Ivanhoe Energy Inc. (NASDAQ: IVAN and TSX: IE), through its wholly owned subsidiary Sunwing Zitong Energy Ltd., will proceed with Phase II of its gas exploration and development contract for the Zitong Block in China's Sichuan Basin. Mitsubishi Gas Chemical Company Inc., which owns a 10% working interest in the project, also has indicated its interest in proceeding with Phase II.
Sichuan is the oldest gas-producing province in China and currently accounts for approximately 27% of China's annual gas production. Ivanhoe's Zitong gas exploration contract covers an area of 900,000 acres in the Sichuan Basin. Sunwing is carrying out its exploration activities under a 30-year exploration and development, production-sharing contract (Zitong PSC) signed with China National Petroleum Corporation (CNPC) in September 2002. CNPC is China's flagship energy enterprise, producing approximately 75% of China's gas production and over 50% of its oil production.
"The 900,000-acre Zitong Block is right in the heart of China's most prolific gas-producing area", said Gerry Moench, Ivanhoe Energy's Executive Vice President. "Our work to date has confirmed the presence of gas and has taught us a great deal. Our partnership with Mitsubishi Gas Chemical Company (MGC) and our contract with PetroChina associates us with two of Asia's energy leaders. We look forward to executing Phase II and proving out the potential of this important block."
Sunwing holds a 90% contractor working interest in the Zitong PSC and is the operator. MGC owns the remaining 10% contractor interest and has an option to acquire a further 10%. Sunwing and MGC 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 in any development of the project through a working interest of up to 51%.
The Zitong PSC provides for two exploration phases, each three years in length. Sunwing, MGC and CNPC will jointly participate in the development and production of any commercially viable discoveries, with production rights limited to the lesser of 30 years following the date of the Zitong PSC or 20 years of continuous production.
Sunwing now has completed Phase I under the Zitong PSC. This included reprocessing approximately 1,649 miles of existing 2D seismic data and acquiring approximately 705 miles of new 2D seismic data, and interpreting this data. This was followed by drilling two wells, totalling an aggregate of 22,293 feet. Both wells encountered expected reservoirs and gas was tested on the Yixin # 1 well, but neither well demonstrated commercially viable flow rates and both have been suspended. Sunwing may elect to re-enter these wells to stimulate or drill directionally in the future.
Phase II entails additional drilling of a total of approximately 22,965 feet, to take place over a three-year period ending in December, 2010. Sunwing has identified potential target structures and its onward plans include acquiring additional high-quality 2D seismic and shooting selected 3D seismic. Drilling is expected to commence late in 2009 and continue in 2010.
Over the past 30 years PetroChina has drilled 27 wells, testing Jurassic, Triassic and Permian formations on the Zitong Block. Gas has been tested from all zones to a depth below 21,000 feet in the Lower Triassic. PetroChina and Sinopec are drilling deeper Lower Triassic and Upper Permian tests on prospects adjacent to Zitong following their successful deep exploration efforts over the past five years.
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