Primeline announced that China National Offshore Oil Corporation ("CNOOC") has agreed to vary the terms of the Petroleum Contract to allow Primeline to carry forward its exploration well obligation into the second exploration phase to accommodate the development and exploration work program.
The Petroleum Contract for Block 25/34 provides for an exploration period of seven years from the date of commencement of May 1, 2005, originally divided into three separate phases of three, two and two years respectively. By a previous Amendment Agreement dated February 18, 2008, the first exploration phase was extended from three to four years, to end on April 30, 2009. The Company and Primeline Petroleum Corp. (PPC) (jointly as "Contractor") are required to complete a minimum exploration work in each exploration phase; the requirement for the first exploration phase being to acquire 200 km2 of 3D seismic and drill one well of not less than 2,500 m deep with a minimum exploration expenditure of US $6 million. To date, in the first exploration phase, the Contractor has acquired a total of 550 km2 of 3D seismic and has together spent in excess of US $20 million but, due to the lack of availability of drilling rigs, has so far been unable to drill the required well despite all reasonable best efforts.
In 2007, the Company and CNOOC agreed on a rolling development strategy, which entails developing the existing gas resources in the Lishui 36-1 gas field whilst at the same time continuing exploration of nearby prospects. Since October 2008, when the Agreement In Principle for Gas Sale was signed with Zhejiang Natural Gas Development Co. Ltd., Primeline has been proceeding with the compilation of the Overall Development Plan (ODP) for the Lishui 36-1 gas field. In view of the current ODP work program, the rolling development strategy and the approaching end of the first exploration phase, CNOOC has now agreed that Primeline may carry forward the unfulfilled one well commitment from the first phase into the second phase. As a result, the work obligation in the second phase will be to drill two exploration wells.
Furthermore, CNOOC has agreed that Primeline may delay its decision to enter into the second exploration phase until October 31, 2009, provided that if Primeline elects to proceed by that date then the second exploration phase shall be deemed to have commenced on May 1, 2009. It is Primeline's current intention to proceed to the second phase but this flexibility will allow Primeline to decide and plan on a better basis when the ODP is completed. When a development decision is made, the agreed development area will be carved out of the exploration area and will be the subject of a Supplemental Development Agreement with CNOOC.
Dr. Ming Wang, CEO of Primeline, commented, "CNOOC recognizes the scarcity of drill rigs in the past few years and the benefits of having the ODP report completed and approved before we proceed with the step out exploration work within the overall rolling exploration and development concept. CNOOC's agreement to amend the Petroleum Contract terms demonstrates the cooperative understanding and goodwill between us supporting the Lishui 36-1 development project and beyond."
As previously announced, Primeline is progressing well with the preparation of the ODP and is in the process of contracting various surveys required for the ODP. Land acquisition for the onshore terminal site from Wenzhou Government is also proceeding well. On the exploration side, Primeline has completed the site survey of the two proposed exploration well locations in the Lishui gas play and other associated preparatory work. Primeline is ready to drill once a rig is available on acceptable terms. As part of the rolling development strategy, it is now anticipated that drilling of the nearby prospects will only commence after a decision on the development is made. It is also believed that the proposed delay should benefit Primeline in that indications are that drilling costs are now coming down as a result of current market conditions.
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