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Far East Energy Corporation (OTCQB:FEEC) held its operations update and investor Q&A webcast on February 14. The webcast turned out to be a highly informative session. Other than the company's progress in its CBM (Coalbed Methane) drilling projects in China as stated in the company's 2/13 press release, here are some key points that I feel important to note.

The dewatering in the Shouyang block near HZ01 well area is proceeding effectively. The company's observation well in the No. 15 coalseam indicates they are getting close to the desorption pressure at which the natural gas should begin to release. They are beginning to see some free gas in the reservoir, something they did not see several months ago.

However, the water production is still lower than the company's target of 2000-3000 barrels/day. Once the water production rate is in the target range, the company expects to see first significant gas production and will be able to project peak gas production rate. At this point, the company estimates that the first significant gas output is from a few weeks away to a few months away.

China's natural gas market has created a very favorable business environment to CBM companies like Far East. Demand far outweighs supply. Based on the company's study, their natural gas can expect to sell for the north of $6.65/mcf. And that estimate could turn out to be rather conservative. Depending on region and accessibility of gas transportation, customers can pay anywhere from $7/mcf to $12.70/mcf. And LNG (Liquidified Natural Gas) end users might have to pay as much as $17/mcf. LNG, CNG (Compressed Natural Gas), and pipeline companies are chasing gas supply actively.

Far East has talked extensively with two of the three major local gas distribution companies (LDCs) in Shanxi Province. The LDCs have indicated their willingness to build CNG facilities on Far East's block in order to lock down a portion of the natural gas supply. CEO Mr. McElwrath figured an initial gas production of about 300 mcf/day would be enough to get one of the CNG companies to build facilities on the company's Shanxi blocks. As recent as a week ago, the President of Shanxi's provincial pipeline company expressed eagerness to begin negotiation with Far East about providing natural gas to the province through its piepline. One branch of the planned provincial pipeline system is scheduled to run directly across the location of Far East's HZ01 well.

Before Far East delivers actual revenue, however, three conditions need to be met: (a) it needs to achieve significant gas production, (b) it needs to conclude negotiation with a LDC or the provincial pipeline company, (c) compression facilities or gas pipeline connections need to be completed on Far East's block. Mr. McElwrath estimated it would take at least six months for a CNG facility to be built. Factoring all these into consideration, Mr. McElwrath cautioned that it is unrealistic for the company to project actual revenue prior to the beginning of 2008.

Much of the information above came from the investor Q&A portion of the webcast. I'm quite impressed with Mr. McElwrath's detailed answers to the investor questions and the in-depth business insight provided therein.

Regarding the exploration period extension on all three PSCs, Mr. McElwrath confirmed that it was due to strategic reasons. He stressed that there is no conflict between exploration period extension and development, revenue generation, or cost/revenue sharing with CUCBM. The longer the exploration period, the better. A longer exploration period means the company can keep on exploring and discovering new production areas while developing and producing natural gas on previously explored areas covered by an ODP (Overall Development Plan). New discoveries can then be moved into the ODP at a later time, and the cycle goes on and on until the exploration period expires. In other words, a longer exploration period translates into more producing wells and sales eventually.

On the high permeability, high gas content assessment for the Shouyang block, it was indeed mainly based on the No. 15 coalseam. The data collected by the company continues to indicate high permeability even to this day. And independent assessment of the data by ARI (Advanced Resources International) confirmed the high permeability figure. Permeability returned by ARI was 93 md, quite close to Far East's own figure of 100 md. With the high permeability around HZ01 modeled by Far East itself, ARI and Mr. Ken Hensel (a leading CBM authority in the world), Mr. McElwrath thinks it is highly unlikely that the assessment could turn out to be wrong. Besides, it is very encouraging that the high permeability continues 6 kilometers south to the HZ02 well where the permeability stands at 20 to 50 md as of now. And the number might go further up after further dewatering and testing. Mr. McElwrath has high confidence in the high permeability, high gas content assessment.

Other than the operational progress, the company made a multitude of presence in the press, natural gas/energy, and investment conferences. During the past five weeks, the company presented at Pritchard Capital Energize 2007, The UBS Greater China Conference (Shanghai), IPAA's 2007 OGIS (Oil & Gas Investment Symposium) Small Cap, and The World Money Show. The company also appears in Television interview with Bloomberg News, and press interviews with Bloomberg and Financial Times. In the next few months Far East will continue to appear frequently in the media in an effort to introduce itself to a wider audience.

Mr. McElwrath was reported to have told Bloomberg on Jan. 30 that Far East will begin natural gas output (and sales) from Shouyang block this year and expects output form Qinnan block one year later. Although I would not take the Qinnan block projection seriously, it should be quite obvious why Mr. McElwrath sounded so upbeat about the Shouyang block. Other than the free gas observation that indicated the desorption pressure is near, the HZ01 well has been dewatered for 14 or so months now. It is getting closer to the long-dewatering scenario of 18 months in Australia's Fairview field, which is thought to be a close analog of the Shouyang area.

With a highly depressed stock price, the possibility of initial significant gas output and first revenue in 2007 or 2008, a management team that is paying closer attention to increasing shareholder value, 2007 is likely to become "the Year of Far East Energy," as Mr. McElwrath put it at the outset of the webcast. Another factor that could support the optimism is the likely uptick of investor enthusiasm in the CBM area. As Mr. James Finch best summed it up recently, "we wonder what would happen should the aggressive Chinese investment community rush into CBM in the same way many North Americans and Australians have embraced the shares of uranium mining companies."

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Disclosure: Author is long FEEC.

Source: Will 2007 Be "The Year of Far East Energy"?