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 six months ended June 30, 2009, we incurred exploration expenditures of $4.0 million, of which $1.5 million were capitalized. Assuming that we obtain approval from our Chinese partner company of the Qinnan Production Sharing Contract ("PSC") 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 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. In the event that the MOC does not approve the Farmout Agreement, we may need to either renegotiate the terms and conditions of our strategic alliance with Arrow or seek additional capital earlier than anticipated to continue operations beyond early fourth quarter of 2009.

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. Raising additional funds by issuing common stock or other types of equity securities would further dilute our existing stockholders. 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, including the Farmout Agreement with Arrow. 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.

If our operating requirements or drilling obligations materially change from those currently planned, we may require more capital than currently anticipated or may be required to raise capital earlier than anticipated. For example, it is possible that the Ministry of Land and Resources ("MLR"), CUCBM or CNPC could seek to, among other things, modify our operating requirement or drilling obligations which may result in an increase our capital expenditures or accelerate our drilling program. If we are unable to commit to the expenditures or accelerate our drilling and dewatering efforts it may adversely affect our ability to extend the terms of our PSCs. Raising additional funds by issuing common stock or other types of equity securities would further dilute our existing stockholders. If we fail to obtain the necessary funds to complete our exploration activities under our production sharing contracts, and we cannot obtain extensions to the requirements under our production sharing contracts, we would not be able to successfully complete our exploration activities and we may lose rights under our production sharing contracts.

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, the Company issued the Warrant to Arrow and FEEB issued the Exchangeable Note to Arrow for $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 second quarter, we used approximately $0.5 million of the $2 million for exploration expenditures related to the Qinnan PSC.

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):

                                                       Six months ended
                                                           June 30,
                                                       2009         2008
          Additions to Unevaluated
          Oil and Gas Properties - Shanxi Province   $   1,499     $ 2,621
          Exploration Costs                              2,453       2,523 (1)
                                                     $   3,952     $ 5,144

(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 $1,415,000.

Shouyang Block, Shanxi Province. As previously reported in our April 8, 2009 news release, we achieved critical desorption pressure in a portion of the pilot area in the Shouyang block in early second quarter of 2009. As in any oil and gas exploration activity, water and gas production in the pilot area fluctuated during the second quarter as a result of our ongoing exploration efforts and the nature of early stage CBM exploration. The current focus of the Shouyang block development involves negotiating a gas marketing agreement with CUCBM followed by likely negotiation of an offtake agreement with a local distribution company; production monitoring; data collection; and application for our Pilot Well Development Program and Overall Development Program ("ODP"). During the second quarter of 2009, we completed the drilling and fracturing of three deviated wells in the pilot area to increase the number of productive wellbores in the coal face. We also completed a work program which included stimulation on existing wells and drilling of new parameter wells. We have initiated testing, evaluation and production operations in the #9 and #3 coal seams of certain existing wells in the pilot area with the goal of adding these coal seams to the #15 coal seam in our application for ODP. We have established early gas production rates in one of the existing wells from the #9 coal seam and initiated testing in an existing well in each of the #3 coal seam and the #9 coal seam.

In addition, we are monitoring gas production from the two coal seams of a well located at the edge of the pilot area. Through the drilling of two new parameter wells, we have identified further field extension to the west and south-west of the #15 coal seam. These wells are presently being tested for gas content and reservoir characteristics.

Although we believe the results of our exploration activities in the Shanxi Province to date have been favorable, we will need to complete more wells to achieve commercial viability, which will require additional expenditures.

Our near-term development plans include further testing and stimulation work in the #3 and #9 coal seams of certain parameter wells and other wells within the pilot area. We believe the results of the development plans will allow us to high-grade the block and identify the next area of development within the block. This work may also increase the daily gas production and confirm adequate feed for a future gas gathering and sales facility.

The exploration period of the Shouyang PSC expired on June 30, 2009. Along with our Chinese partner company in the PSC, China United Coalbed Methane Co. Ltd. ("CUCBM"), we have executed a modification agreement, subject to MOC approval, extending the exploration period from June 30, 2009 to June 30, 2011. That extension and modification agreement has been sent to MOC and based on our previous experience, we anticipate approval will be granted in the near future, but there can be no guarantee that MOC will approve the modification agreement as submitted.

Qinnan Block, Shanxi Province. In our Qinnan block, we have completed the QN 02H well in the #3 coal seam. This short-extension horizontal well was drilled with fresh water only. The lateral extension in the #3 coal seam is 200 meters. Currently production equipment has been moved in and the well is being produced at low water volumes for an extended period to allow for natural clean-up of any fines as a result of drilling operations. Future plans with our proposed partner, Arrow, may include an extensive program of test wells for delineation of the coal seam on the east side of the block. These wells may involve a full complement of evaluation techniques including extensive coring operations. In the future these vertical wells may be put in service as production monitoring wells or targets of intersection from the horizontal well development pattern. These plans are contingent on receiving all approvals and assignments from the Chinese government concerning PSC extensions and change of operatorship.

China National Petroleum Company ("CNPC") has recently replaced CUCBM as our Chinese partner company for the Qinnan PSC. We are in discussions with CNPC regarding the extension of the exploration period of the PSC. At CNPC's request, we have provided certain operational and financial information about our Company to assist them in the decision making process. We are hopeful that MOC and CNPC will respond favorably to the extension applications. However, there can be no assurance that we will be successful in extending the PSCs.

Enhong-Laochang Area, Yunnan Province. In our Yunnan block, we are conducting a strategic review of our Yunnan holdings to determine whether they fit within our risk profile given the tight capital markets and general economic downturn. We are taking into consideration, among other factors, our overall corporate strategy, the prospective costs and benefits of the acreage, our relationship with our Chinese partner companies and our current cash position in order to formulate an optimal strategy for the Company. The strategy may include, but not be limited to: (i) minimal capital spending to continue holding the acreage,
(ii) sale, farm-out or partial farm-out of the acreage, (iii) full or partial relinquishment of the acreage, or (iv) continued staged exploration of the acreage. We have not yet concluded this review and cannot make any projection as to the likely outcome of this review. Moreover, our Chinese partner company in the PSC, CUCBM, will have its own view and certain outcomes will be subject to CUCBM and MOC approval. In the event we decide to continue our exploration activities or sell or assign all or a portion of the acreage, our ability to do so will be dependent on approval of our application for extension of the exploration period

which expired on June 30, 2009. Along with our Chinese partner company in the PSC, CUCBM, we have executed a modification agreement, subject to MOC approval, extending the exploration period from June 30, 2009 to June 30, 2011. That extension and modification agreement has been sent to MOC and based on our previous experience, we anticipate approval will be granted, but there can be no guarantee that MOC will approve the modification agreement as submitted.

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 and State royalty according to the relevant government regulations. 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 June 30, 2009 vs. Three Months Ended June 30, 2008 (in
thousands):

                                            Three months ended June 30,
                                             2009                2008
            Exploration costs            $       1,247       $       1,701
            Lease operating expense                407                 784
            General and Administrative           1,852               1,690
            Total                        $       3,506       $       4,175

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 June 30, 2009 and June 30, 2008 (in thousands):

                                                   Three months ended June 30,
                                                    2009                2008
    Capitalized well costs charged to expense   $           -       $          43
    Technical personnel compensation                      143                 204
    Contract drilling & related expenses                1,104               1,454
    Total                                       $       1,247       $       1,701

Exploration costs for the three months ended June 30, 2009 decreased $0.5 million due primarily to a decrease 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 it becomes the operator of the block. The Farmout Agreement is contingent upon the approval by the PRC government. Subject to the satisfaction of certain conditions in the Farmout Agreement, the estimated exploration costs incurred this quarter to be reimbursed by Arrow totaled $181,000.

The table below sets out components of lease operating expense ("LOE") for the three-month periods ended June 30, 2009 and 2008 (in thousands):

                                         Three months ended June 30,
                                         2009                  2008
             Workovers               $          73         $         335
             Pumping Related Costs             312                   318
             Supervision                        22                   131
             Total                   $         407         $         784

LOE for the three months ended June 30, 2009 was comprised of costs pertaining to the dewatering efforts of 18 wells in the Shouyang Block and one 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 June 30, 2009 decreased primarily due to a decrease in workovers of $0.3 million and a decrease in supervision of $0.1 million. Subject to certain conditions under the Farmout Agreement with Arrow, the estimated LOE incurred this quarter in the Qinnan Block to be reimbursed by Arrow totaled $35,000.

General and administrative ("G&A") expenses for the three months ended June 30, 2009 increased $0.2 million due primarily to an increase in legal fees of $0.3 million, partially offset by a decrease in share-based compensation of $0.1 million due primarily to higher estimated forfeiture rates used in the calculations of the compensation. Subject to certain conditions under the Farmout Agreement with Arrow, the estimated G&A incurred this quarter in the Qinnan Block to be reimbursed by Arrow totaled $77,000.

Six Months Ended June 30, 2009 vs. Six Months Ended June 30, 2008 (in thousands):

                                        Six months ended June 30,
                                         2009               2008
                 Exploration costs   $      2,453       $      3,938
                 LOE                          938              1,726
                 G&A                        3,224              3,731
                 Total               $      6,615       $      9,395

The table below sets out components of exploration costs for the six months ended June 30, 2009 and 2008 (in thousands):

                                                    Six months ended June 30,
                                                     2009               2008
     Capitalized well costs charged to expense   $          -       $      1,415
     Seismic data acquisition                               -                 84
     Technical personnel compensation                     300                416
. . .