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Re: nh post# 6897

Sunday, 08/23/2009 4:04:42 PM

Sunday, August 23, 2009 4:04:42 PM

Post# of 10911
nh and others, this has been discussed a long time ago but you are mistaken on a few points.

First, In the PSC agreements with the JDZ it it determined before oil is drilled for what percentages of recovered oil is attributable to "cost oil" and "profit oil". From the very first drop of oil in the production phase, ERHE will earn their 22% of profit oil (in block 2). Also from the very first drop of oil in the production phase, ERHE will earn their 22% of "cost oil" which goes directly to Sinopec to pay back their cost of discovery and production. Due to ERHE's agreement with Sinopec/Addax, ERHE will never receive any "cost oil". That is their free carry or free loan as you want to think about it.

ERHE is no real burden on Sinopec as some here allude to in my opinion. Sinopec is huge and cash rich along with chinesh government owned. If Sinopec pays 1 billion dollars in the first 5 years to produce oil, they get $1 billion back from "cost oil" Yes 22% of the cost would typically be paid up front by another company but then they wouldn't get it back either. It is simply a interest free loan which in the grand scheme of things doesn't amount to much with Sinopec.

The bigger cost is the "risk" they are carrying for ERHE. If oil is never found in a specific block of commercial quantities, then the cost will never be recovered by Sinopec for that specific block. Sinopec will loose the 22% they are carrying for ERHE in this example.

I beleive there is still a risk that one or more wells drilled will be dry or not commercially viable in todays economic model but given the location of oil in nearby blocks and the number of structures with potential and the fact they have to drill in all three blocks in the next year, the chances of one of these structures not being commercially viable is fairly low (IMHO).

This is another reason why I don't feel Sinopec will buy out ERHE as quickly as others here predict. I think they will always be interested and keep bidding it up after every oil discovery but I also feel Offors "gap" needs to be filled by discovered oil before it happens in multiple blocks.

I am here for the duration.

Good luck all

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