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CNEH to Purchase New Oilfield in Jilin Province

Source: 12/15/2011, Location: Asia

China North East Petroleum Holdings Limited announced that it has entered into a Share Transfer Agreement with China Kinwa High Technology Co., Ltd., and its wholly-owned subsidiary Beijing Shixin Taide Investment Consultancy Co., Ltd., to purchase exclusive oilfield exploration and drilling rights to the Qian 122 oilfield in Jilin Province (the "Acquisition").

China North East Petroleum is expected to pay a total cash consideration of $26.7 million to acquire 100% of the equity interest in Kinwa's subsidiary that holds the exploration and drilling rights to the Qian 122 oilfield. The purchase price will be paid in three tranches: an initial deposit of RMB 34.0 million (approximately US$5.3 million); a first payment of RMB 116.0 million (approximately US$18.2 million) and a final payment of RMB 20.0 million (approximately US$3.1 million). The deposit is payable upon execution of the Share Transfer Agreement. The first payment is due within five business days after the fulfillment of certain conditions, including the approval of the transaction by Kinwa's shareholders, and the final payment is due within 180 days thereafter.

The Qian 122 oilfield encompasses approximately 15.2 square kilometers (3,756 acres) and has 50 producing wells, comprised of 42 oil producing wells and 8 water injection wells. According to a PetroChina geological reserve report, the Qian 122 oilfield has a geological reserve of 6.5MM tons (approximately 47.6MM barrels). China North East Petroleum estimates the number of additional wells that could be drilled in this oilfield to be up to 250. The Company expects to pay for the Acquisition with available cash on hand and expects to close the Acquisition in the first quarter of 2012.

Mr. Jingfu Li, Chief Executive Officer of China North East Petroleum commented, "We are pleased to be acquiring Q122. Q122 has 50 productive oil wells and water wells and we believe it has the capacity for another 250. Its production is superior to the other oilfields we operate in Jilin and Q122 is very close to Q112, our largest existing oilfield in Jilin, which has operational synergistic benefits."

"Like the other oilfields that we operate in Jilin, the Q122 oilfield is owned by PetroChina and all oil produced in Q122 will be sold to PetroChina. Kinwa's subsidiary entered into a twenty year Oil Exploration and Extraction Cooperation Agreement with PetroChina Jilin Oilfield Company in 2004 (the "Oil Lease"). Under the Oil Lease, the operator is entitled to 80% of oil production until the beginning of the fourth quarter of 2014 and 60% of oil production for the remaining ten years. In 2010, Q122 produced approximately 110,000 barrels from its producing wells. Productivity in 2011 is expected to exceed 2010 performance by at least 10%. Our initial plan for Q122 is to drill between 25-35 wells annually. Upon the closing of the acquisition, Q122 is expected to immediately contribute to our revenue, profitability and cash flow."

"We believe we have sufficient cash reserves to develop both Q122 and Durimu simultaneously. With today's announcement, NEP has taken another step in becoming a major independent, regional oil producing and oilfield services company in China and we look forward to providing you with additional updates to our operations in the weeks and months ahead."

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