Mitsubishi will pay Sunwing US$4 million for a 10% interest in the project, subject to approval of the farm-out by China National Petroleum Corporation (CNPC) and PetroChina Company Limited. Mitsubishi has the option to increase its participating interest to 20% by paying US$400,000 plus costs per percentage point prior to any discovery, or $8 million plus costs for an additional 10% interest after completion and testing of the first well drilled under the farmout agreement.
"The agreement with Mitsubishi provides additional funding to continue our exploration drilling activities in the Sichuan basin," said Leon Daniel, Ivanhoe Energy President and CEO. "The US$4 million that we will receive under the agreement will be used toward drilling our second exploratory well in the basin in 2006."
Sunwing has a 100% working interest in a 30-year production-sharing contract with CNPC, signed in September 2002, to commercially develop the Zitong Block. Sunwing and Mitsubishi will receive approximately 75% of any net project revenues before payout and approximately 45% after payout. PetroChina, a subsidiary of CNPC, may elect to participate, through a working interest of up to 51%, in any development of the project.
Ivanhoe Energy was obligated to conduct a minimum exploration program during the first three years of the Zitong Block contract ending December 1, 2005 (Phase 1). The Phase 1 work program included acquiring approximately 300 miles of new seismic lines, reprocessing approximately 1,250 miles of existing seismic and drilling 7,000 meters (22,966 feet). The first well, drilled earlier this year, reached a total depth of 9,022 feet. Based on log analysis, no commercial volumes of hydrocarbons were conclusively detected and the well was suspended.
Ivanhoe Energy has completed Phase 1, with the exception of drilling approximately 13,800 feet. Ivanhoe Energy has received approval from CNPC for an extension to May 31, 2006, and CNPC has advised they will grant an additional six-month extension if additional time is required, to fully evaluate and drill a second Phase 1 exploration well. Following the second Phase 1 exploration well, a decision will be made jointly with Mitsubishi on entering the next three-year exploration phase.
The Sichuan Basin, in Southwestern China approximately 930 miles southwest of Beijing, is the country's largest gas-producing region - with a natural gas resource potential estimated by Chinese officials to be 260 trillion cubic feet. There is a strong and growing market for natural gas in Sichuan, with approximately 120 million people living within the basin. An existing gas transportation grid is close to the project and a major natural gas trunk line, with initial capacity in excess of 200 million cubic feet per day, recently was completed to transport gas from the Sichuan Basin to Eastern China. Under existing delivery contracts, the wellhead price of gas destined for residential and commercial consumers is currently regulated in the range of US$2 to US$3.25 per thousand cubic feet; however recent announcements by the National Reform and Development Commission of the Chinese government indicate that natural gas prices in China will be deregulated in the near future.
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