Liulin CBM Update

31 Mar 2008 07:02

Fortune Oil PLC31 March 2008 31st March 2008 FORTUNE OIL PLC ("Fortune Oil" or "the Company") Liulin Coal Bed Methane - Independent Evaluation Fortune Oil is pleased to provide shareholders with the results of theindependent resource evaluation of the Liulin coal bed methane (CBM) block inShanxi Province conducted by petroleum consultants Netherland, Sewell &Associates, Inc. (NSAI). Further, the Company would like to update shareholderson the exploration activities of Fortune Liulin Gas Company Ltd (FLG) at Liulin. Highlights • NSAI values Fortune Oil's 30 per cent share in the Liulin block at US$184.7 million (as the present value sum of possible reserves and best estimates for unrisked contingent and prospective gas resources), assuming China United Coal Bed Methane Corporation Ltd. (CUCBM) takes up their 50 per cent participation interest in the contract area. • FLG has agreed with CUCBM to extend the exploration phase of the Production Sharing Contract (PSC) for a further two years. Independent Resource Evaluation Netherland, Sewell & Associates, Inc. was appointed to provide an independentCompetent Persons Report for the Liulin Coal Bed Methane block in Shanxiprovince. NSAI has recently conducted CBM reserves reports for several otherCBM operators in China. The estimates of reserves and resources were preparedin accordance with the most recent definitions and guidelines approved by theSociety of Petroleum Engineers of USA. Using the exploration data available up to 31 December 2007, NSAI issued itsreport on 28 March 2008 and appraised the total resource in the Liulin block inbillion standard cubic feet (bcf) as follows: Possible Gas Reserves: 29.7 Contingent Gas Resources: 86.8 (Low estimate, 1C) 268.7 (Best estimate, 2C) 630.5 (High estimate, 3C) Prospective Gas Resources: 18.7 (Low estimate) 57.9 (Best estimate) 135.8 (High estimate) NSAI has also estimated the value of these resources assuming full developmentof the Liulin block over the remaining contract life. The gas price parametersadopted by NSAI in its report were based on information provided by Fortune Oil. The compressed natural gas (CNG) price for wellhead CBM purchased by FortuneOil in Shanxi Province is currently 1.2 RMB/m3 (4.7 US$/MMBTU). NSAI has useda forecast that this price will increase by 40 per cent at Liulin over the nextfive years to 1.7 RMB/m3 (6.6 US$/MMBTU) in 2012, which is still below the pricecurrently charged by Fortune Oil near Beijing. Fortune Oil believes that theprice of domestic gas in China will increase as demand requires additionalimports of pipeline and liquefied natural gas at international prices, but isnot aware of any consensus on the forecasts for regional gas prices. Assuming that CUCBM takes up their full 50 per cent participation interest inthe contract area, NSAI estimates that the value of Fortune Oil's remaining 30per cent share in the Liulin block is: Present Value at 10% discount rate Possible Reserves US$ 22.0 millionUnrisked Contingent Resources (Best estimate) US$ 134.7 millionUnrisked Prospective Resources (Best estimate) US$ 28.0 million Total of above for Fortune Oil share US$ 184.7 million The NSAI report also states that there are sufficient core holes, explorationwells and pilot programmes to demonstrate that coal seams 3/4/5 and 8/9/10 arelaterally continuous across large areas of the Liulin block, contain sufficientpermeability and are of adequate volume to provide an attractive CBM target. Inaddition to the wells drilled recently by FLG there were two prior CBM pilotprojects in and directly offsetting the Liulin block, both of which producedgas. Longer-term production pilot testing will be required to determine thetechnical justification for commercial development. PSC Extension FLG has agreed with CUCBM to extend the exploration phase of the ProductionSharing Contract for a further two years from April 2008 and both parties arenow awaiting formal approval from the Ministry of Commerce. The objectiveremains to have sufficient production data points to satisfy the PRCrequirements for reserves certification, a process that has commenced throughFLG engaging CUCBM to prepare the necessary documentation. An OverallDevelopment Plan needs to be submitted to the government by CUCBM prior tocommercial development and sales of gas. Field Operations Update A pilot production well FL-ED-1B has been drilled, awaiting fracturestimulation, and drilling of an additional pilot production well FL-EP-5 islikely to commence in April. New drilling was delayed in early 2008 because ofthe severe snow storms which hindered travel throughout north and central China,although field operations were able to continue. A new core hole FL-ED3 hasalso been planned. FLG continues to dewater the pilot production wells FL-EP-1 and FL-EP-2 and thewater levels continue to fall more rapidly after installation of larger pumps inDecember 2007. Production pilot well LW-L3, which had been drilled by MolopoAustralia Limited in 2000, was re-opened in early 2008 and a new pump installedfor dewatering. All three wells are currently flaring the gas carried to thesurface in the water, although these are not yet at commercial quantities. Eachof these wells is an isolated vertical well to demonstrate a minimum productionlevel under the Chinese reserves certification procedures. Further explorationand development work is likely to use multi-pilot vertical wells and/orhorizontal wells rather than isolated vertical wells in order to dewater the gasreservoir more effectively and quickly. Enquiries: Fortune Oil PLCJohn Pexton - Deputy Chief Executive Tel: 00 852 2583 3113 (Hong Kong) Pelham Public RelationsArchie Berens Tel: 020 7743 6679 or 07802 442 486 This information is provided by RNS The company news service from the London Stock Exchange