China E1886 V. 5 Shanxi Coalbed Methane Development Public Disclosure Authorized and Utilization Project

Home , Qinshui County

EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report) China E1886 v. 5 Shanxi Coalbed Methane Development Public Disclosure Authorized and Utilization Project

Environmental Impact Assessment

Public Disclosure Authorized (Part IV: Due deligence review for linkage issues)

April 10, 2008

Shanxi Energy CBM Investment Holding

Public Disclosure Authorized Co., Ltd. Public Disclosure Authorized

1 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report) Table of Contents 1. Project Overview...... 1 1.1 Pipeline from Zheng 6 Station to Central Treatment Plant...... 1 1.2 CBM Central Treatment Plant in Qinshui Basin ...... 1 1.3 Qinshui Basin CBM Development Project with a Capacity of 500 Million m3 per Annum (Fanzhuang Block)...... 2 1.4 Project Construction Schedule...... 3 2. EIA Progress ...... 4 2.1 Examining and Approving Opinions ...... 4 3 Major Environmental Impact and Environmental Protection measures ...... 9 3.1 Pipeline from Zheng 6 Station to Central Treatment Plant...... 9 3.2 CBM Central Treatment Plant in Qinshui Basin ...... 10 3.3 Qinshui Basin CBM Development Project with a Capacity of 500 Million m3 per Annum ...... 11 4. Environmental Management Plan...... 13 4.1 Environmental Management...... 13 4.2 Environmental Monitoring Plan ...... 14 4.1 Pipeline from Zheng 6 Station to Central Treatment Plant...... 14 4.2 CMB Central Treatment Plant and 500 million m3/year CMB Capacity...... 15 Building Project in Qinshui Basin ...... 15 5. Analysis of Project Similarities and Differences...... 15 5.1 Similarities ...... 15 5.2 Differences ...... 16 6. Project Progress...... 16

2 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report)

1. Project Overview The proposed WB-financed CBM development and utilization demonstration project of Shanxi Energy CBM Investment Holding Co., Ltd. relates to the pipeline from Zheng 6 Station to the Central Treatment Plant, the CBM Central Treatment Plant in Qinshui Basin and the Qinshui Basin CBM Development Project with an Annual Capacity of 500 million m3, to be constructed by North China Oilfield Branch of PetroChina Company Limited.

See Table1-1-1 for the relevant geographical location of the proposed WB-financed CBM development and utilization demonstration project of Shanxi Energy CBM Investment Controlling Co., Ltd.

1.1 Pipeline from Zheng 6 Station to Central Treatment Plant The pipeline will be laid southeastward, along Provincial Highway S331, from Zheng-6 Gas-collecting Station, passing by Zhengzhuang Town, Zheng-5 Gas-collecting Station, Pigging Stations, Xiaoquangou, etc., arriving nearby Beizhai River; eastward along Provincial Highway, passing by Zhangjiayao, Qianzhuang, Xiaoyueyang; northward along the trunk line valve chamber, Changjiazhuang and Jinfeng, arriving at the Central Processing Plant, with a total length of 20km. See Table 1-1 for the project components. Table 1-1-1 Composition of Pipeline from Zheng 6 Station to Central Treatment Plant Item Engineering volume

Trunk road 508×20km Passing through highway at 7 sites Major engineering volume Passing through river at 4 sites Passing through gully at 7 sites

Accompanying road (km) 4.4

1.2 CBM Central Treatment Plant in Qinshui Basin The scale of the Central Treatment Plant is 30×108m3/a (scale of Phase I: 10×108m3/a). During Phase I, 2 sets of filter separator (total scale: 6 sets), 1 set of TEG dehydration plant (total scale: 3 sets), 4 sets of CBM compressor unit (total scale: 8 sets) and other auxiliary facilities including blank nitriding station, 110kv transformer substation, flare and venting system, heat supply system, water supply and drainage system and fire fighting system, will be installed.

The CBM in the various blocks of Qinshui Basin first enters from the gas-collecting station, through the pipeline, into the gas distributing and pigging system, which is responsible for accepting the tube cleaner during the pigging operation; then enters the filter separator, which functions to separate gas with liquid from the virgin gas; then enters the pressurizer for pressurization, increasing the pressure from 0.9Mpa to 6.0Mpa; then enters the TEG dehydration plant for ensuring the transmission water dew point; finally enters West-to-East gas transmission pipeline after metering.

1.3 Qinshui Basin CBM Development Project with a Capacity of 500 Million m3 per Annum (Fanzhuang Block) Pilot CBM development in central Fangzhuang Block will be conducted with multilateral directional horizontal drilling method and that in the northern and southern parts of the Block will be conducted with vertical well and cluster well pressurization and hydrofracturing method. The vertical well and cluster well CBM development in the northern and southern parts will be divided into two stages: development with the first batch of wells and development of scale. A total of 760 CBM wells and an effective number of 685 wells will be deployed in the first batch well group CBM development area and the scale development area in the southern and northern parts.

See Table 1-3-1 for the project composition and project description.

Table 1-3-1: Project Composition and Project Description. Project name: Qinshui Basin CBM Development Project with a Capacity of 500 Million m3 per Annum

Scale Gas Gas output Gas collecting station producing well

685 wells for 5.0×108m3/a 7 stations Phase I

603 wells for Phase II

Main work Gas well, gas collecting station, gas extraction pipeline (431km), gas collecting pipeline (52km)

1.4 Project Construction Schedule See Table 1-4-1 for Project Construction Schedule.

Table 1-4-1: Construction Schedule Construction Expected operation Construction Project contents scale time of projects unit

Commenced in June Pipeline from Zheng 6 2008 and put into Station to Central 20km operation in June Treatment Plant 2009

Commenced in April Central Treatment Plant 10.0×108m3/a 2008 and put into PetroChina operation in July 2008 North China Oilfield 599 vertical wells Branch have been constructed Qinshui Basin CBM so far and other wells Development Project 500 million m3 / will start construction with a Capacity of 500 year in March 2008 and put Million m3 per Annum into operation in November 2008

3 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report)

2. EIA Progress The EIA of the pipeline project from Zheng 6 Station to the Central Treatment Plant is underway, and an EIA agency has been commissioned to conduct EIA. The EIA report is expected to be completed by March 2008 and submitted to Shanxi Provincial Environmental Protection Bureau by March to April 2008, and Shanxi Provincial Environmental Protection Bureau is expected to complete project examination and approval by May 2008.

In June 2007, The EIA on Qinshui Basin CBM Central Treatment Plant and on Qinshui Basin CBM Development Project with an annual capacity of 500 million m3 was commissioned by PetroChina North China Oilfield Branch to Taiyuan University of Technology EIA Center (guo huan ping zheng yi zi No. 1313), and EIA Statements on the Construction Project of Qinshui Basin CBM Central Treatment Plant and EIA Statements on the Construction Project of Qinshui Basin CBM Development with An Annual Capacity of 500 Million m3 were already completed and Shanxi Provincial Environmental Protection Bureau issued its examining and approving opinions on September 13, 2007.

2.1 Examining and Approving Opinions (1) Examining and approving opinions of EIA Statements on the Construction Project of Qinshui Basin CBM Central Treatment Plant

Examing and Approving Opinions: I. We agree in principle with the experts panel’s technical review opinions and the preliminary review opinions of Jincheng Municipal Environmental Protection Bureau and Qinshui County Environmental Protection Bureau on EIA Statements on Qinshui Basin CBM Central Treatment Plant Project (hereinafter referred to as EIA Statements).

II. Your company plans to implement a CBM Central Treatment Plant Project at 700m northwest to Jinfeng Village, Duanshi Town, Qinshui County, Jincheng Municipality. The total project investment is RMB319.42 million, of which the environmental protection investment is RMB10.717 million. The main components of the project include, gas collecting and distribution device, pressurizing device, dehydration plant, in- plant gas transmission pipeline and other auxiliary and public works. On the premise that the various environmental protection measures and ecological protection measures stipulated in the EIA Statements are strictly carried out, our Bureau agrees on the construction of this project. At the same time, the following activities should be emphasized in this project:

The location of the Central Treatment Plant and the Emergency Servicing Center should avoid farmland, woodland and surface water body and should utilize unused land as much as possible. During the construction process, attention should be paid to protection of surface mellow soil of the farmland and the surface farmland should be restored

4 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report) immediately after completion of the construction. The construction period should be minimized in order to reduce disturbance to the surround residents, farmland and environment.

Gas burning boiler should be used in this project for heating purpose, and the number of times of enabling the flare blowdown system should be controlled strictly to ensure that the discharge of various pollutants conforms consistently to the standards.

A landfill-type effluent treatment device with a treatment capacity of 1m3/h should be set up in the Central Treatment Plant and the Emergency Servicing Center respectively to treat the industrial effluent and domestic sewage produced. The exit water should be recycled for plant greening and road sprinkling and should not be discharged outside.

The waste residue produced during pigging operation should be sent to specified sites for landfill treatment. The domestic garbage should be sent to Duanshi Town to be treated together with the local domestic garbage.

Low-noise equipment should be selected for this project. The high noise equipment such as blowdown pipe and compressor should be deployed far from the villages and such noise reduction measures as enclosed machine room and sound insulator should be adopted to ensure the factory boundary noise does not cause much impact upon the living of the residents in the surrounding villages.

Attention should be paid to the risks of leakage, fire and explosion accidents in the course of CBM transportation and storation in this project; the management level of the links causing risks should be improved; proper risk prevention and control measures and emergency risk response pre-plans should be formulated to minimize the risks.

Environmental management and monitoring plans should be carried out earnestly and necessary monitoring instruments and equipment should equipped to have a timely command of pollutant discharge state and take corresponding measures and ensure the long-term consistent compliance of pollutant discharge; noncompliant discharge and accident discharge should be strictly prohibited. The Povincial Environmental Supervision Team, Jincheng Municipal Environmental Protection Bureau and Qinshui County Environmental Bureau should perform on-site supervision and inspection during the construction period of this project according to their respective responsibilities.

The project cannot be put into formal operation until it passes environmental protection acceptance check after its completion.

Handling person: Li Wenbin

Shanxi Provincial Environmental Protection Bureau 13 September 2007

5 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report)

It can be seen from the above examining and approving opinions that Shanxi Provincial Environmental Protection Bureau approved the construction of Qinshui Basin CBM Central Treatment Plant facilities on the premise of carrying out he various environmental protection measures and ecological protection measures provided in the EIA Statements.

(2) Examining and approving opinions of EIA Statements on the Construction of Qinshui Basin CBM Development Project with An Annual Capacity of 500 Million m3 Examining and Approving Opinions: I. We agree in principle with the experts panel’s technical review opinions and the preliminary review opinions of Jincheng Municipal Environmental Protection Bureau and Qinshui County Environmental Protection Bureau on EIA Statements on Qinshui Basin CBM Development Project with an Annual Capacity of 500 Million m3 (hereinafter referred to as EIA Statements. II. Your company plans to implement a CBM development project with an annual capacity of in Qinshui, Jincheng and a supporting project of CBM Central Treatment Plant (with Statements attached). The total project investment is RMB1.66487 billion, of which the environmental protection investment is RMB82.3612 million. The main components of the project include gas wells, gas collecting stations, gas extracting pipeline, gas collecting pipeline and other supporting & auxiliary works. On the premise that the various environmental protection measures and ecological protection measures stipulated in the EIA Statements are strictly carried out, our Bureau agrees on the construction of this project. At the same time, the following activities should be emphasized in this project: Route selection and direction of the pipeline network should be further optimized and attention should be paid to ecological protection and restoration during the laying of 483km pipeline network (of which the gas extracting pipeline is 431km and the gas collecting pipeline is 52km). The construction period should be minimized in order to reduce disturbance to the surround residents, farmland and environment.the surplus backfill earthwork of 8369.2m3 produced during project construction should be treated on a proper dumping site and should not be piled up arbitrarily.

The location of earth taking and dumping sites should avoid the area with good vegetation and shall not be used until upon further confirmation of local environmental protection authority. The operation of earth taking and dumping should stricly follow the methods and procedures stipulated in the Statements and the vegetation should be restored in time; the temporarily occupied land should be restored in time to alleviate impact upon the regional ecological environment.

The air pollutants, wate pollutants, solid wastes and noise pollution produced during project construction and operation should be controlled and managed according to the various environmental protection and ecological protection measures stipulated in the Statements to ensure the consistent compliance of discharge of various pollutants.

6 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report)

The CBM discharged during trial collecting period and from pigging operation should be treated with such method as flare burning and then be discharged after meeting the standards.

The construction scope should be delineated and the environmental protection supervision should be strengthened during the construction period. The environmental protection responsibilities and tasks should be defined clearly in the contracts with the construction units and the supervision units to ensure that the various environmental protection measures stipulated in the Statements are carried out properly.

Attention should be paid to the risks of leakage and fire accidents in the course of CBM transportation in this project; proper risk prevention and control measures and emergency risk response pre-plans should be formulated, management during the operation period strengthened and the environmental management level improved, to prevent occurence of accidents.

Within three months of test run after the completion of the project, application should be made to our Bureau for environmental protection acceptance check. The project cannot be put into formal operation until it passes environmental protection acceptance check after its completion.

The Povincial Environmental Supervision Team, Jincheng Municipal Environmental Protection Bureau and Qinshui County Environmental Bureau should perform on-site supervision and inspection during the construction period of this project according to their respective responsibilities.

Handling person: Li Wenbin

Shanxi Provincial Environmental Protection Bureau 13 September 2007

It can be seen from the above examining and approving opinions that Shanxi Provincial Environmental Protection Bureau approved the construction of Qinshui Basin CBM Central Treatment Plant facilities (sic, it should be “Construction of Qinshui Basin CBM Development Project with An Annual Capacity of 500 Million m3”) on the premise of carrying out the various environmental protection measures and ecological protection measures provided in the EIA Statements. At the same time, within three months upon

7 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report) the completion and test run of the project, it should be reported to Shanxi Provincial Environmental Protection Bureau for project completion environmental protection acceptance check. Only after the project passes the acceptance check can it be put into formal operation.

8 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report)

3Major Environmental Impact and Environmental Protection measures 3.1 Pipeline from Zheng 6 Station to Central Treatment Plant The EIA on this project component is under preparation. We learned from Shanxi Qinshui Basin CBM Development Plan with An Annual Capacity of 10×108m3/a that the major environmental impact and environmental protection measures for this project component are as follows:

The construction of both the station and the pipeline involves direct occupation of woodland and farmland, interference with a large area of surface soil and surface vegetation and disruption of the original balance of the earth’s surface. Under the act of wind force, the root system of the vegetation and the sandlot under protection of solidified surface would be made exposed again, and the soil structure would become loose and form a new wind erosion surface. If the vegetation is not restored and reconstructed in time, every new slope of the soil and every new rut would become a new erosion point, aggravating water loss and soil erosion and severely affecting the safety of the station.

The main impact of station construction upon the surface vegetation lies in permanent occupation of land, destruction of the vegetation on the occupied land and the destruction of the vegetation surround the temporarily occupied land during station construction. In addition to permanent destruction of the vegetation within the area occupied by the station, the surface vegetation within the scope of 20-50m around the station would also be destructed due to temporary land occupation. As the station is large, the area under destructive impact would also be large. Therefore, after completion of the project, the surface vegetation within the scope of about 50m outside the enclosing wall of the station should be planted and restored.

During construction, the current woodland and grassland in the project area must be protected, and indiscriminate and illegal felling and burning of trees should be strictly prohibited. It is required that the survival rate of forestation should reach about 90% and the greening coefficient of the station area should not be less than 20%.

Measures to be taken to protect the ecological environment: (1) The project construction and the vegetation restoration project should be conducted simultaneously and their completion must be subject to unified acceptance check.

(2) The construction period should be minimized, the scope of construction operation should be delimited and shall not be expanded at random and the operation should follow stipulations; the construction operation scope of vehicles and heavy machinery should be put under strict control and management, cluttering of construction materials is strictly prohibited and a proper stockyard should be specified to prevent expansion of disruption to vegetation.

9 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report) (3) The construction season should be selected on the basic of local conditions and the biological characteristics of the surface vegetation to avoid the plant growing period and minimize its damage to the ecological environment. When the construction is conducted in a section with good surface soil, the surface soil should be piled up separately and backfilled by layer so as to maintain the original living environment of the plants as much as possible and facilitate the restoration of vegetation. During backfilling, a proper accumulation layer should be set aside to prevent surface depression and water loss and soil erosion caused by precipitation and run-off.

(4) Nursery stocks should be planted in and around the station/site to make up the surrounding environment.

At the same time, during project construction, attention should be paid to installation, inspection and maintenance of the sealing face of equipment and pipe to reduce CMB leakage; hermetical pigging process should be adopted to reduce gas venting amount during pigging operation and thus to reduce environmental pollution caused by hydrocarbons.

3.2 CBM Central Treatment Plant in Qinshui Basin We learned from EIA Statements on the Construction Project of Qinshui Basin CBM Central Treatment Plant prepared by Taiyuan University of Technology EIA Center (guo huan ping zheng jia zi No.1313) that the major environmental impact and environmental protection measures of this project component are as follows:

(1) Impact of Atmospheric Pollution The major pollutants caused by the dehydration plant during the operation period, the heating boiler room, boiler room during emergency repairing, gas discharged by canteen through use of fuel gas and the smoke discharged by the flare and venting system are a tiny amount of soot and NOX, and their emission concentration is far below the control index and has little impact upon the atmospheric environment. During overhauling of gas transmission pipeline or accident venting, the CBM is discharged after being burned through the flare and venting system on a yearly or semester basis. It is a non-continuous discharge pollution source, and generally the venting discharge time is within 1 hour, so its environmental impact can be restored naturally. However, management and maintenance should be strengthened to avoid venting pollution discharge. In case of venting, the operation should be steady and abrupt turn-on or turn-off should be avoided in order to improve venting treatment efficiency.

(2) Impact of Water Pollution The industrial effluent and domestic sewage produced during the operation period, after being collected, enter the integrated oil and water separating device and a underground sewage treatment facility respectively for treatment. After its quality of reaches Standard Grade I pursuant to Comprehensive Effluent Discharge Standards (GB8978-1996), the treated water will be used for greening or sprinkling against dustfall.

10 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report)

(3) Environmental Impact of Solid Waste Solid wastes mainly include waste residue from pigging, sludge from effluent treatment and domestic garbage. The waste residue from pigging will be transported to specified sites for landfill treatment; the sludge will, after being desiccated, be transported together with the domestic garbage to Dunshi Town for treatment together with the local domestic garbage.

(4) Impact on Ambient Sound Regarding the areas and equipment with a big noise, such measures as division of area, shock absorption and sound insulation techniques and installation of noise eliminators will be adopted to prevent noise diffusion; sound insulators will be installed on such equipment as pumps and electric machines, and in addition, the vibration of pumps should also be controlled; for the noise produced by mechanical vibration, such soft materials as rubber may be used to make into spacer or spring piece may be underlaid to reduce the transmission of vibration; regarding prevention of traffic noise, speed of motor vehicles, horn blowing or use of high tone loudspeakers should be limited in order to reduce the impact of traffic noise on the environment; around the industrial site and along the highway, trees should be planted to form green shelter to block and absorb noise, beautify the environment, insulate sound and damp dust; persons coming into and going out of high-noise area should be equipped with anti-noise earplug or earmuff to reduce the harm of noise to the workers’ health. 3.3 Qinshui Basin CBM Development Project with a Capacity of 500 Million m3 per Annum We learned from EIA Statements on the Construction Project of Qinshui Basin CBM Development Project with An Annual Capacity of 500 Million m3 prepared by Taiyuan University of Technology EIA Center (guo huan ping zheng jia zi No.1313) that the major environmental impact and environmental protection measures of this project component are as follows:

(1) Impact on Water Environment During normal production, the total water discharge volume of gas wells in the gas field is 858.81m3/d, the lavatory in the gas collecting station is a dry one with anti-seepage treatment. The excrements are cleaned up regularly and transported as crop field manure. No canteen or bathroom is built in the station. The domestic garbage comes from the workers’ daily life water use, the quantity produced by each gas collecting station is 0.32 m3/d, and the total quantity of domestic sewage produced is 2.24 m3/d. The gas well effluent produced by the CBM Project in Fanzhuang Block can reach the discharge standard. The domestic sewage has a small amount and can be splashed on site and evaporated naturally, without affecting local water environment.

(2) Impact on Ambient Air The project does not produce gas emissions at normal operation state. But at certain conditions like overhauling or gas venting at the time of accident, CH4 burning and

11 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report) explosion accidents may be caused. CBM venting must be conducted after burning through venting flare, which would make CH4 convert into CO2, thus effectively reduce the risk of CBM discharge accidents of the project. In addition, such supporting preventive measures as installation of auto block valve on gas collecting and transmission pipelines, regular ball passing, corrosion protection and production safety check, smooth communication, etc. must also be taken, which can minimize the impact of accident risks.

(3) Impact on Ambient Sound The noise sources of this project mainly include noise from such equipment as compressor unit. Such measures as installation of the high noise equipment such as compressor indoors and sound absorbing treatment of interior walls should be taken to prevent the diffusion and spread of noise.

(4) Impact of Solid Wastes on Environment The solid wastes produced in this project mainly include the domestic garbage from the gas collecting station, with a quantity of 12.78t/d. In order to prevent pollution on the environment caused by garbage, the domestic garbage in the gas collecting station will be collected in a centralized manner and put into bags, and is then transported by enclosed garbage truck to Duanshi Town for treatment together with local domestic garbage.

(5) Analysis of Environmental Impact Environmental Impact Analysis during Well Drilling Period (Construction Period) The environmental impact during the drilling period includes the pollution on environment caused by effluent, gas emissions, solid wastes and noise produced in the well drilling process and the disruption to surface vegetation and soil erosion caused by setting construction sites, laying pipelines, and constructing access roads.

I. The fugitive emission source (road dust emission and construction dust emission) in the construction process, after such measures as sprinkling, dust damping, proper arrangement of transportation time interval and direction (i.e., kept off from residential quarters) are taken, would have little impact upon the environment; of the pollutants such as SO2, N02, CO, only NO2 slightly exceeds the standard, but due to the short construction period and absence of other pollution sources in the project area, its adverse impact is acceptable.

II. In the drilling process, the waste drilling liquid would not pollute the water body environment after being solidified. The flushing waste water on the well site is recycled and is not discharged to the outside. The living facilities of construction workers will be settled through the community. During the well drilling period, there is basically no adverse impact upon the water body environment.

III. The solid wastes will be landfilled, and the surface land will be greened or reclaimed after landfilling. This can meet the environmental protection requirements.

12 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report) IV. The construction noise produced during the well drilling period slightly exceeds the standard through natural attenuation and background value composition. Due to such factors as the sound proofing effect of the walls of residential houses and short construction duration, the adverse impact is slight and short.

V. The surface vegetation damaged during the well drilling period main includes grass and shrub and a small quantity of crops. The soil erosion amount during the well drilling period of this project is 3595.52t. After proper ecological alleviation measures are taken during and after construction, the impact is slight.

Environmental Impact Analysis during Production Period (Operation Period) During the production period, the pollutant discharge is very small on normal conditions, mainly including the domestic sewage and garbage, coalbed water and gas emission during pigging.

I. During the operation period, as there is a small number of staff members with scattered inhabitation, the domestic sewage produced is sprinkled on site in the station and evaporated naturally; the domestic garbage, after being centralized, is transported regularly to Duanshi Town for treatment together with the local garbage.

II. The gas emissions from pigging operation are treated with flare burning method, and the product is CO2 and vapor. As the burning time is short and it is a non-recurring project activity, this treatment method is feasible.

III. After being treated with the method of presedimentation, the coalbed water complies with the discharge standard and agro-irrigation water standard and does not have much adverse impact upon the ground water environment of the assessed area.

IV. After the site is greened, the noise within the boundary of the site complies with the standard and there is no adverse impact upon the surround environment during the production period.

V. After the successful experience of other gas fields in preventing and controlling risks are utilized as a reference and complete measures taken, plus strict regulations, it can be said that a minor gas leakage can be controlled in time and will not develop into a big risk. Based on analogy estimate, the safe radius of the low-pressure gas transmission technique is within 10m.

4. Environmental Management Plan 4.1 Environmental Management A health, safety and environment management system, or HSE management system for short, will be set up for these projects carried out by PetroChina North China Oilfield according to the relevant regulations of PetroChina.

13 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report) HSE management system refers to an overall system composed of organizations, functions, practices, procedures, processes and resources of implementing health, safety and environment management. It consists of many elements, which are combined organically through advanced and scientific running mode and form a set of structured dynamic management system through correlation and interaction. In terms of its functions, it is an effective management mode of conducting pre-risk analysis, identifying the likely harms and consequences, adopting effective prevention and control measures to prevent their occurrence so as to reduce the possible personal injury, property loss and environmental pollution. The system puts special emphasis on prior prevention and continuous improvement and is a mechanism of a high degree of self-restraint, self- improvement and self-motivation.

4.2 Environmental Monitoring Plan 4.1 Pipeline from Zheng 6 Station to Central Treatment Plant The environmental impact appraisal of the pipeline from Zheng 6 Station to the Central Treatment Plant is under preparation. Based on our investigation, the prepared environmental impact assessment report will include the monitoring scheme, which will cover monitoring on major environmental impact factors by the construction stage and the operation stage. The main monitoring items include:

Ambient air: TSP, PM10, SO2, NO2, non-methane total hydrocarbon; Water environment: COD, BOD, SS, petroleum, ammonia nitrogen; Noise : noise level LeqdB(A) Solid waste: quantity and treatment methods.

The environmental monitoring of this project will be performed jointly by PetroChina Environmental Monitoring Station and Jincheng Municipal Environmental Protection Monitoring Station.

Jincheng Municipal Environmental Monitoring Station is a national class II environmental monitoring station capable of issuing monitoring report independent of administrative interference and ensuring the correctness and truthfulness of the monitoring results. It is able to undertake independent thirty-party impartial inspection. The Station passed the provincial measurement certification assessment in 1990; then it passed re-assessment and certificate renewal of national measurement certification successively in 1995 and 2001 and acquired the Metrological Qualification Certificate No. (01) Metrological (Jin) Letter (U0015).

The environmental monitoring station built by PetroChina North China Oilfield itself is equipped with the necessary monitoring equipment, mainly including comprehensive atmospheric sampler, BOD5 incubator, COD5 determinator, analytical balance, spectrophotometer, water velocimeter, non-dispersive infrared oil content analyzer, general sound level meter, refrigerator, glassware instrument (set), chemical reagents, which can meeting the needs of routine monitoring. The Station needs the assistance of

14 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report) Jincheng Municipal Environmental Protection Monitoring Station to complete the monitoring plan for this project.

The monitoring expenses will be listed in the environmental impact assessment report.

4.2 CMB Central Treatment Plant and 500 million m3/year CMB Capacity Building Project in Qinshui Basin We learned from the environmental impact statement of this project and PetroChina North China Oilfield Branch that the environmental monitoring scheme of this project will be divided into the construction period and the operation period.

The monitoring scheme for the construction period, based on the project construction characteristics and major environmental impacts, will, generally on a biyearly basis, monitor the main environmental factors of ambient air, water environment, sound environment and solid waste.

The monitoring during the operation period will include monitoring on major polluting sources and current environment quality. The polluting sources include water treatment station, industrial effluent treatment station, noise, pigging waste residue, domestic garbage, etc., usually monitored on a monthly basis. Monitoring on current environment quality mainly covers ambient air, water environment and sound environment, and the monitoring items include:

Ambient air: TSP, PM10, SO2, NO2, non-methane total hydrocarbon; Water environment: COD, BOD, SS, petroleum, ammonia nitrogen; Noise : noise level LeqdB(A)

The monitoring on current environment quality will be performed on a biyearly basis jointly by PetroChina Environmental Monitoring Station and Jincheng Municipal Environmental Protection Monitoring Station. The monitoring expense is about RMB400,000 Yuan per annum.

See 4.1 for the capability of the monitoring agencies.

5. Analysis of Project Similarities and Differences 5.1 Similarities The project subject unit related to all the three projects is PetroChina North China Oilfield Branch, and all the three projects are developed in Qinshui County and are under the supervision of Shanxi Provincial Environmental Protection Bureau, Jincheng Municipal Environmental Protection Bureau and Qinshui County Environmental Bureau.

15 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303 EIA Report of Proposed WB Financed CBM Development and Utilization Demonstration Project of Shanxi Energy CBM Investment Controlling Co., Ltd. (Part IV Due Diligence Report) The environmental management of the CBM development and utilization demonstration project of Shanxi Energy CBM Investment Holding Co., Ltd. and that of the three correlated projects will be conducted within the same management framework. Meanwhile, PetroChina NorthChina Oilfield Branch has set up its own environmental management organ dedicated to environmental management work and at the same time subject to supervision of Shanxi Provincial Environmental Protection Bureau, Jincheng Municipal Environmental Protection Bureau and Qinshui County Environmental Bureau.

5.2 Differences PetroChina NorthChina Oilfield Branch will set up its own environmental monitoring station equipped with certain monitoring equipment and monitoring personnel. The environmental monitoring will be conducted jointly by this station and Jincheng Municipal Environmental Protection Monitoring Station.

The environmental monitoring program of the CBM development and utilization demonstration project of Shanxi Energy CBM Investment Holding Co., Ltd. will be completely commissioned to Jincheng Municipal Environmental Protection & Monitoring Station, and this will spare the trouble of training environmental monitoring personnel and purchasing environmental monitoring equipment. In view that it is difficult for its own environmental monitoring station to meet the needs of environmental monitoring of this project, the company will make full use of the technical equipment of Jincheng Municipal Environmental Protection & Monitoring Station.

6. Project Progress In order to speed up the preliminary preparation work of the CBM Project, Shanxi Energy Industrial Co., Ltd. entered into CBM Strategic Cooperation Agreement with PetroChina North China Oilfield Branch in December 2006. In July 2007, it signed CBM Cooperative Development Agreement with PetroChina North China Oilfield Branch to jointly develop the 49.14km2 CBM field of Zhengzhuang Block of Qinshui Coal Field and other related projects.

So far, PetroChina North China Oilfield Branch has completed the construction of 599 wells and will complete the construction of all the production wells by November 2008, the gas transmission pipeline from Zheng 6 Station to Central Treatment Plant by October 2008 and the construction of the Central Treatment Plant by July 2008.

16 Coal Industry Taiyuan Design & Research Institute guo huan ping zheng jia zi No.1303