Qinnan Block

OVERVIEW

The Qinnan Block is located a few miles south of the Shouyang Block in Shanxi Province. Under the original Production Sharing Contract, China United Coal Bed Methane (CUCBM) was our partner in exploring and developing the Qinnan field. CUCBM was a joint venture between the China National Coal Group Corporation and China National Petroleum Corporate (CNPC). However, CNPC recently withdrew from this joint venture and has replaced CUCBM as our Chinese partner in the Qinnan Production Sharing Contract

As in the Shouyang field, the Qinnan PSC called for a three phase exploration period. Phase I called for Far East Energy to perform a hydraulic fracture procedure on at least one previously drilled exploration well, which we performed in September 2004. We completed the QN-002 well, and testing was performed on a coal seam at a depth of 550 meters (1,880 feet). Our objective was to gain information about the permeability of that particular coal seam. This completed our obligation for Phase I. We fulfilled our obligations under Phase II by drilling and completing two horizontal wells in the Shouyang Block prior to March 31, 2006. In 2006 we acquired and processed 26 kilometers of 2D seismic data in the Qinnan Block and obtained data from a vertical well drilled in December of that year. We utilized this well data and the 2D seismic data to plan a program of horizontal wells. We completed our first horizontal well in the block in 2008, with a well drilled into the #3 coal seam. This coal seam is the object of development by other companies in the area.

However, the exploration period granted in the Qinnan PSC expired on June 30, 2009 and we cannot continue our exploration activities in the Qinnan Block without an extension of the PSC. Our appraisal that the Qinnan Block contains significant quantities of coal bed methane gas remains firm as does our resolve to do everything in our capabilities to secure the necessary extensions for the exploration period. However, at this time, we cannot be optimistic. In January 2011 we received formal notice from CNPC that is has purportedly received all Chinese approvals with respect to the transfer and they have requested that we execute a modified agreement that confirms CNPC as our Chinese partner for the Qinnan PSC. Currently the modified agreement is under review and discussion and we have begun working with CNPC on a variety of matters concerning the Qinnan PSC.

We will provide updates on the progress of these negotiations on this web site as appropriate. At this time we cannot provide any assurance that we will be successful in extending the exploration period of the Qinnan PSC.