Commitments and Contingencies | 9 Months Ended |
Sep. 30, 2014 |
Commitments and Contingencies [Abstract] | ' |
Commitments and Contingencies | ' |
8 | Commitments and Contingencies |
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Legal Proceedings. We are periodically named in legal actions arising from normal business activities. We evaluate the merits of these actions and, if we determine that an unfavorable outcome is probable and can be estimated, we will establish the necessary accruals. We do not anticipate any material losses as a result of commitments and contingent liabilities. We are currently involved in no material legal proceedings. |
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Shouyang Production Sharing Contract. We are the operator under the Shouyang PSC to develop the Shouyang Block in Shanxi Province. The term of the Shouyang PSC consists of an exploration period, a development period and a production period. During the exploration period, we hold a 100% participating interest in the properties, and we must bear all exploration costs for discovering and evaluating CBM-bearing areas. We have negotiated and signed multiple amendments with our Chinese partner companies to extend the exploration period under our PSCs. As provided to date, the exploration period of Area A (approximately 15,988 acres or 64.7 square kilometers) of the Shouyang PSC has not expired, and is transitioning to the development phase; while the exploration period of Area B (approximately 272,581 acres or 1,103.1 square kilometers) of the Shouyang PSC runs until June 30, 2016. Area A will exit the exploration period and commence the development period when the overall development program ("ODP") receives final regulatory approvals. Until such time, Area A technically operates under the exploration period pursuant to the provisions of the Fifth Modification Agreement of the Shouyang PSC (the "Fifth MA"). The Fifth MA provides that the exploration period for part of the Contract Area will be extended without any further agreement from CUCBM for areas awaiting approval of an ODP. We have submitted a report detailing CBM resources to CUCBM that reasonably complies with the Chinese CBM standards. This report was submitted in connection with the development of an ODP and such report was subsequently approved and certifications were received from all requisite levels of the MLR. We have agreed that we will drill at least 39 additional wells in Area B by June 30, 2016. Additionally we relinquished 121,255 acres (approximately 490.7 square kilometers) known as Area C in June 2013. The Shouyang PSC expires on July 1, 2032 unless extended. |
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The total acreage operated by the Company is approximately 288,569 acres (1,167.8 square kilometers) - Areas A and B of the Shouyang Block as referenced above. Area A has recently been certified by the MLR, which is a step that is a necessary regulatory requirement to obtain a permanent development license. This portion of the block covers our pilot development wells located in the northern portion of the Shouyang Block (the "1H Pilot Area," the area of our current CBM sales) and a westward extension thereof. We have a 100% participating interest (subject to a net 3.5% revenue interest held by Phillips China, Inc., a subsidiary of ConocoPhillips ("Phillips") in this portion of the block. With respect to Area B, CUCBM maintains the right to elect up to a 30% participating interest upon completion of certain milestones, and we retain the remaining participating interest in the contract area (subject to the 3.5% revenue interest held by Phillips). |
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During the exploration period, FEEB must complete at least the minimum work program and seek commercial deposits of CBM that can be developed in commercially paying quantities. In order to shift from the exploration period to the development period, an overall development plan is prepared and submitted for governmental approval for a long-term development license for a particular CBM field. The preparation of an overall development plan to submit as part of the application for a long-term development license will require certification in accordance with MLR standards, as well as technical, commercial, environmental, health and safety plans demonstrating how the CBM field will be developed for the exploitation of CBM located therein. Currently, we and CUCBM have been in the process of jointly preparing an application for an overall development plan for approximately 24,661 acres (99.8 square kilometers) located in the northern portion of the Shouyang Block. After several revisions, the final draft of the Nanyanzhu ODP was finished and an internal review was completed. An external expert review was held on March 27, 2014, and the ODP passed review of the required external experts, and the expert group recommended that the relevant parties approve the ODP report. This draft ODP report was submitted to the National Energy Administration ("NEA") of the National Development and Reform Commission ("NDRC") on June 16, 2014 to receive a "Road Pass." The Road Pass was approved on September 15, 2014, allowing FEEB to proceed with important infrastructure processes and preparations (including land, grid power, environmental protection and related preparations) in Area A while awaiting final regulatory approval. |
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Following expiration of the exploration periods, we may elect to continue the process of trying to convert portions of the Shouyang Block into MLR certified areas in order to transition these areas into the process for a long-term development license. Any acreage that is not at or past the stage of submittal of a technical report that reasonably meets the criteria for MLR certification will be relinquished unless the parties agree otherwise. |
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The development period as to any portion of the Shouyang Block will begin after the date of commencement of production of commercial grade quantities of CBM with respect to that area. Any CBM produced and sold prior to the approval of an overall development plan is deemed to occur during the development period, and production is to be distributed in accordance with the parties participating interests in such CBM field. Provided we remain in compliance with the requirements under the Shouyang PSC, the Shouyang PSC allows production to continue on a CBM field until the earlier of the end of the useful life of that area or June 30, 2032, unless extended or otherwise amended. |
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Under the PSCs, we have committed to satisfy certain annual minimum exploration expenditure requirements for each PSC. Our minimum exploration expenditure requirement for each block is based on the minimum exploration expenditure requirements established by the MLR, subject to such additional commitments as may appear in any PSC modification agreements. The MLR sets its requirements by applying a minimum expenditure per acre to the total acreage encompassed by each PSC. As a result, the minimum exploration expenditure requirement for 2014 is approximately $1.9 million for the Shouyang PSC, based on the currency exchange rate between the U.S. Dollar to the Chinese Renminbi ("RMB") as of September 30, 2014. Any portion of the exploration expenditures that exceeds the current year's minimum exploration expenditure requirement cannot be carried forward for the satisfaction of the subsequent year's minimum requirement. On December 6, 2013, we extended the exploration period of the portion of the Shouyang Block identified as Area B until June 30, 2016, and agreed that we will drill at least 39 additional wells in Area B by June 30, 2016. Under the Shouyang PSC, we are required to pay certain fees totaling $0.5 million for the year of 2014. These fees include assistance fees, training fees, fees for CBM exploration rights and salaries and benefits. |
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Qinnan Production Sharing Contract. FEEB is the operator under the Qinnan PSC to develop the Qinnan Block in Shanxi Province. CUCBM assigned the Qinnan PSC to CNPC. The term of the Qinnan PSC consists of an exploration period, a development period and a production period. During the exploration period, we hold a 100% participating interest in the properties, and we must bear all exploration costs for discovering and evaluating CBM-bearing areas. If any CBM field is discovered, the development costs for that CBM field will be borne by us and CNPC in proportion to the respective participating interests. At that time, we will recover that share of the up-front exploration costs allocable to our Chinese partner company through a gradual cost recovery mechanism. The exploration period is divided into three phases called Phase I, Phase II and Phase III. We have completed our Phase I, Phase II and Phase III work program obligations under the Qinnan PSC, and intend to continue pilot development and exploration activities in Phase III until we transition into the development period. |
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The exploration period of the Qinnan PSC in Shanxi Province expired on June 30, 2009, and we cannot continue our exploration activities in the Qinnan Block without an extension of the exploration period or a new PSC. We are continuing to pursue an extension of the exploration period of the Qinnan PSC, but we cannot be optimistic at this time. The Company believes that the underlying exploration period should be extended due to events beyond our reasonable control, namely the lengthy transfer of rights taking place from CUCBM to CNPC. At our Chinese partner’s request, we have provided certain operational and financial information about our company to assist them in the decision making process as to whether to recognize an extension of the exploration period in Qinnan. PetroChina, CNPC’s wholly-owned subsidiary, has completed an accounting audit pursuant to the Qinnan PSC of our expenditures for 2007 and 2008. We have also provided to PetroChina, at their request, our work plan for 2010 for Qinnan. In January 2011, we received a formal notice from CNPC that it has purportedly received all Chinese approvals with respect to the transfer of CUCBM’s interest to it, and subsequently to PetroChina. CNPC also requested we execute a modification agreement to confirm PetroChina as our Chinese partner company for the Qinnan PSC. In negotiations with CUCBM and PetroChina related to this request, we have endeavored to negotiate an assignment agreement that would reflect the transfer of interest to CNPC while CNPC and PetroChina would acknowledge delays that were incurred by virtue of FEEB not having, for an extended period of time, an official Chinese partner that had the capacity or authority under the Qinnan PSC to work with us. |
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Because of the inability to hold a formal JMC meeting or to have the effective involvement of our Chinese partner, we believe that our efforts to continue CBM operations in the Qinnan Block have been materially hindered. Technically, the exploration period under the Qinnan PSC expired on June 30, 2009; however, we have maintained the position that the doctrine of force majeure under the Qinnan PSC entitled us to an extension. We continue to discuss this situation with CUCBM and PetroChina, and as recently as January 2012 have submitted a notice of force majeure in accordance with the Qinnan PSC. There can be no assurance that we will be successful in extending the exploration period of the Qinnan PSC or that a new PSC will be granted. Additionally, in connection with obtaining this extension or a new PSC, we may be required to commit to certain expenditures or to modify the terms or respective ownership interests and/or acreage in the applicable PSC. |
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Under the Qinnan PSC, we have committed to satisfy certain annual minimum exploration expenditure requirements. As with the Shouyang PSC, our minimum expenditure requirement is based on the minimum exploration expenditure requirements of CNPC established by the MLR. The MLR sets its requirements by applying a minimum expenditure per square kilometer to the total acreage encompassed by each PSC. The annual minimum exploration expenditure requirement under the Qinnan PSC is approximately $3.8 million in the aggregate based on the currency exchange rate between the U.S. Dollar and the RMB as of September 30, 2014. These expenditure requirements are denominated in the RMB and, therefore, are subject to fluctuations in the currency exchange rate between the U.S. Dollar and the RMB. Under the Qinnan PSC, we are also required to pay certain fees totaling $0.4 million annually. These fees include assistance fees, training fees, fees for CBM exploration rights and salaries and benefits. Because the stated expiration date for the exploration period for the Qinnan PSC occurred on June 30, 2009, and we have not yet received an extension, we have halted activities associated with the Qinnan Block pending receipt of an extension, should one ultimately be granted. Accordingly, we ceased to accrue for the $0.4 million annual fees effective January 1, 2013. We believe the $1.9 million amount accrued is sufficient to cover any obligation related to the fees should the extension be granted. |
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Yunnan Production Sharing Contract. On January 25, 2002, we entered into a PSC to develop two areas in Yunnan Province: (1) the Enhong area, which covers approximately 145,198 acres (587.6 square kilometers), and (2) the Laochang area, which covers approximately 119,327 acres (482.9 square kilometers) ( the "Yunnan PSC"). FEEB is the operator under the Yunnan PSC. The term of the Yunnan PSC consists of an exploration period, a development period and a production period. The exploration period is divided into two phases, Phase I and Phase II. We have completed Phase I and are operating in Phase II. During the fourth quarter of 2011, we signed a modification agreement to the Yunnan PSC, which was approved by MofCom on June 15, 2012 and extended the exploration period until December 31, 2013, in exchange for allowing CUCBM to proceed at its sole risk with a 100% participating interest in the 145,198 acres (587.6 square kilometers) in the Enhong part of the Yunnan PSC contract area (hence, our interest in the Yunnan PSC now comprises the Laochang area only, and is called the Laochang Block). The exploration period expired on December 31, 2013 and was not amended or extended. Following expiration of the exploration period, we had the right to elect to continue the process of trying to convert portions of the Laochang Area into MLR certified areas in order to transition these areas into the process for a long-term development license and the development period for certain areas. Any acreage that was not at or past the stage of submittal of a technical report to CUCBM that reasonably met the criteria for MLR certification would be relinquished unless the parties otherwise agree. We have been evaluating this acreage with an exploratory drilling program, and while we believe the acreage to have potential, we have chosen to focus our capital and resources upon the high permeability/high gas content acreage in Shouyang and in light of the continued lack of infrastructure in Yunnan. The Company and CUCBM have had discussions that will likely result in the relinquishment of all of the Yunnan acreage covered by the PSC. The Company expects that any such relinquishment of the PSC will be formalized during the last quarter of 2014 or the first half of 2015. |
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Under the Yunnan PSC, we have committed to satisfy certain annual minimum exploration expenditure requirements. Our minimum exploration expenditure requirements for the blocks subject to the Yunnan PSC are based our negotiated agreement to extend the Yunnan PSC exploration period. We are currently obligated to drill a total of eight wells during the entire exploration period, as extended, spending at least $0.8 million (4,850,000 RMB) per year based on the current exchange rate between the U.S. Dollar and the RMB as of September 30, 2014. Under applicable MLR rules for minimum expenditure requirements, the annual minimum exploration expenditure requirement for the Yunnan PSC was approximately $1.8 million per year before the modification but reduced to $0.8 million per year with relinquishment of acreage, based on the currency exchange rate between the U.S. Dollar and the RMB as of September 30, 2014. As we had previously drilled five wells during Phase I and eight wells during Phase II of the Yunnan exploration period in the Yunnan region, we have satisfied the minimum work commitment. The Company and CUCBM have had discussions that will likely result in the relinquishment of all of the Yunnan acreage covered by the PSC. |
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These requirements are denominated in RMB and, therefore, are subject to fluctuations in the currency exchange rate between the U.S. Dollar and the RMB. The MLR minimum expenditure requirements are a significant factor that influences our exploration work program. Under the Yunnan PSC, we were required to pay certain fees totaling $0.4 million for the year of 2014. These fees include assistance fees, training fees, fees for CBM exploration rights and salaries and benefits. Based on the Yunnan modification agreement, the unfulfilled exploration work commitment will be added to the minimum exploration work commitment for the following year. If we terminate the Yunnan PSC and there exists an unfulfilled balance of the minimum exploration work commitment, we may be required to pay the balance to CUCBM. |