China - Zitong

The first phase of the Zitong contract has been completed and in December 2007 Sunwing and Mitsubishi made a decision to enter into the next three-year exploration phase ("Phase 2"). Seismic interpretation is largely complete on the Zitong Project, and an initial two wells have been drilled. Neither well demonstrated commercial flow rates of gas, although the second well successfully encountered gas shows.

By electing to participate in Phase 2, the Zitong Partners relinquished approximately 25% of the Zitong Block acreage and must complete a minimum work program involving the acquisition of approximately 200 miles of new seismic lines and approximately 23,700 feet of drilling (including the Phase 1 shortfall). The Phase 2 seismic line acquisition commitment was fulfilled in the Phase 1 exploration program. Sunwing commenced drilling at Zitong-1 in June 2010. Zitong-1 is targeting the Guan structure, a large 70-kilometres structure in the centre of Sunwing's block in Sichuan. Total depth of the Zitong-1 well is planned to be approximately 4,500 metres and it is expected to take up to six months to drill and test the well.

Several gas-producing structures have been discovered on these blocks. 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