Consideration for this acquisition totals approximately US$27,386,135, to be settled with US$20 million in Ivanhoe Energy common shares and a US$7,386,135 non-interest-bearing, three-year, monthly-amortizing loan. CITIC Resources will acquire 8,591,434 common shares of Ivanhoe Energy at a price of US$2.33 per share. This will represent approximately 3.7% of Ivanhoe's issued and outstanding shares following the completion of the transaction. The loan will be convertible, at Ivanhoe Energy's discretion, into common stock of Sunwing Energy Ltd. when Ivanhoe obtains a public listing for Sunwing to further daylight value and expand the growth of the subsidiary.
The agreement to jointly develop the Kongnan Project was signed by an Ivanhoe Energy subsidiary and CITIC Group in January 2004. The agreement gave CITIC Group the right to convert its participating interest in the Kongnan Project into Ivanhoe common shares. Now, CITIC Group and Ivanhoe have agreed to expand their long-standing cooperation as Ivanhoe continues to develop oil and gas opportunities in China and sharpens its focus on acquiring international reserves and production through its leading edge, heavy-oil-to- light-oil (HTL) and gas-to-liquids (GTL) technologies - which are of particular interest to CITIC Group.
Sunwing Energy Ltd., Ivanhoe's 100%-owned subsidiary dedicated to oil and gas exploration and production in China, will acquire CITIC Resources' 40% working interest in the Kongnan Project. This will increase Sunwing's working interest in the Kongnan Project to 100%, and will increase Sunwing's gross production in China by 67%, to more than 2,050 barrels of oil per day (net 1,681 barrels of oil per day).
"This transaction strengthens Ivanhoe's excellent, longstanding relationship with CITIC Group," said Robert Friedland, Chairman of Sunwing Energy and Vice Chairman of Ivanhoe Energy. "We welcome CITIC as a strategic shareholder and as a potential partner in new energy ventures inside China and in markets around the world, where our technologies will be key to securing and expanding production from heavy-oil reserves and stranded natural gas. In addition, Sunwing's increased ownership of Dagang oil production will provide us with critical mass and stronger positive cash flow, enhancing our financial independence and our position as one of the first - and still one of the few - foreign producers of sweet crude oil on the Chinese mainland - one of the world's most important energy markets."
Wang Jun, Chairman of CITIC Group said: "With the conversion of CITIC Resources' working interest in the Kongnan Project, CITIC will have an exposure to all of Ivanhoe's global operations and not just on the Dagang oilfield. We are looking forward to further developing our relationship with Ivanhoe in new energy ventures that hold a mutual interest for CITIC and Ivanhoe in China and in other countries around the world."
Sunwing Energy is the corporate flagship for Ivanhoe Energy's operations in China. Sunwing's interests include enhanced oil recovery (EOR) operations at Dagang, in Hebei Province, and a large gas exploration project on Sunwing's 900,000-acre Zitong block in Sichuan Province. The Kongnan Project, totalling 22,400 gross acres on six blocks in the Dagang oilfield, is being operated by Sunwing under a 30-year production-sharing contract signed in 1997 between a Sunwing subsidiary and China National Petroleum Corporation. Under this agreement, Sunwing is paid 82% of the oil recovered. A total of 36 wells are in production as part of the ongoing Dagang development program. Dagang oil, a sweet crude of 34 API, is sold at a price slightly less than West Texas Intermediate. The oil price for the first 18 days of February, 2006, averaged US$56.02, an increase from the average of $54.27 received during January, 2006.
CITIC Resources is 61%-owned by the CITIC Group, a Chinese state-owned enterprise. CITIC Group holds major interests in many industries throughout the world that have strategic value to the expanding Chinese economy, including power, banking, airlines, information technology, investment services, real estate, engineering services, heavy industries, infrastructure investment and resource industries.
Mr. Friedland and Chairman Wang announced an Ivanhoe-CITIC initial strategic alliance in October, 2002, committing to cooperate on energy development projects in China and throughout the world. The partnership was subsequently enhanced in April, 2003, when Mr. Friedland and Chairman Wang announced that they had signed an agreement that would enable Ivanhoe and CITIC to form a global strategic alliance to investigate, explore and develop oil, natural gas, metallurgical coal, liquefied natural gas and gas-to-liquid projects in China and around the world to help supply China's future energy requirements.
Ivanhoe Energy is an independent international oil and gas exploration and development company building long-term growth in its reserve base and production. Ivanhoe Energy is a leader in technologically innovative methods designed to significantly improve reserves of oil and gas through the upgrading of heavy oil to light oil (HTL), state-of-the-art drilling techniques, enhanced oil recovery (EOR) and the conversion of natural gas to liquids (GTL). Core operations are in the United States and China, with business development opportunities worldwide.
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