Yunnan PSC (Enhong and Laochang)

OVERVIEW

The Production Sharing Contract for both the Enhong and Laochang areas in the Yunnan Province consists of a two phase exploration period, a development period and a subsequent production period.

We have completed Phase I of the exploration period and are currently operating under Phase II. In 2009 the Ministry of Commerce approved a modified agreement which extends Phase II of the exploration period to June 30, 2011. Upon successful completion of Phase II it is our option to continue development and production stages of the PCS on any CBM discoveries.

Far East Energy is responsible for all exploration costs in the Yunnan Province. If we are successful in discovering a coal bed methane field, the China United Coal Bed Methane Corp. (CUCBM) will join us as a partner with a maximum of 40% working interest. Because there are no pipelines in the vicinity of the Yunnan Province project our ability to sell Coal Bed Methane produced from these projects is limited to communities in the general area until a gas pipeline, compressed natural gas facility or other off-take vehicle is built in the area.

Phase I

Under Phase I of the exploration period we drilled and completed three wells on the project, performed a hydraulic fracture and tested one of the three wells. As a result, we felt that all three wells yielded favorable gas content results, so we acquired 10 kilometers of 2D seismic data in the Enhong area. We also drilled one vertical well in the Enhong area and one in the Laochang area.

Phase II

We entered into Phase II in February, 2005 which obligated us to drill additional horizontal or vertical wells. Based on data gathered from our wells and wells drilled in the area by the Chinese coal industry, we designed and drilled a cluster of four deviated wells to stimulate and test the major coal seam in the area. This pattern, drilling multiple deviated wells from the same pad site, allows us to optimize well spacing and reduce costs, which is especially effective in the mountainous terrain that typifies this region. Based on our testing we anticipate that these coal seams will be characterized by very low permeability requiring multiple hydraulic fracturing to fully test these wells.

We have committed to certain minimum annual exploration expenditures to satisfy the requirement of the Yunnan PSC The annual minimum exploration is based on a per acre formula but is approximately $1.6 million per year, this will fluctuate based on the exchange rate between U.S. dollar and Chinese RMB.