On April 19, 2004, Far East Energy announced that it had received approval of the assignment and farmout agreement from ConocoPhillips for exploration and development of the Dragon Project. Based on the results of recent negotiations resulting in amended work requirements, Far East Energy's agreements with ConocoPhillips require that Far East Energy perform an evaluation and work program to test two existing wells on the Project. The farmout agreement also requires Far East Energy to post a $1,000,000 bank guarantee or surety bond within 30 days of approval of the agreement by the Chinese Ministry of Commerce, an obligation which Far East Energy has now met. The Company expects to begin fracturing and testing the two existing wells no later than late summer of 2004.
"This will be another key development as Far East moves toward its goal of becoming a key player in the development of coalbed methane in China," said Mike McElwrath, Chairman and CEO of Far East Energy. "We are anxious to start testing these wells in the Dragon Project in order to confirm the initial data collected by ConocoPhillips, which is very positive."
If the initial two-well test program is successful and based on recent negotiations resulting in amended work requirements, Far East Energy expects to drill and test one horizontal well on the Dragon Project to satisfy the work commitments for the second phase of the Production Sharing Contract, which will require that Far East Energy post another $900,000 surety bond or guarantee. That well, which is expected to be commenced later this year, is planned to be the first horizontal well ever drilled in China for the production of coalbed methane. If successful, this first horizontal well may represent a major milestone in the exploration for coalbed methane in China. Horizontal drilling is a technology the application of which has been of great interest to China United Coalbed Methane Corp., Ltd. ("CUCBM"), Far East's Chinese partner in the project, because they believe that it may yield results superior to that of conventional vertical wells.
McElwrath stated that, "Horizontal drilling technology has yielded impressive results in coalbed methane applications in the United States. Far East Energy plans to leverage that technology for the benefit of coalbed methane production in China."
Depending on how CUCBM and ConocoPhillips eventually elect to take their participating interests, Far East Energy will have an interest of anywhere from 40% to 100% of the working interest in the Dragon Project. CUCBM is 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.
The Dragon Project is potentially one of the largest coalbed methane projects in China, and coupled with Far East Energy's existing projects in Yunnan Province, which cover more than 250,000 acres, makes Far East Energy the third largest holder of coalbed methane acreage in all of China. The West-to-East Pipeline to Shanghai runs very close to the southern portion of the Shanxi Project and the Shanjing II Pipeline to Bejing is about 40 kilometers from Far East Energy's northern block in Shanxi.
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