Far East Energy Sees Excellent Results on its First CBM Well

Far East Energy Corporation reported that its first exploration coalbed methane (CBM) gas well (FCY-LC01) in Laochang block, Yunnan Province, China, has reached its total depth of 825 meters (2,722 feet) and preliminary test results are excellent.

"We are pleased to see these exceptionally strong initial indications of coalbed methane gas," said Michael McElwrath, chairman of Far East Energy. "Things look quite promising at this early stage."

A total of 15 mineable coal seams were penetrated during the drilling of the well, with a total thickness of 29.40 meters (97 feet), which is considered excellent. The coring of the coal samples showed an unusually high recovery rate of 94.8%, according to Dr. Alex Yang, Vice President of Far East Energy and world-renowned CBM expert.

Based on desorbed gas flare observation, the gas is very pure methane with high quality. In addition, the drilling revealed four targeted major coal seams with a total thickness of 16.30 meters (54 feet), all within an interval of about 110 meters (363 feet), favorable for fracturing and production of CBM.

Using 18 desorption samples from the well, preliminary testing results indicate the final gas content should be in a range of 700 to 840 cubic feet per ton of coal, according to Dr. Yang. By comparison, some of the more prolific CBM basins in the United States have lower gas contents, such as the San Juan Basin in New Mexico, which has gas content of 300-700 cubic feet per ton of coal, and the Black Warrior Basin in Alabama which has gas content of 250-500 cubic feet per ton of coal.

"We are gratified that this first test well supported our earlier position, namely that there is already so much positive data from previous drilling and testing by the Chinese that the probability for favorable results from our initial exploration wells is excellent," McElwrath said. "We are now ready to move on to our second well nearby."

Far East Energy will begin drilling its second well on the Enhong block (FCY-EH02) in about two weeks. The third test well, (FCY-EH03) will be spudded in January 2004 and should be completed about a month later.

Meanwhile, further testing and analysis of these initial wells will continue into the first half of 2004 to determine sustained production rates.

The Far East Energy Enhong-Laochang Production Sharing Contract (PSC) covers a 30-year relationship in which Far East Energy has a 60% working interest, with the remaining 40% owned by China United Coalbed Methane Corporation, Ltd. (CUCBM), a corporation given exclusive authority by the State Council of China to enter into joint venture agreements with foreign enterprises to develop CBM in China.

In addition to the executed Enhong-Laochang PSC in east Yunnan Province, Far East Energy has initiated a PSC with CUCBM for the Zhaotong block in northeast Yunnan. In northern China's Shanxi Province, Far East Energy has also signed a farmout agreement with ConocoPhillips for two PSCs with CUCBM again being the Chinese partner. All three PSCs are in the process of final approval by the Ministry of Commerce. Based on ConocoPhillips and the Yunnan Provincial Coal Geology Bureau (YNCGB)'s estimates, all of Far East's project areas combined contain 19.5 to 26 trillion cubic feet (Tcf) of CBM original gas-in-place. Using a conservative recovery rate of 50%, it is estimated that 9.75 to 13 Tcf is potentially recoverable, with Far East's share being 5.1 to 10 Tcf depending upon the degree of CUCBM and ConocoPhillips participation.

"Natural gas utilization is on the rise in China, with the State Council pushing for a four-fold increase in gas usage by 2010," noted McElwrath. "As we have said before, the strong potential of the Enhong and Laochang Projects, coupled with our Shanxi Project being pursued in partnership with ConocoPhillips in Shanxi Province in North China, positions Far East Energy to become a major player in the exploration and production of natural gas in China. And with the West-to-East Pipeline to Shanghai running very close to the southern portion of our Shanxi Project and with the Shanjing Pipeline to Beijing near the northern portion, we believe we are ideally positioned to be a significant provider for the growing gas demands of China's two largest cities."

At present, there is no pipeline in the vicinity of Far East's project areas in Yunnan Province, and marketing the Yunnan gas will require a pipeline or a liquefied natural gas (LNG) facility. Successful development and production from a sufficient number of wells will be required to attract a pipeline or LNG plant.