The Dagang Project, covering an area of 22,400 acres approximately 125 miles south east of Beijing, is being developed under a 30-year production-sharing contract with CNPC. Initial work, including securing service and drilling contracts and preparing drill sites and pipeline right-of-ways, is currently in progress.
"The development is a low-risk investment that will provide Ivanhoe the opportunity to significantly increase its oil production over the next three years to a target level of 14,000 barrels per day, establishing our longer-term presence in China," said David Martin, Ivanhoe Energy Chairman.
Under terms of the contract and the ODP, Ivanhoe will operate the project and fund 100% of the development costs to earn 82% of the net revenue until payout and 49% thereafter. An independent evaluation conducted by reserve engineers, Gilbert Lausten Jung Associates, indicates that the contract area contains an estimated 52 million barrels of gross recoverable reserves
The ODP involves drilling up to 115 new oil wells and 28 re-completions over the next several years. Drilling is scheduled to commence in October. Ivanhoe Energy will provide funding for the initial development work, and intends to secure first stage project financing before year-end. Sunwing's production, currently more than 500 barrels per day from the pilot area, is sold to PetroChina at world market prices, which have averaged approximately US $30.00 per barrel for 2003.
The geologic interpretation from the existing 2-D seismic data by the local Chinese bureau has identified 16 structures with hydrocarbon-bearing potential on the block. The initial test rates from wells already drilled by the Chinese have ranged between two and 32 million cubic feet of gas per day.
As a part of the early development and exploration program, Sunwing is reprocessing existing seismic data, will acquire an additional 500 kilometers of new 2-D seismic data, and prepare to drill selected appraisal and exploratory wells. First drilling should begin in 2004. In support of these activities, Sunwing has opened a new office in Chengdu.
"At Zitong, we are utilizing state-of-the-art seismic analysis to focus our initial drilling on the most prospective gas-producing structures that were previously discovered by PetroChina." said Mr. Martin.
Under the terms of the agreement signed in September 2002, the company will receive approximately 75% of the project revenues before payout and about 47% after payout. PetroChina may elect to participate up to a 51% working interest. Sunwing is the operator of the Zitong project.
The Sichuan Basin, located in central China and approximately 930 miles southwest of Beijing, is the country's largest gas-producing region 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 in Sichuan, with approximately 120 million people living within the basin and an existing gas transportation grid that is connected to many end users. A major natural gas trunk line is under construction to ship gas from the Sichuan Basin to Eastern China, including Shanghai. The price of gas to residential and commercial consumers is currently regulated in the range of US$2.00 to US$3.25 per mcf, with initiatives in place to convert to a market-driven system over the next few years.
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