10. Commitments and Contingencies

Legal Proceedings. We are periodically named in legal actions arising from normal business activities. We evaluate the merits of these actions and, if we determine that an unfavorable outcome is probable and can be estimated, we will establish the necessary accruals. We do not anticipate any material losses as a result of commitments and contingent liabilities. We are involved in no material legal proceedings.

Shouyang Production Sharing Contract. We are the operator under a PSC entered into with CUCBM to develop the Shouyang Block in the Shanxi Province of the PRC. The term of the Shouyang PSC consists of an exploration period, a development period and a production period. During the exploration period, we hold a 100% participating interest in the properties, and we must bear all exploration costs for discovering and evaluating CBM-bearing areas. If the 2011 Shouyang PSC Modification Agreement is approved by MofCom, we anticipate being able to establish a number of areas that reasonably meet the criteria for certification of "Chinese" reserves under PRC law. Thereafter, to maintain rights to produce and develop a CBM discovery, we must compile an Overall Development Plan ("ODP") application and receive all necessary approvals for such plan. Upon receipt of approvals, we must commence development operations in accordance therewith. At such time, pursuant to the 2011 Shouyang PSC Modification Agreement, CUCBM elected to participate with a 30% participating interest share (other than development in 64.66 km²of the Shouyang ODP Area, for which CUCBM has waived its right to elect a participating interest share). The development costs for such CBM discovery will be borne by us and CUCBM in proportion to the parties' respective participating interests. The Shouyang PSC provides for a gradual cost recovery mechanism whereby operational expenses will first be reimbursed out of 75% of revenues generated from CBM sales. Then, our exploration costs will be reimbursed in equal proportion to CUCBM pre-contract costs in the amount of $2,840,000, and thereafter, development costs incurred by the parties will be reimbursed in proportion to each party's incurrence of such costs. The exploration period is divided into three phases called Phase I, Phase II and Phase III. We have exceeded our minimum work program obligations for all exploration period phases under the Shouyang PSC, provided, however, we have agreed to additional minimum work obligations in connection with the 2011 Shouyang PSC Modification Agreement, which exceed the minimum MLR requirements. We intend to continue voluntary pilot testing activities until we transfer portions of the contract area into the development period for certain CBM Fields in accordance with applicable provisions of the Shouyang PSC and Chinese law.

We were operating under an agreed extension of Phase III of the exploration period until June 30, 2011. We have reached an agreement with CUCBM regarding an additional formal extension of Phase III of the exploration period of the Shouyang PSC. However, the agreement will not be effective unless and until it is approved by the MofCom. Pending a determination with respect to the extension, we are continuing operations under our expanded pilot development work program as provided for in the Shouyang PSC as amended to date. We believe that the MofCom will approve the 2011 Shouyang PSC Modification Agreement, though there can be no assurance that the MofCom will do so. Further, in negotiating the extension and modification agreement, we were required to agree to certain other provisions to the Shouyang PSC which clarify relinquishment obligations and include additional obligations on Far East as operator and a reduction in acreage.

The minimum work expenditure requirements we agree to in our PSCs are denominated in RMB and, therefore, are subject to fluctuations in the currency exchange rate between the U.S. Dollar and the Chinese RMB. In addition to minimum work requirements under our PSCs, the MLR minimum expenditure requirements are a significant factor that influences our exploration work program. Under the Shouyang PSC, we were required to pay certain fees totaling $0.5 million in 2011, which counted toward the satisfaction of the 2011 minimum exploration expenditure requirements. These fees include assistance fees, training fees, fees for CBM exploration rights and salaries and benefits. In 2012, the MLR minimum expenditure requirements will be $2.6 million if the relinquishment agreed upon in the 2011 Shouyang PSC Modification Agreement is approved.

Qinnan Production Sharing Contract. We are the operator under a PSC to develop the Qinnan Block in the Shanxi Province that is in the process of being assigned by CUCBM to China National Petroleum Company ("CNPC"). The term of the Qinnan PSC consists of an exploration period, a development period and a production period. During the exploration period, we hold a 100% participating interest in the properties, and we must bear all exploration costs for discovering and evaluating CBM-bearing areas. If any CBM field is discovered, the development costs for that CBM field will be borne by us and CUCBM in proportion to the respective participating interests. At that time, we will recover that share of the up-front exploration costs allocable to our Chinese partner through a gradual cost recovery mechanism. The exploration period is divided into three phases called Phase I, Phase II and Phase III. We have completed our Phase I, Phase II and Phase III work program obligations under the PSC, and intend to continue pilot development and exploration activities in Phase III until we transfer into the development period.

Although the Qinnan PSC does not expire until July 31, 2032, the stated date for expiration of the exploration period for the Qinnan PSC occurred on June 30, 2009. We are continuing to pursue an extension of the exploration period of the Qinnan PSC, but we cannot be optimistic at this time. We believe the underlying exploration period should be extended due to events beyond our reasonable control, namely the lengthy transfer of rights taking place from CUCBM to CNPC. At CNPC's request, we have provided certain operational and financial information about our Company to assist them in the decision making process for recognizing an extension of the exploration period in Qinnan. CNPC has completed an accounting audit pursuant to the Qinnan PSC of our expenditures for 2007 and 2008. We also provided to CNPC at their request our work plan for 2010 for Qinnan. In January 2011, we received a formal notice from CNPC that it has purportedly received all Chinese approvals with respect to the transfer of rights from CUCBM to CNPC, and CNPC has requested we execute a modification agreement to confirm CNPC as our Chinese partner company for the Qinnan PSC. In connection with that notice, we received a form of assignment agreement, assigning the PSC from CUCBM to CNPC. We modified it to include a formal recognition of the existence of force majeure regarding the delays caused by the incomplete transfer of the PSC to CNPC. Currently, we have not received any response from CNPC or CUCBM regarding our proposed amendments to the draft assignment agreement and we have not signed a formal document confirming the assignment of CUCBM's rights to CNPC or its designee. Due to the inability to hold a formal Joint Management Committee ("JMC") meeting or to have the effective involvement of our Chinese partner, we believe that our efforts to continue CBM Operations in the Qinnan block have been materially hindered. Technically, the exploration period under the Qinnan PSC expired on June 30, 2009; however, we have maintained the position that the doctrine of force majeure under the Qinnan PSC entitled us to an extension. We continue to discuss this situation with CUCBM and PetroChina, and as recently as January 2012 have submitted a notice of force majeure in accordance with the Qinnan PSC. There can be no assurance that we will be successful in extending the exploration period of the Qinnan PSC or that a new PSC will be granted. Additionally, in connection with obtaining this extension or a new PSC, we may be required to commit to certain expenditures or to modify the terms or respective ownership interests and/or acreage in the applicable PSC. However, if we are unable to secure sufficient funds to commit to these expenditures, it may adversely affect our ability to extend the Qinnan PSC.

Under the Qinnan PSC, we have committed to satisfy certain annual minimum exploration expenditure requirements. As with the Shouyang PSC, our minimum exploration expenditure requirement is based on the minimum exploration expenditure requirements of CNPC established by the MLR. The MLR sets its requirements by applying a minimum expenditure per square kilometer to the total acreage encompassed by each PSC. The annual minimum exploration expenditure requirement under the Qinnan PSC is approximately $3.7 million in the aggregate based on the currency exchange rate between the U.S. Dollar and the Chinese RMB as of December 31, 2011. These expenditure requirements are denominated in the RMB and, therefore, are subject to fluctuations in the currency exchange rate between the U.S. Dollar and the Chinese RMB. Because the stated expiration date for the exploration period for the Qinnan PSC occurred on June 30, 2009, and we have not yet received an extension, we have halted activities associated with the Qinnan Block pending receipt of an extension, should one ultimately be granted.

Under the PSCs, we are required to make the following yearly payments to our Chinese partner companies. As indicated below, certain amounts may change from year to year.


Annual Payments		Shouyang PSC				Qinnan PSC
Exploration Period
Salary and Benefit
2012	$	231,542			$	151,686
2011		218,436	⁽¹	⁾		143,100

Exploration Permit Fee		140,136				165,529
Training Fee		60,000				60,000
Assistance Fee		50,000				50,000

Development & Production Period
Signature Fee ⁽²⁾		150,000				150,000
Training Fee		150,000				150,000
Assistance Fee		120,000				120,000

(1) The increase from 2011 to 2012 is due to the increase of standard amount of the CUCBM's professionals' salary and benefit under the amended Shouyang PSC. The salary and benefits for CUCBM professionals during the development and production periods is to be determined by negotiation with CUCBM.

(2) Due within 30 days after first approval of the ODP following the exploration period.

Yunnan Production Sharing Contract. We have been the operator under one Yunnan PSC with CUCBM to develop two areas in the Yunnan Province: Enhong and Laochang. The term of the Yunnan PSC consists of an exploration period, a development period and a production period. The exploration period is divided into two phases called Phase I and Phase II. We completed Phase I and, during the third quarter of 2009, the MofCom approved a modification agreement to extend Phase II of the exploration period for the Yunnan PSC to June 30, 2011 from June 30, 2009. Thus, although the Yunnan PSC does not expire until January 1, 2033, the stated date for expiration of the exploration period for the Yunnan PSC occurred on June 30, 2011. During the fourth quarter of 2011, we negotiated and signed the 2011 Yunnan PSC Modification Agreement with CUCBM, which CUCBM subsequently submitted to the MofCom for approval. The terms of the Yunnan modification agreement are substantially similar to those in the 2011 Shouyang PSC Modification Agreement, save differences in relinquishment and the participating interest percentages of the parties. Although we anticipate that we will receive all necessary governmental approvals for the 2011 Yunnan PSC Modification Agreement, we cannot be certain that they will be approved and become effective. In such instance, we would be operating under a technical extension of the Yunnan PSC for the completion of prior pilot development work programs as necessary to receive final ODP approval no later than June 30, 2013, however, we do not have CUCBM or any governmental acknowledgement or agreement regarding the viability of such extension.

During the exploration period, we must bear all exploration costs for discovering and evaluating CBM-bearing areas. If the 2011 Yunnan PSC Modification Agreement is approved, our work commitment to complete Phase II consists of drilling a total of eight wells during the entire exploration period, as extended, spending at least $0.8 million (4,850,000 RMB) per year as the minimum exploration expenditure. In December 2010 we mobilized a drilling company to fracture stimulate 5 wells that we had drilled to test the number 7+8 and number 19 coal seams in Laochang area. These two seams have good gas content based on lab analysis and significant thickness to merit testing for commercial production. Stimulation operations were completed on January 19, 2011 and the frac company demobilized from the field. However, bad weather prevented the equipment from reaching the field in time to put the wells on production before the Chinese New Year holiday. Therefore, the planned operations were suspended until February 15, 2011 to allow for the roads to improve and the crews to return from the holiday. The dewatering operation started on March 18, 2011 in all five wells of the clustered pilot. With casing pressure of 0.41 Mpa and fluid level several hundred meters above the top of the targeted coal seams, a small amount of gas was produced and flared. Recently, gas production from one of the pilot wells has remained steady at a rate around 20 Mcf (550-600 m³) per day; with the peak daily rate as high as 65 Mcf (1,850 m³). Production from the pilot has continued for about five months; however, there can be no assurance that production will continue to increase or sustain current levels. After initial testing, it was determined that this CBM Field possesses one of the higher-rank coals in China, which means that the coal in this CBM Field contains more carbon and typically results in a much higher energy content and frequently higher gas content. Accordingly, the Company plans to continue the pilot and further testing.

Under the Yunnan PSC, we have committed to satisfy certain annual minimum exploration expenditure requirements. Our minimum exploration expenditure requirements for the blocks subject to the PSC are based on the minimum exploration expenditure requirements of CUCBM established by the MLR and our negotiated agreement to extend the Yunnan PSC exploration period. The MLR sets its requirements by applying a minimum expenditure per square kilometer to the total acreage encompassed by the PSC. The annual minimum exploration expenditure requirement is approximately $1.7 million in the aggregate in 2011, based on the currency exchange rate between the U.S. Dollar and the Chinese RMB as of December 31, 2011. These requirements are denominated in the RMB, and, therefore, are subject to fluctuations in the currency exchange rate between the U.S. Dollar and the Chinese RMB. The MLR minimum expenditure requirements are a significant factor that influences our exploration work program. Under the Yunnan PSC, we were required to pay certain fees totaling $0.4 million in 2011, which were to be counted toward the satisfaction of the 2011 minimum exploration expenditure requirements. These fees include assistance fees, training fees, fees for CBM exploration rights and salaries and benefits. In 2012, the MLR minimum expenditure requirements will be $0.8 million if the relinquishment agreed upon in the 2011 Yunnan PSC Modification Agreement is approved. Based on the modification agreement, the unfulfilled exploration work commitment will be added to the minimum exploration work commitment for the following year. If the Company terminates the Yunnan PSC and there exists an unfulfilled balance on the minimum exploration work commitment, the Company will be required to pay the balance to CUCBM.

Minimum Commitments. At December 31, 2011, total minimum commitments from long-term non-cancelable operating leases and other purchase obligations are as follows (in thousands):


		Amount
2012	$	26,797
2013 - 2014		5,641
2015 - 2016		1,314
2017 and beyond		739
Total minimum commitments	$	34,491