This next horizontal well is being drilled in the same pattern as the HZ01, HZ03, and HZ04 wells, in order to provide the greatest benefit to the dewatering process. Far East Energy also indicated that while the dewatering process is continuing for the HZ01, HZ02, HZ03 and HZ04 wells, the HZ01 and HZ03 wells continue to provide continuous gas flow.
The gas content and permeability in Far East's initial wells is very high based on well data obtained to date. High permeability allows gas to move with greater ease through the coal and from greater distances to the well, and can result in prolific wells similar to those in America's San Juan Basin or Australia's Fairview Field. However, high permeability also means that water can move to the well from greater distances and it will take longer to dewater. The key to capitalizing upon the advantages offered by high permeability and high gas content, and to achieving maximum production at the earliest possible date, is to drill a pattern of additional wells as rapidly as possible in the focus area.
"We are excited to have the HZ05 well underway because each additional well drilled in this area should move us closer to our goal of achieving production," said Michael R. McElwrath, CEO of Far East. "The Fairview Field in Australia is a very productive field that may be a good analog to what we have discovered in our Shouyang focus area. There, because wells were steadily drilled in a pattern around the first Fairview Field wells, dewatering was enhanced and wells that initially had low flow rates due to the lengthy dewatering period, steadily ramped up to significantly higher gas production rates sustained over many years. Of course, until we achieve sustained production from our wells, we cannot be sure if their performance will mirror that of the Fairview Field."
Far East Energy began dewatering its fourth horizontal well, FCC HZ04 in the Shouyang Block of its Shanxi Province in December 2006. The Company has drilled this well to approximately 800 meters in the coal seam, which we consider to be an optimal length based upon information gathered in the drilling of the first three horizontal wells in this area. Far East Energy believes that the high permeability and gas content indicated in the No. 15 coal seam should make significant gas production possible with shorter horizontal laterals.
Shouyang Production Sharing Contract
Far East Energy's Chinese partner, China United Coalbed Methane Corporation Ltd. ("CUCBM"), has agreed in principle to extend the exploration period for the Shouyang Production Sharing Contract (PSC) for another two years to June 30, 2009, subject to final approval of the Ministry of Commerce ("MOC"). That extension will allow the Company to further expand its exploration activities with the goal of maximizing the potential of its very substantial holdings in China. The PSC, which has an overall duration of thirty years, provides for a development period following the successful completion of the exploration period.
Far East Energy recently acquired approximately 26 kilometers of 2D seismic data in the Qinnan Block located in the southern portion of the Shanxi Province. The data has been processed and a vertical well has been completed with the objective of evaluating the No. 3 coal seam. The No. 3 seam appears to be substantially thicker than other coal seams in the Qinnan Block and has been the target of significant drilling activity to the south of the Company's acreage by other operators. CUCBM agreed in principle recently to extend the exploration period of the Qinnan PSC by two years, to June 30, 2009, once Far East Energy begins drilling a horizontal well or equivalent vertical wells in the Qinnan block, subject to final approval of the MOC. Far East Energy has agreed to initiate drilling a horizontal well or equivalent vertical wells in the Qinnan block prior to June 1, 2007. Additionally, the Company agreed to allow CUCBM to perform certain data gathering tests in the Qinnan block and will have access to the data obtained from the CUCBM tests.
The Company has contracted for the drilling of two new vertical wells in the Yunnan project, with the first of those two wells expected to be commenced in the next ten days. Under revised terms, the exploration period requires the drilling of the two vertical wells with an additional requirement to expend approximately $670,000 in exploration costs from January 1, 2007 to June 30, 2007. These wells will target the Nos. 7 and 8 coal seams, which in the Yunnan project acreage are thicker than other prospective coal seams. Once the Company begins the work program as described above, CUCBM has agreed in principle to a two year extension agreement for the exploration period of this PSC, subject to final approval of the MOC.
"We are very pleased with our drilling progress to date and the successful negotiation of new agreements reached with our partner, CUCBM, that allow us two year extensions of the exploration period of each of our PSCs in China," said McElwrath. "This provision provides time for expanded exploration activities and an opportunity for the Company to fully capitalize on the tremendous potential in each of the China PSCs. Our strong relationship with CUCBM continues to be of inestimable value."
The Shouyang and Qinnan Blocks are part of the 4,280 square kilometer (1,057,650 acres) coalbed methane (CBM) project in Shanxi Province that Far East holds under farmouts from ConocoPhillips. Including its 1,073 square kilometer project in Yunnan Province, the coalbed methane concessions of Far East Energy contain a land mass slightly larger than the State of Delaware.
Investor Conference Call
Far East Energy is finalizing plans for an investor conference call to provide an opportunity for Q&A on its operational developments in China. The Company is committed to providing investors ongoing progress reports and will have the final details available next week.
Based in Houston, Texas, with offices in Beijing, Kunming, and Taiyuan City, China, Far East Energy Corporation is focused on the acquisition of, and exploration for, coalbed methane in China through its agreements with ConocoPhillips and China United Coalbed Methane Company, Ltd. (CUCBM).
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