Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - FAR EAST ENERGY CORPFinancial_Report.xls
EX-32.2 - EXHIBIT 32.2 - FAR EAST ENERGY CORPex32_2.htm
EX-31.2 - EXHIBIT 31.2 - FAR EAST ENERGY CORPex31_2.htm
EX-32.1 - EXHIBIT 32.1 - FAR EAST ENERGY CORPex32_1.htm
EX-31.1 - EXHIBIT 31.1 - FAR EAST ENERGY CORPex31_1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

For the quarterly period ended September 30, 2013

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

Commission File Number 0-32455

Far East Energy Corporation
(Exact Name of Registrant as Specified in Its Charter)

Nevada
88-0459590
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

333 N. Sam Houston Parkway East, Suite 230, Houston, Texas 77060
(Address of principal executive offices)(Zip Code)
832-598-0470
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes T No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o 
Accelerated filer T 
Non-accelerated filer o 
Smaller reporting company o
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No T

Number of shares outstanding of the issuer’s common stock as of October 31, 2013.
 
Title of each class
Number of shares
Common Stock, par value $0.001 per share
346,078,509
 


1

FAR EAST ENERGY CORPORATION

TABLE OF CONTENTS

PART I.
FINANCIAL INFORMATION
Page No.
 
 
 
 
 
ITEM 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
3
 
 
 
 
 
 
4
 
 
 
 
 
 
5
 
 
 
 
 
 
6
 
 
 
 
 
 
7
 
 
 
 
 
ITEM 2.
18
 
 
 
 
 
ITEM 3.
33
 
 
 
 
 
ITEM 4.
33
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
 
ITEM1A.
34
 
 
 
 
 
ITEM 6.
36
 
 
 
 
37
 
 
 
 
38
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

FAR EAST ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)

 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
ASSETS
 
Current assets
 
   
 
Cash and cash equivalents
 
$
26,161
   
$
1,340
 
Accounts receivable
   
238
     
163
 
Inventory
   
1,825
     
423
 
Prepaid expenses
   
1,007
     
369
 
Deposits
   
234
     
677
 
Other current assets
   
14
     
16
 
Total current assets
   
29,479
     
2,988
 
 
               
Property and equipment
               
Oil and gas properties, successful efforts method:
               
Proved properties
   
88,695
     
71,875
 
Unproved properties
   
9,074
     
275
 
Other property and equipment
   
2,662
     
2,313
 
Total property and equipment
   
100,431
     
74,463
 
Less accumulated depreciation, depletion and amortization
   
(4,898
)
   
(3,398
)
Total property and equipment, net
   
95,533
     
71,065
 
 
               
Deferred financing costs
   
2,611
     
371
 
Other long-term assets
   
986
     
658
 
Total assets
 
$
128,609
   
$
75,082
 
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
               
Current liabilities
               
Accounts payable
 
$
10,878
   
$
14,814
 
Accrued liabilities
   
28,582
     
7,571
 
Short-term debt
   
21,000
     
25,730
 
Total current liabilities
   
60,460
     
48,115
 
 
               
Secured notes payable
   
63,988
     
-
 
Discount on secured notes payable
   
(1,813
)
   
-
 
Long-term debt
   
62,175
     
-
 
 
               
Asset retirement and environmental obligations
   
1,210
     
840
 
 
               
Commitments and contingencies (Note 8)
               
 
               
Stockholders' equity
               
Preferred stock, $0.001 par value, 500,000,000 shares authorized, none outstanding
   
-
     
-
 
Common stock, $0.001 par value, 500,000,000 shares authorized, 346,078,509 and 344,785,689 issued and outstanding at September 30, 2013 and December 31, 2012, respectively
   
346
     
345
 
Additional paid-in capital
   
178,477
     
175,554
 
Unearned compensation
   
(649
)
   
(987
)
Accumulated Deficit
   
(173,410
)
   
(148,785
)
Total stockholders' equity
   
4,764
     
26,127
 
Total liabilities and stockholders' equity
 
$
128,609
   
$
75,082
 

See the accompanying notes to consolidated financial statements.
FAR EAST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands, Except Per Share Data)
(Unaudited)

 
 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Operating revenues:
 
   
   
   
 
Gas sales
 
$
292
   
$
369
   
$
803
   
$
863
 
Other, net
   
108
     
136
     
298
     
291
 
 
   
400
     
505
     
1,101
     
1,154
 
Operating expenses:
                               
Lease operating expense
   
1,253
     
1,148
     
3,595
     
4,073
 
Exploration costs
   
1,204
     
1,483
     
3,756
     
4,293
 
General and administrative
   
2,504
     
3,572
     
7,707
     
8,999
 
Depreciation, depletion and amortization
   
622
     
507
     
1,581
     
1,284
 
Total operating expenses
   
5,583
     
6,710
     
16,639
     
18,649
 
Operating loss
   
(5,183
)
   
(6,205
)
   
(15,538
)
   
(17,495
)
Other income (expense):
                               
Interest expense
   
(3,057
)
   
(1,333
)
   
(8,606
)
   
(3,622
)
Interest income
   
-
     
1
     
2
     
12
 
Gain on sales of other fixed assets
   
-
     
3
     
-
     
3
 
Foreign currency transaction gain (loss)
   
(174
)
   
71
     
(483
)
   
118
 
Total other income
   
(3,231
)
   
(1,258
)
   
(9,087
)
   
(3,489
)
Loss before income taxes
   
(8,414
)
   
(7,463
)
   
(24,625
)
   
(20,984
)
Income taxes
   
-
     
-
     
-
     
-
 
Net loss
 
$
(8,414
)
 
$
(7,463
)
 
$
(24,625
)
 
$
(20,984
)
 
                               
Comprehensive loss
 
$
(8,414
)
 
$
(7,463
)
 
$
(24,625
)
 
$
(20,984
)
 
                               
Net loss per share:
                               
Basic and diluted
 
$
(0.02
)
 
$
(0.02
)
 
$
(0.07
)
 
$
(0.06
)
 
                               
Weighted average shares outstanding:
                               
Basic and diluted
   
346,079
     
344,786
     
346,040
     
344,467
 

See the accompanying notes to the consolidated financial statements.
FAR EAST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In Thousands Except Share Data)
(Unaudited)

 
 
Common Stock
   
Additional
   
   
   
Total
 
 
 
Number of
   
Par
   
Paid-In
   
Unearned
   
Accumulated
   
Stockholders'
 
 
 
Shares
   
Value
   
Capital
   
Compensation
   
Deficit
   
Equity
 
For the Nine Months Ended Septmber 30, 2013
 
   
   
   
   
   
 
Balance at December 31, 2012
   
344,785,689
   
$
345
   
$
175,554
   
$
(987
)
 
$
(148,785
)
 
$
26,127
 
Net loss
   
-
     
-
     
-
     
-
     
(24,625
)
   
(24,625
)
Nonvested shares issued
   
1,714,000
     
1
     
168
     
338
     
-
     
507
 
Nonvested shares withheld for taxes
   
(92,846
)
   
-
     
(8
)
   
-
     
-
     
(8
)
Nonvested shares forfeited
   
(328,334
)
   
-
     
-
     
-
     
-
     
-
 
Stock options issued
   
-
     
-
     
379
     
-
     
-
     
379
 
Warrants issued
   
-
     
-
     
2,384
     
-
     
-
     
2,384
 
Balance at September 30, 2013
   
346,078,509
   
$
346
   
$
178,477
   
$
(649
)
 
$
(173,410
)
 
$
4,764
 
 
                                               
For the Nine Months Ended September 30, 2012
                                               
Balance at December 31, 2011
   
342,103,218
   
$
342
   
$
174,317
   
$
(792
)
 
$
(121,625
)
 
$
52,242
 
Net loss
   
-
     
-
     
-
     
-
     
(20,984
)
   
(20,984
)
Nonvested shares issued
   
2,707,500
     
3
     
867
     
(361
)
   
-
     
509
 
Nonvested shares withheld for taxes
   
(25,029
)
   
-
     
(7
)
   
-
     
-
     
(7
)
Stock options issued
   
-
     
-
     
287
     
-
     
-
     
287
 
Balance at September 30, 2012
   
344,785,689
   
$
345
   
$
175,464
   
$
(1,153
)
 
$
(142,609
)
 
$
32,047
 

See the accompanying notes to consolidated financial statements.
FAR EAST ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

 
 
Nine months Ended September 30,
 
 
 
2013
   
2012
 
 
 
   
 
Cash flows from operating activities:
 
   
 
Net loss
 
$
(24,625
)
 
$
(20,984
)
Adjustments to reconcile net loss to cash used in operating activities:
               
Depletion, depreciation and amortization
   
1,581
     
1,284
 
Amortization of deferred financing costs
   
1,117
     
1,911
 
Amortization of warrants
   
503
     
-
 
Share-based compensation
   
886
     
796
 
Changes in components of working capital:
               
Accounts receivable
   
(400
)
   
(693
)
Inventory
   
(1,402
)
   
112
 
Prepaid expenses
   
(638
)
   
127
 
Deposits
   
443
     
(133
)
Accounts payable and accrued liabilities
   
6,774
     
(5,070
)
(Gain) loss on sale of assets
   
-
     
(3
)
Other, net
   
(8
)
   
(7
)
Net cash used in operating activities
   
(15,769
)
   
(22,660
)
 
               
Cash flows from investing activities:
               
Additions to oil and gas properties
   
(11,046
)
   
(2,957
)
Additions to other properties
   
(344
)
   
(222
)
Net cash used in investing activities
   
(11,390
)
   
(3,179
)
 
               
Cash flows from financing activities:
               
Net proceeds from credit facility
   
125
     
6,193
 
Net proceeds from secured note payable
   
58,500
     
-
 
Repayment of credit facility
   
(4,855
)
   
-
 
Debt issue costs
   
(1,790
)
   
-
 
Net cash provided by financing activities
   
51,980
     
6,193
 
 
               
Net increase (decrease) in cash and cash equivalents
   
24,821
     
(19,646
)
Cash and cash equivalents--beginning of period
   
1,340
     
23,263
 
Cash and cash equivalents--end of period
 
$
26,161
   
$
3,617
 

See the accompanying notes to consolidated financial statements.
FAR EAST ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Business, Basis of Presentation and Significant Accounting Policies

Business. We were incorporated in Nevada on February 4, 2000. In January 2002, we renamed our company Far East Energy Corporation and changed our focus to exploring, developing, producing and selling coalbed methane gas ("CBM"). Throughout this Quarterly Report on Form 10-Q, the terms "Far East Energy," "Far East," "we," "the Company," "us," "our" and "our company" refer to Far East Energy Corporation and its subsidiaries. References to “FEEB” refer to Far East Energy (Bermuda), Ltd., our principal operating subsidiary. References to "China" and "PRC" are references to the People's Republic of China. References to the “MofCom” are references to the Chinese Ministry of Commerce, the principal regulatory authority with oversight responsibility for our production sharing contracts. References to the “MLR” are references to the Chinese Ministry of Land and Resources, the principal regulatory authority for the exploration, development and production of oil and gas resources in China. References to “CUCBM” are references to China United Coalbed Methane Company, Ltd, and references to “CNPC” are references to China National Petroleum Company. Throughout this Quarterly Report on Form 10-Q, we use the term “our Chinese partner company” when referring to CUCBM and CNPC, as applicable.

The information, as furnished herein, reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented.

Basis of Presentation. The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted pursuant to those rules and regulations. The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires the Company’s management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the information and disclosures provided herein are adequate to present fairly the consolidated financial position, results of operations and cash flows of the Company. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 ("2012 Annual Report").

Recently Issued Accounting Standards and Developments. There were no recent accounting pronouncements at September 30, 2013 that materially affected our company.

2. Liquidity and Realization of Assets

All of our reserves are located in Shanxi Province, China. At December 31, 2012, our estimated net proved and net probable reserves were 51.3 billion cubic feet (“Bcf”) and 392.4 Bcf of CBM, respectively. At December 31, 2012, the standardized measure of our future net cash flows, discounted at 10 percent per annum, relating to our proved natural gas reserves was $40.4 million.

On June 12, 2010, CUCBM, our Chinese partner for the Shouyang production sharing contract ("PSC"), and Shanxi Province Guoxin Energy Development Group Limited (“SPG”) executed a gas sales agreement (the "Gas Sales Agreement"), to which we are an express beneficiary, to sell CBM produced in the CBM field governed by the Shouyang PSC. Gas sales under the Gas Sales Agreement with SPG commenced in the first quarter of 2011. As of September 30, 2013, gas sales proceeds to be collected were approximately $0.2 million, and were recorded in Accounts Receivable. We have funded our exploration and development activities primarily through the sale and issuance of common stock and proceeds received from the Notes (as defined below), the closing of the Facility Agreement (as defined below) and sales of CBM.

On November 28, 2011, FEEB entered into a Facility Agreement, as borrower, with Standard Chartered Bank (“SCB”), as lender, and the Company, as guarantor (the “Facility Agreement”). The Facility Agreement provided for a $25 million credit facility, the proceeds of which were used for project costs with respect to the Shouyang Area in Shanxi Province, China, as well as for finance costs and for general corporate purposes approved by SCB. The Facility Agreement has been fully drawn and no amounts remain for borrowing. See Note 3 - Facility Agreement.
On January 14, 2013, the Company sold senior secured notes of FEEB (the “Notes”) and warrants to purchase common stock of FEEC (the “Warrants”) to certain institutional investors for $60.0 million of gross proceeds in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(a)(2) thereof and Regulation S thereunder (the “Private Placement”). The Private Placement closed on January 15, 2013. See Note 4 – Senior Secured Notes.

On January 15, 2013, FEEC and FEEB entered into the Fifth Amendment to the Facility Agreement (as amended, the “SCB Credit Facility”), among FEEC, FEEB and SCB, to provide for the extension of the maturity date thereof until January 15, 2014. The Fifth Amendment was subject to the repayment of $4.125 million of the outstanding principal amount and the repayment of $0.7 million of capitalized interest. The total amount of outstanding principal and capitalized interest under the Facility Agreement prior to the repayment of such amount was $25.8 million (which included $125,000 borrowed on January 11, 2013). In addition, accrued interest, amendment fees and certain transaction expenses were paid at closing out of the gross proceeds of the Private Placement. The Facility Agreement and the Notes are cross-defaulted against one another.

Our current work programs will satisfy the minimum exploration expenditures for our Shouyang and Yunnan PSCs for 2013; however, we continue to consider whether to continue activities in Yunnan. We have not yet established reserves in Yunnan. With respect to the PSC governing CBM production activities on the approximately 573,000 acres in the Qinnan Block of the Shanxi Province, we have halted activities on the Qinnan Block pending resolution of whether or not its exploration period will be extended as a result of certain force majeure claims.

To secure additional capital for future work programs and to repay the Facility Agreement on or before its maturity date, management must either explore potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, acquisition or sale of some or all of our assets or obtain additional debt, reserve based, project or equity-related financing. However, there can be no assurance that we will be successful in entering into any strategic relationship or transaction, securing capital or raising funds through additional debt, reserve based, project or equity-related financing. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt, reserve based, project or equity-related financing are uncertain, and we cannot predict the timing, structure or other terms and conditions or the consideration that may be paid with respect to any transaction or offering of securities and whether the consideration will meet or exceed our offering price. Due to certain factors, an offering of our common stock is likely not a viable alternative at this time, but a non-convertible preferred stock offering might be possible under certain circumstances. Under certain circumstances, the structure of a strategic transaction may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult. There can be no assurance that the Chinese authorities will provide the approvals necessary for a transaction or transfer. There can be no guarantee of future capital acquisition, fundraising or exploration success.

3. Facility Agreement

On November 28, 2011, FEEB entered into the Facility Agreement, as borrower, with SCB, as lender, and the Company, as guarantor. The Facility Agreement provided for a $25 million credit facility, the proceeds of which were used for project costs with respect to the Shouyang Area in Shanxi Province, China, as well as for finance costs and for general corporate purposes approved by SCB. The Facility Agreement had an initial 9-month term ending August 28, 2012. Loans under the Facility Agreement could be made in such amounts as may be specified from time to time in one or more utilisation requests according to an agreed expenditure schedule. Loans under the Facility Agreement bear interest at LIBOR plus an applicable margin rate of 9.5% during the initial period and 10.0% thereafter, and mandatory costs, if any, to compensate SCB for certain Hong Kong regulatory compliance costs. In connection with and as security for the Facility Agreement, FEEB and/or the Company entered into certain other ancillary agreements dated November 28, 2011, including a Share Pledge Agreement, an Account Charge Agreement, an Assignment of Shareholder Loans and a Subordination Agreement (collectively, the “Ancillary Agreements”). Under the Ancillary Agreements, the Company pledged its shares in FEEB and granted a security interest in certain intercompany debt to SCB, and FEEB granted a security interest in certain bank accounts to SCB.

During 2012, the Company entered into several amendments to the Facility Agreement with SCB which effectively extended the termination date of the Facility Agreement and the due date for payment of all accrued interest to January 15, 2013. On January 15, 2013, FEEC and FEEB entered into the Fifth Amendment to provide for the extension of the maturity date thereof until January 15, 2014. The Fifth Amendment was subject to the repayment of $4.125 million of the outstanding principal amount and the repayment of $0.7 million of capitalized interest. The total amount of outstanding principal and capitalized interest under the Facility Agreement prior to the repayment of such amount was $25.8 million (which included $125,000 borrowed on January 11, 2013). In addition, accrued interest, amendment fees and certain transaction expenses were paid at closing out of the gross proceeds of the Private Placement. See Note 4 – Senior Secured Notes for discussion of the Private Placement.
At September 30, 2013, the total amount drawn under the Facility Agreement was $21.0 million. The related accrued interest was $0.5 million and $0.3 million as of September 30, 2013 and 2012, respectively. The effective interest rate for the Facility Agreement is 13.2% per annum.

At September 30, 2013 and 2012, total financing costs in connection with the Facility Agreement were approximately $0.6 million and $0.9 million, respectively. The costs related to the Facility Agreement were capitalized as deferred financing costs and amortized over the term of the Facility Agreement. Amortization expense for the nine-months ended September 30, 2013 and 2012 was $0.4 million and $1.9 million, respectively.

4. Senior Secured Notes

On January 14, 2013, FEEC and FEEB entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain purchasers (the “Purchasers”) under which FEEC and FEEB agreed to sell, and the Purchasers agreed to purchase the Notes and Warrants for $60.0 million of gross proceeds in the Private Placement. The Warrants provide the holders the right to purchase up to 56,086,439 shares of FEEC common stock at an exercise price of $0.085 per share. The Warrants will expire on December 31, 2017. The Private Placement closed on January 15, 2013.

The Notes are senior secured obligations of FEEB and are fully and unconditionally guaranteed by FEEC. The Notes were sold at an issue price of 100% of par for an aggregate principal amount of $60.0 million. The Notes accrue cash interest at a rate of 13.0% per year, which is paid semi-annually in arrears on June 30 and December 30 of each year, commencing on June 30, 2013. FEEB may, at its option, elect to pay interest “in kind” at a rate of 14.5% per year by issuing additional Notes with the first interest payment required to be paid in kind. The Notes will mature on January 15, 2016. On July 1, 2013, the Company issued $3,987,501 aggregate principal amount of senior secured notes for the paid in kind interest that was due on June 30, 2013. Accrued interest was $2.3 million at September 30, 2013.

The Notes and related guarantees rank equal in right of payment with the Facility Agreement. Except as specifically permitted by the indenture governing the Notes (the “Indenture”), any new indebtedness of FEEC, FEEB or any restricted subsidiary of FEEC will require the consent of SCB and the “Required Noteholders,” which means holders of 75% of aggregate principal amount at maturity of the Notes. The Notes and related guarantees are secured by substantially all of the assets of FEEC and FEEB, other than assets located in the People’s Republic of China, assets the grant, creation or perfection of any lien on which would require the consent, authorization or approval of, or filing with, any governmental authority in the People’s Republic of China and certain other excluded assets. Such collateral continues to secure the Facility Agreement with the administration of such collateral subject to a collateral agency and intercreditor agreement between SCB and Wells Fargo Bank, National Association, as indenture trustee of the Notes and as collateral agent.

In certain circumstances specified in the Indenture and as summarized below, FEEB may or will be required to redeem or offer to repurchase the Notes at the relevant prices set forth below times the principal amount being redeemed or repurchased:

Closing Date to February 28, 2014
   
100
%
March 1, 2014 to December 31, 2014
   
104
%
January 1, 2015 and thereafter
   
108
%

plus accrued and unpaid interest thereof, if any, on the Notes to the applicable date of redemption or repurchase, as applicable.

We applied ASC 470 in the recording of the valuation of the Warrants. We determined the fair value of the Warrants using the Black Scholes Option Pricing Model (“BSOPM”).
The significant assumptions used in the valuation were as follows:

 
 
Black Scholes
 
 
 
Option Pricing Model
 
Volatility
   
70.81
%
Risk free interest rate
   
0.75
%
Expected dividend yield
   
-
 
Expected term
 
5 year
 

Based on the utilization of BSOPM valuation technique, the Warrants were valued at approximately $2.5 million at time of issuance. The amount was recorded as a debt discount to the Notes in the liabilities section and as additional paid-in capital in the equity section of the balance sheet. The debt discount is accreted as interest expense periodically over the term of the Notes. We have recorded an accretion amount of $0.5 million from the issuance date to September 30, 2013.

In connection with the Notes, the Company incurred approximately $3.1 million of financing costs, which included among other items, 1.5 million warrants issued to the placement agent. These warrants were valued at approximately $68,000 based on the same aforementioned BSOPM valuation technique. The total financing costs of $3.1 million were allocated between the Notes and the Warrants in proportion to their respective fair values at time of issuance. The costs related to the Warrants were recorded as an offset to the value of the Warrants in additional paid-in capital. The costs related to the Notes were capitalized as deferred financing costs and amortized based on the effective interest method over the term of the Notes. The objective of that method is to arrive at a periodic interest cost which represents a level effective rate over the term of the Notes on its face amount reduced by the unamortized discount and expense at the beginning of the period. The effective interest rate for the Notes as calculated is 17.8% per annum. We have recorded an amortization amount of $0.7 million for the period from the issuance date to September 30, 2013.

5. Oil and Gas Properties

The costs associated with our oil and gas properties include the following (in thousands):

 
 
At September 30, 2013
   
At December 31, 2012
 
Proved oil and gas properties
 
$
88,695
   
$
71,875
 
 
               
Unproved leasehold costs
   
275
     
275
 
Unproved oil and gas properties
   
8,799
     
-
 
Total unproved oil and gas properties
   
9,074
     
275
 
 
               
Accumulated depreciation, depletion and amortization
   
(3,488
)
   
(2,221
)
 
               
Total oil and gas properties, net
 
$
94,281
   
$
69,929
 

Unproved Leasehold Costs. Unproved leasehold costs are composed of amounts we paid to MofCom and CUCBM pursuant to a PSC we entered into in 2002 with CUCBM to acquire the mineral rights in the Laochang area in the Yunnan Province.

Unproved Oil and Gas Properties. Unproved oil and gas property costs include only suspended well costs which are direct exploratory well costs pending determination of whether proved reserves have been discovered. Accounting guidance regarding capitalization of suspended well costs is provided by FASB ASC Topic 932. FASB ASC Topic 932 addresses whether there are circumstances under the successful efforts method of accounting for oil and gas producing activities that would permit the continued capitalization of exploratory well costs beyond one year, other than when additional exploration wells are necessary to justify major capital expenditures and those wells are under way or firmly planned for the near future. Capitalization of costs should be continued beyond one year in cases where reserves for the project are not yet proven, but the Company demonstrates sufficient continuing progress toward assessing those reserves. For the capitalized costs at September 30, 2013, our assessment indicated that our current work programs demonstrated our efforts in making sufficient continuing progress toward assessing the reserves in the areas for which the costs were incurred. Therefore, we have continued to capitalize these costs.
At September 30, 2013, the Company had no costs capitalized for exploratory wells for a period of greater than one year after the completion of drilling.

6. Asset Retirement and Environmental Obligations

The following table presents the reconciliation of the beginning and ending aggregate carrying amounts of short-term and long-term legal obligations associated with the retirement of property, plant and equipment at September 30, 2013 (in thousands):

 
 
At September 30, 2013
 
Carrying amount at beginning of period
 
$
840
 
Liabilities incurred
   
283
 
Liabilities settled
   
-
 
Accretion expense
   
87
 
Settlement of obligation
   
-
 
Revisions
   
-
 
Carrying amount at end of period
 
$
1,210
 
 
       
Current portion
 
$
-
 
Noncurrent portion
 
$
1,210
 

7. Other Fixed Assets

Other fixed assets, net include the following (in thousands):

 
 
At September 30, 2013
   
At December 31, 2012
 
Other fixed assets
 
$
2,662
   
$
2,313
 
Accumulated depreciation
   
(1,410
)
   
(1,176
)
 Other fixed assets, net
 
$
1,252
   
$
1,137
 

Other fixed assets include leasehold improvements, equipment and furniture. Depreciation expense for the nine-month periods ended September 30, 2013 and 2012 were approximately $228,000 and $241,000, respectively. Depreciation expense for the three-month periods ended September 30, 2013 and 2012 were approximately $82,000 and $81,000, respectively.

8. 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 the Shouyang PSC to develop the Shouyang Block in Shanxi Province. 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. We have negotiated and signed multiple amendments with our Chinese partner companies to extend the exploration period under our PSCs. The exploration period for approximately 288,570 acres (approximately 1,167.8 square kilometers) of the Shouyang Block expires on June 30, 2015. We met our relinquishment obligation for 2013 under the Shouyang PSC by relinquishing 121,255 acres (approximately 490.7 square kilometers) in June 2013. The Shouyang PSC expires on July 1, 2032 unless extended.
After the aforementioned relinquishment, we operate approximately 288,570 acres (1,167.8 square kilometers) of the Shouyang Block. Of this acreage, approximately an area of 15,988 acres (approximately 64.7 square kilometers) was certified by the MLR during the second quarter of 2012, which is a step that is a necessary regulatory requirement to obtain a permanent development license. This certified portion of the block covers our pilot development wells located in the northern portion of the Shouyang Block (the “1H Pilot Area”) and a westward extension thereof. We have a 100% participating interest (subject to a net 3.5% revenue interest held by Phillips China, Inc., a subsidiary of Conoco Phillips (“Phillips”)) in this portion of the block, which contains all of the wells in the 1H Pilot Area (the area of our current CBM sales) and the planned expansion thereof. With respect to the remaining 272,582 acres (1,103.1 square kilometers), CUCBM maintains the right to elect up to a 30% participating interest upon completion of certain milestones, and we retain the remaining participating interest in the contract area, subject to the 3.5% revenue interest.

During the exploration period, FEEB must complete at least the minimum work program and seek commercial deposits of CBM that can be developed in commercially paying quantities. In order to shift from the exploration period to the development period, an overall development plan is prepared and submitted for governmental approval for a long-term development license for a particular CBM field. The preparation of an overall development plan to submit as part of the application for a long-term development license will require certification in accordance with MLR standards as described above, as well as technical, commercial, environmental, health and safety plans demonstrating how the CBM field will be developed for the exploitation of CBM located therein. Currently, we and CUCBM are in the process of jointly preparing an overall development plan for approximately 24,661 acres (99.8 square kilometers) located in the northern portion of the Shouyang Block.

Following the expiration of the exploration period, we may elect to continue the process of trying to convert portions of the Shouyang Block into MLR certified areas in order to transition these areas into the process for a long-term development license. But any acreage that is not at or past the stage of submittal of a technical report that reasonably meets the criteria for MLR certification will be relinquished at the time of expiration of the exploration period unless the parties agree otherwise.

The development period as to any portion of the Shouyang Block will begin after the date of commencement of production of commercial grade quantities of CBM with respect to that area. Any CBM produced and sold prior to the approval of an overall development plan is deemed to occur during the development period, and production is to be distributed in accordance with the parties participating interests in such CBM field. Provided we remain in compliance with the requirements under the Shouyang PSC, the Shouyang PSC allows production to continue on a CBM field until the earlier of the end of the useful life of that area or June 30, 2032, unless extended or otherwise amended.

Under the PSCs, we have committed to satisfy certain annual minimum exploration expenditure requirements for each PSC. Our minimum exploration expenditure requirement for each block is based on the minimum exploration expenditure requirements established by the MLR, subject to such additional commitments as may appear in any PSC modification agreements. The MLR sets its requirements by applying a minimum expenditure per acre to the total acreage encompassed by each PSC. As a result and also taking into consideration of the aforementioned June 2013 acreage relinquishment, the minimum exploration expenditure requirement for 2013 and the minimum exploration expenditure for each yearly period after 2013 are approximately $2.4 million and $1.9 million, respectively, for the Shouyang PSC, based on the currency exchange rate between the U.S. Dollar to the Chinese Renminbi (“RMB”) as of September 30, 2013. Any portion of the exploration expenditures that exceeds the current year’s minimum exploration expenditure requirement cannot be carried forward for the satisfaction of the subsequent year’s minimum requirement. Under the Shouyang PSC, we are required to pay certain fees totaling $0.5 million for the year of 2013. These fees include assistance fees, training fees, fees for CBM exploration rights and salaries and benefits. We have met the annual minimum exploration expenditure requirement under the Shouyang PSC. We have also met the requirement of drilling 25 additional wells in the non-MLR certified area by June 30, 2013 and spending at least $10.8 million. Further, we are required to drill an additional 13 wells and to spend at least $5.3 million during the period from July 1, 2013 to June 30, 2015. The aforementioned amounts are based on the currency exchange rate between the U.S. Dollar and the RMB as of September 30, 2013.
Qinnan Production Sharing Contract. FEEB is the operator under the Qinnan PSC to develop the Qinnan Block in Shanxi Province. CUCBM is in the process of assigning the Qinnan PSC to 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 or CNPC (following the assignment of the Qinnan PSC) 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 company 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 Qinnan PSC.

The exploration period of the Qinnan PSC in Shanxi Province expired on June 30, 2009, and we cannot continue our exploration activities in the Qinnan Block without an extension of the exploration period or a new PSC. We are continuing to pursue an extension of the exploration period of the Qinnan PSC, but we cannot predict the outcome at this time. We believe that 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 our Chinese partner company’s request, we have provided certain operational and financial information to assist them in the decision making process as to whether to recognize an extension of the exploration period in Qinnan. PetroChina, CNPC’s wholly-owned subsidiary, has completed an accounting audit pursuant to the Qinnan PSC of our expenditures for 2007 and 2008. We have also provided to PetroChina, 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 CUCBM’s interest to it, and subsequently to PetroChina. CNPC also requested we execute a modification agreement to confirm PetroChina as our Chinese partner company for the Qinnan PSC. In negotiations with CUCBM and PetroChina related to this request, we have endeavored to negotiate an assignment agreement that would reflect the transfer of interest to CNPC while CNPC and PetroChina would acknowledge delays that were incurred by virtue of us not having, for an extended period of time, an official Chinese partner company that had the capacity or authority under the Qinnan PSC to work with us. Because of the inability to hold a formal joint management committee (“JMC”) meeting or to have the effective involvement of our Chinese partner company, 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 of the exploration period. 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.

Under the Qinnan PSC, we have committed to satisfy certain annual minimum exploration expenditure requirements. As with the Shouyang PSC, our minimum 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 $3.8 million in the aggregate based on the currency exchange rate between the U.S. Dollar and the RMB as of September 30, 2013. 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 RMB. Under the Qinnan PSC, we are also required to pay certain fees totaling $0.4 million annually. These fees include assistance fees, training fees, fees for CBM exploration rights and salaries and benefits. 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. Accordingly, we ceased to accrue for the $0.4 million annual fees effective January 1, 2013. We believe the $1.9 million amount accrued is sufficient to cover any obligation related to the fees should the extension be granted.

Yunnan Production Sharing Contract. On January 25, 2002, we entered into a PSC to develop two areas in Yunnan Province: (1) the Enhong area, which covers approximately 145,198 acres (587.6 square kilometers), and (2) the Laochang area, which covers approximately 119,327 acres (482.9 square kilometers) (the “Yunnan PSC”). FEEB is the operator under the Yunnan PSC. 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, Phase I and Phase II. We have completed Phase I and are operating in Phase II. During the fourth quarter of 2011, we signed a modification agreement to the Yunnan PSC, which was approved by MofCom on June 15, 2012 and extended the exploration period until December 31, 2013, in exchange for allowing CUCBM to proceed at its sole risk with a 100% participating interest in the 145,198 acres (587.6 square kilometers) in the Enhong part of the Yunnan PSC contract area (hence, our interest in the Yunnan PSC now comprises the Laochang area only, and is called the Laochang Block). We may elect to continue the process of trying to transition CBM fields into the process for a long-term development license for certain areas. Any acreage that is not at or past the stage of submittal of a technical report to CUCBM that reasonably meets the criteria for MLR certification will be relinquished unless the parties otherwise agree. Our operations will focus on obtaining MLR certification in the portion of the Laochang area and preparing for compilation of an overall development plan to submit for approval. The development period of any CBM field in the Yunnan PSC area will begin after the approval of a long-term development license pursuant to an overall development plan. An overall development plan would be developed and filed jointly by us and CUCBM, seeking approval from Chinese governmental authorities, for any CBM field that we and CUCBM elect to develop. The production period of any CBM field in the Yunnan PSC area will begin after the date of commencement of production of commercial grade quantities of CBM with respect to that CBM field. Provided that we remain in compliance with the requirements under the Yunnan PSC, production will be allowed to continue on a CBM field until the earlier of the end of the useful life of the field and January 1, 2033, unless extended or otherwise amended. We are responsible for all exploration costs related to the Yunnan PSC, including all exploration costs for discovering and evaluating CBM-producing areas. If any CBM field is discovered within the contract area, CUCBM will be deemed to hold a 40% participating interest in such field and we will be deemed to have a 60% participating interest, unless CUCBM elects to participate at a lower level, in which case we will retain all participating interests not taken by CUCBM and shall be responsible for development costs in proportion to our participating interest.
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 Yunnan PSC are based our negotiated agreement to extend the Yunnan PSC exploration period. Under applicable MLR rules for minimum expenditure requirements, the annual minimum exploration expenditure requirement for the Yunnan PSC was approximately $1.8 million (10,720,000 RMB) before the modification but reduced to $0.8 million with relinquishment of acreage, based on the currency exchange rate between the U.S. Dollar and the RMB as of September 30, 2013. As of September 30, 2013, we have carried forward from 2012 excess exploration expenditures of $1.2 million and incurred an additional $0.7 million of expenditures during the first nine months of 2013 toward the satisfaction of MLR requirement. We are currently obligated to drill a total of eight wells during the entire exploration period, as extended. As we have already drilled five wells in the Laochang area during Phase II of the Yunnan exploration period, we are only obligated to drill an additional three wells before December 31, 2013 to satisfy the minimum work commitment.

These requirements are denominated in RMB and, therefore, are subject to fluctuations in the currency exchange rate between the U.S. Dollar and the RMB. The MLR minimum expenditure requirements are a significant factor that influences our exploration work program. Under the Yunnan PSC, we are required to pay certain fees totaling $0.4 million for the year of 2013. These fees include assistance fees, training fees, fees for CBM exploration rights and salaries and benefits. Based on the Yunnan PSC, any unfulfilled exploration work commitment will be added to the minimum exploration work commitment for the following year. If we terminate the Yunnan PSC and there exists an unfulfilled balance of the minimum exploration work commitment, we will be required to pay the balance to CUCBM.

9. Common Stock

Shares Withheld for Taxes. During the first nine months of 2013, we withheld 92,846 shares of our common stock from the vesting of nonvested shares (also commonly referred to as "restricted stock") granted to employees to satisfy tax withholding obligations of approximately $8,000. Once withheld, the shares were canceled and removed from the number of outstanding shares. Accordingly, we reduced our common stock and our additional paid in capital on our consolidated balance sheet by an amount which equaled the fair market value of the withheld shares on the date of withholding and cancellation. We subsequently remitted the amount withheld to the tax authority.
Outstanding Warrants. A summary of warrants outstanding as of September 30, 2013 is as follows (in thousands, except exercise price):

   
Warrants
   
Expiration Date In
 
Exercise Price
   
Outstanding
   
2014
   
2015
   
2017
 
$0.09
     
57,586
     
-
     
-
     
57,586
(1) 
$0.54
     
290
     
290
     
-
     
-
 
$0.80
     
4,662
     
-
     
4,662
     
-
 
$1.25
     
4,623
     
4,623
     
-
     
-
 
Total
     
67,161
     
4,913
     
4,662
     
57,586
 

(1) During the first six months of 2013, these warrants were issued in conjunction with the private placement of senior secured notes at an exercise price of $0.085 per share. See Note 4 – Senior Secured Notes.

10. Share-Based Compensation

We grant nonvested shares of common stock and options to purchase common stock to employees, members of the board of directors and consultants under our shareholder-approved 2005 Stock Incentive Plan (the "2005 Plan"). Grants prior to the adoption of the 2005 Plan and inducement grants associated with hiring of new employees and appointment of new directors were generally issued outside of the 2005 Plan. During the first six months of 2013, we awarded options to purchase up to 3,610,000 shares of our common stock and 1,604,000 nonvested shares under the 2005 Plan to employees and members of the board of directors; and options to purchase up to 325,000 shares of our common stock and 110,000 nonvested shares outside the 2005 Plan to consultants. During the first six months of 2012, we awarded options to purchase up to 970,000 shares of our common stock and 2,602,500 nonvested shares under the 2005 Plan to employees and members of the board of directors; and options to purchase up to 150,000 shares of our common stock and 105,000 nonvested shares outside the 2005 Plan to a consultant. As of September 30, 2013, we had 8,546,034 shares available for awards under the 2005 Plan, of which 328,533 shares could be issued as nonvested shares or other full-valued stock-based awards.

We account for share-based compensation expense under FASB ASC Topic 718, Compensation – Stock Compensation ("ASC 718"). We measure the cost of employee and non-employee services received in exchange for stock options and other equity awards based on the grant date fair value of those awards. We use the Black-Scholes-Merton option pricing model to determine the grant date fair value of options and the closing share price on date of grant to determine the grant date fair value of nonvested shares. We recognize the compensation expense over the period during which the grantee is required to provide service in exchange for the award.

The compensation expense is included in the Consolidated Statements of Operations as follows (in thousands):

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Exploration Costs
 
$
58
   
$
37
   
$
188
   
$
115
 
General and Administrative
   
194
     
220
     
698
     
681
 
 
 
$
252
   
$
257
   
$
886
   
$
796
 
The following table summarizes stock option transactions during the nine-months ended September 30, 2013 (in thousands, except grant price):

 
 
Options
   
Weighted Average Grant Price
 
Outstanding at January 1, 2013
   
11,149
   
$
0.95
 
Granted
   
3,935
     
0.10
 
Forfeited
   
-
     
-
 
Cancelled
   
(2
)
   
0.28
 
Expired
   
(58
)
   
0.58
 
Outstanding at September 30, 2013
   
15,024
   
$
0.73
 
 
               
Exercisable at September 30, 2013
   
10,764
   
$
0.94
 

At September 30, 2013, the weighted average remaining contractual life for the stock options outstanding and exercisable was 5.44 years and 4.07 years, respectively.

The following table summarizes shares of nonvested stock transactions during the nine-months ended September 30, 2013 (in thousands, except per share data):

 
 
Nonvested Shares
   
Weighted Average Fair Value Per Share
   
Vest Date Fair Value
 
Outstanding at January 1, 2013
   
3,949
   
$
0.40
   
 
Granted
   
1,714
     
0.10
   
 
Vested
   
(1,898
)
   
0.34
   
$
205
 
Forfeited
   
(328
)
   
0.39
         
Withheld for Taxes
   
(93
)
   
0.35
         
Outstanding at September 30, 2013
   
3,344
   
$
0.27
         

As of September 30, 2013, we had approximately $0.9 million in total unrecognized compensation cost related to share-based compensation, of which $0.5 million was related to shares of nonvested stock grants and was recorded in unearned compensation on our consolidated balance sheets. This cost is expected to be recognized over a weighted average period of 1.5 years at September 30, 2013. This expected cost does not include the impact of any future share-based compensation awards.

11. Supplemental Disclosures of Cash Flow Information

We use the indirect method to present cash flows from operating activities. Cash paid for interest expense for the nine-month period ended September 30, 2013 and 2012 was $2.0 million and $1.6 million, respectively. Cash paid for income taxes for the nine-month period ended September 30, 2013 and 2012 was zero. Other supplemental cash flow information for the nine-month period ended September 30, 2013 and 2012 is presented as follows (in thousands):

 
 
Nine Months Ended September 30,
 
 
 
2013
   
2012
 
Non-cash transactions:
 
   
 
Interest paid-in-kind
 
$
3,988
   
$
-
 
Amortization of deferred financing costs
 
$
1,117
   
$
1,911
 
Non-cash share-based compensation
 
$
886
   
$
796
 
Asset retirement and environmental obligation
 
$
283
   
$
15
 
12. Subsequent Events

Subsequent events have been evaluated through the date financial statements were filed with the SEC. There were no items that would have a material impact to the consolidated financial statements presented in this Form 10-Q.
PART 1. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012 ("2012 Annual Report"), our unaudited consolidated financial statements and related notes included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and June 30, 2013, the risk factors contained herein and in our 2012 Annual Report, and all of the other information contained elsewhere in this report. The terms "we," "us," "our," “the Company” and "our company" refer to Far East Energy Corporation and its subsidiaries, unless the context suggests otherwise. The term "FEEB" refers to Far East Energy (Bermuda), Ltd., a wholly-owned subsidiary, which conducts substantially all of our operations in China.

Overview. We are a party to the Shouyang production sharing contract as revised which covers the 409,824 acre (1,658.5 square kilometers) Shouyang Block in Shanxi Province (the “Shouyang PSC”). As of December 31, 2012, we had estimated net proved gas reserves of 51.3 Bcf with an associated standardized measure of our future net cash flows of proved reserves, discounted at 10 percent per annum of $40.4 million. As of December 31, 2012, total net probable reserves were estimated to be 392.4 Bcf.

The proved reserves are attributable to approximately 13,360 gross acres (approximately 54.1 square kilometers). The probable and possible reserves are attributable to approximately 85,502 gross acres (approximately 346.0 square kilometers), which includes the Shouyang Block proved reserve locations. These total acres with proved, probable and possible reserves represents only approximately 21% and 29%, respectively, of our total gross acreage of the Shouyang Block.

During the first nine months of 2013, we continued our efforts to explore and develop CBM pursuant to our Shouyang PSC. Gas sales volume, net to the Company, was 61 million cubic feet (“MMcf”) during the three months ended September 30, 2013. Sales volumes increased 20 MMcf, or 48%, compared to the three months ended June 30, 2013. Gas sales volume, net to the Company, was 168.8 MMcf during the first nine months ended September 30, 2013 compared to 183.9 MMcf in the first nine months of 2012. This decrease as compared to the same period in 2012 is partially attributable to the fact that in the first several months of 2013, there were intermittent interruptions from the power supply to our pumps and compressors as the province engaged in upgrades to the regional power infrastructure. The decrease is also attributable to the fact that there was a temporary production increase that occurred in the second half of 2012 thereby increasing the sales volume for such period. Due to increased operating efficiencies producing wells in Shouyang, Lease Operating Expense per productive well has decreased 41% during the nine months ended September 30, 2013 compared to the same period in 2012. Additionally, during the first nine months of 2013, 34 production wells and 3 appraisal wells have been completed. Of these, 29 wells had production facilities installed and were producing water and or gas.

We continued to employ numerous safety precautions to ensure the safety of our employees and independent contractors. We also seek to conduct our operations in accordance with various laws and regulations concerning the environment, occupational safety and health.

We believe that good environmental, social, health and safety performance is an integral part of our business success. We conduct our business with respect and care for our employees, contractors, communities, and the environments in which we operate. Our vision is zero harm to people and the environment while creating value for our shareholders as well as for China, including the regions and communities within which we operate. Our commitment to these principles is demonstrated by the fact that we have had no lost-time accidents in over eight years and no major environmental incidents. We have a commitment to being good corporate citizens of China, striving to emphasize and utilize very high levels of Chinese content in personnel, services, and equipment; and we have achieved very high percentages of Chinese content in each category.

On November 28, 2011, FEEB and the Company entered into a facility agreement with SCB (the “Facility Agreement”). The Facility Agreement provided for a $25 million credit facility to be used for project costs with respect to the Shouyang Block, finance costs and other general corporate purposes approved by SCB. The Facility Agreement had an initial 9-month term and was subsequently extended. At September 30, 2013, the total amount drawn under the Facility Agreement was $21.0 million. In addition, the related accrued interest as of September 30, 2013 was $0.5 million.
On January 14, 2013, the Company sold senior secured notes of FEEB (the “Notes”) and warrants to purchase common stock of FEEC (the “Warrants”) to certain institutional investors for $60.0 million of gross proceeds in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(a)(2) thereof and Regulation S thereunder (the “Private Placement”). The Private Placement closed on January 15, 2013.

On January 15, 2013, the Company entered into the Fifth Amendment to the Facility Agreement (the “Fifth Amendment”), to provide for the extension of the maturity date thereof until January 15, 2014. The Fifth Amendment was subject to the repayment of $4.125 million of the outstanding principal amount and the repayment of $0.7 million of capitalized interest. The total amount of outstanding principal and capitalized interest under the Facility Agreement prior to the repayment of such amount was $25.8 million (which included $125,000 borrowed on January 11, 2013). In addition, accrued interest, amendment fees and certain transaction expenses were paid at closing out of the gross proceeds of the Private Placement. After taking into account the amounts paid pursuant to the Fifth Amendment and transaction fees and expenses incurred in connection with the Fifth Amendment and the Private Placement, the net proceeds to the Company of the Private Placement were $52.0 million.

To secure additional capital for future work programs and to repay the Facility Agreement on or before its maturity date, management must either explore potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, acquisition or sale of some or all of our assets or obtain additional debt, reserve based, project or equity-related financing. However, there can be no assurance that we will be successful in entering into any strategic relationship or transaction, securing capital or raising funds through additional debt, reserve based, project or equity-related financing. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt, reserve based, project or equity-related financing are uncertain, and we cannot predict the timing, structure or other terms and conditions or the consideration that may be paid with respect to any transaction or offering of securities and whether the consideration will meet or exceed our offering price. Due to certain factors, an offering of our common stock is likely not a viable alternative at this time, but a non-convertible preferred stock offering might be possible under certain circumstances. Under certain circumstances, the structure of a strategic transaction may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult. There can be no assurance that the Chinese authorities will provide the approvals necessary for a transaction or transfer. There can be no guarantee of future capital acquisition, fundraising or exploration success.

Although we believe the results of our exploration activities in Shanxi and Yunnan Provinces to date have been favorable, we will need to complete more wells to achieve commercial viability in these provinces, which will require additional capital expenditures. Our current and future work programs for our PSCs will depend on our ability to raise additional capital to fund our exploration activities. Our current work programs are described below.

Shouyang Block, Shanxi Province. We are a party of the Shouyang PSC with CUCBM, which provides for an operating interest in approximately 409,824 acres (1,658.5 square kilometers) in the Shanxi Province. After relinquishment of 121,255 acres (approximately 490.7 square kilometers) in June 2013, we operate approximately 288,570 acres (1,167.8 square kilometers) of the Shouyang Block. Of this acreage, approximately 15,988 acres (approximately 64.7 square kilometers) have been certified by the MLR to support the request for a long-term development license and for which we hold at 100% participation interest, subject to the Phillips 3.5% revenue interest.

In exchange for CUCBM’s election to forego its participation rights to this approximately 15,988 acres (approximately 64.7 square kilometers) that has received MLR certification, we elected to forgo our rights to approximately 8,673 acres (35.1 square kilometers) of the original Shouyang PSC, which had also been certified by the MLR, allowing CUCBM to proceed independently at its sole risk to develop this area. We believe that this is an advantageous arrangement for us because it provides us with a 100% participating interest (subject to a net 3.5% revenue interest held by Phillips) in the approximately 15,988 acres (approximately 64.7 square kilometer) area, which contains all of the wells in the 1H Pilot Area (the area of our current CBM sales) and the planned expansion thereof. With respect to the remaining approximately 393,837 acres (1,593.8 square kilometers), CUCBM maintains the right to elect up to a 30% participating interest upon completion of certain milestones, and we retain the remaining participating interest in the contract area, subject to the 3.5% revenue interest held by Phillips.
The P8 well is the only well drilled on the portion of the Shouyang Block in which we elected to forgo our rights. This well will be replaced by CUCBM pursuant to an agreement whereby CUCBM has agreed to drill an appraisal well which shall include the expenses associated with coring, fracturing and other testing on our behalf in the Shouyang Block outside of the area for which an overall development plan will be submitted as part of the application for a long-term development license to the same coal seam as the P8 well.

During the exploration period, FEEB, as operator, must complete at least the minimum work program and seek commercial deposits of CBM that can be developed in commercially paying quantities. Under the Shouyang PSC, as modified to date, we are required to conduct pilot testing to obtain information necessary to prepare an application for an overall development plan to submit as part of the application for a long-term development license for a particular CBM field or area within the Shouyang Block.

The preparation of an overall development plan to be submitted jointly with CUCBM as part of the application for a long-term development license will require adequate CBM resources certified to the applicable standard by the MLR, as well as technical, commercial, environmental, health and safety plans demonstrating how the CBM field will be developed for the exploitation of CBM resources located therein.

The key certification is that the identified development area contains verifiable/recoverable CBM resources that can be extracted in a commercially economic manner to the standards and guidelines set forth in the Specifications for Coalbed Methane Resources/Reserves (DZ/T0216-2010) (the “CBM Specifications”) promulgated by the MLR.

The first step in this process is to engage a Chinese company licensed by the MLR to compile reports as to CBM resources in accordance with MLR requirements. The licensed Chinese vendor will estimate CBM resources subject to certain conditions and assumptions specified in the CBM Specifications with respect to well spacing, the types of wells emphasized in the estimation of resources, the level of output of individual wells and the method of determining such output. The estimation of CBM resources at the necessary level is conducted only on blocks containing wells achieving a minimum standard of production for the CBM resources claimed for a time period of at least three months.

Upon completion of a preliminary draft of the report, an independent CBM expert reviews the report and provides comments to the licensed Chinese vendor. Once we are satisfied with the report, our Chinese partner company submits the report to the Petroleum Reserve Office of the MLR. After review and resolution of any questions or comments, the report is approved by the Petroleum Reserve Office of the MLR and submitted to the Reserve Review and Exam Office of the MLR for further review and certification. After review and resolution of any questions or comments, the CBM resources are then certified by the Reserve Review and Exam Office of the MLR to the requisite levels under the CBM Specifications, at which point work can commence on the application process for a long-term development license for the identified development area.

In our case, in October 2010, we engaged the Technology Department of CUCBM to compile our first report. Subsequently, we obtained our first certification from the MLR in June 2012 as to the area described above and are in the process of preparing an application for a long-term development license for the area. We are also evaluating additional acreage for future MLR certification. The subsurface portion of the preliminary draft of the ODP report was finished and the surface design compilation is going on and is planned to be submitted to CUCBM for an internal review in the fourth quarter of 2013. An external expert review will be organized afterward. Additionally, third parties have been engaged to compile supplementary reports needed to obtain various permits from local government bureaus as required by the ODP process.

The development period as to any CBM field covered by the Shouyang PSC will begin after the approval of the overall development plan for any such CBM field. As discussed above, CUCBM has agreed to waive its right to any participating interest share in approximately 15,988 acres (64.7 square kilometers) of the Shouyang Block and it has not currently elected to exercise its option to receive a 30% participating interest in any other CBM field that is developed in the Shouyang Block. Thus, Far East will be entitled to a 100% participating interest share in the entirety of its 1H Pilot Area (subject to Phillips 3.5% revenue interest).

In September 2011, SPG completed the construction of additional gathering lines in the 1H Pilot Area. These gathering lines are used to transport produced gas to the regional pipeline for sales. Currently, we have 66 wells connected to the gathering lines in the 1H Pilot Area. Approximately 25 wells are in the planning and bid process to be connected next.
The price received from SPG for CBM under the Gas Sales Agreement was 1.20 RMB per cubic meter (or $5.41 per thousand cubic feet (“Mcf”), inclusive of $0.63 for VAT and $0.08 for provincial taxes, based on the September 30, 2013 exchange rate, excluding the effect of any applicable subsidies) until June 12, 2011 and thereafter the price was subject to change based on the parties’ agreement in accordance with market economic principles. The 1.20 RMB per cubic meter price continues to apply at this time. The VAT portion of the sales price is refundable to the Company.

Additionally, enacted Chinese government and Shanxi provincial subsidies equal 0.20 RMB and 0.05 RMB per cubic meter, respectively, for a total of 0.25 RMB per cubic meter. The price received by CUCBM and FEEB, including subsidies for gas sales is 1.45 RMB per cubic meter. This equates to approximately $6.68 per Mcf at exchange rates as of September 30, 2013. The Gas Sales Agreement also provides for price adjustments in accordance with changes to the published Chinese national natural gas price and annual price adjustments based on the parties’ mutual agreement. If the parties do not agree on a new price, the then-current price shall continue in effect and either party may seek to resolve any pricing dispute pursuant to arbitration. The Chinese government issued new national natural gas price reforms on July 10, 2013 providing for a nationwide increase of 15% in city-gate prices, and we expect the pricing in our Gas Sales Agreement to be adjusted accordingly in the future.

Work programs are being carried out to achieve three primary goals: (i) to expand the area in the 1H Pilot Area to increase gas production, (ii) to determine the optimal development approach to minimize costs and maximize CBM recovery and (iii) to add appraisal wells, spaced at intervals of several kilometers across the entire Shouyang Block to help delineate the geographic extent of the high permeability and high gas content located in the area. We refer to an “appraisal well” as a CBM well drilled outside of the 1H Pilot Area to determine the physical extent of commercially attractive parameters of the coal (such as high gas content, high permeability and good coal thickness), as well as to contribute to the identification of reserves.

We believe that the addition of production wells in the 1H Pilot Area and the addition of appraisal wells throughout the Shouyang Block could add substantially to proved and probable reserves. The following discussion regarding our drilling activity involves the drilling of wells that constitute “exploratory wells,” as such term is defined in Rule 4-10(a)(13) of Regulation S-X.

The $60 million Notes placed in the first quarter of 2013 provide full funding for the 2013 drilling program, and during the same quarter the Company reviewed requested technical analyses commissioned from third party engineering firms to ascertain both optimal drilling locations for the 2013 drilling program, as well as optimal frac designs. Results were incorporated into the drilling and completion program.

During the third quarter of 2013, twenty wells were spudded. Subsequent to the third quarter, an additional 8 wells were spudded as of October 29, 2013. Since January 1, 2013, 74 wells have been spudded as of October 29, 2013. Additionally, from inception of the Shouyang PSC through October 29, 2013, one well has been abandoned in the Shouyang Block.

FEEC operates the Shouyang drilling program in the most efficient and environmentally responsible methods available. In its execution, the company has elected to pursue pad drilling operations placing as many as 5 wells on one, small footprint, location. This saves important agriculture lands, reduces infrastructure loads, lowers manpower requirements and lightens our impact on the environment. This approach does place additional burdens on the orchestration of drilling, fracturing and completion operations and could introduce minor delays, these are mitigated by our ability to batch wells for the fracturing operations. Through careful cooperation between our fracturing service company, logistics department, and local suppliers, the Company is able to maintain a fracture treatment program of up to 1 well per day for extended periods.

As of October 30, 2013, 51 development wells and 7 appraisal wells have been fracture stimulated and additional 12 wells are currently scheduled for fracture stimulation. As additional wells are drilled, they will be steadily added to the frac program.

The gross and net number of productive wells as of October 23, 2013 in the Shouyang Block, after giving effect to CUCBM’s right to make participating elections in the Shouyang Block as if made on such date, was 109 and105.4. Of these 109 wells, 95 are wells drilled in the initial 1H Pilot Area to expand the field to the west and 14 are appraisal wells. In addition to these wells, there are wells in various stages of drilling and fracing operations as noted above.

A number of appraisal wells were drilled at approximately 4 to 5 kilometer intervals to the west, south and east of the 1H Pilot Area, which is adjacent to the northern boundary of the Shouyang Block, with the goal of providing data to support the full extent of the northern portion of the Shouyang Block that contains high gas content as well as good permeability characteristics. We have continued to drill appraisal wells to the east and southeast of the 1H Pilot Area.
Through the drilling of the appraisal wells we seek to determine what portion of the Shouyang Block shares the same rare combination of high permeability and high gas content as discovered in the 1H Pilot Area. The wells drilled to the west and south of the 1H Pilot Area have revealed both high gas content and high permeability. Additionally, the drilling and production testing of the P12, P18 and SYS05 wells in the east and southeast portion of the Shouyang Block respectively each demonstrate that permeability and the potential for significant gas production extend into these portions of the block. Most significantly, the SYS05 well in the southeastern portion of the block and approximately 35 kilometer southeast of the 1H Pilot Area was successfully production tested at a rate exceeding MLR certification requirements.

Provided we remain in compliance with the requirements under the Shouyang PSC, the Shouyang PSC allows production to continue on a CBM field until the earlier of the end of the useful life of the field or June 30, 2032, unless extended or otherwise amended.

The following table reflects the permeability determined in the Shouyang Block (area amended by the Shouyang Modification Agreement):

Well Area
Permeability Range
(Millidarcies - mD)
Number of Wells
In this Range
1H Pilot Area
80-100
1H Pilot Area Wells
Appraisal/Exploration Wells
200-300
1
Appraisal/Exploration Wells
100-199
3
Appraisal/Exploration Wells
50-99
4
Appraisal/Exploration Wells
10-49
7

With permeabilities ranging from 10 millidarcies to 300 millidarcies, we believe that the No. 15 coal seam in the expanded areas tested appears to contain areas of high permeability coupled with high gas content.

Qinnan Block, Shanxi Province. The exploration period of the Qinnan PSC in Shanxi Province expired on June 30, 2009, and we cannot continue our exploration activities in the Qinnan Block without an extension or a new PSC. We are continuing to pursue an extension of the exploration period of the Qinnan PSC, but we cannot be optimistic at this time. The Company believes the underlying exploration period should be extended due to events beyond its reasonable control, namely the lengthy transfer of rights taking place from CUCBM to CNPC. At our Chinese partner’s request, we have provided certain operational and financial information about our company to assist them in the decision making process as to whether to recognize an extension of the exploration period in Qinnan. PetroChina, CNPC’s wholly-owned subsidiary, has completed an accounting audit pursuant to the Qinnan PSC of our expenditures for 2007 and 2008. We have also provided to PetroChina 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 CUCBM’s interest to it, and subsequently to PetroChina. CNPC also requested we execute a modification agreement to confirm PetroChina as our Chinese partner company for the Qinnan PSC. In negotiations with CUCBM and PetroChina related to this request, we have endeavored to negotiate an assignment agreement that would reflect the transfer of interest to CNPC while CNPC and PetroChina would acknowledge delays that were incurred by virtue of FEEB not having, for an extended period of time, an official Chinese partner that had the capacity or authority under the Qinnan PSC to work with us.

Because of the inability to hold a formal 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.
Laochang Area, Yunnan Province. We are a party to the Yunnan PSC with CUCBM, which provides for an operating interest in approximately 119,327 acres (482.9 square kilometers) in the Laochang Area. CUCBM has the right to accept up to a 40% participating interest within 30 days of receipt of notice of Chinese certifications of CBM resources in a particular CBM field. Unless extended or amended, the exploration period will expire December 31, 2013. As modified to date, following expiration of the extended exploration period, we may elect to continue the process of trying to convert portions of the Laochang Area into MLR certified areas in order to transition these areas into the process for a long-term development license and the development period for certain areas. Any acreage that is not at or past the stage of submittal of a technical report to CUCBM that reasonably meets the criteria for MLR certification will be relinquished unless the parties otherwise agree.

The development period as to any portion of the Laochang Area will not begin until after the approval of an application for an overall development plan. An overall development plan would be developed and filed jointly by us and CUCBM, seeking approval from Chinese governmental authorities, for any portion of the Laochang Area that we and CUCBM elect to develop. The production period as to any portion of the Laochang Area will begin after the date of commencement of commercial production of CBM with respect to that area. Provided that we remain in compliance with the requirements under the Yunnan PSC, production will be allowed to continue on the respective producing portion of the Laochang Area until the earlier of the end of the useful life of that area or January 1, 2033, unless extended or otherwise amended.

We are responsible for all exploration costs related to the Yunnan PSC, including all exploration costs for discovering and evaluating CBM-producing areas. If any portion of the Laochang Area is discovered to be a CBM-producing area, as noted above, CUCBM will be deemed to hold a 40% participating interest in such area and we will be deemed to hold a 60% participating interest, unless CUCBM elects to participate at a lower level, in which case we will retain all participating interests not taken by CUCBM and will be responsible for development costs in proportion to our participating interest.

Because there are no pipelines currently in the immediate vicinity of the Yunnan Province projects, our ability to sell CBM produced on these projects to communities outside the general area will be contingent upon a gas pipeline, compressed natural gas facility or other offtake vehicle being built within close proximity to our project area. CNPC has undertaken a pipeline construction project, with support from the Yunnan provincial government, to extend the Myanmar-China natural gas pipeline to pass through the city of Kunming, then move eastward through the city of Qujing, and finally go to Guizhou Province in the east. We believe that the construction, which would lay pipelines closer to our projects in the Yunnan Block, would help reduce the costs for CBM offtake from our projects and increase our ability to eventually deliver gas to consumers. The diameter of the pipeline is 1016 mm, and the designed capacity for natural gas is 12 billion cubic meters per year. The Myanmar-China pipeline was completed in the middle of October 2013. The pipeline runs about 60 kilometers north of the northern boundary of the Laochang sub-block.

After obtaining sufficient production data from five clustered wells in Laochang, we ceased the pilot program in the middle of May 2013. Further exploration and development will be the subject of our internal strategic review of our Yunnan Block holdings to determine whether they fit within our risk profile, given our other opportunities, such as our anticipated move into the development phase in the Shouyang Block.

We take into consideration, among other factors, our overall corporate strategy, the prospective costs and benefits of the acreage, our relationship with our Chinese partner companies and our current cash position in order to formulate an optimal strategy. The strategy may include, without limitation: (i) minimal capital expenditures to continue holding the acreage, (ii) the sale, farmout or partial farmout of the acreage, (iii) full or partial relinquishment of the acreage, or (iv) continue staged exploration of the acreage. We have not yet concluded this review and cannot make any projection as to the likely outcome of this review. Moreover, CUCBM will have its own view and certain outcomes will be subject to CUCBM and MofCom approval. On May 15, 2013, the State Council of PRC announced that such approval will no longer require the approval by MofCom. The Company is still analyzing the impact of the change and the affect it could have on its business and operations.
Results of Operations

Three Months Ended September 30, 2013 vs. Three Months Ended September 30, 2012:

The following table sets forth the natural gas sales data for the three-month periods ended September 30, 2013 and 2012:

 
 
Three Months Ended September 30,
 
 
 
2013
   
2012
 
Natural Gas
 
   
 
Sale Volumes, net to Far East (Mcf)
   
60,901
     
78,910
 
 
               
Per Day Volumes, net to Far East (Mcf per day)
   
662
     
858
 
 
               
Average Gas Sales Price, net of taxes ($ per Mcf)
 
$
4.80
   
$
4.68
 
PRC National Subsidy and Provincial Subsidies ($ per Mcf)
   
1.15
     
1.12
 
VAT Refund ($ per Mcf)
   
0.63
     
0.62
 
Total Gas Sales and Other Revenues ($ per Mcf)
 
$
6.58
   
$
6.42
 
 
               
Natural Gas Sales, net to Far East ($000's)
 
$
292
   
$
369
 

Natural Gas Sales during the three months ended September 30, 2013 decreased $77,000, or 21%, as compared to the same period a year ago due primarily to the decrease in sales volumes of 18 MMcf, or 22%. Sales volumes decreased during the third quarter of 2013 compared to the same period a year ago as a result of a temporary production increase that occurred in the second half of 2012 that has not occurred in 2013. Sales volumes increased 20 MMcf, or 48%, during the three months ended September 30, 2013 compared to the three months ended June 30, 2013.

The table below sets out major components of our expenditures (in thousands):

 
 
Three Months Ended September 30,
 
 
 
2013
   
2012
 
Additions to Oil and Gas Properties (capitalized)
 
   
 
- Shouyang Block, Shanxi Province (1)
 
$
14,436
   
$
413
 
Exploration Expenditures (expensed)
               
- Shouyang Block, Shanxi Province
   
1,055
     
1,075
 
- Qinnan Block, Shanxi Province
   
12
     
116
 
- Laochang Block, Yunnan Province
   
137
     
292
 
- Total
   
1,204
     
1,483
 
Lease Operating Expenditures (expensed)
               
- Shouyang Block, Shanxi Province
   
1,253
     
1,148
 
- Qinnan Block, Shanxi Province
   
-
     
-
 
- Total
   
1,253
     
1,148
 
 
               
Total Capital and Operating Expenditures
 
$
16,893
   
$
3,044
 
 
               
General and Administrative Expenses
 
$
2,504
   
$
3,572
 

  (1) Capitalized in the Consolidated Balance Sheets.
The table below sets out the operating expenses in the Consolidated Statements of Operations for the three-month periods ended September 30, 2013 and 2012 (in thousands):

 
 
Three Months Ended September 30,
 
 
 
2013
   
2012
 
Lease operating expense
 
$
1,253
   
$
1,148
 
Exploration costs
   
1,204
     
1,483
 
General and administrative
   
2,504
     
3,572
 
Depreciation, depletion and amortization
   
622
     
507
 
Total
 
$
5,583
   
$
6,710
 

The table below sets out components of exploration costs for the three months ended September 30, 2013 and 2012 (in thousands):

 
 
Three Months Ended September 30,
 
 
 
2013
   
2012
 
Technical personnel compensation
 
$
71
   
$
101
 
PSC related payments
   
205
     
288
 
Contract drilling & related expenses
   
928
     
1,094
 
Total
 
$
1,204
   
$
1,483
 

Exploration costs for the three months ended September 30, 2013 decreased by $0.3 million compared to the same period in 2012 due primarily to decreases in contract drilling and related expenses of $0.2 million and PSC related payments of $0.1 million.

The table below sets out components of lease operating expense ("LOE") for the three-month periods ended September 30, 2013 and 2012 (in thousands):

 
 
Three Months Ended September 30,
 
 
 
2013
   
2012
 
Pumping Related Costs
 
$
975
   
$
870
 
Workovers
   
65
     
98
 
Supervision
   
213
     
180
 
Total
 
$
1,253
   
$
1,148
 

LOE for the three months ended September 30, 2013 was comprised of costs pertaining to the production and dewatering efforts in the Shouyang Block in Shanxi Province. LOE for the three months ended September 30, 2013 increased $0.1 million compared to the same period in 2012 due primarily to an increase in pumping related costs. However, due to increased operating efficiencies, LOE per productive well has decreased 27% in the three months ended September 30, 2013 compared to the same period in 2012.

General and administrative ("G&A") expenses for the three months ended September 30, 2013 decreased $1.0 million primarily due to a $0.5 million decrease in legal expenses, a $0.2 million decrease in payroll expenses, a $0.2 million decrease in travel expenses and a $0.1 million decrease in professional services.
Nine Months Ended September 30, 2013 vs. Nine Months Ended September 30, 2012:

The following table sets forth the natural gas sales data for the nine-month periods ended September 30, 2013 and 2012:

 
 
Nine Months Ended September 30,
 
 
 
2013
   
2012
 
Natural Gas
 
   
 
Sale Volumes, net to Far East (Mcf)
   
168,840
     
183,891
 
 
               
Per Day Volumes, net to Far East (Mcf per day)
   
618
     
671
 
 
               
Average Gas Sales Price, net of taxes ($ per Mcf)
 
$
4.76
   
$
4.69
 
PRC National Subsidy and Provincial Subsidies ($ per Mcf)
   
1.14
     
1.13
 
VAT Refund ($ per Mcf)
   
0.63
     
0.62
 
Total Gas Sales and Other Revenues ($ per Mcf)
 
$
6.53
   
$
6.44
 
 
               
Natural Gas Sales, net to Far East ($000's)
 
$
803
   
$
863
 

Natural Gas Sales during the first nine months ended September 30, 2013 decreased by $60,000, or 7%, as compared to the same period a year ago due primarily to the decrease in sales volumes of 15 MMcf, or 8%. Sales volumes decreased during the first nine months of 2013 compared to the same period a year ago. This decrease as compared to the same period in 2012, is partially attributable the fact that in the first several months of 2013, there were intermittent interruptions from the power supply to our pumps and compressors as the province engaged in upgrades to the regional power infrastructure. The decrease is also attributable to the fact that there was a temporary production increase that occurred in the second half of 2012 thereby increasing the sales volume for such period.

The table below sets out major components of our expenditures (in thousands):

 
 
Nine Months Ended September 30,
 
 
 
2013
   
2012
 
Additions to Oil and Gas Properties (capitalized)
 
   
 
- Shouyang Block, Shanxi Province (1)
 
$
25,619
   
$
2,957
 
Exploration Expenditures (expensed)
               
- Shouyang Block, Shanxi Province
   
3,112
     
3,081
 
- Qinnan Block, Shanxi Province
   
33
     
345
 
- Laochang Block, Yunnan Province
   
611
     
867
 
- Total
   
3,756
     
4,293
 
Lease Operating Expenditures (expensed)
               
- Shouyang Block, Shanxi Province
   
3,595
     
4,073
 
- Qinnan Block, Shanxi Province
   
-
     
-
 
- Total
   
3,595
     
4,073
 
 
               
Total Capital and Operating Expenditures
 
$
32,970
   
$
11,323
 
 
               
General and Administrative Expenses
 
$
7,707
   
$
8,999
 

(1) Capitalized in the Consolidated Balance Sheets.
The table below sets out the operating expenses in the Consolidated Statements of Operations for the nine-month periods ended September 30, 2013 and 2012 (in thousands):

 
 
Nine months ended September 30,
 
 
 
2013
   
2012
 
Lease operating expense
 
$
3,595
   
$
4,073
 
Exploration costs
   
3,756
     
4,293
 
General and administrative
   
7,707
     
8,999
 
Depreciation, depletion and amortization
   
1,581
     
1,284
 
Total
 
$
16,639
   
$
18,649
 

The table below sets out components of exploration costs for the nine months ended September 30, 2013 and 2012 (in thousands):

 
 
Nine Months Ended September 30,
 
 
 
2013
   
2012
 
Technical personnel compensation
 
$
224
   
$
287
 
PSC related payments
   
612
     
812
 
Contract drilling & related expenses
   
2,920
     
3,194
 
Total
 
$
3,756
   
$
4,293
 

Exploration costs for the nine months ended September 30, 2013 decreased by $0.5 million compared to the same period a year ago primarily due to a $0.2 million decrease in PSC payments and a $0.3 million decrease in contract drilling expenses.

The table below sets out components of LOE for the nine-month periods ended September 30, 2013 and 2012 (in thousands):

 
 
Nine Months Ended September 30,
 
 
 
2013
   
2012
 
Pumping Related Costs
 
$
2,666
   
$
3,264
 
Workovers
   
266
     
384
 
Supervision
   
663
     
425
 
Total
 
$
3,595
   
$
4,073
 

LOE for the nine months ended September 30, 2013 was comprised of costs pertaining to the production and dewatering efforts in the Shouyang Block in Shanxi Province. LOE for the nine months ended September 30, 2013 decreased $0.5 million compared to the same period in 2012 due primarily to a decrease in pumping related costs, which resulted from decreases in production monitoring, land lease costs, and equipment and transportation costs. Additionally, there was $0.1 million decrease in workovers offset by a $0.2 million increase in supervision costs. Due to increased operating efficiencies, LOE per productive well has decreased 41% in the nine months ended September 30, 2013 compared to the same period in 2012.

G&A expenses for the nine months ended September 30, 2013 decreased $1.3 million compared to the same period in 2012. The decrease is primarily due to a $0.5 million decrease in payroll expenses and a $0.9 million decrease in legal expenses offset by a $0.1 million increase in professional services.

Capital Resources and Liquidity. Although gas sales under the Gas Sales Agreement commenced in the first quarter of 2011, our primary source of cash flow has been cash proceeds from public offerings and private placements of our common stock and warrants to purchase our common stock, the exercise of warrants and options to purchase our common stock, and proceeds received from the closing of the Facility Agreement and the issuance of the Notes.

On January 14, 2013, the Company sold the Notes and the Warrants to certain institutional investors for $60.0 million of gross proceeds in the Private Placement, which was exempt from the Securities Act. The Private Placement closed on January 15, 2013.
On January 15, 2013, the Company entered into the Fifth Amendment to the Facility Agreement (the “Fifth Amendment”), among FEEC, FEEB and SCB Bank, to provide for the extension of the maturity date thereof until January 15, 2014. The Fifth Amendment was subject to the repayment of $4.125 million of the outstanding principal amount and the repayment of $0.7 million of capitalized interest. The total amount of outstanding principal and capitalized interest under the Facility Agreement prior to the repayment of such amount was $25.8 million (which includes $125,000 borrowed on January 11, 2013). In addition, accrued interest, amendment fees and certain transaction expenses were paid at closing out of the gross proceeds of the Private Placement. As of January 15, 2013 the amount remaining owed under the Facility Agreement was $21.0 million. After taking into account the amounts paid pursuant to the Fifth Amendment and transaction fees and expenses incurred in connection with the Fifth Amendment and the Private Placement, the net proceeds to the Company of the Private Placement were $52.0 million. At September 30, 2013, the total amount drawn under the Facility Agreement was $21.0 million and the related accrued interest was $0.5 million. The Notes and the Facility Agreement are cross-defaulted against one another. Due to our current cash position and our current liabilities, we will need to refinance the Facility Agreement or secure additional capital in order to repay the Facility Agreement in full on its maturity date.

In addition to payment of the above amounts to SCB, FEEB and FEEC intend to use the net proceeds of the Private Placement for (i) drilling and development expenses for the Shouyang CBM project in the Shanxi Province in China, including drilling and completion expenses of appraisal wells, drilling and completion expenses of production wells, construction and installation of gathering and compression facilities and submission of an overall development plan for the project, (ii) general corporate purposes, including exploration costs for such project, operating costs on the Shouyang PSC and general and administrative expenses and (iii) transaction expenses. Under the securities purchase agreement for the Private Placement and the Indenture, FEEB and FEEC are obligated to apply the net proceeds according to the estimated amounts of each category set forth therein within an agreed range, provided that FEEC and FEEB shall apply not less than $21.6 million for the drilling and completion of production wells.

Summary of Material Terms of the Notes.

The Notes are senior secured obligations of FEEB and are fully and unconditionally guaranteed by FEEC. The Notes were sold at an issue price of 100% of par for an aggregate principal amount of $60.0 million. The Notes accrue cash interest at a rate of 13.000% per year, which is paid semi-annually in arrears on June 30 and December 30 of each year, commencing on June 30, 2013. FEEB may, at its option, elect to pay interest “in kind” at a rate of 14.500% per year by issuing additional Notes with the first interest payment required to be paid in kind. The Notes will mature on January 15, 2016.

The Notes and related guarantees rank equal in right of payment with the Facility Agreement. Except as specifically permitted by the Indenture, any new indebtedness of FEEC, FEEB or any restricted subsidiary of FEEC will require the consent of SCB and the “Required Noteholders,” which means holders of 75% of aggregate principal amount at maturity of the Notes. The Notes and related guarantees are secured by substantially all of the assets of FEEC and FEEB, other than assets located in the People’s Republic of China, assets the grant, creation or perfection of any lien on which would require the consent, authorization or approval of, or filing with, any governmental authority in the People’s Republic of China and certain other excluded assets. Such collateral continues to secure the Facility Agreement with the administration of such collateral subject to a collateral agency and intercreditor agreement between SCB and Wells Fargo Bank, National Association, as indenture trustee of the Notes and as collateral agent.

In certain circumstances specified in the Indenture and as summarized below, FEEB may or will be required to redeem or offer to repurchase the Notes at the relevant prices set forth below times the principal amount being redeemed or repurchased:

Closing Date to February 28, 2014
   
100
%
March 1, 2014 to December 31, 2014
   
104
%
January 1, 2015 and thereafter
   
108
%

plus accrued and unpaid interest thereof, if any, on the Notes to the applicable date of redemption or repurchase, as applicable.

FEEB has the option to redeem the Notes, in whole or in part, at any time after all obligations under the Facility Agreement have been repaid in full at the relevant redemption prices set forth above.
In the event that FEEC and FEEB obtain financing pursuant to a credit facility, agreement or indenture with one or more banks or other institutional lenders or a trustee or investors (a “Future Financing”), which in certain circumstances would require the consent of the Required Noteholders and SCB, or if FEEC sells capital stock at a time when the aggregate principal amount of the Notes outstanding exceeds $10.0 million, the net proceeds of such Future Financing and the net proceeds of such capital stock offering in excess of $5.0 million, as applicable, shall first be used to repay obligations under the Facility Agreement and thereafter to redeem the Notes at the redemption prices set forth above to the extent of such amounts.

In the event that (i) FEEC and FEEB generate “excess cash flow” as defined in the Indenture, (ii) FEEC or FEEB sell assets in circumstances described in the Indenture or (iii) a casualty loss of property or assets of FEEC or FEEB occurs and the insurance proceeds with respect to such loss exceed $30.0 million, then FEEB will be required to apply the “excess cash flow amount” (as defined in the Indenture), the net proceeds of such asset sale or such insurance proceeds, as applicable, to first repay obligations under the Facility Agreement and thereafter to offer to repurchase the Notes at the purchase prices set forth above. The “excess cash flow amount” means, with respect to any period, 50% of the excess cash flow for such period minus $5.0 million of cash and cash equivalents for such period minus the principal amount of the Facility Agreement repaid with such excess cash flow during such period.

In the event of a change of control of FEEC, FEEB will be required to repay all obligations outstanding under the Facility Agreement and to offer to repurchase the Notes at the purchase prices set forth above.

The Indenture contains covenants that, among other restrictions, limit FEEC’s and FEEB’s ability and the ability of certain of their subsidiaries to:

•            amend our constitutional documents;

•           incur or guarantee additional indebtedness other than up to $15.0 million of aggregate principal amount of additional Notes and additional warrants on terms identical to or more favorable to FEEC than the Warrants;

•            issue certain preferred stock;

•            create or incur liens other than liens permitted by the Indenture;

•            pay dividends, repurchase equity securities, redeem subordinated debt, repay certain intercompany indebtedness up to a specified amount or make investments or other restricted payments;

•            transfer or sell assets;

•            incur dividend or other payment restrictions;

•            enter into certain transactions with affiliates;

•            change FEEC’s or FEEB’s line of business;

•            form subsidiaries;

•            sell capital stock of restricted subsidiaries; and

•            merge, consolidate or transfer all or substantially all of FEEC’s and FEEB’s assets.

In addition, the Indenture contains covenants that, among other obligations, require FEEC and FEEB to:

•            be in compliance with all relevant laws and regulations;

•            provide specified financial reports to holders of Notes;

•            maintain customary insurance policies;
•            maintain FEEB’s foreign exchange registration certificate;

•            use the net proceeds of the Private Placement as set forth in the Indenture; and

•            use their commercially reasonable efforts to list the Notes on the Cayman Islands Stock Exchange within six months of the issue date and maintain such listing.

The Indenture contains customary events of default that could, subject to certain conditions, cause the Notes to become immediately due and payable, including but not limited to:

•            the failure to make principal (at maturity, upon redemption or otherwise) or interest payments when due;

•            the failure to make, and to accept and pay the purchase price for Notes tendered pursuant to, the offers to purchase required by the Indenture;

•            the failure to comply with certain covenants in the Indenture or any of the collateral documents;

•            the failure to comply with the reporting obligations in the Indenture for ten days after notice by the trustee or the holders of at least 25% of the aggregate principal amount of the Notes;

•            the default by FEEC or any of its restricted subsidiaries under any mortgage, indenture or other indebtedness in the aggregate of $1 million or more if caused by the failure to pay principal or interest when due or if such default entitles the creditor to declare such indebtedness due and payable prior to its stated maturity;

•            the failure to satisfy certain final, non-appealable judgments of any court of competent jurisdiction in excess of $1.0 million;

•            if any Note guarantee is held to be unenforceable or is repudiated by the guarantor thereof;

•            certain events of bankruptcy or insolvency;

•            the liens securing the Notes cease to be in full force in effect or cease to have priority over certain other lienholders with respect to collateral with a fair market value in excess of $1.0 million or are contested by FEEB or any guarantor in circumstances specified by the Indenture;

•           any representation or warranty made by FEEC or FEEB in the securities purchase agreement for the Private Placement proves to be incorrect in any material respect;

•            the validity of the Notes, the guarantees of the Notes or the Indenture is contested by FEEB or any guarantor;

•            the Shouyang project is abandoned in whole or in part, the Shouyang PSC is terminated, revoked or ceases to be in full force and effect or an event of loss occurs with respect to any of the property or assets of FEEC or FEEB in excess of $10 million net of any insurance proceeds; and

•           certain acts of governmental expropriation or nationalization or certain governmental restrictions on foreign currency exchange or that prevents FEEC or FEEB from paying its obligations in U.S. dollars.

Summary of Material Terms of the Warrants.

The Warrants provide the holders the right to purchase up to 56,086,439 shares of FEEC common stock at an exercise price of $0.085 per share, subject to adjustments described below. The Warrants are exercisable at any time after issuance and will expire at 5:00 p.m., New York City time, on December 31, 2017. The Warrants have anti-dilution provisions specified in the Warrant Agreement, dated January 15, 2013 (the “Warrant Agreement”), between FEEC and Continental Stock Transfer & Trust Company, as warrant agent, including, but not limited to, adjustments for (i) stock splits, reverse stock splits and stock dividends, (ii) the issuance of rights, options, warrants or convertible or exchangeable securities at a price per share less than the current market value of FEEC common stock at the record date therefore, (iii) certain distributions of cash, evidence of indebtedness or other property or assets to holders of any class of common stock, (iv) certain reclassifications, consolidations, mergers or sales of assets of FEEC and (v) certain issuances or sales, or deemed issuances or sales, of shares of common stock for an effective price below the then-effective exercise price of the Warrants or for an effective price greater than the then-effective exercise price but less than or equal to $0.425 per share, subject to adjustment, or for an effective price greater than $0.425, subject to adjustment, but less than the current market price per share at the time of such issuance or sale.
The holders of the Warrants are entitled to certain registration rights set forth in the Registration Rights Agreement, dated January 15, 2013 (the “Registration Rights Agreement”), between FEEC and the purchasers of the Warrants. Under the Registration Rights Agreement, FEEC will file a registration statement (the "Primary Registration Statement") on the appropriate form with the Securities and Exchange Commission (“SEC”) to register under the Securities Act the resale of the shares of common stock issuable upon exercise of the Warrants within 210 days after the closing date and will use its best efforts to cause the Primary Registration Statement to be declared effective by the SEC under the Securities Act within 360 days after the closing date (or within 390 days after the closing date if FEEC receives comments on the Primary Registration Statement from the SEC). In addition, the holders of common stock underlying the Warrants will have "piggyback" registration rights for the resale of such shares of common stock.

Our board of directors has the authority, without further action by the stockholders but subject to restrictions in the Warrant Agreement and Indenture, to issue up to 500 million shares of preferred stock in one or more series and to designate the rights, preferences, privileges and restrictions of each series. We also have 500 million shares of Common Stock authorized under our charter documents, of which approximately 346.1 million shares were issued and outstanding as of September 30, 2013.

The issuance of preferred stock could have the effect of restricting dividends on the common stock or delaying or preventing our change in control without further action by the stockholders. While we have no present plans to issue any shares of preferred stock, we may need to do so in the future in connection with capital raising transactions. In addition, we may issue additional shares of common stock in connection with capital raising activities. The issuance of additional common stock would also have a dilutive impact on our stockholders' ownership interest in our company.

Work Program and Other Funding. Our current work programs would satisfy the minimum exploration expenditures for our Shouyang and Yunnan PSCs for 2013. With respect to the Qinnan PSC, we have halted activities on the Qinnan Block pending regulatory approval or denial of our force majeure claims. To secure additional capital for future work programs and to repay the Facility Agreement on or before its maturity date, management must either explore potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, acquisition or sale of some or all of our assets or obtain additional debt, reserve based, project or equity-related financing. However, there can be no assurance that we will be successful in entering into any strategic relationship or transaction, securing capital or raising funds through debt, reserve based, project or equity- related financing. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt, reserve based, project or equity-related financing are uncertain and we cannot predict the timing, structure or other terms and conditions or the consideration that may be paid with respect to any transaction or offering of securities and whether the consideration will meet or exceed our offering price. Due to certain factors, an offering of our common stock is likely not a viable alternative at this time, but a non-convertible preferred stock offering might be possible under certain circumstances. Under certain circumstances, the structure of a strategic transaction may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult. In particular, any transfer of our rights under the PSCs will require the approval of our Chinese partner company and the MofCom. On May 15, 2013, the State Council of PRC announced that such approval will no longer require the approval by MofCom. The Company is still analyzing the impact of the change and the affect it could have on its business and operations. There can be no assurance that the Chinese authorities will provide the approvals necessary for the consummation of a transaction or transfer. There can be no guarantee of future success in capital acquisition, fundraising or exploration success.

Our capital resources and planning can be impacted by fluctuations in the U.S. Dollar and RMB exchange rate as well as inflation in these countries. For further discussion of these risks, see Item 3. "Quantitative and Qualitative Disclosures About Market Risk."

Cash Flows. As of September 30, 2013, our balance in cash and cash equivalents was $26.1 million, an increase of $24.8 million from the balance of $1.3 million as of December 31, 2012. The increase was due primarily to $58.5 million net cash proceeds from the Private Placement offset by $15.8 million used by operating activities, $11.4 million used by investing activities and $4.9 million used to repay certain amounts under the Facility Agreement.
Cash used in operating activities for the nine months ended September 30, 2013 was $15.8 million as compared to cash used in operating activities for the same period in 2012 of $22.7 million. The decrease was primarily due to $1.4 million decrease of in G&A expenses, $0.5 million decrease in LOE, $0.6 million decrease in exploration expenses and $5.9 million favorable change in working capital, the decrease was offset by increase of $0.4 million in interest payments.

Cash used in investing activities for the nine months ended September 30, 2013 was $11.4 million as compared to $3.2 million for the same period in 2012. The increase was primarily due to an increase in additions to oil and gas properties of $8.0 million.

Cash provided by financing activities for the nine months ended September 30, 2013 was $52.0 million as a result of net proceeds from the Private Placement during the first quarter of 2013. Cash provided by financing activities for the nine months ended September 30, 2012 was $6.2 million as a result of a draw on the Facility Agreement in January 2012.

Forward-Looking Statements. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words "believe," "may," "will," "plan," "estimate," "continue," "anticipate," "intend," "expect," "project," and similar expressions, as they relate to us, are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Although we believe that the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that the actual results or developments we anticipate will be realized or, even if substantially realized, that they will have the expected effects on our business or operations. Actual results could differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ materially from those projected in such forward-looking statements include: the preliminary nature of well data, including permeability and gas content; there can be no assurance as to the volume of gas that is ultimately produced or sold from our wells; the fracture stimulation program may not be successful in increasing gas volumes; due to limitations under Chinese law, we may have only limited rights to enforce the Gas Sales Agreement, to which we are an express beneficiary; additional wells may not be drilled, or if drilled may not be timely; additional pipelines and gathering systems needed to transport our gas may not be constructed, or if constructed may not be timely, or their routes may differ from those anticipated; the pipeline and local distribution/compressed natural gas companies may decline to purchase or take our gas (although the Gas Sales Agreement with the pipeline is a “take or pay” contract), or we may not be able to enforce our rights under definitive agreements with pipelines; conflicts with coal mining operations or coordination of our exploration and production activities with mining activities could adversely impact or add significant costs to our operations; if required, the MofCom may not approve on a timely basis or at all, the extension of the Qinnan PSC or, if so, on commercially advantageous terms; our Chinese partner companies or the MofCom may require certain changes to the terms and conditions of the Shouyang or Yunnan PSCs in conjunction with their approval of any extension of the exploration period, including reductions in acreage or a reduction in the term of the extension for the exploration period; our lack of operating history; limited and potentially inadequate management of our cash resources; risk and uncertainties associated with exploration, development and production of CBM; our inability to extract or sell all or a substantial portion of our estimated CBM resources; we may not satisfy requirements for listing our securities on a securities exchange; expropriation and other risks associated with foreign operations; disruptions in capital markets affecting fundraising; matters affecting the energy industry generally; lack of availability of oil and gas field goods and services; environmental risks; drilling and production risks; changes in laws or regulations affecting our operations, as well as other risks described in our filings with the SEC.

When you consider these forward-looking statements, you should keep in mind these factors, the risk factors set forth in our 2012 Annual Report and this Quarterly Report on Form 10-Q under "Item 1A. Risk Factors" and in other filings with the SEC and the other cautionary statements in this Quarterly Report on Form 10-Q. Our forward-looking statements speak only as of the date made. All subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. We assume no obligation to update any of these statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In addition to the U.S. Dollar, we conduct our business in RMB and, therefore, are subject to foreign currency exchange risk on cash flows related to expenses and investing transactions. In June 2010, China announced that it would gradually allow the RMB to float against the U.S. Dollar and, as a result, the Chinese currency is expected to slowly appreciate with respect to the U.S. Dollar. All of our costs to operate our Chinese offices are paid in RMB. Our exploration costs in China may be incurred under contracts denominated in RMB or U.S. Dollars. As of September 30, 2013, the U.S. Dollar ($) to RMB (¥) depreciated slightly at an exchange rate of about $1 to ¥6.14, compared to an exchange rate of $1 to ¥6.31 at September 30, 2012. If the RMB appreciates with respect to the U.S. Dollar, our costs in China may increase. To date we have not engaged in hedging activities to hedge our foreign currency exposure. In the future, we may enter into hedging instruments to manage our foreign currency exchange risk or continue to be subject to exchange rate risk. If the RMB appreciates by 10% during the third quarter of 2013, our costs would increase by approximately $0.3 million. If the RMB depreciates by 10%, it is estimated that our costs would be approximately $0.3 million lower in the third quarter of 2013.

Although inflation has not materially impacted our operations in the recent past, increased inflation in China or the U.S. could have a negative impact on our operating and general and administrative expenses, as these costs could increase. In the last couple of years, we have increased our use of Chinese suppliers, including drilling contractors, that are paid in RMB. Since 2008, China experienced inflationary pressures, which increased our costs associated with our operations in China. In the future, inflation in China may result in higher minimum expenditure requirements under our PSCs if our Chinese partner companies adjust these requirements for inflation. The actual inflationary impact on the Company may also be exacerbated by the increasing demand for goods and services in the oil and gas industry. A material increase in these costs could adversely affect our operations and, if there are material changes in our costs, we may seek to secure additional capital earlier than anticipated.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION

FAR EAST ENERGY CORPORATION

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A - "Risk Factors" in our 2012 Annual Report, which could materially affect our business, financial condition, or future results. The risks described in our 2012 Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Risks Relating to Our Business

We have a limited source of revenue.

We will not generate material revenues from our existing properties until we have successfully completed exploration and development, and started meaningful production of CBM. Although we have had some sales under the Gas Sales Agreement since early first quarter of 2011, we are not able to predict exactly when we will recognize significant revenues. Although SPG has completed its pipeline, which runs within 2 kilometers of our 1H Pilot Area and is being used to transport CBM sold pursuant to the Gas Sales Agreement and in-field gathering system and compression equipment were connected to the pipeline in early January 2011, we have not yet achieved significant production in the Shouyang Block. Our ability to realize significant revenues from any producing wells may be impaired until production increases significantly in the Shouyang Block and additional pipelines or facilities are built out or arrangements are made to deliver a higher level of production to market. Additionally, no facilities exist to transport or process CBM near our Yunnan Province project.

We must obtain additional capital in order to continue our operations.

As discussed above, we are not able to predict exactly when we will recognize significant revenues. We expect to experience operating losses and negative cash flow until production levels in the Shouyang Block increase sufficiently, which will require the drilling and completion of a significant number of productive wells.

Management will continue to seek to secure additional capital to continue operations, repay the Facility Agreement on or before its maturity date and to meet future expenditure requirements necessary to retain our rights under our PSCs. In connection therewith, management must either seek to secure additional capital by exploring potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, acquisition or sale of some or all of our assets or obtain debt, reserve based, project or equity-related financing. However, there can be no assurance that we will be successful in entering into any strategic relationship or transaction, securing capital or raising funds through debt, reserve based, project or equity-related financing. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt, reserve based, project or equity-related financing are uncertain and we cannot predict the timing, structure or other terms and conditions or the consideration that may be paid with respect to any transaction or offering of securities and whether the consideration will meet or exceed our offering price. Due to certain factors, an offering of our common stock is likely not a viable alternative at this time, but a non-convertible preferred stock offering might be possible under certain circumstances. Under certain circumstances, the structure of a strategic transaction may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult or impossible. In particular, any transfer of our rights under any PSC will require the approval of our Chinese partner company. There can be no assurance that the Chinese authorities will provide the approvals necessary for a transaction or transfer. The ongoing global financial crisis has created liquidity problems for many companies and financial institutions, and international capital markets have stagnated, especially in Europe. A continuing downturn in these markets could impair our ability to obtain, or may increase our costs associated with obtaining, additional funds through the sale of our securities or otherwise. The ongoing crisis has created a difficult environment in which to negotiate and consummate a transaction. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt, reserves based, project or equity related financing are uncertain and we cannot predict the timing, structure or other terms and conditions of any such arrangements or the consideration that may be paid with respect to any transaction or offering of securities and whether the consideration will meet or exceed our offering price.
If our operating requirements or drilling obligations materially change from those currently planned, we may require more capital than currently anticipated or may be required to secure capital earlier than anticipated. For example, it is possible that the MLR or one of our Chinese partner companies could seek to, among other things, force us to relinquish acreage, increase our capital expenditures or accelerate our drilling program. If we are unable to commit to the expenditures or accelerate our drilling and dewatering efforts, it may adversely affect our ability to extend the terms of our PSCs. If we fail to obtain the necessary funds to complete our exploration activities under our PSCs, and we cannot obtain extensions to the requirements under our PSCs, we would not be able to successfully complete our exploration and development activities and we may lose rights under our PSCs or we may have to limit the acreage used in the Shouyang Block.

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our debt obligations.

As of September 30, 2013, on a consolidated basis, we had total senior secured indebtedness outstanding of approximately $85.0 million, consisting of $64.0 million aggregate principal amount of the Notes due 2016 and approximately $21.0 million aggregate principal amount under Facility Agreement with SCB plus related accrued interest on such amounts due on January 15, 2014. The Notes and the Facility Agreement are cross-defaulted against one another. Subject to the restrictions in the Indenture governing the Notes and in the Facility Agreement, we may incur additional indebtedness. In addition, the Notes provide for paid in kind interest, which will add to the aggregate principal amount outstanding on each interest payment date in which we are required or elect to pay paid in kind interest. Our high level of indebtedness could have important consequences for an investment in us and significant effects on our business. For example, our level of indebtedness and the terms of our debt agreements may:

make it more difficult for us to satisfy our financial obligations under our indebtedness and our contractual and commercial commitments and increase the risk that we may default on our debt obligations or be unable to repay our debt obligations on or before their respective maturity dates;
 
 
 
 
prevent us from raising the funds necessary to repurchase Notes tendered to us if there is a change of control or in connection with an excess cash flow offer, asset sale offer or insurance proceeds offer, which would constitute a default under the Indenture governing the Notes;
 
 
 
 
require us to use a substantial portion of our cash flow from operations or from additional indebtedness or equity capital raises to pay interest and principal on the Facility Agreement and the Notes, which would reduce the funds available for working capital, capital expenditures and other general corporate purposes;
 
 
 
 
limit our ability to obtain additional financing for additional drilling, working capital, capital expenditures, acquisitions and other investments, or general corporate purposes, which may limit our ability to execute our business strategy;
 
 
 
 
heighten our vulnerability to downturns in our business, our industry or in the general economy and restrict us from exploiting business opportunities or making acquisitions;
 
 
 
 
place us at a competitive disadvantage compared to those of our competitors that may have proportionately less debt;
 
 
 
 
limit management’s discretion in operating our business; and
 
 
 
 
limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate or the general economy.
 
 
Each of these factors may have a material and adverse effect on our financial condition and viability. Our ability to satisfy our other debt obligations will depend on our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors affecting our company and industry, many of which are beyond our control.

ITEM 6. EXHIBITS

Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits beginning on page 38 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
Far East Energy Corporation
 
 
 
/s/ Michael R. McElwrath
 
Michael R. McElwrath
 
Chief Executive Officer and President
 
(Principal Executive Officer)
 
 
 
/s/ Jennifer D. Whitley
 
Jennifer D. Whitley
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)

Date: November 8, 2013
INDEX OF EXHIBITS

Exhibit Number
Description
3.1
Articles of Incorporation of the Company, as amended (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, which was filed on March 15, 2005, and incorporated herein by reference).
3.2
Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 17, 2005, and incorporated herein by reference).
10.1
Second Amendment to Amended and Restated Employment Agreement, dated September 9, 2013, between Far East Energy Corporation and Michael R. McElwrath (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 10, 2013, and incorporated herein by reference).
10.2
First Amendment to Amended and Restated Employment Agreement, dated September 9, 2013, between Far East Energy Corporation and Jennifer D. Whitley (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 10, 2013, and incorporated herein by reference).
Certification of Chief Executive Officer of the Company under Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer of the Company under Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer of the Company Pursuant to 18 U.S.C. Sec. 1350.
Certification of Chief Financial Officer of the Company Pursuant to 18 U.S.C. Sec. 1350.
101.INS†
XBRL Instance Document
101.SCH†
XBRL Taxonomy Extension Schema
101.CAL†
XBRL Taxonomy Extension Calculation Linkbase
101.DEF†
XBRL Taxonomy Extension Definition Linkbase
101.LAB†
XBRL Taxonomy Extension Label Linkbase
101.PRE†
XBRL Taxonomy Extension Presentation Linkbase
____________
** Furnished herewith
Filed herewith
 
 
38