AOE 0.00% $4.68 arrow energy limited


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    Award of Chinese Business Licence in Xinjiang Province

    Arrow Energy Ltd (AOE) has been awarded a business licence for its Joint Venture company with the Urumqui Geological Development Company of Xinjiang Geological Survey (Team #9).

    This is the first CSG (coal seam gas) business licence granted by the Xinjiang Proivncial Government. It provides the JV company access to CSG opportuniites in the large and prolific coal mining areas of the province which hosts over 40% of China's coal resources, and has a population of over 20 million people.

    AOE International had previously conducted evaluation of prospective opportunities by research of existing coal and CSG data. Now the JV company now has the exclusive right to conduct further field test-work in Xinjiang Province, including some drilling for coal samples to assess CSG parameters. This preliminary field work is to target and better assess or screen identified opportunities for detailed evaluation and development work. We understand this phase is akin to a company beign exclusively aligned with a State government geological survey in regional exploration work, but does not automatically allow detailed evaluation or development.

    The JV will need to apply for, and have granted by the Xinjiang Provincial Government, tenements that will permit detailed evaluation and development work. A process for agreeing PSC (Production Sharing Contract) terms has also been established. Tenements are to be awarded by the Provincial Government with ultimate approval given by the national Chinese government.

    This is a significant step toward detailed evaluation and development of CSG projects by AOE in China. While this initial agreement took time to be consumated, we expect that, with an agreed structure in place, now AOE, through the JV, can move onto the ground with initial drill testing of prospective areas to determine or confirm key CSG parameters before applying for an evaluation and development tenement.

    As we described when AOE announced its initial MOU's and HoA's agreements with Chinese parties for evaluation and development of CSG projects, a success in one or more of the proposed Chinese JV's has potential to match or surpass AOE's CSG resources and operations in Australia.

    AOE is a WHTM Resource Sector Top Pick

    AOE is one of our resource sector Top Picks, underpinned by the points below and reinforced by the potential represented by this agreement.

    Sales of coal seam gas and electricity into eastern Australian energy markets meets demand from basic energy demand which tends to have little variation with industrial cycles, having as much variance according to climatic variation (i.e. mild or intense summers and winters).
    Commissioning of the OCGT Braemar II power station (AOE 50%) is expected mid-2009.
    Cash payment from Shell of about $700m is expected in December quarter. No need for additional funds until FID on LNG project (2010).
    AOE is seeing strong gas flow results from its Taroom pilot projects at Kogan, Daandine, Stratheden, and Tipton West. These have potential to markedly improve the average production rates from AOE's Surat Basin tenements with use of already existing gas-gathering infrastructure
    Drilling porgrams are aimed at increasing reserves for LNG and power station projects. Exploration in Australian tenements is again testing targets widely across AOE's extensive tenements. Asian exploration drilling in India and Vietnam should yield results in next two quarters.

    Discounted target price for AOE is $4.17 per share. We retain our BUY recommendation
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