7. Commitments and Contingencies Legal Proceedings. We are periodically named in legal actions arising from normal business activities. We evaluate the merits of these actions and, if we determine that an unfavorable outcome is probable and can be estimated, we will establish the necessary accruals. We do not anticipate any material losses as a result of commitments and contingent liabilities. We are involved in no material legal proceedings. Shouyang Production Sharing Contract. We are the operator under a PSC entered into with CUCBM to develop the Shouyang Block in the Shanxi Province of the PRC. The term of the Shouyang PSC consists of an exploration period, a development period and a production period. During the exploration period, we hold a 100% participating interest in the properties, and we must bear all exploration costs for discovering and evaluating CBM-bearing areas. If the 2011 Shouyang PSC Modification Agreement is approved by MofCom, we anticipate being able to establish a number of areas that reasonably meet the criteria for certification of  Chinese  reserves under PRC law. Thereafter, to maintain rights to produce and develop a CBM discovery, we must compile an Overall Development Plan ("ODP") application and receive all necessary approvals for such plan. Upon receipt of approvals, we must commence development operations in accordance therewith. At such time, pursuant to the 2011 Shouyang PSC Modification Agreement, CUCBM elected to participate with a 30% participating interest share (other than development in 64.66 km 2 of the Shouyang ODP Area, for which CUCBM has waived its right to elect a participating interest share). The development costs for such CBM discovery will be borne by us and CUCBM in proportion to the parties' respective participating interests. The Shouyang PSC provides for a gradual cost recovery mechanism whereby operational expenses will first be reimbursed out of 75% of revenues generated from CBM sales. Then, our exploration costs will be reimbursed in equal proportion to