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COAL MINE METHANE RECOVERY IN UKRAINE:BUINE PLAN

FOR A DEVELOPMENT PROJECTAT KOCHINKY MINE

DECEMBER 2000


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ACKNOWLEDGMENTSThisreportwaspreparedbyPartnershipforEnergyandEnvironmentalReform(PEER)fortheU.S.EnvironmentalProtectionAgency(EPA)CoalbedMethaneProgramandtheUkraineClimateChangeInitiative,aU.S.AgencyforInternationalDevelopment(AID)projectadministeredbyHaglerBaillyServices,Inc.

TheprincipalauthorsofthisreportwerethestaffofPEER,JerryTriplett( [email protected]),AlexanderFilippov

([email protected]),andAlexanderPisarenko([email protected]),andStephenBlackburn,DirectorofOperations,BlackWarriorMethaneCorporation.Importantcontributionstothisreportwereprovidedbythefollowinginstitutionsandindividuals:

StateDepartmentoftheCoalIndustry oftheMinistryofFuelandEnergyofUkraine

StateDepartmentofLaborSafetySupervision oftheMinistryofLaborandSocialPolicyofUkraine

SkochinskyMineAdministrativeandTechnicalStaffs

Dr.ValentineKonarev

DISCLAIMERTheauthorsofthisreportdonot:

a)Makeanywarrantyorrepresentation,expressedorimplied,withrespecttotheaccuracy,completeness,orusefulnessoftheinformationcontainedinthisreport;or,

b)Assumeanyliabilitywithrespecttotheuseof,ordamagesresultingfromtheuseofanyinformationdisclosedinthisreport.

ii
mailto:[email protected]:[email protected]:[email protected]:tr[email protected]:[email protected]:[email protected]


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TABLE OF CONTENTS

1.0 EXECUTIVE SUMMARY .................................................................................................... 1

2.0 IMPORTANCE OF COALBED METHANE IN UKRAINE .................................................... 1

2.1 CoalbedMethaneasanAlternativeFuelSource...................................................... 1

2.2 EnvironmentalBenefitsofUsingCoalMineMethane................................................ 2

2.3 CoalMineMethaneasaHealthandSafetyIssue..................................................... 2

3.0 SKOCHINSKY MINE PROJECT ........................................................................................ 2

3.1 Introduction............................................................................................................... 2

3.2 Background............................................................................................................... 3

3.3 ProjectDescription.................................................................................................... 3

3.3.1 PilotProjectPhase........................................................................................ 3

3.3.2 ProjectEvaluationPhase............................................................................... 4

3.3.3 ProjectDevelopmentPhase.......................................................................... 4

3.3.3.1 DrillingProgram............................................................................... 4

3.3.3.2 GasProductionandEconomics...................................................... 5

3.3.3.3 GasMarkets,Pricing,andPayments................................................. 6

3.4 TheRoleofSkochinskyMine...................................................................................... 6 3.5 GeologyOverview....................................................................................................... 7

3.5.1 GeneralInformation......................................................................................... 7

3.5.2 StratigraphyandLithology................................................................................7

3.5.3 Tectonics ......................................................................................................... 7

3.5.4 CoalStrata....................................................................................................... 8

3.5.5 CoalMethaneContent......................................................................................8

3.5.6 Hydrogeology................................................................................................... 8

3.6 ProjectRisks............................................................................................................... 8

LIST OF TABLESTable1 CashFlowandEconomics............................................................................................10

Table2 PilotProjectDrillingandCompletionCostEstimate.......................................................11

Table3 PilotProjectEconomicEvaluationforFiveStandardWells...........................................12

Table4 PilotProjectEconomicEvaluationforOneGobWell....................................................13

Table5 DrillingProgramSchedule.............................................................................................14

Table6 DevelopmentProjectWellCostEstimates....................................................................14

Table7 ProductionProfileforOneStandardWell......................................................................15

Table8 ProductionProfileforOneGobWell............................................................................ 16

Table9 ProjectGasProduction.................................................................................................17

Table10 EconomicEvaluationforOneStandardWellw/TaxBenefits.........................................18

Table11 EconomicEvaluationforOneGobWellw/TaxBenefits............................................... 19

Table12 EconomicEvaluationforOneStandardWellw/oTaxBenefits..................................... 20

Table13 EconomicEvaluationforOneGobWellw/oTaxBenefits............................................ 21

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LIST OF EXHIBITS

Exhibit1 GeneralLocationMap.................................................................................................. ...9

Exhibit2 StandardWellDailyProductionForecast......................................................................15

Exhibit3 StandardWellCumulativeProductionForecast............................................................15

Exhibit4 GobWellDailyProductionForecast..............................................................................16

Exhibit5 GobWellCumulativeProductionForecast....................................................................16

Exhibit6 StratigraphicColumn.....................................................................................................22

ABBREVIATIONS AND TERMS

CBM CoalbedMethaneCIS CommonwealthofIndependentStates

CMM CoalMineMethane

CO2

CarbonDioxide

DAF DryAshFree

C DegreesCentigrade

DCF-ROI DiscountedCashFlowReturnOnInvestment

G&A GeneralandAdministrative(Expense)

GCAL Gigacalories

KCM ThousandCubicMeters

KM KilometerM Meter

MOB/DE-MOB Mobilization/DeMobilization

PV PresentWorth

VAT ValueAddedTax

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1.0 EXECUTIVE UMMARY

The objective of this business plan is to demonstratethe financial feasibility of a coal mine methanedevelopment project at the Skochinsky Mine located inthe Donetsk Region of Ukraine (See Exhibit 1). The

business plan incorporates the utilization of Westerntechnology and equipment and is patterned after similarprojects that have been successfully implemented inother parts of the World. The project will entail threephases; pilot project, evaluation, and the full-scaledevelopment program.

The pilot project phase will consist of the drilling andcompletion of five standard wells and one gob well. Anevaluation phase will follow the pilot project to assessthe results of the drilling and completion conductedduring the pilot project phase and to allow time formaking the decision to continue into the developmentprogram. The business plan assumes a full year to

complete the pilot project and the evaluation period ata cost of approximately $6.2 million.

The full-scale development program consists of thedrilling and completion of four holes per month over athree-year period resulting in a total of 144 wells. Thedrilling program will include 124 standard wells and 20gob wells. Selected coal seams and sandstones inthe standard wells will be hydraulically stimulated(fractured) to provide an avenue for the gas and waterto flow from the formation to the well bore. The gobwells will not be hydraulically stimulated. The gob wellswill produce gas from the relaxed fractured coal seamsand sandstones resulting from the longwall mining

operations in the Skochinsky Mine.

The project Cash Flow and Economics (See Table 1)yields a discounted cash flow rate of return of 39.70%over the project evaluation period of thirteenyears. Excluding working capital requirements, themaximum capital required for implementing the projectis approximately $20.0 million. This projection includesincome tax benefits associated with the project receivingFree Economic Zone designation. The pilot projectcosts are reflected in Year 0, or the year before thedevelopment program begins. The pilot projects firstyear of methane production is to be vented while the

wells are being evaluated. The pilot projects wellproduction for the second through the tenth year isreflected in the first through the ninth year of thedevelopment phase. All wells are assumed to have aten-year life including the year it was drilled which resultsin a project life of thirteen years. A ten-year well life isvery conservative as coal mine methane wells in theUnited States are expected to have a fifteen to twentyyear life.

The project has additional prospects to increase thefinancial returns. There is the potential that gob wells

and standard wells drilled in the near vicinity of anexisting mine may qualify for greenhouse gascredits. Also, there is a good possibility that gasrecovery rates may exceed those shown in the forecast.

An analysis of all factors indicates that the project hasthe potential to be financially viable. The resourcedensity is very large and terrain demographics are

suitable for a large-scale development project and ahigh-sustained rate of methane flow during and aftermining indicates that adequate permeability will exist.

2.0 IMPORTANCE OF COAL-

BED METHANE IN UKRAINE

Commercial development and utilization of methane inUkraine will have many positive benefits to the economy,the environment, and to the coal industry. A fullyimplemented methane development project will resultin the following:

creating an alternative energy source that wouldmitigate Ukraines dependency on imported fuel;primarily natural gas from Russia and other CIScountries,

reducing the amount of methane, a potentgreenhouse gas, that Ukrainian coal mines releaseto the atmosphere, and

improving coal mine safety, coal mine employeehealth, and productivity.

In 1999, the Cabinet of Ministers of Ukraine considereda national energy program for 2000 to 2010. Thisprogram includes a set of goals for the energy sector toachieve a more balanced supply/demand situationthrough a combination of alternative energy sourcesand energy efficiency programs. One of the goals isto have eight billion cubic meters of methane producedper year by the year 2010.

For the purpose of this business plan, the followingdefinitions apply:

coalbed methane (CBM) methane contained incoal seams and the rock strata surrounding thecoal seams and

coal mine methane (CMM) methane contained

in coal seams and the rock strata surrounding thecoal seams in reserve areas that have beenassigned to specific mines.

2.1 COALBED METHANE AS AN

ALTERNATIVE FUEL SOURCE

The large-scale capture and utilization of CBM couldcontribute greatly towards Ukraines energyrequirements. Ukraine currently consumesapproximately 75 billion cubic meters of natural gas on

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an annual basis while only producing approximately 18billion cubic meters from domestic sources. Thisshortfall, of approximately 57 billion cubic meters peryear, is being imported creating a serious increase inforeign debt. Ukraine receives 30 billion cubic metersof natural gas from Russia each year as compensationto transport Russian natural gas to Europe throughpipelines located in Ukraine. The remaining 27 billion

cubic meters of natural gas is sold to Ukraine at $80per thousand cubic meters thus creating a negativebalance of trade in excess of $2 billion per year.

Increasing domestic standard natural gas and oilproduction is not an economically feasible option forUkraine. Under the Soviet Union, the larger andshallower natural gas and oil reserves were depleted;leaving small, deep, and more expensive reserves thatwill require vast capital resources to develop thatUkraine does not possess.

It is clear that the gas produced from a commercial CBMdevelopment project would have a ready market thatwould enhance the economic conditions in Ukraine.

2.2 ENVIRONMENTAL BENEFITS OFUSING COAL MINE METHANE

Methane is one of a number of gases that scientistsbelieve contribute to the greenhouse effect, the trappingof heat in the Earths atmosphere. The extent to whichany given greenhouse gas traps heat is measuredrelative to the heating effect of carbon dioxide. Methaneis estimated to be 21 times as potent as carbon dioxidein trapping atmospheric heat over a hundred yearperiod. Methane and other greenhouse gases arereleased to the atmosphere through various naturalprocesses and through many human activities, suchas the mining of coal.

Capturing and utilizing CMM in Ukraine can significantlyreduce the amount of greenhouse gas that coal minespresently emit into the atmosphere. During 1999,Ukrainian coal mines generated approximately 2,060million cubic meters of methane. Through degasificationsystems, the mines captured approximately 257 millioncubic meters of methane (13% of the total generated)and used only 79 million cubic meters of the capturedmethane; thus emitting approximately 1,981 million

cubic meters of methane into the atmosphere. Notonly this is a waste of a vitally needed energy sourcebut CMM emissions contribute to the greenhouse gaseffect.

The development of CMM projects in Ukraine canreduce the amount of gas coal mines emit into theatmosphere. In addition, with the advent of the tradingof carbon credits, Ukrainian coal mines could beconsidered as candidates to generate these credits. Asof July, 2000 over $30 million of carbon credit

transactions have taken place on a worldwidebasis. Total potential market for carbon trading couldreach in excess of $10 billion by the year 2010. Thusfar, the carbon credit transaction values have only beena fraction of the costs that would be incurred to reducegreenhouse gas emissions. However, there is not aconsensus among economists in determining the totalmitigation costs that should be included in reducing

greenhouse gas emissions. Mitigation costs of CMMdevelopment projects in Ukraine may be considerablyless than those expected in the United States.

2.3 COAL MINE METHANE AS AHEALTH AND SAFETY ISSUE

The development of CMM projects at coal mines inUkraine can greatly reduce the number of accidentsand fatalities that Ukrainian mines are presentlyexperiencing. In 1999, Ukraine coal mines experienced296 fatalities, or 3.7 deaths per one million raw tonnesof coal produced. This grave statistic is one of theworse in the world. Many of the fatalities are the resultof outbursts caused by high gas content and fromexplosions caused by the ignition of explosiveconcentrations of methane. Pre-mining degasificationof the coal reserves, with the drilling of vertical wellsand utilizing enhanced underground degasificationsystem, would greatly reduce the accident and fatalityrates in Ukrainian coal mines. In addition, removal ofthe methane from the mines will increase productivityby reducing the number of mine slowdowns orshutdowns due to high methane levels.

CMM development projects can reduce coal mine

accidents and fatalities, while at the same time lowertheir mining costs by increasing productivity.

3.0 KOCHINKY MINE

PROJECT

3.1 INTRODUCTIONThis business plan for a commercial CMM developmentproject at the Skochinsky Mine demonstrates thefinancial viability of such a project utilizing Western

equipment and technology. The business plan wasdeveloped in cooperation with Western CBM developmentexperts, Western energy experts, and data andinformation provided from Ukrainian CBM and energyprofessionals.

The project includes a Pilot Project Phase, an EvaluationPhase, and a Development Phase. Each Phase willbe implemented in a manner to maximize the projectcash flow and is patterned after development projectsthat have been successfully implemented in other

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countries. Prior tothestart ofthePilot Project,additionaltimeandexpenseswillberequiredtoconfirmthe status ofcurrentUkrainianlawsandcurrent taxregulations,creatingabusinessstructuretoimplementtheproject, contracting with Western drilling andcompletionorganizations,andothernecessarystepsthatarerequiredtostartaprojectinadevelopingcountry. Theserelated expenseshavenot been

includedinthisbusinessplanandhavebeenassumedthattheywillbeabsorbedbytheprojectdeveloper.

ItisrecognizedthatinUkraine,asinmostdevelopingcountries,manylegal,economic,andadministrativebarrierswillhavetobeovercomeforthesuccessfulimplementationofsuchaprojectassetoutinthisbusinessplan. Manyof theassumptions thathavebeenmadeinassemblingthisbusinessplanmustbeverifiedand/orrevisedbasedoncurrentconditionspriortoimplementingtheproject.

3.2 BACKGROUNDSkochinskyMine,locatedwithintheboundariesofthecityofDonetsk, isoneof the241undergroundcoalminesin Ukraine. Thisminewasselected forevaluationbasedonitsmethanereserves,specificmethanecontentofitscoalseams,itsannualcoalproduction,and projected economicl i fe. TheSkochinskyMineincludesareserveareaof80squarekilometersthatcontainsmethaneofapproximately45billioncubicmeters. Theminereserveareacontainsthirtycoalseamsthathaveanaggregatethicknessof9.25metersandthemethanecontentofthecoalseamsrangefrom16to22meters/tonnedaf. During1999,

themineproducedapproximately785,000rawtonnesfromoneseamthatrangedinthicknessfrom1.10to1.95meters.

SkochinskyisaStateownedenterprisethatisaparto f the Donugo l S ta te Ho ld ing Company (anAssociation). SkochinskyMine management andpersonnelhaveactivelyparticipatedingatheringinformationanddataforthisbusinessplanandhavebeensupportiveoftheproject.

3.3 PROJECT DESCRIPTIONThisbusinessplanforaCMMdevelopmentprojectat

theSkochinskyMinewasinitiatedaftergatheringandevaluatingdataandinformationregardingthemineandreservearea. The geology, hydrogeology, andstructureoftheareaarewellknownfromtheextensivemining andcoringin thearea. Anoverview ofthegeologyoftheareaispresentedinSection3.5ofthisbusinessplan.

ThewelldrillingenvisionstheuseofWesterndrillingandcompletionequipmentandtheutilizationofproventechnologiesthathavebeensuccessfullyimplemented

insimilarprojectsinotherpartsoftheWorld. AlloftheassumptionsthathavebeenutilizedindevelopingthisbusinessplanarebasedonsimilarprojectsandthenmodifiedtoadjusttoconditionsthatareexpectedtobeencounteredinUkraine. AlloftheoperatingandequipmentcostsarethoseineffectasofJanuary1,2000andallofthefinancialprojectionsarebasedonaconstantdollarbasis.

Thebusinessplanisbasedondrillingandcapturinggasfromverticalwellsonly. Thebusinessplandoesnotincludeadditionalgasthatisavailablefromthemineventilationshaftsandfromtheirundergrounddegasificationsystem. ThebusinessplanassumesastandalonebusinessstructuresoasnottoburdentheprojectwiththefinancialconstraintsoftenfoundwiththecoalminesinUkraine.

3.3.1 Pilot Project PhaseAPilotProjectPhasehasbeenincludedinthebusinessplanasamethodtodeterminetheviabilityofacommercialCMMprojectinUkrainebeforeafulldevelopment project wouldbe initiated. ThePilotProjectwillbeusedtoassessthepotentialproductioncharacteristics,confirmationof inplacegasvolume,determination of fracturingcharacteristics,and toassessthewaterregimeinthearea. ThePilotProjectPhaseassumesthedrillingandtestingoffivestandardwellsandonegobwell. Selected coalseamsandstandstoneswithinthefivestandardwellswillbehydraulicallystimulated tocreateapassageway,oravenue,forgasandwatertoflowfromtheformationtothewellbore. DuringthePilotProject,themostsuitable

drillingandcompletiontechniquesandthetargetseamcombinationthatwillmaximizetheproductionpotentialfromthedevelopmentprojectwillbedefined. Thegobwellwillnotbehydraulicallystimulated. Thegobwellwillproducegasfromtherelaxedfracturedcoalseamsandstandstones locatedabovethe longwall miningoperations.

Suitabledrillingandcompletionequipmentandrelatedrequired services arenot available inUkrainetoimplementthePilotProject. Inaddition,dueto thelimitedsizeandscopeofthePilotProject,itwouldbecostprohibitivetopurchaseandusetheappropriatesuiteofequipmentandservicesexclusivelyforsucha

smallproject. Therefore,thecostsforthePilotProjectarebasedonusingadrillingcontractorfromCentralorWesternEurope,ahydraulicfracturingcontractorfromWesternEurope,andthetechnicalservicesandsupportbeing providedby experiencedUnitedStates CBMoperators.

ThePilotProjectcostsfordrillingandcompletingthesixwellsareestimatedtobeapproximately$6.2million(SeeTable2)andhavebeenincludedinYear0oftheproject cash flow analysis(SeeTable 1). The

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estimatedcostsdonotincludeprovisionsforextensivecoringanddesorbtiontestsasthegascontentinthecoalseamsisknownwithahighdegreeofconfidenceandthegascontentforthesandstonesisconsideredtobeaminimumof0.8cubicmeterspercubicmeterofsandstone. ThegasproducedfromthesixwellsduringYear 0 hasassumed tobeventeduntil after theEvaluationPhasehasbeencompleted. However,gas

producedfromthesixwellsareincludedintheprojectcashflowanalysisforthefivestandardwells(SeeTable3)andfortheonegobwell(SeeTable4)startingwithYear1oftheprojecteconomicanalysis.

3.3.2 Project Evaluation PhaseItisrecognizedthatafterthecompletionofthePilotProjectPhaseaperiodoftimeforevaluationmustbeconsideredbefore thestart of thefull developmentprogram. DrillingandcompletingwellsforCMMisnewforUkraineandnohistoricaldataandinformationareavailable for a comparative analysis. The exact

amountoftimerequiredforthisevaluationisunknownandwillvaryinlengthbasedontheresultsobtainedfromthePilotProjectandtheexperienceandknowledgeofthedeveloper. Sufficienttimehasbeenincludedintheprojectcashflowanalysisbyassumingthatafullyear(Year0)willberequiredforthePilotProjectandEvaluationPhases. The costsassociated for theevaluationperiodhavenotbeenincludedintheprojectcashflowandthattheywillbeabsorbedbytheprojectdeveloper.

3.3.3 Project Development PhaseThe Project Development Phase assumes thesuccessfulcompletionofthePilotProjectandthatadecisiontoproceedwiththeprojectwasreachedduringtheEvaluationPhase. SimilartothePilotProject,thesameequipmentandserviceshavebeenassumedtobeavailable for implementing the fulldevelopmentprogram. Ithasbeenfurtherassumedthatthedrillingandstimulation contractorshavesecuredsufficientbusinessinUkrainetoestablishabaseofoperations. Alloftheassociatedcostsfortheseservicesarebasedonthisassumptionandarecriticaltothefinancialviabilityoftheproject.

Density of gas resources

3.3.3.1 Dillin PoamThedrillingprogramwillbecompletedoverathreeyearperiodandthatfourwellspermonthwillbedrilled. Duringthisperiod,144wellswillbedrilledthatincludesacombinationofstandardwellsandgobwells(SeeTable5). Thestandardwells,drilledtoadepthof1,400meters,willhaveadensityofthreewellsper

squarekilometerwhilethegobwells,drilledtoadepthof1,200meters,willhaveaneffectivedensityofsixwellspersquarekilometer.

Thelocationofthe144wellstobedrilledduringtheDrillingProgramwasdeterminedafterreviewingthegeologyoftheminearea,aminemapcontainingareasthathadbeenpreviouslymined,andprojectionsofareasforfutureminedevelopment. Intheselectedareafordrilling,thewellswillencounter30coalseamsand4layersofsandstone. Thedrillingareahasanaveragegascontentofapproximately20cubicmeterspertonneinthecoalseamsandaminimumof0.8cubicmetersofgaspercubicmeterofsandstone.

Thedensityoftheselectedareaisassumedtobeasshowninthetablebelow.

Thedevelopmentcostsforeachstandardwellareestimatedtobe$331,000andforeachgobwelltobe$231,000(SeeTable6). ThefollowingisageneraloverviewofthesequenceofeventsassociatedwiththedrillingandcompletionofastandardwellthatwillbefollowedduringboththePilotProjectandtheProjectDevelopmentPhases. StandardwellsdrilledduringthePilotProjectwillbepreparedforthehydraulics timu la tion p rocess before any wel l w il l bestimulated. DuringtheProjectDevelopmentPhase,thetimingofthehydraulicstimulationwillbescheduledto achieve the most costeffective results. Thesequenceofeventsforthedrillingandcompletionofastandardwillareasfollows:

Preparewellsite,

Moveindrillingrigandequipment,

Setconductorcasing,

Drillsurfacehole,

Runandsetsurfacecasing,

Drillproductionhole,

Runopenholeelectriclog,

Coal seams Sandstones

IntervalNumber

TotalThickness, m

Density,Millionm

3/km

2Number

TotalThickness, m

Density,Millionm

3/km

2

Total Density,Million m

3/km

2

h3Sh1

6-i2

3Si23

(standard wells)30 9.25 236.30 3 77.00 386.90 623.20

h0

8Si2-i2

3Si2

3

(gob wells)25 6.31 163.87 2 27.00 108.65 272.52

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Movedrillrigoffandcleanupsite,

Runandsetproductioncasingwitheitherdrillrigorworkoverrig,

Runcementbondlog,

Move inhydraulic stimulationandperforatingequipment,

Perforatebottomzone,

Hydraulicallystimulatethebottomzone,

Runandsetabridgeplugabovetheperforationsjust stimulated and below the next zone to bestimulated,

Perforatethenextzonetobestimulated,

Hydraulicallystimulatethezonejustperforated,

Runandsetbridgeplugandcontinuethesequenceuntilallzoneshavebeenstimulated,

Flowthewellbacktoapitoratank,

Duringtheflowbackperiod,moveinandsetupsurfaceequipment,

Use workoverrig tocirculate waterornitrogenthroughthetubingtocleansandandcoalfinesoutofthewell,

Useworkoverrigtorunpump,tubing,androds.

Hookupsurfaceequipment,whichwill includedriveheadandelectricmotorforthepump,meter,separator,andatankforproducedwater,and

Beginpumpingwaterandproductiongas.

Itshouldbenotedthatduringtheflowbackoperationthewaterandnitrogenusedinthestimulationprocessshouldbeallowedtoflowbackslowly. Thiswillallowthesandtostayintheformationratherthanflowing

backwiththewaterandnitrogen. Thisprocessmaytakefromtwotosixdaysdependinguponthetypeofbridgeplugsthatareutilized. Thecharacteristicsofdifferentbridgeplugsarethefollowing:

Flowthroughbridgeplugs:flowbackprocesswilltaketwotothreedaysandaworkoverrigwillnotbenecessary,

Nonflowthroughbridgeplugs:flowbackprocesswilltakefourtosixdaysandaworkoverrigwillbenecessary,

Retrievablebridgeplugs:awirelinetruckwillbeusedtoremovetheplugs,and

Drillablebridge plugs: a workoverrig will berequired.

Thefollowingisageneraloverviewofthesequenceofactivitiesassociatedwiththedrillingandcompletionofagobwellthatwillbefollowedforgobwellsthataredrilledduringboth thePilotProjectand theProjectDevelopmentPhases:

Preparewellsite,

Moveindrillingrigandequipment,

Setconductorcasing,

Drillsurfacehole,

Runandsetsurfacecasing,

Drillproductionhole,

Runopenholeelectriclog,

Movedrillrigoffandcleanupsite,

Runandsetslottedproductioncasinginsertwitheitherthedrillrigoraworkoverrig,

Hookupsurfaceequipmentwhichwillincludedriveheadandelectricmotor forthe pump, meter,separator,andatankforproducedwater,and

Beginpumpingwaterandproductiongas.

Intheprojectareathereisalayerofsiltytypeclayabovethecoalseamthatisbeingmined. Thislayerofclaywilltendtobendandnotbreakthusblockingdirectcommunicationbetweenthemineandthegobwell. Withoutdirectcommunication,wellborewaterthatentersthewellwillimpedegasproductionandmust bepumpedout. Inaddition, without directcommunication,wellpressurecanbemaintainedwithouttheuseofacompressor.

Inadditiontothesequenceofactivitiesenumeratedforthedrillingandcompletionofthestandardandgobwells,the basicinfrastructure mustbeconstructed. Theinfrastructurewillincludethegasandwatergatheringsystems, the monitoring system, compressionequipmenttogatherandtransportthegas,andawaterdisposalsystem. Additional infrastructurewillbeconstructedasadditionalwellsaredevelopedandconnectedforultimateutilizationoftheproducedgas.

3.3.3.2 Gas Poduction And EconomicsBasedonareviewofthegeologicalinformation,theassumptionoftheavailabilityofWesternequipmentandtechnology,andtheexperiencefromsimilarprojectsinotherpartsoftheWorld,productionprofilesweredevelopedforboththestandardandgobwells(SeeTables 7and8; Exhibits 2through5). The wellproductionprofileshavebeenforecastedforatenyearperiodonly. ThetotalprojectgasproductiononanannualbasisisshownonTable9.

Eachstandardwellhasbeenplacedatadensityofthree

wellspersquarekilometerandwillbedrilledtoadepthof 1,400 meters. Withtheseparameters,thegasreservesperstandardwellhavebeencalculatedtobe78,000thousandcubicmeters(kcm)inthecoalseamsand 128,000kcm inthestandstones. Thus,eachstandardwellwillhaveagasreservebaseof206,000kcm. Utilizing Western fracturingequipment andtechnology,ithasbeenprojectedthateachstandardwellwillrecoveratotalof32,600kcmoveratenyearproductioncycle. Gasfrom thecoal seamsisestimatedtobeapproximately25%ofthegasinplace

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andgasfromthesandstonesisestimatedtobe

approximately10%ofthegasinplace.

Eachgobwellwillbeplacedataneffectivedensityof

sixwellspersquarekilometerandwillbedrilledtoadepthof1,200meters. With theseparameters,the

gasreservespergobwellhavebeencalculatedtobe27,000kcminthecoalseamsand18,000kcminthe

sandstones. Thus,each gobwell will have agasreservebaseof45,000kcm. Ithasbeenprojectedthatoveratenyearproductioncycle,eachgobwellwill

produce20,237 kcm. Gas recoveryfromthecoalseamsandsandstoneswillbeapproximately45%ofthegasinplace.

With theproductionprofiles andvarious financialassumptions,economicevaluationswerecalculatedfor

atypicalstandardwell(SeeTable10)andforatypicalgobwell(SeeTable11). Overatenyearproduction

cycleastandardwellisprojectedtohaveapositivecashflowofapproximately$817,510andadiscounted

cashflowrateofreturn(DCFROI)of53.27%assumingspecialtaxbenefits. With similarassumptions, thetypicalgobwellhasapositivecashflowofapproximately

$484,784andaDCFROIof45.64%. ThefinancialassumptionsarelistedontherespectiveTables.

ThespecialtaxbenefitsthatareassumedonTables10and11areinregardstotherecentlypassedlawon

Free EconomicZones. The Skochinsky Mine isincludedwithinoneoftheestablishedFreeEconomicZonesanditisassumedthatthetaxbenefitswillbe

available for a commercialCMM developmentproject. TheparticulartaxbenefitsofaFreeEconomic

Zoneincludeazeroincometaxrateforthefirstthreeyearsofanapprovedprojectandanincometaxrateof50%oftheprevailingincometaxrateforthenextthree

years oftheproject. Toreflectthebenefitsofthisspecial tax treatment,economicevaluations were

calculatedwithoutthetaxbenefitsforatypicalstandardwell(SeeTable12)andforatypicalgobwell(SeeTable13). WithoutthetaxbenefitsthestandardwellDCF-

ROIisreducedto38.94%andthegobwellinreducedto33.51%.

3.3.3.3 Gas Marktsg Picing and PaymkntKeyelements thatare required forthe successfulimplementationofthisprojectincludethefollowing:

Areadymarkettoacceptthegasthatisproduced,

Consumersthatarewillingtopayacompetitivepriceforthegas,and

Consumersthathavetheabilitytopaywithcashforthegas.

AsnotedinSection2,thereisareadymarketforgasthatwouldbeproducedfromacommercialCMMdevelopmentproject inUkraine. For simplicity, the

businessplanhasassumedthat theproduced gaswouldbesoldintotheexistingnaturalgassystem. Fordevelopersthatwishtoconverttheproducedgasintoelectricity,therearesufficientdetailsinthebusinessplantoformthebasisofaneweconomicanalysis.

ThecurrentofficialStatepricefornaturalgasinUkraineis$80perkcmplusatransportationfeeof$3perkcm. Ithasbeenassumedfortheeconomicanalysisofthebusinessplanthattheprojectwouldnet$60perkcmattheprojectsite. The$20reductioninthepriceisforrents,royalties,VAT,andotherpaymentstotheStatebutdoesnotincludeincometaxontheprojectprofits.

Ithasbeenassumedfortheeconomicanalysisthatthe project wouldbepaid in cashforallof the gasproducedandsold. HistoricallyinUkraine,thiswouldhavebeenagrossassumptionasmostpaymentsweremadewiththebartersystem. However,duringtheyear2000 therehasbeenasignificantincrease incashpayments forservices such asgas, electricity, and

water. TheStatehasestablishedthisasahighpriorityissueandisnowallowingserviceproviderstherighttoshutoffconsumersthathavenotpaid. Duringthefirstsixmonthsof2000thecashpaymentshavereachedover45%andtheStatehasestablishedagoalofreaching50%bytheendoftheyear. Inaddition,therearemanylargegasconsumersthathavethefinancialsresourcestopayincashfortheirobligationsthattheprojectcanseekoutandsecure.

3.4 THE ROLE OF SKOCHINSKY MINEThesuccessfulimplementationofthisprojectwillrequire

theestablishmentandmaintenanceofastrongrelationshipwiththeMine. Theprojectdevelopermustbekeptawareofallcurrentcoalproduction,futurecoaldevelopmentplans,andanydeviationsfromtheseplansthatarebeingconsidered. Inaddition,theMinemaybeconsideredasaconsumerofaportionofthegasthatisproduced.

TheSkochinskyMinecanutilizethecapturedmethaneatthemineasboilerfuel. Theminehasfiveboilersthatprimarilyconsumecoalandduring1999themineconsumed15,136Gcalofheatin theirboilers. Inaddition,ifelectricityisgeneratedwiththecapturedmethane,theminecouldutilizeaportionofthe

output. During1999,themineusedelectricityatthecapacityofapproximately3MWatanaveragecostof$0.035perkilowatthour.

Not included in this business plan is thepotentialadditionalsourceoffundsthroughthetradingofcarboncredits. The SkochinskyMine isa contributorofmethaneemissionsintotheatmosphere. During1999,themineliberatedapproximately38.6 millioncubicmetersofmethane;34.6millioncubicmetersviatheventilationshaftsand 4.0mill ion through their

6


12/27

degasificationsystem. Theminedidnotcapturedandconsumedanyofthisgasanditwasallemittedintotheatmosphere.

TheSkochinskyMine willencouragea coalbeddevelopmentprojecttoreducetheiraccidentsandfatalitieswhileatthesametimereducingtheircostsbyincreasingproductivity. Includingthemineconstruction

periodandtwentyfiveyearsofcoalproduction,theminehasrecorded over6,000coaloutbursts causedbyexcessivelevelsofmethane. Duringthesametimeperiod , the mine has exper iencedover 260fatalities. Duetothehighlevelofmethaneintheminingareasduringproduction,themineislimitedtotakingonlytwopassespershiftwiththelongwallshearandarethenrequiredtowaitfortheareastostabilizebeforeresumingproduction. Withaproperlyimplementedpreminedegasificationprogramtheminecouldrealizeafiftypercentincreaseinproductionbybeingallowedtotakethreecutspershift.

3.5 GEOLOGY OVERVIEW3.5.1 General InformationTheSkochinskylocatedinthewesternareaofDonetskMakeevskygeologic/industrialzoneandiswithinthecityofDonetsk. The minereservearea covers80squarekilometersand liesbetween tworivers, theVolchiaandtheKalmius. Topographically,itisaplain(steppe)crossedbysmallriversandravineswithamaximumelevationof250metersabovesealevelinthenortheasternpartoftheareaandminimumof148metersneartheOsikovaRavine. Theclimateinthe

mineareaisconsideredtobemoderatelycontinentalwithmaximumandminimumtemperaturesof+38 oCand30oCrespectively,andanaverageyearlytemperatureof+8oC. Thesoiltendstofreezetodepthof1.2and1.5meters. Yearlyprecipitationaverages0.5meters. There areno preservesoranyotherconservationareas withinthe mine area. ElectricpowerforthemineisprovidedbyDonbassenergoandwater issuppliedfrom thecanal SeverskyDonetsDonbassthroughwatermains.

3.5.2 Stratigraphy and LithologyGeologically,themineareaislocatedinthesouthwesternflankoftheKalmiusToretskayadepressionwiththeC

31

coalbearingstrata(UpperCarboniferousperiod)andC27,

C26,C

25,C

24,andC

23(MiddleCarboniferousperiod)strata

overlappedwith youngerbeds. Quaternarydepositsdevelopedwithin themineareaare typically15to18metersthick. Thesedepositsarerepresentedbysoil,yellowredandbrownredloam,andclaywithlimestoneinclusionsandsomesandlens. Neogenedepositsaredevelopednonuniformly. Inthecentralandsouthernpartsofthemineareatheirthicknessrangesbetween4

and34meters,graduallythinningoutinanorthbynorthwestdirection. Neogenedepositsarerepresentedbyspeckledclaycontainingmediumandf inesands. Thesedepositsare5to6metersthickandoftencontain quicksand atthe bottom. Underthesedeposits are layers of quartzite andgravelstonysandstones. Cretaceousdeposits,thataretypicalonlyfortheextremewesternandnorthwesternpartsofthe

minearea,arerepresentedbychalkymarl(23metersinthickness),glauconiticsand(7meters),andspongolite(upto25meters)(SeeExhibit6).

ThecoalseamscontainedinthestrataC 1,C 7,C 6,3 2 2

andC25aredevelopedbyotherminesinthearea. The

strataC2

4,withathicknessof220meters,includesalternatingbandsofclayshale(22to27%),sandyshale(40to45%),sandstone(28to35%),andwithtributarylayersoflimestoneandcoalseams. Sandstones,i

3Si

32

andI2Si

14,with thickness of10 to27 meters are

consideredmostuniforminstructure.

ThestrataC2

3isformedwithuniformlydistributedlayersofclay shale (35 to40%),sandyshale(30to32%),sandstonewithadifferentgrainsize(25to30%),andupto2%oflimestoneandcoal. Thethicknessofthisstrataincreaseseastward f rom375 meters to 485meters. Markersofthisstrataareasfollows:h

10Bcoal

seam withunderlayerh10

Handoverlyingclayshaleenclosingh

11coalseamandI

1limestone;limestonesH

61

andH6withunderlyingcoalseamsh

8H+Bandh

8H;crystalline

limestoneH5

0withunderlyingcoalseamh6

1andunderstratumofquartziticsandstone;and,coalseamh

3

andlimestoneH2withunderlyingcoalseamh

1.

3.5.3 TectonicsThewesternandcentralpartsofthemineareaarenotedfor conformablemonoclinal beddingthat stretchessouthwestonthestrikeandnorthwesttoadipof8to16 degrees. Inaddition, thisformationhas somedisjunctions with amplitude ofbetween2 and 10meters. ThestructureoftheeasternandnortheasternpartsofthemineareaismorecomplexwhichisattributedtotheinfluenceoftheFrantsuzsky,KoksovyandMushketovskythrustsandtheVetkovskayaflexurewhose apophyses have a ser ies of t r ibutary disjunctions. TheFranstuzskyandKoksovythrusts

form a naturalnortheastern boundary of theminearea. TheamplitudeoftheFrantsuzskythrustrangesbetween130and650meters. TheadjacentKoksovythrusthasadisplacementamplitudeofupto180metersthatdecreases to15 metersin thenorthwest. TheMushketovskythrustisthemaindisturbancewithinthemineareawithanalmostlatitudinalstrike. Thepitchangleof the displacement planedecreases inawestwarddirectionfrom50to65metersdownto5to10meters. IntheareaoftheVetkovskayaflexure,thestrikeofthestrata(originallysouthwestern)changesto

7


13/27

latitudinalandthestratadips northbynorthwestatanglesrangingfrom8to16degreesupto35to40degrees.

3.5.4 Coal StrataThecoalstrataC

24 inthemineareainclude13coal

seamsandlayersofwhichsix(i32,i3 ,i2 ,i1

4,i1,and,i0)

are atleast 0.45 meters thickalthough they arecategorizedasirregular. Geologicaland qualitativecharacteristicsofthecoalseamsofC

24andC

23strata

areshowninbelow.

ThecoalstrataC23contains18coalseamsandlayers

althoughonlysixofthem,

h ,h B,h ,h 1,h andh ,areminable;eitherthrough11 10 8 6 5 3

the wholearea orin certain locations. The minecurrentlydevelopsonecoalseam,theh

61.

Petrographically, coals of theC2

4strata aredurain-clarainousandclaraindurainous,whilethoseoftheC2

3

strataareclarainandsimilartothem.

Coal Characteristics:Symbol

Averagethickness

meters

% ofminefield

Ash%

Moisture%

Sulfur%

Volatiles%

i32

0.47 3 8.3 1.5 3.2 29.544.9i3 0.48 33 7.1 1.9 2.9 35.444.9i2 0.53 26 12.6 1.7 0.9 28.041.0i1

40.65 38 8.4 2.3 1.0 34.746.4

i1 0.47 14 11.9 1.4 2.8 39.445.4i0 0.54 10 12.4 1.5 3.4 40.648.0h11 0.48 29 11.7 2.2 0.7 27.538.5

h10B

0.61 95 11.8 2.0 3.5 18.545.4h8B+H

0.69 29 12.6 1.7 3.3 29.849.5h8

H0.60 56 10.4 1.6 0.9 17.939.1

h61

1.30 95 9.6 2.2 1.1 14.635.0h5 0.59 40 17.1 1.6 3.0 18.041.2h3 0.60 90 13.9 2.2 0.6 15.936.7

3.5.5 Coal Methane ContentDatacollectedfromgeologicalsurveysshowthattheCBMcontentofcoalbearingstrataC

23rangesbetween

16and22m3/tdaf. Accordingtodatagatheredbythemine,averagegascontentisapproximately20m3/tdaf. Methanegasismainlyretainedinthecoalmatter

inasorbedstate. Gaspressuremeasuredattheh61

seamthroughexploratorywells##9123,9131and9143

atthedepthsof110to1,364metersrangedbetween10.8and13.6MP. Accordingtoaveragedresultsofananalysisofthechemicalcompositionofgas

recovered,themaincomponentofthegasmixtureismethane(94.2%)withsomeethane(1.69%),propane

(0.31%),carbondioxide(0.52%),andnitrogen(2.98%). CBMresourceswithintheactiveminelevelstotal4.7billioncubicmeters. ThedensityoftheCBM

resourcesinthe30coalseamsandlayersnotbeingunderminedwithintheminefieldareestimatedat236.3millionm3/km2;whilethosecontainedinthe12seamsandlayerseffectedbyactivemininginh

61total70.4

millionm3/km2. Thegassaturationofthesandstoneaverages0.8m3/m3becauseoftheirporosity. InthesandstonesofC

24strataitrangesfrom4to11%while

intheC2

3strataitrangesfrom2to4%. Thedensityof

theCBMresourcesinsandstonesisestimatedtobe337millionm3/km2.

3.5. HydrogeologyThewaterbearinghorizonsofthequaternarydepositsarenotexpandedbutarepressurefreebecauseoftheirbeingfedthroughatmosphericprecipitation. ThewaterbearinghorizonsoftheNeogenePaleogenicbedswithpressurefreeporewaterisfedthroughinfiltrationofatmospher ic precipitation;such beds overlaycarboniferousrockstratawhosewaterstheynaturallyreplenish. In carboniferous deposits, fractured

sandstonesareconsideredthemostwaterbearing. Thel ayers o f li mest ones do not im pact w ate rencroachment. Intestholesdrilledunder themine

shafts,thepiezometricwaterlevelwas8to32metersdeep. Datafromgeologicsurveysindicatethatdowntoadepthof250meters,averagefiltrationcoefficientofcarboniferousrocksis0.0128metersperhour. Atdepthsfrom 250to 800meters theaverage filtration is0.0016metersperhourandatgreaterdepthsthan800metersitis0.00021metersperhourdue toreduced porosity. Chemical

composition of waters changesfromsulfate sodiumcalcium (down to 250meters),to sulfatechloride sodiumcalcium(betweendepthsof250and800meters),andthentochloridesodium(atdepthsdeeperthan800meters). Water

mineralizationcorrespondinglychanges from3 to9gramsperliter.

3. PROJECT RISKSTheprimaryrisksinaCBMprojectarethelackofresourceand lowgas production. Inaddition,

regulationsfordisposalofproducedwater,restraintsontheacquisitionofsurfacerights,andpoormarketconditionsfornaturalgascanadverselyaffectprojects. Also,implementingaprojectinadevelopingcountrycontainsitsownsetsofrisksinvolvinglegalandtaxissues. Someofthesefactorsareaddressedbelow:

Resource:TheSkochinskyMinecoalseamdepthandthickness areknown from coring andmining. Thegascontenthasbeendetermined

8


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fromalonghistoryofminingandgasemissionmeasurements.Thereisahighdegreeofconfidenceintheaccuracyoftheresourceestimatebutevenwithsomedegreeoferrortheresourcedensityisextremelyhigh.

Gasproductionrate:Highsustainedrateofgasflowsduringafterterminationofminingindicatespotentialforgoodpermeability. However,theonlydefinitivewaytodeterminepermeabilityandotherproductioncharacteristicsistodrillandevaluatewells. Thebestavailabletechnologyhasbeenassumedtobeemployedbyexperiencedpersonneltodesign and completethe project. Thecombination ofhighresourcedensity and thepotentialforsatisfactorypermeabilitygivesahighdegreeofconfidencethatcommercialproductioncanbeachieved.

Exhibit 1: General Location Map

Water Disposal: Problems withwastewaterdisposalcanbeanimpedimenttoCBM/CMMdevelopment projects. Wastewaterproducedfromtheoperationswillbedischargedintolocalstreams. Thereisanadequatestreamsysteminor near the project areato receivethewastewater produced fromtheproject. Thereshouldbenoregulatoryproblemssincethewater

qualitywillbethesameorsimilartothewastewaterdischargedfromthecoalmine.

Acquisitionof drillsites and rightsofway:Demographicsandterrainintheprojectareaaresuitablefortheplannedscopeoftheproject. Themethodtoobtaintherighttousethesurfacefordrillingandproductionactivitiesis unclear andwarrantsfartherinvestigation.

UkraineKyiv

Donetsk

Lugansk

Lugansk

Donetsk

Skochinsky Mine

9


15/27


16/27

Table 2: Pilot Project Drilling and Completion Cost EstimateWell Type Standard Gob

Number of Wells 5 1

Total Depth- feet- meters

4,6001,400

3,9001,200

Drilling

Survey $1 000 $1 000Location & Road $15 000 $15 000Water $5 000 $5 000Fuel $30 000 $23 000Mob / De-mob $72 000 $72 000Rig Cost $156 800 $147 000Ceme nting $25 000 $25 000Cementing Overhead $11 000 $11 000Transport ation $5 000 $5 000Welding $1 000 $1 000Logging $20 000 $0Conductor Casing - Cost $1 500 $1 500Surface Casing - Cost $10 350 $10 350Production Cas ing - Cost $22 000 $15 000Mud $7 500 $7 500

Bits $12 000 $12 000Drilling Cost per W ell $395 150 $351 350Contingency (10%) $39 515 $35 135

Total Drilling Cos t Per W ell $434 665 $386 485Completion

CEMENT PRODUCTION CA SINGCementing Overhead $5 500Equipment $18 000Materials $3 700Personnel $6 600

Sub-Total $33 800 $0

CEMENT BOND LOGSMob / De-Mob - Prorated: 5 W ells $900Service $5 850

Sub-Total $6 750 $0

FRACTURE STIMULATIONMob / De-mob - Prorated: 5 W ells $54 000Equipment $260 000Materials $208 000Personnel $48 000Bridge Plugs $15 000Perforating $2 000

Sub-Total $587 000 $0

WELL C LEANOUTRig Time $29 400Tools $4 000

Sub-Total $33 400 $0

TANGIBLES2-7/8" Production Tubing $10 000 $7 800Rods & Pump $12 000 $9 000Pumping Unit $30 000 $30 000Surface Equipment $10 000 $10 000

Sub-Total $62 000 $56 800Total Completion Cost (Per W ell) $722 950 $56 800

SummaryTotal Cost Per Well $1 157 615 $443 285Total Project Costs $5 788 075 $443 285

GRAND TOTAL $6 231 360

11


17/27

Table 3: Pilot Project Economic Evalua

Assumptions:

Capital Cost $5 788 075Gas Price ($/kcm) $60.00Gathering Costs ($/kcm) $11.20Pipeline Tariff ($/kcm) $3.50Misc. Op'g Costs ($/kcm) $5.25G & A ($/kcm) $1.75Depreciation 14%

*1,000 cubic meters** Pilot Project Evaluation Year

Production Profile for F

Reserves (kcm*) 515 000C

Year of Production, Production, Pr

Operation kcm per day kcm per year

1 68.77 25 1003 39.34 14 3575 27.55 10 057

0 56.74 20 710

2 49.80 18 177

4 32.49 11 859

6 23.81 8 689 7 20.88 7 620 8 18.52 6 760 9 16.58 6 052

Results:(Year) 0 ** 1 2 3 4 5 6Gas Production (kcm/yr) 20 710 25 100 18 177 14 357 11 859 10 057 8 689 Gross Revenue $0 $1 506 014 $1 090 605 $861 428 $711 564 $603 413 $521 349 Gathering Costs $0 ($281 123) ($203 580) ($160 800) ($132 825) ($112 637) ($97 319) Pipeline Tariff $0 ($87 851) ($63 619) ($50 250) ($41 508) ($35 199) ($30 412) Misc. Operating Costs $0 ($131 776) ($95 428) ($75 375) ($62 262) ($52 799) ($45 618) G & A $0 ($43 925) ($31 809) ($25 125) ($20 754) ($17 600) ($15 206) Net Production Revenue $0 $961 339 $696 170 $549 878 $454 215 $385 179 $332 795 Depreciation $0 ($810 331) ($810 331) ($810 331) ($810 331) ($810 331) ($810 331) (Taxable Income $0 $151 009 ($114 161) ($260 452) ($356 116) ($425 152) ($477 536) (

12


18/27

Table 4: Pilot Project Economic

Assumptions: Production Profile fo

Capital Cost $443 285 Reserves (kcm*) 45 000Gas Price ($/kcm) $60.00Gathering Costs ($/kcm) $11.20Pipeline Tariff ($/kcm) $3.50Misc. Op'g Costs ($/kcm) $5.25G & A ($/kcm) $1.75Depreciation 14%

Year of Production, Production,C

Operation kcm per day kcm per yPr

ear

0 8.87 3 239 1 10.76 3 926 2 7.79 2 843 3 6.15 2 246 4 5.08 1 855 5 4.31 1 573 6 3.72 1 359 7 3.27 1 192 8 2.90 1 057 9 2.60 947

Results:(Year) 0 ** 1 2 3 4 5 6

Gas Production (kcm/yr) 3 239 3 926 2 843 2 246 1 855 1 573 1 359 Gross Revenue $0 $235 560 $170 580 $134 760 $111 300 $94 380 $81 540 Gathering Costs $0 ($43 971) ($31 842) ($25 155) ($20 776) ($17 618) ($15 221) Pipeline Tariff $0 ($13 741) ($9 951) ($7 861) ($6 493) ($5 506) ($4 757) Misc. Operating Costs $0 ($20 612) ($14 926) ($11 792) ($9 739) ($8 258) ($7 135) G & A $0 ($6 871) ($4 975) ($3 931) ($3 246) ($2 753) ($2 378) Net Production Revenue $0 $150 366 $108 887 $86 022 $71 047 $60 246 $52 050 Depreciation $0 ($62 060) ($62 060) ($62 060) ($62 060) ($62 060) ($62 060) Taxable Income $0 $88 306 $46 827 $23 962 $8 987 ($1 814) ($10 010)

*1,000 cubic meters** Pilot Project Evaluation Year

13


19/27

Table 5: Drilling Program ScheduleYEAR 1 YEAR 2 YEAR 3

StandardWells

Gob WellsStandard

WellsGob Wells

StandardWells

Gob Wells

Month 1 3 1 2 2 3 1Month 2 3 1 3 1 4 0Month 3 3 1 3 1 3 1Month 4 4 0 3 1 3 1Month 5 4 0 3 1 4 0Month 6 4 0 4 0 3 1Month 7 4 0 3 1 3 1Month 8 4 0 3 1 3 1Month 9 3 1 4 0 3 1

Month 10 4 0 4 0 3 1Month 11 4 0 4 0 4 0Month 12 4 0 4 0 4 0

Category Total 44 4 40 8 40 8Year Total 48 48 48

Grand Total 144

Table : Development Project Well Cost EstimatesStandard Well Specifications Gob Well SpecificationsDepth: 4,600ft (1,400m) Depth: 3,900ft (1,200m)cased, cemented to surface, logged & slotted production casing insert,perforated multiple zone hydraulic fracture progressive cavity pump with electricstimulation progressive cavity pump with electric motormotor

Intangibles

PermitsRoad & drill site constructionSurveyDrilling

CementingLoggingPerforatingHydraulic fracWorkovers and cleanoutMiscellaneous services

Sub-Total

TangiblesCasing (conductor, surface & production)TubingWellheadPump & rodsSurface facilities & equipmentFlow line & meters

Separator Sub-Total

Total Drilling & Completion Costs

Other CostsPro rata portion of gas & watergathering systemContingencyOverhead

Sub-Total

Total Well cost

Standard Well

$500$5 000

$500$48 000

$12 000$5 000$12 000$75 000$10 000$10 000

$178 000

$15 000$5 000

$10 000$15 000$13 000$20 000

$5 000$83 000

$261 000

$30 000

$20 000$20 000$70 000

$331 000

Gob Well

$500$5 000

$500$45 000

$8 000$0$0$0

$10 000$10 000$79 000

$14 000$5 000

$10 000$15 000$13 000$20 000

$5 000$82 000

$161 000

$30 000

$20 000$20 000$70 000

$231 000

14


20/27

Table 7: Production Profile for One Standard WellReserves (kcm*) 206 000

Year ofOperation

AverageProduction,kcm per day

Production,kcm per year

CumulativeProduction,

kcm


% of Reserves

Decline Rate% of

Prior Year

1 14.30 5 218 5 218 2.53%

2 17.33 6 325 11 543 5.60% 21.22%

3 12.55 4 580 16 123 7.83% -27.59%

4 9.91 3 618 19 741 9.58% -21.00%

5 8.19 2 988 22 729 11.03% -17.41%

6 6.94 2 534 25 263 12.26% -15.19%

7 6.00 2 189 27 452 13.33% -13.61%

8 5.26 1 920 29 372 14.26% -12.29%

9 4.67 1 703 31 075 15.08% -11.30%

10 4.18 1 525 32 600 15.83% -10.45%

Exhibit 2: Standard Well Daily Production Forecast25.00

20.00

kcmPerDay

15.00

10.00

5.00

0.00

1 2 3 4 5 6 7 8 9 10

YEAR

Exhibit 3: Standard Well Cumulative Production Forecast3500030000

kcmPer

Day 25000

20000

15000

10000

5000

0

1 2 3 4 5 6 7 8 9 10

*1,000CubicMeters YEAR

15


21/27

Table : Production Profile for One Gob WellReserves (kcm*) 45 000

Year ofOperation

AverageProduction,kcm per day



kcm


% of Reserves

Decline Rate% of

Prior Year

1 8.87 3 239 3 239 7.20%

2 10.76 3 926 7 165 15.92% 21.21%

3 7.79 2 843 10 008 22.24% -27.59%

4 6.15 2 246 12 254 27.23% -21.00%

5 5.08 1 855 14 109 31.35% -17.41%

6 4.31 1 573 15 682 34.85% -15.20%

7 3.72 1 359 17 041 37.87% -13.60%

8 3.27 1 192 18 233 40.52% -12.29%

9 2.90 1 057 19 290 42.87% -11.33%

10 2.60 947 20 237 44.97% -10.41%

Exhibit 4: Gob Well Daily Production Forecast14.00

12.00

10.00

kcmPerDay

8.00

6.00

4.00

2.00

0.00

1 2 3 4 5 6 7 8 9 10

YEAR

Exhibit 5: Gob Well Cumulative Production Forecast25000

20000

kcmPe

rDay

15000

10000

5000

0

1 2 3 4 5 6 7 8 9 10

*1,000CubicMeters YEAR

16


22/27

Wells Started: TabProject Year: 1 2 3

Gob Wells Started 4 8 8

Pilot Gob Well 1 1 1

Standard Well Started 44 40 40

Pilot Standard Well 5 5 5

Well Production Year: 1 2 3 4 5 6 7 8 9

Gob Well Flow 3 239 3 926 2 843 2 246 1 855 1 573 1 359 1 192 1 057

Pilot Gob Well Flow 3 239 3 926 2 843 2 246 1 855 1 573 1 359 1 192 1 057

Standard Well Flow 5 218 6 325 4 580 3 618 2 988 2 534 2 189 1 920 1 703 Pilot 5 Standard Wells Flow 20 710 25 100 18 177 14 357 11 859 10 057 8 689 7 620 6 760

Project Year: 0 1 2 3 4 5 6 7 8

Gob Well Started Year 1 12 956 15 704 11 372 8 984 7 420 6 292 5 436 4 768

Gob Well Started Year 2 25 912 31 408 22 744 17 968 14 840 12 584 10 872

Gob Well Started Year 3 25 912 31 408 22 744 17 968 14 840 12 584

Pilot Gob Well 2 373 1 718 1 357 1 121 951 821 720 639

Standard Well Started Year 1 229 592 278 300 201 520 159 192 131 472 111 496 96 316 84 480

Standard Well Started Year 2 208 720 253 000 183 200 144 720 119 520 101 360 87 560

Standard Well Started Year 3 208 720 253 000 183 200 144 720 119 520 101 360

Pilot 5 Standard Wells 26 175 18 955 14 972 12 367 10 487 9 061 7 947 7 049

Annual Total: 271 096 549 309 748 261 672 016 518 962 424 718 358 723 309 312

Project Total: 4 570 736

Note: all volumes in kcm

17


23/27

Assumptions: Production Profile for O

Capital Cost per well $331 000 Reserves (kcm*) 206 000

Table 10: Economic Evaluation for One S

Gas Price ($/kcm) $60.00

Gathering Costs ($/kcm) $11.20Pipeline Tariff ($/kcm) $3.50Misc. Op'g Costs ($/kcm) $5.25G & A ($/kcm) $1.75Depreciation 14%

Income Tax:

First Three Years 0.0%Next Three Years 15.0%Thereafter 30.0%

Year ofOperation

Production,kcm per day


Cu

Pr

1 14.30 5 218 2 17.33 6 325 3 12.55 4 580 4 9.91 3 618 5 8.19 2 988 6 6.94 2 534 7 6.00 2 189 8 5.26 1 920 9 4.67 1 703

10 4.18 1 525

Results: (Year) 1 2 3 4 5 6 7

Gas Production (kcm/yr) 5 218 6 325 4 580 3 618 2 988 2 534 2 189 Gross Revenue $313 080 $379 500 $274 800 $217 080 $179 280 $152 040 $131 340 Gathering Costs ($58 442) ($70 840) ($51 296) ($40 522) ($33 466) ($28 381) ($24 517) Pipeline Tariff ($18 263) ($22 138) ($16 030) ($12 663) ($10 458) ($8 869) ($7 662) Misc. Operating Costs $27 395 $33 206 $24 045 $18 995 $15 687 $13 304 $11 492 G & A ($9 132) ($11 069) ($8 015) ($6 332) ($5 229) ($4 435) ($3 831) Net Production Revenue $199 849 $242 248 $175 414 $138 569 $114 440 $97 052 $83 839 Depreciation ($46 340) ($46 340) ($46 340) ($46 340) ($46 340) ($46 340) ($46 340) Taxable Income $153 509 $195 908 $129 074 $92 229 $68 100 $50 712 $37 499 Income Tax $0 $0 $0 ($13 834) ($10 215) ($7 607) ($11 250) Income After Taxes $153 509 $195 908 $129 074 $78 395 $57 885 $43 105 $26 249 Net Cash Flow From Oper $199 849 $242 248 $175 414 $124 735 $104 225 $89 445 $72 589 Initial Investment ($331 000)Cumulative Net Cash Flow ($131 151) $111 097 $286 511 $411 246 $515 471 $604 917 $677 506

Economic Indicators: * kcm = 1,000 cubic metersDiscount Rate 53.27%Discounted Net Cash Flow $331 000 Net Present Value $0Internal Rate of Return 53.27%

18


24/27



Table 11: Economic Evaluation for O

Gas Price ($/kcm) $60.00Gathering Costs ($/kcm) $11.20Pipeline Tariff ($/kcm) $3.50Misc. Op'g Costs ($/kcm) $5.25G & A ($/kcm) $1.75Depreciation 14%

Income Tax:


Year ofOperation

Productkcm per day

ion, Production,kcm per year

CPr

1 8.87 3 239 2 10.76 3 926 3 7.79 2 843 4 6.15 2 246 5 5.08 1 855 6 4.31 1 573 7 3.72 1 359 8 3.27 1 192 9 2.90 1 057

10 2.60 947

Results: (Year) 1 2 3 4 5 6 7

Gas Production (kcm/yr) 3 239 3 926 2 843 2 246 1 855 1 573 1 359 Gross Revenue $194 340 $235 560 $170 580 $134 760 $111 300 $94 380 $81 540 Gathering Costs ($36 277) ($43 971) ($31 842) ($25 155) ($20 776) ($17 618) ($15 221) Pipeline Tariff ($11 337) ($13 741) ($9 951) ($7 861) ($6 493) ($5 506) ($4 757) Misc. Operating Costs ($17 005) ($20 612) ($14 926) ($11 792) ($9 739) ($8 258) ($7 135) G & A ($5 668) ($6 871) ($4 975) ($3 931) ($3 246) ($2 753) ($2 378) Net Production Revenue $124 054 $150 366 $108 887 $86 022 $71 047 $60 246 $52 050 Depreciation ($32 340) ($32 340) ($32 340) ($32 340) ($32 340) ($32 340) ($32 340) Taxable Income $91 714 $118 026 $76 547 $53 682 $38 707 $27 906 $19 710 Income Tax $0 $0 $0 ($8 052) ($5 806) ($4 186) ($5 913) Income After Taxes $91 714 $118 026 $76 547 $45 630 $32 901 $23 720 $13 797 Net Cash Flow From Oper $124 054 $150 366 $108 887 $77 970 $65 241 $56 060 $46 137 Initial Investment ($231 000)

Cumulative Net Cash Flow ($106 946) $43 420 $152 306 $230 276 $295 516 $351 576 $397 713


19


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Assumptions: Production Profile for O


Table 12: Economic Evaluation for One Sta

Gas Price ($/kcm) $60.00

Gathering Costs ($/kcm) $11.20Pipeline Tariff ($/kcm) $3.50Misc. Op'g Costs ($/kcm) $5.25G & A ($/kcm) $1.75Depreciation 14%

Income Tax:


Year ofOperation Production,kcm per day Production,kcm per year

C

Pr

1 14.30 5 218 2 17.33 6 325 3 12.55 4 580 4 9.91 3 618 5 8.19 2 988 6 6.94 2 534 7 6.00 2 189 8 5.26 1 920 9 4.67 1 703

10 4.18 1 525

Results: (Year) 1 2 3 4 5 6 7

Gas Production (kcm/yr) 5 218 6 325 4 580 3 618 2 988 2 534 2 189 Gross Revenue $313 080 $379 500 $274 800 $217 080 $179 280 $152 040 $131 340 Gathering Costs ($58 442) ($70 840) ($51 296) ($40 522) ($33 466) ($28 381) ($24 517) Pipeline Tariff ($18 263) ($22 138) ($16 030) ($12 663) ($10 458) ($8 869) ($7 662) Misc. Operating Costs ($27 395) ($33 206) ($24 045) ($18 995) ($15 687) ($13 304) ($11 492) G & A ($9 132) ($11 069) ($8 015) ($6 332) ($5 229) ($4 435) ($3 831) Net Production Revenue $199 849 $242 248 $175 414 $138 569 $114 440 $97 052 $83 839 Depreciation ($46 340) ($46 340) ($46 340) ($46 340) ($46 340) ($46 340) ($46 340) Taxable Income $153 509 $195 908 $129 074 $92 229 $68 100 $50 712 $37 499 Income Tax ($46 053) ($58 772) ($38 722) ($27 669) ($20 430) ($15 214) ($11 250) Income After Taxes $107 457 $137 135 $90 352 $64 561 $47 670 $35 499 $26 249 Net Cash Flow From Oper $153 797 $183 475 $136 692 $110 901 $94 010 $81 839 $72 589 Initial Investment ($331 000)Cumulative Net Cash Flow ($177 203) $6 272 $142 964 $253 864 $347 874 $429 713 $502 302


20


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Table 13: Economic Evaluation for On

Gas Price ($/kcm) $60.00Gathering Costs ($/kcm) $11.20Pipeline Tariff ($/kcm) $3.50Misc. Op'g Costs ($/kcm) $5.25G & A ($/kcm) $1.75Depreciation 14%

Income Tax:


Year ofOperation

Productkcm per day

ion, Production,kcm per year

CuPr

1 8.87 3 239 2 10.76 3 926 3 7.79 2 843 4 6.15 2 246 5 5.08 1 855 6 4.31 1 573 7 3.72 1 359 8 3.27 1 192 9 2.90 1 057 10 2.60 947

Results: (Year) 1 2 3 4 5 6 7

Gas Production (kcm/yr) 3 239 3 926 2 843 2 246 1 855 1 573 1 359 Gross Revenue $194 340 $235 560 $170 580 $134 760 $111 300 $94 380 $81 540 Gathering Costs ($36 277) ($43 971) ($31 842) ($25 155) ($20 776) ($17 618) ($15 221) Pipeline Tariff ($11 337) ($13 741) ($9 951) ($7 861) ($6 493) ($5 506) ($4 757) Misc. Operating Costs ($17 005) ($20 612) ($14 926) ($11 792) ($9 739) ($8 258) ($7 135) G & A ($5 668) ($6 871) ($4 975) ($3 931) ($3 246) ($2 753) ($2 378) Net Production Revenue $124 054 $150 366 $108 887 $86 022 $71 047 $60 246 $52 050 Depreciation ($32 340) ($32 340) ($32 340) ($32 340) ($32 340) ($32 340) ($32 340) Taxable Income $91 714 $118 026 $76 547 $53 682 $38 707 $27 906 $19 710 Income Tax ($27 514) ($35 408) ($22 964) ($16 105) ($11 612) ($8 372) ($5 913) Income After Taxes $64 200 $82 618 $53 583 $37 577 $27 095 $19 534 $13 797 Net Cash Flow From Oper $96 540 $114 958 $85 923 $69 917 $59 435 $51 874 $46 137 Initial Investment ($231 000)Cumulative Net Cash Flow ($134 460) ($19 502) $66 420 $136 338 $195 772 $247 646 $293 783


21


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Exhibit :Stratigraphic Column

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