Primeline Energy Holdings Inc. - Petroleum Contract

Primeline's interest in Block 25/34 is held through the Petroleum Contract. Primeline and its affiliate company, PPC, are jointly designated as Contractors under the Petroleum Contract.

The Petroleum Contract provides for a seven-year exploration period, which commenced on 1st May 2005, and for a development and production period for each commercial development of 15 years, (extendable to 20 years). The exploration period is split into three phases of 3, 2 and 2 years respectively. The Contractors are responsible for all costs incurred during the exploration phases with the option to terminate the Petroleum Contract at the end of each phase. The Petroleum Contract is on favourable fiscal terms with no royalties being payable on production below 194 MMcfd and no production sharing by the government below 335 MMcfd for each production field within the Block.

In the first phase, Primeline's minimum commitment to the work programme is to acquire a minimum of 200 sq km of 3D seismic data and drill one well of no less than 2,500m in depth.

During the first phase Primeline has acquired a total of 550 sq km of 3D seismic and spent in excess of US$10 million but, due to the lack of available drilling rigs, has been unable to drill the required well. Accordingly, in view of the rig market conditions, CNOOC agreed to extend the first phase of the exploration period by an additional twelve months.

By an amendment to the Petroleum Contract dated 18 February 2008, it was agreed that the first exploration period shall be for a period of four years from the date of commencement on 1st May 2005, provided that one of the two subsequent two-year exploration periods will be reduced by a corresponding period of one year unless otherwise agreed with CNOOC. The minimum exploration requirement for each of phases two and three is the drilling of one well to 2,500 m and a minimum expenditure of US$5 million.

At the end of exploration phases one and two, the Contractors have to relinquish 25% of the contract area of the Block. At the end of exploration phase three, the Contractors have to relinquish all of the remaining contract area except any appraisal/development/production areas which have been identified and agreed with CNOOC.

If a discovery is made inside the Block, CNOOC has the right to participate in up to 51% of any commercial development by paying its pro rata share of the development costs. In the event that CNOOC elects to participate in any discovery, Primeline would remain as the operator but all three companies (CNOOC, Primeline and PPC) would be obliged to contribute to the development and production costs on a pro rata basis in their respective proportions of 51%, 36.75% and 12.25%.

CNOOC has confirmed that, subject to the Overall Development Plan which is currently underway confirming the commerciality of the Lishui 36-1 discovery, it will exercise its right to take a 51% interest in that development.



	Introduction Exploration History Lishui 36-1 Discovery Lishui Gas Play Block 25/34 Petroleum Contract Dynamic Gas Market Gas Agreement Resource Report	Primeline's interest in Block 25/34 is held through the Petroleum Contract. Primeline and its affiliate company, PPC, are jointly designated as Contractors under the Petroleum Contract. The Petroleum Contract provides for a seven-year exploration period, which commenced on 1st May 2005, and for a development and production period for each commercial development of 15 years, (extendable to 20 years). The exploration period is split into three phases of 3, 2 and 2 years respectively. The Contractors are responsible for all costs incurred during the exploration phases with the option to terminate the Petroleum Contract at the end of each phase. The Petroleum Contract is on favourable fiscal terms with no royalties being payable on production below 194 MMcfd and no production sharing by the government below 335 MMcfd for each production field within the Block. In the first phase, Primeline's minimum commitment to the work programme is to acquire a minimum of 200 sq km of 3D seismic data and drill one well of no less than 2,500m in depth. During the first phase Primeline has acquired a total of 550 sq km of 3D seismic and spent in excess of US$10 million but, due to the lack of available drilling rigs, has been unable to drill the required well. Accordingly, in view of the rig market conditions, CNOOC agreed to extend the first phase of the exploration period by an additional twelve months. By an amendment to the Petroleum Contract dated 18 February 2008, it was agreed that the first exploration period shall be for a period of four years from the date of commencement on 1st May 2005, provided that one of the two subsequent two-year exploration periods will be reduced by a corresponding period of one year unless otherwise agreed with CNOOC. The minimum exploration requirement for each of phases two and three is the drilling of one well to 2,500 m and a minimum expenditure of US$5 million. At the end of exploration phases one and two, the Contractors have to relinquish 25% of the contract area of the Block. At the end of exploration phase three, the Contractors have to relinquish all of the remaining contract area except any appraisal/development/production areas which have been identified and agreed with CNOOC. If a discovery is made inside the Block, CNOOC has the right to participate in up to 51% of any commercial development by paying its pro rata share of the development costs. In the event that CNOOC elects to participate in any discovery, Primeline would remain as the operator but all three companies (CNOOC, Primeline and PPC) would be obliged to contribute to the development and production costs on a pro rata basis in their respective proportions of 51%, 36.75% and 12.25%. CNOOC has confirmed that, subject to the Overall Development Plan which is currently underway confirming the commerciality of the Lishui 36-1 discovery, it will exercise its right to take a 51% interest in that development.