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Primeline and Cnooc Sign Agreements for Sale Of CO2

Source: 12/17/2009, Location: Asia

Primeline Energy Holdings Inc. announced that agreements for the sale of CO2 which will be produced as a by-product of the production of natural gas from the Lishui 36-1 Gas Field have been entered into.

Primeline is working with China National Offshore Oil Corporation ("CNOOC") on the development plan for the Lishui 36-1 gas field. The raw gas in Lishui 36-1 contains CO2 which must be extracted as part of the process of production of natural gas for sale into the Zhejiang provincial gas grid. China is imposing tighter environmental controls and the current regulations require that the CO2 extracted from natural gas must be properly dealt with. Under the overall development plan for the Lishui 36-1 field (ODP) it is intended that the CO2 should be extracted and then liquefied to create food grade liquid CO2 which can be sold into the local market. Primeline commissioned a detailed market research report to assess the market for liquid CO2, which report confirmed that there is a rapidly growing market for CO2 products in the East China region with applications including metal processing, fabrication (particularly in the ship building industry) and numerous uses in the food industry.

Primeline and CNOOC have now concluded initial negotiations with the three largest CO2 distribution companies in Zhejiang and Fujian Provinces which have resulted in Framework Distribution Agreements ("Agreements") being signed between CNOOC and each of the three distribution companies. In entering into the Agreements, CNOOC acted on its own behalf and on behalf of Primeline and Primeline Petroleum Corporation ("PPC") who are the foreign contractors as defined by the petroleum contract under which the contractors hold their interests in Block 25/34. A separate agreement was entered into between CNOOC, Primeline and PPC outlining the terms of authorisation for CNOOC to sell the CO2 on behalf of Primeline and PPC pursuant to the Agreements.

Under the Agreements the distribution companies have agreed to take or pay for an aggregate amount of liquid CO2 representing the initial proposed production from the Lishui 36-1 gas field. The Agreements define the general terms on which the distribution companies will buy and distribute the liquid CO2 to be produced by Primeline and CNOOC. These three companies will sell the liquid CO2 into the East China market, each being granted an exclusive distribution area. The ODP contains plans for a dock facility adjacent to the gas processing terminal which is intended to be used to facilitate the transportation of the liquid CO2 by sea.

On the basis of the price agreed for the sale of the liquid CO2 it is anticipated that the full cost of the creation and operation of the CO2 production facilities will be covered with a small profit.

In the meantime, Primeline, together with CNOOC, is in the process of finalising all supporting documentation required for submission of the ODP to the Chinese Government. The sale of CO2 pursuant to the Agreements deals with the environmental concerns relating to the disposal of CO2 created as a by-product of natural gas production and are an important element of the proposed development.

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