Coal Bed Methane Development

18 Apr 2006 07:01

Fortune Oil PLC18 April 2006 18 APRIL 2006 FORTUNE OIL PLC ("Fortune Oil" or "the Company") Liulin Coal Bed Methane The Company is pleased to announce a conditional agreement to take a 60%interest in a company formed to develop coal bed methane ("CBM") gas reserves inthe Liulin block in Shanxi Province, China. The other 40% shareholding will beheld by Molopo Australia Limited ("Molopo"), an ASX-listed company withsignificant experience in the development of CBM in Australia. In 1999 asubsidiary of Molopo signed a Production Sharing Contract ("PSC") fordevelopment of the Liulin block with CUCBM (China United Coal Bed MethaneCompany), a PRC government entity responsible for all CBM PSCs. Subject toapproval by the Ministry of Commerce, the foreign contractor rights in this PSCwill be extended and transferred to the new company, Fortune Liulin Gas CompanyLimited, registered in Hong Kong. The initial obligation of Fortune Oil is tocommit US$2.5 million for further field appraisal, to be financed from theCompany's cashflow. CBM consists of natural gas that is trapped within coal seams. China has one ofthe world's largest reserves of CBM and its development is being encouragedbecause of resource limitations and the need to remove gas from coal reserves onsafety grounds. To date CUCBM has signed over 20 PSCs with foreign companiesbut the industry is only just emerging and China's CBM output is small at 100million cubic metres per year. The industry has now been spurred by thedevelopment of local gas markets and supply infrastructure, particularly inShanxi Province which has the two largest CBM basins. We believe that Fortune Oil is the only foreign company controlling pipelinesand reticulation networks for supply of natural gas in Shanxi Province. Thisgas is sourced from the Shaanxi-Beijing trunk pipelines which pass through theprovince and are operated by our partner in the Fu Hua natural gas business. AsCBM fields are developed the gas will be supplied initially to local markets bytruck as compressed natural gas (CNG) and ultimately to Beijing as pipeline gas.Therefore, once the Liulin block has been commercially developed, we envisagethe gas being supplied to Fortune Oil-controlled gas distribution companies suchas the Tongzhou CNG station in Beijing. This will provide Fortune Oil with anindependent source of gas and increase reliability of supply for our downstreambusinesses. The Liulin block is one of the best geologically proven CBM blocks in China.Analysis from coal holes and exploration wells has indicated an in-place gasresource of approximately 0.8 trillion cubic feet ("TCF"). With a successfulappraisal programme, this resource may be converted to recoverable reserves inthe order of 400 billion cubic feet (12 billion cubic metres) in an area ofapproximately 200 square kilometres. The gas recovered to date is over 95%methane, located in three main coal seams at a depth of 400 to 700 metres. Thecoal parameters such as permeability, gas content and seam thickness arefavourable for CBM drilling, as advised by our technical consultants, AdvancedResources International, Inc of Virginia, USA. A Molopo subsidiary, Lowell Petroleum NL ('Lowell"), started to explore theLiulin block over 10 years ago and drilled 4 vertical exploration wells underthe PSC in 2000. Under the terms of the agreement with Molopo, approval will besought from PRC authorities for the PSC to be extended and the rightstransferred from Lowell to Fortune Liulin Gas Company Limited. Fortune Oilwould then commit US$2.5 million for further appraisal over the next year and beentitled to a 60% shareholding in the company, with Molopo retaining a 40%interest. This would involve further drilling, in particular using techniquesrecently applied successfully in China and Australia. Should this appraisalwork prove successful, then we anticipate commercial development of the blockcommencing after two years. The agreements for extension and transfer of the PSC are now being approved byCUCBM for submission to the Ministry of Commerce for final approval, which weexpect to receive by end of May. Bruce McGowan, Executive Vice-Chairman of Fortune Oil, stated: "This is our first step into the upstream gas business. We are very excited bythe long-term potential of China's vast CBM resources and the synergies with ourgas distribution business. Development of Coal Bed Methane reserves is veryimportant for China to provide clean fuels for the community. Molopo'sexperience in CBM development in Australia and its knowledge of the Liulin blockprovide an ideal partner for Fortune Oil in developing our CBM business - thecombination is very powerful. All upstream developments have risk and we cannotexpect immediate results but the Company is very well placed to take advantageof China's CBM opportunities and the accelerating demand for gas." ENQUIRIES: Fortune Oil PLC Bruce McGowan - Executive Vice Chairman Tel: 020 7824 8411 (UK) John Pexton - Deputy Chief Executive Tel: 00 852 2583 3113 (Hong Kong) Pelham Public Relations Limited Tel: 020 7743 6679 Archie Berens or 07802 442 486 This information is provided by RNS The company news service from the London Stock Exchange