Primeline Energy Holdings Inc. - Lishui 36-1 Gas Field Development



	Introduction Exploration History Lishui 36-1 Gas Field Development Lishui Gas Play Block 25/34 Petroleum Contract Dynamic Gas Market Gas Agreement and Overall Development Program Reserve Report	The Lishui 36-1-1 well was spudded on 25th July 1997 and reached a total depth of 3,300 m. The well encountered 543 m of gross hydrocarbon-bearing section and flowed 9.86 mmcfpd of gas and 117 bopd of condensate through a 48/64" choke from the top reservoir section of 24 m. The first appraisal well, Lishui 36-1-2, was spudded on 1st June 2000 and reached a total depth of 2,900m. The well encountered and confirmed similar reservoir quality and characteristics to the discovery well. From a single test zone in the upper Palaeocene reservoir, the well flowed at a stabilised rate of 12.25mmcfd of gas and 189bopd of condensate through a 7/8" choke. At the time of the discovery and appraisal, following evaluation of the results of the two wells and the 3D seismic data, the resource base for the Lishui 36-1 discovery was regarded as sub-commercial. However, as a result of the general escalation of world oil and gas prices, the continued economic growth of China and the rapid growth of gas infrastructure in China, it is now regarded as a commercial discovery and, accordingly, in 2007, CNOOC and Primeline embarked on the commercialisation of the discovery. Primeline and CNOOC obtained approval of a reserve report for the Lishui 36-1 discovery by the Chinese State Reserves Committee in July 2007. Primeline then commissioned CNOOC China Ltd., Shanghai and CNOOC Research Beijing to prepare a full feasibility study for the commercialisation of the Lishui 36-1 discovery, which was completed in December 2007. Following execution of an agreement for sale of the gas from Lishui 36-1 in October 2008 (described in more detail under "Gas Agreement"), Primeline commissioned CNOOC Research in Beijing to produce an Overall Development Program (ODP) for the Lishui 36-1 discovery. The ODP was completed in December 2009. Since then Primeline and CNOOC have been preparing the supporting documents required for submission of the ODP to the Government for approval, including an environmental impact study report and a safety assessment report and finalising the acquisition of the site for the terminal. Primeline and CNOOC aim to submit the ODP to the Government in the first quarter of 2011. In March 2010, Primeline and CNOOC signed a number of agreements relating to the development, including a Supplemental Development Agreement ("SDA"), a Joint Operating Agreement ("JOA"), and an agreement relating to the implementation of the development and procurement and cost control principles ("Implementation Agreement"). Under the Development Agreements CNOOC confirmed exercise of its right under the Petroleum Contract to take its full participating interest of 51% in the Lishui 36-1 gas field, so that the respective participating interests in the development of and production from the gas field are now 51% CNOOC, 36.75% Primeline and 12.25% Primeline's affiliate, PPC. The development and operating costs will be borne by the parties in their respective participating interests. The agreements also set out various agreed contracting arrangements for the development and production operations so that the parties can move ahead with the development. The operatorship for the development and production operations for the Lishui 36-1 gas field was transferred from Primeline to CNOOC, which transfer is expected to result in various benefits, including in cost and schedule savings for the development. Primeline continues to act as operator under the Petroleum Contract in respect of all exploration operations. CNOOC has commenced the preparation of the development including engineering design and early stage procurement.