Australia's Sino Gas & Energy Holdings said Wednesday that it has signed its first sales agreement for gas from the Linxing block in central China that allows pilot production to start in December this year.

The agreement is for gas to be sold to state-owned China United Coalbed Methane, which is a partner in the Linxing block. The gas will be further sold to industrial gas markets in Shanxi province through existing pipeline infrastructure, Sino Gas said in a filing to the Australian Securities Exchange.

The gas will be sold at $7/Mcf during the first year and will be adjusted annually, in line with government policies and referencing Shanxi prices, Sino Gas added.

Initially, seven wells will be connected to a central gathering station located on the western flank of Linxing and more wells are expected to come online as drilling progresses, Sino Gas said.

"After the first year, sales volumes can increase up to 1 million cubic meters/day under the contract. Any incremental volumes beyond this amount are dependent upon well performance and further negotiations," the statement said.

The Linxing block is located in central China's Ordos Basin and covers a total of 1,874 sq km although Sino Gas' development is only centered on the 573 sq km Linxing West area and a small portion north of the 1,301 sq km Linxing East area. The company owns 100% of the block during the exploration phase while its partners CUCBM and CBM Energy Associates have the right to back-in with 64.75% and 5.25%, respectively, once the overall development plan is approved by the central government.

Sino Gas previously said it was working toward preparation of an ODP and a Chinese reserve report for the acreage during 2013.