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Sichuan Basin
The Sichuan Basin, located in central China and approximately 930 miles southwest of Beijing, is the country's largest gas-producing region with a current production rate of more than 800 mmcf/d and with a natural gas resource potential estimated by Chinese officials of 260 trillion cubic feet. There is a strong and growing market for natural gas, with approximately 120 million people living within the basin, an existing transportation grid within the Zitong block that is connected to many industrial and populated areas and also one major trunk line recently completed to ship gas to other new users in Eastern China via Wuhan. The price of natural gas is currently regulated, yielding in the range of US$2.50 to $3.50 per mcf at the wellhead, with initiatives in place to convert to a market-driven price system.
Zitong Block
In September 2002, Ivanhoe through its 100% owned subsidiary Pan-China Resources, signed a 30-year production-sharing contract with PetroChina covering approximately 900,000 acres with a gross natural gas resource potential of five trillion cubic feet located in the western portion of the Sichuan Basin. Under the terms of the agreement, Ivanhoe will develop natural gas deposits on the Zitong Block. In return for its investment and development expertise, Ivanhoe will receive approximately 80% of the revenue before costs are recovered and about 45% after costs are fully recovered. PetroChina participates as a partner in any successful developments, with up to a 51% working interest. In addition to developing existing producing structures, Ivanhoe will conduct exploration activities over these blocks, which includes acquiring new 2-D seismic data, reprocessing existing seismic data and drilling of at least four exploratory wells before the third quarter of 2008. Seismic interpretation is largely complete on the Zitong project. We drilled our first exploratory well in the Zitong block in the second quarter of 2005. No commercial volumes of hydrocarbons were conclusively detected and we have suspended the well. Pending further evaluation of this well, we may drill a directional hole following the second exploratory well in the Zitong block.
In January 2006, we finalized a farm-out agreement with Mitsubishi Gas Chemical Company Inc., where Mitsubishi paid US$4 million for a 10% interest in the Zitong block. In April 2006, an extension to the exploration agreement was granted. The second exploration well has been drilled and after testing, we will evaluate the results and make an election, along with Mitsubishi, to enter into the next three-year exploration phase.
Several gas-producing structures have been discovered on these blocks. We intend to utilize seismic analysis to focus our drilling on the most favorable structures. Our experience in utilizing high-angle drilling can significantly improve the well productivity and longevity of gas production from this area. The geologic interpretation from the existing 2-D seismic data by the local Chinese bureau has identified 16 structures with hydrocarbon-bearing potential. Initial test rates from wells already drilled by the Chinese on the Zitong block have ranged between two and 32 million cubic feet per day. Four wells are currently producing and it is believed that larger potential exists from other zones in the producing well bores. Ivanhoe has estimated the potential natural gas resources on these blocks to be as large as five trillion cubic feet.
In addition, pursuant to existing exclusive agreements, Ivanhoe has the right to negotiate toward a production-sharing contract for the one-million-acre Yudong Block, located on the eastern edge of the Sichuan Basin.
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