Far East Energy announced that its second-half 2010 drilling program for the Shouyang Block commenced recently with three wells, the 34D, 40V, and the 11D having been spudded in the past week. The drilling program is planned to consist of approximately 60 wells drilled during the remainder of 2010 through the summer of 2011. Currently, 51 of these wells are planned to be drilled in the 1H Pilot Area to accelerate gas production and maximize gas sales, projected to begin by year-end 2010. In addition to these pilot area wells, 9 parameter wells will be drilled to continue to extend the testing of the #3, #9 and #15 coal seams across a broad area of the northern half (approximately 242,000 acres or 980 square kilometers) of the Shouyang Block with primary exploration in the #15 coal seam.
Far East also announced that it is presently finishing a 10 well fracture stimulation program comprised of fracing 6 already-drilled wells in the 1H Pilot Area and 4 parameter wells located as much as 16km west of the 1H Pilot Area. Fracing the 6 pilot wells should further increase production in the 1H Pilot Area, and Far East continues to target gas volumes of 2 million cubic feet per day by year-end, which would double the production announced in late August.
In order to execute the planned drilling program, Far East will utilize as many as eight drilling rigs simultaneously which should allow completion of the drilling program in the summer of 2011. "Based upon the response to our last drilling program and the rapid ramp-up in production that we announced in August, we have designed an aggressive drilling program with the target of doubling production by year-end," said Michael R. McElwrath, CEO and President. "We will focus first and foremost upon rapidly increasing production, with roughly eighty-five percent of the new wells drilled in the 1H Pilot Area. But we will continue drilling parameter wells that will hopefully continue to expand the size of the area determined to contain high gas content and high permeability across the northern portion of our Block because we want the potential to be clear."
Far East also confirmed that the construction of the Shouyang gas gathering system is underway and is currently on schedule to be completed and commissioned by year-end. At that time flaring will cease, and gas can be delivered for sale. Shanxi Gas Gathering, a subsidiary of Shanxi Provincial Guoxin Energy Development Group Co., Ltd., is managing the gathering system's completion.
"We were proud to be the first western company to obtain a CBM gas sales agreement with a pipeline," said McElwrath, "and we will be even more proud to be the first to sell gas into a pipeline as China begins to transition from a CBM transportation system comprised mainly of compressed natural gas (CNG) - which distinctly limits the volumes of gas which can be transported to market – to a rapidly developing pipeline infrastructure. This gives us a distinct market advantage in the sense of being able to potentially market very large volumes of gas."
Far East Energy will soon commence the process of obtaining Chinese reserve certification with the objective of completing this process in the second quarter of 2011. Far East Energy has already started the process of evaluating resources and SEC reserves. The engineering firm of Netherland Sewell and Associates, Inc. (NSAI) has been engaged to complete a report on the overall resource base in the Shouyang Block in the coming weeks (two categories of resources, Contingent and Prospective), to be determined under the guidelines of the Society of Petroleum Engineers), and to complete a report on SEC reserves in the Shouyang Block as of December 31, 2010.
Mr. McElwrath commented, "We have been very busy in the second and third quarters of 2010 moving this project toward commercial production and development. The recent capital raise of $32.5 million of net proceeds has been instrumental in accelerating our plans for gas sales and our potential for gas reserves by year end. Our relationship with Shanxi Gas Gathering has proven to be a great benefit in accelerating our progress toward gas sales and we are very excited at the prospect of beginning to generate revenue from our Shouyang Block in December 2010."
Garry R. Ward, Senior Vice President – Engineering, commented, "Our program of parameter wells has been generating very good information regarding the recurring high permeability and high gas content of the #15 coal seam all the way out to the western edge of the Shouyang Block. Our recent drilling of new parameter wells is designed to expand our knowledge of reservoir quality in the northern 240,000 acres of the Shouyang Block. In addition to the parameter wells, our pilot wells have been showing good gas production and we are excited at the prospect of accelerating our immediate gas production through the addition of the most recent fracture stimulated wells. We are continuing to refine our completion procedures to lower our drilling costs and improve our gas production."
Additionally, Far East commented that it will fracture stimulate 5 wells in the Laochang Block in Yunnan to test two coal seams for production. This fracture stimulation and production testing work will commence in October.
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