The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes and all of the other information contained elsewhere in this report. The terms "we," "us," "our" and "our company" refer to Far East Energy Corporation and its consolidated subsidiaries.

Overview. We are a development stage company, and our objective is to become a recognized leader in CBM property acquisition, exploration, development and production. In 2008, we continued our primary activities of drilling, testing and completion of exploratory wells, which we commenced in late 2003. Our activities prior to 2003 were principally limited to organizational activities, including developing a strategic operating plan, capital funding, hiring personnel, entering into contracts, and acquiring rights to explore, develop, produce and sell oil and gas or coalbed methane ("CBM").

We believe that good environmental, social, health and safety ("ESHS") performance is an integral part of our business success. We conduct our business with respect and care for our employees, contractors, communities, and the environments in which we operate. Our vision is zero harm to people and the environment while creating value for our shareholders as well as for China, including the regions and communities within which we operate. Our commitment to these principles is demonstrated by the fact that we have had no lost-time accidents in the past 3.5 years-plus and no major environmental incidents. We have a commitment to being good corporate citizens of China, striving to emphasize and utilize very high levels of Chinese content in personnel, services, and equipment; and we have achieved very high percentages of Chinese content in each category.

During 2008, we continued our efforts to explore and develop CBM in Shanxi Province in northern People's Republic of China ("PRC" or "China") and in Yunnan Province in southern PRC. We continued to employ numerous safety precautions to ensure the safety of our employees and independent contractors. We also conducted our operations in accordance with various laws and regulations concerning the environment, occupational safety and health.

Although we believe the results of our exploration activities in Shanxi and Yunnan Provinces to date have been favorable, we will need to complete more wells to achieve commercial viability in these provinces, which will require additional capital expenditures. On March 13, 2009, we formed a strategic alliance related to our Qinnan Block with Arrow Energy International Pte Ltd ("Arrow"), the Singapore-based subsidiary of Arrow Energy Limited, a large Australian CBM producer. For additional information on the strategic alliance, see "Capital Resources and Liquidity" and Item 1. "Business - Strategic Alliance with Arrow." Assuming that we obtain approval from our Chinese partner company and the MOC, and satisfy the other conditions under the Farmout Agreement with Arrow prior to October 15, 2009, then the additional payment due upon the occurrence of these events from Arrow together with funds currently available should provide sufficient working capital to meet our current minimum exploration expenditures for all three of our PSCs through early 2010. Management intends to continue to seek to obtain funds by entering into a strategic relationship or transaction, such as a joint venture or farmout and/or obtaining debt or equity financing. The global financial crisis has created liquidity problems for many companies and financial institutions and international capital markets have stagnated, especially in the United States and Europe. A continuing downturn in these markets could impair our ability to obtain, or may increase our costs associated with obtaining, additional funds through the sale of our securities. The ongoing crisis has created a difficult environment in which to negotiate and consummate a transaction. While we will continue to seek to raise funds, there can be no assurance that we will be able to enter any strategic relationship or transaction or that we will be successful in obtaining funds through debt or equity financing. Under certain circumstances, the structure of a strategic transaction may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult. In particular, any transfer of our rights under the PSCs will require the approval of our Chinese partner company and the MOC. There can be no assurance that the Chinese authorities will provide the approvals necessary for a transaction or transfer. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt or equity financing are uncertain and we cannot predict the timing, structure or other terms and conditions of any such arrangements. There can be no guarantee of future fundraising or exploration success or that we will realize the value of our unevaluated exploratory well

Total Exploration Expenditures. The table below sets out the components of our total exploration expenditures, both capitalized and expensed (in thousands):

                                                                                   February 4, 2000
                                                 Year ended December 31,         (Inception) through
                                                  2008              2007          December 31, 2008

Additions to Unevaluated Oil and Gas
Properties
Shanxi Province                               $      6,930       $    7,326     $               30,837
Yunnan Province                                          -              331                          -
                                                     6,930            7,657                     30,837
Exploration Expenditures (1)                         7,376            3,188                     27,018
Total Cost Incurred Related to Exploratory
Activities                                    $     14,306       $   10,845     $               57,855

(1) Exploration Expenditures shown are different from Exploration costs in the Consolidated Statements of Operations as these expenditures do not include prior year unevaluated exploratory well costs charged to expense of $7.9 million and $0.2 million for December 31, 2008 and 2007, respectively.

In 2008, we incurred Exploration Expenditures of $14.3 million, of which $6.9 million related to our Shouyang PSC project were capitalized. Exploration Expenditures shown in the table above differ from Exploration costs in our Consolidated Statements of Operations. Exploration Expenditures in the table above represent costs incurred during the current period only. Exploration costs include prior periods' costs charged to expense during the current period. Oil and gas exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether they have discovered proved commercial reserves. We assess our capitalized exploratory well costs each quarter to determine whether costs should remain capitalized or should be charged to earnings. During 2008, we determined that $7.9 million of the previously capitalized costs no longer met the requirements for continued capitalization pursuant to Financial Accounting Standards Board Staff Position No. 19-1 - Accounting for Suspended Well Costs. Therefore, we charged the amount to Exploration costs. The amount included $7.0 million exploration expenditures related to the FCC-HZ02 well in the Shouyang project. For the capitalized costs at December 31, 2008, our assessment indicated that our current work programs demonstrated our efforts in making sufficient continuing progress toward assessing the reserves in the areas for which the costs were incurred. Therefore, we have continued to capitalize these costs. As of December 31, 2008, we had approximately $23.6 million exploratory drilling costs that have been deferred for more than one year (see Note 4 to the Consolidated Financial Statements).

As with any energy exploration and production company, we continuously review our acreage holdings in order to optimize those holdings. We may, from time to time and as circumstances dictate, decide to relinquish all or part of any of our blocks that we deem non-prospective or sub-optimal in order to optimize our acreage holdings and/or preserve cash resources.

Shouyang Block, Shanxi Province. The pilot area of the Shouyang Block is being closely monitored and work programs are being carried out there to achieve two primary goals: (i) to maximize water production to attempt to reach critical desorption pressure as soon as possible in order to achieve commercial quantities of gas production, and (ii) to determine the optimal approach to minimize costs and maximize gas recovery. During the later portion of the second quarter and through the third quarter of 2008, we increased our drilling activities considerably.

We have gained insights over time as to situations where cavitation or hydraulic fracture stimulation may improve our dewatering efficiency in the pilot area. Hydraulic fracturing is a stimulation method successfully used in other gas shale and coalbed reservoirs to improve wellbore productivity by providing channels that extend beyond any formation damage done to the wellbore during the drilling process. This allows for water and gas to more easily flow into the wellbore and then be produced. During 2008, we performed hydraulic fracturing operations on seven vertical wells in the Shouyang Block. Six of the wells were existing wells, and the fracturing operations increased

To further increase water production, we drilled three deviated wells in the second half of 2008 to increase the amount of productive wellbores in the coal face. Once drilled to the coal seam, the wells were fracture stimulated. The last one of the three wells was fracture stimulated in late October. These deviated wells represent a component in our efforts to reduce costs, in relation to costs associated with drilling a horizontal well. These are essentially vertical wells but drilled at a very high angle from an existing well pad and location. Utilizing an existing well location allows more than one well to be drilled from the same pad, consequently reducing land and pad construction costs, as well as reducing environmental impact.

Based on the knowledge and experience we have gained in this area, we believe short-reach horizontal wells may further enhance water production of the area. In the fourth quarter, we completed drilling of a short-reach horizontal well. This well was drilled using lightweight drilling fluids in an attempt to minimize formation damage during the drilling process. Operational difficulties with the drilling fluid prevented us from drilling as much horizontal section as planned. We successfully drilled approximately 50 meters of coal in the horizontal plane and this well is currently producing both water and gas. Our current near-term appraisal plan contemplates drilling additional vertical and deviated wells as and if funds are available.

During the third quarter of 2008, we also drilled a parameter well approximately ten kilometers away from the FCC-HZ01 well area to gather additional information on the coal seam characteristics of the #3, #9 and #15 coal seams, all of which are potential CBM producers in the Shouyang Block. We plan to use the data in any potential overall development program for the area that may be submitted to CUCBM.

Qinnan Block, Shanxi Province. During the third quarter of 2008, we completed the drilling of our first horizontal well in the area, with 3,000 meters drilled in the #3 coal seam. The #3 coal seam is the stated object of development by other parties in the area near the southern end of Shanxi Province. Our testing of the well to date has demonstrated that the coal seam has low permeability of approximately one to two millidarcies, which we expected, and that the wellbore formation has been damaged during the drilling process. We continue to test the well through measured water and gas production.

To expand our exploration effort and understanding of the potential of the Qinnan Block, in the third quarter of 2008, we successfully drilled three of four planned parameter wells on the southern end of the Qinnan Block to test the coal seams for permeability, reservoir pressure, coal thickness and gas content. Although it is still early in the core analyses for gas content, based on preliminary results, we believe that the three parameter wells have demonstrated gas content of 300 to 500 standard cubic feet of natural gas per ton of coal. These measurements are similar to those obtained from previous testing of wells on the Qinnan Block. The tests of the three parameter wells have provided valuable information on the continuity of the coal seam on the southern end of the Qinnan Block. We plan to use the information gathered in discussions with our Chinese partner company when determining the size of any potential overall development program for the area. The fourth parameter well failed to find coal seams sufficiently thick to be prospective and was plugged and abandoned.

We also commenced drilling operations in late 2008 on an additional horizontal well in the Qinnan area. This well is designed to begin appraising the area around one of the parameter wells drilled earlier in the year. Drilling operations are continuing on this well, but the current plan is to complete the well and begin production testing of the well as and if funds are available.

Enhong-Laochang Area, Yunnan Province. During 2008, we completed drilling the third and the fourth deviated wells in a five well pattern to test the #7, #8, #13 and #19 coal seams in Yunnan. These wells were directionally drilled from the same surface location as an existing vertical well to provide a close pattern of wells to test the coal seams and to provide valuable information on how best to exploit this area in 2009. As a result of our testing, we anticipate that these coal seams will have low permeability and that we will need to fracture multiple zones to fully test these wells. We believe these wells will provide us with more geological and reservoir information about the area. In addition, we drilled one vertical parameter well in Yunnan Province.

Production Sharing Contracts. Our operations in the Shouyang and Qinnan Blocks in Shanxi Province and the Enhong-Laochang area of Yunnan Province are conducted under three separate production sharing contracts ("PSCs"). The two Shanxi PSCs and the Yunnan PSC will expire on July 1, 2032 and January 1, 2033, respectively, subject to the existence of commercially productive reserves and unless extended or otherwise amended. CUCBM has the right to participate in up to 30% of the interest in the Shanxi PSCs and up to 40% of the interest in the Yunnan PSC. CUCBM is the participant with respect to the remaining shares of the PSCs. The three PSCs are divided into three periods: exploration, development and production. All three PSCs are currently in the exploration period, which expires on June 30, 2009, unless extended or otherwise amended. We have begun the application process for an extension by conducting preliminary discussions with and submitting a formal application to each Chinese partner company under each PSC. Additionally, at a recent JMC meeting for the Shouyang PSC, the JMC, composed of representatives from our Company and our Chinese partner company, adopted a resolution recommending extension of the term. The Qinnan and Yunnan extensions will be discussed in the respective JMC meeting for the Qinnan PSC and Yunnan PSC to be held in the near future. We are hopeful that our Chinese partner company for each PSC will respond favorably to the extension application. After the recommendation for extension or modification of any PSC, such extensions and associated modifications will require MOC approval. There can be no assurance that we will be successful in extending the PSCs. If we are unable to commit to certain expenditures or acceleration of our drilling and dewatering efforts, it may adversely affect our ability to extend the terms of our PSCs.

During the exploration period, all expenditures are funded by us. Expenditures in the development and production periods are funded in proportion to the respective participating share of the participants in the PSC. If we satisfy the conditions to the Farmout Agreement, including obtaining approval from our Chinese partners and the MOC, and successfully assign 75.25% of our participating interest in the Qinnan PSC to Arrow, Arrow will make an initial payment of $8 million to us, become the operator under the Qinnan PSC, and, subject to certain conditions, will fund all exploration and other development costs associated with the Qinnan PSC up to a maximum of $30 million. If the conditions to the Farmout Agreement are not satisfied prior to October 15, 2009, then either party has the right to terminate the Farmout Agreement by delivering notice of such termination to the other party. Assuming that the Farmout Agreement conditions are met, after Arrow reaches such $30 million cap, FEEB and Arrow will share further Qinnan development costs and any future revenues in proportion to the participating interests in the Qinnan PSC, provided that FEEB may, in its discretion, instead elect to assign all of its interest in the Qinnan PSC to Arrow subject to retaining a 2% overriding royalty interest. In addition, under the Farmout Agreement, if we obtain Chinese governmental approval of an ODP for the Qinnan area, Arrow will pay FEEB an additional $8 million in cash as a bonus, and FEEB will have the option to assign all of its interest in the Qinnan PSC to Arrow, while retaining a 5% overriding royalty interest. Qualified project costs incurred under the PSCs by us can be recovered from the value of the first 75% of gross production of CBM for the two Shanxi Province PSCs and 70% of gross production of CBM for the Yunnan PSC. Participants will pay their proportionate share of the value added tax of 5% and a royalty to the Chinese government of up to 3%. In addition, with respect to the Shouyang and Qinnan PSCs, our company must pay ConocoPhillips, Inc. a 3.5% royalty on production.

Results of Operations

Year Ended 2008 compared to Year Ended 2007

The table below sets forth our exploration costs, lease operating expense ("LOE") and general and administrative expense for the years ended December 31, 2008 and December 31, 2007 (in thousands):

                                 2008         2007        Increase (Decrease)      % Change
  Exploration costs            $ 15,283     $  3,345     $              11,938           357 %
  Lease operating expense         2,904        1,945                       959            49 %
  General and administrative      4,515        7,230                    (2,715 )         -38 %
  Total                        $ 22,702     $ 12,520     $              10,182            81 %

Exploration costs consist primarily of the write-off of drilling and exploration costs previously capitalized. Accounting for such write-offs is determined by Statement of Financial Accounting Standards (SFAS) No. 19 - Financial Accounting and Reporting by Oil and Gas Producing Entities and Financial Accounting Standards Board Staff Position (FSP) No. 19-1, Accounting for Suspended Well Cost, which require that wells be expensed unless a sufficient quantity of reserves has been located to justify completing the well, and the enterprise is making sufficient progress assessing the reserves. Oil and gas exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether they have discovered proved commercial reserves. For further discussion of our accounting policies, see "Critical Accounting Policies-Accounting for Oil and Gas Properties" below.

The table below sets out components of exploration costs for the years ended December 31, 2008 and December 31, 2007 (in thousands):

                                                     Year ended December 31,
                                                       2008              2007
       Capitalized well costs charged to expense   $       7,907       $    157
       Seismic data acquisition                               84            320
       Technical personnel compensation                      641            430
       PSC related payments                                1,044          1,007
       Contract drilling & related expenses                5,607          1,431
       Total                                       $      15,283       $  3,345

During 2008, we determined that $7.9 million of capitalized costs incurred previously no longer met the requirements for continued capitalization. The amount includes $7.0 million related to the FCC-HZ02 well in the Shouyang project. Accordingly, we charged this amount to exploration costs. Comparable charges in 2007 were $0.2 million. Exploration costs also increased due to higher contract drilling and related expenses of $4.2 million as a result of increased drilling activities and higher employee compensation of technical personnel of $0.2 million, which consisted primarily of non-cash share-based compensation. The increases were partially offset by a decrease in the cost of the acquisition of seismic data in the Qinnan Block of $0.2 million.

The table below sets out components of LOE expense for the years ended December 31, 2008 and December 31, 2007 (in thousands):

                                           Year ended December 31,
                                           2008               2007
               Workovers               $      1,266       $        840
               Pumping Related Costs          1,265                792
               Supervision                      373                313
               Total                   $      2,904       $      1,945

LOE for the year ended December 31, 2008 was comprised of costs pertaining to the dewatering efforts in the Shouyang and Qinnan Blocks in Shanxi Province, which presently have sustained low rates of small gas production. To date, the production is not at commercial levels and the data obtained is not sufficient to project when or if the wells will achieve commercial gas production rates and what those rates may be. LOE for the year ended December 31, 2008 increased primarily due to an increase in workovers of $0.4 million and an increase in pumping related costs of $0.4 million. Dewatering efforts in 2008 related to a total of 20 wells: 5 horizontal wells, 3 deviated wells and 12 vertical wells. Dewatering efforts in 2007 related to a total of 5 wells: 4 horizontal wells and 1 vertical well.

General and administrative expenses for 2008 decreased primarily due to a $2.1 million adjustment made to previously recognized share-based compensation costs to reflect higher estimated forfeiture rates. Other decreases in general and administrative expenses for 2008 are due to actions taken to reduce expenses of $0.2 million in light of the change in the global economic conditions, reduction in travel expense of $0.1 million, and a reduction in third party investor relations and web-site hosting of $0.2 million. Additionally, insurance expense in 2008 was lower by $0.1 million.

Year Ended 2007 compared to Year Ended 2006

The table below sets forth our exploration costs, LOE and general and administrative expense for the years ended December 31, 2007 and December 31, 2006 (in thousands):

                                 2007         2006        Increase (Decrease)      % Change
  Exploration costs            $  3,345     $  1,914     $               1,431            75 %
  Lease operating expense         1,945          958                       987           103 %
  General and administrative      7,230        7,903                      (673 )          -9 %
  Total                        $ 12,520     $ 10,775     $               1,745            16 %

Expensed exploration costs for 2007 was higher than 2006 primarily due to the expensing of exploration permit fees and inclusion of certain general and administrative expenses, which were identified as directly related to exploratory activities.

LOE for 2007 comprised of expenses pertained to the dewatering efforts of four horizontal wells and a vertical well in the Shouyang Block in the Shanxi Province, which presently have small sustained gas flows. The production is currently small and the data obtained is not yet sufficient to project peak gas production. Recording of these costs related to the first two of the four horizontal wells as LOE began in July and October 2006. Recording of these costs related to the last two of the four horizontal wells and the vertical well as LOE began in May 2007 and August 2007. LOE for 2007 increased due primarily to the additional costs as a result of dewatering five wells in 2007 versus two in 2006.

General and administrative expenses for 2007 decreased primarily due to lower share-based compensation amortization as grants awarded in the first half of 2004 were completely amortized by the end of the second quarter of 2007 and the absence of costs incurred related to the proxy contest which began in late third quarter of 2006. The decrease was partially offset by salary adjustments effective in the first quarter of 2007 and higher professional service fees and costs related to additional employees in China to support expanded operations.

Capital Resources and Liquidity

We have no source of revenue or cash flow from operations, and our primary source of cash flow has been cash proceeds from public offerings and private placements of our common stock and warrants to purchase our common stock, and . . .