Indonesia

Indonesia has one of the largest CBM reserves in the world with a potential 453 trillion cubic feet ("Tcf"), more than double the country's natural gas reserves. The South Sumatra Basin, the largest CBM basin in Indonesia, is estimated to contain in-place resources of approximately 183 Tcf; and the Kutai Basin, the third largest CBM basin in Indonesia, is estimated to contain in-place resources of approximately 80 Tcf (SPE, 2004). Between May 2008 and August 2009, 15 CBM PSCs were granted by the Government of Indonesia, representing exploration commitments of US$95.68 million over the next 3 years.

A comprehensive assessment of Indonesia's coalbed methane resources including an analysis of petroleum and coal mining data identified 12.7 trillion m3 or 453 Tcf of prospective coalbed methane resources within all onshore coal basins (Society of Petroleum Engineers, 2004). While coalbed methane potential was identified in all 11 of Indonesia's coal basins, the South Sumatra and Kutai basins, where the Company is focused, ranked first and third in terms of coalbed methane resource potential with 183 Tcf and 80.4 Tcf, respectively, of prospective coalbed methane resources.



Pricing -- The Asian Value Gap


Rising demand for gas and liquefied natural gas ("LNG") in Asia Pacific countries has propelled development of the CBM industry and pipeline projects across the continent. Indonesia, the world's third- largest exporter of LNG, obtained record prices from Japan in a contract starting 2011, as Japan seeks to secure supply amid rising demand. The price of LNG from the Bontang plant is expected to reach approximately $16/MMBtu (Bloomberg, 2008). China, the world's second-largest energy user, is building more than 10 LNG terminals to meet its target of doubling the use of gas as an alternative to coal. In 2008, Japan continued to pay top dollar for LNG, with trades as high as $19/MMBtu (Platts, 2008). By contrast, in the highly competitive and well-stocked U.S. gas market, futures contracts traded at $7.00/MMBtu at the Henry Hub.

Indonesia


Indonesia is at a critical juncture in its economic and energy history with increasing value being placed on its unconventional resources. In 2007 and 2008, the Indonesian government passed new legislation for CBM development to protect investors and simulate development of unconventional resources. The Indonesian government revised O&G regulation, developed a package of investment incentives and adapted fiscal policy for CBM investment. As part of the new regulations, the government now provides a relatively better production split for CBM projects than oil and gas projects, increasing CBM operators' profit sharing to 45 percent - much higher than the 15 percent and 30 percent, respectively, that oil operators and gas operators receive. Regulation No. 36 passed on November 12, 2008, removed equal rights to CBM for coal mining concessions (KP holders) and oil and gas PSC holders. Under its framework for the development of CBM, the government is targeting production of 1 billion standard cubic feet per day, or about 0.18 million barrels of oil equivalent, by 2025.

Emerging Multi-basin CBM Play

From May 2008 to August 2009, the Government of Indonesia awarded 15 CBM PSCs representing exploration commitments of US$95.68 million over first three years. PSC consortia members include the following major publicly traded Indonesian O&G and coal companies: PT Medco Energi International (JSX: OTH), PT Energi Mega Perada (JSX: MEDC), and PTBumi Resources (JSX: BUMI); and regional mid-cap CBM companies mostly from Australia, including: Churchill Mining (AIM: CHL), Arrow Energy (ASX: AOF), and Westside Corporation Limited (ASX: WCL). With a number of projects now in the appraisal and pilot phases, the role of coalbed methane in Indonesia is expected to rapidly expand over the next decade.

PT Medco Energi International, Indonesia's largest independent oil and gas company with a market cap in excess of US$1.2 billion, Arrow Energy, Batavia Energy and PT Energi Pasir Hitam Indonesia (Ephindo), were granted the first PSC for coalbed methane development in the South Sumatra Basin, Indonesia ("Sekayu PSC"), in May 2008. This marked the beginning of Indonesia's coalbed methane industry. Medco Energi International, the operator of the block, has forecasted first commercial CBM production to begin in 2011 and peak in six years (Financial Times, 2008). On August 19, 2009, CBM Asia Development acquired 24% net participation interest in the 58,349 hectare Sekayu PSC. PT Ephindo is also CBM Asia's partner in the Kutai Block in East Kalimantan.

In addition to the 15 PSCs awarded to date, in 2008 Virginia Indonesia Company, LLC ("VICO"), a joint venture between UK's BP Plc and Italy's Eni SpA, and one of the largest natural gas producers in Indonesia, announced plans to develop a US$600 million coalbed methane project in Sanga Sanga in Kalimantan. VICO's Sanga Sanga coalbed methane project falls under VICO's existing gas PSC. VICO has stated that they will accelerate drilling for the Sanga Sanga coalbed methane project and expect to deliver gas from the coal seams by 2020 at the latest. BP has over 30 years of experience in coalbed methane exploration and production in the U.S.

Kalimantan

Kalimantan is the dominant driver in the rapid production growth of Indonesia's 5 billion tonnes of recoverable coal reserves (Ambrian Partners, 2008; EIA, 2005). In 2007, Indonesia produced over 150 million tonnes of coal and overtook Australia as the world's largest exporter of thermal coal (EIA, 2008). While coal is found in 11 distinct basins on the four major portions of the archipelago that comprise Indonesia, approximately 75 percent of all coal production takes place in East Kalimantan, which has higher quality coal deposits (U.S. Embassy, 2004).

Kalimantan is part of Borneo, which is the third largest island in the world. Borneo is divided into the Indonesian provinces of East, South, West and Central Kalimantan, and the Malaysian states of Sabah and Sarawak, and the independent country of Brunei which occupies the north and north-west coastline. Land use has historically been for timber, but is now dominated by palm oil, oil and gas E&P, and coal mining. Kutai is located in East Kalimantan and is 220 km north of the major coastal city of Balikpapan (the oil industry centre), 130 km north-west of the Sangatta coalfields, and 250 km by road from the provincial capital of Samarinda. Kalimantan is a tropical climate with a wet season between October and May.

The Kutai Basin is approximately 100,000 km2 in size and is a major oil and gas producing region. Indonesia has 187 Tcf of natural gas reserves, less than one half the country's potential CBM reserves of 453 Tcf (Petroleum Report Indonesia, 2008). Indonesia ranks eighth in world gas production of natural gas, with East Kalimantan accounting for 25.2% (47.77 Tcf) of Indonesia's total natural gas reserves. In 2006, Indonesia's largest gas producers (in order) were Total, Pertamina, ConocoPhillips, ExxonMobile, VICO, BP, Petrochina and Chevron, all of which operate under PSCs and account for 90% of the country's total gas production.

The eastern area of Kalimantan has numerous coal outcrops and open pit coal mines, as well as several natural gas fields and the world's second largest LNG facility, PT Badak's Bontang Plant, which is expected to be the most likely market for CBM projects in the region. At present, LNG produced at PT Badak's Bontang Plant is shipped to buyers in Japan, Korea and Taiwan.