The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2008 ("2008 Annual Report"), the financial statements and related notes in this Quarterly Report, the risk factors contained herein and in our 2008 Annual Report, 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 subsidiaries, unless the context suggests otherwise.

Overview. During the first quarter of 2009, we successfully entered into a strategic alliance with Arrow Energy International Pte Ltd ("Arrow") (see "Strategic Alliance with Arrow" below) and 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 try 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. We believe that good environmental, social, health and safety 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 the three months ended March 31, 2009, we incurred exploration expenditures of $1.2 million, of which $1,000 were capitalized. Assuming that we obtain approval from our Chinese partner company and the Ministry of Commerce ("MOC") of the PRC, and satisfy the other conditions under the Farmout Agreement (as defined below) with Arrow prior to October 15, 2009, then the additional payment of $8 million and reimbursement of certain 2009 Qinnan expenditures incurred by us 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 production sharing contracts ("PSCs") through early 2010.

Management will continue to seek to raise additional capital to continue operations beyond early 2010 and to meet future expenditure requirements necessary to retain our rights under the PSCs. Management intends to seek to obtain additional funds by various methods, which might include the issuance of equity securities, issuance of debt instruments, continued exercise of warrants issued to investors, obtaining farm-out partners and/or the potential sale of property interests, among other alternatives. 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. While we will continue to seek to raise funds, there can be no assurance that we will be able to enter any transaction or that we will be successful in obtaining funds through debt or equity financing. Under certain circumstances, the structure of certain transactions may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult. 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 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 costs. Management believes that we will continue to be successful in obtaining the funds necessary to continue as a going concern.

Strategic Alliance with Arrow. On March 13, 2009, we formed a strategic alliance related to our Qinnan Block with Arrow. In conjunction with the strategic alliance, one of our wholly owned subsidiaries, Far East Energy (Bermuda), Ltd.
("FEEB"), and Arrow entered into a Farmout Agreement (the "Farmout Agreement")
under which, subject to certain conditions, FEEB will assign to Arrow 75.25% of its rights in the Qinnan PSC in the Shanxi Province (the "Assignment"). The Farmout Agreement conditions the Assignment on, among other things, the receipt of required approvals from the government of the PRC on or prior to October 15, 2009 or such later date as we may agree upon. Upon satisfaction of the conditions, Arrow will make an initial payment of $8 million to us, and, subject to certain conditions, will fund all exploration costs associated with the Qinnan PSC, up to a maximum of $30 million. In addition, under the Farmout Agreement, if we obtain Chinese governmental approval of an overall development program ("ODP") for the Qinnan area, Arrow will pay FEEB an additional $8 million in cash as a bonus. If the conditions under the Farmout Agreement are not satisfied prior to October 15, 2009, then either party has the right to terminate the agreement by delivering notice of such termination to the other party. Additionally, on March 13, 2009, (i) we entered into a securities purchase agreement with Arrow ("Securities Purchase Agreement"); (ii) FEEB issued an exchangeable note ("Exchangeable Note"), $10 million principal amount, to Arrow for $10 million in cash, which we received shortly after the note was executed; (iii) we issued a warrant to Arrow for 7,420,000 shares of our common stock, at an exercise price of $1.00 per share ("Warrant"); and (iv) the Company and Arrow entered into a registration rights agreement. The Company incurred approximately $0.5 million in costs in connection with the formation of the strategic alliance.

Under the Securities Purchase Agreement, FEEB issued Arrow the Exchangeable Note, the Company issued Arrow the Warrant and Arrow paid FEEB $10 million in cash, of which $2 million was to be set aside to be used exclusively to satisfy FEEB's existing exploration and development commitments in connection with the Qinnan PSC. This restricted portion of the proceeds was recorded as restricted cash on the balance sheet. During the period from the formation of the strategic alliance to the end of the first quarter, we used approximately $0.3 million of the $2 million for Qinnan exploration expenditures.

The Exchangeable Note has an initial principal amount of $10 million and bears interest at a rate of 8% per annum, beginning on October 15, 2009 if the required approvals from the PRC government to effect the Assignment are not received. Principal and interest is due and payable on the maturity date of March 13, 2011. Arrow has the right at any time to exchange the Exchangeable Note in whole or in part for shares of common stock at an exchange rate of 21,052.63 shares per $10,000, or $0.475 per share ("the Exchange Rate"), of principal and interest. However, if certain conditions to the effectiveness of the Assignment are satisfied on or before October 15, 2009, the entire principal amount of the Exchangeable Note will automatically be exchanged for shares of common stock at the Exchange Rate.

The Exchangeable Note contains certain restrictive covenants applicable to the Company and FEEB, including, among others, restrictions on the incurrence of indebtedness that ranks senior to or pari passu with the Exchangeable Note and restrictions on FEEB's ability to sell all of its rights under the Shouyang PSC. The Company has guaranteed FEEB's payment obligations under the Exchangeable Note.

The Warrant entitles Arrow to purchase 7,420,000 shares of common stock at an exercise price of $1.00 per share. The Warrant may be exercised in whole or in part only upon satisfaction of certain conditions to the effectiveness of the Assignment and is exercisable until the date that is eighteen months from March 13, 2009 (the "Exercise Period"). If, during the Exercise Period, the trading price of the common stock equals or exceeds $1.50 per share for fifteen or more consecutive trading days, the Company will have the right to require Arrow either to exercise the Warrant or relinquish its rights thereunder.

For additional information on the strategic alliance, see Item 1 - Business of our 2008 Annual Report.

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

                              Three months ended
                                   March 31,
                               2009          2008
Additions to Unevaluated
   Oil and Gas Properties
     - Shanxi Province      $        1      $ 1,578
Exploration Costs                1,206          864   (1)
                            $    1,207      $ 2,442

(1) Amount shown is different from that in the Consolidated Statements of Operations as the amount is net of prior year unevaluated exploratory well costs charged to expense of $1,373,000.

Shouyang Block, Shanxi Province. At this time, our goal for the pilot area of the Shouyang Block is to maximize water production to attempt to reach critical desorption pressure as soon as possible in order to achieve commercial quantities of gas production. We plan to drill more wells in the 1H pilot area as well as a number of parameter wells outside the pilot area to further delineate the field during 2009. In early April, we disclosed to the public recent gas production in the 1H pilot area had reached 200 thousand cubic feet per day ("Mcfd"), which represented an increase of approximately 300% in gas production since beginning of the year. If we continue to successfully produce at this level or higher, we plan to explore the possibility of building compression facilities and marketing, instead of flaring, the gas to partially offset expenses. These plans are subject to our Chinese partner company's approval and the level of gas production. We cannot guarantee that gas will continue to be produced at that daily rate, that the daily rate will increase or remain similar to what was reported, or that our Chinese partner company will approve our plans to sell gas into the local compressed natural gas market prior to submitting an ODP and receiving approval of such an ODP from the Chinese government.

Qinnan Block, Shanxi Province. In our Qinnan block, we plan to drill a number of wells in order to fully explore some of the most prospective acreage in the block. We also plan to fracture stimulate and produce one or more existing wells. Our plans will be designed in conjunction with our partner Arrow, provided that all approvals for the Assignment are received from the Chinese government.

Enhong-Laochang Area, Yunnan Province. In our Yunnan block, we plan to continue our exploration effort by acquiring existing data through purchase, and also to begin to determine commercial feasibility of an area in the Laochang sub-block by fracture stimulating and producing five existing wells.

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 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 recent joint management committee ("JMC") meetings for the Shouyang PSC and for the Yunnan PSC, the respective JMCs, composed of representatives from our Company and our Chinese partner company, adopted resolutions recommending extension of the exploration period for each of these PSCs. The Qinnan extension will be discussed in a JMC meeting to be held in the near future. We are hopeful that our Chinese partner company for the Qinnan 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 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


Three Months Ended March 31, 2009 vs. Three Months Ended March 31, 2008 (in
thousands):

                               Three months ended March 31,
                                 2009                2008
Exploration costs            $       1,206       $       2,237
Lease operating expense                531                 942
General and Administrative           1,372               2,041
    Total                    $       3,109       $       5,220

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 more information on capitalized drilling costs, see "Overview-Total Exploration Expenditures."

The table below sets out components of exploration costs for the three months ended March 31, 2009 and March 31, 2008 (in thousands):

                                              Three months ended March 31,
                                                2009                2008
Capitalized well costs charged to expense   $           -       $       1,373
Seismic data acquisition                                -                  86
Technical personnel compensation                      156                 212
Contract drilling & related expenses                1,050                 566
    Total                                   $       1,206       $       2,237

Exploration costs in the first quarter of 2009 decreased $1 million due primarily to a charge of $1.4 million in the first quarter of 2008, partially offset by an increase of $0.4 million in contract drilling and related expenses during the first quarter of 2009. Under the Farmout Agreement with Arrow, Arrow will reimburse us for a majority of our exploration costs incurred in the Qinnan Block between March 13, 2009 and before the first day they become the operator of the block, which is contingent upon the approval by the PRC government. As of March 31, 2009, the estimated exploration costs to be reimbursed by Arrow totaled $121,000.

The table below sets out components of lease operating expense ("LOE") for the three-month periods ended March 31, 2009 and 2008 (in thousands):

                           Three months ended March 31,
                            2009                  2008
Workovers               $          69         $         716
Pumping Related Costs             317                   144
Supervision                       145                    82
    Total               $         531         $         942

LOE for the three months ended March 31, 2009 was comprised of costs pertaining to the dewatering efforts of 17 wells in the Shouyang Block and 1 well in the Qinnan Block, which are both located in Shanxi Province. Both blocks 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 three months ended March 31, 2009 decreased primarily due to a decrease in workovers of $0.6 million, partially offset by increase in pumping related costs of $0.1 million. As discussed above, under the Farmout Agreement with Arrow, the estimated LOE incurred in the Qinnan Block to be reimbursed by Arrow totaled $12,000.

General and administrative ("G&A") expenses for the three months ended March 31, 2009 decreased $0.7 million due primarily to a decrease in share-based compensation of $0.4 million. In the first quarter of 2008, we recorded $0.2 million of share-based compensation expense related to the nonvested shares granted in December 2007 in conjunction with the amendments to certain option agreements impacted by Section 409A of the Internal Revenue Code of 1986, as amended. The remaining decrease in share-based compensation of $0.2 million is due primarily to higher estimated forfeiture rates. G&A expenses also decreased due to a total decrease in legal fees, travel and payroll of approximately $0.1 million. As discussed above, under the Farmout Agreement with Arrow, the estimated G&A incurred in the Qinnan Block to be reimbursed by Arrow totaled $57,000.

Capital Resources and Liquidity. Prior to 2009, we funded our exploration and development activities primarily through the sale and issuance of common stock through 2008. On March 13, 2009, we formed a strategic alliance related to our Qinnan Block with Arrow. In conjunction with the formation of the alliance, we issued an exchangeable note, $10 million principal amount, to Arrow for $10 million in cash. For additional information on the strategic alliance, see "Overview - Strategic Alliance with Arrow" above. Assuming that we obtain approval from our Chinese partner company and the Ministry of Commerce of the PRC ("MOC"), and satisfy the other conditions under the Farmout Agreement with Arrow prior to October 15, 2009, then the additional payment of $8 million and reimbursement of certain 2009 Qinnan expenditures incurred by us 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 will continue to seek to raise additional capital to continue operations beyond early 2010 and to meet future expenditure requirements necessary to retain our rights under the PSCs. Management intends to seek to obtain additional funds by various methods, which might include the issuance of equity securities, issuance of debt instruments, continued exercise of warrants issued to investors, obtaining farm-out partners and/or the potential sale of property interests, among other alternatives. 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. While we will continue to seek to raise funds, there can be no assurance that we will be able to enter any transaction or that we will be successful in obtaining funds through debt or equity financing. Under certain circumstances, the structure of certain transactions may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult. 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 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 costs. Management believes that we will continue to be successful in obtaining the funds necessary to continue as a going concern.

As of March 31, 2009, we had unevaluated exploratory well costs totaling $30.6 million, of which $25.2 million have been capitalized for a period greater than one year. Such costs, which relate to the Shouyang Block in Shanxi Province, were initially capitalized under successful efforts accounting, pending a determination of whether sufficient quantities of economically recoverable proved reserves are found. We make periodic assessments of whether these costs qualify for continuing capitalization, based on whether we are making sufficient progress in assessing the reserves and determining the economic and operating viability of the project, as more fully discussed in Note 4 to the Consolidated Financial Statements - Unevaluated Oil and Gas Properties.

In addition to these periodic assessments, we also assess whether we have a reasonable expectation of recovering these costs through future net cash flows from the project, if we are successful in establishing proved reserves. Although there are many uncertainties associated with our exploration and dewatering efforts, we believe the results of our exploration efforts so far provide the Company with a reasonable basis for the long-term viability and economic success of this project, and support the continued capitalization of our unevaluated capitalized exploratory well costs in the project while we are continuing to evaluate the field. However, there are many risks and uncertainties involved in early stages of exploring and attempting to develop a new CBM gas field and we cannot make any assurances that our efforts will be successful in making the pilot area commercially viable. In the event we are not successful, we may be required to write off some or all of these unevaluated exploratory well costs.

Our capital resources and planning can be impacted by fluctuations in the U.S. Dollar and Chinese RMB exchange rate as well as inflation in these countries. For further discussion of these risks, see Part I Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Cash Flows. As of March 31, 2009, our balance in cash and cash equivalents was $11.7 million, an increase of $3.8 million from the balance of $7.9 million as of December 31, 2008, reflecting a cash inflow of $10 million as a result of the strategic alliance with Arrow and cash outflows related to field operations of approximately $2.6 million, an increase in restricted cash related to the strategic alliance with Arrow of $2.0 million, G&A expenditures of approximately $1.1 million and costs associated with the strategic alliance with Arrow of approximately $0.5 million. During the period from the formation of the strategic alliance with Arrow to the end of the first quarter, we used approximately $0.3 million of the $2 million for Qinnan exploration expenditures. As of March 31, 2009, our balance in restricted cash was $1.7 million.

Cash used in operating activities for the first quarter of 2009 was $2.7 million as compared to cash used in operating activities for the same period in 2008 of $2.6 million. The slight increase in cash used in operating activities was due primarily to an unfavorable change in working capital of $0.4 million, partially offset by lower cash operating expenses of approximately $0.3 million.

Cash used in investing activities for the first quarter of 2009 was less than $1 million as compared to $1.6 million for the same period in 2008. The decline was primarily due to a decrease in additions to unevaluated oil and gas properties of $0.6 million.

Cash provided by financing activities for the first quarter of 2009 was $7.0 million as a result of the $10 million proceeds from the issuance of the Exchangeable Note, partially offset by a restricted cash classification of $2 million out of the Exchangeable Note proceeds under the Securities Purchase Agreement and the total financing costs of $0.5 million.

Forward-Looking Statements. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities . . .