Far East Energy Corporation, the U.S. listed company that operates the Shouyang Coalbed Methane (CBM) Production Sharing Contract (PSC) in China's Shanxi Province announced Monday that it welcomes the recent announcement by the National Development and Reform Commission (NDRC) to raise city-gate gas prices by 20 percent for base volume non-residential customers.
China Raises City-gate Gas Prices
Effective Sept. 1, city-gate natural gas prices for base volumes rose by $1.83 per million cubic feet (MMcf) or CNY 0.4 per cubic meter, or approximately 20 percent. These increases affect non-residential buyers only, such as industrial consumers and bulk buyers. In July 2013, the NDRC introduced a new pricing structure to bring its domestic natural gas prices closer to the cost of imports in order to not only encourage higher domestic output but to address pollution problems as well. A similar price hike of $1.83/MMcf (CNY 0.4/cubic meter) announced in July 2013 allowed the Company to successfully negotiate a 42 percent increase in the wellhead gas price received for its gas.
Far East Energy Corporation expects to enter into a new round of gas price negotiations before the end of 2014 at which time management would expect to secure another increase in gas prices for future gas sales.
Commenting, CEO Michael McElwrath said, “We welcome this increase because it should translate into significantly higher pricing for our gas. And we believe that gas prices in China will maintain their upward trend, hopefully providing an ongoing opportunity for significant annual enhancement to the price we receive at the wellhead. The Chinese government is committed to improving the environment, and supporting the use of more domestic gas is an integral part of their strategy. Even with this rise in gas pricing, gas prices remain significantly below those of competing fuels, such as fuel oil and diesel – both of which are far more polluting than cleaner burning natural gas, so there is ample room for the government to provide further increases in the coming years.”
Production, Sales and Drilling Update
Gas production from the Shouyang PSC remained consistent during July and August at roughly 1.92 million cubic feet per day (MMcf/d), mirroring production rates seen in May and June after wells were shut-in for various reasons including Area B wells shut-in due to distance from the production area and certain Area A gel-frac wells shut-in because they were not tied in to the gathering system. However, partially as a result of production increases from gathered wells in the production area and also improved efficiencies across the summer, sales have increased from an average of 1.4 MMcf/d in May to 1.55 MMcf/d thus far in September. Drilling has also begun on the P8 replacement well with CUCBM, which committed to fund the drilling of a replacement well in the northeast portion of Area B pursuant to the terms of the April 26, 2012 Modification Agreement of the Shouyang PSC. Management worked with CUCBM on the design and planning of the P8 replacement well (designated FCC-SYE01), and the well has now been spudded with drilling underway.
Extension of Facility Maturity
The maturity date of the bridge facility with Standard Chartered Bank (SCB) has been extended to Oct. 31 from the previous maturity date of Sept. 15. Commenting, CFO Jennifer Whitley said “This added extension of the facility underlines SCB’s ongoing support as we further our discussions with various third parties.” The Company will advise shareholders as appropriate, as developments progress.
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