Entry into Production Sharing Agreement

EGL has recently transferred its entire working interest in Gazonor to Transcor.

As part of the restructure of its Convertible Notes announced on 6 May 2011, European Gas Ltd (EGL) has entered into a Production Sharing Agreement (PSA) in relation to 2 large production permits covering an area of 766 km2 in Northern France.

The PSA is effective from 5 May 2011, and is between EGL and Gazonor SAS (Gazonor, EGL's former operating subsidiary, which is now owned by Transcor France SAS (Transcor France)).

The PSA is in relation to the following 2 production permits or concessions :

- Poissonnierre, which is 698 km2 in area (including an extension of 180km2 granted in January 2009) and which has a current expiry date of December 2017. Gazonor owns 2 production facilities within Poissonnierre, namely Divion and Avion.

- Desiree, which is 68km2 in area and which has a current expiry date of December 2017. Gazonor owns 1 production facility within Desiree, namely Desiree.

Key Points:

- EGL to conduct exploration and development operations on existing large production permit areas ‘Poissonnierre’ and ‘Desiree’ to aim for Increased Revenue and Enhanced Gas Production.

- Agreed 2 year timeframe for EGL to expend €1 million, after which further expenditures on ‘EGL Operations’ and ‘Enhanced Gas Production Facilities’ in respect of the ‘designated areas’ are to be funded as to 70% by EGL and 30% by Gazonor/Transcor France.

- EGL is to earn a ‘Participating Interest’, being a 70% interest in the ‘Increased Revenue’ received by Gazonor/Transcor France.

History

At the end of 2007, the company acquired 100% of the issued capital of Gazonor S.A., a company incorporated in France (“Gazonor”). Gazonor was a wholly owned subsidiary of Charbonnages de France, the French state owned coal Mining Corporation.

Settlement of the purchase and handover occurred on 28 December 2007.

The purchase price for the Gazonor shares was €26.2 million (approximately A$43.7 million based on an A$/Euro foreign exchange rate of 1:0.60).

Gazonor is the owner of the Nord - Pas de Calais coal mine methane (“CMM”) production field and associated infrastructure situated in northern France.

For a period of 25 years and since 1992, Gazonor has held the gas exploitation rights over the Poissonnière and Désirée permits situated in the districts of Nord - Pas de Calais in northern France, comprising a total area of 579 square kilometres (km2).  A further production permit covering 188 km2 was granted in 2010 while an additional 1,352 km2 had been granted in 2009 with the permits of Valenciennois and Sud Midi.

Coal was mined in these districts since 1820, with the last coal mines closing in 1992.  The extraction of CMM from the permits commenced for industrial use in 1979 from the three main processing sites, Avion and Divion in the Poissonnière permit and Désirée in the Désirée permit. 

At the end of financial year 2010 Gas production and sales totaled 321 GWh (1.2 PJ) a t 54% methane content.

Reserves and Resources
Reserves CMM

The following table summarizes the proven (1P), probable (2P) and possible (3P) CMM reserves for the Gazonor project.

*contained methane

The last estimates were carried out and certified by independent Deutsche Montan Technologie GmbH of Essen, Germany (“DMT”) on behalf of European Gas in 2010.

Both deterministic and probabilistic methodology has been used to derive reserve estimates. The 2P figure is based on a lognormal relationship being in force and using the deterministic 1P and 3P estimates for control.

These reserve estimates assume that current commercial production will continue using the existing infrastructure. No account has been taken of the enhanced production which is expected to result from the installation of additional pumping stations and development drilling. Similarly the Company is re-evaluating the recoverable desorbable gas volume based on a more detailed model for sub-surface pressure distribution in the de-stressed coal. When complete this is likely to result in the re-rating of the CMM based reserves.

Resources CBM

The following table summarises the CBM contingent resources for the Gazonor project.

*contained methane

The estimates were conducted by the European Gas technical group under Society of Petroleum Engineers (“SPE”) and Petroleum Resource Management System (“PRMS”) guidelines. The study allows for the planning and commencement of moving the contingent resources to reserve categories and the assessment of development and production options.

Due to the nature of CBM accumulations at Gazonor there is a higher probability of converting contingent resources to reserves, and of converting 3P reserves to 2P reserves, than in conventional gas accumulations. The Company is confident that over time it will be possible to continue to mature its reserve position in this manner. The present production of CMM and the understanding of the Company’s 1P, 2P and 3P reserves position, combined with significant CBM contingent resources, provides the opportunity for appraisal and development of the Gazonor asset.

Process Description
Typically, CMM is extracted under very low mine pressure through degasification wells drilled into the old underground workings, gathered and transported to the central processing facilities at Avion and Désirée where it is filtered, compressed, dehydrated, odorised and measured for quality and quantity under gas sales agreements. 

At the Avion site the gas is compressed to about 6,700 Kilo Pascal gauge (“kPag”) for supply of gas under a sales agreement with Total Gas and Power.  At the Désirée site the gas is compressed to between 300 and 350 kPag for supply of gas under sales agreements with a local industry through buried gas pipelines.  

Asset Development
European Gas is assessing several options for the continued development of the Gazonor assets. 

The company is evaluating additional CMM and coal seam gas (CSG) potential within the Gazonor permits, including the identification of drilling locations. The production sharing agreement involves a spending commitment of €1 million by European Gas on the Poissonière and Désirée concessions, while the farm-in agreement involves commitments to fund €2 million of exploration and development work on the Sud Midi permit and €795,000 on the Valenciennois permit.  

The company’s permit interests cover an historic and now abandoned coal mining area, which was noted for its gassy coals. Relief wells were drilled to remove methane ahead of mining and many of these wells are still emitting methane. European Gas plans to twin wells that are already known to be capable of producing methane gas, applying modern CSG well completion methods to enhance gas deliverability and production. The region is rich in gas collection and transport infrastructure, but an ultimate market for gas produced from the Gazonor region is likely to be power generation, which can be added to the grid.