PRODUCTION SHARING CONTRACT

Production Sharing Agreement

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FAR EAST ENERGY CORP | CHINA UNITED COALBED METHANE CORPORATION LTD. | PHILLIPS CHINA INC.

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Title: PRODUCTION SHARING CONTRACT
Date: 3/15/2005

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EXHIBIT 10.21

PRODUCTION SHARING CONTRACT FOR

THE EXPLOITATION OF COALBED METHANE RESOURCES

FOR THE QINNAN AREA IN

SHANXI PROVINCE, QINSHUI BASIN,

THE PEOPLE'S REPUBLIC OF CHINA

BETWEEN

CHINA UNITED COALBED METHANE CORPORATION LTD.

AND

PHILLIPS CHINA INC.

BEIJING, CHINA

APRIL 16, 2002

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TABLE OF CONTENTS

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ARTICLE PAGE

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ARTICLE 1: DEFINITIONS........................................................................ 1

ARTICLE 2: OBJECTIVE OF THE CONTRACT.......................................................... 5

ARTICLE 3: CONTRACT AREA...................................................................... 5

ARTICLE 4: CONTRACT TERM...................................................................... 6

ARTICLE 5: RELINQUISHMENT OF THE CONTRACT AREA................................................ 8

ARTICLE 6: MINIMUM EXPLORATION WORK COMMITMENT AND EXPECTED MINIMUM EXPLORATION EXPENDITURES.. 9

ARTICLE 7: MANAGEMENT ORGANIZATION AND ITS FUNCTIONS.......................................... 10

ARTICLE 8: OPERATOR........................................................................... 15

ARTICLE 9: ASSISTANCE PROVIDED BY CUCBM....................................................... 18

ARTICLE 10: WORK PROGRAM AND BUDGET............................................................ 19

ARTICLE 11: DETERMINATION OF COMMERCIALITY OF CBM............................................. 20

ARTICLE 12: FINANCING AND COST RECOVERY........................................................ 22

ARTICLE 13: CBM PRODUCTION AND ALLOCATION...................................................... 23

ARTICLE 14: QUALITY, QUANTITY, PRICE, AND DESTINATION OF CBM................................... 27

ARTICLE 15: PREFERENCE FOR THE EMPLOYMENT OF CHINESE PERSONNEL, GOODS AND SERVICES............. 29

ARTICLE 16: TRAINING OF CHINESE PERSONNEL AND TRANSFER OF TECHNOLOGY........................... 30

ARTICLE 17: OWNERSHIP OF ASSETS AND DATA....................................................... 32

ARTICLE 18: ACCOUNTING, AUDITING AND PERSONNEL COSTS........................................... 32

ARTICLE 20: INSURANCE.......................................................................... 35

ARTICLE 21: CONFIDENTIALITY.................................................................... 36

ARTICLE 22: ASSIGNMENT......................................................................... 37

ARTICLE 23: ENVIRONMENTAL PROTECTION AND SAFETY................................................ 38

ARTICLE 24: FORCE MAJEURE...................................................................... 38

ARTICLE 25: CONSULTATION AND ARBITRATION....................................................... 39

ARTICLE 26: EFFECTIVENESS AND TERMINATION OF THE CONTRACT...................................... 40

ARTICLE 27: THE APPLICABLE LAW................................................................. 41

ARTICLE 28: LANGUAGE OF CONTRACT AND WORKING LANGUAGE.......................................... 41

ARTICLE 29: MISCELLANEOUS...................................................................... 42

ANNEX II: ACCOUNTING PROCEDURE............................................................... 44

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PREAMBLE

This Production Sharing Contract ("the Contract") is entered into in Beijing on

this 16th day of April, 2002 by and between China United CBM Corporation Ltd.

(hereafter abbreviated as "CUCBM"), a company organized and existing under the

laws of the People's Republic of China, having its headquarters domiciled in

Beijing, the People's Republic of China as one part; and Phillips China Inc., a

company organized and existing under the laws of Liberia, having its

headquarters domiciled in Beijing (hereinafter referred to as the "Foreign

Contractor" or "Contractor") as the other part.

WITNESSETH

WHEREAS, all Coalbed Methane resources under the territory and internal waters

of the People's Republic of China and within the limits of national jurisdiction

of the People's Republic of China are owned by the People's Republic of China;

and

WHEREAS, CUCBM shall be responsible for business matters in respect of the

exploitation of Coalbed Methane resources in cooperation with foreign

enterprises, and for negotiating, entering into and implementing contracts for

the exploitation of Coalbed Methane resources in cooperation with foreign

enterprises and has the exclusive right to explore for, develop and produce

Coalbed Methane in cooperation with foreign enterprises in areas approved by the

State Council for exploitation of Coalbed Methane resources in cooperation with

foreign enterprises and the exclusive authority to enter into this Contract as

authorized by the State Council of the People's Republic of China; and

WHEREAS, the Foreign Contractor desires and agrees to provide funds, and apply

its appropriate and advanced technology and managerial experience to cooperate

with CUCBM for the exploitation of Coalbed Methane resources within the Contract

Area and agrees to be subject to the laws, decrees, and other rules and

regulations of the People's Republic of China with respect to the implementation

of the Contract.

NOW, THEREFORE, IT IS MUTUALLY AGREED as hereafter set forth:

ARTICLE 1: DEFINITIONS

The following words and terms used in the Contract shall have, unless otherwise

specified herein, the following meanings:

1.1 "Coalbed Methane" or "CBM" means any gas mainly consisting of methane

stored in coal seams and/or adjacent strata (including in the overlying

and underlying strata) within the Contract Area.

1.2 "Coalbed Methane Products" or "CBM Products" means any or all of Coalbed

Methane, methanol, electricity generated by a coalbed methane-fired

generation facility, and other Coalbed Methane derivatives or products

including water and any other product of production.

1.3 "Coalbed Methane Discovery" or "CBM Discovery" means a potential Coalbed

Methane reservoir which, in accordance with Article 11 hereof, is worth

further evaluation by exploration within the Contract Area.

1.4 "Coalbed Methane Field" or "CBM Field" means an accumulation of Coalbed

Methane within the Contract Area which has been determined to be of

commercial value and for which it has been decided to proceed with

development. The accumulation may be bounded by but is not limited to

geologic structures such as fault blocks, coal discontinuities or

topographical features. Fields may also be designated as areas of similar

geologic characteristics including but not limited to coal thickness,

drill depths, and gas content.

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1.5 "Coalbed Methane Operations" or "CBM Operations" means the Exploration

Operations, Development Operations, Production Operations, and other

activities related to these Operations carried out under the Contract.

1.6 "Liquid Hydrocarbons" means any liquid hydrocarbons extracted from CBM.

1.7 "Exploration Operations" means operations carried out for the purpose of

discovering and evaluating CBM bearing areas by means of geological,

geophysical, geochemical and other methods including exploratory well

drilling; all the work undertaken to determine the commerciality of areas

in which CBM has been discovered including core drilling, modeling, area

selection, feasibility studies, Pilot Development (including production

therefrom), formulation of the Overall Development Program; and activities

related to all such operations including negotiation and signing of

longterm transportation and sales contracts.

1.8 "Development Operations" means operations carried out during the

development period for the realization of CBM production from the date of

approval of the Overall Development Program for any CBM Field, including

planning, design, construction, installation, drilling, developing

transportation systems and markets, and the related research work as well

as production activities, carried out before the Date of Commencement of

Commercial Production.

1.9 "Production Operations" means operations and all activities related

thereto carried out during the production period for CBM production of

each CBM Field from the Date of Commencement of Commercial Production,

including, but not limited to extraction, injection, stimulation,

treatment, storage, transportation and lifting, etc.

1.10 "Contract Area " means a surface area demarcated with geographic

coordinates for the cooperative exploitation of CBM resources, and in the

Contract, means the surface area stipulated in Article 3.1 hereof.

1.11 "Exploration Area" means the surface area within the Contract Area which

has not been relinquished and which is not included in a Development Area

or Production Area before the expiration of the exploration period hereof

and in which Development Operations and Production Operations have not

begun.

1.12 "Development Area" means a portion of the Contract Area covering a CBM

Field which has been designated for development. The Development Area(s)

shall be proposed by the Operator, demarcated by the Joint Management

Committee ("JMC") and delineated as such in the Overall Development

Program submitted for approval and approved by the Department or Unit.

1.13 "Production Area" means a surface area within any Development Area for the

purpose of the performance of the Production Operations within said

Development Area. The Production Area proposed by the Operator and

approved by JMC shall be submitted to CUCBM for approval before the Date

of Commencement of Commercial Production.

1.14 "Date of Commencement of Commercial Production" means the date of

commencement and delivery of the production of CBM from any CBM Field

proposed and announced by JMC in accordance with the provisions in Article

7.2.5 hereof.

1.15 "Calendar Year" means a period of twelve (12) consecutive Gregorian months

under the Gregorian Calendar, beginning on the first day of January and

ending on the thirty-first day of December in the same year.

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1.16 "Contract Year" means a period of twelve (12) consecutive Gregorian months

under the Gregorian Calendar, within the term of the Contract, beginning

on the Date of Commencement of the Implementation of the Contract or any

anniversary thereof.

1.17 "Production Year" means in respect of each CBM Field, a period of twelve

(12) consecutive Gregorian months under the Gregorian Calendar, beginning

on the Date of Commencement of Commercial Production of such CBM Field or

any anniversary thereof.

1.18 "Calendar Quarter" means a period of three (3) consecutive Gregorian

months under the Gregorian Calendar, beginning on the first day of

January, the first day of April, the first day of July, or the first day

of October.

1.19 "Exploratory Well" means any well drilled within the Contract Area during

the exploration period for the purpose of searching and evaluating for CBM

accumulations, including wells drilled for the purpose of obtaining

geological and geophysical parameters, any dry hole(s) and discovery

well(s).

1.20 "Pilot Development" means the installation and operation of necessary

equipment within the Contract Area (including wells) aiming at evaluating,

through pilot production of Coalbed Methane, the potential commercial

value of the Coalbed Methane in a specific area.

1.21 "Development Well" means a well drilled after the date of approval of the

Overall Development Program for a CBM Field for the purpose of producing

CBM, increasing production or accelerating extraction of CBM, including

production wells, injection wells and dry holes.

1.22 "Work Program" means all types of plans formulated for the performance of

the CBM Operations, including but not limited to plans for exploration,

development, production, transportation and sales.

1.23 "Overall Development Program" means a plan prepared by the Operator for

the development of a CBM Field or part of a CBM Field (phased development)

which has been reviewed and adopted by JMC, confirmed by CUCBM and

approved by the Department or Unit, and such plan shall include, but not

be limited to, recoverable reserves, the Development Well pattern, master

design, production profile, economic analysis and time schedule of the

Development Operations.

1.24 "Deemed Interest" means interest accruing on the development costs

calculated in accordance with the rate of interest stipulated in Article

12.2.3.2 hereof when the development costs incurred in each CBM Field

within the Contract Area are recovered by the Parties.

1.25 "CBM Field Straddling a Boundary" means a CBM Field extending from the

Contract Area to one or more other contract areas and/or areas in respect

of which no CBM contracts have been signed.

1.26 "Annual Gross Production of CBM" means the total amount of CBM produced

from each CBM Field within the Contract Area considered separately in each

Calendar Year, less the amount of CBM used for CBM Operations in such CBM

Field within the Contract Area and the amount of losses, which is saved

and measured by a measuring device at the Delivery Point as specified in

Article 14.3.1 hereof.

1.27 "Annual Gross Production of Liquid Hydrocarbons" means the total amount of

Liquid Hydrocarbons produced from each CBM Field within the Contract Area

considered separately in each Calendar Year, less the amount of Liquid

Hydrocarbons used for CBM Operations in such CBM Field within the Contract

Area and the amount of losses, which is saved and measured by a measuring

device at the Delivery Point as specified in Article 14.3.1 hereof.

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1.28 "Basement" means igneous rocks, metamorphic rocks or rocks of such nature

which, or formations below which, could not contain CBM deposits in

accordance with the knowledge generally accepted in the international

Coalbed Methane industry and shall also include such impenetrable rock

substances as salt domes, mud domes and any other rocks which make further

drilling impracticable or economically unjustifiable by the modern

drilling technology normally utilized in the international Coalbed Methane

industry.

1.29 "Contractor" means the Foreign Contractor specified in the Preamble

hereto, including any assignee(s) pursuant to an assignment made in

accordance with Article 22 hereof.

1.30 "Parties" means CUCBM and the Contractor.

1.31 "Party" means either of the Parties.

1.32 "Operator" means the entity responsible for the performance of the CBM

Operations under the Contract.

1.33 "Subcontractor" means any entity which provides the Operator with goods or

services for the purpose of the Contract.

1.34 "Third Party" means any individual or entity except CUCBM, the Contractor

and any of their Affiliates.

1.35 "Chinese Personnel" means any citizen of the People's Republic of China,

including CUCBM's personnel and Chinese citizens employed by the

Contractor and/or the Subcontractor(s) involved in Coalbed Methane

Operations under the Contract.

1.36 "Expatriate Employee" means any person employed by the Contractor,

Subcontractor(s), or CUCBM who is not a citizen of the People's Republic

of China. Overseas Chinese who reside abroad and have the nationality of

the People's Republic of China and other Chinese abroad, when they are

employed by the Contractor, Subcontractor(s) or CUCBM, shall also be

deemed to be Expatriate Employees within the scope of the Contract.

1.37 "Affiliate" means:

(a) any entity in which CUCBM or any company comprising Contractor

directly or indirectly holds fifty percent (50%) or more of the

voting rights carried by its share capital; or

(b) any entity which directly or indirectly holds fifty percent (50%) or

more of the aforesaid voting rights of CUCBM or any company

comprisingthe Contractor; or

mentioned in (b) above in an amount of fifty percent (50%) or more;

1.38 "Delivery Point" means a point or points agreed upon by the Parties for

the delivery of CBM or Liquid Hydrocarbons located within or outside the

Contract Area and specified in the Overall Development Program.

1.39 "Department or Unit" means the department or unit which is authorized by

the State Council of the People's Republic of China to be responsible for

administration of the Coalbed Methane industry of the People's Republic of

China.

1.40 "Date of Commencement of the Implementation of the Contract" means the

first day of the month following the month in which the Contractor has

received notification from CUCBM of

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the approval of the Contract by the Ministry of Foreign Trade and Economic

Co-operation of the People's Republic of China.

1.41 "Pre-Contract Costs" means those costs and expenditures incurred by CUCBM

in respect of the exploration of the Contract Area and prior to the Date

of Commencement of the Implementation of the Contract. Pre-Contract Costs

are agreed to be One Million Two Hundred Forty Thousand U.S. dollars

(US$1,240,000.00). Pre-Contract Costs shall be recovered by CUCBM pursuant

to the provisions of Article 13 hereof.

ARTICLE 2: OBJECTIVE OF THE CONTRACT

2.1 The objective of the Contract is to explore for, develop, produce and sell

Coalbed Methane, Liquid Hydrocarbons or Coalbed Methane Products that may

exist in the Contract Area, including all activities necessary to

transport and market CBM, CBM Products and Liquid Hydrocarbons from the

Contract Area.

2.2 The Contractor shall apply its appropriate and advanced technology and

assign its competent experts to perform the Coalbed Methane Operations.

2.3 During the performance of the CBM Operations, the Contractor shall, as far

as practicable and appropriate, transfer its technology used in CBM

Operations hereunder to allow the Chinese Personnel to utilize said

technology and to train such personnel in accordance with Article 16

hereof.

2.4 The Contractor shall bear all the exploration costs required for the

Exploration Operations. In the event that any CBM Field is discovered

within the Contract Area, the development costs of such CBM Field shall be

borne by the Parties in proportion to their participating interests:

thirty percent (30%) by CUCBM and seventy percent (70%) by the Contractor.

In the event that CUCBM opts to participate at a level less than thirty

percent (30%) of the participating interests, or not to participate in the

development of the CBM Field, the Contractor shall bear the remaining

development costs necessary for the development of the CBM Field in

accordance with Article 12.1.2 hereof.

2.5 If any CBM Field is discovered within the Contract Area, the CBM and/or

Liquid Hydrocarbons produced therefrom shall be allocated in accordance

with Articles 12 and 13 hereof.

2.6 Nothing contained in the Contract shall be deemed to confer any right on

the Contractor other than those rights expressly granted hereunder.

ARTICLE 3: CONTRACT AREA

3.1 The Contract Area as of the date of signature of the Contract covers a

total area of two thousand three hundred seventeen and four tenths square

kilometers (2,317.4 km(2)), as marked out by the geographic location and

the coordinates of the connecting points of the boundary lines shown on

Annex I attached hereto.

The said total area of the Contract Area shall be reduced in accordance

with Articles 4, 5 and 11 hereof.

Associated with the Contract Area and included in the grants of rights

hereunder will be a pipeline right-of-way, if required, from the Contract

Area to an interconnection or Delivery Point.

3.2 Except for the rights as expressly provided by the Contract, no right is

granted in favor of the Contractor to the surface area, subsurface area,

lake bed, stream bed, subsoil and any bodies

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of water or any natural resources or aquatic resources other than CBM, CBM

Products and Liquid Hydrocarbons, existing therein and any things under

the surface within the Contract Area.

ARTICLE 4: CONTRACT TERM

4.1 The term of the Contract shall include an exploration period, a

development period and a production period.

4.2 The exploration period, beginning on the Date of Commencement of the

Implementation of the Contract, shall be divided into three (3) phases and

shall consist of five (5) consecutive Contract Years, unless the Contract

is sooner terminated, or the exploration period is extended in accordance

with Article 24 hereof and Article 4.3 herein. The three (3) phases shall

be as follows:

the first phase of one (1) Contract Years (the first Contract Year) for

reconnaissance;

the second phase of two Contract Years (the second Contract Year through

the third Contract Year) for core testing

the third phase of two Contract Years (the fourth Contract Year through

the fifth Contract Year) for Pilot Development.

4.3 If the time remaining in the exploration period when a CBM discovery is

made within the Contract Area is not reasonably sufficient to complete the

Pilot Development, or the time period for the Pilot Development of a CBM

discovery extends beyond the expiration of the exploration period under a

Pilot Development Work Program approved by JMC in accordance with Article

11 hereof, subject to CUCBM's approval the exploration period under

Article 4.2 hereof shall be extended to the extent necessary to complete

the Pilot Development.

If there are no channels for transportation or market access or consuming

facilities, or if the Parties have not concluded a long-term

transportation and sales contract in respect of the CBM, CBM Products

and/or Liquid Hydrocarbons during the exploration period or during the

extended exploration period as provided for above, Contractor shall be

granted an additional extension to the exploration period. The period of

extension shall be approved by CUCBM and shall be for a reasonable five

(5) year period in order to complete such long-term transportation and

sales contract and allow transportation and market access and consuming

facilities to develop. If a long-term transportation and sales contract is

not concluded within the reasonable five (5) year extension to the

exploration period, the Contract shall be terminated.

Any extension to the exploration period granted under this Article 4.3

shall be for a period of time reasonably required to complete the above

mentioned work and to develop transportation and market access and

consumption facilities and for the Parties to negotiate long-term

transportation and sales contracts in respect of CBM, CBM Products and/or

Liquid Hydrocarbons in order to enable JMC to make a decision on the

commerciality of the said CBM discovery in accordance with Article 11

hereof and submit an acceptable Overall Development Program to the

Department or Unit for approval.

4.4 The development period of any CBM Field within the Contract Area shall

begin on the date of approval of the Overall Development Program of the

said CBM Field, and end on the date of the entire completion of the

Development Operations set forth in the Overall Development Program (which

may continue beyond the Date of Commencement of Commercial Production),

excluding the time for carrying out other additional development projects

during the production period in accordance with Article 11.10 hereof.

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4.5 The production period of any CBM Field within the Contract Area shall be

a period beginning on the Date of Commencement of Commercial Production

of the said CBM Field up to the Date of the expiration of the production

period as specified in the approved Overall Development Program.

However, the production period shall be extended for so long as there

exist commercially recoverable reserves of CBM from the CBM Field. The

extension of the production period shall not exceed the term of this

Contract set forth under Article 4.7 herein.

Under such circumstances as where the construction of a CBM Field is to

be conducted on a large scale, and the time span required therefore is

long, or where separate production of each of the multiple CBM producing

zones of an CBM Field is required, or under other special circumstances,

the production period thereof shall, when it is necessary, be properly

extended with the approval of the Department or Unit.

4.6 Suspension or abandonment of production of a CBM Field.

4.6.1 Suspension of production from a CBM Field within the production period

In the event that the Parties agree to suspend temporarily production

from a CBM Field which has entered into commercial production, the

Production Area covered by the CBM Field shall be retained within the

Contract Area. In no event shall the period of such retention extend

beyond the date of the expiration of the production period of that CBM

Field. The duration of the relevant period of production suspension and

the arrangement for the maintenance operations during the aforesaid

period of suspension shall be proposed by the Operator, and shall be

decided by JMC through discussion. With respect to the aforesaid CBM

Field which has been suspended and retained within the Contract Area, in

the event that production is restored during the period of such

retention, the production period of that CBM Field shall be extended

correspondingly. In the event that the Parties fail to reach an

agreement on the restoration of production by the expiration of the

production suspension period decided by JMC through discussion, the

Party who wishes to restore production shall have the right to restore

production solely. The other Party may later elect to participate in

production by paying to the other Party its participating interest share

of the costs incurred in restoring such production, but shall have no

rights or obligations in respect of such CBM Field for the production

during such solely restored production period.

In any event, the obligation for abandonment and site restoration shall

rest solely with the Party(s) which participate in the restored

production; which shall indemnify and hold harmless any

non-participating Party from any costs, expenses or claims arising out

of such obligation.

4.6.2 Abandonment of production from a CBM Field within the production period.

4.6.2.1 During the production period, either Party to the Contract may propose

to abandon production from any CBM Field within the Contract Area,

provided, however, that prior written notice shall be given to the other

Party to the Contract. The other Party shall make a response in writing

within ninety (90) days from the date on which the said notice is

received. If the other Party also agrees to abandon production from the

said CBM Field, then abandonment costs shall be paid by the Parties in

proportion to their participating interests in such CBM Field. The

Parties shall abandon such CBM Field in accordance with procedure agreed

on by the Parties. From the date on which the abandonment is completed,

the production period of such CBM Field shall be terminated and such CBM

Field shall be excluded from the Contract Area.

4.6.2.2 If the Contractor notifies CUCBM in writing of its decision to abandon

production from a CBM Field while CUCBM decides not to abandon

production from said CBM Field, then from the date on which the

Contractor receives CUCBM's written response of its aforesaid decision

(the "Abandonment Date"), all of the Contractor's rights and obligations

under the Contract in respect of said CBM Field, including, but not

limited to, any obligation with respect to abandonment and site

restoration in respect of such CBM Field, shall be transferred

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to CUCBM and terminated automatically with respect to Contractor, provided

that the Contractor shall not transfer to CUCBM any of the Contractor's

debts, existing liabilities and obligations in respect of the said CBM

Field. In addition, the Contractor shall undertake its existing

liabilities and obligations under the Contract prior to the Abandonment

Date. From the Abandonment Date, the said CBM Field shall be excluded from

the Contract Area.

4.7 The term of the Contract shall not go beyond thirty (30) consecutive

Contract Years from the Date of Commencement of the Implementation of the

Contract, unless otherwise stipulated hereunder.

ARTICLE 5: RELINQUISHMENT OF THE CONTRACT AREA

5.1 The Contractor shall relinquish a portion or portions of the Contract Area

in accordance with the following provisions:

5.1.1 In any of the following cases, the Contractor shall relinquish the

remaining Contract Area, except for any Development Area, a possible or

proposed Development Area and/or Production Area:

(a) at the expiration of the last phase of the exploration period

(including extensions) as mentioned in Article 4.2 hereof; or

(b) at the expiration of the said exploration phase if the Contractor

exercises its option under Article 6.3 (b) hereof; or

exploration period is extended in accordance with Article 4.3 or

Article 24 hereof.

5.1.2 In the execution of Article 5.1.1 herein, a Production Area and/or

Development Area or any area proposed by Contractor corresponding to a CBM

Discovery with a possibility of or potential for Pilot Development or

awaiting Pilot Development and/or under a Pilot Development or included in

an Overall Development Program awaiting approval, shall not be regarded as

an area to be relinquished.

5.1.3 At the expiration of the production period of any CBM Field as specified

in Article 4.5 hereof, such CBM Field within the Contract Area shall be

excluded from the Contract Area.

5.2 Within ninety (90) days prior to the date of relinquishment of the

Contract Area, the Contractor shall submit to CUCBM a report on its

completed Exploration Operations on the areas proposed to be relinquished,

including a map showing the proposed areas to be relinquished with the

geographic location and the coordinates of the connecting points of the

boundary lines.

5.3 In the exploration period, the Contractor shall bear the fee for CBM

exploration rights of the Contract Area to be paid in accordance with the

relevant laws and regulations of the People's Republic of China. In the

development period and production period, CUCBM and the Contractor shall,

in proportion to their respective participating interests, bear the fee

for CBM mining rights of the Development Area and Production Area paid in

accordance with relevant laws and regulations of the People's Republic of

China. The fees for CBM exploration and mining rights shall be paid and

are cost recoverable pursuant to Article 5.2.20 of Annex II hereof.

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ARTICLE 6: MINIMUM EXPLORATION WORK COMMITMENT AND EXPECTED MINIMUM EXPLORATION

EXPENDITURES

6.1 The Contractor shall begin to perform the Exploration Operations within

six (6) months after the Date of Commencement of the Implementation of the

Contract, unless otherwise agreed upon by the Parties.

6.2 The Contractor shall fulfill the minimum exploration work commitment and

expected minimum exploration expenditures for each phase of the

exploration period in accordance with the following provisions:

6.2.1 During the first phase of the exploration period, the Contractor shall:

Drill one (1) Exploration Well with footage totaling seven hundred

(700) meters estimated to cost three hundred fifty thousand US

dollars (US$350,000), or acquire an equivalent amount of seismic

equal to the estimated cost of drilling one (1) exploration well.

6.2.2 During the second phase of the exploration period, the Contractor shall:

(a) Drill two (2) Exploration Wells with footage totaling one thousand

four hundred (1,400) meters;

(b) Spend seven hundred thousand (US$700,000) U.S. dollars as its

expected minimum exploration expenditures for such Exploration

Operations.

6.2.3 During the third phase of the exploration period, the Contractor shall:

(a) drill and complete one (1) Pilot Development consisting of six (6)

wells; and

(b) spend one million eight hundred thousand (US$1,800,000) U.S. dollars

as its expected minimum exploration expenditures for such

Exploration Operations.

6.2.4 With respect to the minimum exploration work commitment for each phase of

the exploration period committed by the Contractor in accordance with

Articles 6.2.1, 6.2.2 and 6.2.3 herein, when calculating whether the

minimum exploration work commitment has been fulfilled, the number of

Exploration Wells and Pilot Development Wells shall be the basis of such

calculation.

6.3 At the expiration of the first and second phases of the exploration

period, the Contractor has options (a), (b), or (c) and at the expiration

of the third phase of the exploration period options (b) or (c) as

follows:

(a) to enter the next phase and continue exploration; or

(b) to conduct Development Operations and Production Operations only on

any CBM discoveries in accordance with the procedures under Article

11 hereof provided, however, that the minimum exploration work

commitments up to the date of such expiration of the said

exploration phase have been fulfilled and the areas specified in

Article 5 hereof have been relinquished; or

6.4 At the expiration of any phase of the exploration period, if the actual

exploration work fulfilled by the Contractor is less than the minimum

exploration work commitment set forth for the said exploration phase, and

if the Contractor opts to enter the next phase and continue

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exploration under Article 6.3 (a) herein, the Contractor shall give

reasons to CUCBM for the underfulfillment. The unfulfilled balance of the

said phase shall be added to the minimum exploration work commitment for

the next exploration phase.

At any time within the exploration period, if there is any potential CBM

discovery, JMC shall, at the request of any Party to the Contract, discuss

the possibility of amending the exploration work. Any Exploration Wells

added by any such amendment shall be deducted from and/or credited against

the minimum exploration work commitment.

6.5 Where the Contractor has fulfilled ahead of time the minimum exploration

work commitment for any phase of the exploration period, the duration of

such exploration phase stipulated in Article 4.2 hereof shall not be

shortened thereby, and if the exploration work actually fulfilled by the

Contractor exceeds the minimum exploration work commitment for the said

exploration phase, the excess part shall be deducted from and/or credited

against the minimum exploration work commitment for the next exploration

phase.

6.6 If any addition or deduction is made under Article 6.4 or Article 6.5

herein in regard to the minimum exploration work commitment for any phase

of the exploration period, the increased or reduced exploration work shall

become the new minimum exploration work commitment for the Contractor to

fulfill in the said phase.

6.7 At the expiration of any phase during the exploration period, if the

exploration work actually fulfilled by the Contractor is less than the

minimum exploration work commitment for such phase or less than the new

minimum exploration work commitment in Article 6.6 herein, and if,

regardless of whether the expected minimum exploration expenditures are

fulfilled or not fulfilled, the Contractor opts to terminate the Contract

under Article 6.3 (c) herein, or if the said phase is the last exploration

phase, subject to the approval of the Department or Unit the Contractor

shall be allowed to transfer its unfulfilled minimum exploration work

commitment to another Contract Area as agreed by the Contractor and CUCBM,

or the Contractor shall, within thirty (30) days from the date of the

decision of its election to terminate the Contract or within thirty (30)

days from the date of the expiration of the exploration period, pay CUCBM

only any unfulfilled balance of the minimum exploration work commitment (

or of the new such commitment) in U.S. dollars after it has been converted

into a cash equivalent using the method provided in Annex II-Accounting

Procedure hereto. However, if the minimum exploration work commitment for

the exploration period is fulfilled while its expected corresponding

minimum exploration expenditures are not fulfilled, the unfulfilled part

shall be deemed as a saving and shall not be paid to CUCBM.

6.8 Contractor shall be allowed the flexibility to transfer all or any part of

the minimum exploration work commitment under this Contract to another

contract area and vice versa. The minimum exploration work commitment

transferred from another contract area to this Contract and vice versa

shall be credited toward the satisfaction of the aggregate exploration

work commitments for both this Contract Area and to the contract area from

which the minimum exploration work commitment was transferred. Nothing

herein contained shall be construed or interpreted to allow any reduction

in the aggregate minimum exploration work commitment for any phase of the

exploration period for this Contract or the contract area from which the

exploration work commitment was transferred.

ARTICLE 7: MANAGEMENT ORGANIZATION AND ITS FUNCTIONS

7.1 For the purpose of the proper performance of the CBM Operations in the CBM

Fields, the Parties shall establish a Joint Management Committee (JMC)

within forty-five (45) days from the Date of Commencement of the

Implementation of the Contract.

7.1.1 CUCBM and the Contractor shall each have the right to appoint an equal

number of representatives (two to five each) to form JMC, and each Party

to the Contract shall designate

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one of its representatives as its chief representative. The representative

of the Operator among the companies comprising the Contractor shall be the

chief representative of the Contractor. Either Party may replace any of

its representatives, or designate another representative as its chief

representative, by a written notice to the other Party, pursuant to

Article 29.2 hereof. All the aforesaid representatives shall have the

right to present their views on the proposals at the meetings held by JMC.

When a decision is to be made on any proposal, the chief representative

from each Party to the Contract shall be the spokesman on behalf of the

Party to the Contract.

The Chairman of JMC shall be the chief representative designated by CUCBM,

and the Vice-Chairman shall be the chief representative designated by the

Contractor. The Chairman of JMC shall preside over meetings of JMC. In his

absence, one representative present at the meeting from CUCBM shall be

designated to act as the chairman of the meeting. In the absence of the

Vice-Chairman of JMC, one representative present at the meeting from the

Contractor shall be designated to act as the Vice-Chairman of the meeting.

The Parties may, according to need, designate a reasonable number of

advisers who may attend, but shall not be entitled to vote at JMC

meetings.

7.1.2 A regular meeting of JMC shall be held at least once a Calendar Quarter,

and other meetings, if necessary, may be held at any time at the request

of any Party to the Contract, upon giving reasonable notice to the other

Party of the date, time and location of the meeting and the items to be

discussed.

7.2 The Parties shall empower JMC to:

7.2.1 Review and approve the Work Programs and budgets proposed by the Operator

and subsequent amendments thereto;

7.2.2 Determine the potential commerciality of each Coalbed Methane Discovery

that has been made in accordance with the Operator's Pilot Development

report and report its decision to CUCBM for confirmation;

7.2.3 Review and approve the Overall Development Program and budget for each CBM

Field and the amendments to the budget;

7.2.4 Approve or confirm the following items of procurement and expenditures:

(a) approve procurement of any item within the budget with a unit price

exceeding Five Hundred Thousand U.S. dollars (U.S. $500,000) or any

single purchase order of total monetary value exceeding Two Million

U.S. dollars (U.S. $2,000,000);

(b) approve a lease of equipment, or an engineering subcontract or a

service contract within the budget of a monetary value exceeding Two

Million U.S. dollars (U.S. $2,000,000); and

the expenditures pursuant to Article 10.2.2 hereof;

7.2.5 Propose and announce the Date of Commencement of Commercial Production of

each CBM Field within the Contract Area;

7.2.6 Determine the type and scope of information and data provided to any Third

Party in accordance with Article 21.5 hereof;

7.2.7 Approve the boundaries of the Development Area and the Production Area of

each CBM Field;

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7.2.8 Review and approve the Joint Operating Agreement in accordance with

Article 8.8 hereof;

7.2.9 Review and approve the insurance program proposed by the Operator and

emergency procedures on safety and environmental protection;

7.2.10 Review and approve personnel training programs;

7.2.11 Review and approve minutes and/or resolutions of JMC meetings, and

discuss, review, decide and approve other matters that have been proposed

by either Party to the Contract or submitted by the expert groups

pursuant to Article 7.4.2 hereof or by the Operator; and

7.2.12 Review and examine matters required to be submitted to relevant

authorities of the Chinese Government and/or CUCBM for approval or

confirmation.

7.3 Decisions of JMC shall be made unanimously through consultation. All

decisions made unanimously shall be deemed as formal decisions and shall

be equally binding upon the Parties. When matters upon which agreement

cannot be reached arise, the Parties may convene another meeting in an

attempt to find a new solution thereto based on the principle of mutual

benefit.

7.3.1 During the exploration period, the Parties shall endeavor to reach

agreement through consultation on exploration programs and annual

exploration Work Programs. If the Parties fail to reach agreement through

consultation within thirty (30) days of first being considered by JMC,

the Contractor's proposal shall prevail, provided that such proposal is

not in conflict with the relevant provisions in Articles 4, 5 and 6

hereof.

7.3.2 If it is considered by the chairman and/or the vice chairman or their

nominees that a matter requires urgent handling or may be decided without

convening a meeting, JMC may make decisions through facsimiles or the

circulation of documents.

7.4 JMC shall establish the following subordinate bodies:

7.4.1 Secretariat

The secretariat shall be a permanent organization consisting of up to two

(2) secretaries. One secretary shall be appointed by each of the Parties

or they may share one. The secretaries shall not be members of JMC, but

may attend meetings of JMC to perform the following duties:

(a) to keep minutes of meetings;

(b) to prepare summaries of the resolutions for JMC meetings;

(d) to receive and transmit proposals, reports or plans submitted by

the Operator and/or proposed by any Party to the Contract, that

require discussion, review or approval by JMC.

7.4.2 Expert Groups

Advisory expert groups shall be established in accordance with the

requirements of the Coalbed Methane Operations in various periods. Each

expert group shall consist of an equal number of CUCBM Personnel and the

Contractor's employees, and, with the agreement of JMC, any other

personnel. JMC shall discuss and decide upon their establishment or

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dissolution, size, tasks, location of their work and the appointment of

their leaders in accordance with the requirements of their work. The

expert groups which should be of a reasonable size and number shall have

the following functions:

(a) to discuss and study matters assigned to them by JMC and submitted

by the Operator to JMC for its review and approval and any other

matter assigned to them by JMC and to make constructive

suggestions to JMC;

(b) to have access to and observe and investigate the Coalbed Methane

Operations conducted by the Operator without affecting such

Operations at Operator's office and operating sites as work

requires and to submit relevant reports to JMC; and

7.5 When any of the companies comprising the Contractor acts as the Operator,

CUCBM shall have the right to assign mutually acceptable qualified

professional representatives to the Operator's administrative and

technical departments which are related to the CBM Operations. These

professional representatives from CUCBM shall have specific job duties

and responsibilities in relation to the CBM Operations.

The professional representatives of CUCBM shall have access to the

centers of research, design, and data processing related only to the

execution of the Contract and to the operating sites to observe all the

non-proprietary activities and study all the information with respect to

the CBM Operations. Whether to provide such access to the aforesaid

centers outside the People's Republic of China shall be decided by JMC

through discussion. If the decision is made, such access shall be

arranged by the Operator and the Operator shall use all reasonable

endeavors to assist the professional representatives to have access to

Third Parties' sites. The work of professional representatives of CUCBM

shall be arranged by the manager(s) of the departments of the Operator in

which professional representatives' work.

Professional representatives of CUCBM, except for CUCBM's procurement

professional representatives who shall undertake their functions in

accordance with Article 7.6 herein, shall