Far East Energy Updates on Shouyang Block
Far East Energy summarized current and recently completed drilling and completion activities in its Shouyang Block, designed to increase gas production from its Shouyang 1H Pilot Area in preparation for potential gas sales in the second half of 2010. Far East also discussed its near-term plans for exploration and development of the northern portion of the Shouyang Block as well as recent developments concerning potential pipeline access and second half-2010 gas sales.
The Company has drilled a cumulative total of 32 wells in the northern portion of the Shouyang Block in Shanxi Province, China. Six of these wells are horizontal wells, seven are deviated or directional wells, and 19 are vertical wells. Twenty-six of those wells were drilled in the 1H Pilot Area. These 26 wells provide the production pilot from which most of the Company's gas production is currently derived, and this area is targeted to be steadily expanded to the west and southwest to increase production in anticipation of gas sales.
Six of the wells drilled to-date in northern Shouyang, including the early 2V and 2H wells, serve as parameter or "step-out" wells to provide further information regarding the geographic extent of the high permeability/high gas content area, and have been drilled several kilometers to the east, west and southwest. Thus far all parameter wells have revealed good to excellent permeability, and some are already producing gas. The results of all parameter wells will be analyzed with a goal of identifying additional prospective areas for drilling and production operations across the northern portion of the Shouyang Block.
Another 14 wells are expected to be drilled during the first half of 2010, with five to be drilled in the 1H Pilot Area, and nine to be parameter exploration wells. The five Pilot Area wells are underway or nearing commencement. The nine additional parameter wells will bring to thirteen the number of parameter or step-out wells drilled in northern Shouyang for exploratory purposes.
"Upon completion of these parameter exploration wells, we will have covered a substantial swath of the northern portion of our Shouyang Block from its eastern to its western boundary," said Michael R. McElwrath CEO and President of Far East Energy. "We will have obtained essential data facilitating our identification and high-grade ranking of what we believe to be the best areas for the next pilots. Fortunately, in the step-out wells drilled to-date, we are finding what appears to be much better permeability than is normally found in China's gas rich coals."
In addition to this aggressive first-half 2010 drilling program, approximately 25 wells are planned to be fracture stimulated from late March through late July. Thirteen of these will be in the 1H Pilot Area, including four existing Pilot Area wells that are being re-stimulated. Twelve are parameter wells. All are being fracture stimulated using enhanced methods developed by Far East during its 2009 Work Program, including the use of resin-coated sand to improve the stability and durability of the fracs. Production results from these efforts should be realized across the next few months.
To date, the 1H area pilot wells, as well as parameter wells drilled at intervals of four to six kilometers to the south and west of the 1H Pilot Area have revealed estimated permeability ranging from 10 millidarcies (md) to over 100md. Thus, the Company believes that the estimated high permeability in the 1H Pilot Area and in the parameter wells, combined with high gas content throughout, preliminarily indicates an area of very promising gas productivity, particularly in contrast with typical permeability rates in China.
It is rare to find high permeability and high gas content together in the same coal. The San Juan Basin is generally considered the most prolifically producing CBM basin in the world and is an example of what can happen when high perm and high gas content are found in combination along with synergistic geologic and hydrologic controls.
Far East remains in discussions regarding the potential off-take and sale of gas produced from the 1H Pilot Area. Definitive agreements have not yet been reached, and all gas sales will be negotiated by Far East and its partner, China United Coalbed Methane (CUCBM). Far East had previously disclosed that two pipeline companies are planning to lay lines of approximately 18 inches in diameter near the Shouyang 1H Pilot Area. One of those lines is well-underway and has been re-routed to pass within one to two kilometers of the 1H Pilot Area by July 2010. The second competing pipeline company has now stated that it has obtained approval to build a pipeline to the City of Shouyang which is about 15 kilometers away, and desires to discuss routing that line to our Shouyang Pilot Area and then on to Taiyuan, the capital of Shanxi Province with a population of approximately 4 million. These developments could enable Far East to initiate gas sales as early as the third quarter of 2010.
"Current indications are that a second pipeline may be built within close proximity of our Pilot Area. If so, this is an excellent development," said McElwrath. "It is rare to have a pipeline within a few kilometers of your holdings in China. Should it develop that two pipelines are built to within a few kilometers of us, that will be rare indeed. It could accelerate the date of first gas sales and facilitate the execution of the first gas sales contract. That in turn should put Far East in position to begin discussions and planning for long-term project finance. We will, of course, need to demonstrate sufficient reserves, but the potential is quite clear."
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