Mr. Victor Hwang reports

PRIMELINE ANNOUNCES PRODUCTION UPDATE, REPAYMENT OF BONDS AND BANK LOAN ADJUSTMENT

Primeline Energy Holdings Inc. has provided an update on production from the LS36-1 gas field, its resolution of various financial issues and on the final stage of its arbitration with CNOOC and CCL China Ltd.

CNOOC lowered the LS 36-1 production

CCL, the operator of the LS36-1 gas field, reported on Sept. 10, 2018, that well A5 had stopped producing as a result of water ingress. Well A5 represents approximately 13 per cent of the total production from the gas field. As a precaution, CCL also proposed reducing production from well A1M, which drains the same reservoir as A5, until it completed its investigation of the cause of the loss of A5 and temporarily reduced production of the gas field to a level of approximately 450,000 cubic metres per day of sale gas, or about 60 per cent of the previous production level.

Following receipt of the information regarding the A5 well, on Sept. 11, 2018, Primeline Energy Holdings approved a budget for CCL to proceed with work to investigate and resolve the problems with A5 immediately. However, CCL did not commence the work until Nov. 5, 2018, when it conducted coiled tubing operations to lift water in the A5 well bore. On Nov. 8, 2018, CCL reported that while such operations had successfully removed the water from the well, gas flow had not been restored, confirming CCL's view that production from the A5 well should be discontinued. CCL demobilized the coiled tubing equipment. However, the well head pressure of A5 recovered on Nov. 11, 2018, and Primeline Energy Holdings has requested that the coiled tubing equipment be returned to the platform immediately, but CCL has refused to do so.

Primeline Energy Holdings has also requested that production from well A1M should now be increased back to the previous level. However, notwithstanding the agreement by CCL and Primeline Energy Holdings in a joint management committee (JMC) meeting in July, 2018, that the operator should maximize production of gas from the gas field, CCL has not agreed to increase production. Instead, on Nov. 8, 2018, CCL proposed that the production level of the gas field for the year 2019 should be reduced to a total sales gas quantity of only 102,310 cubic metres per year, which would be the equivalent of approximately 33 per cent of the annual contract quantity (ACQ) under the gas sale contract (GSC) with Zhejiang Gas, under which production from the gas field is sold. At that level of production, the gas sales revenue would only be sufficient to cover the budget for operating costs that CCL has proposed for 2019, providing no or minimal revenue to Primeline Energy Holdings. Primeline Energy Holdings has objected strongly and the matter is to be discussed in detail at a JMC meeting, which is to take place shortly.

The development of the gas field was intended to supply gas for 15 years under the GSC at an ACQ of 300,000 cubic metres per year for an initial plateau period of seven years. The facilities have a design life of 25 years. However, after only four years of intermittent production at a rate lower than the designed plateau rate, CCL has now proposed that production be reduced to just a break-even level.

To put matters into context, one of the key issues related to the current production shortfall is CCL's failure as operator to implement a previously agreed plan to drill for additional gas resources discovered and identified within the gas field that can be drilled from the platform. The rolling development of the reserves and resources in the field was always envisioned and, therefore, additional well slots were built on the platform to allow such additional work. In 2013, following the drilling of the initial four production wells, CCL presented to the JMC detailed reports confirming the proven developed reserves and identifying additional gas reserves and resources. Four wells were designed for such phase 2 drilling and their technical justification was approved by the JMC in October, 2013. However, CCL has failed to implement such work for additional gas during the five years from 2013. This failure, among others, forms part of the main claims in the CNOOC arbitration.

Primeline Energy Holdings believes CCL's proposal to reduce production and failure to drill for additional gas is commercially illogical and without any proper technical justification, and is not consistent with CCL's own technical reports presented in the past and in the last few days.

As previously reported, in late 2017, as part of its defence in the CNOOC arbitration, CNOOC purported to terminate the petroleum contract and cease performance of its obligations thereunder, including the obligation to distribute Primeline Energy Holdings' share of production revenue. This was a breach of the contractual requirement that the parties should not cease the performance of contract obligations until the final award of the tribunal. Primeline Energy Holdings applied to the tribunal for interim relief and, after the hearing in January, 2018, the tribunal ordered CNOOC to continue to comply with its contractual obligations until the tribunal's award in the CNOOC arbitration.

The main hearing of the CNOOC arbitration took place in Singapore between Sept. 10, 2018, and Sept. 14, 2018, as well as Sept. 17, 2018, to Sept. 20, 2018, and then on Oct. 30, 2018. The tribunal has not provided guidance, but Primeline Energy Holdings' assessment is that the final award is not expected until sometime in the first half of 2019.

Support from the syndicate banks

Primeline Energy Holdings informed its lending banks of the reduction in production and operational forecast made by CNOOC. The lending banks, being China Development Bank, China Export and Import Bank, and Shanghai Pudong Development Bank, which financed the company's share of the gas field development costs, have been extremely supportive to date and, in November, 2016, agreed to company's application to amend the capital repayments and to reduce the interest rate margin payable in relation to the loan facility.

Primeline Energy Holdings is extremely pleased to report that it has secured the syndicate banks' approval for a reduction of the principal repayment due in November, 2018, in view of the current abnormal operation conditions, the inability of CCL to restore the production to its former level and the anticipated schedule of the CNOOC arbitration. Such adjustment provides support and flexibility until the CNOOC arbitration is completed. An amendment agreement to the syndicate facility was signed on Nov. 19, 2018.

Major shareholder support in resolving GEMS bonds

On Aug. 14, 2015, Primeline Energy Holdings issued $10-million (U.S.) principal amount Tranche A convertible bonds to GRF Prime Ltd., and then $8-million (U.S.) principal amount Tranche B convertible bonds on Nov. 10, 2015. The term of the bonds is three years, extendable at the option of GRF Prime for two one-year periods.

As previously announced, in August, 2018, the company repaid the Tranche A bonds through a replacement bond issued to a company controlled by Victor Hwang, Primeline Energy Holdings' president, chairman and majority shareholder.

The Tranche B bonds were due for repayment on Nov. 12, 2018. However, all of Primeline Energy Holdings' cash flow from the gas field is charged to, and controlled by, the syndicate banks and it was not possible to secure the release of funds with which to repay the Tranche B bonds. Primeline Energy Holdings was not able to agree to terms with GRF Prime in relation to the extension of the term of the Tranche B bonds.

Therefore, Primeline Energy Holdings is extremely pleased to announce that it has again secured support from Mr. Hwang to allow the company to pay the redemption amount due in respect of the Tranche B bonds.

Payment of the redemption amount due on the Tranche B bonds has been financed by a loan of $9,301,000 (U.S.) from Mr. Hwang. Mr. Hwang's loan is intended to be secured by the issuance by Primeline Energy Holdings of $9.3-million (U.S.) principal amount of bonds having the same terms as the Tranche B bonds. Issuance of the new B bonds is subject to TSX Venture Exchange approval.

The company will continue to manage the current situation for the benefit of all stakeholders of Primeline Energy Holdings and endeavour to ensure that the CNOOC arbitration is successfully completed.

About Primeline Energy Holdings Inc.

Primeline Energy Holdings is an exploration and production company focusing exclusively on China natural resources under petroleum contracts with CNOOC in the East China Sea. The LS36-1 gas field has been in production since July, 2014.

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