Far East Energy Negotiates Shouyang Gas Sales Agreement

Shouyang Block
(Click to Enlarge)

Far East Energy has negotiated a Gas Sales Agreement (GSA) with its partner, China United Coal Bed Methane (CUCBM) and Shanxi Provincial Guoxin (SPG) to sell all production of coalbed methane (CBM) from the contract area covered by the Shouyang Production Sharing Contract. The price received by Far East for its gas will be 1.55 Rmb per cubic meter, including enacted and recently announced Chinese government subsidies, which equates to approximately $6.55 per Mcf at current exchange rates.

"We are thrilled," said Michael R. McElwrath, CEO and President of Far East Energy. "This gas price is over thirty-five percent higher than current US gas prices, which are running about $4.80 per Mcf. This is one of the advantages of producing CBM in China, and we are pleased to sign a gas sales contract with a pipeline that has the capacity to take up to 40 to 50 million cubic feet per day of our Shouyang gas."

The GSA is a 20-year agreement that provides that SPG is required to purchase all gas produced from the Shouyang Block up to 300,000 cubic meters (10,584,000 cubic feet) per day of CBM gas on a take-or-pay basis with any quantities above such amount to be negotiated pursuant to a separate agreement. This provision gives Far East and CUCBM the opportunity to negotiate a new contract for volumes above 10.584 million cubic feet per day at a time when a second pipeline may have been built to the area, and/or when gas prices may have risen further. The GSA does not have any minimum delivery obligations, but does commit all production from the Shouyang Block up to 300,000 cubic meters per day to SPG.

Gas sales are expected to commence upon completion of Far East's in-field gathering system, which will interconnect with SPG's 18-inch diameter line in Shanxi Province that is currently under construction and is scheduled to be completed by September or October 2010.

"We have pursued this gas sales contract tenaciously, but have also been incredibly fortunate," said McElwrath. "Our great good fortune arose from the circumstance that SPG was already routing a pipeline between Yuxian and Jinzhong passing very near our Shouyang Pilot Development; and then was sufficiently hungry for gas to be willing to build a short connecting line at its expense. SPG was also willing to commit to take all volumes that we produce (or pay for any gas not taken)."

"Furthermore," continued McElwrath, "it is remarkable that we can move straight from early-stage gas production to pipeline sales. In China, first gas must nearly always be sold as compressed natural gas (CNG)."

As is the practice in China, the GSA was signed by and between CUCBM (Far East's Chinese partner), as seller, and SPG, as purchaser, with Far East being an express beneficiary thereto. Simultaneously with the execution of the GSA, CUCBM and Far East entered into an agreement in accordance with the PSC, whereby CUCBM and Far East agreed to jointly market and sell all production from the Shouyang Block.

"CUCBM continues to be the best partner one could hope to have in China," said McElwrath. "Their leadership is visionary. They worked tirelessly to get this sales agreement in place, and negotiated excellent terms for our benefit."

McElwrath continued, "We are looking forward to a long and mutually beneficial relationship with SPG. They have built a very impressive pipeline network in Shanxi Province in a very short period of time, and we are fortunate that such a well-managed and dynamic company is constructing a network of pipelines ideally situated to provide offtake for our gas.

A more detailed description of the GSA will be contained in a Current Report on Form 8-K to be filed by Far East with the Securities and Exchange Commission.


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