Agreement opens Mongolia market to Canadian company’s growing Asia focus

A subsidiary of Ivanhoe Energy Inc. will merge with PanAsian Petroleum Inc., which holds oil and gas exploration and production rights to a large, highly prospective block in central Mongolia.

Ivanhoe Energy intends to combine PanAsian's Mongolian interests with Sunwing Energy Ltd., Ivanhoe's 100%-owned subsidiary for oil and gas operations in Asia, as Sunwing Energy contemplates a listing on a major Asian stock exchange.

PanAsian Petroleum is a private company based in Alberta, Canada. The company's key asset is a production-sharing contract - held through subsidiary PanAsian Energy Ltd. - with the Petroleum Authority of Mongolia, a state agency. The contract provides PanAsian Energy with the exclusive right to explore, develop and produce oil or gas within Block XVI in Mongolia's Nyalga Basin.

Block XVI, covering 16,839 square kilometers, contains four significant sub-basins and is approximately 100 kilometers southeast of the capital, Ulaanbaatar. The Trans-Mongolian Railway, linking railway networks and markets in Russia, to the north, and China, to the south, runs through the western end of Block XVI, closely following Mongolia's main north-south highway.

The target on Block XVI is light oil, consistent with discoveries by Petrochina and Sinopec in Mongolia and other similar discoveries in China's adjacent Inner Mongolia region.

The PanAsian merger transaction will involve the issuance of up to three million shares of Ivanhoe Energy's common stock. It will not involve the payment of any cash to PanAsian's principals. PanAsian Energy's corporate structure and its contractual relationship with the Petroleum Authority of Mongolia will not be altered by the merger.

"This is an exceptional opportunity for Ivanhoe and Sunwing," said A. Robert Abboud, Ivanhoe Energy's co-chairman. "Mongolia's vast sedimentary basins have been significantly underexplored and Block XVI, in particular, has been identified as offering highly prospective development potential," he added.

Sunwing has a 15-year history of oil and gas exploration and production in China and has signed three production-sharing agreements with Petrochina. Sunwing currently produces approximately 1,800 barrels of light oil per day in Dagang, in China's Hebei province, in a production-sharing agreement with Petrochina in which Sunwing is the operator. In addition, Sunwing is the operator in a gas exploration block in Zitong, in Sichuan province, with its 10% partner, Mitsubishi Gas Chemical Co.

Exploration taps Block XVI as prospective producer
The merger transaction will ensure access to 458 kilometers of 2D seismic data over the Kherulen sub-basin within the Nyalga Basin. The data already have resulted in 19 leads being identified in the sub-basin's southwestern area.

Block XVI was partially explored in the 1950s by Russian interests and was included in a regional appraisal conducted by BP International for the Mongolian Government in 1990. The Russian drilling program reportedly encountered oil shows in 20 of roughly 40 wells drilled to depths of 700 to 1,800 meters; one well flowed oil. The 1990 BP appraisal of central Mongolia's hydrocarbon potential concluded that the Nyalga Basin had the best potential for an active petroleum system among the sites evaluated in the region.

Exploration to date has established that the Nyalga Basin possesses many of the characteristics of interior rift basins that produce light oil in Mongolia, east and south of Nyalga, and in northern China. These include: Petrochina's Tamsag project in eastern Mongolia; Sinopec's Zuunbayan project in southeastern Mongolia; and a 980-million-barrel discovery of light, sweet crude oil in the Bameng region of China's Inner Mongolia, announced by a Sinopec subsidiary last August.

PanAsian has invested roughly US$4 million in the acquisition and development of Block XVI.

The merger transaction
Ivanhoe Energy has agreed to issue up to three million common shares in exchange for all of the issued and outstanding common shares of PanAsian. Closing of the transaction is subject to approval by PanAsian shareholders and approval by the Toronto Stock Exchange.

Any net indebtedness of PanAsian's in excess of C$150,000 will result in a compensating downward adjustment in the number of Ivanhoe Energy shares issued. In addition, existing stock-purchase warrants in PanAsian will be rolled-over into approximately 800,000 Ivanhoe Energy purchase warrants that entitle the holders to purchase Ivanhoe Energy common shares at approximately C$3.50 for a period of roughly 18 months.

Ivanhoe Energy is an international oil and gas company focused on a) heavy-oil development and production opportunities worldwide; and b) oil and gas exploration and development projects in the Asia region. Core operations are in Canada, Ecuador, China and, following closing of the PanAsian merger transaction, in Mongolia.