ITEM 1. BUSINESS - Plan of Operations.
Petroleum Exploration Permit PEP 38328 (40.0%)
The participants in the permit are the Registrant (40.0%), Trans-Orient Petroleum Ltd. (22.5%) and Boral Energy Resources Limited (37.5%). After completing the purchase of Trans-Orient Petroleum Ltd.'s interest, the Registrant's interest will be (62.5%). The Registrant is the operator. The permit area is 785,000 acres (1,226 square miles). The permit was granted on July 1, 1996.
The conditions of the first year of the permit were satisfied by drilling the Kereru-1 well in 1996 which recorded some gas shows, but was plugged and abandoned without testing.
Through the past acquisition of nearly 200 miles of new seismic, reprocessing of over 200 miles of existing seismic and the completion of a variety of geological studies, a number of exploration leads and prospects have been identified. These include an anticline feature in the north of PEP 38328 (the MaiMai Prospect), anticlinal features in the coastal area around and south of Napier (the Napier Lead, the Whakatu Prospect and the Haumoana Lead), and several features near the border of the two permits (the Rosearl Leads).
During the year the Registrant and its partners concentrated their exploration efforts within this permit on three prospects: the Napier, Whakatu and Mai Mai by collecting 25 miles of new seismic data over these areas. Subsequent processing and mapping of the seismic confirmed the Whakatu Prospect, located near the city of Hastings, as a drillable prospect with the other prospects also considered as possible future drilling sites. . The Whakatu-1 well was then drilled during January and February 2000 to test a large anticlinal structure located near the city of Hastings The well was drilled to a total depth of 4800 feet; and although there were some hydrocarbon indications during drilling, electric logging of the well did not reveal any reservoir zones worthy of flow testing, The. Whakatu-1 well was, therefore, plugged and abandoned in early February. The permit area has ongoing exploration potential, and other prospects and leads will be reviewed in the light of the results of Whakatu-1 before any further exploration program is defined.
Current gas consumption in this area is around 2.5 billion cubic feet per annum. This is supplied by an eight inch pipeline from the Taranaki area on the west coast of the North Island (220 miles from Hastings). This pipeline passes through the center of the PEP 38328 permit and the adjacent PEP 38332 permit area, giving Indo-Pacific excellent access to the national gas pipeline infrastructure as well as close proximity to the local market.
The drilling of the Whakatu-1 well fulfills all permit obligations to June 2001.
An operating agreement has been entered into among the participants. Among other things, the operating agreement provides that a participant may not sell, assign, transfer, mortgage, pledge, charge, encumber, lease, sub-lease, declare itself trustee of or otherwise dispose of or create a charge or encumbrance over all or part of its participating interest except to a "related body corporate" as that expression is defined in the Companies Act (NZ) if that related body corporate holds the participating interest for at least one year without either the consent of the other participants or first offering the participating interest proposed to be dealt with to the other participants.
For work planned to be done before December 31, 2000 on PEP 38328 and its estimated cost See ITEM 1. BUSINESS-Plan of Operations.
Petroleum Exploration Permit PEP 38332 (42.5%)
PPL 38332 was granted on June 24, 1997. The other participants are Trans-Orient Petroleum Ltd. (20.0%) and Boral Energy Resources Limited. (37.5%). After completing the purchase of Trans-Orient Petroleum Ltd.'s interest, the Registrant's interest will be (62.5%).The Registrant is the operator. The permit area is situated immediately south of PEP 38328 and is 999,700 acres in area.
Through the past acquisition of nearly 68 miles of new seismic, reprocessing of over 100 miles of existing seismic and the completion of a variety of geological studies, a number of exploration leads and prospects have been identified. During the year, the Registrant and the other participants acquired a further 43 miles of seismic data over the Tukipo Lead and other areas.. Subsequent processing and mapping of the seismic have ruled out the Tukipo Lead as a favorable drilling prospect. The Boar Hill Prospect which has been defined by earlier seismic mapping is being considered as a possible drilling target by the permit participants, as also are a number of seismic and surface geology leads, including Speedy, Waewaepa and Oparae A further four mile seismic line was acquired over Speedy in January 2000, and confirmed a closed structure, which is now being considered for drilling to about 3000 feet depth in mid 2000.
The Registrant and the other participants have completed the work program required for the first two and a half years, and have made the permit commitment required by December 24, 1999 to drill one exploration well prior to June 24, 2000, or surrender the permit. Other participants may be sought to fund drilling.
An operating agreement is being negotiated. Before execution of an operating agreement, the participants proceed in accordance with local industry conventions. Among other things, the operating agreement will provide that a participant may not sell, assign, transfer, mortgage, pledge, charge, encumber, lease, sub-lease, declare itself trustee of or otherwise dispose of or create a charge or encumbrance over all or part of its participating interest except to a "related body corporate" as that expression is defined in the Companies Act (NZ) if that related body corporate holds the participating interest for at least one year without either the consent of the other participants or offering the participating interest proposed to be dealt with to the other participants.
For work planned to be done before December 31, 2000 on PEP 38332 and its estimated cost see ITEM 1. BUSINESS-Plan of Operations.
New Zealand, Onshore Canterbury Basin, South Island
Petroleum Exploration Permit 38256 (35.0%)
The Canterbury Basin is located both onshore and offshore in the area surrounding Christchurch, on the east coast of the South Island. The total area of the Canterbury Basin is about twelve million acres with the 2,760,120 acre (4,312.7 square miles) PEP 38256 covering most of
the onshore area. The sediments in the Canterbury Basin range in age from Early Cretaceous to Quaternary. The participants in this permit are the Registrant (35%), Trans-Orient Petroleum Ltd. (35%) and AMG Oil Ltd. (30%). After completing the purchase of Trans-Orient Petroleum Ltd.'s interest, the Registrant's interest will be (70.0%).
PEP 38256 was granted on August 25, 1997 to the Registrant and to Trans-Orient Petroleum Ltd. The Registrant and Trans-Orient Petroleum Ltd. agreed to assign an interest of 20% to AMG Oil Ltd. (formerly Trans New Zealand Oil Company) and an interest of 10% to Gondwana Energy Ltd. This latter transaction was cancelled January 31, 1998. The Registrant is the operator.
The participants have completed all seismic acquisition requirements to February 25, 2000. The participants are required by August 25, 2000 to drill an exploration well to the lesser of 1,200 meters (3,940 feet) or economic basement.
An operating agreement dated June 25, 1998 has been entered into. Among other things, the operating agreement provides that a participant may not sell, assign, transfer, mortgage, pledge, charge, encumber, lease, sub-lease, declare itself trustee of or otherwise dispose of or create a charge or encumbrance over all or part of its participating interest except to a "related body corporate" as that expression is defined in the Companies Act (NZ) if that related body corporate holds the participating interest for at least one year without either the consent of the other participants or offering the participating interest proposed to be dealt with to the other participants.
The Registrant and Trans-Orient Petroleum Ltd. by agreement dated June 25, 1998 optioned up to 80% of the permit to AMG Oil Ltd. In August 1998 AMG Oil Ltd. earned 30% of the permit by paying the cost of a 120 mile seismic survey. To earn an additional 50%, AMG was required to elect before December 4, 1998 to pay the cost of any additional seismic required to define two drilling prospects and to pay the dry hole costs of drilling two wells to a maximum of about US$2,100,000. The option agreement was modified by three subsequent agreements dated December 3, 1998, October 26, 1999 and February 23, 2000 which extended the period of time in which the AMG must exercise its option to acquire up to a further 50% interest in the 38256 permit area to June 16, 2000. Additionally, the February 23, 2000 amendment provided AMG with a choice of committing to: ( Option A') to earn an additional 50% in PEP 38256 from the Registrant by funding all expenditure including an agreed program of seismic work leading up to and including the drilling of two exploration wells. Alternatively, AMG may, at its election, earn an additional 35% the Registrant in the permit by funding all work leading up to and including the drilling of one exploration well ( Option B'). In the event that the AMG exercises Option B, it shall acquire a further option ( Option C') to earn an additional 15% in the permit by funding all further work up to and including a second exploration well on a separate exploration target. Option C must be exercised within 30 days of reaching the predetermined target depth in the exploration well drilled pursuant to exercise of Option B.
In February 1999, The Registrant and its joint venture partners completed a 165 mile 2D seismic program as a second stage follow up survey to the joint venture's earlier 120 mile seismic survey. The second phase of seismic surveys were paid solely by AMG Oil Ltd. Field sampling and laboratory analysis has identified several potential source and reservoir rock sequences.
The participants have completed the interpretation and mapping of the recently acquired seismic, and a further 112 miles of seismic were acquired in March 2000 to further define the Ealing and Arcadia Prospects and the Chertsey South Lead for drilling in late 2000.
The Arcadia Prospect is a well defined four-way dip closed anticline in excess of 8000 acres as mapped at Oligocene level. The main targets are the Mt Brown Limestone at approximately 2,100 ft, Homebush Sandstones at 3,800 ft and Broken River Formation sandstones at 4,500 ft.
The Ealing Prospect is a large paleo-drape structure which is augmented by monoclinal flexure above a reactivated basement fault on its northern margin. The main targets are the Homebush and Broken River Sandstones.
For work planned to be done before December 31, 2000 on PEP 38256 and its estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Exploration Permit PEP 38339, Cook Strait (50.0%)
PEP 38339 was granted on November 26, 1998 to the Registrant. The permit area encompasses onshore portions of the South Island and offshore portions of Cook Strait lying between the North and South Islands. The participants in this permit are the Registrant (50%) and Trans-Orient Petroleum Ltd. (50%). After completing the purchase of Trans-Orient Petroleum Ltd.'s interest, the Registrant's interest will be (100.0%).The Registrant is the operator.
The permit area is approximately 815,400 acres and encloses the southern part of a Miocene-Pliocene basin formed in response to movement along the Alpine Fault and associated plate boundary faults. No wells have been drilled and there is no previous onshore seismic data. However, surface geological mapping has identified the Blind River Anticline as a focus of exploration.
Before February 26, 2000 the participants are required to reprocess available offshore seismic data and collect additional gravimetric data, conduct rock sampling and evaluate the database to define the basin structure and identify prospects and leads for further evaluation. Before November 26, 2000, the participants are to collect and interpret a minimum of 12 miles of onshore seismic data and 30 miles of offshore seismic data. Any additional seismic data required to identify a drilling prospect is to be collected by May 2001 and a well is to be drilled before November 26, 2001. A work program for the remainder of the permit is then to be submitted for approval.
The initial focus of exploration on this permit has been the onshore Blind River Anticline, a feature that BP geologists mapped as an area of interest several decades ago. The Registrant. acquired 15 miles of new seismic data over the Blind River area in March 1999. The data was of poor quality, which has hindered interpretation. Further geological and geophysical work is being considered.
For work planned to be done before December 31, 2000 on PEP 38339 and its estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
New Zealand, Onshore Taranaki Basin, North Island
The Taranaki Basin is located on the west coast of the North Island. The sediments in the Taranaki Basin range in age from Late Cretaceous to the Quaternary and encompass a depth of some 25,000 feet with complex structure and geology. Compression across the eastern portion of the Basin during the early Miocene period created a thrusted fold belt up to ten miles wide, which contains the McKee, Tariki, Ahuroa and Waihapa-Ngaere fields. Further west in the onshore region are the fault bounded Kapuni, Ngatoro and Kaimiro fields. All these fields are currently in production.
Petroleum Mining Permit PMP 38148 (5.0%)
Effective September 1, 1996 the Registrant bought the outstanding shares of Minora Energy (New Zealand) Limited for AUS$575,000 (CDN$478,755, US$348,790). The name of the company was changed to Ngatoro Energy Limited. Ngatoro Energy Limited owns a five percent participating interest and revenue interest in petroleum mining permit 38148, which has six producing oil wells and one producing gas well.
The permit area is 9,400 acres. The permit expires on December 23, 2010. Production is from turbidite sandstones of the Mount Messenger Formation at depths of 1,500 metres to 2,000 metres. The other participants are New Zealand Oil & Gas Ltd. (35.43%) and Fletcher Challenge Energy Taranaki Ltd. (59.57%). New Zealand Oil & Gas Ltd. is the operator. The Crown in right of New Zealand has reserved a royalty of the greater of five per cent of net sales revenue from the sale of petroleum products or 20% of accounting profits.
Oil and gas production and sales revenue during the Registrant's last three fiscal years:
Oil Sales Oil Revenue Gas Sales Gas Revenue Year (bbl) (US$) (000 scf) (US$)
1997 26,556 487,941 [1] 1998 20,628 224,921 27,688 9,247 1999 19,786 302,064 38,605 12,634
[1] To August 1998 gas was flared.
The Registrant entered into an oil sales contract dated November 9, 1997 with Fletcher Challenge Energy Taranaki Limited and a gas sales contract dated February 18, 1998 with Fletcher Challenge Energy Limited. Under the oil sales contract, the Registrant sells its share of production from the field at the monthly average of the mean of the Asian Petroleum Price Index published in Hong Kong. The agreement may be terminated on 30 days' notice on the occurrence of certain events. Gas sales began in the third quarter of 1998.
A workover of the Ngatoro-1 well was completed successfully in mid-June 1999, adding approximately 280 barrels of oil per day to production. The joint venture participants have also approved workovers of the Ngatoro-9, Ngatoro-11 and Ngatoro-1 production wells which should add at least 100 barrels of oil per day to production. At the 1999 year end, production from the field was averaging approximately 1100 barrels of oil per day and 2.6 million cubic foot of gas per day. Drilling of two new wells to test separate oil prospects is being considered.
For work planned to be done before December 31, 2000 on PMP 38148 and its estimated cost see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Prospecting License PEP 38736 (100%)(includes the area formerly held under PPL 38706)
The Registrant has a 100% participating interest in Petroleum Exploration Permit 38736 ("PEP 38736") which was granted on July 14, 1999. The Registrant had a 7.75% participating interest in Petroleum Prospecting License 38706 ("PPL 38706") with Fletcher Challenge Energy Ltd. ("Fletcher Challenge"), as the operator, holding the remaining 92.25% participating interest. PPL 38706 required the participants to complete a work program including reprocessing 300 kilometers of seismic data by July 31, 1999 and drilling one exploration well by July 31, 2000. However, Fletcher Challenge relinquished its interest in PPL 38706 and as a result, the Registrant was permitted to add the acreage of PPL 38706 as part of PEP 38736, subject only to a slight increase in the work program required under PEP 38736.PEP 38736 now requires the Registrant to complete a work program including the following
i) prior to January 14, 2002, acquire, process and interpret eight kilometers of seismic data or equivalent 3D seismic data, reprocess ten kilometers of seismic data, and either commit to complete the next stage of the work program detailed below in (ii) or surrender the permit; and
ii) prior to July 14, 2002, drill one exploration well and either commit to a satisfactory work program for the remainder of the permit term or surrender the permit.
At December 31, 1999, PEP 38736 is in good standing with respect to its work commitments. For work planned to be done before December 31, 2000 on PEP 38706 and its estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Exploration Permit PEP 38716 (23.8%)
PEP 38716 was granted on January 30, 1996. The participants are the Registrant (23.8%), Marabella Enterprises Ltd. (29.6%), Euro-Pacific Energy Pty. Ltd. (6.6%), Australia Worldwide Exploration NL (25.0%) and Antrim Energy Ltd. (15%).
PEP 38716 is situated in the eastern margin of the onshore Taranaki Basin and covers an area of approximately 67,000 acres. It is located adjacent to the Waihapa-Ngaere oil and gas field. The gathering station for the Waihapa-Ngaere oil and gas field is located within a few miles of the boundary of PEP 38716. The area consists of gently rolling hills with rural agriculture being the main activity. Previous exploration of PEP 38716 has resulted in the collection of several hundred miles of seismic data, and the drilling of several wells, all of which had oil shows. The Crown Prospect is located in the northern part of PEP 38716. The main target horizons in the Crown Prospect were prognosed as the Tikorangi limestones, at an estimated depth near 9,000 feet and the Tariki sandstones below about 11,500 feet, while Kapuni Group sandstones are expected to be encountered below 12,500 feet. The Crown Prospect was interpreted as a thrust block anticline, somewhat similar in geological style and size to the nearby Waihapa oil field.
On March 31, 1999, drilling of the Huinga-1 well on the Crown Prospect commenced. The Huinga-1 well was drilled to a total depth of 13,000 feet in order to test several target zones. The well was plugged and suspended as in order to allow a reassessment of the prospect, given that the geology drilled so far is somewhat different to that expected.
South of the Crown Prospect lies the Oru Prospect which targets the Miocene sandstones of the Mount Messenger Formation at depths of less than 5,000 feet. This is considered to be a secondary target within the permit area. The Waihapa-8 well, drilled on the very edge of the Oru structure, flow tested oil from the target sandstones at rates in excess of 750 barrels per day. Oru Prospect is a potential future drilling target.
For work planned to be done before December 31, 2000 on PEP 38716 and its estimated cost see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Exploration Permit PEP 38720 (50.0%)
PEP 38720 was granted on September 2, 1996. The participants in this permit are the Registrant (50%) and Trans-Orient Petroleum Ltd. (50%). After completing the purchase of Trans-Orient Petroleum Ltd.'s interest, the Registrant's interest will be (100.0%).The permit is approximately 6,322 acres in area.The Registrant has completed the work program of seismic data collection, seismic reprocessing and modeling and reservoir engineering studies on offset wells required for the first two and a half years. The remaining work program required the Registrant to drill one exploration well prior to September 2, 1999 and either commit to a satisfactory work program for the remainder of the permit term or surrender the permit. The Clematis-1 well was spudded in early December 1999 to test the shallow potential of the Waitoriki
Structure. Clematis 1 well reached its Target Depth of 5900 feet on December 20, 1999. Following a review of electric logs from the well, the decision was made to plug and abandon the well, as it was not considered that any zones would flow hydrocarbons at commercially viable rates. At some later date, the structure's major gas potential in the deeper play zones to 13,000-foot depth are planned to be tested with a deep well.
An agreement has been entered into with Westech Energy (NZ) Ltd. whereby the Registrant will contribute NZ$50,000 to the cost of a 3D seismic survey which covers an area including about 1000 acres in the south of PEP 38720, for which the Registrant will receive approximately 2000 acres of 3D seismic data covering an area including that within PEP 38720. This survey was acquired in February 2000.
For work planned to be done before December 31, 2000 on PEP 38720 and its estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Exploration Permit PEP 38723 (80%)
PEP 38723 was granted on October 30, 1997. The other participants in this permit are Trans-Orient Petroleum Ltd. (40%) and Gondwana Energy Ltd. (20.0%). After completing the purchase of Trans-Orient Petroleum Ltd.'s interest, the Registrant's interest will be (80.0%).The Registrant is the operator. The permit is 19,783 acres in area.
The Registrant and the other participants have completed the work program required, which included reprocessing and interpreting a minimum of 30 miles of seismic data. On June 2, 1999, the Ministry approved a change in conditions of the Permit such that the remaining work program requires the participants to collect a minimum of 5 miles of 2D seismic data prior to April 30, 2000 and either commit by April 30, 2000 to drill an exploration well by October 30, 2000 or surrender the permit. The Registrant has committed to the new stage of the seismic, which will be acquired in April 2000 over the Ratapiko Prospect. The Ratapiko Prospect is a combination trap with the main target being Mt Messenger sandstones between 3,500 and 4,600 ft.
For work planned to be done before December 31, 2000 on PEP 38723 and its estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
AUSTRALIA
Offshore exploration permits granted in Australia provide for the exclusive right to explore for petroleum for an initial term of six years, renewable for an unlimited number of five-year terms over one-half of the remaining area at each renewal. The participants are allowed to exceed the committed work programs for the permits or apply for extensions or reductions of such work programs for any particular year. Any production permits granted will be for a term of 21 years from the date of issue, renewable for a further 21 years. In addition to general Australian taxation provisions, most offshore permits, including all of the Company's Australian permits, are subject to
Petroleum Resource Rent Taxation at the rate of 40% on a project's net income after deduction of allowable project and exploration expenditures, with undeducted exploration expenditures compounded forward at the Long-Term Bank Rate ("LTBR") plus 15% and project expenditures at LTBR plus 5%.
Offshore Petroleum Exploration Permit Ashmore Cartier AC/P19 (65.0%), Timor Sea
A participating interest of 65.0% was acquired by the Registrant in AC/P19 in May, 1997. The other participant is Mosaic Oil NL (35.0%). The Registrant is the operator.
The AC/P19 Permit is approximately 364,500 acres and is located across the southern Ashmore Platform and Cartier Trough area in the Timor Sea. Fan sands are one reservoir objective, similar to those found in the Tenacious-1 well to the southeast of the permit. The Registrants earlier acquired the Corvus 2D seismic data, which has detailed the Ursa Prospect as a potential Plover Sands trap covering an area of up to 5,000 acres.
The Ursa Prospect's expected main reservoir, Middle Jurassic Plover Formation sandstones, are both sourced and sealed by organic-rich Oxfordian/Kimmeridgian syn-rift shales and mudstones of the Lower Vulcan Formation. The Plover sands are a proven high quality producer at Jabiru and other nearby fields.
By an agreement dated August 12, 1997 the participants granted an interest to Lonman Pty. Ltd. which is 5% of the premium obtained in farmout of the first well in the permit, unless previously converted to an equivalent participating interest by repayment of past costs. Upon commencement of production, there shall be reimbursement of past costs related to the carried interest payable out of 50% of attributable, net production revenue.
The Company has also committed to purchase20 sq. miles of 3D seismic from PGS Ltd. to further define prospects and identify new leads.
For work planned to be done before December 31, 2000 on AC/P19 and its estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Permit Area AC/P31 (65%),
On September 12, 1999, the Northern Territory Department of Mines and Petroleum formally awarded permit AC/P31 in the Timor Sea to the Registrant as Operator (65%) and Mosaic Oil NL (35%). The permit, of approximately 18,000 acres, is adjacent to the much larger AC/P19, and is being explored in conjunction with the program in AC/P 19.
AC/P31 is awarded for six years subject to the Registrant fulfilling the following minimum work requirements:
(i) in the first year, these work requirements comprise the purchase of geological and geophysical data and the completion of geological and geophysical studies;
(ii) in the second year, they comprise the reprocessing of 18 miles of 2D seismic data and completion of AVO and pre-stack depth migration studies over a test line;
(iii) in the third year, they comprise the acquisition of 12 miles of new 2D seismic and their integration into and interpretation of the existing database;
(iv) in year four, the obligation is to acquire 12 miles of new 2D seismic to high grade prospects, and
(v) in the fifth year the participants must conduct a re- evaluation and re-interpretation of seismic data and prior to September 12, 2005, one exploration well must be drilled.
For work planned to be done before December 31, 2000 on AC/P31 and its estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
Permit AC/P26, Offshore Bonaparte Basin,
Permit AC/P26 was granted under the Petroleum (Submerged Lands) Act 1967 on February 25, 1997 for a term of six years. The participants in the permit are the Trans-Orient Petroleum Ltd. (35.0%), West Oil N.L. (30.0%) and Mosaic Oil N.L. (35.0%). After completing the purchase of Trans-Orient Petroleum Ltd.'s interest, the Registrant's interest will be (35.0%). Mosaic Oil N. L. is the operator. The permit is situated in the Timor Sea on the eastern flank of the oil-rich Vulcan Graben, about 120 miles offshore from the Western Australia coastline and is administered by the state government of the Northern Territory, Australia. The water depth is about 300 feet. The permit area is 101,250 acres.
The Vulcan Basin is a northeast-trending, fault bounded to the northwest and the southeast by the high blocks of the Ashmore Platform and the Londonderry High. The basin is characterized by several prominent troughs and a horst and graben terrain. The grabens lie in an echelon distribution along the flanks of the basin. Pre-rift, rift, sag and collision phases are recognized in the structural and stratigraphic development of the area. Up to 30,000 feet of Upper Permian to Cenozoic sediments occur in the Basin. For the most part, Jurassic sediments are not present on the Londonderry High and Ashmore Platform.
Nearby commercial oil fields include the Jabiru, Challis and Skua oil fields with combined reserves of approximately 200 million barrels of oil. These have been profitable producers using low cost FPSO (floating production, storage and offloading) technology which enables profitable production even at low oil prices. Other mostly uneconomic discoveries including the Montara, Bilyara and Tahbilk (oil and gas) discoveries west of the permit area and the Talbot oil field adjacent to the permit area. Petroleum discoveries in the region have been made in Triassic and Lower to Mid Jurassic sandstones.
The occurrence of hydrocarbons at the Skua, Montara and Talbot fields has proved that hydrocarbons have been generated in this region. Migration pathways from potential Lower Cretaceous and upper Jurassic source shales can be traced on existing tectonic and detailed structural maps out of the Skua Trough and Northern Browse Basin into the permit area.
By an agreement dated May 5, 1998 the participants granted an interest to Lonman Pty. Ltd. which is 5% of the premium obtained in farmout of the first well in the permit, unless, previously converted to an equivalent participating interest by repayment of past costs. Upon commencement of production, there shall be reimbursement of past costs related to the carried interest payable out of 50% of attributable net production revenue.
The participants in the permit have completed the work program required for the first and second years. The remaining work program requires the participants to complete the following:
i) prior to February 25, 2001, drill one exploration well;
ii) prior to February 25, 2002, complete a work program which includes acquiring 100 kilometers of new 3D seismic data, or purchase of existing 3D data, or surrender the permit;
iii) prior to February 25, 2003, complete a work program which includes interpreting seismic data to define prospects, or surrender the permit; and
iv) prior to February 25, 2004, drill a second exploration well, or surrender the permit.
Two hydrocarbon traps along trend from the Talbot oil field have been identified and mapped from interpretation of a100 square mile 3D seismic survey purchased in 1998. Several other leads have been identified from interpretation of 2D seismic data, including a stratigraphic trap in the east of the permit. A large fault trap, the Rossini Prospect, has been identified as the most attractive drilling target. Presentations of the results at various industry forums are being conducted with a view to securing a farm out with third parties to fund the drilling of an exploration well, planned for late 2000.
An industry standard operating agreement is near finalization. Before execution of an operating agreement, the participants proceed in accordance with local industry conventions.
For work planned to be done before December 31, 2000 on AC/P26 and its estimated cost, see Item 1. Business- Plan of Operations.
Timor Gap Zone of Cooperation
Zone of Cooperation Area A Block 96-16, Australia and Indonesia
Trans-Orient Petroleum Ltd. acquired a 33 1/3% interest in a venture to explore the Zone of Cooperation Area A Block 96-16 ("ZOCA 96-16") in the Timor Gap Zone of Cooperation located between Australia and Indonesia. The permit area was originally 670,000 acres, however, pursuant to the terms of the permit grant, the participants were required to relinquish 25% of the permit area in November 1999. The other participants in ZOCA 96-16 are Norwest Energy N.L., as operator (33.33%) and West Oil N.L. (33.33%). The participants have entered into an agreement with Phillips Petroleum Ltd. which provides that Phillips will fund the drilling and testing of an exploration well on the Coleraine Prospect in the western part of the permit during year 2000. Under the terms of this agreement, Phillips earns a 66% interest in the permit by paying all costs through the drilling and testing of the exploration well, which will fulfil the year 2001 well obligation. Following completion of this well by Phillips Petroleum, the ZOCA 96-16 license interests will be Phillips Petroleum (66%), Norwest Energy NL (14%), West Oil NL (10%), and the Trans-Orient Petroleum Ltd. (10%). After completing the purchase of Trans-Orient Petroleum Ltd.'s interest, the Registrant's interest will be (10.0%).
The Timor Gap Zone of Cooperation was established in 1989 by treaty between Indonesia and Australia in settlement of a dispute between the two countries during the 1980's regarding the boundary between their respective economic zones, which had halted all exploration of this prospective area. ZOCA 96-16 lies within Area A of the Zone of Cooperation, which is now administered by the Australia-United Nations (on behalf of the Republic of East Timor) Joint Authority.
Following signature of the treaty, Area A was divided into a number of contract areas, most of which were awarded in 1991 and 1992. This initiated an active phase of exploration, in which many of the world's leading oil companies were involved, and some 25 exploration and ten appraisal wells have now been drilled in Area A, with several significant oil and gas discoveries having already been made. Companies currently involved in the area include Shell,, Phillips, , Woodside, , Santos, Mobil and others. Discoveries in the last few years include Elang (oil), Elang West (oil), Kakatua (oil), all now in production, Bayu (gas-condensate), and Undan (gas-condensate), now scheduled for development by Phillips Petroleum while the Laminaria and Buffalo oil discoveries, which recently commenced production, are located just outside Area A, some 25 miles west of ZOCA 96-16.
Discovery wells on two of the permits adjacent to ZOCA 96-16 have recorded flow rates in production testing exceeding 11,000 barrels of oil per day, while in the case of Bayu-1 a combined flow rate of 90 million cubic feet of gas per day, with an associated 5,250 barrels of condensate was achieved.
Of particular interest to the ZOCA 96-16 contract area are the Elang and Undan-Bayu discoveries. The Elang discovery was the first in Area A, made in February, 1994 when the Elang-1 well was flow tested at a rate of 5,800 barrels per day, and a 250 foot oil column was intersected in sandstones of the Montara Beds Formation, immediately underlying the 'Break-Up Unconformity' at a depth of 10,000 feet. Production from the combined Elang/Kakatua development commenced in 1998 at initial field production rates of 35,000 barrels a day, although production is now in decline. A recent new development well flowed 20,000 barrels per day. The development location is only five miles from the boundary of ZOCA 96-16 and enhances the value of the contract area by bringing infrastructure close to it.
Elang is also important to ZOCA 96-16 in that it demonstrates that oil is being generated in the Flamingo Syncline, which lies north of Elang and crosses the southern part of ZOCA 96-16, thus improving the chances of structures close to the syncline within ZOCA 96-16 being charged with oil. Seismic mapping of the area shows prospects and leads extending northeast from Elang across the Flamingo Syncline and into ZOCA 96-16. Other prospects are identified further east within ZOCA 96- 16, particularly on the Basilisk and Minotaur trends. Both Basilisk-1 and Minotaur-1 had extensive oil indications, as also did the third well in ZOCA 96-16, the Naga-1 well, and petrophysical review of Minotaur-1 strongly suggests that the well would have been capable of flowing oil from a similar level to that of the oil column in Elang, if it had been tested. The Coleraine Prospect is mapped directly along trend from Minotaur-1. The Foyle Prospect is mapped as a low relief structure covering an area of about 18 square miles, situated between Undan-Bayu and Coleraine.
The Undan-Bayu gas-condensate field was discovered by Phillips Petroleum with the drilling of Bayu-1 in early 1995, and then extended further west later in 1995 by the drilling of Undan-1 by BHP in the adjacent Contract Area. Appraisal drilling since that time has established a gas-condensate reserve of some three trillion cubic foot (TCF) of gas, and an associated 100-200 million barrels of condensate. The field covers an area of approximately 40,000 acres, some 15 miles southeast of ZOCA 96-16. Phillips Petroleum has purchased BHP's interest in the reserve, and is now proceeding to develop the field with an early production stage which strips the condensate from the reservoir and reinjects the gas for later production. The development of this field will also add value to ZOCA 96-16 due to the proximity of the Undan-Bayu production infrastructure.
ZOCA 96-16 is subject to an annual contract service fee of US$125,000 and a production sharing agreement with the Australia-Indonesia Joint Authority. For the first five years of production, the Joint Authority is entitled to 50% to 70% of the initial 10% of gross production, and of the initial 20% of gross production for each year thereafter. Any excess production, after deduction of allowable operating costs and investment credits of 127% of exploration expenditures, is shared with the Joint Authority at rates of 50% to 70%. In addition, any taxable income from the area is also subject to a combined tax regime, with an effective corporate tax rate of 42%. The production sharing agreement
has a stated term of 30 years but if no petroleum has been located in commercial quantities before November 14, 2002 the participants may by notice extend the term over the remaining area to November 14, 2006. If no petroleum has been discovered in commercial quantities by this date, the contract will terminate. Before November 14, 2002 the participants are required to relinquish a further 25% of the difference between the area granted in the production sharing contract less any area allocated to a commercial discovery. The production sharing contract requires the following minimum work to be done:
Year of Estimated Contract Description of Work Cost (US$)
One Data review $ 100,000 Two Data review 100,000 Three 1500 km of seismic survey 800,000 Four Data review 160,000 Five One exploration well 5,000,000 Six Data review 80,000
The work prescribed for the first three years has been completed. The Registrant has paid its one-third share of the above costs. The requirements of the remaining work program are as follows:
i) prior to November 14, 2000, complete a work program which includes seismic data review, or surrender the permit; prior to November 14, 2001, drill one exploration well, or surrender the permit; and
ii) prior to November 14, 2002, complete a work program which includes seismic data review, or surrender the permit.
Following the agreement with Phillips Petroleum Ltd, they will fund the drilling and testing of an exploration well in the permit during Year 2000, at no cost to the Registrant. This well will fulfill the Year 2001 well obligation.
The Registrant's equity in the permit is reduced to 10%, following Phillips entry and assumption of permit operatorship and the obligation to the other parties to drill the well during 2000.
After recovery of investment credits for exploration and capital costs and of operating costs, the value of production, if any, of petroleum is to be divided as follow;
(i) for average daily production up to 50,000 barrels, 50% to the Joint Authority and 50% to the participants;
(ii) for average daily production of between 50,001 and 150,000 barrels, 60% to the Joint Authority and 40% to the participants; and
(iii) for average daily production over 150,000 barrels, 70% to the Joint Authority and 30% to the participants;
and for any production of gas, after recovery of investment credits for exploration and capital costs and of operating costs, the value of production, if any, of gas is to be divided 50% to the Joint Authority and 50% to the participants.
An operating agreement exists among the participants. Among other things, the operating agreement provides that a participant may not sell, assign, transfer, charge, mortgage, or otherwise dispose of, deal with, encumber, make a declaration of trust or undertake any other act whereby any legal or equitable interest is created over all or part of its participating interest except to an "affiliated corporation" as that expression is defined in the production sharing contract of November 14, 1996 without the written consent of the other participants or permit a transfer or allotment of shares not outstanding on February 10, 1998 without the consent of the other participants.
A seismic grid totaling some 4,000 miles of data already existed within ZOCA 96-16, and under the terms of the ZOCA 96-16 Contract, the joint venture has carried out a reinterpretation of this data, together with a reanalysis of the wells in and around the Contract Area, and has now acquired an additional 1500 km of new seismic, which is presently being computer processed, prior to interpretation which will rank and risk the prospects.
For work planned to be done before December 31, 2000 on ZOCA 96-16 and its estimated cost see ITEM 1. BUSINESS-Plan of Operations.
Offshore Gippsland Basin, Bass Strait Permit VIC/P-39 (33.33% relinquished in 1999)
After extensive geological and geophysical work in this permit the participants determined that there is a lack of sufficient prospectivity in this permit area. This conclusion has resulted in the Joint Venture's formal offer to surrender the permit. The Joint Venture awaits a response from the Federal Government of Australia.
PAPUA NEW GUINEA
Petroleum Prospecting Licence PPL 192 (40.0%)
PPL 192 was granted in on January 28, 1997. The participants in the permit are the Registrant (40%), Trans-Orient Petroleum Ltd. (20%), Durum Cons. Energy Corp. (20%) and Mosaic Oil Niugini Pty. Ltd. (20%). After completing the purchase of Trans-Orient Petroleum Ltd.'s interest, the Registrant's interest will be (60.0%).The Registrant is the operator.
PPL 192 grants the exclusive right to explore for petroleum for an initial six year term commencing January 28, 1997, extendable for a further five year term over 50% of the original area, and the exclusive right to enter into a production agreement upon a discovery. A production agreement provides the right to produce any oil and gas discovered for a period of up to 30 years from discovery, subject to a
maximum 22.5% participating interest that can be acquired by the Government of Papua New Guinea and a two per cent participating interest that can be acquired by local landowners. See Item 2
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Registrant is subject or which are anticipated or threatened.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted for the vote of security holders in the fourth quarter of the year.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Price of and Dividends on the Registrant's Common Equity
The shares of the Registrant traded on the Vancouver Stock Exchange ("VSE") in Vancouver, British Columbia, Canada to September 12, 1996. Since January, 1996 the shares of the Registrant have traded and continue to trade on the OTC Bulletin Board under the symbol "INDX". Summary trading by quarter for the two most recently competed fiscal periods ending December 31, 1999: The Registrant believes that its market price is a reflection of actual sales and purchases. OTC BB quotations may reflect interdealer prices, without retail markup, markdown or commission and may not necessarily reflect actual transactions.
Year and Quarter High Low
First Quarter 3.563 2.406 Second Quarter 3.000 1.492 Third Quarter 1.813 0.563 Fourth Quarter 1.031 0.6875 First Quarter 1.281 0.42 Second Quarter 1.25 0.5625 Third Quarter 0.781 0.50 Fourth Quarter 0.656 0.3125 First Quarter [1] 0.875 0.3125
[1] Prices to March 16, 2000
As at March 27, 2000 there were 28,262,398 shares outstanding. At February 16, 2000 there were 213 shareholders of record resident in Canada holding 8,713,458 shares and 1,149 shareholders of record resident in the United States holding 19,316,901 shares.
No cash dividends have been declared by the Registrant nor are any intended to be declared. The Registrant is not subject to any legal restrictions respecting the payment of dividend (except that they may not be paid to render the Registrant insolvent). Dividend policy will be based on the Registrant's cash resources and needs and it is anticipated that all available cash will be needed for property development for the foreseeable future.
Recent Sales of the Registrant's Securities
No securities were issued by the Registrant during the 1999 fiscal year, however as part of the consideration to be paid by the Registrant to Trans-Orient Petroleum Ltd. for the purchase of Trans-Orient Petroleum Ltd.'s Assets, the Registrant will issue 4,184,224 Units. At March 27, 2000 these units have not yet been issued but it is expected that these units will be issued in the very near future upon formal closing of the asset purchase. The total value of the Trans-Orient Petroleum Ltd. Assets to be acquired by the Registrant were valued by the parties at $4,097,362. Each Unit consists of one common share and one "A" Warrant. Each "A" Warrant will entitle the holder to purchase one additional common share of the Registrant in consideration for $0.50 per common share exercisable up to the end of business on the date which is one year from their issuance and thereafter for $0.75 per common share up to the close of business on the date which is two years from the date of issuance. Upon the exercise of the "A" Warrants by Trans-Orient Petroleum Ltd. and subject to a commercial discovery having occurred on the Assets, the Registrant shall issue to Trans- Orient Petroleum Ltd. one "B" Warrant for each "A" Warrant exercised. The "B" Warrants shall be exercisable at a price of $1.50 for a period of one year from the date of issue of the "B" Warrants. The securities are to be issued pursuant to the exemptions from registration under the 1933 Securities Act contained with Regulation S (Rules 901-905).
Rights to Acquire Common Shares on Exercise of Options
No options to acquire the common shares of the Registrant were issued during the fiscal year ending December 31, 1999. At the Annual General Meeting of Shareholders held in June 1998, the Registrant did receive approval to grant options to directors, officers and employees. In March 1999 the registrant announced that it intended to cancel all previously granted but unexercised options and grant directors, officers and employees new options to acquire 5.6 million common shares in the capital stock of the Registrant at a price of US$0.85 per share. However the original options were not cancelled nor were the options to acquire 5.6 million shares granted to any individuals as of December 31, 1999. The names, holdings, exercise price and expiry date of outstanding options to acquire common shares of the Registrant are as follows:
Exercise Number Expiration Name Of Shares Price Date Under Option [1]
DJ and JM Bennett Family Trust [2][3][4] 200,000 $2.50 10/30/00 Alex Guidi [3][4] 500,000 $2.50 10/30/00 Brad Holland[3][5] 300,000 $2.50 05/13/00
[1] In the year ended December 31, 1999, no options to acquire shares were exercised.
[2] Beneficially owned by David Bennett and his spouse Jenni Bennett
[3] Term extended pursuant to agreements dated May 7, 1998.
[4] The options were originally granted on October 30, 1996.
[5] The option was originally granted on May 13, 1996.
Rights to Acquire Common Shares on Exercise of Warrants
No warrants to acquire the common shares of the Registrant were issued during the fiscal year ending December 31, 1999. The names, holdings, exercise price and expiry date of outstanding warrants to purchase common shares of the Registrant are as follows:
Number of Share Purchase Purchase Expiration Name Warrants [1] Price Date
Tracy Godoy[2] 160,000 $.90 05/27/00 Alex Guidi[2] 494,000 $.90 05/27/00 Peter Loretto[3][2] 146,000 $.90 05/27/00 1,000,000 $.90 07/03/00 Tanya Loretto[2] 150,000 $.90 05/27/00
[1] In the year ended December 31, 1999, no warrants to acquire shares were exercised.
[2] During the 1999 fiscal year the Registrant amended the exercise price from Cdn. $3.485 to US$.90 and extended the expiry date from May 27, 1999 to May 27, 2000.
[3] By an agreement dated June 2, 1997, Mr. Loretto purchased 1,000,000 units for Cdn. $1.80 per unit. Each unit is comprised of one common share and one non-transferable share purchase warrant. Each share purchase warrant entitles the holder to purchase a common share for Cdn. $1.90 before July 4, 1998, for Cdn. $2.00 from July 4, 1998 to July 3, 1999 and for Cdn. $2.10 from July 4, 1999 to July 3, 2000. During the 1999 fiscal year the Registrant amended the exercise price at which the holder may exercise his warrant from Cdn. $2.10 to US$.90.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following constitutes selected financial data for the Registrant prepared in accordance with United States generally accepted accounting principles for the last five completed financial periods. The information, expressed in United States dollars unless otherwise indicated, must be read in conjunction with the more detailed financial information contained in the accompanying audited financial statements.
[1] For the eleven month period ended December 31, 1995.
[2] For the year ended January 31, 1995.
Exchange Rates
On December 31, 1999 the buying rate for Canadian dollars was US$1.00: Cdn$1.4433. The following table sets out the buying rate for Canadian dollars for the period indicated. Rates of exchange are obtained from the Bank of Canada and believed by the Registrant to approximate closely the rates certified for customs purposes by the Federal Reserve Bank in New York.
[1] The high and low buying rate figures are selected from daily high and low figures.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Summary
The Registrant is in the exploration and evaluation stage on nearly all its oil and gas properties and hence has not yet achieved profitability or break even cash flow. The Registrant has experienced losses in each fiscal period reported on and expects to continue to incur losses for the upcoming fiscal year. Total losses incurred from incorporation to December 31, 1999 were $7,644,685. The level of future operations is limited by the availability of capital resources, the sources of which
are not predictable. The sales value of any oil and gas discovered by the Registrant will be largely dependent on factors beyond the Registrant's control such as the market value of the hydrocarbons produced.
Liquidity
As of December 31, 1999 the Registrant had $6,130,997 in working capital as compared with $8,890,218 as of December 31, 1998 and $10,827,096 as of December 31, 1997. For the upcoming fiscal year, the Registrant does not have sufficient capital to satisfy all the capital expenditures which are necessary to satisfy the prescribed work commitments contained within the Registrant permit license grants and joint venture agreements see ITEM 1 BUSINESS- Plan of Operations. The required permit expenditures for the upcoming fiscal year will, if fully committed to, exhaust the Registrant's current working capital with the result that the Registrant will not have sufficient working capital to continue its operations without further infusions of capital. The production revenue and interest income which the Registrant receives is not sufficient to satisfy the Registrant's operating expenses and as such these revenues will not improve the Registrant's anticipated deficiency in working capital. In order to satisfy the required capital expenditures for the upcoming fiscal year, the Registrant will need to raise additional capital from outside sources. The Registrant relies on its ability to raise additional capital through the issuance of common shares, which has a dilutive effect on the Registrant's shareholders. It is uncertain whether the Registrant will be able to secure outside sources of capital in an amount that is sufficient for it to continue with its current operations on its permits. Should the Registrant fail to raise sufficient capital, the Registrant will have to endeavor to enter into farm out arrangements with third parties to reduce its capital exposure on exploration drilling programs and/or withdraw and/or dispose of some or all of its permit interests in order to reduce the capital requirements attributable to the Registrant.
Capital Resources
For a description of the Registrant's material capital commitments for the upcoming fiscal year see ITEM 1 BUSINESS- Plan of Operations. The Registrant has no other anticipated capital expenditures of a material amount. However, the Registrant intends to acquire additional petroleum interests, which may give rise to further capital expenditures.
The Registrant's capital resources have been comprised primarily of private investors, including members of management, who are either existing contacts of the Registrant's management or who come to the attention of the Registrant through personal and business contacts, financial institutions and other intermediaries. The Registrant's management is of the view that conventional banking is unavailable to resource companies which are in the exploration stage. The Registrant's access to capital is always dependent upon general financial market conditions, especially those which pertain to venture capital situations such as oil and gas exploration companies. The Registrant
has no agreements with management, investors, shareholders or anyone else respecting additional financing at this time. Due to the speculative nature of the Registrant's business and its lack of revenue generating assets, potential investors are generally limited to those willing to accept a high degree of risk. Therefore the number of outside sources of capital for the Registrant are somewhat limited. Other than the foregoing, there are no other trends in the nature of its capital resources which could be considered predictable.
Results of Operations
The Registrant is an exploration company. The Registrant's primary focus as of December 31, 1999 is the investigation and acquisition of oil and gas properties. The Registrant's policy is to acquire interests and where possible, minimize its risk exposure by farming out or joint venturing these interests to other industry participants.
The Registrant's current property focus is on the acquisition and exploration of properties primarily in the Austral Pacific region with the objective of establishing a solid cash flow base and participating in high potential exploration blocks in under explored countries with attractive fiscal regimes.
Revenues for the year ended December 31, 1999 were $673,609 compared with $684,765 for the year ended December 31, 1998 and $870,059 for the year ended December 31, 1997. The revenue figures reported by the Registrant include both production revenues and interest income earned on the Registrant's cash and short-term deposits.
Except for the Registrant's interest in Petroleum Mining Permit ("PMP") 38148, the Registrant's petroleum permits are in the exploration stage and do not generate any production revenues. The Registrant holds a 5% participating interest and revenue interest in PMP 38148 located in the Taranaki Basin, North Island, New Zealand. PMP 38148 has six producing oil wells, four producing gas wells and two shut-in gas and oil wells.
Production revenue for the year ending December 31, 1999 was $314,698 compared with gross 1998 production revenue of $234,168. The increase is due to a rise in the average oil sale price of US$4.30 per barrel of oil to US$15.30 per barrel, partially offset by by a fall in production volume from 20,629 barrels to 19,786 barrels. The above includes revenue from gas production of $12,634 (year ended December 31, 1998: $9,247).
Costs and Expenses
In the year ended December 31, 1999 the Registrant incurred expenditures in the acquisition, exploration and development of petroleum interests of $1,923,921. The amount incurred in the acquisition, exploration and development of petroleum interests for the year ended December 31, 1998 was $1,901,030. The amount incurred in the acquisition, exploration and development of petroleum interests for the year ended December 31, 1997 was $1,064,976. The increase is largely attributable to the Registrant's participation in the drilling of the
Huinga-1 and Whakatu-1 and Clematis-1 wells, the acquisition of additional petroleum interests and development and implementation exploration programs. After the purchase of the Assets from Trans- Orient Petroleum Ltd. it is expected that costs attributable to the acquisition, exploration and development of petroleum interests will materially increase from those incurred in the past.
Depletion and amortization expense for the year ended December 31, 1999 was $176,855. For the year ended December 31, 1998 the depletion and amortization expense was $148,875 and for the year ended December 31, 1997 was $97,827.
General and administrative expenses for the year ended December 31, 1999 were $532,497. For the year ended December 31, 1998 the general and administrative expenses were $563,480 and for the year ended December 31, 1997 were $1,247,569.
Interest Expense
The Registrant finances its business primarily from the issuance of common shares and to a lesser extent from the receipt of petroleum revenues from its interest in the Ngatoro oil field, New Zealand. The Registrant has not effected any borrowing and has consequently not incurred any interest expense.
Interest Income
Interest income for the year ended December 31, 1999 was $358,911. Interest income for the year ended December 31, 1998 was $450,597 and for the year ended December 31, 1997 was $382,118.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant operates in the international crude oil, refined product, natural gas and natural gas liquids markets and is exposed to fluctuations in hydrocarbon prices, foreign currency rates, and interest rates that can affect the revenues and cost of operating, investing and financing. The Registrant has not established any policies to protect against the foregoing risks.
Commodity Price Risk
The Registrant's policy is to generally be exposed to market pricing for commodity purchases and sales. The Company has not taken any steps to protect against the fluctuating market price of oil or gas and as such the Registrant's operating revenue will be affected by changes in the market price for oil & gas. All other things being equal, where the oil & gas prices decrease it can be expected that the Registrant's revenues will in turn be reduced, whereas where oil & gas prices increase it can be expected that the Registrant's revenues will in turn increase.
Currency Risk
The Registrant has foreign currency exchange rate risk resulting from operations in overseas countries in the south Pacific and Canada. The Registrant generally holds its cash reserves in Canadian dollars while its operations expenditures are incurred in Papua New Guinea, New Zealand and Australia dollars ("Foreign Currencies"). As such any strengthening of Foreign Currencies against the Canadian dollar will cause an increase in the Registrant's operating costs. The Registrant does not hedge its exposure to currency rate changes, although it may choose to selectively hedge exposure to foreign currency exchange rate risk. The Registrant, however, has no policies relating to the foregoing.
Interest Rate Risk
The Registrant believes that it has no material interest rate risk to manage, as the Registrant has not made use of debt as a means of financing its operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS.
Financial statements begin on following page.
AUDITORS' REPORT
To the Shareholders of Indo-Pacific Energy Ltd.
We have audited the accompanying consolidated balance sheets of Indo- Pacific Energy Ltd. and its subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the financial position of Indo-Pacific Energy Ltd. and its subsidiaries as of December 31, 1999 and 1998 and the results of their operations and cash flows for each of the years in the three year period ended December 31, 1999, in conformity with generally accepted accounting principles in the United States.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, there is substantial doubt regarding the ability of the Company to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ SADOVNICK TELFORD & SKOV CHARTERED ACCOUNTANTS
Vancouver, British Columbia Canada March 28, 2000
INDO-PACIFIC ENERGY LTD. Consolidated Balance Sheets (Expressed in United States Dollars)
Approved by the Directors:
/s/ David Bennett /s/ Alex Guidi Director Director
See accompanying notes to the consolidated financial statements
INDO-PACIFIC ENERGY LTD. Consolidated Statements of Operations and Comprehensive Income (Loss) (Expressed in United States Dollars)
For the Years Ended December 31,
See accompanying notes to the consolidated financial statements
INDO-PACIFIC ENERGY LTD. Consolidated Statements of Changes in Stockholders' Equity (Expressed in United States Dollars) For the Years Ended December 31, 1999, 1998 and 1997
See accompanying notes to the consolidated financial statements
INDO-PACIFIC ENERGY LTD. Consolidated Statements of Cash Flows (Expressed in United States Dollars) For the Years Ended December 31,
See accompanying notes to the consolidated financial statements
b
INDO-PACIFIC ENERGY LTD. Consolidated Schedules of General and Administrative Expenses (Expressed in United States Dollars) For the Years Ended December 31,
See accompanying notes to the consolidated financial statements
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 1 - NATURE OF OPERATIONS AND CONTINGENCIES
The Company was incorporated under the Company Act (British Columbia) and continued its jurisdiction of incorporation to the Yukon Territory under the Business Corporations Act (Yukon).
The Company is primarily engaged in the acquisition, exploration and development of its oil and gas properties and, with the exception of PMP 38148, has yet to determine whether its properties contain oil and gas reserves that are economically recoverable. The recoverability of the amounts capitalized for oil and gas properties is dependent upon the completion of exploration work, the discovery of oil and gas reserves in commercial quantities and the subsequent development of such reserves.
The Company does not generate sufficient cash flow from operations to fund its entire exploration and development activities and has therefore relied principally upon the issuance of securities for financing. Additionally, the Company has periodically reduced its exposure in oil and gas properties by farming out to other participants. The Company intends to continue relying on these measures to finance its exploration and development activities to the extent such measures are available and obtainable under terms acceptable to the Company. Accordingly, the Company's consolidated financial statements are presented on a going concern basis.
Refer to Note 9
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Accounting Principles and Use of Estimates
These financial statements are prepared in conformity with generally accepted accounting principles in the United States and requires the Company's management to make informed judgements and estimates that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the year reported. Actual results could differ from these estimates.
Material differences between United States and Canadian generally accepted accounting principles which affect the Company are referred to in Note 16.
b) Basis of Consolidation
These consolidated financial statements include the accounts of Indo- Pacific Energy Ltd. and its wholly-owned subsidiaries, Indo Overseas Exploration Ltd., Indo-Pacific Energy Pty. Ltd., Indo-Pacific Energy (PNG) Limited, Source Rock Holdings Limited, Indo-Pacific Energy (NZ) Limited, Ngatoro Energy Limited and PEP 38716 Limited. All significant intercompany balances and transactions have been eliminated upon consolidation.
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
c) Joint Operations
The Company's exploration and development activities are conducted jointly with other companies and accordingly, these financial statements reflect only the Company's proportionate interest in these activities.
d) Translation of Foreign Currencies
The Company's foreign operations through its subsidiaries are of an integrated nature and accordingly, the remeasurement method of foreign currency translation is used for conversion into United States dollars. Monetary assets and liabilities are translated into United States dollars at the rates prevailing on the balance sheet date. Other assets and liabilities are translated into United States dollars at the rates prevailing on the transaction dates. Revenues and expenses arising from foreign currency transactions are translated into United States dollars at the average rate for the year. Exchange gains and losses are recorded as income or expense in the year in which they occur.
e) Financial Instruments
The Company's financial instruments consist of current assets and current liabilities. The fair values of these assets and liabilities approximate the carrying amounts due to the short-term nature of these instruments.
f) Accounting Pronouncements Recently Issued
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133: Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), effective for fiscal periods beginning after June 15, 1999. SFAS 133 requires that the fair-market value of derivatives be reported on the balance sheet and any changes in the fair value of the derivative be reported in income or other comprehensive income, as appropriate. The Company does not expect adoption of this new standard to have a material effect on its financial reporting.
g) Cash and Short-Term Deposits
Cash and short-term deposits include government treasury bills and bankers' acceptances with original maturities of three months or less, together with accrued interest.
h) Property and Equipment
Property and equipment consist of furniture and office equipment and are recorded at cost and depreciated over their estimated useful lives on a declining-balance basis at annual rates of 10% to 20%.
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
i) Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas operations whereby all costs associated with the acquisition, exploration and development of oil and gas reserves are capitalized in cost centers on a country-by-country basis. Such costs include property acquisition costs, geological and geophysical studies, carrying charges on non-producing properties, costs of drilling both productive and non- productive wells, and overhead expenses directly related to these activities.
Depletion is calculated for producing properties by using the unit-of- production method based on proved reserves, before royalties, as determined by management of the Company or independent consultants. Sales or dispositions of oil and gas properties are credited to the respective cost centers and a gain or loss is recognized when all properties in a cost center have been disposed of, unless such sale or disposition significantly alters the relationship between capitalized costs and proved reserves of oil and gas attributable to the cost center. Costs of abandoned oil and gas properties are accounted for as adjustments of capitalized costs and written off to expense.
A ceiling test is applied to each cost center by comparing the net capitalized costs to the present value of the estimated future net revenues from production of proved reserves discounted by 10%, net of the effects of future costs to develop and produce the proved reserves, plus the costs of unproved properties net of impairment, and less the effects of income taxes. Any excess capitalized costs are written off to expense. The calculation of future net revenues is based upon prices, costs and regulations in effect at each year end.
Unproved properties are assessed for impairment on an annual basis by applying factors that rely on historical experience. In general, the Company may write-off any unproved property under one or more of the following conditions:
i) there are no firm plans for further drilling on the unproved property; ii) negative results were obtained from studies of the unproved property; iii) negative results were obtained from studies conducted in the vicinity of the unproved property; or iv) the remaining term of the unproved property does not allow sufficient time for further studies or drilling.
j) Stock Options
In accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company elected to apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees to account for stock options and provide pro forma disclosures of net loss as if the fair value method had been applied.
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
k) Income Taxes
The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactment of changes in the tax laws or rates are considered.
NOTE 3 - LOAN RECEIVABLE FROM RELATED PARTY
The Company is owed $1,062,211 including interest of $18,051 by Trans- Orient Petroleum Ltd. ("Trans-Orient") for payments relating to oil and gas exploration on behalf of Trans-Orient. This amount is unsecured with no fixed terms for repayment and accrues interest on a monthly basis at the average three-month bankers' acceptance rate plus 3%.
Refer to Note 8 and 15
NOTE 4 - MARKETABLE SECURITIES
Marketable securities comprise of 517,020 shares (December 31, 1998: 517,020 shares) of Trans-Orient Petroleum Ltd. acquired at a cost of $383,075 and recorded at an estimated market value of $222,319 (December 31, 1998: $694,875).
Refer to Notes 8 and 15
NOTE 5 - INVESTMENTS
Investments comprise of 1,800,000 shares (December 31, 1998: 1,000,000 shares) of AMG Oil Ltd. acquired at a cost of $650,000 (December 31, 1998: $250,000) and 600,000 shares (December 31, 1998: Nil) of Gondwana Energy, Ltd. acquired at a cost of $20,000 (December 31, 1998: Nil), recorded at estimated market values of $720,000 (December 31, 1998: $1,500,000) and $20,000 (December 31, 1998: Nil), respectively.
The Company holds an option to purchase a further 200,000 shares of AMG Oil Ltd. at a price of $0.50 per share expiring on December 31, 2000.
Refer to Note 8
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment are comprised as follows:
NOTE 7 - OIL AND GAS PROPERTIES
Oil and gas properties are comprised as follows:
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
NEW ZEALAND
Unless otherwise indicated, petroleum exploration permits granted in New Zealand provide for the exclusive right to explore for petroleum for an initial term of five years, renewable for a further five years over one-half of the original area. The participants can apply for extensions or reductions of the committed work programs for the permits under certain circumstances. Any production permits granted will be for a term of up to 40 years from the date of issue. The New Zealand government has reserved a royalty of the greater of 5% of net sales revenue or 20% of accounting profits from the sale of petroleum products.
a) PMP 38148 Ngatoro Oil Field
The Company has a 5% participating interest in Petroleum Mining Permit 38148 which includes seven producing oil and/or gas wells. The New Zealand government has reserved a royalty of the greater of 5% of net sales revenue or 20% of accounting profits from the sale of petroleum products amounting to $15,248 for the 1999 fiscal year (1998 fiscal year: $10,269).
At December 31, 1999, PMP 38148 is in good standing with respect to its work commitments and does not require the Company to incur minimum exploration expenditures for the 2000 fiscal year.
b) PEP 38256
The Company has a 35% participating interest in, and is the operator of, Petroleum Exploration Permit 38256 ("PEP 38256") which was granted on August 25, 1997. At least one-half of the original area must be relinquished by August 25, 2000 in addition to the area which would normally be required to be relinquished upon renewal of PEP 38256. The other participants of PEP 38256 are Trans-Orient Petroleum Ltd. (35%) and AMG Oil Ltd. (30%).
By an agreement dated June 25, 1998, AMG Oil Ltd. ("AMG") acquired a right to earn up to an 80% participating interest in PEP 38256 from Trans-Orient Petroleum Ltd. and the Company. In December 1998, AMG earned a 30% participating interest in PEP 38256 by funding all of the costs of acquiring, processing and interpreting 200 kilometers of seismic data. AMG has the right to earn an additional 50% participating interest by funding all of the costs of drilling two exploration wells including any further seismic data required prior to drilling. By agreements dated December 3, 1998 and October 26, 1999, this right has been extended to May 31, 2000.
The Company and the other participants have completed the work program required for the first two and a half years. PEP 38256 requires the participants to complete the remaining work program that includes committing by February 25, 2000 to drill one exploration well prior to August 25, 2000, or surrender the permit.
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
At December 31, 1999, PEP 38256 is in good standing with respect to its work commitments. Upon committing to drill one exploration well prior to August 25, 2000, the Company's share of work commitments for the 2000 fiscal year requires an estimated $455,000 of exploration expenditures to be incurred.
Refer to Notes 8 and 15
c) PEP 38328
The Company has a 40% participating interest in, and is the operator of, Petroleum Exploration Permit 38328 ("PEP 38328") which was granted on June 19, 1996. The other participants of PEP 38328 are Boral Limited (37.5%) and Trans-Orient Petroleum Ltd. (22.5%).
The Company and the other participants have completed the work program required for the first four years that included drilling the Kereru-1 exploration well. PEP 38328 requires the participants to complete the remaining work program that includes committing by June 19, 2000 to drill one exploration well prior to June 19, 2001, or surrender the permit.
At December 31, 1999, PEP 38328 is in good standing with respect to its work commitments and does not require the Company to incur minimum exploration expenditures for the 2000 fiscal year.
Refer to Note 8
d) PEP 38330
The Company has a 34% participating interest in, and is the operator of, Petroleum Exploration Permit 38330 ("PEP 38330") which was granted on July 1, 1996. The other participants of PEP 38330 are Norwest Energy N.L. (33%) and Mosaic Oil N.L. (33%).
The Company and the other participants have completed the work program required for the first three years. PEP 38330 requires the participants to complete the remaining work program that includes acquiring, processing and interpreting 25 kilometers of seismic data and committing prior to July 1, 2000 to drill an exploration well by July 1, 2001, or surrender the permit.
At December 31, 1999, PEP 38330 is in good standing with respect to its work commitments and does not require the Company to incur minimum exploration expenditures for the 2000 fiscal year.
Refer to Note 15
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
e) PEP 38332
The Company has a 42.5% participating interest in, and is the operator of, Petroleum Exploration Permit 38332 ("PEP 38332") which was granted on June 24, 1997. The other participants of PEP 38332 are Boral Limited (37.5%) and Trans-Orient Petroleum Ltd. (20%).
The Company and the other participants have completed the work program required for the first two and a half years. PEP 38332 requires the participants to complete the remaining work program that includes drilling one exploration well prior to June 24, 2000.
At December 31, 1999, PEP 38332 is in good standing with respect to its work commitments. The Company's share of work commitments for the 2000 fiscal year requires an estimated $268,000 of exploration expenditures to be incurred.
Refer to Note 8
f) PEP 38335
The Company has a 10% participating interest in Petroleum Exploration Permit 38335 ("PEP 38335") which was granted on November 29, 1998. The other participants of PEP 38335 are Westech Energy Corporation (70%), as the operator, Trans-Orient Petroleum Ltd. (15%) and Everest Energy Inc. (5%).
The Company and the other participants are required to complete the work program originally due by November 29, 1999 and extended to March 31, 2000 that includes acquiring, processing and interpreting 20 kilometers of seismic data or equivalent 3D seismic data. Additionally, PEP 38335 requires the participants to complete the remaining work program that includes the following:
i) prior to November 29, 2000, drill one exploration well and either commit to complete the next stage of the work program detailed below in ii) or surrender the permit; and iii) prior to November 29, 2001, evaluate the results of the exploration well drilled during the second year and either commit to a satisfactory work program for the remainder of the permit term or surrender the permit.
At December 31, 1999, PEP 38335 is in good standing with respect to its work commitments. The Company's share of work commitments for the 2000 fiscal year requires an estimated $122,000 of exploration expenditures to be incurred.
Refer to Note 8
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
g) PEP 38339
The Company has a 50% participating interest in, and is the operator of, Petroleum Exploration Permit 38339 ("PEP 38339") which was granted on November 26, 1998. The other participant of PEP 38339 is Trans- Orient Petroleum Ltd. (50%).
The Company and the other participant have completed the work program required to February 26, 2000. PEP 38339 requires the participants to complete the remaining work program that includes the following:
i) prior to November 26, 2000, acquire, process and interpret a minimum of 20 kilometers of onshore and 50 kilometers of offshore seismic data, and either commit to complete the next stage of the work program detailed below in (ii) or surrender the permit; ii) prior to May 26, 2001, acquire, process and interpret additional seismic data and either commit to complete the next stage of the work program detailed below in (iii) or surrender the permit; and iii) prior to November 26, 2001, drill one onshore or offshore exploration well and either commit to a satisfactory work program for the remainder of the permit term or surrender the permit.
At December 31, 1999, PEP 38339 is in good standing with respect to its work commitments. The Company's share of work commitments for the 2000 fiscal year requires an estimated $42,000 of exploration expenditures to be incurred.
Refer to Note 8
h) PEP 38716
The Company has a 23.8% participating interest in Petroleum Exploration Permit 38716 ("PEP 38716") which was granted on January 30, 1996. The other participants of PEP 38716 are Marabella Enterprises Ltd. (29.6%), as the operator, Australian Worldwide Exploration N.L. (25%), Antrim Oil and Gas Limited (7.5%), Swift Energy International Inc. (7.5%) and Euro-Pacific Energy Pty. Ltd. (6.6%).
In December 1999, Durum Cons. Energy Corp. relinquished its 4% participating interest in PEP 38716 in favor of the Company for no consideration.
By an agreement effective July 30, 1998 with Antrim Oil and Gas Limited ("Antrim"), the Company and one other participant agreed to assign a 15% participating interest in PEP 38716 to Antrim for a total amount of $450,000. The Company received $150,000 for assigning a 5% participating interest in PEP 38716 to Antrim.
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
The Company and the other participants have completed the work program required to June 30, 1999 that included drilling the Huinga-1 exploration well. A work program has been submitted for approval for the remaining term of PEP 38716 which expires on January 30, 2001 unless renewed.
At December 31, 1999, PEP 38716 is in good standing with respect to its work commitments. The Company's share of work commitments for the 2000 fiscal year, if approved as submitted, requires an estimated $20,000 of exploration expenditures to be incurred.
Refer to Note 8
i) PEP 38720
The Company has a 50% participating interest in, and is the operator of, Petroleum Exploration Permit 38720 ("PEP 38720") which was granted on September 2, 1996. The other participant of PEP 38720 is Trans- Orient Petroleum Ltd. (50%).
The Company and the other participant have completed the work program required for the first three years that included drilling the Clematis- 1 exploration well. A work program has been submitted for approval for the remaining term of PEP 38720 which expires on September 2, 2001 unless renewed.
At December 31, 1999, PEP 38720 is in good standing with respect to its work commitments. The Company's share of work commitments for the 2000 fiscal year, if approved as submitted, requires an estimated $60,000 of exploration expenditures to be incurred.
Refer to Note 8
j) PEP 38723
The Company has a 40% participating interest in, and is the operator of, Petroleum Exploration Permit 38723 ("PEP 38723") which was granted on October 30, 1997. The other participants of PEP 38723 are Trans- Orient Petroleum Ltd. (40%) and Gondwana Energy, Ltd. (20%).
The Company and the other participants have completed the work program required to March 30, 1999. PEP 38723 requires the participants to complete the remaining work program that includes acquiring, processing and interpreting eight kilometers of seismic data and committing by April 30, 2000 to drill an exploration well by October 30, 2000 or surrender the permit.
At December 31, 1999, PEP 38723 is in good standing with respect to its work commitments. The Company's share of work commitments for the 2000 fiscal year requires an estimated $316,000 of exploration expenditures to be incurred.
Refer to Note 8
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
k) PEP 38736 and PPL 38706
The Company has a 100% participating interest in Petroleum Exploration Permit 38736 ("PEP 38736") which was granted on July 14, 1999. The Company had a 7.75% participating interest in Petroleum Prospecting License 38706 ("PPL 38706") with Fletcher Challenge Energy Ltd. ("Fletcher Challenge"), as the operator, holding the remaining 92.25% participating interest. PPL 38706 required the participants to complete a work program that included reprocessing 300 kilometers of seismic data by July 31, 1999 and drilling one exploration well by July 31, 2000. However, Fletcher Challenge relinquished its interest in PPL 38706 and as a result, the Company was permitted to add the acreage of PPL 38706 as part of PEP 38736 and subject only to the work program required under PEP 38736. All costs associated with PPL 38706 have been written off during the 1999 fiscal year.
PEP 38736 requires the Company to complete a work program that includes the following:
i) prior to January 14, 2002, acquire, process and interpret eight kilometers of seismic data or equivalent 3D seismic data, reprocess ten kilometers of seismic data, and either commit to complete the next stage of the work program detailed below in (ii) or surrender the permit; and ii) prior to July 14, 2002, drill one exploration well and either commit to a satisfactory work program for the remainder of the permit term or surrender the permit.
At December 31, 1999, PEP 38736 is in good standing with respect to its work commitments and does not require the Company to incur minimum exploration expenditures for the 2000 fiscal year.
AUSTRALIA
Unless otherwise indicated, offshore exploration permits granted in Australia provide for the exclusive right to explore for petroleum for an initial term of six years, renewable for an unlimited number of five-year terms over one-half of the remaining area at each renewal. The participants can apply for extensions or reductions of the committed work programs for the permits under certain circumstances. Any production permits granted will be for a term of 21 years from the date of issue, renewable for a further 21 years. In addition to general Australian taxation provisions, most offshore permits, including all of the Company's Australian permits, are subject to Petroleum Resource Rent Taxation at the rate of 40% on a project's net income after deduction of allowable project and exploration expenditures, with undeducted exploration expenditures compounded forward at the Long-term Bank Rate ("LTBR") plus 15% and project expenditures at LTBR plus 5%.
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
l) AC/P19
The Company has a 65% participating interest in, and is the operator of, Ashmore-Cartier Permit 19 ("AC/P19") which was granted on May 30, 1997. The other participant of AC/P19 is Mosaic Oil N.L. (35%). AC/P19 is subject to a maximum 5% carried interest to the original participants, convertible to an equivalent participating interest upon commencement of production through the reimbursement of past costs payable out of 50% of net production revenue.
The Company and the other participant have completed the work program required for the first two years. AC/P19 requires the participants to complete the remaining work program that includes the following:
i) prior to May 30, 2000, acquire, process and interpret 300 kilometers of seismic data; (ii) prior to May 30, 2001, acquire, process and interpret additional seismic data; (iii) prior to May 30, 2002, drill one exploration well; and (iv) prior to May 30, 2003, reinterpret and evaluate results.
The participants have the right to withdraw from AC/P19 at the end of each year's work program starting in the third year.
At December 31, 1999, AC/P19 is in good standing with respect to its work commitments. The Company's share of work commitments for the 2000 fiscal year requires an estimated $108,000 of exploration expenditures to be incurred.
m) AC/P31
The Company acquired a 65% participating interest in, and is the operator of, Ashmore-Cartier Permit 31 ("AC/P31") which was granted on September 12, 1999. The other participant of AC/P31 is Mosaic Oil N.L. (35%).
AC/P31 requires the participants to complete a work program that includes the following:
(i) prior to September 12, 2000, conduct geological and geophysical studies; (ii) prior to September 12, 2001, reprocess 30 kilometers of seismic data; (iii) prior to September 12, 2002, acquire, process and interpret 20 kilometers of seismic data; (iv) prior to September 12, 2003, acquire, process and interpret 20 kilometers of seismic data; (v) prior to September 12, 2004, reinterpret and evaluate seismic data; and (vi) prior to September 12, 2005, drill one exploration well.
The participants have the right to withdraw from AC/P31 at the end of each year's work program starting in the third year.
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
At December 31, 1999, AC/P31 is in good standing with respect to its work commitments. The Company's share of work commitments for the 2000 fiscal year requires an estimated $13,000 of exploration expenditures to be incurred.
PAPUA NEW GUINEA
Petroleum prospecting licenses granted in Papua New Guinea provide for the exclusive right to explore for petroleum for an initial term of six years, renewable for a further five years over one-half of the original area, and the right to enter into a Petroleum Agreement upon a discovery. The Petroleum Agreement provides the right to produce any oil and gas discovered for a period of up to 30 years from discovery, subject to a maximum 22.5% participating interest that can be acquired by the Government of Papua New Guinea and a 2% participating interest that can be acquired by local landowners. The participants can apply for extensions or reductions of the committed work programs for the licenses under certain circumstances.
n) PPL 192
The Company has a 40% participating interest in, and is the operator of, Petroleum Prospecting License No. 192 ("PPL 192") which was granted on January 28, 1997. The other participants of PPL 192 are Trans- Orient Petroleum Ltd. (20%), Durum Cons. Energy Corp. (20%) and Mosaic Oil N.L. (20%).
The Company and the other participants have completed the work program required for the first three years. PPL 192 requires the participants to complete the remaining work program that includes the following:
i) prior to January 28, 2001, drill one exploration well. In addition, the participants must commit to a minimum work program prior to November 28, 2000 for the fifth and sixth years, or surrender the permit; ii) prior to January 28, 2002, acquire, process and interpret 400 kilometers of seismic data or equivalent 3D seismic data; and iii) prior to January 28, 2003, drill a second exploration well.
At December 31, 1999, PPL 192 is in good standing with respect to its work commitments. The Company's share of work commitments for the 2000 fiscal year requires an estimated $2,045,000 of exploration expenditures to be incurred.
Refer to Note 8
o) PPL 215
The Company acquired a 40% participating interest in, and is the operator of, Petroleum Prospecting License No. 215 ("PPL 215") which was granted on May 6, 1999. The other participants of PPL 215 are Trans-Orient Petroleum Ltd. (40%) and Mosaic Oil N.L. (20%).
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
PPL 215 requires the participants to complete a work program that includes the following:
i) prior to May 7, 2001, reprocess 200 kilometers of seismic data. In addition, the participants must commit to a minimum work program prior to March 7, 2001 for the third and fourth years, or surrender the permit; ii) prior to May 7, 2003, acquire, process and interpret 100 kilometers of seismic data. In addition, the participants must commit to a minimum work program prior to March 7, 2003 for the fifth and sixth years, or surrender the permit; and iii) prior to May 7, 2005, drill one exploration well.
At December 31, 1999, PPL 215 is in good standing with respect to its work commitments. The Company's share of work commitments for the 2000 fiscal year requires an estimated $35,000 of exploration expenditures to be incurred. Refer to Note 8
PEOPLE'S REPUBLIC OF CHINA
p) Nanling-Wuwei Blocks
By a Joint Study Agreement dated March 18, 1996 with China National Oil and Gas Exploration and Development Corp. ("CNODC"), the Company acquired a 50% participating interest to study the Nanling and Wuwei Blocks ("the Blocks"). The other participant in the Blocks was Moondance Energy Limited (50%).
The Company had an exclusive right to obtain partners to enter into a Production Sharing Contract which expired in July 1999. Accordingly, the Company has written off the Blocks in its entirety.
NOTE 8 - RELATED PARTY TRANSACTIONS
a) Prepaid Expenses
The Company prepaid $41,571 relating to general and administative expenses to DLJ Management Corp., a wholly-owned subsidiary of a company having directors, officers and/or principal shareholders in common with the Company.
b) Loan Receivable from Related Party
The Company is owed $1,062,211 (December 31, 1998: Nil) by Trans-Orient Petroleum Ltd., a company having directors, officers and/or principal shareholders in common with the Company. Refer to Note 3
c) Marketable Securities and Investments
Marketable securities and investments consist entirely of common shares of companies having directors, officers and/or principal shareholders in common with the Company. These companies are Trans-Orient Petroleum Ltd., AMG Oil Ltd. and Gondwana Energy, Ltd. Refer to Notes 4 and 5
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 8 - RELATED PARTY TRANSACTIONS
d) Due from Related Parties
At December 31, 1999, the Company is owed $62,667 (December 31, 1998: $46,161) by certain public companies with directors, officers and/or principal shareholders in common with the Company. This amount is non- interest bearing and has no fixed terms for repayment.
e) Oil and Gas Properties
Certain participants of oil and gas properties have directors, officers and/or principal shareholders in common with the Company. These participants are Trans-Orient Petroleum Ltd., AMG Oil Ltd., Durum Cons. Energy Corp. and Gondwana Energy, Ltd.
Refer to Note 7
f) Other
During the 1999 fiscal year, the Company incurred $60,899 (1998 fiscal year - $57,123, 1997 fiscal year - $132,214) in consulting fees and $27,177 (1998 fiscal year - $19,480, 1997 fiscal year - Nil) in rent to the President of the Company.
During the 1997 fiscal year, the Company paid $12,820 to a private company owned by a former director of the Company pursuant to a consulting agreement cancelled during the same year.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
a) Work Commitments
The Company participates in oil and gas exploration and development activities as a joint venturer with third and related parties and is contractually committed under agreements to complete certain exploration programs.
The Company's management estimates that the total commitments under various agreements is approximately $3,484,000 of which a related party participant has farmed into PEP 38256 to contribute approximately $455,000.
b) Political Risks
Papua New Guinea is subject to political uncertainty and instability and the Company faces a number of risks and uncertainties which may adversely impact on its ability to pursue its exploration and development activities.
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)
c) Environmental Laws and Regulations
The Company is not aware of any events of noncompliance in its operations with any environmental laws or regulations nor of any potentially material contingencies related to environmental issues. However, the Company cannot predict whether any new or amended environmental laws or regulations introduced in the future will have a material adverse effect on the future business of the Company.
NOTE 10 - COMMON STOCK
a) Authorized and Issued Share Capital
The authorized share capital of the Company is 100,000,000 shares of common stock without par value. At December 31, 1999 and 1998, there were 28,262,398 shares of common stock issued and outstanding.
b) Incentive Stock Options
The Company applies Accounting Principles Board Opinion No. 25: Accounting for Stock Issued to Employees ("APB 25") to account for all stock options granted. Further, Statement of Financial Accounting Standards No. 123: Accounting for Stock-Based Compensation ("SFAS 123") requires additional disclosure to reflect the results of the Company had it elected to follow SFAS 123. SFAS 123 requires a fair value based method of accounting for stock options using the Black-Scholes option pricing model. This model was developed for use in estimating the fair value of traded options and require the input of and are highly sensitive to subjective assumptions including the expected stock price volatility. Stock options granted by the Company have characteristics significantly different from those of traded options. In the opinion of management, the existing model does not provide a reliable single measure of the fair value of stock options granted by the Company.
In accordance with SFAS 123, the following is a summary of the changes in the Company's stock options for the 1999, 1998 and 1997 fiscal years:
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 10 - COMMON STOCK (continued)
There were no stock options granted during the 1999 and 1998 fiscal years thus no weighted-average fair values have been assigned. For the 1997 fiscal year, the weighted-average fair value for stock options granted was estimated at the date of grant or amendment using a Black- Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 6.23%; volatility factors of the expected market price of the Company's common stock of 0.66; option lives of 1.64 years; and no expected dividends. A stock option grant during the 1997 fiscal year to purchase 500,000 shares at a price of $2.50 per share has been excluded from the fair value calculations as this stock option was cancelled without exercise subsequent to the year.
The following is a summary of the Company's net loss and basic and diluted loss per share as reported and pro forma as if the fair value based method of accounting defined in SFAS 123 had been applied for the 1999, 1998, and 1997 fiscal years:
The following stock options are outstanding at December 31, 1999:
During the 1999 fiscal year, previously granted stock options to purchase 50,000 shares at a price of $2.50 per share, 6,000 shares at a price of $3.00 per share and 10,000 shares at a price of $3.125 per share expired without exercise. No stock options were granted or amended by the Company during the 1999 fiscal year.
During the 1998 fiscal year, previously granted stock options to purchase 832,000 shares exercisable at a price of $2.50 per share until May 13, 1998 were amended to 300,000 shares exercisable at a price of $2.50 per share until May 13, 2000 and previously granted stock options to purchase 700,000 shares exercisable at a price of $2.50 per share until October 30, 1998 were extended to October 30, 2000. Additionally, previously granted stock options to purchase 500,000 shares exercisable at a price of $2.50 per share until March 25, 1999 were cancelled. No stock options were granted by the Company during the 1998 fiscal year. INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 10 - COMMON STOCK (continued)
c) Share Purchase Warrants
The following share purchase warrants to purchase shares of the Company are outstanding at December 31, 1999:
During the 1999 fiscal year, previously issued share purchase warrants to purchase 950,000 shares exercisable at a price of Cdn$3.485 per share until May 27, 1999 were amended to 950,000 shares exercisable at a price of $0.90 per share until May 27, 2000. Additionally, previously issued share purchase warrants to purchase 1,000,000 shares exercisable at a price of $2.00 per share until July 3, 1999 and thereafter at a price of $2.10 per share until July 3, 2000 were amended to 1,000,000 shares exercisable at a price of $0.90 per share until July 3, 2000.
During the 1998 fiscal year, share purchase warrants to purchase 950,000 shares exercisable at a price of Cdn$3.485 per share until May 27, 1998 were extended to May 27, 1999.
d) Escrow Shares
During the 1998 fiscal year, 1,406,250 shares at a price of Cdn$0.00333 per share, subject to escrow restrictions, were cancelled. To replace these cancelled escrow shares, 1,406,250 shares at a price of Cdn$0.01 per share were issued by private placements.
NOTE 11 - LOSS PER SHARE
The following is a reconciliation of the numerators and denominators of the basic and diluted loss per share calculations for the 1999, 1998 and 1997 fiscal years:
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 11 - LOSS PER SHARE (continued)
Due to net losses incurred for the 1999, 1998 and 1997 fiscal years, stock options and share purchase warrants outstanding were not included in the computation of diluted loss per share as the inclusion of such securities would be antidilutive.
NOTE 12 - INCOME TAXES
There are no income taxes payable for the 1999 and 1998 fiscal years. At December 31, 1999, the Company has approximately CDN$1.62 million (December 31, 1998 - CDN$1.59 million) of resource and other unused tax pools to offset future taxable income derived in Canada. Additionally, the Company has non-capital losses of approximately CDN$1.28 million (December 31, 1998 - CDN$1.13 million) available for future deductions from taxable income derived in Canada, which expire as follows:
2000 CDN$ 10,071 2001 52,731 2002 251,664 2003 662,559 2004 - 2005 153,875 2006 153,478 ----------- CDN$ 1,284,378 ===========
The Company also has losses and deductions of approximately NZ$9.79 million (December 31, 1998: NZ$6.39 million) available to offset future taxable income derived in New Zealand, Australia and Papua New Guinea.
The benefits of these excess resource tax pools and non-capital loss carryforwards have been offset by a valuation allowance of the same amount.
NOTE 13 - COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the current year's presentation.
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 14 - UNCERTAINTY DUE TO THE YEAR 2000
The year 2000 issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as the year 1900 or some other date, resulting in errors when information is processed using year 2000 dates. In addition, similar problems may arise in some systems which use certain year 1999 dates to represent something other than a date. Although the change in date has occurred, it is not possible to conclude that all aspects of the year 2000 issue affecting the Company, including those related to the efforts of suppliers and other third parties, have been fully resolved.
NOTE 15 - SUBSEQUENT EVENTS
a) PEP 38256
The participants of PEP 38256 have committed to drill one exploration well prior to August 25, 2000.
By an amended agreement dated February 23, 2000 between AMG Oil Ltd. ("AMG"), Trans-Orient Petroleum Ltd. and the Company, AMG will fund the acquisition of additional seismic data in return for an extension of AMG's right to earn up to an additional 50% participating interest in PEP 38256 to June 15, 2000. Additionally, AMG's right to increase its participating interest in PEP 38256 has been amended as follows:
i) earn an additional 50% participating interest in PEP 38256 by funding all of the costs of drilling two exploration wells including any further seismic data required prior to drilling; or ii) earn an additional 35% participating interest in PEP 38256 by funding all of the costs of drilling one exploration well including any further seismic data required prior to drilling and, at the option of AMG upon completion of the first exploration well, earn a further 15% participating interest in PEP 38256 by funding all of the costs of drilling a second exploration well including any further seismic data required prior to drilling.
b) PEP 38330
By a farmout agreement dated January 20, 2000, the participants of PEP 38330 assigned a 17.5% participating interest in PEP 38330 to Boral Limited ("Boral") in return for funding by Boral of certain survey costs up to NZ$385,000. The other participants of PEP 38330 are Norwest Energy N.L. (27.225%), Mosaic Oil N.L. (27.225%) and the Company (28.05%).
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 15 - SUBSEQUENT EVENTS
c) Purchase of Oil and Gas Properties
By a letter of intent dated January 30, 2000 and under an effective date of January 1, 2000 between Trans-Orient Petroleum Ltd. ("Trans-Orient") and the Company, the Company agreed to acquire all of Trans-Orient's onshore and offshore oil and gas interests located in New Zealand, Australia and Papua New Guinea at a purchase price of $4,097,360, representing an aggregate 20% premium of the total book value of the interests. At the request of the boards of directors of both Trans-Orient and the Company, an independent party reviewed the proposed transaction and determined that the transaction was fair to both companies. As part of the transaction, the loan receivable from Trans- Orient to the Company will be offset against the purchase price.
The Company will issue 4,184,224 units of the Company to Trans-Orient at a deemed value of $0.50 per unit for a total value of $2,092,112. Each unit consists of one common share of the Company, one Series A warrant and one Series B warrant. Each Series A warrant is exercisable to purchase one common share at a price of $0.50 during the first year and thereafter at a price of $0.75 during the second year. Each Series B warrant will, upon a commercial discovery on any one of the oil and gas interests in the transaction, replace each Series A warrant exercised and is exercisable to purchase one common share at a price of $1.50 until expiry during the first two years. Additionally, the Company will provide Trans-Orient with anti-dilution protection for a period of our year from the closing date if the aggregate amount raised is greater than $500,000 and the average price is less than $0.50 per share or unit.
The Company will provide Trans-Orient additional consideration for the transaction, as follows:
i) 1,800,000 common shares of AMG Oil Ltd. ("AMG Oil") acquired at a cost of $650,000 and valued at $720,000 for the transaction, including the option to purchase a further 200,000 shares of AMG Oil at a price of $0.50 per share expiring on December 31, 2000; ii) 600,000 shares of Gondwana Energy, Ltd. acquired at a cost of and valued at $20,000 for the transaction; iii) 517,020 shares of Trans-Orient Petroleum Ltd. acquired at a cost of $383,075 and valued at $222,319 for the transaction; and iv) gross overriding royalties, valued at $1 for the transaction, on all oil and gas interests purchased from Trans-Orient ranging from 1% to 5%.
This transaction is subject to approval by the shareholders of Trans- Orient and upon closing, will be subject to certain exchange gains or losses.
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 16 - DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP") which conform in all material respects with Canadian generally accepted accounting principles ("Canadian GAAP") except for the following differences:
CONSOLIDATED BALANCE SHEETS
a) Assets
i) Marketable Securities
Under U.S. GAAP, the Company's marketable equity securities are classified as available-for-sale securities and reported at market value, with unrealized gains and losses included as a component of comprehensive income. Under Canadian GAAP, the Company's marketable equity securities are valued at the lower of cost or market value.
Total current assets under Canadian GAAP as at December 31, 1999 and 1998 are $6,408,980 and $8,735,314, respectively.
ii) Investments
Under U.S. GAAP, the Company's long-term investments are classified as available-for-sale securities and reported at market value, with unrealized gains and losses included as a component of comprehensive income. Under Canadian GAAP, the Company's long-term investments are valued at the lower of cost or market value.
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 16 - DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
Total assets under Canadian GAAP as at December 31, 1999 and 1998 are $10,879,165 and $11,939,336, respectively.
b) Stockholders' Equity
i) Common Stock
Under U.S. GAAP, compensation cost must be considered for all stock options granted requiring the Company to utilize both the intrinsic value-based and the fair value based methods of accounting and reporting stock-based compensation. Under Canadian GAAP, no such cost is recognized.
ii) Accumulated Deficit
The effects of Note 16(b)(i) on accumulated deficit are as follows:
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 16 - DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
iii) Cumulative Comprehensive Adjustment
Under U.S. GAAP, the components of other comprehensive income (loss) are required to be reported as part of the basic financial statements. Under Canadian GAAP, no such requirement exists.
The effects of Note 16(a) on cumulative comprehensive adjustment are as follows:
As a result of these adjustments under Canadian GAAP, total stockholders' equity as at December 31, 1999 and 1998 are $10,601,182 and $11,782,440, respectively.
CONSOLIDATED STATEMENTS OF OPERATIONS
c) Net Loss for the Year
The following are the effects of Note 16 (b) on net loss for the 1999, 1998 and 1997 fiscal years:
d) Loss per Share
Under U.S. GAAP, shares held in escrow are excluded from the calculation of the weighted-average number of shares outstanding until such shares are released for trading. Under Canadian GAAP, shares held in escrow are included in the calculation of loss per share.
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 16 - DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
The following is a reconciliation of the numerators and denominators of the basic and diluted loss per share calculations for the 1999, 1998 and 1997 fiscal years:
Due to net losses incurred for the 1999, 1998 and 1997 fiscal years, stock options and share purchase warrants outstanding were not included in the computation of diluted loss per share as the inclusion of such securities would be antidilutive.
CONSOLIDATED STATEMENTS OF CASH FLOWS
e) Operating Activities
The following are the effects of the adjustments required to reconcile from U.S. to Canadian GAAP for the 1999, 1998 and 1997 fiscal years:
INDO-PACIFIC ENERGY LTD. Notes to the Consolidated Financial Statements (Expressed in United States Dollars) For the Years Ended December 31, 1999 and 1998
NOTE 16 - DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
CONSOLIDATED SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES
f) General and Administrative Expenses
The following are the effects of Note 16(b) on general and administrative expenses for the 1999, 1998 and 1997 fiscal years:
INDO-PACIFIC ENERGY LTD.
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (EXPRESSED IN UNITED STATES DOLLARS)
AS AT DECEMBER 31, 1999 (Unaudited - Prepared by Management)
PROVED PETROLEUM AND NATURAL GAS RESERVE QUANTITIES
12/31/99 12/31/98 12/31/97 12/31/96
PETROLEUM RESERVES
Proved developed reserves, end of period Oil (barrels) 70,400 90,000 110,500 70,000 Gas (billion cubic feet) 0.03 0.13 0.17 0.17
Proved reserves, end of period Oil (barrels) 70,400 90,000 110,500 145,000 Gas (billion cubic feet) 0.03 0.13 0.17 0.40
All petroleum and natural gas reserves are located in New Zealand.
Petroleum and natural gas reserves cannot be measured exactly. Reserve estimates are based on many factors related to reservoir performance which require evaluation by engineers interpreting available date, as well as price, costs and other economic factors. The reliability of these estimates at any point in time depends on both the quantity of the technical and economic data, the production performance of the reservoirs as well as extensive engineering judgement. Consequently, reserve estimates are subject to revision as additional data becomes available during the producing life of a reservoir. When a commercial reservoir is discovered, proved reserves are initially determined based on only limited data from the first well or wells. Further drilling may better define the extent of the reservoir and additional production performance, well tests and engineering studies will likely improve the reliability of the estimate.
Proved developed reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved reserves are reserves which geological and engineerying data demonstrate with reasonable certainty to be recoverable in future years from known reserves under existing economic and operating conditions. Reserves are considered proved if economic producibility is supported by either production or conclusive formation tests.
SF-1
INDO-PACIFIC ENERGY LTD.
SUPPLEMENTARY INFOMRATION ON OIL AND GAS PRODUCING ACTIVITIES (EXPRESSED IN UNITED STATES DOLLARS)
AS AT DECEMBER 31, 1999 (Unaudited - Prepared by Management)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
12/31/99 12/31/98 12/31/97 12/31/96
Future cash inflows $ 1,645,840 $ 1,222,000 $ 1,493,878 $ 850,040
Future production and development costs to abandonment at December 31, 2006 572,996 644,500 639,322 314,576
Future income taxes - - - - ----------- ----------- ----------- --------- 1,072,844 577,500 854,556 535,464 Discount at 10% annual rate for estimated timing of cash flows 202,174 117,000 169,983 54,025 ----------- ----------- ----------- --------- $ 870,670 $ 460,500 $ 684,573 $ 481,439 =========== =========== =========== =========
Undiscounted future net cash flows from proved producing oil and natural gas reserves is largely based on information provided by in-house reserve calculations. A discount factor of 10% was applied to estimated future cash flows to compute the estimated present value of proved oil and natural gas reserves. This valuation procedure does not necessarily result in an estimate of the fair market value of the Company's oil and natural gas properties.
There has been no provision for income taxes, as the Company has resource and other usused tax pools to offset future taxable income.
The only change in the standardized measure of future cash flows from production has been due to the purchase of Ngatoro Energy Limited (formerly Minora Energy (New Zealand) Limited), a company whose sole asset was a 5% interest in the producing Ngatoro oil field. This is the only interest the Company holds in a proven oil property. The standarized measure calculation for the property, at December 31, 1999, was $870,670, as compared to the Net Book Value of $374,417.
SF-2
INDO-PACIFIC ENERGY LTD.
RESULTS OF OPERATION FOR PRODUCING ACTIVITIES (EXPRESSED IN UNITED STATES DOLLARS)
FOR THE YEAR ENDED DECEMBER 31, 1999 (Unaudited - Prepared by Management)
Total New Zealand
REVENUES
Petroleum and natural gas $ 314,698 $ 314,698 ----------- ---------- Amortization and depletion 104,475 104,475 Production costs 50,598 50,598 Royalties 15,248 15,248 Write-down of petroleum properties 983,168 650,703 ----------- ---------- 1,153,489 821,024 ----------- ---------- RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES (excluding corporate overhead and interest costs) $ (838,791) $ (506,326) ============ ==========
SF-3
ITEM 9.
ITEM 9.
There have been no disagreements on accounting and financial disclosures during the last three fiscal years to the date of this annual report.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The names, municipality of residence, age and position held of the directors and officers of the Registrant are as follows:
Name Age Position Held
Dr. David Bennett[1] 54 President, Chief Executive Officer and Director
Ronald Bertuzzi[1][2] 63 Director
Alex P. Guidi[3] 41 Chairman of the Board and Director
Brad J. Holland[1] 43 Director
Mark Katsumata 34 Secretary
[1] Member of audit committee.
[2] Appointed on March 31, 1998.
[3] Subsequent to the year end, Mr. Guidi has stepped down as Chairman of the Registrant. David R. McDonald has joined the Board of Directors and has assumed the position of Chairman.
Dr. David Bennett has been a member of the board of directors and an officer since October, 1996. Dr. Bennett received a Bachelor of Arts (Natural Sciences) from Cambridge University in 1968 and a Master of Science in Exploration Geophysics from the University of Leeds in 1969. In 1973, Dr. Bennett received his doctorate in Geophysics from the Australian National University and from 1973 to 1975 conducted post- doctoral research at the University of Texas (Dallas). From 1975 to 1977, Dr. Bennett was a post-doctoral fellow and lecturer at the University of Wellington, New Zealand. From 1977 to 1982, Dr. Bennett was employed by the Department of Scientific and Industrial Research, Government of New Zealand and from 1982 to 1994 was employed as geophysicist, exploration manager and finally general manager by New Zealand Oil and Gas Ltd. Dr. Bennett was an independent consultant from 1994 to 1996 when he joined the Registrant and other associated companies. Dr. Bennett has been the president and a member of the board directors of the Registrant since October, 1996. Since November, 1996, Dr. Bennett has been a member of the board of directors, and since April, 1997 the president, of Trans-Orient Petroleum Ltd., since April, 1997 a member of the board of directors of Durum Cons. Energy Corp. and since June 25, 1998 a member of the board of directors of AMG Oil Ltd.
Mr. Bertuzzi was a member of the board of directors from October 2, 1992 to October 30, 1996 and was appointed on March 31, 1998 to fill the vacancy resulting from the passing of Mr. John Holland. Mr. Bertuzzi received a Bachelor of Arts from the University of British Columbia in 1965 and has worked in the medical sales and product development industries since that time. Mr. Bertuzzi is a member of the board of directors of several companies, including AMG Oil Ltd., of which he is president, and Gondwana Energy, Ltd., of which he is a member of the Board of Directors.
Mr. Alex Guidi has been a member of the board of directors and an officer since October 1996. Mr. Guidi has been involved in public markets since 1985 and since 1989 in the oil and gas sector. Mr. Guidi has organized and financed several oil and gas companies. Mr. Guidi has been chairman of the board and a member of the board of directors of the Registrant since October, 1996. From July, 1988 to December, 1995, Mr. Guidi was a member of the board of directors of Trans-Orient Petroleum Ltd. and was elected a member of the board of directors on January 28, 1998 and chairman on April 22, 1998. From December, 1990 to May, 1996, Mr. Guidi was a member of the board of directors of Durum Cons. Energy Corp. and was president from August, 1992 to May, 1996. From August 6, 1997 Mr. Guidi has been a member of the board of directors of AMG Oil Ltd.
Mr. Brad Holland was a member of the board of directors from May 1996 to February 1997, an officer from February 1997 to October 15, 1997 and was appointed a member of the board on October 15, 1997. Mr. Holland received a Bachelor of Science in Chemical Engineering from the University of Alberta in 1979. Mr. Holland was initially employed for two years by John Holland Consultants Ltd. in property valuation, production management, evaluation and financing for production acquisition. From 1982 to 1988, Mr. Holland was employed by Canadian Western Natural Gas, a natural gas utility. From 1988 to 1992, Mr. Holland was employed as a senior project engineer with Nova Corp. where he was responsible for the design and construction of large diameter pipeline projects. Since 1992, Mr. Holland has been employed by ARAMCOin Saudi Arabia in the construction of pipelines.
Mr. Mark Katsumata was a director and officer from December, 1994 to November, 1995 and an officer from November, 1995 to February, 1997. Mr. Katsumata was appointed Secretary on October 15, 1997. Mr. Katsumata is a certified general accountant who was in public practice from 1990 to 1994 in Vancouver, B.C. In 1994 Mr. Katsumata joined the Registrant. Mr. Katsumata is also the secretary of Trans-Orient Petroleum Ltd., Durum Cons. Energy Corp., AMG Oil Ltd. and Gondwana Energy, Ltd. Mr. Katsumata is also the Corporate Secretary and Chief Financial Officer of Verida Internet Corp.
All directors have a term of office expiring at the next annual general meeting of the Registrant to be scheduled in June 2000 unless re-elected or unless a director's office is earlier vacated in accordance with the by-laws of the Registrant or the provisions of the Business Corporations Act (Yukon). All officers have a term of office lasting until their removal or replacement by the board of directors.
Indemnification of Directors and Officers
Except with respect to an action by the Registrant to obtain a judgment, the constating documents of the Registrant provide for the indemnification of any director, officer, employee or agent of the Registrant if the person acted honestly and in good faith with a view to the best interests of the Registrant and, with respect to any criminal action or administrative proceeding, had reasonable grounds to believe that his action was lawful. The Registrant has not, however, entered into any agreement with a director and officer providing for the grant of a covenant of indemnity by the Registrant pursuant to this provision in the constating documents of the Registrant.
With respect to an action to obtain a judgment, the Registrant is required under the Business Corporations Act (Yukon) before performing its obligation to indemnify to obtain the approval of the Supreme Court (Yukon) of the indemnity and any payment to be made in connection with the indemnity.
To date, no agreements to contractually provide indemnities have been executed and delivered.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities and Exchange Act of 1934 requires officers, directors and persons who own more than ten percent of a registered class of a company's equity securities to file initial reports of beneficial ownership and to report changes in ownership of those securities with the Securities and Exchange Commission. They are also required to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of Forms 3, 4 and 5 furnished to the Company or written representations that no other transactions were required, the Company has determined that the pertinent officers, directors and principal shareholders have complied with all applicable Section 16(a) requirements during fiscal 1998.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by the Company for services rendered during the period indicated:
SUMMARY COMPENSATION TABLE
[1] In fiscal 1998, 1,406,250 shares held in escrow and previously issued for CDN$4,688 in 1994 were cancelled. International Resource Management Corporation, a private company wholly-owned by Alex Guidi, held 1,361,250 of these shares with the remaining 45,000 shares held by two former directors. To replace the cancelled shares, 1,406,250 shares for total proceeds of CDN$14,063 were reallocated through private placements to International Resource Management Corporation as to 1,181,250 shares and to the DJ and JM Bennett Family Trust as to 225,000 shares.
[2] During the year Ms Jenni Lean, spouse of Dr. David Bennett, received $24,125 in salary. Ms Lean is the Corporate Affairs Manager for the Registrant
[3] David Bennett and Jenni Lean, via the DJ and JM Bennett Family Trust, own the building in which the Registrant's New Zealand office is located. During the year the Registrant paid $27,177 in office rental costs for the use of the building.
Cash Compensation.
During the year ended December 31, 1999 the Registrant had two executive officers: David Bennett, president and chief executive officer and Alex Guidi, chairman of the board. The aggregate cash compensation paid or payable by the Registrant and its subsidiaries to its executive officers during the year ended December 31, 1999 was $60,899 all of which was compensation paid to Dr. Bennett.
During the year ended December 31, 1998 the Registrant had two executive officers: David Bennett, president and chief executive officer and Alex Guidi, chairman of the board. The aggregate cash compensation paid or payable by the Registrant and its subsidiaries to its executive officers during the year ended December 31, 1998 was $57,123 all of which was compensation paid to Dr. Bennett.
During the year ended December 31, 1997 the Registrant had two executive officers: David Bennett, president and chief executive officer and Alex Guidi, chairman of the board. The aggregate cash compensation paid or payable by the Registrant and its subsidiaries to its executive officers during the year ended December 31, 1997 was $132,214 all of which was compensation paid to Dr. Bennett.
Compensation of Directors.
The Company's Board of Directors unanimously resolved that members receive no compensation for their services, however, they are reimbursed for travel expenses incurred in serving on the Board of Directors.
No other cash compensation, including salaries, fees, commissions, and bonuses, was paid or is to be paid to the directors and officers of the Registrant for services rendered for the financial years ended December 31, 1999.
No profit sharing, pension or retirement benefit plans have been instituted by the Registrant and none are proposed at this time. There are no arrangements for payments on termination of any member of management in the event of a change of control.
Aggregated Option/SAR Exercises and Fiscal 1999 Year-End Option/SAR Value Table.
The following table sets forth certain information with respect to each exercise of stock options and SARs during fiscal 1999 by each of the Named Executive Officers, and the fiscal 1999 year-end value of unexercised options and SARs. The dollar values are calculated by determining the difference between the exercise or base price of the options and the fair market value of the underlying stock at the time of exercise and at fiscal year-end if unexercised, respectively. The unexercised options, some of which may be exercisable, have not been exercised and it is possible they might never be exercised. Actual gains realized, if any, on stock option exercises and common stock holdings are dependent on the future performance and value of the Common Stock and overall stock market conditions. There can be no assurance that the projected gains and values shown in this Table will be realized.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1999 AND OPTION/SAR VALUES AT DECEMBER 31, 1999
No Options were granted to the directors or executive officers during the 1999 fiscal year.
There were no directors' or senior officers' options exercised in the year ended December 31, 1999. There were no directors' or senior officers' options exercised in the year ended December 31, 1998. The aggregate value of directors' and senior officers' options exercised below the market price of the shares at the time of exercise for the year ended December 31, 1997 was $570,660. These benefits are calculated as the difference between the market price and option exercise price on the date of exercise. Actual proceeds of the disposition will usually vary from the date of the exercise to the date of actual disposition of such shares.
Long-Term Incentive Plan Awards.
The Company does not have any formalized long-term incentive plans, excluding restricted stock, stock option and SAR plans, which provide compensation intended to serve as incentive for performance to occur over a period longer than one fiscal year, whether such performance is measured by reference to financial performance of the Company or an affiliate, the Company's stock price, or any other measure.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Beneficial Holders of More Than Five Percent of Outstanding Shares
The following schedule sets forth the Common Stock ownership of each person known by the Company to be the beneficial owner of five percent or more of the Company's Common Stock, each director, individual, and all officers and directors of the Company as a group. Each person or entity has sole voting and investment power with respect to the shares of Common Stock shown, and all ownership is of record and beneficial.
Name and address Number of Percent of owner Shares Position of Class
David Bennett[1] 225,000 President, CEO 0.8% Karori, Wellington and Director New Zealand
Ronald Bertuzzi 1,790 Director 0.0% Vancouver, BC Canada
Alex Guidi 5,724,076 Chairman of Board 20.3% Vancouver, BC Canada
Brad Holland Nil Director Nil Dhahran, Saudi Arabia
Mark Katsumata 4,000 Secretary 0.0% Surrey, BC Canada
ALL OFFICERS AND DIRECTORS AS A GROUP (5 persons) 5,954,866 21.1%
[1] By an agreement dated April 15, 1998 the DJ and JM Bennett Family Trust purchased 225,000 shares at Cdn$0.01 per share, subject to release on board approval from time to time.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No director or senior officer, and no associate or affiliate of the foregoing persons, and no insider has, or has had any material interest, direct or indirect, in any transactions, or in any proposed transaction which in either such case has materially affected or will materially affect the Registrant or its predecessors except as disclosed herein.
Mr. Alex Guidi is a member of the board of directors, the chairman and principal shareholder of the promoter of the Registrant. Mr. Guidi is the chairman, a member of the board of directors, principal shareholder and the promoter of Trans-Orient Petroleum Ltd. Mr. Guidi is the principal shareholder of Durum Cons. Energy Corp.
Mr. Guidi is a member of the member of the board of directors, the principal shareholder and the promoter of AMG. Oil Ltd. Mr. Guidi is the principal shareholder and promoter of Gondwana Energy Ltd. See below regarding shareholdings and options, warrants and rights to acquire shares beneficially held by Mr. Guidi.
Dr. David Bennett is the president, chief executive officer shareholder and a member of the boards of directors of the Registrant, Trans-Orient Petroleum Ltd. and Durum Cons. Energy Corp. Dr. Bennett is a member of the board of directors and shareholder of AMG Oil Ltd.
Mr. Ronald Bertuzzi is a member of the boards of directors and shareholder of the Registrant Trans-Orient Petroleum Ltd. and AMG Oil Ltd. Mr. Bertuzzi is also a member of the board of directors and shareholder of Gondwana Energy Ltd.
Mr. Brad Holland is a director of the Registrant and is a shareholder in Trans-Orient Petroleum Ltd., Durum Cons. Energy Corp., AMG Oil Ltd. and Gondwana Energy Ltd.
Mr. Mark Katsumata is the secretary and a shareholder of the Registrant, Trans-Orient Petroleum Ltd., Durum Cons. Energy Corp., AMG Oil Ltd. and Gondwana Energy Ltd.
The related transactions in the year ended December 31, 1999 are:
(a) On January 31, 2000 the Registrant announced that it had entered into a letter of intent to acquire all the Assets of Trans-Orient Petroleum Ltd. A formal agreement has been finalized with formal closing of the Agreement expected to occur on or about March 31, 2000 while the effective date of the Agreement is January 1, 2000. The Agreement is subject to ratification by the shareholders of Trans-Orient Petroleum Ltd. at a General Meeting of the shareholders of Trans-Orient Petroleum Ltd. which is to be held on May 23, 2000. In the event the Trans-Orient Petroleum Ltd. shareholders do not approve this Agreement by a requisite extraordinary majority or in the event that a sufficient number of Trans-Orient Petroleum Ltd. shareholders exercise dissent rights which, in the opinion of Trans-Orient Petroleum Ltd. acting reasonably, makes the transaction financially impractical then the parties agree that Trans-Orient Petroleum Ltd. and its affiliates who are parties hereto shall have the right, exercisable for seven days, to elect to rescind the transactions contemplated by the Agreement or alternatively to seek judicial direction as to those elements of the transaction which can be completed without requiring shareholders consent. Pending May 23, 2000 the parties shall not deal with the exchanged consideration in a way which makes effective rescission of the Agreement impossible and in particular Trans-Orient Petroleum Ltd. shall not deal
with the Registrant's securities received and the Registrant shall not sell, transfer, mortgage or otherwise encumber the Assets except with the consent of Trans-Orient Petroleum Ltd. which Trans-Orient Petroleum Ltd.will give for all transactions which can be said to be in the ordinary course of business. The value placed upon the Assets by the Registrant and Trans-Orient Petroleum Ltd. was $4,089,836 less an intercompany loan from the Registrant to Trans-Orient Petroleum Ltd. in the amount of $1,042,928; resulting in a net consideration payable by the Registrant to Trans-Orient Petroleum Ltd. of $3,054,434. See ITEM 1. BUSINESS for a description of the Assets acquired.
(b) At December 31, 1999, Trans-Orient Petroleum Ltd. owed a total of $1,062,211 including interest charges of $18,051 to the Registrant as a result of accrued joint venture permit expenditures which were paid by the Registrant on behalf of joint venture operations in which Trans-Orient Petroleum Ltd. was a participant with the Registrant. The majority of this amount relates to drilling the Whakutu-1 and Clematis-1 wells. The $1,062,211 outstanding was offset against the purchase price paid by the Registrant to Trans-Orient Petroleum Ltd. for the purchase of its permit interests.
(c) In December 1999. Durum Cons. Energy Corp. relinquished its (4%) interest in PEP 38716 in favor of the Registrant for no costs. After being assigned this interest the Registant holds a 23.8% interest in the permit.
(d) The Registrant and Trans-Orient Petroleum Ltd. by agreement dated June 25, 1998 optioned up to 80% of the permit to AMG Oil Ltd. In August 1998 AMG Oil Ltd. earned 30% of the permit by paying the cost of a 120 mile seismic survey. To earn an additional 50%, AMG was required to elect before December 4, 1998 to pay the cost of any additional seismic required to define two drilling prospects and to pay the dry hole costs of drilling two wells to a maximum of about US$2,100,000. The option agreement was modified by three subsequent agreements dated December 3, 1998, October 26, 1999 and February 23, 2000 which extended the period of time in which the AMG must exercise its option to acquire up to a further 50% interest in the 38256 permit area to June 16, 2000. Additionally, the February 23, 2000 amendment provided AMG with a choice of committing to: ( Option A') to earn an additional 50% in PEP 38256 from the Registrant by funding all expenditure including an agreed program of seismic work leading up to and including the drilling of two exploration wells. Alternatively, AMG may, at its election, earn an additional 35% the Registrant in the permit by funding all work leading up to and including the drilling of one exploration well ( Option B'). In the event that the AMG exercises Option B, it shall acquire a further option ( Option C') to earn an additional 15% in the permit by funding all further work up to and including a second exploration well on a separate exploration target. Option C must be exercised within 30 days of reaching the predetermined target depth in the exploration well drilled pursuant to exercise of Option B.
(e) On March 17, 1999 the Registrant partially exercised its share purchase option in AMG Oil Ltd. and acquired 800,000 common shares at a cost of $400,000.
(f) During the year ending December 31, 1999, the Registrant paid $27,177 in office rental fees to the DJ & JM Bennett Family Trust, which owns the building in which the Registrant's New Zealand office is located.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
All schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
B. Reports on Form 8-K
During the 1999 fiscal year the Company filed no reports on Form 8-K.
C. Index to Exhibits
The following Exhibits are filed herewith:
Exhibit Number Document Description
27 Financial Data Schedule 99.1 PEP 38256 Option Amending Agreement 99.2 Change in conditions to permit PEP 38723 99.3 Farm-out Agreement on PEP38330
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report and any amendment thereto to be signed on its behalf by the undersigned, thereunto duly authorized.
INDO-PACIFIC ENERGY LTD.
By: /s/ David J. Bennett April 11, 2000 David J. Bennett, President and Chief Executive Officer
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report and any amendment thereto to be signed on its behalf by the undersigned, thereunto duly authorized.
INDO-PACIFIC ENERGY LTD.
By: /s/ Alex Guidi April 11, 2000 Alex Guidi, Chairman of the Board of Directors
By: /s/ D. J. Bennett April 11, 2000 Dr. David Bennett, Member of the Board of Directors