Far East Energy Corporation

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	26108
Company name	Far East Energy Corporation
Country	China
Sector	Oil, Gas and Mining
Environmental category	B
Department	Oil, Gas, Mining And Chemicals
Status	Active

Date SPI disclosed	July 20, 2007
Projected board date	August 20, 2007
Previous Events	Invested: August 27, 2007 Signed: August 24, 2007 Approved: August 23, 2007

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The project is to complete the exploration program, including completion of the feasibility study and Social and Environmental Impact Assessment (SEIA) documentation for coal bed methane (CBM) development and production in China. The sponsor, Far East Energy Corporation (FEEC), has been active in China since 2002 and, through its wholly owned subsidiary, Far East Energy (Bermuda) Ltd., holds three concession areas with a total of 5,250 km2 in the Shanxi and Yunnan Provinces. Its contracting partner for all the concessions is China United Coalbed Methane Co. Ltd. (CUCBM), the state-owned entity responsible for foreign CBM development in the country.

Anticipated development impact of the project

China recently overtook the United States as the world's biggest producer of carbon dioxide. The environmental and associated health impacts of a principally coal fired economy are of increasing concern, and development of local natural gas resources, including CBM, can be part of the solution to alleviate these problems. Compared to coal-fired electricity, natural gas use produces virtually no emissions of sulfur dioxide, mercury or particulate matter, 80% less NOx, and approximately 50 percent less CO2. Increasing the use of natural gas helps reduce acid rain, smog, regional haze, and their associated health impacts, including asthma attacks, cardiac problems and upper and lower respiratory ailments.

China is the world’s second largest consumer of oil after the U.S. and the third largest net importer of oil after the U.S. and Japan. The development of a local energy source can help alleviate concerns of energy security. Furthermore, the government will reap benefits from fiscal revenues, royalties, and taxes.

The government of China is taking measures to diversify its energy supply, with the aim of increasing the proportion of clean energy in the mix. China’s natural gas usage is projected to increase from the current 3.2% of the nation’s energy mix to 8.0% by 2020. In order to meet this target, CBM & CMM development and utilization has been identified as a priority in China’s 11th 5-Year Development Plan. China has considerable potential for CBM development, but as yet projects are mainly at the exploration stage and there is limited commercial production. There are several barriers to overcome to move projects from the exploration to development and production stage, including access to advanced technology and equipment, technical expertise, necessary market access and downstream infrastructure for CBM sales, and project financing of a frontier sector in the country.

Development benefits at the gas production stage include environmental and associated health benefits from cleaner energy, increased energy security from local energy source, employment, and fiscal revenues (royalties, taxes, and government ownership interests in CBM production).

- Fit with World Bank Group Strategy

Within the broad framework of the World Bank Group’s operational strategy in China as outlined in the FY06-10 CAS, IFC’s strategic priorities include:

- improving the business environment and strengthening regulatory capacity;
- expanding access to markets;
- upgrading corporate practices;
- expanding access to finance and financial sector development;
- enhancing environmental sustainability and energy efficiency; and
- promoting private participation in infrastructure.

IFC’s value proposition in China is to be the preferred financial partner for companies seeking to adopt international standards in governance, environmental and social practices.

The project is consistent with IFC and World Bank Group strategy for China as it supports private sector investment in one of the poor interior provinces of China and in a sector which has the potential to contribute significantly to addressing China’s energy and environmental problems.

World Bank has been actively supporting development of China’s natural gas market through:

- promotion of the country's energy switch from coal to gas and the use of cleaner coal technologies; and
- providing technical assistance to the Shanxi government for CBM utilization projects.

IFC is also committed to actively support development of overall natural gas market in China, including current support of the expansion of local distribution infrastructure and expected support for future gas-fired power plants.

Governance risks assessment

As noted above, the expected development impacts of the project include environmental and health benefits associated with the use of cleaner energy, increased energy security from local energy source, employment, and fiscal revenues. It is judged that the governance risks to these benefits are relatively low. Therefore, this is a project that IFC should support. In addition, the sponsor has agreed to publicly disclose all payments made to the Chinese government.

IFC's expected development contribution

FEEC is in the process of transitioning from the exploration to development stage, and IFC support at this critical time is expected to involve following levels of support:

- guidance on community engagement and strategic advice on FEEC’s environmental and social management program;
- early stage equity support, and longer term potential project financing;
- potential financing of associated downstream infrastructure, including connecting pipelines, CNG, and LNG infrastructure; and
- potential political risk mitigation.

IFC been actively involved in the carbon credit market of the Clean Development Mechanism of the Kyoto Protocol, and it will also provide guidance to FEEC to develop a long term strategy to leverage potential carbon finance opportunities.

Environmental and social issues - Category B

This is a category B project according to IFC’s procedure for Environmental and Social Review of Projects because a limited number of specific environmental and social impacts may result which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria.

The key environmental and social issues and impacts from the proposed project include acquisition of land use rights, well dewatering, groundwater quality, and employee and community environment, health and safety.

IFC’s environmental and social appraisal for the project consisted of document reviews, company interviews, visits to the project sites, and meetings with local governmental agencies and communities impacted by the project. Specific information about how potential environmental and social impacts will be addressed by FEEC is summarized in the Environmental and Social Review Summary (ESRS) for the project. An environmental and social action plan has also been agreed with the company to address all of the issues identified during appraisal. The action plan is attached to the ESRS.

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