"The spudding of our first development well at Dagang marks an important milestone for Ivanhoe Energy in China," said David Martin, Ivanhoe's Chairman. "In 1999 we undertook a pilot program at Dagang as a pioneering joint venture with a goal of introducing advanced drilling, well-stimulation technology and new production equipment to discovered, but largely unproduced, oil reservoirs. After four years of hard work, we have now successfully made the transition to a development operation, which we expect will lead to significantly increased production rates in the coming years."
The Dagang Project, covering an area of 22,400 acres approximately 125 miles southeast of Beijing, is being developed under a 30-year production-sharing contract with China National Petroleum Corporation. Sunwing initiated a pilot program at Dagang in 1999, and currently produces approximately 500 barrels per day of light crude oil from seven test wells. The oil is sold to PetroChina at world market prices, which have averaged approximately US$30.00 per barrel for 2003, a discount of US$2.00 per barrel below WTI prices.
Initial work, including securing service and drilling contracts and preparing drill sites and pipeline right-of-ways, is currently in progress. Ivanhoe Energy will provide funding for the initial development work, and intends to secure first-stage project financing before year-end. 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 cash flow estimates are based on several key assumptions that are subject to change, including production rates, price assumptions and the timely securing of project financing. For example, changes in timing of financing or delays due to rig availability will result in lower than projected results. Field operating cash flow is revenue less operating costs and production-related taxes.
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