China North East Petroleum Wraps Up Shengyuan Acquisition

China North East Petroleum Wraps Up Shengyuan Acquisition

Monday, April 25, 2011
China North East Petroleum Holdings Ltd.

China North East Petroleum has completed its acquisition of Sunite Right Banner Shengyuan Oil and Gas Technology Development Co., Ltd. ("Shengyuan"). As a result of the Acquisition, Shengyuan is now a wholly-owned subsidiary of Songyuan. Pursuant to a 25 year lease signed in 2010, Shengyuan has exclusive oilfield exploration and drilling rights to the Durimu oilfield in Inner Mongolia.

As is common among all private, independently-owned and operated oil companies in China, NEP does not directly own its oil fields in China and is only allowed to obtain exploration and drilling rights from qualified state-owned-enterprises ("SOE's"). The Durimu oilfield belongs to Yanchang Petroleum Group ("Yanchang"), the fourth largest SOE for oil and gas exploration in China. Yanchang has assigned management over oil exploration and production activities in the Durimu oilfield to Sunite Right Banner Jianyuan Mining Co. Ltd. ("Jianyuan"), a local SOE. In turn, Jianyuan has entered into an agreement with Shengyuan, granting Shengyuan exclusive oilfield exploration and drilling rights in the Durimu oilfield (the "Lease"). Yanchang has qualified Shengyuan to operate in the Durimu oilfield subject to the supervision of Jianyuan. The Company will benefit from the 24 years remaining under the Lease and Shengyuan has the first right of refusal to renew the Lease at the end of its term.

Ralph E. Davis, an independent worldwide petroleum consultant based in Houston, Texas, conducted a proven reserve study of the portion of the Durimu oilfield subject to the Lease in accordance with generally accepted petroleum engineering and evaluation principles and in conformity with SEC definitions and guidelines. The Ralph E. Davis study was based on the performance of the three existing exploration wells. The Ralph E. Davis study estimated total proven reserves ("total P1") in the Durimu oilfield at 1.54MM Barrels and the PV10 at approximately $46.4MM. The PV10 includes the estimated future gross revenue to be generated from the production of the proven reserves, net of estimated production and development costs, and with an annual discount rate of 10%. The PV10 also excludes the 25% royalty to the SOE.

According to a geological study conducted by PetroChina's North Center Branch Exploration and Development Research Institute, the Durimu oilfield has geological reserves of 77.5MM tons (approximately 573.5MM barrels), and a recoverable reserve of approximately 19.38MM tons (approximately 143.4MM barrels). PRC geologists have also suggested that the optimal number of wells that can be drilled in the Durimu oilfield is in excess of 2,000.

Pursuant to the terms of the Share Transfer Agreement and the Share Issuance Agreement, the final acquisition price is approximately $43.4 million payable in cash and shares of the Company's common stock. No later than May 16th ("or within the next 15 business days"), the Company's subsidiary Songyuan Yu Qiao Oil and Gas Development Co., Ltd. will pay the former Shengyuan shareholders RMB70 million (approximately US$10.6 million) in cash. In addition, the Company will issue to Bellini 5.8 million shares of the Company's restricted Common Stock (the "Acquisition Shares"), which carries a value of $32.8 million based on the 30 day trading average from December 6, 2010-January 7, 2011. The cash portion of the purchase price will be paid utilizing cash on hand. In addition, Bellini has entered into a lock-up agreement pursuant to which Bellini is prohibited from disposing of any Acquisition Shares for a period of six months after the closing date of the Acquisition and is prohibited from disposing of 50% of the Acquisition Shares for a period of 12 months after the closing date of the Acquisition.

Mr. Jingfu Li, CEO of China North East Petroleum commented, "This acquisition will allow NEP to expand its operations and secure additional oil reserves that can provide better overall returns on our investment. The Durimu oilfield is nearly three times larger than the four oilfields we currently lease in PetroChina's Jilin oilfield with much larger oil extraction and drilling opportunities. We have the knowledge and experience to scale production in the Durimu oilfield aggressively in the coming years and further establish NEP as a major independent, regional oil producing and oilfield services company in China."

Additional Acquisition Details

According to the terms of the Lease, Shengyuan is entitled to 75% of all production revenue while 25% is allocated to Yanchang. Shengyuan will only be subject to income tax on its 75% portion of the oil production revenue. All oil produced by Shengyuan is required to be sold to refineries/buyers already qualified by Yanchang.

Over time, the Company intends to shift the focus of its oil production segment from its four fields within the Jilin oilfield to the Durimu oilfield. The Company has already issued requests for bids from qualified independent geological consulting firms in China for the preparation of the survey plan and seismic test program for the Durimu oilfield. The Company expects to complete the bidding process and select the winning firm by the end of the second quarter, and to begin seismic testing by the beginning of July. After seismic testing begins, the Company expects the initial survey results to be completed within 30 working days. The Company's in-house engineering team will then work with the geological consulting firm to develop a preliminary production plan. The Company expects initial test drilling to commence by the end of the third quarter.

The Company currently plans to utilize two or three drilling rigs that belong to its subsidiary Song Yuan Tiancheng Drilling Engineering Co., Ltd. ("Tiancheng") to conduct the initial test drilling. The Company intends to charge Shengyuan for such drilling services at market rates. This initial stage is expected to last approximately 12-18 months, and during such period, any oil produced will be sold to qualified buyers which will generate revenue and cash flow to support the Durimu oilfield exploration program. After this initial stage is complete, the Company intends to begin drilling in Durimu with an expected overall increase in production, which will in turn generate greater revenues and more stable cash flows. The Company believes its activities in the Durimu oilfield will not affect current production levels and operating cash flow from the Company's four existing Jilin oilfields.