during the drilling of the well, with a total thickness of 42.8 meters (141 feet), an excellent result. The total thickness of the four coal seams targeted for potential production was 17.2 meters (57 feet). Estimated gas content based on the preliminary desorption results obtained by the Xi'an Branch of the China Coal Research Institute is 8 to 10 cubic meters per ton of coal or about 280 to 350 cubic feet per ton of coal. This is right in line with the projections for the Enhong Block which estimate a gas content of 200 to 400 cubic feet per ton of coal. By way of comparison, the well-known Black Warrior Basin in the United States has gas contents ranging from 250 to 500 cubic feet per ton of coal.
The Far East Energy Enhong-Laochang Production Sharing Contract (PSC) covers a 30-year relationship in which Far East Energy has a 60% working interest with the remaining 40% owned by China United Coalbed Methane Corporation, Ltd. (CUCBM), a corporation given exclusive authority by the State Council of China to enter into joint venture agreements with foreign enterprises to develop CBM in China. At present, there is no pipeline in the vicinity of Far East's project areas in Yunnan Province, and marketing the Yunnan gas will require a pipeline or a liquefied natural gas (LNG) facility. Successful development and production from a sufficient number of wells will be required to attract a pipeline or LNG plant.
The farmout agreement from Phillips China Inc., a Conoco Phillips subsidiary, covers 4280 square kilometers (1,059,650 acres) in both the Shouyang Block (near Taiyuan City) and the Qinnan Block (near Jincheng and Qinshui). Phillips China has an election to retain a net undivided thirty percent (30%) participating interest, or take a 3.5 percent overriding royalty interest. CUCBM is again the Chinese partner, and can elect to participate at anywhere from zero to thirty percent (30%) of costs and revenues. Thus, Far East Energy will have an interest of anywhere from forty percent (if both Phillips China and CUCBM elect maximum participation) to 96.5% if Phillips China takes only its overriding royalty and CUCBM elects to take no interest.
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