All of our gas and oil properties are located in the Cherokee Basin and substantially all of our reserves are CBM reserves. CBM is comprised almost entirely of methane gas, which is a primary component of natural gas. Unlike conventional natural gas hydrocarbon production, CBM gas is “dry”, or without the presence of other naturally occurring hydrocarbon liquids such as ethane, propane and butane. Accordingly, CBM gas is suitable for gathering and delivery into end-user sales pipelines without the necessity to process or remove any liquids.

CBM is produced when large volumes of water are pumped from a coal seam in a process known as dewatering or depressuring. As pressure within the coalbed formation is reduced, CBM  is released through a process called desorption. CBM then moves into naturally occurring cracks, or cleats, in the coal, and then to the production wells. Cleats are natural fractures which have formed in the coals, usually as a result of the coalification process and geological stresses. Because the cleats are generally filled with water, the static water level above the coal must be reduced, which then lowers the reservoir pressure allowing desorption to occur. Thus, unlike producing from a conventional natural gas reservoir, reservoir pressure in a coalbed formation must generally be reduced to allow for production of CBM. Because of the necessity to remove water and reduce the pressure within the coal seam, CBM, unlike conventional hydrocarbons, often will not show immediately on initial production testing. Coalbed formations typically require extensive dewatering and depressuring before desorption can occur and the methane begins to flow at commercial rates. Our Cherokee Basin CBM properties typically dewater for a period of 12 months before peak production rates are achieved.

There are three well defined coal seams underlying our current acreage position. These coal seams are found at relatively shallow depths (300 to 1,400 feet), making wells easier to drill and less expensive to complete compared to conventional wells. Our wells generally reach total depth in one and one half days and our estimated average cost for drilling and completing a well for the six months ended June 30, 2007 was approximately $135,000. Our Cherokee Basin multi-seam CBM wells have average net proved reserves of 130 MMcf. As of June 30, 2007, we were operating approximately 1,904 gross gas wells, of which approximately 90% were multi-seam wells, and 29 gross oil wells. As of June 30, 2007, we owned the development rights to approximately 523,000 net acres throughout the Cherokee Basin and had only developed approximately 48% of our acreage.