Today, Far East Energy Corporation announced that it has formed a strategic alliance with Arrow Energy International Pte Ltd., the Singapore-based international arm of Arrow Energy Ltd., a large Australian coalbed methane (CBM) producer. As agreed, Arrow will pay Far East US $8 million in cash, and Far East will assign to Arrow a 75.25% share of Far East’s participating interest in the Qinnan Production Sharing Contract to develop CBM resources in the Shanxi province of China.

Arrow will become the operator and fund all exploration costs during the exploration period, including Far East’s remaining 24.75% participating interest, until Arrow has spent US $30.0 million on exploration. If the Chinese authorities approve an Overall Development Plan for development of all, or a portion of, the block, Far East will receive a bonus of US $8 million.

As part of the terms of the alliance, Arrow will also immediately acquire an exchangeable note from Far East for US $10 million, which will be exchanged for Far East common stock at an exchange price of US $0.475 per share upon the approval of the Qinnan farm-out agreement by the Chinese authorities and the satisfaction of certain other conditions. Once the conclusion of the transaction is reached, Arrow will own approximately 21.05 million shares of Far East common stock (representing approximately 11.54% of the outstanding shares) and will become the company’s largest shareholder. In addition, Far East issued warrants to Arrow to purchase up to 7.42 million shares of Far East common stock at an exercise price of US $1.00 per share.

“This transaction successfully culminates a strategy announced several months ago targeted at consummating a strategic transaction that would bring us the required capital to advance exploration of our significant holdings in China, while at the same time securing additional technical resources,” commented Michael R. McElwrath, CEO of Far East Energy. “Arrow’s known expertise in coalbed methane and its financial strength should enable aggressive exploitation of the great potential of our 572,000 acre (2,300 square kilometers) Qinnan Block. In turn, that will allow Far East to focus on achieving production from our 484,000 acre (1,900 square kilometers) Shouyang Block, which we continue to consider to be a significant potential prospect for China’s CBM industry.”

“We are extremely pleased that, in a difficult financial market, we have been able to secure funding while minimizing stockholder dilution. If we receive Chinese approval of an ODP for Qinnan, the potential value to Far East of the strategic alliance will be up to approximately US $63.4 million including all fixed and contingent cash payments to be made to Far East, Arrow’s funding of up to US $30 million of exploration costs, and the optional exercise of Arrow’s warrants. We look forward to working with Arrow to create an alliance that should become a significant force in the development of coalbed methane resources,” he added.

Arrow Energy Chief Executive Officer, Nick Davies, stated, “I am very pleased that we have been able to reach this agreement with FEEC. The Qinnan block represents, in Arrow’s view, one of the best prospects for near-term commercial CBM production in China, and we expect Qinnan to become a material project within the Arrow portfolio. We look forward to working with FEEC and our Chinese partners at CUCBM and PetroChina on this exciting project. This is an important step in the strategic expansion of Arrow into international markets.”