Operations

Shouyang Block

OVERVIEW

The Shouyang Block is located in the Qinshui Basin approximately 233 miles (375 Km) southwest of Beijing. The total area encompasses 485,018 acres (1,962.8 square kilometers) and is the current focus of our operations.

NETHERLAND SEWELL & ASSOCIATES REVIEW

The oil and gas in place (OGIP) as estimated by Netherland Sewell & Associates (NSAI) for the Shouyang Block based on a best estimate is 6.9 Tcf (197 Bcm) and high estimate is 8.4 Tcf (240 Bcm). Preliminary technical data suggests that our Shouyang Block compares very well to the premier U.S. CBM plays of the San Juan and Warrior Basins. See figure 1.1

The permeability found in our initial wells is very high. This high permeability allows gas to move with greater ease through the coal, and from greater distances which makes it possible to gain maximum recoverability with fewer wells drilled. However, this same high permeability also means water can move to the well with greater ease and from greater distances meaning it will take longer to dewater each well. The key to capitalizing on the advantages offered by this high permeability and high gas content and reaching maximum production at the earliest possible date is to drill a pattern of wells in a focus area that minimizes the dewatering time and allows wells to produce marketable gas sooner. The Fairview Field in Australia is a reasonable comparison to what we have in the Shouyang Block. There, because wells were consistently drilled in a pattern around the initial wells, dewatering was enhanced and wells that initially had very low gas flow rates due to the long dewatering period steadily ramped up to significantly higher gas production rates and have sustained those rates for many years. We cannot be sure if our performance will mirror this until we obtain more data taken from a longer period of time.

The Shouyang Block is characterized by three coal seams, the #15, the #9 and the #3 coals seams, with current production predominately from the #15 and #9. As of December 31, 2010, Far East Energy has drilled and fraced 53 CBM wells. Of these 53 wells, 40 are program wells drilled in the 1H Pilot Area and 13 are pilot development test wells to expand the field to the west.

Current plans call for 5 to 8 rigs to continue a drilling program of 60 pilot production and pilot development test wells from September 2010 to mid year 2011. See figure 1.2

ADVANCED RESOURCES INTERNATIONAL, INC. REVIEW

According to studies conducted by Advanced Resources International, Inc. (ARI), the #15 coal seam is especially productive with permeability between 80 and 120 millidarcies and an estimated gas content of 500 scf (standard cubic feet) per ton of coal. The study estimates peak daily production per vertical well on 80 acre spacing from this seam of 300-500 Mcfpd (thousand cubic feet per day). As an alternative we could drill horizontal wells on a 400 acre spacing and reach an estimated 2.3-5.0 MMcfpd (million cubic feet per day). See figures 1.3 and 1.4

The horizontal wells can be more effective but they are also significantly more expensive to drill and complete. The Company is currently studying well economics to determine the most efficient method to develop the entire field utilizing vertical and directional well drilling.

FUTURE DEVELOPMENT

Far East Energy signed a gas pipeline sales contract in June 2010 with the Shanxi Provincial Guoxin Energy Development Group (SPG). This pipeline was built in December 2010 and first gas sales occurred in January 2011. Far East gas will be flowing into a newly completed pipeline that has total capacity of approximately 40 MMcfpd (million cubic feet per day). Our well head price of gas is approximately $6.25-$7.11 per Mcf, a price that was nearly double the U.S. Henry Hub price on the day we signed the contract. This is a 20 year contract and it is on a “take or pay” basis, meaning the pipeline must take all gas produced up to 10.6 MMcfpd (million cubic feet per day) or pay for all available volumes not taken. In addition, we can negotiate other terms for a contract for volumes in excess of 10.6 MMcfpd setting a strong competitive position with an alternative pipeline that is currently being constructed. This second pipeline is expected to be completed in the first half of 2012.

The Company recently implemented a greatly accelerated drilling program and field development with an eye on major production increases over the next 24 months. In addition Far East Energy is working to begin meaningful production from the #9 coal seam and validate the commercial viability of the #3 coal seam. We also recently completed a gas gathering system in the field with a pipeline tie-in.