Kutai West PSC

From January 2007 to November 2008, the Company completed the initial study phase of the Kutai-West Block and in the second half of 2008, submitted a Cooperation Contract to the Government of Indonesia's Executive Agency for Upstream Oil and Natural Gas Activities ("BPMigas"), for coalbed methane production sharing on the Kutai-West Block. On November 13, 2008, the Company and its partners were awarded a PSC on the Kutai-West Block which is in close proximity to a 30 km pipeline that connects to the Bontang LNG Plant, the world's largest LNG plant. The Kutai-West PSC marks only the fourth time the Indonesian Government has awarded a PSC for the exploration and development of coalbed methane in Indonesia.

On June 28, 2010, the Company announced that Kutai West Inc., jointly owned by Ephindo-Ilthabi and CBM Asia, on a 60/40 basis, entered into a Joint Operating Agreement with operator Newton Energy CBM Limited ("Newton Energy") on the Kutai West PSC. The Kutai West JOA establishes the rights and obligations of participating interest owners in conducting exploratory and development programs on the block. Newton Energy has received approval from the Indonesian Executive Agency for Oil and Gas Upstream Business Activities ("BPMigas"), for the 2010 work program consisting of a minimum of four (4) wells. Subsequent reserve delineation is anticipated to be conducted based upon results of the 2010 and 2011 work programs.

Kutai West PSC

On November 13, 2008, a production sharing contract (PSC) was awarded to Kutai West CBM Inc. and Newton Energy Capital Limited (the "Consortium") for 86,897 (760 Km2) hectares in the Kutai Block in East Kalimantan ("Kutai West PSC"). Kutai West CBM Inc. has a 45% interest in the PSC and the Company has a 40% equity interest in Kutai West CBM Inc. Under the terms of the amended Kutai Block Participation Agreement (April 18, 2008), the Company has the right to earn an 18% overall interest in the Kutai-West PSC.


PT Tanito Harum
PT Tanito Harum ("Tanito Harum") a wholly owned subsidiary of Indonesia's Tanito Coal Group, holds government issued contracts for coal mining in areas covered by the Kutai Block including Kutai-West and Kutai Ephindo and is a consortium member of the Kutai-West PSC. One of Indonesia's first private coal mining companies, Tanito Harum has been operating in the Kutai Basin for more than 20 years. During this time, Tanito Harum has built significant mining and civil engineering infrastructure within the areas covered by the Kutai-West PSC including extensive roadway development throughout the property. The Company's plan is to utilize as much of the existing infrastructure as possible, which Management believes will save the company significant early stage exploration expenditures and support fast track exploration and development of the Kutai-West PSC. In addition, Tanito has successfully completed a formal community relations program which covers exploration and development under the Kutai-West coalbed methane PSC.

The Tanito Coal Group controls a number of coal concessions containing surface minable coal reserves including the operation of two mines in East Kalimantan, PT Tanito Harum and PT Mahakam Sumber Jaya, with a third mine, PT Santan Batubara scheduled to begin production in 2009. With 2008 sales of 7 Mt, Tanito Coal is one of the largest bituminous thermal coal producers and exporters in Indonesia.

Under the terms of the PSC, the Consortium has an initial term of three years for the exploration period, subject to a one time extension of four years. The term of the PSC is for a total of thirty years and includes a domestic market obligation to supply 25% of total coalbed methane produced for domestic consumption. Additionally, the GOI is entitled to approximately 20% (19.6429%) of coalbed methane produced each year. Finally, on the anniversary of the third and sixth years, the Consortium must relinquish ten percent of the contract area to the Government of Indonesia.

Under the PSC, the Consortium paid a US$1,000,000 signing bonus to the Government of Indonesia in December 2008, and must incur exploration expenditures totalling US$5,515,000 over a period of three years including the drilling of two core holes and four exploration wells on the Kutai Block. In addition, the Consortium, is responsible for commitments and production milestone payments to the Government of Indonesia over the thirty year term of the PSC totalling US$2,350,000 (CDN$4,102,419).

To earn its 18% participation interest, the Company must fund 30% of the Kutai-West PSC, as to two-thirds of the cost of Kutai West CBM Inc.'s 45% interest in the PSC. As such, the Company has paid US$300,000 of the signing bonus to the Government of Indonesia for the Kutai-West PSC and is responsible for US$1.7M of the exploration commitment over the next three years; and US$705,000 for production milestone payments over the thirty year term of the Kutai-West PSC. In addition, the Company has paid US$400,000 in bank guarantee commitments of which $100,000 has been subsequently returned to the Company. Kutai-West Development Phases

Under the terms of the Kutai Block Participation Agreement the Company is responsible for carrying out a three phase program on the Kutai Project to obtain fundamental information on methane content, permeability and well completion data and techniques for the Kutai Basin coal beds. Based on an initial study, the Consortium determined that its initial focus is the Kutai-West block.

Study Phase - Completed
Beginning in January 2007 and concluding November 2008, the Company carried out the first phase, an initial feasibility study (the "Study Phase") of the Kutai-West block (18% earn in interest) as set out under the terms of the Kutai Participation Agreement. The Study Phase provided essential baseline information necessary for the development and production from areas believed to have the greatest potential for economically extractable coalbed methane within the overall Kutai Block. The Study Phase included the acquisition and evaluation of extensive geological data on wells drilled in relevant hectares in East Kalimantan to map the area related to coal deposits and the full extent of coalbed methane potential. Data included CBM wells drilled by Lemigas, the government research arm, which are the first CBM test wells drilled in Indonesia.

Proposal Phase - Completed
In the second half of 2008, the Company submitted the Kutai-West Study along with proposal to the Indonesian Government for a Cooperation Contract for CBM production sharing for the Kutai-West Block (the "Proposal Phase"). The Proposal Phase is the second phase of the Kutai Participation Agreement with the Cooperation Contract forming the basis of the commercial arrangement to be entered into by BPMigas and the Consortium. Terms of the Cooperation Contract were agreed to and, on November 13, 2008, BPMigas awarded the Consortium the Kutai-West PSC a portion of the Consortium's overall Kutai Block.

Pilot Project Phase - Current
With the Kutai-West PSC awarded November 13, 2009, the Company, as geotechnical lead is responsible for directing a US$5.6 million exploration and appraisal program over the first three years (to November 13, 2011), to determine commercial feasibility of CBM production and submit a Plan of Development to the Government of Indonesia for approval. With the detailed geological assessment developed during the Study Phase, target areas deemed to have the best potential for economically recoverable CBM will be used in the test drilling and appraisal program to determine feasibility and cost for the commercial development of the Kutai-West Project (the "Pilot Project Phase"). Based on evaluation of existing information, three exploration core holes will be drilled in the most promising target areas, from which coals and selected organic-rich shales will be recovered and tested for gas content. On April 21, 2009, the Company announced that it had received approval from BPMigas for its initial drilling program on the Kutai West PSC.