"This is the first of two very significant production-sharing contracts we expect to sign to exploit natural gas in the Sichuan Basin," said Ivanhoe's Chairman David Martin. "The demand for clean-burning natural gas in China is expected to grow dramatically over the next decade. Ivanhoe will be clearly positioned to benefit from this trend."
Under the terms of the agreement, Ivanhoe will develop natural gas deposits on the Zitong Block. In return for its investment and development expertise, Ivanhoe will receive approximately 80% of the revenue before costs are recovered and about 45% after costs are fully recovered. PetroChina participates as a partner in any successful developments, with up to a 51% working interest. In addition to developing existing producing structures, Ivanhoe will conduct exploration activities over these blocks, which will include acquiring new 2-D seismic data, reprocessing existing seismic data and drilling of at least four exploratory wells over the next six years. Drilling could commence in late 2003. Ivanhoe management already has been approached by major financial institutions and investment banks interested in providing financing for this major Canadian-managed natural gas project.
"Several gas-producing structures have been discovered on these blocks. Over the next year we intend to utilize seismic analysis to focus our initial drilling on the most favorable structures. Our experience in utilizing high-angle drilling can significantly improve the well productivity and longevity of gas production from this area," Martin added.
The geologic interpretation from the existing 2-D seismic data by the local Chinese bureau has identified 16 structures with hydrocarbon-bearing potential. Initial test rates from wells already drilled by the Chinese on the Zitong block have ranged between two and 32 million cubic feet per day (mmcf/d). Four wells are currently producing and it is believed that larger potential exists from other zones in the producing well bores. Ivanhoe has estimated the potential natural gas resources on these blocks to be as large as five trillion cubic feet.
In addition, pursuant to existing exclusive agreements, Ivanhoe has the right to negotiate toward a production-sharing contract for the one-million-acre Yudong Block, located on the eastern edge of the Sichuan Basin. Ivanhoe management expects these negotiations to begin before the end of the year.
The Sichuan Basin, located in central China and approximately 930 miles southwest of Beijing, is the country's largest gas-producing region with a current production rate of more than 800 mmcf/d and with a natural gas resource potential estimated by Chinese officials of 260 trillion cubic feet. There is a strong and growing market for natural gas, with approximately 120 million people living within the basin, an existing transportation grid within the Zitong block that is connected to many industrial and populated areas and also one major trunk line being built to ship gas to other new users in Eastern China via Wuhan. The price of gas to residential and commercial consumers is currently regulated in the range of US$2.00 to $3.25 per mcf, with initiatives in place to convert to a market-driven price system over the next few years.
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