UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM ~~10-K/A~~10-K

~~Amendment No. 1~~

(Mark One)


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2007~~2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.: 1-10762

HARVEST NATURAL RESOURCES, INC.

(Exact name of registrant as specified in its charter)


Delaware		77-0196707
(State or other jurisdiction of incorporation or organization)		~~77-0196707~~ (I.R.S. Employer Identification Number)

1177 Enclave Parkway, Suite 300
~~1177 Enclave Parkway, Suite 300~~ Houston, Texas		77077
(Address of principal executive offices)		~~77077~~ (Zip Code)

Registrant’s telephone number, including area code: (~~281)~~(281) 899-5700

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered

Common Stock, $.01 Par Value		NYSE

Securities registered pursuant to Section 12(g) of the Act:


~~Title of each class~~		~~Name of each exchange on which registered~~
~~None~~		~~None~~

Preferred Share Purchase Rights

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.oþ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filero	Accelerated Filerþ	Non-Accelerated Filero	Smaller Reporting Companyo
		(Do not check if a smaller reporting company)	~~Smaller Reporting Company~~o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June ~~29, 2007~~30, 2009 was: ~~$444,689,722.~~$144,812,960.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date. Class: Common Stock, par value $0.01 per share, on March ~~12, 2008,~~9, 2010, shares outstanding: ~~35,050,833.~~33,260,554.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the ~~2008~~2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission, not later than 120 days after the close of the registrant’s fiscal year, pursuant to Regulation 14A, are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this annual report.

PART I

Harvest Natural Resources, Inc. (“Harvest” or the “Company”) cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this report or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors. When used in this report, the words “budget”, “guidance”, forecast”, “expect”, “believes”, “goals”, “projects”, “plans”, “anticipates”, “estimates”, “should”, “could”, “assume” and similar expressions are intended to identify forward-looking statements. In accordance with the provisions of the Private Securities Litigation Reform Act of 1995, we caution you that important factors could cause actual results to differ materially from those in the forward-looking statements. Such factors include our concentration of operations in Venezuela, the political and economic risks associated with international operations (particularly those in Venezuela), the anticipated future development costs for undeveloped reserves, drilling risks, the risk that actual results may vary considerably from reserve estimates, the dependence upon the abilities and continued participation of certain of our key employees, the risks normally incident to the exploration, operation and development of oil and natural gas properties, risks incumbent to holding a noncontrolling interest in a corporation, the permitting and the drilling of oil and natural gas wells, the availability of materials and supplies necessary to projects and operations, the price for oil and natural gas and related financial derivatives, changes in interest rates, the Company’s ability to acquire oil and natural gas properties that meet its objectives, availability and cost of drilling rigs and seismic crews, overall economic conditions, political stability, civil unrest, acts of terrorism, currency and exchange risks, currency controls, changes in existing or potential tariffs, duties or quotas, changes in taxes, changes in governmental policy, availability of sufficient financing including the Company’s ability to obtain the Islamic (sukuk) financing described in Item 1A — Risk Factors, changes in weather conditions, and ability to hire, retain and train management and personnel. See Item 1A — Risk Factors and Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 1. Business

Executive Summary

Harvest Natural Resources, Inc. is an international petroleum exploration and production company incorporated under Delaware law in 1989. Our focus is on acquiring exploration, development and producing properties in geological basins with proven active hydrocarbon systems. Our experienced technical, business development and operating staffs have identified low entry cost exploration opportunities in areas with large hydrocarbon resource potential. We operate from our Houston, Texas headquarters. We also have regional/technical offices in the United Kingdom and Singapore, and small field offices in Jakarta, Indonesia, Muscat, Sultanate of Oman (“Oman”) and Roosevelt, Utah to support field operations in those areas. We have acquired and developed significant interests in the Bolivarian Republic of Venezuela (“Venezuela”) through our 40 percent equity affiliate, Petrodelta, S.A. (“Petrodelta”), which operates a portfolio of properties in eastern Venezuela including large proven oil fields as well as properties with very substantial opportunities for both development and exploration. We have seconded key technical and managerial personnel into Petrodelta and participate on Petrodelta’s board of directors. Geophysical, geosciences, and reservoir engineering support services are available to our in-house experts through our minority equity investment in Fusion Geophysical, LLC (“Fusion”). Fusion is a technical firm specializing in the areas of geophysics, geosciences and reservoir engineering headquartered in the Houston area. Through the pursuit of technically-based strategies guided by conservative investment philosophies, we are building a portfolio of exploration prospects to complement the low-risk production, development, and exploration project in Venezuela. Currently, we hold interests in Venezuela, the Gulf Coast Region of the United States through an Area of Mutual Intent (“AMI”) agreement with two private third parties, the Antelope prospect in the Western United States through a Joint Exploration and Development Agreement (“JEDA”), and exploration acreage mainly onshore West Sulawesi in the Republic of Indonesia (“Indonesia”), offshore of the Republic of Gabon (“Gabon”), onshore in Oman and offshore of the People’s Republic of China (“China”).

HNR Finance B.V. (“HNR Finance”) has a 40 percent ownership interest in Petrodelta. As we indirectly own 80 percent of HNR Finance, we indirectly own a net 32 percent interest in Petrodelta, and our partner, Oil & Gas Technology Consultants (Netherlands) Coöperatie U.A. (“OGTC”), a controlled affiliate of Venezolana de Inversiones y Construcciones Clerico, C.A. (“Vinccler”), indirectly owns the remaining eight percent interest.

Corporación Venezolana del Petroleo S.A. (“CVP”) owns the remaining 60 percent of Petrodelta. Petrodelta is governed by its own board of directors, charter and bylaws.

On April 11, 2009, we signed an Exploration and Production Sharing Agreement (“EPSA”) with Oman for the Al Ghubar / Qarn Alam license (“Block 64 EPSA”).

On April 23, 2009, Petrodelta’s board of directors declared a dividend of $51.9 million, $20.8 million net to HNR Finance ($16.6 million net to our 32 percent interest), which represents Petrodelta’s net income as reported under International Financial Reporting Standards (“IFRS”) for the six months ended June 30, 2008. HNR Finance received the cash related to this dividend in the form of an advance dividend in October 2008.

In June 2009, drilling operations commenced on a deep natural gas test well (the Bar F #1-20-3-2 [“Bar F”]). The Bar F was drilled as a tight hole and was permitted to 18,000 feet. Drilling was completed in the fourth quarter of 2009 at a depth of 17,566 feet and production casing has been run. Production testing of the well commenced in November 2009 and continues in the first quarter of 2010. The testing program is expected to be completed by the end of the first quarter of 2010.

In December 2009, drilling operations commenced in an eight well appraisal and development drilling program to produce oil and natural gas from the Green River formation on the southern portion of our Antelope land position. As of March 1, 2010, all eight wells have been drilled. Seven wells are currently on production. One additional well is waiting on completion operations and is anticipated to commence production in early March 2010.

During the year ended December 31, 2009, Petrodelta drilled and completed 14 successful development wells, suspended one well due to problems with the well and drilled two appraisal wells. Petrodelta currently has one drilling rig working in the Uracoa field.

On January 28, 2010, we entered into an agreement with one of the private third parties in our AMI for an option to participate in a new project. We paid $1.5 million for the option to acquire up to a 50 percent interest in the new project. If we exercise our option to participate, we will participate in this project with essentially the same terms as the other existing projects in the AMI. The option to participate expires on June 1, 2010.

On February 17, 2010, we closed a debt offering of $32 million in aggregate principal amount of our 8.25 percent senior convertible notes due 2013, which resulted in net proceeds to us, after deducting underwriting discounts, commissions and estimated offering expenses, of approximately $30 million.

SeeItem 1 — Business, Operations, Item 1A — Risk Factors,andItem 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operationsfor a more detailed description of these and other events during 2009.

As of December 31, 2009, we had total assets of $348.8 million, unrestricted cash of $32.3 million and no long-term debt. For the year ended December 31, 2009, we had revenues of $0.2 million and net cash used in operating activities of $34.9 million. Subsequent to December 31, 2009, we offered and issued $32.0 million in aggregate principal amount of our 8.25 percent senior convertible notes due 2013. As of December 31, 2008, we had total assets of $362.3 million, unrestricted cash of $97.2 million and no long-term debt. For the year ended December 31, 2008, we had no revenues and net cash provided by operating activities of $50.4 million.

Our strategy has broadened from our primary focus on Venezuela to identify, access and integrate hydrocarbon assets to include organic growth through exploration in basins globally with proven hydrocarbon systems as an alternative to purchasing proved producing assets. We seek to leverage our Venezuelan experience as well as our recently expanded business development and technical platform to create a diversified resource base. With the addition of exploration technical resources, opening of our London and Singapore offices, as well as our minority equity investment in Fusion, we have made significant investments to provide the necessary foundation and global reach required for an organic growth focus. While exploration will become a larger part of our overall portfolio, we generally restrict ourselves to basins with known hydrocarbon systems and favorable risk-reward profiles.

We intend to use our available cash to pursue additional growth opportunities in the United States, Indonesia, Gabon, Oman, China and other countries that meet our strategy. However, the execution of this strategy may be limited by factors including access to additional capital and the receipt of dividends from Petrodelta as well as the need to preserve adequate development capital in the interim. As described inItem 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Capital Resources and Liquidity, on February 17, 2010, we incurred indebtedness of $32.0 million in aggregate principal amount of our 8.25 percent senior convertible notes. As a result of this offering, we received net proceeds, after deduction of underwriting discounts, commissions and estimated offering expenses, of approximately $30.0 million. We intend to use these net proceeds to fund capital expenditures and for working capital needs and general corporate purposes.

The ability to successfully execute our strategy is subject to significant risks including, among other things, payment of Petrodelta dividends, exploration, operating, political, legal and financial risks. SeeItem 1A — Risk Factors,Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operationsand other information set forth elsewhere in this Annual Report on Form 10-K for a description of these and other risk factors.

Available Information

We file annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (“Exchange Act”). The public may read and copy any materials that we file with the SEC at the SEC’s Office of Investor Education and Advocacy at 100 F Street NE, Washington, DC 20549-0213. The public may obtain information on the operation of the Office of Investor Education and Advocacy by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

We also make available, free of charge on or through our Internet website (http://www.harvestnr.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Forms 3, 4 and 5 filed with respect to our equity securities under Section 16(a) of the Exchange Act are also available on our website. In addition, we have adopted a Code of Business Conduct and Ethics that applies to all of our employees, including our chief executive officer, principal financial officer and principal accounting officer. The text of the Code of Business Conduct and Ethics has been posted on the Corporate Governance section of our website. We intend to post on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics applicable to our senior officers. Additionally, the Code of Business Conduct and Ethics is available in print to any person who requests the information. Individuals wishing to obtain this printed material should submit a request to Harvest Natural Resources, Inc., 1177 Enclave Parkway, Suite 300, Houston, Texas 77077, Attention: Investor Relations.

Operations

Since April 1, 2006, our Venezuelan operations have been conducted through our equity affiliate Petrodelta which is governed by the Contract of Conversion (“Conversion Contract”) signed on September 11, 2007. All of the equity investment in HNR Finance and Harvest Vinccler, S.C.A. (“Harvest Vinccler”) is owned by Harvest-Vinccler Dutch Holding B.V., a Netherlands private company with limited liability. We own an 80 percent equity investment in Harvest-Vinccler Dutch Holding B.V. The remaining 20 percent noncontrolling interest is owned by OGTC. In addition, we have an interest varying from 50 to 55 percent by prospect in an area of the Gulf Coast Region of the United States covered by an AMI agreement with private third parties, a 60 percent interest in the Antelope prospect in the Western United States covered by a JEDA, a 47 percent interest in the Budong-Budong production sharing contract (“Budong PSC”) which we may operate during the production phase, a 66.667 percent interest in the production sharing contract related to the Dussafu Marin Permit production sharing contract (“Dussafu PSC”) for which we are the operator, a 100 percent interest in an Exploration and Production Sharing Agreement (“EPSA”) with Oman for the Al Ghubar/Qarn Alam license, and a 100 percent interest in the WAB-21 petroleum contract in the South China Sea for which we are the operator. SeeItem 1 — Business, United States; Budong-Budong, Onshore Indonesia; Dussafu Marin, Offshore Gabon, Block 64 Project, Oman,andWAB-21, South China Seafor a more detailed description.

Reserves

In December 2008, the SEC issued its final rule, Modernization of Oil and Gas Reporting, which is effective for reporting 2009 reserve information. The primary impacts of the SEC’s final rule on our reserve estimates include:

	•		In Venezuela, the use of the unweighted 12-month average of the first-day-of-the-month contracted reference price of $56.83 per barrel for oil compared to the year-end contracted reference price of $69.87 per barrel, and

	•		In the United States, the use of the unweighted 12-month average of the first-day-of-the-month reference prices of $48.21 per barrel for oil and $3.31 per Mcf for gas compared to year-end reference prices of $61.73 per barrel of oil and $4.25 per Mcf for gas.

	•		The disclosure of probable and possible reserves.

Under the SEC’s final rule, prior period reserves were not restated.

The process for preparation of our oil and gas reserves estimates is completed in accordance with our prescribed internal control procedures, which include verification of data provided for, management reviews and review of the independent third party reserves report. The technical employee responsible for overseeing the process for preparation of the reserves estimates has a Bachelor of Arts in Engineering Science, a Master of Science in Petroleum Engineering, has more than 25 years of experience in reservoir engineering and is a member of the Society of Petroleum Engineers.

All reserve information in this report is based on estimates prepared by Ryder Scott Company L.P. (“Ryder Scott”), independent petroleum engineers. The technical personnel responsible for preparing the reserve estimates at Ryder Scott meet the requirements regarding qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Ryder Scott is an independent firm of petroleum engineers, geologists, geophysicists and petrophysicists; they do not own an interest in our properties and are not employed on a contingent fee basis.

The following table shows, by country and in the aggregate, a summary of our proved, probable and possible oil and gas reserves as of December 31, 2009. Probable and possible reserves are not reported for Domestic — Utah due to the ongoing evaluation of assets within these categories.


	Oil and		Natural
	Condensate		Gas		Total
	(MBls)		(MMcf)		(MBls)⁽¹⁾
Proved Developed Reserves:
Domestic — Utah		131		653		240
International — Venezuela⁽²⁾		14,242		24,015		18,244

Total Proved Developed		14,373		24,668		18,484


Proved Undeveloped Reserves:
Domestic — Utah		95		473		174
International — Venezuela⁽²⁾		33,177		38,695		39,626

Total Proved Undeveloped		33,272		39,168		39,800


Total Proved Reserves		47,645		63,836		58,284

Probable Developed Reserves:
International — Venezuela⁽²⁾		118		93		134

Probable Undeveloped Reserves:
International — Venezuela⁽²⁾		43,689		14,593		46,121


Total Probable Reserves		43,807		14,686		46,255


Possible Developed Reserves:
International — Venezuela⁽²⁾		11		—		11

Possible Undeveloped Reserves:
International — Venezuela⁽²⁾		168,506		46,434		176,245


Total Possible Reserves		168,517		46,434		176,256


⁽¹⁾		MBls is determined using the ratio of one barrel of crude oil or condensate to six Mcf of natural gas.

⁽²⁾		Information represents HNR Finance’s 40 percent interest.

Our estimates of proved reserves, proved developed reserves and proved undeveloped reserves at December 31, 2009, 2008 and 2007 and changes in proved reserves during the last three years are contained inPart IV, Item 15 — Supplemental Information on Oil and Natural Gas Producing Activities (unaudited). SeeItem 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policiesfor additional information on our reserves.

Petrodelta

General

On October 25, 2007, the Venezuelan Presidential Decree which formally transferred to Petrodelta the rights to the Petrodelta Fields subject to the conditions of the Conversion Contract was published in the Official Gazette. Petrodelta will engage in the exploration, production, gathering, transportation and storage of hydrocarbons from the Petrodelta Fields for a maximum of 20 years from that date. Petrodelta has undertaken its operations in accordance with its business plan as set forth in the Conversion Contract. Under the Conversion Contract, work programs and annual budgets adopted by Petrodelta must be consistent with Petrodelta’s business plan. Petrodelta’s business plan may be modified by a favorable decision of the shareholders owning at least 75 percent of the shares of Petrodelta. On February 4, 2010, Petrodelta’s board of directors endorsed a capital budget of $205 million for Petrodelta’s 2010 business plan.

Petrodelta shareholders intend that the company be self-funding and rely on internally-generated cash flow to fund operations. Currently, Petrodelta has one drilling rig operating in the Uracoa field. For 2010, the planned drilling program includes utilizing two rigs to drill both development and appraisal wells for both maintaining production capacity and appraising the substantial resource bases in the El Salto field and presently non-producing Isleño field.

During 2009, Petrodelta drilled and completed 14 successful development wells and two appraisal wells, produced approximately 7.8 million barrels of oil and sold 4.4 billion cubic feet (“BCF”) of natural gas. Petrodelta was advised by the Venezuelan government that the 2009 production target was approximately 16,000 barrels of oil per day following the December 17, 2008 Organization of the Petroleum Exporting Countries (“OPEC”) meeting establishing new production quotas. However, Petrodelta was allowed to produce at capacity to help fulfill other companies’ production shortfalls, thus averaging 21,464 barrels of oil per day during 2009.

Petrodelta began the appraisal and testing of its large portfolio of undeveloped resources in the second quarter of 2009. During the second quarter 2009, Petrodelta drilled two successful appraisal wells in the El Salto field, and pilot production commenced from one of the appraisal wells through temporary facilities. The well commenced production on July 18, 2009 and has produced 349,000 barrels of oil through the end of 2009. The second appraisal well is still waiting on permits from the Ministry of Energy and Petroleum (“MENPET”) for testing.

On April 15, 2008, the Venezuelan government published in the Official Gazette the Law of Special Contribution to Extraordinary Prices at the Hydrocarbons International Market (the “original Windfall Profits Tax”). The original Windfall Profits Tax was based on prices for Brent crude. On July 10, 2008, the Venezuelan government published the amended Windfall Profits Tax to be calculated on the Venezuelan Export Basket (“VEB”) of prices as published by MENPET. The amended Windfall Profits Tax was made retroactive to April 15, 2008, the date of the original Windfall Profits Tax. As instructed by CVP, Petrodelta has applied the amended Windfall Profits Tax to gross oil production delivered to Petroleos de Venezuela S.A. (“PDVSA”) since April 15, 2008 when the tax was enacted. The amended Windfall Profits Tax established a special 50 percent tax to the Venezuelan government when the average price of the VEB exceeds $70 per barrel. In a similar manner, the percentage is increased from 50 percent to 60 percent when the average price of the VEB exceeds $100 per barrel. The amended Windfall Profits Tax is reported as expense on the income statement and is deductible for Venezuelan tax purposes. Petrodelta recorded $0.9 million and $56.4 million for the years ended December 31, 2009 and 2008, respectively, for the amended Windfall Profits Tax.

During the fourth quarter of 2009, PDVSA completed an updated actuarial study as of December 31, 2009. This study was based on a further refinement of assumptions for each of the mixed companies, including Petrodelta and a new allocation methodology as PDVSA gathered during 2009 all relevant information for each of the mixed companies. The revised pension obligation allocated to Petrodelta resulted in a decrease of $8.4 million ($2.7 million net to our 32 percent interest) to the pension and retirement plan costs as compared to those previously recorded to Petrodelta in May 2009. This change in management’s estimate related to the pension and retirement plan costs was recorded in December 2009. Pension costs at December 31, 2009 reasonably reflect Petrodelta’s employee demographic and plan conditions. The additional pension cost is not tax deductible until future periods when the pension is settled in cash. The provision for the pension plan is subject to future revisions, both upwards and downwards, based on changes in assumptions, the terms of the relevant plans, the allocation methodology or other prospective amendments or changes as determined by PDVSA.

on projects to promote inventions or investigate technology in areas deemed critical to Venezuela. LOCTI requires major corporations engaged in activities covered by the Hydrocarbon and Gaseous Hydrocarbon Law (“OHL”) to contribute two percent of their gross revenue generated in Venezuela from activities specified in the OHL. The contribution is based on the previous year’s gross revenue and is due the following year. LOCTI requires that each company file a separate declaration stating how much has been contributed; however, waivers have been granted in the past to allow PDVSA to file a declaration on a consolidated basis covering all of its and its consolidating entities liabilities. Since Petrodelta expects PDVSA to continue requesting and receiving waivers, Petrodelta has not accrued a liability to LOCTI for the year ended December 31, 2009. The potential exposure to LOCTI for the year ended December 31, 2009 is $9.5 million, $4.8 million net of tax ($1.5 million net to our 32 percent interest).

In our Annual Report on Form 10-K for the year ended December 31, 2008, we reported that Petrodelta had not received all information regarding production and operating costs during the conversion period for the Temblador field in order to invoice all volumes produced in that field during that period. As Temblador production was processed through the PDVSA system, PDVSA had allocated only partial, estimated production to Petrodelta. As a result, Petrodelta had not, and still has not, received full credit for the Temblador field production nor has Petrodelta been invoiced for the related operating costs. Although we believe the amount of production, related revenue and operating costs to be immaterial to Petrodelta, discussions are ongoing to settle figures. During the third quarter of 2009, Petrodelta completed the facilities and pipelines to segregate approximately 80 percent of the Temblador field’s production into Petrodelta’s system.

PDVSA has failed to pay on a timely basis certain amounts owed to contractors that PDVSA has contracted to do work for Petrodelta. PDVSA purchases all of Petrodelta’s oil production. PDVSA and its affiliates have reported shortfalls in meeting their cash requirements for operations and planned capital expenditures, and PDVSA has fallen behind in certain of its payment obligations to its contractors, including contractors engaged by PDVSA to provide services to Petrodelta. In addition, PDVSA has fallen behind in certain of its payment obligations to Petrodelta, which payments Petrodelta would otherwise use to pay its contractors. As a result, Petrodelta has experienced, and may continue to experience, difficulty in retaining contractors who provide services for Petrodelta’s operations. We cannot provide any assurance as to whether or when PDVSA will become current on its payment obligations. Inability to retain contractors or to pay them on a timely basis is having an adverse effect on Petrodelta’s operations and on Petrodelta’s ability to carry out its business plan.

On January 8, 2010, the Venezuelan government published in the Official Gazette the Exchange Agreement which establishes new exchange rates for the Venezuela Bolivar (“Bolivar”)/United States Dollar (“U.S. Dollar”) currencies that will enter into force on January 11, 2010. Each exchange rate will be applied to foreign currency sales and purchases conducted through the Foreign Currency Administration Commission (“CADIVI”), in the cases expressly provided in the Exchange Agreement. In this regard, the exchange rates established in the Agreement are: 2.60 Bolivars per U.S. Dollar and 4.30 Bolivars per U. S. Dollar. The 2.60 Bolivar exchange rate applies to the food, health, medical and technology sectors. The 4.30 Bolivar exchange rate applies to all other sectors not expressly established by the 2.60 Bolivar exchange rate. The U.S. Dollar is the functional reporting currency for both Petrodelta and Harvest Vinccler.

Location and Geology

Petrodelta Fields

Uracoa Field

There are currently 78 oil and natural gas producing wells and six water injection wells in the field. The current production facility has capacity to handle 60 thousand barrels (“MBbls”) of oil per day, 130 MBbls of water per day, and storage of up to 75 MBbls of crude oil. All natural gas presently being delivered by Petrodelta is produced from the Uracoa field.

Tucupita Field

There are currently 16 oil producing wells and four water injection wells in the field. The Tucupita production facility has capacity to process 30 MBbls of oil per day, 125 MBbls of water per day and storage for up to 60 MBbls of crude oil. The oil is transported through a 31-mile, 20 MBbls of oil per day pipeline from the Tucupita field to the Uracoa plant facilities. 3-D seismic is available over the entire field and is currently being reprocessed and reinterpreted.

Bombal Field

East Bombal was drilled in 1992, and currently remains underdeveloped. The West Bombal field is currently inactive pending facility and pipeline upgrades. Development of East Bombal and West Bombal has been incorporated into Petrodelta’s business plan.

Isleño Field

The Isleño field was discovered in 1953. 2-D seismic data is available over a portion of the field. Seven oil appraisal wells were drilled by PDVSA prior to the field being contributed to Petrodelta which have confirmed the presence of commercial oil deposits. The field is located near the Uracoa field existing infrastructure. Petrodelta’s business plan projects full development of the Isleño field over the next four years.

Temblador Field

The Temblador field was discovered in 1936 and developed in the 1940s and 1950s. There are currently 19 oil producing wells in the field. The fluid produced from Temblador field flows through two flow stations operated by Petrodelta. Approximately 80 percent of the Temblador field’s production flows through Petrodelta pipelines directly into PDVSA’s system. The remaining 20 percent of the Temblador field’s production flows through the EPT-1 plant operated by PDVSA. 3-D seismic is available over the entire field.

El Salto Field

The El Salto field was discovered in 1936. Currently there is one oil producing well in the field. A total of 31 appraisal wells were drilled by PDVSA prior to the field being contributed to Petrodelta, identifying nine productive structures and six productive formations. Pilot production from the one producing well commenced in the second quarter of 2009 through temporary facilities. The second appraisal well will be tested after the permitting process with MENPET is completed. 3-D seismic data is available over one-third of the field. We believe the El Salto field has substantial exploration upside from several fault blocks, which have been identified using 2-D seismic data but have not yet been confirmed through drilling.

Infrastructure and Facilities

Petrodelta has a 25-mile oil pipeline from its oil processing facilities at Uracoa to PDVSA’s storage facility, the custody transfer point. The marketing contract specifies that the oil stream may contain no more than one percent base sediment and one percent water. Quality measurements are conducted both at Petrodelta’s facilities and at PDVSA’s storage facility. Approximately 20 percent of the Temblador production is currently delivered to the sales point in the EPT-1 PDVSA facility through gathering systems integrated with the Jobo and Pilon fields operated by PDVSA and is allocated to Petrodelta based on well tests. Petrodelta is working to segregate completely Temblador’s production.

Petrodelta has a 64-mile pipeline from Uracoa with a normal capacity of 70 million cubic feet (“MMcf”) of natural gas per day and a design capacity of 90 MMcf of natural gas per day.

Petrodelta has agreements in place for purchase of power for the electrical needs, leasing of compression, and operation and maintenance of the gas treatment and compression facilities at the Uracoa and Tucupita fields through 2012.

Business Plan of Petrodelta

Petrodelta’s focus in 2009 was the resumption of drilling in the Uracoa field, development drilling in the Temblador field and appraisal drilling in the El Salto field which resulted in an increase in production. Petrodelta is reprocessing existing 3-D seismic over Petrodelta’s fields. Temblador field production is processed at existing field facilities. El Salto production is being process through temporary facilities. The El Salto field is believed to contain substantial undeveloped and unexplored reserves. We expect to acquire additional 3-D seismic and undergo significant appraisal and development in a timely manner to provide for larger scale development implementation. Isleño field production can be integrated into the existing Uracoa field infrastructure providing for early production from the field. Overall, production is expected to peak in approximately ten years under Petrodelta’s 2010 business plan.

Risk Factors

We face significant risks in holding a minority equity investment in Petrodelta. These risks and other risk factors are discussed inItem 1A — Risk FactorsandItem 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

United States Operations

During 2008, we initiated a domestic exploration program in two different basins. We are the operator of both exploration programs and have complemented our existing personnel with the addition of highly experienced management and technical personnel and with the acquisition of our minority equity investment in Fusion.

Gulf Coast

General

In March 2008, we executed an AMI agreement with a private third party for an area in the upper Gulf Coast Region of the United States. We are the operator and have initial working interests of 55 percent in Starks, the first prospect in the AMI, and 50 percent in West Bay, the second prospect in the AMI. The private third party contributed these two prospects, including the leases and proprietary 3-D seismic data sets, and numerous leads generated over the last three decades of regional geological focus. We agreed to fund the first $20 million of new lease acquisitions, geological and geophysical studies, seismic reprocessing and drilling costs. At June 30, 2009, we had met the $20 million funding obligation under the terms of the AMI. All costs incurred after June 30, 2009 are being shared by the parties in proportion to their working interests as defined in the AMI. In August 2009, the AMI became a three party arrangement when the private third party restructured and assigned a portion of its interest to one of its affiliates.

The private third parties are obligated to evaluate and present additional opportunities at their sole cost. As each prospect is accepted it will be covered by the AMI. Although several additional potential prospects had been screened and evaluated within the AMI since its inception, we had not pursued leasing or drilling on any new projects within the AMI as of December 31, 2009. On January 28, 2010, we entered into an agreement with one of the private third parties in our AMI for an option to participate in a new project. We paid $1.5 million for the option to acquire up to a 50 percent interest in the new project. If we exercise our option to participate, we will participate in this project with essentially the same terms as the other existing projects in the AMI. The option to participate expires on June 1, 2010.

Location and Geology

The AMI covers the coastal areas from Nueces County, Texas to Cameron Parish, Louisiana, including state waters.

Drilling and Development Activity

We drilled an exploratory dry hole on the Starks prospect in 2008. In December 2009, we wrote off the remaining carrying value of $0.7 million of the Starks prospect as we have no plans for further activities relating to this prospect.

During the year ended December 31, 2009, operational activities in the West Bay prospect included the interpretation of 3-D seismic, site surveying, and preparation of engineering documents. Interpretation of 3-D seismic data on the West Bay project was completed in 2009 and resulted in the identification of a set of drilling leads and prospects for the project. On July 14, 2009, we, along with our partner in the AMI, acquired 880 acres of shallow water offshore bay leases representing two separate tracts from the State of Texas General Land Office at a state lease sale for a total gross cost of $0.5 million. Acquisition of these two tracts completes the planned land acquisition activities on the project.

The AMI participants are currently continuing to evaluate the leads and prospects to determine priorities and drilling plans for the West Bay project and have identified the likely initial drilling prospect. Land, regulatory, and surface access preparations are currently in progress focused on taking the initial drilling prospect to drill-ready status. Current plans are to drill the initial well in 2011.

Western United States — Antelope

In October 2007, we entered into a JEDA with a private third party to pursue a lease acquisition program and drilling program on the Antelope prospect in the Western United States. We are the operator and had an initial working interest of 50 percent in the Antelope prospect. The private third party is obligated to assemble the lease position on the Antelope prospect. The JEDA provides that we would earn our initial 50 percent working interest in the Antelope prospect by compensating the private third party for leases acquired in accordance with terms defined in the JEDA, and by drilling and completing one deep natural gas test well (the Bar F) at our sole expense. In November 2008, we entered into a Letter Agreement/Amendment of the JEDA (the “Letter Agreement”) with the private third party. The Letter Agreement clarifies several open issues in the JEDA, such as classification of $2.7 million of prepaid land costs for the Antelope prospect as a note receivable, addition of a requirement for the private third party to partially assign leases to us prior to meeting the lease earning obligation, and clarification of the private third party’s cost obligations for any shallow wells to be drilled on the Antelope prospect prior to the Bar F. Per the Letter Agreement, payment of the $2.7 million note receivable was due from the private third party on or by spud date of the Bar F. Since payment was not received prior to the Bar F spud date, our interest in the Antelope prospect was increased to 60 percent, with the incremental 10 percent working interest being earned by drilling and completing the Bar F. The note receivable remains outstanding and will be collected through sales revenues taken from a portion of the private third party’s net revenue from the Bar F provided the Bar F is commercial.

Activities are in progress on two separate projects on the Antelope prospect in Duchesne County, Utah.

Mesaverde

General

The Mesaverde project is targeted to explore for and develop oil and natural gas from multiple reservoir horizons in the Uintah Basin of northeastern Utah in Duchesne and Uintah Counties. Leads and/or prospects were identified in three prospective reservoir horizons in preparation for drilling.

Drilling and Development Activity

of multiple potential reservoir horizons is now in progress. To date, testing has been focused on the evaluation of the natural gas potential of the Mesaverde tight gas reservoir over a prospective interval from 14,000 to 17,400 feet. Completion activities consisted of hydraulic fracturing of eight separate reservoir intervals in the Mesaverde and multiple extended flow tests of the individual fractured intervals, along with a flow test of the commingled eight intervals. While the results to date have not definitively determined the commerciality of a stand-alone development of the Mesaverde, we believe these results indicate progress toward that determination and that the Mesaverde reservoir remains potentially prospective over a portion of our land position.

Earning of Undeveloped Acreage

Acreage for Mesaverde reflects the acreage that will be earned by us upon completion of the drilling and testing of the first deep natural gas test well on the project. We anticipate completing the lease earning obligation in 2010. If, however, the earning well is not completed in accordance with the requirements of the JEDA, we will have an obligation to assign our interest in the acreage back to the private third party in accordance with the terms of the Letter Agreement.

Monument Butte

General

The Monument Butte project is an eight well appraisal and development drilling program to produce oil and natural gas from the Green River formation on the southern portion of our Antelope land position. The Monument Butte project is non-operated and we hold a 43 percent working interest. The parties have formed a 320 acre AMI which contained the eight drilling locations.

Drilling and Development Activity

Budong-Budong, Onshore Indonesia

General

In February 2008, Indonesia’s oil and gas regulatory authority, BP Migas, approved the assignment to us of a 47 percent interest in the Budong PSC located mainly onshore West Sulawesi, Indonesia. Final government approval from the Ministry of Energy and Mineral Resources, Migas, was received in April 2008. Our partner will be the operator through the exploration phase as required by the terms of the Budong PSC. We will have control of major decisions and financing for the project with an option to become operator, if approved by BP Migas, in the subsequent development and production phase.

Location and Geology

The Budong PSC covers 1.35 million acres and includes the Lariang and Karama sub-basins, which are the eastern onshore extension of the West Sulawesi foldbelt (“WSFB”). Exploration to date in the basin is immature due to previously difficult jungle terrain, which is now accessible with the development of palm oil plantations and their related infrastructure. Field work performed over the last 10 years, as outcrops have been more accessible, has given a new understanding to the presence of Eocene source and reservoir potential that had not previously been recognized. Recent seismic surveys have greatly improved the understanding of the geology and enhanced the prospectivity of the offshore WSFB and, by analogy, the sparsely explored onshore area.

Drilling and Development Activity

Title to Undeveloped Acreage

We acquired the 47 percent interest in the Budong PSC by committing to fund the first phase of the exploration program including the acquisition of 2-D seismic and drilling of the first two exploration wells. This commitment is capped at $17.2 million. Prior to drilling the first exploration well, subject to the estimated cost of that well, our partner will have a one-time option to increase the level of the carried interest to a maximum of $20.0 million, and as compensation for the increase, we will increase our participation to a maximum of 54.65 percent. This equates to a total carried cost for the farm-in of $9.1 million.

Dussafu Marin, Offshore Gabon

General

In 2008, we completed the purchase of a 66.667 percent interest in the Dussafu PSC for $6.0 million. We are the operator of the Dussafu PSC.

Location and Geology

The Dussafu PSC contract area is located offshore Gabon, adjacent to the border with the Republic of Congo. It contains 680,000 acres with water depths to 1,000 feet. The Dussafu PSC has two small oil discoveries in the Gamba and Dentale reservoirs and a small natural gas discovery. Production and infrastructure exists in the blocks contiguous to the Dussafu PSC.

Drilling and Development Activity

The Dussafu PSC partners and the Republic of Gabon, represented by the Ministry of Mines, Energy, Petroleum and Hydraulic Resources (“Republic of Gabon”), entered into the second exploration phase of the Dussafu PSC with an effective date of May 28, 2007. The second exploration phase comprises a three-year work commitment which includes the acquisition and processing of 500 kilometers of 2-D seismic, geology and geophysical interpretation, engineering studies and the drilling of a conditional well. Operational activities during 2009 focused on completion of the processing and reprocessing of 1,330 kilometers of 2-D seismic and the pre-stack depth reprocessing of 1,076 square kilometers of 3-D seismic data. The improved imaging from this work has allowed the interpretation to mature the prospect inventory to provide the partnership a number of prospective targets in the sub-salt section, in both the Gamba and Syn-rift plays that are productive in the nearby Etame, Lucina and M’Bya fields. Subject to drilling rig availability, we expect to drill an exploration well in the third quarter of 2010.

Oman

General

On April 11, 2009, we signed an Exploration and Production Sharing Agreement (“EPSA”) with Oman for the Al Ghubar/Qarn Alam license. We have a 100 percent working interest in Block 64 EPSA during the exploration phase. Oman Oil Company has the option to back-in to up to a 20 percent interest in Block 64 EPSA after the discovery of gas.

Location and Geology

Block 64 EPSA is a newly-created block designated for exploration and production of non-associated gas and condensate which the Oman Ministry of Oil and Gas has carved out of the Block 6 Concession operated by Petroleum Development of Oman (“PDO”). The 3,867 square kilometer (955,600 acres) block is located in the gas and condensate rich Ghaba Salt Basin in close proximity to the Barik, Saih Rawl and Saih Nihayda gas and condensate fields.

Drilling and Development Activity

PDO will continue to produce oil from several fields within Block 64 EPSA area. We have an obligation to drill two wells over a three year period with a funding commitment of $22.0 million. Current activities include the compilation of existing data, over two prospect areas of approximately 1,000 square kilometers and geological studies to determine drillable prospects. Well planning is expected to commence in 2010 for exploration drilling in 2011.

WAB-21, South China Sea

General

Location and Geology

The WAB-21 contract area is located in the West Wan’ an Bei Basin (Nam Con Son) of the South China Sea. Its western edge lies approximately 20 miles to the east of significant producing natural gas fields, Lan Tay and Lan Do, which are reported to contain two trillion cubic feet (“Tcf”) of natural gas and commenced production in November 2002. Also located to the west of WAB-21 are the Dua and Chim Sao (formerly Blackbird) discoveries and the discovery in 2009 of Ca’ Rong. The Chim Sao oil field has recently received development approval. The WAB-21 contract area covers a large unexplored area of the Wan’ an Bei Basin where the same successful Lower Miocene through to Upper Miocene plays to the west are present. Exploration success in the basin to date has resulted in discoveries estimated to total in excess of 500 million barrels of oil and 7.5 Tcf of natural gas. Several similar structural trends and geological formations, each with significant potential for hydrocarbon reserves in traps with multiple pay zones similar to the known fields and discoveries to the west are present within WAB-21.

Drilling and Development Activity

Due to the border dispute between China and Vietnam, we have been unable to pursue an exploration program during Phase One of the contract. As a result, we have obtained license extensions, with the current extension in effect until May 31, 2011. While no assurance can be given, we believe we will continue to receive contract extensions so long as the border disputes persist. Recently, Vietnam, along with the company that is the party to the agreement with Vietnam, announced plans for exploration drilling during 2010. While no assurance can be given, we believe this announcement may provide some resolution with the border disputes, although we do not know in what manner any resolution might appear.

Production, Prices and Lifting Cost Summary

In the following table we have set forth, by country, our net production, average sales prices and average operating expenses for the years ended December 31, 2009, 2008 and 2007. The presentation for Venezuela


	Year Ended December 31,
	2009				2008				2007
	Gross		Net		Gross		Net		Gross		Net
Wells Drilled:
Venezuela (Petrodelta)
Development		15		4.8		9		2.9		—		—
Appraisal		2		0.6		—		—		—		—
United States
Development		5		2.1		—		—		—		—
Exploration		1		1.0		1		1.0		—		—

Average Depth of Wells (Feet)
Venezuela (Petrodelta)
Crude Oil		—		6,500		—		6,500		—		—
United States
Crude Oil		—		6,751		—		—		—		—
Natural Gas		—		17,566		—		12,290		—		—

Producing Wells⁽¹⁾:
Venezuela (Petrodelta)
Crude Oil		114		36.5		118		37.8		97		31.0
United States
Crude Oil		2		0.7		—		—		—		—


⁽¹⁾		The information related to producing wells reflects wells we drilled, wells we participated in drilling and producing wells we acquired.

All of our drilling activities are conducted on a contract basis with independent drilling contractors. We do not directly operate any drilling equipment.

Acreage

The following table summarizes the developed and undeveloped acreage that we owned, leased or held under concession as of December 31, 2009:


	Developed				Undeveloped
	Gross		Net		Gross		Net
Venezuela — Petrodelta		23,050		9,220		224,063		89,625
China		—		—		7,470,080		7,470,080
United States:
West Bay		—		—		12,808		6,316
Antelope		212		90		111,457		36,536
Indonesia		—		—		1,357,723		638,130
Gabon		—		—		685,470		456,982
Oman		—		—		955,600		955,600

Total		23,262		9,310		10,817,201		9,653,269

Regulation

General

Our operations and our ability to finance and fund our growth strategy are affected by political developments and laws and regulations in the areas in which we operate. In particular, oil and natural gas production operations and economics are affected by:

change in governments;

	•		civil unrest;

	•		price and currency controls;

	•		limitations on oil and natural gas production;

	•		tax, environmental, safety and other laws relating to the petroleum industry;

	•		changes in laws relating to the petroleum industry;

	•		changes in administrative regulations and the interpretation and application of such rules and regulations; and

	•		changes in contract interpretation and policies of contract adherence.

In any country in which we may do business, the oil and natural gas industry legislation and agency regulation are periodically changed, sometimes retroactively, for a variety of political, economic, environmental and other reasons. Numerous governmental departments and agencies issue rules and regulations binding on the oil and natural gas industry, some of which carry substantial penalties for the failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and our potential for economic loss.

Competition

We encounter substantial competition from major, national and independent oil and natural gas companies in acquiring properties and leases for the exploration and development of crude oil and natural gas. The principal competitive factors in the acquisition of such oil and natural gas properties include staff and data necessary to identify, investigate and purchase such properties, the financial resources necessary to acquire and develop such properties, and access to local partners and governmental entities. Many of our competitors have influence, financial resources, staffs, data resources and facilities substantially greater than ours.

Environmental Regulation

Various federal, state, local and international laws and regulations relating to the discharge of materials into the environment, the disposal of oil and natural gas wastes, or otherwise relating to the protection of the environment may affect our operations and costs. We are committed to the protection of the environment and believe we are in substantial compliance with the applicable laws and regulations. However, regulatory requirements may, and often do, change and become more stringent, and there can be no assurance that future regulations will not have a material adverse effect on our financial position, results of operations and cash flows.

Employees

At December 31, 2009, our Houston office had 23 full-time employees. Our Utah, Caracas, London, Singapore, Jakarta and Muscat offices had 1, 14, 7, 3, 4 and 3 employees, respectively. We augment our employees from time to time with independent consultants, as required. We closed our Moscow office on March 31, 2009.

Item 1A. Risk Factors

In addition to other information set forth elsewhere in this Annual Report onForm 10-K, the following factors should be carefully considered when evaluating us.

Our cash position and limited ability to access additional capital may limit our growth opportunities.At December 31, 2009, we had $32 million of available cash and, until Petrodelta pays a dividend or the revenue from our U.S. operations increases substantially, cash available from operations will not be sufficient to meet operational requirements. Having a Petrodelta dividend as our primary source of cash flow limits our access to additional capital, and our concentration of political risk in Venezuela may limit our ability to leverage our assets. In addition, our future cash position depends upon the payment of dividends by Petrodelta or success with our exploration program. While we believe that Petrodelta will reinvest any excess cash which might be available for payment of dividends into Petrodelta in 2010 and 2011, there is no assurance this will be the case, nor that if the cash is not reinvested that it will be paid as dividends. These factors could have a material adverse effect on our financial condition and liquidity and may limit our ability to grow through the acquisition or exploration of additional oil and gas properties and projects.

We have incurred long-term indebtedness obligations, which significantly increased our leverage.On February 17, 2010, we closed a debt offering of $32.0 million in aggregate principal amount of our 8.25 percent senior convertible notes due 2013. Prior to the offering, we had no long-term debt obligations. The degree to which we are leveraged could, among other things:

	•		make it difficult for us to make payments on the notes;

	•		make it difficult for us to obtain financing for working capital, acquisitions or other purposes on favorable terms, if at all;

	•		make us more vulnerable to industry downturns and competitive pressures; and

	•		limit our flexibility in planning for, or reacting to changes in, our business.

Our ability to meet our debt service obligations will depend upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. Additionally, the covenants contained in the indenture governing the notes restrict, among other things, our ability to incur certain indebtedness. Any failure to comply with these covenants could result in an event of default under the indenture, which could permit acceleration of the indebtedness under the notes. If our indebtedness were to be accelerated, we cannot assure you that we would be able to repay it.

We may incur significant indebtedness in the near future.We continually assess our need for additional sources of financing based on our operational, working capital and other needs from time to time. In addition, we are currently contemplating one particular additional source of financing through an Islamic (sukuk) financing, in which one of our subsidiaries would form and contribute certain assets to a partnership and subsequently sell a minority interest in the partnership to one or more third parties for approximately $250 million. Although the terms of this transaction have not been finalized, we anticipate that the terms would include our agreement to pay all or a substantial portion of the future dividends paid by Petrodelta over the next five or six years to reacquire all of the third-party partnership interests, including premiums thereon. While we may be able to consummate this financing transaction during the first half of 2010, there can be no assurances that this transaction will be consummated, and we may consider alternative forms of additional financing if we deem necessary or advisable with respect to our operations from time to time.

Global market and economic conditions, including those related to the credit markets, could have a material adverse effect on our business, financial condition and results of operations. A general slowdown in economic activity could adversely affect our business by impacting our ability to access additional capital, the receipt of dividends from Petrodelta as well as the need to preserve adequate development capital in the interim.

We may not be able to meet the requirements of the global expansion of our business strategy. We have added a significant global exploration component to diversify our overall portfolio. In many locations, we may be required to post performance bonds in support of a work program. We also intend to acquire underdeveloped, undeveloped and exploration properties from time to time for which the primary risks may be technical, operational or both.

Our strategy to identify, access and integrate hydrocarbon assets in known hydrocarbon basins globally carries greater deal execution, operating, financial, legal and political risks.The environments in which we operate are often difficult and the ability to operate successfully will depend on a number of factors, including our ability to control the pace of development, our ability to apply “best practices” in drilling and development, and the fostering of productive and transparent relationships with local partners, the local community and governmental authorities. Financial risks include our ability to control costs and attract financing for our projects. In addition, often the legal systems of these countries are not mature and their reliability is uncertain. This may affect our ability to enforce contracts and achieve certainty in our rights to develop and operate oil and natural gas projects, as well as our ability to obtain adequate compensation for any resulting losses. Our strategy depends on our ability to have significant influence over operations and financial control.

Operations in areas outside the United States are subject to various risks inherent in foreign operations.Our operations are subject to various risks inherent in foreign operations. These risks may include, among other things, loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, war, insurrection, civil unrest, strikes and other political risks, increases in taxes and governmental

royalties, being subject to foreign laws, legal systems and the exclusive jurisdiction of foreign courts or tribunals, renegotiation of contracts with governmental entities, changes in laws and policies, including taxes, governing operations of foreign-based companies, currency restrictions and exchange rate fluctuations and other uncertainties arising out of foreign government sovereignty over our international operations. Our international operations may also be adversely affected by laws and policies of the United States affecting foreign policy, foreign trade, taxation and the possible inability to subject foreign persons to the jurisdiction of the courts in the United States.

Operations on the Uintah and Ouray Reservation of the Ute Indian Tribe in the western United States are subject to various risks similar to those for foreign operations.Similar to our operations in foreign jurisdictions, our operations on the Uintah and Ouray Reservation of the Ute Indian Tribe are subject to certain risks. These risks may include, among other things, loss of revenue, property and equipment as a result of hazards such as civil unrest, strikes and other political risks, increases in taxes or fees, being subject to tribal laws, changes in tribal laws and policies and other uncertainties arising out of tribal sovereignty.

Estimates of oil and natural gas reserves are uncertain and inherently imprecise. This Annual Report on Form 10-K contains estimates of our oil and natural gas reserves. These estimates are based upon various assumptions, including assumptions required by the SEC relating to oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds.

The process of estimating oil and natural gas reserves is complex, requiring significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. Therefore, these estimates are inherently imprecise. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves likely will vary from those estimated. Any significant variance could materially affect the estimated quantities and present value of reserves set forth. Actual production, revenue, taxes, development expenditures and operating expenses with respect to our reserves will likely vary from the estimates used, and these variances may be material.

You should not assume that the present value of future net revenues referred to inPart IV, Item 15 — Supplemental Information on Oil and Natural Gas Producing Activities (unaudited), TABLE V — Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Natural Gas Reserve Quantitiesis the current market value of our estimated oil and natural gas reserves. In accordance with SEC requirements, the estimated discounted future net cash flows from proved reserves are generally based on the unweighted average price of the first day of the month during the 12-month period before the ending date of the period covered by the reserve report and costs as of the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate. Any changes in demand, changes in our ability to produce or changes in governmental regulations, policies or taxation will also affect actual future net cash flows. The timing of both the production and the expenses from the development and production of oil and natural gas properties will affect the timing of actual future net cash flows from estimated proved reserves and their present value. In addition, the 10 percent discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most accurate discount factor. The effective interest rate at various times and the risks associated with the oil and natural gas industry in general will affect the accuracy of the 10 percent discount factor.

We may not be able to replace production with new reserves. In general, production rates and remaining reserves from oil and natural gas properties decline as reserves are depleted. The decline rates depend on reservoir characteristics. Our future oil and natural gas production is highly dependent upon our level of success in finding or acquiring additional reserves. The business of exploring for, developing or acquiring reserves is capital intensive and uncertain. We may be unable to make the necessary capital investment to maintain or expand our oil and natural gas reserves if cash flow from operations is reduced and external sources of capital become limited or unavailable. We cannot give any assurance that our future exploration, development and acquisition activities will result in additional proved reserves or that we will be able to drill productive wells at acceptable costs.

Our future operations and our investments in equity affiliates are subject to numerous risks of oil and natural gas drilling and production activities.Oil and natural gas exploration and development drilling and production activities are subject to numerous risks, including the risk that no commercially productive oil or natural gas reservoirs will be found. The cost of drilling and completing wells is often uncertain. Oil and natural gas

drilling and production activities may be shortened, delayed or canceled as a result of a variety of factors, many of which are beyond our control. These factors include:

	•		unexpected drilling conditions;

	•		pressure or irregularities in formations;

	•		equipment failures or accidents;

	•		weather conditions;

	•		shortages in experienced labor;

	•		delays in receiving necessary governmental permits;

	•		delays in receiving partner approvals;

	•		shortages or delays in the delivery of equipment;

	•		delays in receipt of permits or access to lands; and

	•		government actions or changes in regulations.

The prevailing price of oil also affects the cost of and availability for drilling rigs, production equipment and related services. We cannot give any assurance that the new wells we drill will be productive or that we will recover all or any portion of our investment. Drilling for oil and natural gas may be unprofitable. Drilling activities can result in dry wells and wells that are productive but do not produce sufficient net revenues after operating and other costs.

Our oil and natural gas operations are subject to various governmental regulations that materially affect our operations. Our oil and natural gas operations are subject to various governmental regulations. These regulations may be changed in response to economic or political conditions. Matters regulated may include permits for discharges of wastewaters and other substances generated in connection with drilling operations, bonds or other financial responsibility requirements to cover drilling contingencies and well plugging and abandonment costs, reports concerning operations, the spacing of wells, and unitization and pooling of properties and taxation. At various times, regulatory agencies have imposed price controls and limitations on oil and natural gas production. In order to conserve or limit supplies of oil and natural gas, these agencies have restricted the rates of the flow of oil and natural gas wells below actual production capacity. We cannot predict the ultimate cost of compliance with these requirements or their effect on our operations.

We are subject to complex laws that can affect the cost, manner or feasibility of doing business.Exploration and development and the production and sale of oil and natural gas are subject to extensive federal, state, local and international regulation. We may be required to make large expenditures to comply with environmental and other governmental regulations. Matters subject to regulation include:

	•		the amounts and types of substances and materials that may be released into the environment;

	•		response to unexpected releases to the environment;

	•		reports and permits concerning exploration, drilling, production and other operations;

	•		the spacing of wells;

	•		unitization and pooling of properties;

	•		calculating royalties on oil and gas produced under federal and state leases; and

	•		taxation.

Under these laws, we could be liable for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs, natural resource damages and other environmental damages. We also could be required to install expensive pollution control measures or limit or cease activities on lands located within wilderness, wetlands or other environmentally or politically sensitive areas. Failure to comply with these laws also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties as well as the imposition of corrective action orders. Moreover, these laws could change in ways that substantially increase our costs. Any such liabilities, penalties, suspensions, terminations or regulatory changes could have a material adverse effect on our financial condition, results of operations or cash flows.

Potential regulations regarding climate change could alter the way we conduct our business. Governments around the world are beginning to address climate change matters. This may result in new

environmental regulations that may unfavorably impact us, our suppliers and our customers. The cost of meeting these requirements may have an adverse impact on our financial condition, results of operations and cash flows.

Competition within the industry may adversely affect our operations. We operate in a highly competitive environment. We compete with major, national and independent oil and natural gas companies for the acquisition of desirable oil and natural gas properties and the equipment and labor required to develop and operate such properties. Many of these competitors have financial and other resources substantially greater than ours.

The loss of key personnel could adversely affect our ability to successfully execute our strategy.We are a small organization and depend on the skills and experience of a few individuals in key management and operating positions to execute our business strategy. Loss of one or more key individuals in the organization could hamper or delay achieving our strategy.

We no longer directly manage operations of Petrodelta.PDVSA, through CVP, exercises substantial control over Petrodelta’s operations, making Petrodelta subject to some internal policies and procedures of PDVSA as well as being subject to constraints in skilled personnel available to Petrodelta. These issues may have an adverse effect on the efficiency and effectiveness of Petrodelta’s operations.

We hold a minority equity investment in Petrodelta.Even though we have substantial negative control provisions as a minority equity investor in Petrodelta, our control of Petrodelta is limited to our rights under the Conversion Contract and its annexes and Petrodelta’s charter and bylaws. As a result, our ability to implement or influence Petrodelta’s business plan, assure quality control, and set the timing and pace of development may be adversely affected. In addition, the majority partner, CVP, has initiated and undertaken numerous unilateral decisions that can impact our minority equity investment.

Petrodelta’s business plan will be sensitive to market prices for oil.Petrodelta operates under a business plan, the success of which will rely heavily on the market price of oil. To the extent that market values of oil decline, the business plan of Petrodelta may be adversely affected.

A decline in the market price of crude oil could uniquely affect the financial condition of Petrodelta.Under the terms of the Conversion Contract and other governmental documents, Petrodelta is subject to a special advantage tax (“ventajas especiales”) which requires that if in any year the aggregate amount of royalties, taxes and certain other contributions is less than 50 percent of the value of the hydrocarbons produced, Petrodelta must pay the government of Venezuela the difference. In the event of a significant decline in crude prices, the ventajas especiales could force Petrodelta to operate at a loss. Moreover, our ability to control those losses by modifying Petrodelta’s business plan or restricting the budget is limited under the Conversion Contract.

An increase in oil prices could result in increased tax liability in Venezuela affecting Petrodelta’s operations and profitability, which in turn could affect our dividends and profitability. Prices for oil fluctuate widely. On July 10, 2008, the Venezuelan government published the amended Windfall Profits Tax to be calculated on the VEB of prices as published by MENPET. The amended Windfall Profits Tax established a special 50 percent tax to the Venezuelan government when the average price of the VEB exceeds $70 per barrel. In a similar manner, the percentage is increased from 50 percent to 60 percent when the average price of the VEB exceeds $100 per barrel. Any increase in the taxes payable by Petrodelta, including the Windfall Profits Tax, as a result of increased oil prices will reduce cash available for dividends to us and our partner, CVP.

Oil price declines and volatility could adversely affect Petrodelta’s operations and profitability, which in turn could affect our dividends and profitability.Prices for oil also affect the amount of cash flow available for capital expenditures and dividends from Petrodelta. Lower prices may also reduce the amount of oil that we can produce economically and lower oil production could affect the amount of natural gas we can produce. We cannot predict future oil prices. Factors that can cause fluctuations in oil prices include:

	•		relatively minor changes in the global supply and demand for oil;

	•		export quotas;

	•		market uncertainty;

	•		the level of consumer product demand;

	•		weather conditions;

	•		domestic and foreign governmental regulations and policies;

	•		the price and availability of alternative fuels;

	•		political and economic conditions in oil-producing and oil consuming countries; and

	•		overall economic conditions.

The total capital required for development of Petrodelta’s assets may exceed the ability of Petrodelta to finance such developments.Petrodelta’s ability to fully develop the fields in Venezuela will require a significant investment. Petrodelta’s future capital requirements for the development of its assets may exceed the cash available from existing cash flow. Petrodelta’s ability to secure financing is currently limited and uncertain, and has been, and may be, affected by numerous factors beyond its control, including the risks associated with operating in Venezuela. Because of this financial risk, Petrodelta may not be able to secure either the equity or debt financing necessary to meet its future cash needs for investment, which may limit its ability to fully develop the properties, cause delays with their development or require early divestment of all or a portion of those projects. This could negatively impact our minority equity investment. If we are called upon to fund our share of Petrodelta’s operations, our failure to do so could be considered a default under the Conversion Contract and cause the forfeiture of some or all our shares in Petrodelta. In addition, CVP may be unable or unwilling to fund its share of capital requirements and our ability to require them to do so is limited.

The legal or fiscal regime for Petrodelta may change and the Venezuelan government may not honor its commitments.While we believe that the Conversion Contract and Petrodelta provide a basis for a more durable arrangement in Venezuela, the value of the investment necessarily depends upon Venezuela’s maintenance of legal, tax, royalty and contractual stability. Our recent experiences in Venezuela demonstrate that such stability cannot be assured. While we have and will continue to take measures to mitigate our risks, no assurance can be provided that we will be successful in doing so or that events beyond our control will not adversely affect the value of our minority equity investment in Petrodelta.

PDVSA’s failure to timely pay contractors could have an adverse affect on Petrodelta.PDVSA has failed to pay on a timely basis certain amounts owed to contractors that PDVSA has contracted to do work for Petrodelta. PDVSA purchases all of Petrodelta’s oil production. PDVSA and its affiliates have reported shortfalls in meeting their cash requirements for operations and planned capital expenditures, and PDVSA has fallen behind in certain of its payment obligations to its contractors, including contractors engaged by PDVSA to provide services to Petrodelta. In addition, PDVSA has fallen behind in certain of its payment obligations to Petrodelta, which payments Petrodelta would otherwise use to pay its contractors. As a result, Petrodelta has experienced, and may continue to experience, difficulty in retaining contractors who provide services for Petrodelta’s operations. We cannot provide any assurance as to whether or when PDVSA will become current on its payment obligations. Inability to retain contractors or to pay them on a timely basis is having an adverse effect on Petrodelta’s operations and on Petrodelta’s ability to carry out its business plan.

Tax claims by municipalities in Venezuela may adversely affect Harvest Vinccler’s financial condition.The municipalities of Uracoa and Libertador have asserted numerous tax claims against Harvest Vinccler which we believe are without merit. However, the reliability of Venezuela’s judicial system is a source of concern and it can be subject to local and political influences.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

office space in Singapore for approximately $19,000 per month. In April 2009, we signed a two-year lease for office space in Indonesia for approximately $5,000 per month. In September 2009, we signed a two-year lease for office space in Oman for approximately $5,000 per month. In November 2009, we signed a one-year lease for office space in London for approximately $24,000 per month. SeeItem 1 — Businessfor a description of our oil and gas properties.

Item 3. Legal Proceedings

Excel Enterprises L.L.C. vs. Benton Oil & Gas Company, now known as Harvest Natural Resources, Inc., Chemex, Inc., Benton-Vinccler, C.A., Gale Campbell and Sheila Campbell in the District Court for Harris County, Texas. This suit was brought in May 2003 by Excel alleging, among other things, breach of a consulting agreement between Excel and us, misappropriation of proprietary information and trade secrets, and fraud. Excel seeks actual and exemplary damages, injunctive relief and attorneys’ fees. In April 2007, the court set the case for trial. The trial date, reset for the first quarter of 2009, had been stayed indefinitely. On October 20, 2009, the stay was lifted. A trial date of November 1, 2010 has been set. We dispute Excel’s claims and plan to vigorously defend against them. We are unable to estimate the amount or range of any possible loss.

Uracoa Municipality Tax Assessments. Our Venezuelan subsidiary, Harvest Vinccler has received nine assessments from a tax inspector for the Uracoa municipality in which part of the Uracoa, Tucupita and Bombal fields are located as follows:

	•		Three claims were filed in July 2004 and allege a failure to withhold for technical service payments and a failure to pay taxes on the capital fee reimbursement and related interest paid by PDVSA under the Operating Service Agreement (“OSA”). Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss one of the claims and has protested with the municipality the remaining claims.

	•		Two claims were filed in July 2006 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on these claims.

	•		Two claims were filed in August 2006 alleging a failure to pay taxes on estimated revenues for the second quarter of 2006 and a withholding error with respect to certain vendor payments. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on one claim and filed a protest with the municipality on the other claim.

	•		Two claims were filed in March 2007 alleging a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a protest with the municipality on these claims.

Harvest Vinccler disputes the Uracoa tax assessments and believes it has a substantial basis for its positions. Harvest Vinccler is unable to estimate the amount or range of any possible loss. As a result of the SENIAT’s, the Venezuelan income tax authority, interpretation of the tax code as it applies to operating service agreements, Harvest Vinccler has filed claims in the Tax Court in Caracas against the Uracoa Municipality for the refund of all municipal taxes paid since 1997.

Libertador Municipality Tax Assessments. Harvest Vinccler has received five assessments from a tax inspector for the Libertador municipality in which part of the Uracoa, Tucupita and Bombal fields are located as follows:

One claim was filed in April 2005 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Mayor’s Office and a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss the claim. On April 10, 2008, the Tax Court suspended the case pending a response from the Mayor’s Office to the protest. If the municipality’s response is to confirm the assessment, Harvest Vinccler will defer to the competent Tax Court to enjoin and dismiss the claim.

	•		Two claims were filed in June 2007. One claim relates to the period 2003 through 2006 and seeks to impose a tax on interest paid by PDVSA under the OSA. The second claim alleges a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims.

	•		Two claims were filed in July 2007 seeking to impose penalties on tax assessments filed and settled in 2004. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims.

Harvest Vinccler disputes the Libertador allegations set forth in the assessments and believes it has a substantial basis for its position. Harvest Vinccler is unable to estimate the amount or range of any possible loss. As a result of the SENIAT’s interpretation of the tax code as it applies to operating service agreements, Harvest Vinccler has filed claims in the Tax Court in Caracas against the Libertador Municipality for the refund of all municipal taxes paid since 2002.

In June 2007, the SENIAT issued an assessment for taxes in the amount of $0.4 million for Harvest Vinccler’s failure to withhold VAT from vendors during 2005. Also, the SENIAT imposed penalties and interest in the amount of $1.3 million for Harvest Vinccler’s failure to withhold VAT. In July 2008, the SENIAT adjusted the assessment for penalties and interest to the change in tax units as mandated by the Venezuelan tax code and issued a new assessment for $2.3 million. The change in assessment resulted in an additional $1.0 million expense recorded in the year ended December 31, 2008. In August 2008, Harvest Vinccler filed an appeal in the tax courts and presented a proposed settlement with the SENIAT. In October 2008, after consideration of our proposed settlement, the SENIAT offered a counter-proposal which Harvest Vinccler accepted. Throughout 2009, the General Attorney Office and Harvest Vinccler agreed several times to resuspend the case while the Finance Minister and the SENIAT confirmed their acceptance to the proposed settlement. On December 30, 2009, Harvest Vinccler settled the case for 3.1 million Bolivars (approximately $1.4 million) for penalties and interest and closed the case with the SENIAT’s concurrence. As a result of the settlement, in December 2009, Harvest Vinccler reversed $0.9 million of accrued penalties and interest previously accrued based on notices received from the SENIAT.

We are a defendant in or otherwise involved in other litigation incidental to our business. In the opinion of management, there is no such litigation which will have a material adverse impact on our financial condition, results of operations and cash flows.

PART II


Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

Our common stock is traded on the NYSE under the symbol “HNR”. As of December 31, 2009, there were 33,281,385 shares of common stock outstanding, with approximately 515 stockholders of record. The following table sets forth the high and low sales prices for our Common Stock reported by the NYSE.

PLOT POINTS
(December 31 of each year)


	2004		2005		2006		2007		2008		2009
Harvest Natural Resources, Inc.	$	100	$	51	$	62	$	72	$	25	$	31
Dow Jones US E&P Index	$	100	$	166	$	174	$	244	$	142	$	201
S&P 500 Index	$	100	$	105	$	121	$	128	$	81	$	102

Total Return Data provided by S&P’s Institutional Market Services, Dow Jones & Company, Inc. is composed of companies that are classified as domestic oil companies under Standard Industrial Classification codes (1300-1399, 2900-2949, 5170-5179 and 5980-5989). The Dow Jones US Exploration & Production Index is accessible athttp://www.djindexes.com/mdsidx/index.cfm?event=showTotalMarket.

Item 6. Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected consolidated financial data for each of the years in the five-year period ended December 31, 2009. In December 2007, we changed our accounting method for oil and gas exploration and development activities to the successful efforts method from the full cost method. The selected consolidated financial data have been derived from and should be read in conjunction with our annual audited consolidated financial statements, including the notes thereto.


	Year Ended December 31,
	2009			2008			2007⁽¹⁾			2006⁽¹⁾			2005
	(in thousands, except per share data)
Statement of Operations:
Total revenues	$	181		$	—		$	11,217		$	59,506		$	236,941
Operating income (loss)		(30,959	)		(54,440	)		(19,536	)		574			104,571
Net income from Unconsolidated Equity Affiliates		35,757			34,576			55,297			—			—
Net income (loss) attributable to Harvest		(3,107	)		(21,464	)		60,118			(62,502	)		38,876
Net income (loss) attributable to Harvest per common share:
Basic	$	(0.09	)	$	(0.63	)	$	1.65		$	(1.68	)	$	1.05

Diluted	$	(0.09	)	$	(0.63	)	$	1.59		$	(1.68	)	$	1.01

Weighted average common shares outstanding
Basic		33,084			34,073			36,550			37,225			36,949
Diluted		33,084			34,073			37,950			37,225			38,444


	Year Ended December 31,
	2009		2008		2007⁽¹⁾		2006⁽¹⁾		2005
	(in thousands)
Balance Sheet Data:
Total assets	$	348,779	$	362,266	$	417,071	$	468,365	$	451,377
Long-term debt, net of current maturities		—		—		—		66,977		—
Total Harvest’s Stockholders’ equity⁽²⁾		274,593		273,242		316,647		281,409		337,975


⁽¹⁾		Activities under our former OSA in Venezuela are reflected under the equity method of accounting effective April 1, 2006. The results of Petrodelta’s operations from April 1, 2006 until December 31, 2007 are reflected in 2007 when Petrodelta was formed.

⁽²⁾		No cash dividends were declared or paid during the periods presented.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operations

We had a net loss attributable to Harvest of $3.1 million, or $(0.09) per diluted share, for the twelve months ended December 31, 2009 compared with a net loss attributable to Harvest of $21.5 million, or $(0.63) per diluted share, for the twelve months ended December 31, 2008. Net loss attributable to Harvest for the year ended December 31, 2009 includes $7.8 million of exploration expense and the net equity income from Petrodelta’s operations of $40.7 million. Net loss attributable to Harvest for the year ended December 31, 2008 includes $16.4 million of exploration expense, $10.8 million of dry hole expense and the net equity income from Petrodelta’s operations of $35.9 million.

Petrodelta – Venezuela

During 2009, Petrodelta drilled and completed 14 successful development wells, suspended one well due to problems with the well and drilled two appraisal wells, produced approximately 7.8 million barrels of oil and sold 4.4 billion cubic feet (“BCF”) of natural gas. Petrodelta was advised by the Venezuelan government that the 2009 production target was approximately 16,000 barrels of oil per day following the December 17, 2008 OPEC meeting establishing new production quotas. However, Petrodelta was allowed to produce at capacity to help fulfill other companies’ production shortfalls, thus averaging 21,464 barrels of oil per day during 2009.

Petrodelta began the appraisal and testing of its large portfolio of undeveloped resources in the second quarter of 2009. During the second quarter 2009, Petrodelta drilled two successful appraisal wells in the El Salto field, and pilot production commenced from one of the appraisal wells through temporary facilities. The well commenced production on July 18, 2009 and has produced 349,000 barrels of oil through the end of 2009. The second appraisal well will be tested after the permitting process with MENPET is completed.

Petrodelta shareholders intend that the company be self-funding and rely on internally-generated cash flow to fund operations. Currently, Petrodelta has one drilling rig operating in the Uracoa field. On February 4, 2010, Petrodelta’s board of directors endorsed a capital budget of $205 million for Petrodelta’s 2010 business plan. For 2010, the planned drilling program includes utilizing two rigs to drill both development and appraisal wells for both maintaining production capacity and appraising the substantial resource bases in the El Salto field and presently non-producing Isleño field.

On April 23, 2009, Petrodelta’s board of directors declared a dividend of $51.9 million, $20.8 million net to HNR Finance ($16.6 million net to our 32 percent interest). HNR Finance received the cash related to this dividend in the form of an advance dividend in October 2008. We expect to receive future dividends from Petrodelta; however, we expect the amount of any future dividends to be lower in the near term as Petrodelta reinvests most of its earnings into the company in support of its drilling and appraisal activities. Petrodelta’s results and operating information is more fully described inPart IV, Item 15, Notes to the Consolidated Financial Statements, Note 7 – Investment in Equity Affiliates – Petrodelta, S.A.

Diversification

Beginning in 2005, we recognized the need to diversify our asset base as part of our strategy. We broadened our strategy from our primary focus on Venezuela to identify, access and integrate hydrocarbon assets to include organic growth through exploration in basins globally with proven hydrocarbon systems. We seek to leverage our Venezuelan experience as well as our recently expanded business development and technical platform to create a diversified resource base. With the addition of technical resources, opening of our London and Singapore offices, as well as our minority equity investment in Fusion, we have made significant investments to provide the necessary foundation and global reach required for an organic growth focus. Our organic growth is focused on undeveloped or underdeveloped fields, field redevelopments and exploration. While exploration will become a larger part of our overall portfolio, we will generally restrict ourselves to basins with known hydrocarbon systems and favorable risk-reward profiles. Exploration will be technically driven with a low entry cost and high

resource potential that provides sustainable growth. We will continue to seek opportunities where perceived geopolitical risk may provide high reward opportunities in the long term. In 2009, we acquired an exploration asset in Oman that fit our strategy and began production at Monument Butte described below.

United States

Gulf Coast – West Bay

The AMI participants are currently evaluating the leads and prospects to determine priorities and drilling plans for the West Bay project. Depending on the selected drilling prospects and locations, the drilling may or may not require permit(s) from the U.S. Army Corps of Engineers – Galveston District (“Corps of Engineers”). We expect to firm up plans for initial drilling on the West Bay project during 2010, with the expectation of initial drilling on the West Bay project in 2011. During the year ended December 31, 2009, we incurred $0.4 million for lease acquisition, surveying, permitting and site preparation and $1.5 million for seismic data interpretation. The 2010 budget for the West Bay project is $0.1 million.

Western United States – Antelope

Activities are in progress on two separate projects on the Antelope prospect in Duchesne County, Utah.

Mesaverde

The Mesaverde project is targeted to explore for and develop oil and natural gas from multiple reservoir horizons in the Uintah Basin of northeastern Utah in Duchesne and Uintah Counties. Leads and prospects have been identified in three prospective reservoir horizons and initial drilling activities commenced in 2009 on one prospect.

Operational activities during 2009 on the Mesaverde project focused on continuing leasing activities on private, Allottee, and tribal land, and surveying, preliminary engineering, permitting preparations, and conducting drilling operations on a deep natural gas test well (the Bar F) that commenced drilling on June 15, 2009. The Bar F was permitted to 18,000 feet. The Bar F was drilled to a total depth of 17,566 feet and an extended production test is now in progress. To date, testing has been focused on the evaluation of the natural gas potential of the Mesaverde tight gas reservoir over a prospective interval from 14,000 to 17,400 feet. Completion activities consisted of hydraulic fracturing of eight separate reservoir intervals in the Mesaverde and multiple extended flow tests of the individual fractured intervals, along with a flow test of the commingled eight intervals. While the results to date have not definitively determined the commerciality of a stand-alone development of the Mesaverde, we believe these results indicate progress toward that determination and that the Mesaverde reservoir remains potentially prospective over a portion of our land position. During the year ended December 31, 2009, we incurred $23.4 million for drilling, lease acquisition, surveying, permitting and site preparation and $0.3 million for seismic data program planning. The 2010 budget for the Mesaverde project is $5.7 million; however, contingent on successful results of the Bar F and availability of funds, we plan to increase this budget to $33.0 million.

Monument Butte

Monument Butte project is non-operated and we hold a 43 percent working interest. The parties have formed a 320 acre AMI which contained the eight drilling locations.

Operational activities during 2009 on the Monument Butte project focused on resolution of forced pooling issues with a non-consenting interest, negotiations and finalization of an agreement with the operator for the joint drilling operations. As of March 1, 2010, all eight wells have been drilled. Seven wells are currently on production. One additional well is waiting on completion operations and is anticipated to commence production in early March 2010. During the year ended December 31, 2009, we incurred $1.8 million for drilling (including drilling accruals), lease acquisition, surveying, permitting and site preparation. The 2010 budget for the Monument Butte project is $1.1 million which has already been spent in the first quarter of 2010. We are currently evaluating the potential expansion of this drilling program. Contingent on the successful results of this evaluation, negotiation with the operator and availability of funds, this budget could be increased to $4.6 million.

Budong-Budong Project, Indonesia

Operational activities during 2009 focused on the interpretation of 650 kilometers of 2-D seismic and well planning. Two drill sites have been selected. Currently, the locations for the two test wells are being constructed and the rig and ancillary equipment is being mobilized to the area. It is expected that the first of two exploration wells will spud early in the second quarter of 2010. In accordance with the farm-in agreement, we expect to fund 100 percent of the well expenditures to earn our 47 percent working interest up to a cap of $10.7 million; thereafter, we will pay in proportion to our working interest. During the year ended December 31, 2009, we incurred $0.3 million for surveying, permitting, engineering and well planning and $1.8 million for seismic data processing and interpretation. The 2010 budget for the Budong PSC is $14.9 million. Contingent on the successful results of the two exploratory test wells and availability of funds, this budget could be increased to $28.0 million.

Dussafu Project — Gabon

Operational activities during 2009 focused on completion of the processing and reprocessing of 1,330 kilometers of 2-D seismic and the pre-stack depth reprocessing of 1,076 square kilometers of 3-D seismic data. The improved imaging from this work has allowed the interpretation to mature the prospect inventory to provide the partnership a number of prospective targets in the sub-salt section, in both the Gamba and Syn-rift plays that are productive in the nearby Etame, Lucina and M’Bya fields. Subject to drilling rig availability, we expect to drill an exploration well in the third quarter of 2010. During the year ended December 31, 2009, we incurred $1.2 million for seismic data processing and reprocessing. The 2010 budget for the Dussafu PSC is $2.2 million. Contingent on rig availability and successful results from the exploration well and availability of funds, this budget could be increased to $20.1 million.

Block 64 EPSA Project — Oman

On April 11, 2009, we signed an EPSA with Oman for the Block 64 EPSA. Current activities include the compilation of existing data over two prospect areas of approximately 1,000 square kilometers and geological studies to determine drillable prospects. Well planning is expected to commence in 2010 for exploration drilling in 2011. We incurred $2.3 million for costs associated with signing the license, including signature bonus and data compilation and $0.5 million for seismic data processing and reprocessing. The 2010 budget for the Block 64 EPSA is $2.8 million. Contingent on the availability of funds, an additional $1.9 million are planned for this project.

WAB-21 Project – China

The WAB-21 petroleum contract lies within an area which is the subject of a border dispute between China and Vietnam. The border dispute has lasted for many years, and there has been limited exploration and no development activity in the WAB-21 area due to the dispute. However, Vietnam, along with the company that is the party to the agreement with Vietnam, recently announced plans for exploration drilling during 2010. While no assurance can be given, we believe this announcement may provide some resolution with the border disputes, although we do not know in what manner any resolution might appear.

Other Exploration Projects

Relating to other projects, we incurred $1.3 million during the year ended December 31, 2009. The 2010 budget for other projects is $0.3 million. Contingent upon successful test results in Utah and Indonesia and availability of funds, we may increase this budget to $20.4 million.

Either one of the two exploratory wells to be drilled in 2010 on the Budong PSC or the completion of the well on the Mesaverde project can have a significant impact on our ability to obtain financing, record reserves and generate cash flow in 2010 and beyond.

InItem 1 – BusinessandItem 1A – Risk Factors,we discuss the situation in Venezuela and how the actions of the Venezuelan government have and continue to adversely affect our operations. Low crude oil prices and the expectation that dividends from Petrodelta will be minimal over the next two years has restricted our available cash and had a significant adverse effect on our ability to obtain financing to acquire and develop growth opportunities elsewhere.

We will use our available cash and future access to capital markets to expand our diversified strategy in a number of countries that fit our strategic investment criteria. In executing our business strategy, we will strive to:

	•		maintain financial prudence and rigorous investment criteria;

	•		access capital markets;

	•		continue to create a diversified portfolio of assets;

	•		preserve our financial flexibility;

	•		use our experience and skills to acquire new projects; and

	•		keep our organizational capabilities in line with our rate of growth.

			To accomplish our strategy, we intend to:

	•		Diversify our Political Risk:Acquire oil and natural gas fields in a number of countries to diversify and reduce the overall political risk of our investment portfolio.

	•		Seek Operational and Financial Control: We desire control of major decisions for development, production, staffing and financing for each project for a period of time sufficient for us to ensure maximum returns on investments.

	•		Establish a Presence Through Joint Venture Partners and the Use of Local Personnel:We seek to establish a presence in the countries and areas we operate through joint venture partners to facilitate stronger governmental and business relationships. In addition, we use local personnel to help us take advantage of local knowledge and experience and to minimize costs.

	•		Commit Capital in a Phased Manner to Limit Total Commitments at Any One Time:We are willing to agree to minimum capital expenditures or development commitments at the outset of new projects, but we endeavor to structure such commitments to fulfill them over time under a prudent plan of development, allowing near-term operating cash flow to help fund further investment, thereby limiting our maximum cash exposure. We also seek to maximize available local financing capacity to develop the hydrocarbons and associated infrastructure.

	•		Provide Technical Expertise:We believe there is an advantage in being able to provide geological, geophysical and engineering expertise beyond what many companies or countries possess internally. In addition to our in-house technical capabilities, we acquired a minority equity investment in Fusion, a technical firm with significant experience in providing leading edge geophysical, geosciences and reservoir engineering services in many places in the world. Through this acquisition we have strategic access to these services.

	•		Maintain a Prudent Financing Plan: We intend to maintain our financial flexibility by closely monitoring spending, holding sufficient cash reserves, minimizing the use of restricted cash, actively seeking

			opportunities to reduce our weighted average cost of capital and increase our access to debt and equity markets.

	•		Manage Exploration Risks. We seek to manage the higher risk of exploration by diversifying our prospect portfolio, applying state-of-the-art technology for analyzing targets and focusing on opportunities in proven active hydrocarbon systems with infrastructure.

	•		Establish Various Sources of Production. We seek to establish new production from our exploration and development efforts in a number of diverse markets and expect to monetize production through operations or the sale of assets.

Results of Operations

The following discussion should be read with the results of operations for each of the years in the three-year period ended December 31, 2009 and the financial condition as of December 31, 2009 and 2008 in conjunction with our consolidated financial statements and related notes thereto.

Years Ended December 31, 2009 and 2008

We reported a net loss attributable to Harvest of $3.1 million, or $(0.09) diluted earnings per share, for the year ended December 31, 2009, compared with a net loss attributable to Harvest of $21.5 million, or $(0.63) diluted earnings per share, for the year ended December 31, 2008.

Revenues were higher for the year ended December 31, 2009 compared with the year ended December 31, 2008 due to the Monument Butte wells coming on production in December 2009.

Total expenses and other non-operating (income) expense (in millions):


	Year Ended
	December 31,						Increase
	2009			2008			(Decrease)
Depletion, depreciation and amortization	$	0.4		$	0.2		$	0.2
Exploration expense		7.8			16.4			(8.6	)
Dry hole costs		—			10.8			(10.8	)
General and administrative		21.9			27.2			(5.3	)
Taxes other than on income		1.0			(0.2	)		1.2
Gain on financing transactions		—			(3.4	)		3.4
Investment earnings and other		(1.1	)		(3.7	)		2.6
Interest expense		—			1.7			(1.7	)
Income tax expense		1.2			—			1.2

Depletion and amortization expense per Boe produced during 2009 was $6.59.

Our accounting method for oil and gas properties is the successful efforts method. During the year ended December 31, 2009, we incurred $4.3 million of exploration costs related to the processing and reprocessing of seismic data related to ongoing operations, $2.8 million related to other general business development activities and $0.7 million related to the write off of the remaining carrying value of the Starks prospect. During the year ended December 31, 2008, we incurred $16.4 million of exploration costs related to the purchase and re-processing of seismic data related to our U.S. operations, acquisition of seismic data related to our Indonesia operations, and other general business development activities. Also during the year ended December 31, 2008, we incurred $10.8 million of dry hole costs related to the Harvest Hunter #1 well, which in January 2009 was determined to have no commercial quantities of hydrocarbons and was plugged and abandoned.

General and administrative costs were lower in the year ended December 31, 2009, than in the year ended December 31, 2008, primarily due to employee related expenses, lower general operations and office costs, and the reversal of accruals no longer required, including penalties and interest of $0.9 million on the resolved SENIAT

assessments. Taxes other than on income for the year ended December 31, 2009, were higher than the year ended December 31, 2008 due to the reversal in 2008 of a $1.1 million franchise tax provision that was no longer required.

We did not participate in any security exchange transactions in the year ended December 31, 2009. During the year ended December 31, 2008, we entered into a securities exchange transaction exchanging U.S. government securities for U.S. Dollar indexed debt issued by the Venezuelan government. This security exchange transaction resulted in a $3.4 million gain on financing transactions for the year ended December 31, 2008.

Investment earnings and other decreased in the year ended December 31, 2009 compared to the year ended December 31, 2008 due to lower interest rates earned on lower average cash balances. Interest expense was lower for the year ended December 31, 2009 compared to the year ended December 31, 2008 due to the repayment of debt in 2008.

For the year ended December 31, 2009, income tax expense was higher than that of the year ended December 31, 2008 primarily due to additional income tax assessed in the Netherlands of $0.7 million as a result of financing activities, which was recorded in the first quarter of 2009, and additional current income tax in the Netherlands of $0.5 million due to interest income earned from loans to affiliates and on cash balances. No income tax benefit is recorded for the net operating losses incurred as a full valuation allowance has been placed on the related deferred tax asset as management believes that is more likely than not that additional net losses will not be realized through future taxable income. There was no utilization of net operating loss carryforwards in the year ended December 31, 2009.

Net income from unconsolidated equity affiliates includes two non-recurring adjustments:

	•		During the second quarter of 2009, Petrodelta recorded additional pension expense of $15.6 million ($5.0 million net to our 32 percent interest) in the three month period ended June 30, 2009 based on an actuarial study commissioned by PDVSA which was finalized during the second quarter of 2009. During the fourth quarter of 2009, Petrodelta received a revised allocation of its pension obligation from PDVSA which reflected an update to the actuarial study based on a further refinement of assumption and a revised allocation methodology as a result of an analysis of more detailed census data specific to each mixed company not previously available. This revised allocation resulted in a decrease of $8.4 million ($2.7 million net to our 32 percent interest) to the pension and retirement plan costs as compared to those previously recorded to Petrodelta in May 2009. This change in management’s estimate related to the pension and retirement plan costs was recorded in December 2009.

	•		Based on cash flow projections and considering Fusion’s current liquidity, we performed a review at December 31, 2009 for impairment of our minority equity investment in Fusion. Based on this review, we concluded that Fusion’s potential business opportunities did not support its on-going cash flow requirements; and therefore, we recorded a $1.6 million charge to fully impair the carrying value of our equity investment in Fusion at December 31, 2009.

SeePart IV, Item 15, Notes to the Consolidated Financial Statements, Note 7 – Investment in Equity Affiliatesfor additional information.

Years Ended December 31, 2008 and 2007

We reported a net loss attributable to Harvest of $21.5 million, or $(0.63) diluted earnings per share, for the year ended December 31, 2008 compared to net income attributable to Harvest of $60.1 million, or $1.59 diluted earnings per share, for the year end December 31, 2007.

We included the results of operations of Harvest Vinccler in our consolidated financial statements and reflected the 20 percent ownership interest of OGTC as a noncontrolling interest in 2005 and the first quarter of 2006. Since April 1, 2006, our minority equity investment in Petrodelta has been reflected under the equity method of accounting. We recorded the cumulative effect from April 1, 2006 to December 31, 2007 in the three months ended December 31, 2007. The year ended December 31, 2008 includes net income from unconsolidated equity affiliates for Petrodelta on a current basis. SeePart IV, Item 15, Notes to the Consolidated Financial Statements, Note 7 – Investment in Equity Affiliates – Petrodelta, S.A.for Petrodelta’s results of operations which reflect the results for the years ended December 31, 2009, 2008 and 2007, comparatively.

Revenue recorded for the year ended December 31, 2007 reflects the reversal of deferred revenue recorded by Harvest Vinccler for 2005 and first quarter of 2006 deliveries pending clarification on the calculation of crude prices under the Transitory Agreement. SeePart IV, Item 15, Notes to the Consolidated Financial Statements, Note 1 – Organization and Summary of Significant Account Policies – Revenue Recognition. There were no sales of oil and natural gas in 2008 or 2007 due to the conversion of the OSA to a minority equity investment in Petrodelta.

Total expenses and other non-operating (income) expense (in millions):


	Year Ended
	December 31,						Increase
	2008			2007			(Decrease)
Depreciation	$	0.2		$	0.4		$	(0.2	)
Exploration expense		16.4			0.9			15.5
Dry hole costs		10.8			—			10.8
General and administrative		27.2			29.1			(1.9	)
Taxes other than on income		(0.2	)		0.4			(0.6	)
Gain on financing transactions		(3.4	)		(49.6	)		46.2
Investment earnings and other		(3.7	)		(9.1	)		5.4
Interest expense		1.7			8.2			(6.5	)
Income tax expense		—			6.3			(6.3	)

In December 2007, we changed our accounting method for oil and gas exploration and development activities to the successful efforts method from the full cost method. During the year ended December 31, 2008, we incurred $16.4 million of exploration costs related to the purchase and re-processing of seismic data related to our U.S. operations, acquisition of seismic data related to our Indonesia operations, and other general business development activities. Also during the year ended December 31, 2008, we incurred $10.8 million of dry hole costs related to the Harvest Hunter #1 well, which in January 2009 was determined to have no commercial quantities of hydrocarbons and was plugged and abandoned. During the year ended December 31, 2007, we incurred $0.9 million of exploration costs related to other foreign general business development.

General and administrative costs were lower in the year ended December 31, 2008, than in the year ended December 31, 2007, primarily due to employee related expenses and lower contract services. Taxes other than on income for the year ended December 31, 2008, were lower than the year ended December 31, 2007 due to the reversal of a $1.1 million franchise tax provision that was no longer required.

During the years ended December 31, 2008 and 2007, we entered into securities exchange transactions exchanging U.S. government securities for U.S. Dollar indexed debt issued by the Venezuelan government. These security exchange transactions resulted in a $3.4 million and $49.6 million gain on financing transactions for the years ended December 31, 2008 and 2007, respectively.

Investment earnings and other decreased in the year ended December 31, 2008, as compared to the same period of the prior year due to lower interest rates earned on lower cash balances. Interest expense decreased due to the payment of Harvest Vinccler’s Bolivar denominated debt in July of 2008.

For the year ended December 31, 2008, income tax expense, which is comprised of income tax on our foreign activities and withholding tax on interest income from Harvest Vinccler, was lower than that of the year ended December 31, 2007, partially due to the $49.6 million gain on financing transactions occurring in the year ended December 31, 2007 compared to a $3.4 million gain on financing transactions occurring in the year ended December 31, 2008. The reduction in income tax expense was also partially due to the reduction in the rate of withholding tax on the Venezuela interest, which went from 10 percent to 5 percent under the Netherlands-Venezuela double tax treaty. No income tax benefit is recorded for the net operating losses incurred as a full valuation allowance has been placed on the related deferred tax asset as management believes that is more likely than not that additional net losses will not be realized through future taxable income. There was no utilization of net operating loss carryforwards in the year ended December 31, 2008.

Capital Resources and Liquidity

The oil and natural gas industry is a highly capital intensive and cyclical business with unique operating and financial risks (seeItem 1A — Risk Factors). We require capital principally to fund the exploration and development of new oil and gas properties. For calendar year 2010, we have preliminarily established an exploration and drilling budget of approximately $27.1 million. We are concentrating a substantial portion of this budget on the development of our Antelope prospect and Budong PSC. Contingent upon the successful test results of the exploratory well drilled on the Antelope prospect, the exploratory wells to be drilled on the Budong PSC and availability of funds, we have planned capital expenditures of up to $110.8 million to evaluate and develop our prospect portfolio in the United States and international locations, excluding Venezuela’s self funding program. We currently believe that Petrodelta will fund its own operations and continue to pay dividends although no dividends are expected in 2010 based on our current forecast. InItem 1A – Risk Factors, we discuss a number of variables and risks related to our minority equity investment in Petrodelta and exploration projects that could significantly utilize our cash balances, affect our capital resources and liquidity. We also point out that the total capital required to develop the fields in Venezuela may exceed Petrodelta’s available cash and financing capabilities, and that there may be operational or contractual consequences due to this inability.

Based on our cash balance of $32 million at December 31, 2009, we will be required to raise additional funds in order to fund our future operating and capital expenditures. As we disclosed in previous filings, our cash is being used to fund oil and gas exploration projects and to a lesser extent general and administrative costs. Through December 31, 2009, our exploration expenditures outside of Venezuela have resulted in a modest amount of new proved reserves in Utah in the United States. If we are not able to raise additional capital or prove up additional sources of revenue, there will be a need to reduce our projected expenditures which could limit our ability to operate our business. Currently, our primary source of cash is dividends from Petrodelta. However, there is no certainty that Petrodelta will pay dividends in 2010 or 2011. Our lack of cash flow and the unpredictability of cash dividends from Petrodelta could make it difficult to obtain financing, and accordingly, there is no assurance adequate financing can be raised. We continue to pursue, as appropriate, additional actions designed to generate liquidity including seeking of financing sources, accessing equity and debt markets, exploration of our properties worldwide, and cost reductions. In addition, we could delay discretionary capital spending to future periods or sell assets as necessary to maintain the liquidity required to run our operations, if necessary. There can be no assurances that any of these possible efforts will be successful or adequate, and if they are not, our financial condition and liquidity could be materially adversely affected.

On February 17, 2010, we closed an offering of $32.0 million in aggregate principal amount of our 8.25 percent senior convertible notes. Under the terms of the notes, we will pay interest semi-annually and the notes will mature on March 1, 2013, unless earlier redeemed, repurchased or converted. The notes are convertible into shares of our common stock at a conversion rate of 175.2234 shares of common stock per $1,000 principal amount of convertible notes, equivalent to a conversion price of approximately $5.71 per share of common stock, subject to adjustment. The notes are our general unsecured obligations, ranking equally with all of our other unsecured senior indebtedness, if any, and senior in right of payment to any of our subordinated indebtedness, if any. The notes are also redeemable in certain circumstances at our option and may be repurchased by us at the purchaser’s option in connection with occurrence of certain events. The net proceeds of the offering to us were approximately $30.0 million, after deducting underwriting discounts, commissions and estimated offering expenses. We intend to use these net proceeds to fund capital expenditures and for working capital needs and general corporate purposes.

In addition, we are currently contemplating one particular additional source of financing through an Islamic (sukuk) financing, in which one of our subsidiaries would form and contribute certain assets to a partnership and subsequently sell a minority interest in the partnership to one or more third parties for approximately $250 million. Although the terms of this transaction have not been finalized, we anticipate that the terms would include our agreement to pay all or a substantial portion of the dividends paid by Petrodelta to which we are entitled over the next five or six years to reacquire all of the third-party partnership interests, including premiums thereon. While we may be able to consummate this financing transaction during the first half of 2010, there can be no assurances that this transaction will be consummated, and we may consider alternative forms of additional financing if we deem necessary or advisable with respect to our operations from time to time.

On February 5, 2003, Venezuela imposed currency controls and created CADIVI with the task of establishing the detailed rules and regulations and generally administering the exchange control regime. These

controls fix the exchange rate between the Bolivar and the U.S. Dollar and restrict the ability to exchange Bolivars for U.S. Dollars and vice versa. The U.S. Dollar and Bolivar exchange rates had not been adjusted since March 2005 until January 8, 2010 when the Venezuelan government adjusted the exchange rate from 2.15 Bolivars per U.S. Dollar to 2.60 Bolivars per U. S. Dollar for the food, health, medical and technology sectors; and 4.30 Bolivars per U. S. Dollar for all other sectors not expressly established by the 2.60 Bolivar exchange rate. The U.S. Dollar is the functional reporting currency for both Petrodelta and Harvest Vinccler. The Bolivar is not readily convertible into the U.S. Dollar. The Venezuelan currency conversion restriction has not adversely affected our ability to meet short-term loan obligations and operating requirements for the foreseeable future.

Working Capital. Our capital resources and liquidity are affected by the ability of Petrodelta to pay dividends. On April 23, 2009, Petrodelta’s board of directors declared a dividend of $51.9 million, $20.8 million net to HNR Finance ($16.6 million net to our 32 percent interest). HNR Finance received the cash related to this dividend in the form of an advance dividend in October 2008. We expect to receive future dividends from Petrodelta; however, we expect the amount of any future dividends to be lower in the near term as Petrodelta reinvests most of its earnings into the company in support of its drilling and appraisal activities. In June 2009, CVP issued instructions to all mixed companies regarding the accounting for deferred tax assets. The mixed companies have been instructed to set up a reserve within the equity section of the balance sheet for deferred tax assets. The setting up of the reserve had no effect on Petrodelta’s financial position, results of operation or cash flows. However, the new reserve could have a negative impact on the amount of dividends received in the future. In addition to reinvesting earnings into the company in support of its drilling and appraisal activities, the decline in the price per barrel affects Petrodelta’s ability to pay dividends. All available cash will be used to meet current operating requirements and will not be available for dividends. SeeItem 1 — Business, PetrodeltaandItem 1A — Risk Factorsfor a more complete description of the situation in Venezuela and other matters.

The net funds raised and/or used in each of the operating, investing and financing activities are summarized in the following table and discussed in further detail below:


	Year Ended December 31,
	(in thousands except as indicated)
	2009			2008			2007
Net cash provided by (used in) operating activities	$	(34,945	)	$	50,380		$	(20,655	)
Net cash provided by (used in) investing activities		(28,603	)		(23,055	)		69,960
Net cash used in financing activities		(1,300	)		(51,001	)		(76,543	)

Net decrease in cash	$	(64,848	)	$	(23,676	)	$	(27,238	)


Working Capital		34,206			77,010			111,534
Current Ratio		3.0			3.0			3.6
Total Cash, including restricted cash		32,317			97,165			127,610
Total Debt		—			—			9,302

The decrease in working capital of $42.8 million was for capital expenditures and administrative expenses.

Cash Flow from Operating Activities. During the year ended December 31, 2009, net cash used in operating activities was approximately $34.9 million. During the year ended December 31, 2008, net cash provided by operating activities was approximately $50.4 million. The $85.3 million decrease was primarily due to the receipts in 2008 of a $72.5 million dividend net to HNR Finance ($58.0 million net to our 32 percent interest) and advance dividend of $20.8 million net to HNR Finance ($16.6 million net to our 32 percent interest) from our unconsolidated equity affiliate and payment of advances by PDVSA offset by payment of the accounts payable related party, repurchase of treasury stock, payment of a dividend to the noncontrolling interest in Harvest-Vinccler Dutch Holding, B.V., and capital expenditures.

Cash Flow from Investing Activities.During the year ended December 31, 2009, we had cash capital expenditures of approximately $28.0 million. Of the 2009 expenditures, $0.4 million was attributable to the West Bay project, $23.7 million was attributable to the Antelope prospect, $0.3 million was attributable to exploration

activity on the Budong PSC, $2.3 million was attributable to the Block 64 EPSA project and $1.3 million on other projects. During the year ended December 31, 2008, we had cash capital expenditures of approximately $26.3 million. Of the 2008 expenditures, $4.7 million was attributable to the Gulf Coast prospects, $10.8 million was attributable to the Harvest Hunter #1 exploration well, $4.2 million was attributable to the Antelope prospect, $0.1 million was attributable to the Budong PSC, $5.3 million was attributable to the Dussafu PSC, and $1.2 million on other projects. During the year ended December 31, 2008, we increased our minority equity investment in Fusion by purchasing an additional two percent interest for $2.2 million. During the year ended December 31, 2008, $6.8 million of restricted cash used as collateral for loans which were repaid was returned to us. During the year ended December 31, 2009 and 2008, we incurred $0.6 million and $1.3 million, respectively, of investigatory costs related to various international and domestic exploration studies.

With the conversion to Petrodelta, Petrodelta’s capital commitments will be determined by its business plan. Petrodelta’s capital commitments are expected to be funded by internally generated cash flow. Our budgeted capital expenditures of $27.1 million for 2010 for U.S., Indonesia, Gabon and Oman operations will be funded through our existing cash balances, the February 2010 debt offering, other financing sources, accessing equity and debt markets, and cost reductions. In addition, we could delay discretionary capital spending to future periods or sell assets as necessary to maintain the liquidity required to run our operations, as warranted.

Cash Flow from Financing Activities.During the year ended December 31, 2009 we incurred $1.7 million in legal fees associated with prospective financing. During year ended December 31, 2008, Harvest Vinccler repaid 20 million Bolivars (approximately $9.3 million) of its Bolivar denominated debt, we redeemed the 20 percent minority interest in our Barbados affiliate, incurred $1.1 million in legal fees associated with prospective financing, and we paid a dividend of $14.9 million to the noncontrolling interest in Harvest-Vinccler Dutch Holding, B.V.

In July 2008, our Board of Directors authorized the purchase of up to $20 million of our common stock from time to time through open market transactions. As of December 31, 2008, 1.2 million shares of stock had been purchased at an average cost of $10.17 per share for a total cost of $12.2 million of the $20 million authorization. During the year ended December 31, 2009, no stock was purchased under the program.

Contractual Obligations

We have a lease obligation of approximately $32,000 per month for our Houston office space. This lease runs through July 2014. In addition, Harvest Vinccler has lease obligations for office space in Caracas, Venezuela for approximately $10,000 per month. This lease runs through November 2010. We also have lease commitments for an office in Utah for approximately $6,000 per month, an office in Singapore for approximately $19,000 per month, an office space in Indonesia for approximately $5,000 per month, an office in Oman for approximately $5,000 per month and an office in London for approximately $24,000 per month. These leases expire in September 2010, October 2010, March 2011, August 2011 and November 2010, respectively. Our London office space is leased on a month-to-month basis with no long term commitment. We do not have any long-term contractual commitments for any of our projects.


	Payments (in thousands) Due by Period
			Less than						After 4
Contractual Obligation	Total		1 Year		1-2 Years		3-4 Years		Years
Office Leases	$	2,674	$	1,215	$	459	$	407	$	593
Asset Retirement Obligation		50		—		—		—		50

Total Contractual Obligations	$	2,724	$	1,215	$	459	$	407	$	643

Effects of Changing Prices, Foreign Exchange Rates and Inflation

Our results of operations and cash flow are affected by changing oil prices. Fluctuations in oil prices may affect our total planned development activities and capital expenditure program.

Venezuela imposed currency exchange restrictions in February 2003, and adjusted the official exchange rate in February 2004, March 2005 and again in January 2010. The currency conversion restrictions or the adjustment in the exchange rate have not had a material impact on us at this time. Dividends from Petrodelta will be denominated in U.S. Dollars when paid. Within the United States and other countries in which we conduct business, inflation has had a minimal effect on us, but it is potentially an important factor with respect to results of operations in Venezuela.

During the years ended December 31, 2009 and 2008, our net foreign exchange gains attributable to our international operations were minimal. The U.S. Dollar and Bolivar exchange rates have not been adjusted from March 2005 until January 2010. However, there are many factors affecting foreign exchange rates and resulting exchange gains and losses, most of which are beyond our control. We have recognized significant exchange gains and losses in the past, resulting from fluctuations in the relationship of the Venezuelan currency to the U.S. Dollar. It is not possible for us to predict the extent to which we may be affected by future changes in exchange rates and exchange controls.

An exemption under the Venezuelan Criminal Exchange Law for transactions in certain securities results in an indirect securities transaction market of foreign currency exchange, through which companies may obtain foreign currency legally without requesting it from the Venezuelan government. Publicly available quotes do not exist for the securities transaction exchange rate but such rates may be obtained from brokers. Securities transaction markets are used to move financial securities in and out of Venezuela.

Critical Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries. The equity method of accounting is used for companies and other investments in which we have significant influence. All intercompany profits, transactions and balances have been eliminated.

Reporting and Functional Currency

The U.S. Dollar is our reporting and functional currency. Amounts denominated in non-U.S. Dollar currencies are re-measured in U.S. Dollars, and all currency gains or losses are recorded in the consolidated statement of operations. We attempt to manage our operations in such a manner as to reduce our exposure to foreign exchange losses. However, there are many factors that affect foreign exchange rates and resulting exchange gains and losses, many of which are beyond our influence.

The U.S. Dollar is the reporting and functional currency for all of our controlled subsidiaries and Petrodelta.

Revenue Recognition

We record revenue for our U.S. oil and natural gas operations when we deliver our production to the customer and collectability is reasonably assured. Revenues from the production of oil and natural gas on properties in which we have joint ownership are recorded under the sales method. Differences between these sales and our entitled share of production are not significant.

Investment in Equity Affiliates

Investments in unconsolidated companies in which we have less than a 50 percent interest and have significant influence are accounted for under the equity method of accounting. Investment in equity affiliates is increased by additional investment and earnings and decreased by dividends and losses. We review our investment in equity affiliates for impairment whenever events and circumstances indicate a decline in the recoverability of its carrying value.

Property and Equipment

We follow the successful efforts method of accounting for our oil and gas properties. Under this method, oil and natural gas lease acquisition costs are capitalized when incurred. Unproved properties with individually significant acquisition costs are assessed quarterly on a property-by-property basis, and any impairment in value is recognized. Unproved properties with acquisition costs that are not individually significant are aggregated, and the portion of such costs estimated to be nonproductive, based on historical experience, is amortized over the average

holding period. If the unproved properties are determined to be productive, the appropriate related costs are transferred to proved oil and gas properties. Lease rentals are expensed as incurred.

Oil and natural gas exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. The costs of drilling exploratory wells are capitalized pending determination of whether the wells have discovered proved reserves. Exploratory drilling costs are capitalized when drilling is completed if it is determined that there is economic producibility supported by either actual production, conclusive formation test or by certain technical data. If proved reserves are not discovered, such drilling costs are expensed. In some circumstances, it may be uncertain whether proved reserves have been found when drilling has been completed. Such exploratory well drilling costs may continue to be capitalized if the reserve quantity is sufficient to justify its completion as a producing well and sufficient progress in assessing the reserves and the economic and operating viability of the projects is being made. Costs to develop proved reserves, including the costs of all development wells and related equipment used in production of natural gas and crude oil, are capitalized.

Depreciation, depletion, and amortization of the cost of proved oil and natural gas properties are calculated using the unit of production method. The reserve base used to calculate depletion, depreciation or amortization for leasehold acquisition costs and the cost to acquire proved properties is proved reserves. With respect to lease and well equipment costs, which include costs and successful exploration drilling costs, the reserve base is proved developed reserves. Estimated future dismantlement, restoration and abandonment costs, net of salvage values, are taken into account. Certain other assets are depreciated on a straight-line basis.

Assets are grouped in accordance with paragraph 30 of the accounting standard for financial accounting and reporting by oil and gas producing companies. The basis for grouping is reasonable aggregation of properties with a common geological structural feature or stratigraphic condition, such as a reservoir or field.

Amortization rates are updated to reflect: 1) the addition of capital costs, 2) reserve revisions (upwards or downwards) and additions, 3) property acquisitions and/or property dispositions and 4) impairments.

We account for impairments of proved propertied under the provisions of the accounting standard for accounting for the impairment or disposal of long-lived assets. When circumstances indicate that an asset may be impaired, we compare expected undiscounted future cash flows at a producing field level to the amortized capitalized cost of the asset. If the future undiscounted cash flows, based on our estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the amortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is calculated by discounting the future cash flows at an appropriate risk-adjusted discount rate.

Reserves

In December 2009, we adopted revised oil and gas reserve estimation and disclosure requirements which conforms the definition of proved, probable and possible reserves with the SEC Modernization of Oil and Gas Reporting rules, which were issued by the SEC at the end of 2008. The new accounting standard requires that the unweighted average, first-day-of-the-month price during the 12-month period preceding the end of the year, rather than the year-end price, be used when estimating reserve quantities and permits the use of reliable technologies to determine proved reserves, if those technologies have been demonstrated to result in reliable conclusions about reserves volumes. Prior-year data are presented in accordance with FASB oil and gas disclosure requirements effective during those periods.

Proved reserves are those quantities of oil and gas which by analysis of geoscience and engineering data can be estimated with reasonable certainty to be economically producible from a given date forward from known reservoirs and under existing economic conditions, operating methods, government regulations, etc.,i.e., at prices as described above and costs as of the date the estimates are made. Prices include consideration of changes in existing prices provided only by contractual arrangements, and do not include adjustments based upon expected future conditions. Probable reserves are those additional reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely as not to be recovered. Possible reserves are those additional reserves which are less certain to be recovered than probable reserves and thus the probability of achieving or exceeding the proved plus probable plus possible reserves is low.

Reserves may be estimated using probabilistic methods in which there is at least a 90 percent probability of recovery of proved reserves, at least a 50 percent probability of recovery of probable reserves, and at least a 10 percent probability of recovery of possible reserves. Our probable reserves were calculated using probabilistic methods and represent the 50 percent probability that the actual quantities recovered will be equal to or greater than the proved plus probable estimate. The larger quantity of proved reserves plus probable reserves, as compared to proved reserves only, is attributable largely to using a less conservative interpretation of reservoir size and recovery factor in estimating probable reserves.

The estimate of reserves is made using available geological and reservoir data as well as production performance data. These estimates are prepared by an independent third party petroleum engineering consulting firm and revised, either upward or downward, as warranted by additional data. Revisions are necessary due to changes in, among other things, reservoir performance, prices, economic conditions and governmental restrictions, as well as changes in the expected recovery associated with infill drilling. Decreases in prices, for example, may cause a reduction in some proved reserves due to reaching economic limits earlier. A material adverse change in the estimated volumes of proved reserves could have a negative impact on DD&A expense and could result in the recognition of an impairment.

Accounting for Asset Retirement Obligation

If a reasonable estimate of the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon wells can be made, we record a liability (an asset retirement obligation or “ARO”) on our consolidated balance sheet and capitalize the present value of the asset retirement cost in oil and gas properties in the period in which the retirement obligation is incurred. In general, the amount of an ARO and the costs capitalized will be equal to the estimated future cost to satisfy the abandonment obligation assuming the normal operation of the asset, using current prices that are escalated by an assumed inflation factor up to the estimated settlement date, which is then discounted back to the date that the abandonment obligation was incurred using an assumed cost of funds for our Company. After recording these amounts, the ARO is accreted to its future estimated value using the same assumed cost of funds and the additional capitalized costs are depreciated on a unit-of-production basis within the related asset group. Accretion is included in operating expenses and depreciation is included in depreciation, depletion and amortization on our consolidated statement of income.

Income Taxes

Deferred income taxes reflect the net tax effects, calculated at currently enacted rates, of (a) future deductible/taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements or income tax returns, and (b) operating loss and tax credit carry forwards. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized.

New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued an accounting standard for subsequent events which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This standard is effective for interim or annual periods ending after June 15, 2009. We adopted this standard effective June 15, 2009. The adoption of this standard did not have an effect on our consolidated financial position, results of operations or cash flows.

In June 2009, the FASB issued an accounting standard for accounting for transfers of financial assets. The objective in issuing this standard is to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This standard is effective for annual periods beginning after November 15, 2009. The adoption of this standard did not have a material impact on our consolidated financial position, results of operations or cash flows.

In June 2009, the FASB issued an amendment to the financial interpretation to improve financial reporting by enterprises involved with variable interest entities. This amendment is effective for annual periods beginning after November 15, 2009. This amendment did not have a material impact on our consolidated financial position, results of operations or cash flows.

not included in this standard is now nonauthoritative. This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard did not have an impact on our consolidated financial position, results of operations or cash flows.

In December 2009, the FASB issued its final updates to oil and gas accounting rules to align the oil and gas reserve estimation and disclosure requirements of Extractive Industries — Oil and Gas (Topic 932) with the requirements in the SEC’s final rule,Modernization of the Oil and Gas Reporting Requirements,which was issued on December 31, 2008 and is effective as of December 31, 2009.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.


Item 7A.		Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from adverse changes in oil and natural gas prices and foreign exchange risk, as discussed below.

Oil Prices

As an independent oil producer, our revenue, other income and profitability, reserve values, access to capital and future rate of growth are substantially dependent upon the prevailing prices of crude oil and natural gas. Prevailing prices for such commodities are subject to wide fluctuation in response to relatively minor changes in supply and demand and a variety of additional factors beyond our control. Historically, prices received for oil production have been volatile and unpredictable, and such volatility is expected to continue.

Foreign Exchange

The Bolivar is not readily convertible into the U.S. Dollar. We have utilized no currency hedging programs to mitigate any risks associated with operations in Venezuela, and therefore our financial results are subject to favorable or unfavorable fluctuations in exchange rates and inflation in that country. Venezuela has imposed currency exchange controls (SeeItem 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Capital Resources and Liquidityabove).


Item 8.		Financial Statements and Supplementary Data

The information required by this item is included herein on pages S-1 through S-40.


Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.


Item 9A.		Controls and Procedures

Evaluation of Disclosure Controls and Procedures.We have established disclosure controls and procedures that are designed to ensure the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management of the Company, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on their evaluation as of December 31, 2009, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.

Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the Internal Control Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009. The effectiveness of our internal control over financial reporting as of December 31, 2009, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Management’s Remediation Efforts.In our Annual Report on Form 10-K for the year ended December 31, 2008, management concluded that the Company did not maintain effective controls over the period-end financial reporting process as of December 31, 2008. Specifically, effective controls did not exist to ensure that the deferred tax adjustments to reconcile net income reported by Petrodelta under IFRS to that required by GAAP were completely and accurately identified and that the necessary adjustments were appropriately analyzed and recorded on a timely basis.

During 2009, management has enhanced the controls over its equity investment to ensure that the adequate information regarding Petrodelta’s temporary deferred tax differences is obtained and that a comprehensive analysis of such information is performed. Specifically, management has requested further information related to the nature of each temporary deferred tax difference which enables management to determine the impact on the deferred tax adjustment to reconcile net income reported by Petrodelta under IFRS to that required under GAAP. The enhanced controls have enabled management to ensure that the deferred tax adjustment to reconcile net income reported by Petrodelta under IFRS to that required under GAAP is identified and completely and accurately reconciled.

During the year ended December 31, 2009, management further enhanced the controls necessary to ensure that all necessary adjustments are appropriately analyzed and recorded on a timely basis. These enhancements were in place and operating effectively as of December 31, 2009.

Changes in Internal Control over Financial Reporting. There have been no changes in internal control over financial reporting during the quarter ended December 31, 2009 that have materially affected or are reasonably likely to materially affect that Company’s internal control over financial reporting.


Item 9B.		Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Please refer to the information under the captions “Election of Directors” and “Executive Officers” in our Proxy Statement for the 2010 Annual Meeting of Stockholders.

PART IV

Item 15. Exhibits and Financial Statement Schedules ~~and Other:~~


~~Schedule II — Valuation and Qualifying Accounts~~(a)	1.	*	Index to Financial Statements:	Page


			Report of Independent Registered Public Accounting Firm	S-1

			Consolidated Balance Sheets at December 31, 2009 and 2008	S-2

			Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007	S-3

			Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007	S-4

			Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007	S-5

			Notes to Consolidated Financial Statements	S-7

	2.		Consolidated Financial Statement Schedules and Other:

			Schedule II — Valuation and Qualifying Accounts	S-40

			Schedule III — Financial Statements and Notes for Petrodelta, S.A.		7S-41

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.

~~Previously filed.~~

(b) 3. Exhibits:


3.1		Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1(i) to our Form 10-Q filed on August 13, 2002, File No. 1-10762.)


3.2		Restated Bylaws as of May 17, 2007. (Incorporated by reference to Exhibit 3.1 to our Form 8-K filed on ~~April~~May 23, 2007, File No. 1-10762.)


4.1		Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to our Form 10-K filed on March 17, 2008, File No. 1-10762.)


4.2		Certificate of Designation, Rights and Preferences of the Series B Preferred Stock of Benton Oil and Gas Company, filed May 12, 1995. (Incorporated by reference to Exhibit 4.1 to our Form 10-Q filed on May 13, 2002, File No. 1-10762.)


4.3		Third Amended and Restated Rights Agreement, dated as of August 23, 2007, between Harvest Natural Resources, Inc. and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 99.3 to our Form 8-A filed on October 23, 2007, File No. 1-10762.)

	4.4		Indenture dated as of February 17, 2010, between Harvest Natural Resources, Inc. and U.S. Bank National Association, as trustee. (Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on February 18, 2010, File No. 1-10762.)

	4.5		First Supplemental Indenture dated as of February 17, 2010 between Harvest Natural Resources, Inc. and U.S. Bank National Association, as trustee. (Incorporated by reference to Exhibit 4.2 to our Form 8-K filed on February 18, 2010, File No. 1-10762.)



10.3^†		Form of Indemnification Agreement between Harvest Natural Resources, Inc. and each Director and Executive Officer of the Company. (Incorporated by reference to Exhibit 10.19 to our Form 10-K filed on February 23, 2005, File No. 1-10762.)


10.4		Form of 2004 Long Term Stock Incentive Plan Stock Option Agreement. (Incorporated by reference to Exhibit 10.20 to our Form 10-K filed on February 23, 2005, File No. 1-10762.)


10.5		Form of 2004 Long Term Stock Incentive Plan Director Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.21 to our Form 10-K filed on February 23, 2005, File No. 1-10762.)


10.6		Form of 2004 Long Term Stock Incentive Plan Employee Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.22 to our Form 10-K filed on February 23, 2005, File No. 1-10762.)

~~10.7~~^†		Employment Agreement dated September 12, 2005 between Harvest Natural Resources, Inc. and Steven W. Tholen. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.)

~~10.8~~10.7^†		Employment Agreement dated September 12, 2005 between Harvest Natural Resources, Inc. and Karl L. Nesselrode. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.)


~~10.9~~10.8^†		Employment Agreement dated September 15, 2005 between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on October 27, 2005, File No. 1-10762.)


~~10.10~~10.9^†		Stock Option Agreement dated September 15, 2005, between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.24 to our Form 10-K filed on February 27, 2006, File No. 1-10762.)


~~10.11~~10.10^†		Stock Option Agreement dated September 15, 2005, between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.25 to our Form 10-K filed on February 27, 2006, File No. 1-10762.)


~~10.12~~10.11^†		Stock Option Agreement dated September 26, 2005, between Harvest Natural Resources, Inc. and Byron A. Dunn. (Incorporated by reference to Exhibit 10.26 to our Form 10-K filed on February 27, 2006, File No. 1-10762.)

~~10.13~~^†		Employment Agreement dated February 10, 2006 between Harvest Natural Resources, Inc. and Kurt A. Nelson. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on April 20, 2006, File No. 1-10762.)

~~10.14~~10.12		Harvest Natural Resources 2006 Long Term Incentive Plan. (Incorporated by reference to Exhibit 4.5 to our Registration Statement on Form S-8 filed on June 1, 2006 [Registration Statement No. 333-134630].)


~~10.15~~10.13		Form of 2006 Long Term Incentive Plan Stock Option Agreement. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.)


~~10.16~~10.14		Form of 2006 Long Term Incentive Plan Director Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.)



~~10.18~~10.16^†		Stock Unit Award Agreement dated September 15, 2005 between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.)


~~10.19~~10.17^†		Stock Unit Award Agreement dated March 2, 2006 between Harvest Natural Resources, Inc. and James A. Edmiston. (Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.)

~~10.20~~		Note Payable agreement dated November 20, 2006 between Harvest Vinccler, C.A. and Banesco Banco Universal C.A. related to a principal amount of 120 billion Bolivars with interest at 10.0 percent, for refinancing of the SENIAT assessments and operating requirements. (Incorporated by reference to Exhibit 10.32 to our Form 10-K filed on March 13, 2007, File No. 1-10762.)

~~10.21~~10.18		Form of 2006 Long Term Incentive Plan Stock Option Agreement — Five Year Vesting, Seven Year Term. (Incorporated by reference to Exhibit 10.33 to our Form 10-K filed on March 13, 2007, File No. 1-10762.)


~~10.22~~10.19		Amendment to Harvest Natural Resources 2006 Long Term Incentive Plan adopted July 19, 2006. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on May 3, 2007, File No. 1-10762.)


~~10.23~~10.20^†		Employment Agreement dated May 7, 2007 between Harvest Natural Resources, Inc. and Keith L. Head. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on July 25, 2007, File No. 1-10762.)


~~10.24~~10.21^†		Stock Option Agreement dated May 7, 2007 between Harvest Natural Resources, Inc. and Keith L. Head. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on July 25, 2007, File No. 1-10762.)


~~10.25~~10.22^†		Employee Restricted Stock Agreement dated May 7, 2007 between Harvest Natural Resources, Inc. and Keith L. Head. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on July 25, 2007, File No. 1-10762.)

~~10.26~~^†		Consulting Agreement dated July 16, 2007 between Harvest Natural Resources, Inc. and Kerry R. Brittain. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on July 25, 2007, File No. 1-10762.)

~~10.27~~10.23		Contract for Conversion to a Mixed Company between Corporación Venezolana del Petróleo, S.A., Harvest-Vinccler, S.C.A. and HNR Finance B.V. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on November 1, 2007, File No. 1-10762.)


~~10.28~~10.24^†		~~Separation~~Employment Agreement dated ~~November 16, 2007~~April 14, 2008 between Harvest Natural Resources, Inc. and ~~Byron A. Dunn.~~Patrick R. Oenbring. (Incorporated by reference to Exhibit ~~10.28~~10.1 to our Form ~~10-K~~10-Q filed on ~~March 17,~~May 1, 2008, File No. 1-10762.)


~~21.1~~10.25^†		~~List of subsidiaries.~~Stock Option Agreement dated April 14, 2008 between Harvest Natural Resources, Inc. and Patrick R. Oenbring. (Incorporated by reference to Exhibit ~~21.1~~10.2 to our Form ~~10-K~~10-Q filed on ~~March 17,~~May 1, 2008, File No. 1-10762.)


~~23.1~~10.26^†		~~Consent of PricewaterhouseCoopers LLP — Houston.~~Employee Restricted Stock Agreement dated April 14, 2008 between Harvest Natural Resources, Inc. and Patrick R. Oenbring. (Incorporated by reference to Exhibit ~~23.1~~10.3 to our Form ~~10-K~~10-Q filed on ~~March 17,~~May 1, 2008, File No. 1-10762.)

	10.27^†		Employment Agreement dated May 19, 2008 between Harvest Natural Resources, Inc. and Stephen C. Haynes. (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on August 7, 2008, File No. 1-10762.)

~~23.2~~	10.28^†		Stock Option Agreement dated May 19, 2008 between Harvest Natural Resources, Inc. and Stephen C. Haynes. (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on August 7, 2008, File No. 1-10762.)

	10.29^†		Employee Restricted Stock Agreement dated May 19, 2008 between Harvest Natural Resources, Inc. and Stephen C. Haynes. (Incorporated by reference to Exhibit 10.3 to our Form 10-Q filed on August 7, 2008, File No. 1-10762.)

	10.30^†		Employment Agreement dated May 19, 2008 between Harvest Natural Resources, Inc. and G. Michael Morgan. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on August 7, 2008, File No. 1-10762.)

	10.31^†		Stock Option Agreement dated May 19, 2008 between Harvest Natural Resources, Inc. and G. Michael Morgan. (Incorporated by reference to Exhibit 10.5 to our Form 10-Q filed on August 7, 2008, File No. 1-10762.)

	10.32^†		Employee Restricted Stock Agreement dated May 19, 2008 between Harvest Natural Resources, Inc. and G. Michael Morgan. (Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on August 7, 2008, File No. 1-10762.)

	10.33		Placement Agent Agreement dated February 10, 2010, by and among Harvest Natural Resources, Inc., as issuer, and Lazard Capital Markets LLC and Madison Williams and Company LLC, as placement agents, relating to the 8.25% Senior Convertible Notes due 2013. (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on February 11, 2010, File No. 1-10762.)

	10.34		Form of Standard Subscription Agreement, to be entered into by and among Harvest Natural Resources, Inc. and certain purchasers signatory thereto. (Incorporated by reference to Exhibit 10.2 to our Form 8-K filed on February 11, 2010, File No. 1-10762.)

	10.35		Form of Subscription Agreement, to be entered into by and among Harvest Natural Resources, Inc. and certain purchasers signatory thereto. (Incorporated by reference to Exhibit 10.3 to our Form 8-K filed on February 11, 2010, File No. 1-10762.)

	21.1		List of subsidiaries.

	23.1		Consent of ~~Espiñeira, Sheldon y Asociados.~~PricewaterhouseCoopers LLP.


~~23.3~~23.2		Consent of Ryder Scott Company, LP. ~~(Incorporated by reference to Exhibit 23.2 to our Form 10-K filed on March 17, 2008, File No. 1-10762.)~~

	23.3		Consent of HLB PGFA Perales, Pistone & Asociados — Caracas, Venezuela.

	31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 executed by James A. Edmiston, President and Chief Executive Officer.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Harvest Natural Resources, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)1 present fairly, in all material respects, the financial position of Harvest Natural Resources, Inc. and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing as Schedule II in Item 15(a)2 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for noncontrolling interests effective January 1, 2009. As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it estimates the quantities of proved oil and natural gas reserves in 2009.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

S-1

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	December 31,
	2009			2008
	*(in thousands, except per share data)*
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	32,317		$	97,165
Accounts and notes receivable, net		11,478			11,570
Advances to equity affiliate		4,927			3,732
Prepaid expenses and other		2,214			3,964

TOTAL CURRENT ASSETS		50,936			116,431

OTHER ASSETS		3,613			3,316
INVESTMENT IN EQUITY AFFILIATES		233,989			218,982
PROPERTY AND EQUIPMENT:
Oil and gas properties (successful efforts method)		58,543			22,328
Other administrative property		3,085			2,368

		61,628			24,696
Accumulated depreciation and amortization		(1,387	)		(1,159	)

		60,241			23,537

	$	348,779		$	362,266

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable, trade and other	$	696		$	1,662
Advance from equity affiliate		—			20,750
Accrued expenses		10,253			12,241
Accrued interest		4,691			4,691
Income taxes payable		1,090			77

TOTAL CURRENT LIABILITIES		16,730			39,421

ASSET RETIREMENT LIABILITY		50			—

COMMITMENTS AND CONTINGENCIES		—			—

EQUITY
STOCKHOLDERS’ EQUITY:
Preferred stock, par value $0.01 a share; authorized 5,000 shares; outstanding, none		—			—
Common stock, par value $0.01 a share; authorized 80,000 shares at December 31, 2009 and 2008; issued 39,495 shares and 39,128 shares at December 31, 2009 and 2008, respectively		395			391
Additional paid-in capital		213,337			208,868
Retained earnings		126,244			129,351
Treasury stock, at cost, 6,448 shares and 6,444 shares at December 31, 2009 and 2008, respectively		(65,383	)		(65,368	)

TOTAL HARVEST STOCKHOLDERS’ EQUITY		274,593			273,242
NONCONTROLLING INTEREST		57,406			49,603

TOTAL EQUITY		331,999			322,845

	$	348,779		$	362,266

See accompanying notes to consolidated financial statements.

S-2

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2009			2008			2007
	*(in thousands, except per share data)*
Revenues
Oil sales	$	160		$	—		$	11,217	*
Gas sales		21			—			—

		181			—			11,217


Expenses
Depletion, depreciation and amortization		436			201			384
Exploration expense		7,824			16,402			850
Dry hole costs		—			10,828			—
General and administrative		21,854			27,215			29,096
Taxes other than on income		1,026			(206	)		423

		31,140			54,440			30,753


Loss from Operations		(30,959	)		(54,440	)		(19,536	)
Other Non-Operating Income (Expense)
Gain on Financing Transactions		—			3,421			49,623
Investment earnings and other		1,085			3,663			9,051
Interest expense		(5	)		(1,730	)		(8,224	)

		1,080			5,354			50,450


Income (Loss) from Consolidated Companies Before Income Taxes		(29,879	)		(49,086	)		30,914
Income Tax Expense		1,182			25			6,312

Income (Loss) from Consolidated Companies		(31,061	)		(49,111	)		24,602
Net Income from Unconsolidated Equity Affiliates		35,757			34,576			55,297

Net Income (Loss)		4,696			(14,535	)		79,899

Less: Net Income Attributable to Noncontrolling Interest		7,803			6,929			19,781


Net Income (Loss) Attributable to Harvest	$	(3,107	)	$	(21,464	)	$	60,118


Net Income (Loss) Attributable to Harvest Per Common Share:
Basic	$	(0.09	)	$	(0.63	)	$	1.65

Diluted	$	(0.09	)	$	(0.63	)	$	1.59


*		Recognition of deferred revenue in 2007 – See Note 1 – Organization and Summary of Significant Accounting Policies – Revenue Recognition.

See accompanying notes to consolidated financial statements.

S-3

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)


	Common				Additional								Non-
	Shares		Common		Paid-in		Retained			Treasury			Controlling			Total
	Issued		Stock		Capital		Earnings			Stock			Interest			Equity
Balance at January 1, 2007		37,974	$	380	$	194,176	$	90,697		$	(3,844	)	$	37,765		$	319,174

Issuance of common shares:
Exercise of stock options		402		4		1,934		—			—			—			1,938
Employee stock-based compensation		137		1		5,828		—			—			—			5,829
Purchase of Treasury Shares		—		—		—		—			(32,647	)		—			(32,647	)
Net Income		—		—		—		60,118			—			19,781			79,899


Balance at December 31, 2007		38,513		385		201,938		150,815			(36,491	)		57,546			374,193

Issuance of common shares:
Exercise of stock options		547		5		1,560		—			—			—			1,565
Employee stock-based compensation		68		1		5,370		—			—			—			5,371
Purchase of Treasury Shares		—		—		—		—			(28,877	)		—			(28,877	)
Distribution to noncontrolling Interests		—		—		—		—			—			(14,872	)		(14,872	)
Net Income (Loss)		—		—		—		(21,464	)		—			6,929			(14,535	)


Balance at December 31, 2008		39,128		391		208,868		129,351			(65,368	)		49,603			322,845

Issuance of common shares:
Exercise of stock options		205		2		384		—			—			—			386
Employee stock-based compensation		162		2		4,085		—			—			—			4,087
Purchase of Treasury Shares		—		—		—		—			(15	)		—			(15	)
Net Income (Loss)		—		—		—		(3,107	)		—			7,803			4,696


Balance at December 31, 2009		39,495	$	395	$	213,337	$	126,244		$	(65,383	)	$	57,406		$	331,999

See accompanying notes to consolidated financial statements.

S-4

HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Years Ended December 31,
	2009			2008			2007
				*(in thousands)*
Cash Flows From Operating Activities:
Net income (loss)	$	4,696		$	(14,535	)	$	79,899
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depletion, depreciation and amortization		436			201			384
Dry hole costs		—			10,828			—
Gain on financing transactions		—			(3,421	)		(49,623	)
Net income from unconsolidated equity affiliates		(35,757	)		(34,576	)		(55,297	)
Non-cash compensation related charges		4,087			6,061			6,108
Deferred income taxes		—			—			5,608
Dividend received from equity affiliate		—			72,530			—
Changes in operating assets and liabilities:
Accounts and notes receivable		92			548			393
Advances to equity affiliate		(1,195	)		12,620			2,794
Prepaid expenses and other		(1,055	)		(5,632	)		214
Accounts payable		(966	)		(2,957	)		2,122
Accounts payable, related party		—			(10,093	)		456
Advance from equity affiliate		—			20,750			—
Accrued expenses		(6,296	)		(1,073	)		(1,251	)
Accrued interest		—			(445	)		(1,714	)
Deferred revenue		—			—			(11,217	)
Income taxes payable		1,013			(426	)		469

Net Cash Provided By (Used In) Operating Activities		(34,945	)		50,380			(20,655	)

Cash Flows from Investing Activities:
Additions of property and equipment		(28,022	)		(26,317	)		(647	)
Investments in equity affiliates		—			(2,161	)		(7,388	)
(Increase) decrease in restricted cash		—			6,769			82,120
Investment costs		(581	)		(1,346	)		(4,125	)

Net Cash Provided By (Used In) Investing Activities		(28,603	)		(23,055	)		69,960

Cash Flows from Financing Activities:
Net proceeds from issuances of common stock		386			1,565			1,938
Purchase of treasury stock		—			(29,416	)		(32,755	)
Financing costs		(1,686	)		(1,075	)		—
Payments of note payable		—			(7,211	)		(45,726	)
Dividend paid to minority interest		—			(14,864	)		—

Net Cash Used In Financing Activities		(1,300	)		(51,001	)		(76,543	)

Net Decrease in Cash and Cash Equivalents		(64,848	)		(23,676	)		(27,238	)
Cash and Cash Equivalents at Beginning of Year		97,165			120,841			148,079

Cash and Cash Equivalents at End of Year	$	32,317		$	97,165		$	120,841

Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest expense	$	5		$	768		$	7,972

Cash paid during the year for income taxes	$	169		$	456		$	201

See accompanying notes to consolidated financial statements.

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HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 — Organization and Summary of Significant Accounting Policies

Harvest Natural Resources, Inc. (“Harvest”) is an independent energy company engaged in the acquisition, exploration, development, production and disposition of oil and natural gas properties since 1989, when it was incorporated under Delaware law. We have significant interests in the Bolivarian Republic of Venezuela (“Venezuela”) through our ownership in Petrodelta, S.A. (“Petrodelta”). HNR Finance B.V. (“HNR Finance”) has a 40 percent ownership interest in Petrodelta. As we indirectly own 80 percent of HNR Finance, we indirectly own a net 32 percent interest in Petrodelta, and our partner, Oil & Gas Technology Consultants (Netherlands) Coöperatie U.A., a controlled affiliate of Venezolana de Inversiones y Construcciones Clerico, C.A. (“Vinccler”), indirectly owns the remaining eight percent equity interest. Corporación Venezolana del Petroleo S.A. (“CVP”) owns the remaining 60 percent of Petrodelta. Petrodelta is governed by its own charter and bylaws. We have exploration acreage in the Gulf Coast Region of the United States, the Antelope prospect in the Western United States, mainly onshore in West Sulawesi in the Republic of Indonesia (“Indonesia”), offshore of the Republic of Gabon (“Gabon”), onshore in the Sultanate of Oman (“Oman”), and offshore of the People’s Republic of China (“China”). We also have production from the Monument Butte project in the Antelope prospect. SeeNote 8 – United States, Note 9 – Indonesia,Note 10 – Gabon, Note 11 – OmanandNote 12 – China.

Principles of Consolidation

The consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries. All intercompany profits, transactions and balances have been eliminated.

Investment in Equity Affiliates

Investments in unconsolidated companies in which we have less than a 50 percent interest and have significant influence are accounted for under the equity method of accounting. Investment in Equity Affiliates is increased by additional investments and earnings and decreased by dividends and losses. We review our Investment in Equity Affiliates for impairment whenever events and circumstances indicate a decline in the recoverability of its carrying value.

Reporting and Functional Currency

The United States Dollar (“U.S. Dollar”) is our reporting and functional currency. Amounts denominated in non-U.S. Dollar currencies are re-measured in U.S. Dollars, and all currency gains or losses are recorded in the consolidated statement of operations. We attempt to manage our operations in such a manner as to reduce our exposure to foreign exchange losses. However, there are many factors that affect foreign exchange rates and resulting exchange gains and losses, many of which are beyond our influence.

The U.S. Dollar is the reporting and functional currency for all of our controlled subsidiaries and Petrodelta.

Revenue Recognition

Until March 31, 2006, each quarter, Harvest Vinccler, S.C.A. (“Harvest Vinccler”) invoiced Petroleos de Venezuela S.A. (“PDVSA”), based on barrels of oil accepted by PDVSA during the quarter, using quarterly adjusted U.S. Dollar contract service fees per barrel. With the formation of Petrodelta in 2007, Harvest Vinccler recognized deferred revenue of $11.2 million for 2005 and first quarter 2006 deliveries that had been deferred pending clarification on the calculation of crude prices under a transitory agreement signed in August 2005 between Harvest Vinccler and PDVSA.

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Cash and Cash Equivalents

Cash equivalents include money market funds and short term certificates of deposit with original maturity dates of less than three months.

Fair Value Measurements

We adopted the accounting standard for fair value measurements for financial assets as of January 1, 2008 and for non-financial assets and liabilities as of January 1, 2009. This standard provides guidance for using fair value to measure assets and liabilities. This standard also clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability and establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The standard applies whenever other standards require assets or liabilities to be measured at fair value. The adoption of this standard had no impact on our consolidated financial position, results of operations or cash flows.

At December 31, 2009 and 2008, cash and cash equivalents include $26.8 million and $88.6 million, respectively, in a money market fund comprised of high quality, short term investments with minimal credit risk which are reported at fair value. The fair value measurement of these securities is based on quoted prices in active markets for identical assets which are defined as “Level 1” of the fair value hierarchy based on the criteria in the accounting standard for fair value measurements.

Credit Risk and Operations

All of our total consolidated revenues in 2007 related to operations in Venezuela. Petrodelta’s sole source of revenues for its production is PDVSA Petroleo S.A. (“PPSA”), a 100 percent owned subsidiary of PDVSA, which maintains full ownership of all hydrocarbons in its fields. The sale of oil and natural gas by Petrodelta to the Venezuelan government is pursuant to a Contract for Sale and Purchase of Hydrocarbons with PPSA which was signed on January 17, 2008.

Accounts and Notes Receivable

Notes receivable relate to prospect leasing cost financing arrangements, bear interest and can have due dates that are less than one year or more than one year. Amounts outstanding under the notes bear interest at a rate based on the current prime rate and are recorded at face value. Interest is recognized over the life of the note. We may or may not require collateral for the notes.

Each note is analyzed to determine if it is impaired pursuant to the accounting standard for accounting by creditors for impairment of a loan. A note is impaired if it is probable that we will not collect all principal and interest contractually due. We do not accrue interest when a note is considered impaired. All cash receipts on impaired notes are applied to reduce the accrued interest on the note until the interest is made current and, thereafter, applied to reduce the principal amount of such notes.

During the year ended December 31, 2008, we reclassified $2.7 million of prepaid land costs for the Antelope project to notes receivable. The note is due in less than one year and bears interest at a rate of 12 percent and is secured by a revenue interest in a well currently being evaluated. At December 31, 2009, notes receivable plus accrued interest was approximately $3.3 million.

Other Assets

Other assets consist of investigative costs associated with new business development projects. These costs are reclassified to oil and natural gas properties or expensed depending on management’s assessment of the likely outcome

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of the project. During the year ended December 31, 2009, $1.4 million was reclassified to oil and gas properties and $1.7 million was reclassified to exploration expense. During the year ended December 31, 2008, $3.8 million was reclassified to oil and gas properties and $1.2 million was reclassified to exploration expense.

Property and Equipment

The major components of property and equipment at December 31 are as follows (in thousands):


	2009			2008
Proved property costs	$	1,646		$	—
Unproved property costs		54,111			20,960
Oilfield inventories		2,786			1,368
Furniture and fixtures		3,085			2,368

		61,628			24,696
Accumulated depletion, impairment and depreciation		(1,387	)		(1,159	)

	$	60,241		$	23,537

Properties and equipment are stated at cost less accumulated depletion, depreciation and amortization (“DD&A”). Costs of improvements that appreciably improve the efficiency or productive capacity of existing properties or extend their lives are capitalized. Maintenance and repairs are expensed as incurred. Upon retirement or sale, the cost of properties and equipment, net of the related accumulated DD&A, is removed and, if appropriate, gains or losses are recognized in investment earnings and other.

We follow the successful efforts method of accounting for our oil and gas properties. Under this method, exploration costs such as exploratory geological and geophysical costs, delay rentals and exploration overhead are charged against earnings as incurred. Costs of drilling exploratory wells are capitalized pending determination of whether proved reserves can be attributed to the area as a result of drilling the well. If management determines that commercial quantities of hydrocarbons have not been discovered, capitalized costs associated with exploratory wells are charged to exploration expense. During the year ended December 31, 2008, we charged to exploration expense $10.8 million of exploratory well costs associated with the Harvest Hunter #1. Costs of drilling successful exploratory wells, all development wells, and related production equipment and facilities are capitalized and depleted or depreciated using the unit-of-production method as oil and gas is produced. Depletion expense, which was all attributable to the Monument Butte project, for the year ended December 31, 2009, was $0.03 million ($6.59 per equivalent barrel).

Leasehold acquisition costs are initially capitalized. Acquisition costs of unproved leaseholds are assessed for impairment during the holding period and transferred to proved oil and gas properties to the extent associated with successful exploration activities. Costs of maintaining and retaining undeveloped leaseholds, as well as amortization and impairment of unsuccessful leases, are included in exploration expense. Costs of expired or abandoned leases are charged to exploration expense, while costs of productive leases are transferred to proved oil and gas properties.

Proved oil and gas properties are reviewed for impairment at a level for which identifiable cash flows are independent of cash flows of other assets when facts and circumstances indicate that their carrying amounts may not be recoverable. In performing this review, future net cash flows are determined based on estimated future oil and gas sales revenues less future expenditures necessary to develop and produce the reserves. If the sum of these undiscounted estimated future net cash flows is less than the carrying amount of the property, an impairment loss is recognized for the excess, if any, of the property’s carrying amount over its estimated fair value, which is generally based on discounted future net cash flows. No impairment of proved oil and gas properties was required in 2009.

Costs of drilling and equipping successful exploratory wells, development wells, asset retirement liabilities and costs to construct or acquire offshore platforms and other facilities, are depreciated using the unit-of-production method based on total estimated proved developed reserves. Costs of acquiring proved properties, including leasehold acquisition costs transferred from unproved leaseholds, are depleted using the unit-of-production method

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based on total estimated proved reserves. All other properties are stated at historical acquisition cost, net of allowance for impairment, and depreciated using the straight-line method over the useful lives of the assets.

Undeveloped property costs, including oilfield inventories, consist of $3.1 million for West Bay, $36.4 million for Mesaverde, $2.0 million for the Budong-Budong production sharing contract (“Budong PSC”), $6.9 million for the Dussafu Marin exploration production sharing contract (“Dussafu PSC”), $3.8 million for the Oman exploration and production sharing agreement (“Block 64 EPSA”), $3.0 million for WAB-21, and $1.7 million for other projects.

Depreciation of furniture and fixtures is computed using the straight-line method with depreciation rates based upon the estimated useful life of the property, generally 5 years. Leasehold improvements are depreciated over the life of the applicable lease. Depreciation expense was $0.4 million, $0.2 million and $0.4 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Reserves

In December 2008, the SEC issued its final rule, Modernization of Oil and Gas Reporting, which is effective for reporting 2009 reserve information. In January 2010, the Financial Accounting Standards Board (“FASB”) issued its authoritative guidance on extractive activities for oil and gas to align its requirements with the SEC’s final rule. We adopted the guidance as of December 31, 2009 in conjunction with our year-end reserve report as a change in accounting principle that is inseparable from a change in accounting estimate. Such a change is accounted for prospectively under the authoritative accounting guidance. Comparative disclosures applying the new for periods before the adoption of the FASB’s final rule are not required.

The adoption of the FASB’s final rule on December 31, 2009 impacted our financial statements and other disclosures in our Annual Report on Form 10-K for the year ended December 31, 2009, as follows:

All oil and gas reserves volumes presented as of and for the year ended December 31, 2009 were prepared using the updated reserves rules and are not on a basis comparable with prior periods. The change in comparability occurred because the FASB’s final rule requires the use of the unweighted 12-month average of the first-day-of-the-month reference price for the prior twelve month period and permits the use of reliable technologies to support reserve estimates. Under the previous reserve estimation rules, which are no longer in effect, our reserves would have been calculated using end of period prices.

The impairment review of our proved oil and gas properties used undiscounted estimated future net cash flows models for our estimated proved developed reserves which were calculated using the FASB’s final rule.

We historically have applied a policy of using our year-end proved reserves to calculate our fourth quarter depletion rate. As a result, the estimate of proved reserves for determining our deletion rate and resulting expense for the fourth quarter of 2009 is not on a basis comparable to the prior quarters of prior years.

The impact of the adoption of the FASB’s final rule on our financial statements is not practicable to estimate due to the operational and technical challenges associated with calculating a cumulative effect of adoption by preparing reserve reports under both the old and new rules.

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forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Ryder Scott is an independent firm of petroleum engineers, geologists, geophysicists and petrophysicists; they do not own an interest in our properties and are not employed on a contingent fee basis.

Asset Retirement Liability

The accounting for asset retirement obligations standard requires entities to record the fair value of a liability for a legal obligation to retire an asset in the period in which the liability is incurred if a reasonable estimate of fair value can be made. No wells were abandoned in the year ended December 31, 2009. Changes in asset retirement obligations during the year ended December 31, 2009 were as follows (in thousands):


	December 31,
	2009
Asset retirement obligations beginning of period	$	—
Liabilities recorded during the period		50
Liabilities settled during the period		—
Revisions in estimated cash flows		—
Accretion expense		—

Asset retirement obligations end of period	$	50

Income Taxes

Deferred income taxes reflect the net tax effects, calculated at currently enacted rates, of (a) future deductible/taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements or income tax returns, and (b) operating loss and tax credit carryforwards. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized. With the formation of Petrodelta, Harvest Vinccler recognized the deferred tax related to the deferred revenue discussed above.

Financial Instruments

Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are placed with commercial banks with high credit ratings. This diversified investment policy limits our exposure both to credit risk and to concentrations of credit risk.

Noncontrolling Interests

We adopted the accounting standard for noncontrolling interests in consolidated financial statements as of January 1, 2009. This standard establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This standard also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interest of the parent and the interests of the noncontrolling owner. The retrospective adoption of this standard impacted the presentation of our consolidated financial position, results of operations and cash flows.

New Accounting Pronouncements

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In June 2009, the FASB issued an accounting standard that codifies and modifies the hierarchy of generally accepted accounting principles. This standard is the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This standard superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in this standard is now nonauthoritative. This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard did not have an impact on our consolidated financial position, results of operations or cash flows.

In December 2009, the FASB issued its final updates to oil and gas accounting rules to align the oil and gas reserve estimation and disclosure requirements of Extractive Industries – Oil and Gas (Topic 932) with the requirements in the SEC’s final rule,Modernization of the Oil and Gas Reporting Requirements,which was issued on December 31, 2008 and is effective for the year ended December 31, 2009. We have complied with the disclosure requirements in our Annual Report on Form 10-K for the year ended December 31, 2009.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil and natural gas reserve volumes and future development costs. Actual results could differ from those estimates.

Reclassifications

Certain items in 2008 have been reclassified to conform to the 2009 financial statement presentation.

Note 2 — Long-Term Debt and Liquidity

In November 2006, Harvest Vinccler entered into a three-year term loan with a Venezuelan bank to pay the SENIAT, the Venezuelan income tax authority, income tax assessments and related interest, refinance a portion of a 105 million Venezuela Bolivar (“Bolivar”) loan and to fund operating requirements. The loan was collateralized by a $6.8 million deposit plus interest in a U.S. bank. On July 9, 2008, the loan was repaid in full and the cash collateral returned to us. We have no other debt obligations.

We have incurred $2.8 million in costs related to ongoing negotiations for a future financing. If successful, these costs will be amortized over the life of the financial instrument.

Liquidity— Based on our cash balance of $32.3 million at December 31, 2009, we will be required to raise additional funds in order to fund our future operating and capital expenditures. As we disclosed in previous filings, our cash is being used to fund oil and gas exploration projects and to a lesser extent general and administrative costs. Currently, our primary source of cash is dividends from Petrodelta. However, there is no certainty that

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Petrodelta will pay dividends in 2010 or 2011. Our lack of cash flow and the unpredictability of cash dividends from Petrodelta could make it difficult to obtain financing, and accordingly, there is no assurance adequate financing can be raised. We continue to pursue, as appropriate, additional actions designed to generate liquidity including seeking of financing sources, accessing equity and debt markets, exploration of our properties worldwide, and cost reductions. In addition, we could delay discretionary capital spending to future periods or sell assets as necessary to maintain the liquidity required to run our operations, if necessary. There can be no assurances that any of these possible efforts will be successful or adequate, and if they are not, our financial condition and liquidity could be materially adversely affected.

Note 3 — Commitments and Contingencies

We have employment contracts with seven executive officers which provide for annual base salaries, eligibility for bonus compensation and various benefits. The contracts provide for a lump sum payment as a multiple of base salary in the event of termination of employment without cause. In addition, these contracts provide for payments as a multiple of base salary and bonus, excise tax reimbursement, outplacement services and a continuation of benefits in the event of termination without cause following a change in control. By providing one year notice, these agreements may be terminated by either party on or after May 31, 2010.

In April 2004, we signed a ten-year lease for office space in Houston, Texas, for approximately $17,000 per month. In December 2008, we signed a five-year lease for additional office space in Houston, Texas, for approximately $15,000 per month. In November 2008, Harvest Vinccler extended its lease for office space in Caracas, Venezuela for two years for approximately $10,000 per month. In August 2008, we signed a two-year lease in Roosevelt, Utah for approximately $6,000 per month. In October 2008, we signed a two-year lease for office space in Singapore for approximately $19,000 per month. In April 2009, we signed a two-year lease for office space in Indonesia for approximately $5,000 per month. In September 2009, we signed a two-year lease for office space in Oman for approximately $5,000 per month. In November 2009, we signed a one-year lease for office space in London for approximately $24,000 per month. We do not have any long-term contractual commitments for any of our projects.

Uracoa Municipality Tax Assessments. Our Venezuelan subsidiary, Harvest Vinccler, has received nine assessments from a tax inspector for the Uracoa municipality in which part of the Uracoa, Tucupita and Bombal fields are located as follows:

Three claims were filed in July 2004 and allege a failure to withhold for technical service payments and a failure to pay taxes on the capital fee reimbursement and related interest paid by PDVSA under the Operating Service Agreement (“OSA”). Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss one of the claims and has protested with the municipality the remaining claims.

Two claims were filed in July 2006 alleging the failure to pay taxes at a new rate set by the municipality. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on these claims.

Two claims were filed in August 2006 alleging a failure to pay taxes on estimated revenues for the second quarter of 2006 and a withholding error with respect to certain vendor payments. Harvest Vinccler has filed a protest with the Tax Court in Barcelona, Venezuela, on one claim and filed a protest with the municipality on the other claim.

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Two claims were filed in March 2007 alleging a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a protest with the municipality on these claims.

Two claims were filed in June 2007. One claim relates to the period 2003 through 2006 and seeks to impose a tax on interest paid by PDVSA under the OSA. The second claim alleges a failure to pay taxes on estimated revenues for the third and fourth quarters of 2006. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims.

Two claims were filed in July 2007 seeking to impose penalties on tax assessments filed and settled in 2004. Harvest Vinccler has filed a motion with the Tax Court in Barcelona, Venezuela, to enjoin and dismiss both claims.

In June 2007, the SENIAT issued an assessment for taxes in the amount of $0.4 million for Harvest Vinccler’s failure to withhold VAT from vendors during 2005. Also, the SENIAT imposed penalties and interest in the amount of $1.3 million for Harvest Vinccler’s failure to withhold VAT. In July 2008, the SENIAT adjusted the assessment for penalties and interest to the change in tax units as mandated by the Venezuelan tax code and issued a new assessment for $2.3 million. The change in assessment resulted in an additional $1.0 million expense recorded in the year ended December 31, 2008. In August 2008, Harvest Vinccler filed an appeal in the tax courts and presented a proposed settlement with the SENIAT. In October 2008, after consideration of our proposed settlement, the SENIAT offered a counter-proposal which Harvest Vinccler accepted. Throughout 2009, the General Attorney Office and Harvest-Vinccler agreed several times to resuspend the case while the Finance Minister and the SENIAT confirmed their acceptance to the proposed settlement. On December 30, 2009, Harvest Vinccler settled the case for 3.1 million Bolivars (approximately $1.4 million) for penalties and interest and closed the case with the SENIAT’s concurrence. As a result of the settlement, in December 2009, Harvest Vinccler reversed $0.9 million of accrued penalties and interest previously accrued based on notices received from the SENIAT.

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Note 4 — Taxes

Taxes Other Than on Income

The components of taxes other than on income were (in thousands):


	2009		2008			2007
Franchise taxes	$	182	$	(951	)	$	166
Severance taxes		11		—			—
Payroll and other taxes		833		745			257

	$	1,026	$	(206	)	$	423

During the year ended December 31, 2008, we reversed a $1.1 million franchise tax provision that is no longer required.

Taxes on Income

The tax effects of significant items comprising our net deferred income taxes as of December 31, 2009, are as follows (in thousands):


	2009			2008
Deferred tax assets:
Operating loss carryforwards	$	15,599		$	7,547
Dry hole costs		—			4,060
Stock options		1,426			1,680
Valuation allowance		(17,025	)		(7,841	)

Net deferred tax asset		—			5,446

Deferred tax liability:
Tax on undistributed earnings		—			(5,446	)

Net deferred tax asset (liability)	$	—		$	—

We currently have undistributed earnings from foreign affiliates of $5.9 million at our Netherlands Antilles subsidiary, HNR Energia B.V. The full amount would be subject to United States income tax if distributed to us.

The valuation allowance increased by $9.2 million as a result of additional net operating losses and tax benefits that we do not expect to fully realize through future taxable income. Realization of deferred tax assets associated with net operating loss carryforwards is dependent upon generating sufficient taxable income prior to their expiration. Management anticipates that additional losses will be generated and that it is more likely than not that they will not be realized through future taxable income. Management further anticipates that any unremitted foreign earnings will be reinvested outside of the U.S.

The components of income before income taxes are as follows (in thousands):


	2009			2008			2007
Income (loss) before income taxes
United States	$	(22,357	)	$	(34,760	)	$	(17,786	)
Foreign		(7,522	)		(14,326	)		48,700

Total	$	(29,879	)	$	(49,086	)	$	30,914

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The provision (benefit) for income taxes consisted of the following at December 31, (in thousands):


	2009		2008			2007
Current:
United States	$	39	$	(128	)	$	400
Foreign		1,143		153			5,912

		1,182		25			6,312
Deferred:
Foreign		—		—			—

	$	1,182	$	25		$	6,312

A comparison of the income tax expense (benefit) at the federal statutory rate to our provision for income taxes is as follows (in thousands):


	2009			2008			2007
Computed tax expense (benefit) at the statutory rate	$	(10,458	)	$	(17,180	)	$	10,820
Effect of foreign source income and rate differentials on foreign income		3,775			5,167			(11,140	)
Change in valuation allowance		9,184			6,059			1,085
Tax on undistributed earnings		—			5,446			—
Deemed income inclusion under Subpart F		—			968			12,942
Net operating loss utilization		—			—			(7,306	)
Foreign disregarded entities		21			(268	)		—
Return to accrual adjustment		(1,093	)		(166	)		—
Other		(247	)		(1	)		(89	)

Total income tax expense	$	1,182		$	25		$	6,312

Rate differentials for foreign income result from tax rates different from the U.S. tax rate being applied in foreign jurisdictions.

At December 31, 2009, we had, for federal income tax purposes, operating loss carryforwards of approximately $44.4 million, expiring in the years 2026 through 2029.

Accounting for Uncertainty in Income Taxes

Effective January 1, 2007, we adopted the interpretation for accounting for uncertainty in income taxes which was an interpretation of the accounting standard accounting for income taxes. This interpretation created a single model to address accounting for uncertainty in tax positions. This interpretation clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.

We or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2006. To date, the Internal Revenue Service (“IRS”) has not performed an examination of our U.S. income tax returns for 2006 through 2008.

We do not have any unrecognized tax benefits or loss contingencies.

Note 5 — Stock Option and Stock Purchase Plans

In May 2006, our shareholders approved the 2006 Long Term Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the issuance of up to 1,825,000 shares of our common stock in satisfaction of exercised stock options, stock appreciation rights (“SARs”) and restricted stock to eligible participants including employees, non-employee directors and consultants of our company or subsidiaries. Under the 2006 Plan, no more than 325,000 shares may be granted as restricted stock. No individual may be granted more than 900,000 options or SARs and no more than 175,000 shares of restricted stock during any period of three consecutive calendar years. The exercise price of stock options granted under the 2006 Plan must be no less than the fair market value of our common stock on the date of grant. All options granted through December 31, 2006 vest ratably over a three to five year period

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from their dates of grant and expire seven to ten years from grant date. Restricted stock granted to employees or consultants to date is subject to a restriction period of not less than 36 months during which the stock will be deposited with Harvest and is subject to forfeiture under certain circumstances. Restricted stock granted to non-employee directors vests as to one-third of the shares on each anniversary of the date of grant of the award provided that he is still a director on that date. The 2006 Plan also permits the granting of performance awards to eligible employees and consultants. Performance awards are paid only in cash and are based upon achieving established indicators of performance over an established period of time of at least one year. No employee or consultant shall be granted a performance award during a calendar year that could result in a cash payment of more than $5.0 million. In the event of a change in control, any restrictions on restricted stock will lapse, the indicators of performance under a performance award will be treated as having been achieved and any outstanding options and SARs will vest and become exercisable.

In May 2004, our shareholders approved the 2004 Long Term Incentive Plan (the “2004 Plan”). The 2004 Plan provides for the issuance of up to 1,750,000 shares of our common stock in satisfaction of exercised stock options, stock appreciation rights (“SARs”) and restricted stock to eligible participants including employees, non-employee directors and consultants of our company or subsidiaries. Under the 2004 Plan, no more than 438,000 shares may be granted as restricted stock, and no individual may be granted more than 110,000 shares of restricted stock or 438,000 in options over the life of the Plan. The exercise price of stock options granted under the 2004 Plan must be no less than the fair market value of our common stock on the date of grant. All options granted to date vest ratably over a three-year period from their dates of grant and expire ten years from grant date. Restricted stock granted to employees or consultants to date is subject to a restriction period of not less than 36 months during which the stock will be deposited with Harvest and is subject to forfeiture under certain circumstances. Restricted stock granted to non-employee directors vests as to one-third of the shares on each anniversary of the date of grant of the award provided that he is still a director on that date (as amended). The 2004 Plan also permits the granting of performance awards to eligible employees and consultants. Performance awards are paid only in cash and are based upon achieving established indicators of performance over an established period of time of at least one year. Performance awards granted under the Plan may not exceed $5.0 million in a calendar year and may not exceed $2.5 million to any one individual in a calendar year. In the event of a change in control, any restrictions on restricted stock will lapse, the indicators of performance under a performance award will be treated as having been achieved and any outstanding options and SARs will vest and become exercisable.

In July 2001, our shareholders approved the 2001 Long Term Stock Incentive Plan (the “2001 Plan”). The 2001 Plan provides for grants of options to purchase up to 1,697,000 shares of our common stock in the form of Incentive Stock Options and Non-Qualified Stock Options to eligible participants including employees of our company or subsidiaries, directors, consultants and other key persons. The exercise price of stock options granted under the 2001 Plan must be no less than the fair market value of our common stock on the date of grant. No officer may be granted more than 500,000 options during any one fiscal year, as adjusted for any changes in capitalization, such as stock splits. In the event of a change in control, all outstanding options become immediately exercisable to the extent permitted by the plan. All options granted to date vest ratably over a three-year period from their dates of grant and expire ten years from grant date.

Since 1989 we have adopted several other stock option plans under which options to purchase shares of our common stock have been granted to employees, officers, directors, independent contractors and consultants. Options granted under these plans have been at prices equal to the fair market value of the stock on the grant dates. Options granted under the plans are generally exercisable in varying cumulative periodic installments after one year and cannot be exercised more than ten years after the grant dates. Following the adoption of the 2001 Plan, no options may be granted under any of these plans.

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A summary of the status of our stock option plans as of December 31, 2009, 2008 and 2007 and changes during the years ending on those dates is presented below (shares in thousands):


	2009						2008						2007
	Weighted						Weighted						Weighted
	Average						Average						Average
	Exercise						Exercise						Exercise
	Price			Shares			Price			Shares			Price			Shares
Outstanding at beginning of the year:	$	8.54			3,783		$	7.80			4,172		$	7.70			4,123
Options granted		4.60			118			10.28			444			9.63			866
Options exercised		(2.11	)		(205	)		(2.86	)		(548	)		(4.73	)		(397	)
Options cancelled		(2.95	)		(333	)		(11.34	)		(285	)		(13.49	)		(420	)

Outstanding at end of the year		9.35			3,363			8.54			3,783			7.80			4,172

Exercisable at end of the year		9.09			2,066			7.23			2,147			5.87			2,372

Significant option groups outstanding at December 31, 2009 and related weighted average price and life information follow (shares in thousands):


	Outstanding								Exercisable
			Weighted-
			Average		Weighted						Weighted-
Range of	Number		Remaining		Average		Aggregate		Number		Average		Aggregate
Exercise	Outstanding		Contractual		Exercise		Intrinsic		Exercisable		Exercise		Intrinsic
Prices	at 12/31/09		Life		Price		Value		at 12/31/09		Price		Value
$1.55 - $2.07		336		0.6	$	1.71	$	1,205		336	$	1.71	$	1,205
$4.60 - $7.10		274		4.2		5.31		107		156		5.86		25
$8.78 - $10.91		2,167		5.0		10.02		—		1,001		9.75		—
$12.25 - $13.90		586		3.6		13.13		—		573		13.15		—

		3,363					$	1,312		2,066			$	1,230

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value based on our closing stock price of $5.29 of December 31, 2009, which would have been received by the option holders had all option holders exercised their options as of that date.

The value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:


For options granted during:	2009			2008			2007
Weighted average fair value	$	4.60		$	5.85		$	4.67
Weighted averaged expected life		7			7			7
Valuation assumptions:
Expected volatility		68.9	%		46.6-49.7	%		47.7-48.7	%
Risk-free interest rate		3.5	%		3.0-3.9	%		4.5%-4.6	%
Expected dividend yield		0	%		0	%		0	%
Expected annual forfeitures		3	%		3	%		3	%

The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including the expected stock price volatility and expected life. The expected volatility is based on historical volatilities of our stock. Historical data is used to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options are expected to be outstanding. The risk-free rate for the periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of our nonvested options as of December 31, 2009, and changes during the year ended December 31, 2009, is presented below (shares in thousands):

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				Weighted-Average
	Nonvested			Grant-Date
	Options			Fair Value
Nonvested at January 1, 2009		1,979		$	5.80
Granted		118			3.13
Vested		(567	)		(5.82	)
Forfeited		(10	)		(5.64	)

Nonvested at December 31, 2009		1,520			5.59

As of December 31, 2009, there was $3.7 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under our plans. That cost is expected to be recognized over the next three to four years. The total fair value of shares vested during the years ended December 31, 2009, 2008 and 2007 was $2.6 million, $4.0 million and $4.5 million, respectively.

In addition to options issued pursuant to the plans, options have been issued to new hire employees as employment inducement grants under a New York Stock Exchange (“NYSE”) exception. These options were granted in 2007 and 2008 between $10.07 and $12.63 and vest over three years. At December 31, 2009, a total of 360,000 options issued outside of the plans were outstanding and 136,666 options were exercisable.

Stock options of 0.2 million were exercised in the year ended December 31, 2009 resulting in cash proceeds of $0.4 million. Stock options of 0.5 million were exercised in the year ended December 31, 2008 resulting in cash proceeds of $1.6 million.

Treasury Stock Buy-Back Program

Note 6 — Operating Segments

We regularly allocate resources to and assess the performance of our operations by segments that are organized by unique geographic and operating characteristics. The segments are organized in order to manage regional business, currency and tax related risks and opportunities. The results of operations and economic benefits of our minority equity investment in Petrodelta from April 1, 2006 through December 31, 2007 were recorded in the three months ended December 31, 2007 as Net Income from Unconsolidated Equity Affiliates. Oil and gas sales for 2007 is the recognition of the deferred revenue recorded by Harvest Vinccler for 2005 and first quarter 2006 deliveries pending clarification on the calculation of crude prices under the Transitory Agreement (seeNote 1 – Organization and Summary of Significant Accounting Policies, Revenue Recognition). Operations included under the heading “United States and Other” include U.S. operations, corporate management, cash management, business development and financing activities performed in the United States and other countries which do not meet the requirements for separate disclosure. All intersegment revenues, other income and equity earnings, expenses and receivables are eliminated in order to reconcile to consolidated totals. Corporate general and administrative and interest expenses are included in the United States and Other segment and are not allocated to other operating segments.

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	2009			2008			2007
				(in thousands)
Segment Revenues
Oil and gas sales:
United States and other	$	181		$	—		$	—
Venezuela		—			—			11,217

Total oil and gas sales		181			—			11,217

Segment Income (Loss) Attributable to Harvest
Venezuela		39,696			33,020			79,878
Indonesia		(5,124	)		(8,966	)		(7	)
United States and other		(37,679	)		(45,518	)		(19,753	)

Net income (loss) attributable to Harvest	$	(3,107	)	$	(21,464	)	$	60,118


	December 31,
	2009			2008
	(in thousands)
Operating Segment Assets
Venezuela	$	249,484		$	231,755
Indonesia		5,893			1,556
United States and other		113,555			152,184

		368,932			385,495
Intersegment eliminations		(20,153	)		(23,229	)

	$	348,779		$	362,266

Note 7 – Investment in Equity Affiliates

Petrodelta, S.A.

On October 25, 2007, the Venezuelan Presidential Decree which formally transferred to Petrodelta the rights to the Petrodelta Fields subject to the conditions of the Conversion Contract was published in the Official Gazette. Petrodelta will engage in the exploration, production, gathering, transportation and storage of hydrocarbons from the Petrodelta Fields for a maximum of 20 years from that date. Petrodelta has undertaken its operations in accordance with Petrodelta’s business plan as set forth in the Conversion Contract. Under the Conversion Contract, work programs and annual budgets adopted by Petrodelta must be consistent with Petrodelta’s business plan. Petrodelta’s business plan may be modified by a favorable decision of the shareholders owning at least 75 percent of the shares of Petrodelta. On February 4, 2010, Petrodelta’s board of directors endorsed a capital budget of $205 million for Petrodelta’s 2010 business plan.

The sale of oil and gas by Petrodelta to the Venezuelan government is pursuant to a Contract for Sale and Purchase of Hydrocarbons with PPSA signed on January 17, 2008. The form of the agreement is set forth in the Conversion Contract. Crude oil delivered from the Petrodelta Fields to PPSA is priced with reference to Merey 16 published prices, weighted for different markets, and adjusted for variations in gravity and sulphur content, commercialization costs and distortions that may occur given the reference price and prevailing market conditions. Natural gas delivered from the Petrodelta Fields to PPSA is priced at $1.54 per thousand cubic feet. PPSA is obligated to make payment to Petrodelta of each invoice within 60 days of the end of the invoiced production month by wire transfer, in U.S. Dollars in the case of payment for crude oil and natural gas liquids delivered, and in Bolivars in the case of payment for natural gas delivered, in immediately available funds to the bank accounts designated by Petrodelta. Any dividend paid by Petrodelta will be made in U.S. Dollars.

On April 15, 2008, the Venezuelan government published in the Official Gazette the Law of Special Contribution to Extraordinary Prices at the Hydrocarbons International Market (“original Windfall Profits Tax”). The original Windfall Profits Tax was based on prices for Brent crude. On July 10, 2008, the Venezuelan government published an amendment to the Windfall Profits Tax (“amended Windfall Profits Tax”) to be calculated on the Venezuelan Export Basket (“VEB”) of prices as published by the Ministry of the People’s Power for Energy and Petroleum (“MENPET”). The amended Windfall Profits Tax was made retroactive to April 15, 2008, the date of the original Windfall Profits Tax. As instructed by CVP, Petrodelta has applied the amended Windfall Profits Tax to gross oil production delivered to PDVSA since April 15, 2008 when the tax was enacted. The amended Windfall Profits Tax established a special 50 percent tax to the Venezuelan government when the average price of the VEB exceeds $70 per barrel. In a similar manner, the percentage is increased from 50 percent to 60 percent when the average price of the VEB exceeds $100 per barrel. The amended Windfall Profits Tax is reported as expense on the income statement and is deductible for Venezuelan tax purposes. Petrodelta recorded $0.9 million and $56.4 million of expense for the amended Windfall Profits Tax during the years ended December 31, 2009 and 2008, respectively.

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During the second quarter of 2009, PDVSA completed an actuarial study for their pension and retirement plan. This pension and retirement plan covers all PDVSA employees and mixed companies employees. Petrodelta is not required to reimburse the pension costs to PDVSA until PDVSA pays the pension benefits to employees. In May 2009, upon completion of the review of this actuarial study, PDVSA sent a statement to Petrodelta for its respective costs associated with the pension and retirement plan. Petrodelta recorded additional pension expense of $15.6 million ($5.0 million net to our 32 percent interest) in the three month period ended June 30, 2009 based on the statement received. The pension adjustment resulted from the completion of the first full actuary study by PDVSA related to its employees that provide services to the mixed companies and a refinement of management’s assumptions related to credit for past service costs covering the period from January 2008, when the Harvest Vinccler employees were migrated to PDVSA payroll, through May 2009. At this time PDVSA did not have specific benefit information related to each individual mixed company and thus allocated the pension obligation to each mixed company assuming that the employees serving each of the mixed companies had the same characteristics. The pension adjustment was a change in Petrodelta management’s estimate based on the new information provided by PDVSA.

During the fourth quarter of 2009, PDVSA completed an updated actuarial study as of December 31, 2009. This study was based on a further refinement of assumptions for each of the mixed companies, including Petrodelta and a new allocation methodology as PDVSA gathered during 2009 all relevant information for each of the mixed companies. The revised pension obligation allocated to Petrodelta resulted in a decrease of $8.4 million ($2.7 million net to our 32 percent interest) to the pension and retirement plan costs as compared to those previously recorded to Petrodelta in May 2009. This change in management’s estimate related to the pension and retirement plan costs was recorded in December 2009. Pension costs at December 31, 2009 reasonably reflect Petrodelta’s employee demographic and plan conditions. The additional pension cost is not tax deductible until future periods when the pension is settled in cash. The provision for the pension plan is subject to future revisions, both upwards and downwards, based on changes in assumptions, the terms of the relevant plans, the allocation methodology or other prospective amendments or changes as determined by PDVSA.

In June 2009, CVP issued instructions to Petrodelta to set up a reserve within the equity section of the balance sheet for deferred tax assets. Petrodelta’s bylaws state that Petrodelta’s shareholders are required to approve the setting up of special reserves. In August 2009, Petrodelta’s board of directors approved the setting up of the reserve. Although this reserve has no effect on Petrodelta’s financial position, results of operation or cash flows, it has the effect of limiting future dividends to net income adjusted for deferred tax assets. Past dividends received from Petrodelta represented Petrodelta’s net income as reported under IFRS. However, Article 307 of the Venezuelan Commerce Code states that distributions and payments of dividends must meet two conditions: 1) the retained earnings of the entity should be liquid and realizable, and 2) the entity has enough cash to pay and distribute the dividend. Deferred taxes are not liquid or realizable as cash until the items giving rise to the deferred tax are recognized in the entity’s tax return. Therefore, CVP’s instructions are to ensure future dividends are declared and paid as stated under Venezuelan law. Article 307 also states that shareholders are not obligated to restore dividends that have been distributed in good faith according to the entity’s balances and sets the statute of limitations for an entity to claim restoration of dividends at five years.

In 2005, Venezuela modified the Science and Technology Law (referred to as “LOCTI” in Venezuela) to require companies doing business in Venezuela to invest, contribute, or spend a percentage of their gross revenue on projects to promote inventions or investigate technology in areas deemed critical to Venezuela. LOCTI requires major corporations engaged in activities covered by the Hydrocarbon and Gaseous Hydrocarbon Law (“OHL”) to contribute two percent of their gross revenue generated in Venezuela from activities specified in the OHL. The contribution is based on the previous year’s gross revenue and is due the following year. LOCTI requires that each company file a separate declaration stating how much has been contributed; however, waivers have been granted in the past to allow PDVSA to file a declaration on a consolidated basis covering all of its and its consolidating entities liabilities. Since Petrodelta expects PDVSA to continue requesting and receiving waivers, Petrodelta has not accrued a liability to LOCTI for the year ended December 31, 2009. The potential exposure to LOCTI for the year ended December 31, 2009 is $9.5 million, $4.8 million net of tax ($1.5 million net to our 32 percent interest).

Petrodelta’s reporting and functional currency is the U.S. Dollar. HNR Finance owns a 40 percent interest in Petrodelta and recorded its share of the earnings of Petrodelta from April 1, 2006 to December 31, 2007 in the three months ended December 31, 2007. The years ended December 31, 2009 and 2008 include net income from unconsolidated equity affiliates for Petrodelta on a current basis. Petrodelta’s financial information is prepared in accordance with IFRS which we have adjusted to conform to GAAP. All amounts through Net Income Equity Affiliate represent 100 percent of Petrodelta. Summary financial information has been presented below at December 31, 2009, 2008 and 2007, and for the years ended December 31, 2009, 2008 and 2007:

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	Year Ended December 31,
	2009			2008			2007
	(in thousands)
Barrels of oil sold		7,835			5,505			5,374
MCF of gas sold		4,397			10,700			13,456
Total Boe		8,568			7,288			7,616

Average price per barrel	$	57.62		$	83.22		$	58.61
Average price per mcf	$	1.54		$	1.54		$	1.54

Revenues:
Oil sales	$	451,473		$	458,113		$	314,928
Gas sales		6,778			16,506			20,789
Royalty		(156,799	)		(168,790	)		(114,847	)

		301,452			305,829			220,870

Expenses:
Operating expenses		48,311			52,946			21,352
Workovers		—			24,663			2,400
Depletion, depreciation and amortization		33,666			25,509			18,549
General and administrative		9,746			5,974			19,880
Windfall profits tax		882			56,377			—
Taxes other than on income		—			—			2,747

		92,605			165,469			64,928


Income from Operations		208,847			140,360			155,942
Interest expense		(3,617	)		(2,329	)		—

Income before Income Tax		205,230			138,031			155,942

Current income tax expense		105,868			69,374			85,849
Deferred income tax benefit		(43,922	)		(52,560	)		(21,348	)

Net Income		143,284			121,217			91,441
Adjustment to reconcile to reported Net Income from Unconsolidated Equity Affiliate:
Deferred income tax benefit		38,516			34,827			12,343

Net Income Equity Affiliate		104,768			86,390			79,098
Equity interest in unconsolidated equity affiliate		40	%		40	%		40	%

Income before amortization of excess basis in equity affiliate		41,907			34,556			31,639
Amortization of excess basis in equity affiliate		(1,356	)		(1,155	)		(2,530	)
Conform depletion expense to GAAP		183			2,533			—

Net income from unconsolidated equity affiliate	$	40,734		$	35,934		$	29,109


	December 31,		December 31,
	2009		2008
	(in thousands)
Current assets	$	404,825	$	311,017
Property and equipment		265,442		211,760
Other assets		141,245		97,323
Current liabilities		345,812		260,234
Other liabilities		33,600		19,174
Net equity		432,100		340,692

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Fusion Geophysical, LLC (“Fusion”)

Fusion is a technical firm specializing in the areas of geophysics, geosciences and reservoir engineering. The purchase of Fusion extends our technical ability and global reach to support a more organic growth and exploration strategy. Our 49 percent minority equity investment in Fusion is accounted for using the equity method of accounting. In October 2008, we increased our minority equity investment in Fusion from 45 percent to 49 percent for $2.2 million. Operating revenue and total assets represent 100 percent of Fusion. No dividends were declared or paid during the years ended December 31, 2009, 2008 and 2007, respectively. Summarized financial information for Fusion follows:


	Year Ended December 31,
	2009			2008			2007
				(in thousands)
Operating Revenues	$	11,089		$	13,063		$	7,392
Net Income (Loss)	$	(4,798	)	$	(1,290	)	$	527
Equity interest in unconsolidated equity affiliate		49	%		49	%		45	%

Net income (loss) from unconsolidated equity affiliate		(2,351	)		(632	)		237
Amortization of fair value of intangibles		(995	)		(726	)		(656	)
Impairment of investment		(1,631	)		—			—

Net loss from unconsolidated equity affiliate	$	(4,977	)	$	(1,358	)	$	(419	)


	December 31,		December, 31
	2009		2008
Current assets	$	2,726	$	7,864
Total assets		30,205		30,633
Current liabilities		8,024		7,294
Total liabilities		12,242		8,281

Approximately 29 percent, 26 percent and 7 percent of Fusion’s revenue for the years ended December 31, 2009, 2008 and 2007, respectively, was earned from Harvest or equity affiliates.

On April 9, 2009, we entered into a service agreement with Fusion whereby we prepaid $1.5 million for certain services to be performed in connection with certain projects as defined in the service agreement. The services are to be performed in accordance with the existing consulting agreement. Upon written notice to Fusion, the projects and types of services can be amended. The unapplied portion of the prepayment advance bears interest at an annual rate of 12 percent which will be added to the prepayment advance balance and used to offset future service invoices from Fusion. Services rendered have been applied against the prepayment, and as of December 31, 2009, the balance for prepaid services was approximately $1.0 million.

As of December 31, 2009, we updated the review for impairment of our minority equity investment in Fusion. In preparing this update, future net cash flows prepared by Fusion based on different business opportunities that Fusion is currently pursuing were updated for current activities. These business opportunities were weighted with a probability of success. Based on these cash flow projections and considering Fusion’s current liquidity, we concluded that the potential business opportunities did not support Fusion’s on-going cash flow requirements; and therefore, we recorded a $1.6 million charge to fully impair the carrying value of our equity investment in Fusion at December 31, 2009.

Note 8 – United States

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Gulf Coast

In March 2008, we executed an AMI agreement with a private third party for an area in the upper Gulf Coast Region of the United States. The AMI covers the coastal areas from Nueces County, Texas to Cameron Parish, Louisiana, including state waters. We are the operator and have initial working interests of 55 percent in Starks, the first prospect in the AMI, and 50 percent in West Bay, the second prospect in the AMI. The private third party contributed these two prospects, including the leases and proprietary 3-D seismic data sets, and numerous leads generated over the last three decades of regional geological focus. We agreed to fund the first $20 million of new lease acquisitions, geological and geophysical studies, seismic reprocessing and drilling costs. At June 30, 2009, we had met the $20 million funding obligation under the terms of the AMI. All costs incurred after June 30, 2009 are being shared by the parties in proportion to their working interests as defined in the AMI. In August 2009, the AMI became a three party arrangement when the private third party restructured and assigned a portion of its interest to one of its affiliates.

The private third party is obligated to evaluate and present additional opportunities at their sole cost. As each prospect is accepted it will be covered by the AMI. Although several additional potential prospects had been screened and evaluated within the AMI since its inception, we had not pursued leasing or drilling on any new projects within the AMI as of December 31, 2009. On January 29, 2010, we entered into an agreement with one of the private third parties in our AMI for an option to participate in a new project (seeNote 14 – Subsequent Events).

Starks Project

West Bay Project

The AMI participants are currently continuing to evaluate the leads and prospects to determine priorities and drilling plans for the West Bay project and have identified the likely initial drilling prospect. Land, regulatory, and surface access preparations are currently in progress focused on taking the initial drilling prospect to drill-ready status. The West Bay project represents $3.1 million and $2.9 million of unproved oil and gas properties on our December 31, 2009 and 2008 balance sheets, respectively.

Western United States – Antelope

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spud date of the Bar F. Since payment was not received prior to the Bar F spud date, our interest in the Antelope prospect was increased to 60 percent, with the incremental 10 percent working interest being earned by drilling and completing the Bar F. The note receivable remains outstanding and will be collected through sales revenues taken from a portion of the private third party’s net revenue from the Bar F provided the Bar F is commercial.

Activities are in progress on two separate projects on the Antelope prospect in Duchesne County, Utah.

Mesaverde

Operational activities during 2009 on the Mesaverde project focused on continuing leasing activities on private, Allottee, and tribal land, and surveying, preliminary engineering, permitting preparations, and conducting drilling operations on a deep natural gas test well (the Bar F) that commenced drilling on June 15, 2009. The Bar F was permitted to 18,000 feet. The Bar F was drilled to a total depth of 17,566 feet and an extended production test of multiple potential reservoir horizons is now in progress. To date, testing has been focused on the evaluation of the natural gas potential of the Mesaverde tight gas reservoir over a prospective interval from 14,000 to 17,400 feet. Completion activities consisted of hydraulic fracturing of eight separate reservoir intervals in the Mesaverde and multiple extended flow tests of the individual fractured intervals, along with a flow test of the commingled eight intervals. While the results to date have not definitively determined the commerciality of a stand-alone development of the Mesaverde, we believe these results indicate progress toward that determination and that the Mesaverde reservoir remains potentially prospective over a portion of our land position. The Mesaverde project represents $36.4 million and $8.3 million of unproved oil and gas properties on our December 31, 2009 and 2008 balance sheets, respectively.

Monument Butte

Operational activities during 2009 on the Monument Butte project focused on resolution of forced pooling issues with non-consenting interests, negotiations and finalization of an agreement with the operator for the joint drilling operations. As of December 31, 2009, five wells had been drilled: two of the five wells were on production, and three wells waiting on completion. These three wells were placed on production in the first quarter 2010. The three additional wells were drilled by the end of February 2010: two wells had been placed on production and the one remaining well was waiting on completion operations. The Monument Butte project represents $1.6 million of proved oil and gas properties and $0.3 million of unproved oil and gas properties on our December 31, 2009 and 2008 balance sheets, respectively.

Note 9 – Indonesia

In 2008, we acquired a 47 percent interest in the Budong-Budong Production Sharing Contract (“Budong PSC”) by committing to fund the first phase of the exploration program including the acquisition of 2-D seismic and drilling of the first two exploration wells. This commitment is capped at $17.2 million. The commitment is comprised of $6.5 million for the acquisition of seismic and $10.7 million for the drilling of the first two exploratory wells. After the commitment of each component is met, all subsequent costs will be shared by the parties in proportion to their ownership interests. The $6.5 million carry obligation for the 2-D seismic acquisition was met in December 2008. Prior to drilling the first exploration well, subject to the estimated cost of that well, our partner will have a one-time option to increase the level of the carried interest to a maximum of $20.0 million, and as compensation for the increase, we will increase our participation to a maximum of 54.65 percent. This equates to a total carried cost for the farm-in of $9.1 million. Our partner will be the operator through the exploration phase as required by the terms of the Budong PSC. We will have control of major decisions and financing for the project

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with an option to become operator if approved by BP Migas, Indonesia’s oil and gas regulatory authority, in the subsequent development and production phase.

The Budong PSC covers 1.35 million acres and includes the Lariang and Karama sub-basins which are the eastern onshore extension of the West Sulawesi foldbelt (“WSFB”). Exploration to date in the basin is immature due to previously difficult jungle terrain, which is now accessible with the development of palm oil plantations and their related infrastructure. Field work performed over the last 10 years, as outcrops have been more accessible, has given a new understanding to the presence of Eocene source and reservoir potential that had not previously been recognized. Recent seismic surveys have greatly improved the understanding of the geology and enhanced the prospectivity of the offshore WSFB and, by analogy, the sparsely explored onshore area. The Budong PSC includes a ten-year exploration period and a 20-year development phase. During the initial three-year exploration phase, which began January 2007, operational activities during 2009 focused on the interpretation of 650 kilometers of 2-D seismic and well planning. Two drill sites have been selected. Currently, the locations for the two test wells are being constructed and the rig and ancillary equipment is being mobilized to the area. It is expected that the first of two exploration wells will spud early in the second quarter of 2010. In accordance with the farm-in agreement, we expect to fund 100 percent of the well expenditures to earn our 47 percent working interest up to a cap of $10.7 million; thereafter, we will pay in proportion to our working interest. The Budong PSC represents $2.0 million and $0.2 million, respectively, of unproved oil and gas properties on our December 30, 2009 and 2008 balance sheets.

Note 10 – Gabon

We are the operator of the Dussafu Marin Permit offshore Gabon in West Africa (“Dussafu PSC”) with a 66.667 percent interest in the Dussafu PSC. Located offshore Gabon, adjacent to the border with the Republic of Congo, the Dussafu PSC contains 680,000 acres with water depths up to 1,000 feet. The Dussafu PSC has two small oil discoveries in the Gamba and Dentale reservoirs and a small natural gas discovery. Production and infrastructure exists in the blocks contiguous to the Dussafu PSC.

Note 11 – Oman

On April 11, 2009, we signed an Exploration and Production Sharing Agreement (“EPSA”) with Oman for the Al Ghubar / Qarn Alam license. We have a 100 percent working interest in Block 64 EPSA during the exploration phase. Oman Oil Company has the option to back-in to up to a 20 percent interest in Block 64 EPSA after the discovery of gas.

Block 64 EPSA is a newly-created block designated for exploration and production of non-associated gas and condensate which the Oman Ministry of Oil and Gas has carved out of the Block 6 Concession operated by Petroleum Development of Oman (“PDO”). PDO will continue to produce oil from several fields within Block 64 EPSA area. The 3,867 square kilometer (955,600 acres) block is located in the gas and condensate rich Ghaba Salt Basin in close proximity to the Barik, Saih Rawl and Saih Nihayda gas and condensate fields. We have an obligation to drill two wells over a three year period with a funding commitment of $22.0 million. Current activities include the compilation of existing data, over two prospect areas of approximately 1,000 square kilometers and geological studies to determine drillable prospects. Well planning is expected to commence in 2010 for exploration

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drilling in 2011. During the year ended December 31, 2009, we incurred $1.6 million for costs associated with negotiating Block 64 EPSA and $2.2 million for costs associated with signing the license, including signature bonus and data compilation. The Block 64 EPSA represents $3.8 million of unproved oil and gas properties on our December 31, 2009 balance sheet.

Note 12 — China

In December 1996, we acquired a petroleum contract with China National Offshore Oil Corporation (“CNOOC”) for the WAB-21 area. The WAB-21 petroleum contract covers 6.2 million acres in the South China Sea, with an option for an additional 1.25 million acres under certain circumstances, and lies within an area which is the subject of a border dispute between the People’s Republic of China (“China”) and Socialist Republic of Vietnam (“Vietnam”). Vietnam has executed an agreement on a portion of the same offshore acreage with another company. The border dispute has lasted for many years, and there has been limited exploration and no development activity in the WAB-21 area due to the dispute. Due to the border dispute between China and Vietnam, we have been unable to pursue an exploration program during Phase One of the contract. As a result, we have obtained license extensions, with the current extension in effect until May 31, 2011. While no assurance can be given, we believe we will continue to receive contract extensions so long as the border disputes persist. Recently, Vietnam, along with the company that is the party to the agreement with Vietnam, announced plans for exploration drilling during 2010. While no assurance can be given, we believe this announcement may provide some resolution with the border disputes, although we do not know in what manner any resolution might appear. WAB-21 represents $3.0 million of unproved oil and gas properties on our December 31, 2009 and 2008 balance sheets, respectively.

Note 13 — Earnings Per Share

Basic earnings per common share (“EPS”) are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. The weighted average number of common shares outstanding for computing basic EPS was 33.1 million, 34.1 million and 36.5 million for the years ended December 31, 2009, 2008 and 2007, respectively. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The weighted average number of common shares outstanding for computing diluted EPS, including dilutive stock options, was 33.1 million, 34.1 million and 37.9 million for the years ended December 31, 2009, 2008 and 2007, respectively.

An aggregate of 3.7 million options were excluded from earnings per share calculations because there exercise price exceeded the average price for the year ended December 31, 2009. An aggregate of 4.0 million options were excluded from the earnings per share calculations because their exercise price exceeded the average price for the year ended December 31, 2008. For the year ended December 31, 2007, 1.1 million was excluded from the earnings per share calculations because their exercise price exceeded the average price.

Note 14 – Subsequent Events

We conducted our subsequent events review up through the date of the issuance of this Annual Report on Form 10-K.

On January 8, 2010, the Venezuelan government published in the Official Gazette the Exchange Agreement which establishes new exchange rates for the Bolivar/U.S. Dollar currencies that will enter into force on January 11, 2010. Each exchange rate will be applied to foreign currency sales and purchases conducted through the Foreign Currency Administration Commission (“CADIVI”), in the cases expressly provided in the Exchange Agreement. In this regard, the exchange rates established in the Agreement are: 2.60 Bolivars per U.S. Dollar and 4.30 Bolivars per U. S. Dollar. The 2.60 Bolivar exchange rate applies to the food, health, medical and technology sectors. The 4.30 Bolivar exchange rate applies to all other sectors not expressly established by the 2.60 Bolivar exchange rate. The U.S. Dollar is the functional reporting currency for both Petrodelta and Harvest Vinccler.

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HARVEST NATURAL RESOURCES, INC. AND SUBSIDIARIES

Quarterly Financial Data (unaudited)

Summarized quarterly financial data is as follows:


	Quarter Ended
	March 31			June 30			September 30			December 31
	(amounts in thousands, except per share data)
Year ended December 31, 2009
Revenues	$	—		$	—		$	—		$	181
Expenses		(7,825	)		(10,217	)		(7,286	)		(5,812	)
Non-operating income		331			296			224			229

Loss from consolidated companies before income taxes		(7,494	)		(9,921	)		(7,062	)		(5,402	)
Income tax expense		889			147			109			37

Loss from consolidated companies		(8,383	)		(10,068	)		(7,171	)		(5,439	)
Net income from unconsolidated equity affiliates		4,410			7,476			9,890			13,981

Net income (loss)		(3,973	)		(2,592	)		2,719			8,542
Less: Net income attributable to noncontrolling interest		803			1,597			1,936			3,467

Net income (loss) attributable to Harvest	$	(4,776	)	$	(4,189	)	$	783		$	5,075


Net income (loss) attributable to Harvest per common share:
Basic	$	(0.15	)	$	(0.13	)	$	0.02		$	0.15

Diluted	$	(0.15	)	$	(0.13	)	$	0.02		$	0.15


	Quarter Ended
	March 31			June 30			September 30			December 31
	(amounts in thousands, except per share data)
Year ended December 31, 2008
Expenses	$	(7,869	)	$	(9,530	)	$	(10,621	)	$	(26,420	)
Non-operating income (expense)		2,002			1,582			1,100			670

Loss from consolidated companies before income taxes		(5,867	)		(7,948	)		(9,521	)		(25,750	)
Income tax expense (benefit)		64			37			(20	)		(56	)

Loss from consolidated companies		(5,931	)		(7,985	)		(9,501	)		(25,694	)
Net income from unconsolidated equity affiliates		8,809			9,409			5,309			11,049

Net income (loss)		2,878			1,424			(4,192	)		(14,645	)
Less: Net income attributable to noncontrolling interest		1,673			2,057			1,045			2,154

Net income (loss) attributable to Harvest	$	1,205		$	(633	)	$	(5,237	)	$	(16,799	)


Net income (loss) attributable to Harvest per common share:
Basic	$	0.03		$	(0.02	)	$	(0.16	)	$	(0.51	)

Diluted	$	0.03		$	(0.02	)	$	(0.16	)	$	(0.51	)

Supplemental Information on Oil and Natural Gas Producing Activities (unaudited)

The following tables summarize our proved reserves, drilling and production activity, and financial operating data at the end of each year. Tables I through III provide historical cost information pertaining to costs incurred in exploration, property acquisitions and development; capitalized costs; and results of operations. Tables IV through VI present information on our estimated proved reserve quantities, standardized measure of estimated discounted future net cash flows related to proved reserves, and changes in estimated discounted future net cash flows.

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TABLE I	—	Total costs incurred in oil and natural gas acquisition, exploration and development activities (in thousands):


							United States
	Oman		Gabon		Indonesia		and Other		Total
Year Ended December 31, 2009
Acquisition costs	$	3,757	$	941	$	1,800	$	28,170	$	34,668
Exploration costs		459		225		1,793		2,563		5,040
Development costs		—		—		—		1,547		1,547

	$	4,216	$	1,166	$	3,593	$	32,280	$	41,255


Year Ended December 31, 2008
Acquisition costs	$	—	$	5,792	$	71	$	13,302	$	19,165
Exploration costs		—		3,016		7,647		14,020		24,683

	$	—	$	8,808	$	7,718	$	27,322	$	43,848


Year Ended December 31, 2007
Acquisition costs	$	—	$	136	$	168	$	160	$	464
Exploration costs		—		—		—		204		204

	$	—	$	136	$	168	$	364	$	668


TABLE II	—	Capitalized costs related to oil and natural gas producing activities (in thousands):


							United States
	Oman		Gabon		Indonesia		and Other			Total
Year Ended December 31, 2009
Proved property costs	$	—	$	—	$	—	$	1,646		$	1,646
Unproved property costs		3,757		6,869		670		42,815			54,111
Oilfield Inventories		—		—		1,369		1,417			2,786
Less accumulated depletion		—		—		—		(29	)		(29	)

	$	3,757	$	6,869	$	2,039	$	45,849		$	58,514


Year Ended December 31, 2008
Unproved property costs	$	—	$	5,927	$	239	$	16,162		$	22,328


Year Ended December 31, 2007
Unproved property costs	$	—	$	136	$	168	$	2,859		$	3,163

We regularly evaluate our unproved properties to determine whether impairment has occurred. We have excluded from amortization our interest in unproved properties and the cost of uncompleted exploratory activities. The principal portion of such costs, excluding those related the acquisition of WAB-21, are expected to be included in amortizable costs during the next two to three years. The ultimate timing of when the costs related to the acquisition of WAB-21 will be included in amortizable costs is uncertain.

Unproved property costs at December 31, 2009 consisted of the following by year incurred (in thousands):


	Total		2009		2008		2007		Prior
Property acquisition costs	$	56,897	$	34,569	$	19,165	$	263	$	2,900

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TABLE III	—	Results of operations for oil and natural gas producing activities (in thousands):


	United States
Year Ended December 31, 2009
Revenues:
Oil and natural gas revenues	$	181

Expenses:
Operating, selling, and distribution expenses and taxes other than on income		15
Depletion		29
Income Tax expense		—

Total expenses		44

Results of operations from oil and natural gas producing activities	$	137


TABLE IV	—	Quantities of Oil and Natural Gas Reserves

Estimating oil and gas reserves is a very complex process requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. This data may change substantially over time as a result of numerous factors such as production history, additional development activity and continual reassessment of the viability of production under various economic and political conditions. Consequently, material upward or downward revisions to existing reserve estimates may occur from time to time; although, every reasonable efforts is made to ensure that reported results are the most accurate assessment available. We ensure that the data provided to our external independent experts, and their interpretation of that data, corresponds with our development plans and management’s assessment of each reservoir. The significance of subjective decisions required and variances in available data make estimates generally less precise than other estimates presented in connection with financial statement disclosures.

In December 2008, the SEC issued its final rule, Modernization of Oil and Gas Reporting, which is effective for reporting 2009 reserve information. In January 2010, the FASB issued its authoritative guidance on extractive activities for oil and gas to align its requirements with the SEC’s final rule. We adopted the guidance as of December 31, 2009 in conjunction with our year-end reserve report as a change in accounting principle that is inseparable from a change in accounting estimate. Under the SEC’s final rule, prior period reserves were not restated. For the United States, the primary impacts of the SEC’s final rule on our reserve estimates include:

	•		The use of the unweighted 12-month average of the first-day-of-the-month reference price of $48.21 per barrel for oil compared to year-end reference price of $61.73 per barrel, and

	•		The use of the unweighted 12-month average of the first-day-of-the-month reference price of $3.31 per Mcf for gas compared to year-end reference price of $4.25 per Mcf.

The impact of the adoption of the SEC’s final rule on our financial statements is not practicable to estimate due to the operational and technical challenges associated with calculating a cumulative effect of adoption by preparing reserve reports under both the old and new rules.

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by the Society of Petroleum Engineers. Ryder Scott is an independent firm of petroleum engineers, geologists, geophysicists and petrophysicists; they do not own an interest in our properties and are not employed on a contingent fee basis.

Reserves for Petrodelta are reflected in the following sectionAdditional Supplemental Information on Oil and Natural Gas Producing Activities (unaudited) for Venezuela Equity Affiliate as of December 31, 2009, 2008 and 2007, TABLE IV — Quantities of Oil and Natural Gas Reserves.

The table shown below represents our interests in the United States. All of our other properties are unproved and have no associated reserves. There were no reserves prior to December 31, 2009 and all amounts are reflected as discoveries. During 2009, we identified and approved the development of eight locations in the Monument Butte project in Utah. At year end 2009, we have drilled and moved to the proved developed category three of these locations. At year end 2009, we have five identified proved undeveloped (“PUD”) locations. All PUD locations have subsequently been converted to proved developed (“PDP”) locations or are scheduled to be converted to PDP locations by the end of the first quarter 2010. These reserves are in a new geographic area for us.


	As of
	December 31, 2009
	Oil		Gas
	(MBbls)		(MMcf)
	(in thousands)
Proved
Developed
United States		131		653

Undeveloped
United States		95		473

Total Proved		226		1,126


TABLE V	—	Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Natural Gas Reserve Quantities

The standardized measure of discounted future net cash flows is presented in accordance with the provisions of the accounting standard on disclosures about oil and gas producing activities. In preparing this data, assumptions and estimates have been used, and we caution against viewing this information as a forecast of future economic conditions.

Future cash inflows were estimated by an applying the average price during the 12-month period, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, adjusted for fixed and determinable escalations provided by the contract, to the estimated future production of year-end proved reserves. Our average prices used were $48.21 per barrel for oil and $3.31 per Mcf for gas. Future cash inflows were reduced by estimated future production and development costs to determine pre-tax cash inflows. Future income taxes were estimated by applying the year-end statutory tax rates to the future pre-tax cash inflows, less the tax basis of the properties involved, and adjusted for permanent differences and tax credits and allowances. The resultant future net cash inflows are discounted using a ten percent discount rate.

The table shown below represents our net interest at December 31, 2009. This is the first year to report our reserves in the United States, based on the results of Ryder Scott Company L.P.

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Additional Supplemental Information on Oil and Natural Gas Producing Activities (unaudited) for Petrodelta S.A. as of December 31, 2009, 2008 and 2007

Petrodelta (32 percent ownership) is accounted for under the equity method, and has been included at its ownership interest in the consolidated financial statements and the following Tables based on a year ending December 31 and, accordingly, results of operations for oil and natural gas producing activities in Venezuela reflect the year ended December 31, 2009, 2008 and 2007.


TABLE I –		Total costs incurred in oil and natural gas acquisition, exploration and development activities (in thousands):


	Year ended December 31,
	2009		2008		2007
Development costs	$	26,605	$	17,144	$	972
Exploration costs		—		—		—

	$	26,605	$	17,744	$	972


TABLE II –		Capitalized costs related to oil and natural gas producing activities (in thousands):


	Year ended December 31,
	2009			2008			2007
Proved property costs	$	108,696		$	79,807		$	64,415
Unproved property costs		163			3,036			2,653
Oilfield inventories		10,748			7,892			4,426
Less accumulated depletion and impairment		(27,089	)		(16,966	)		(11,063	)

	$	92,518		$	73,769		$	60,431


TABLE III –		Results of operations for oil and natural gas producing activities (in thousands):


	Year Ended December 31,
	2009			2008			2007
Revenue:
Oil and natural gas revenues	$	146,640		$	151,878		$	107,429
Royalty		(50,176	)		(54,013	)		(36,751	)

		96,464			97,865			70,678

Expenses:
Operating, selling and distribution expenses and taxes other than on income		15,742			42,876			7,601
Depletion		10,123			5,903			5,746
Income tax expense		35,300			23,530			28,666

Total expenses		61,165			72,309			42,013

Results of operations from oil and natural gas producing activities	$	35,299		$	25,556		$	28,665


TABLE IV –		Quantities of Oil and Natural Gas Reserves

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of December 31, 2009 in conjunction with our year-end reserve report as a change in accounting principle that is inseparable from a change in accounting estimate. Under the SEC’s final rule, prior period reserves were not restated. For Petrodelta, the primary impact of the SEC’s final rule on our reserve estimates include:

The use of the unweighted 12-month average of the first-day-of-the-month contracted reference price of $56.83 per barrel for oil compared to the year-end contracted reference price of $69.87 per barrel for oil.

Petrodelta is producing from, and continuing to develop, the Petrodelta Fields. Petrodelta has both developed and undeveloped oil and gas reserves identified in all six fields. Petrodelta produces the fields in accordance with a business plan defined by its conversion contract executed in late 2007. Proved Undeveloped (“PUD”) oil and gas reserves are drilled in accordance with Petrodelta’s business plan, but can be revised where drilling results indicate a change is warranted. This was the case when two wells drilled in El Salto in 2009 justified a modification to the El Salto PUD program.

As of year end 2009, Petrodelta has a total of 164 PUD (39,626 Boe) locations identified. Since the implementation of its business plan, Petrodelta has drilled 24 gross wells (2008 nine wells [1,743 Boe] and 2009 15 wells [2,498 Boe]) which have moved to the proved developed producing (“PDP”) category. Of these 24 locations, 17 (3,511 Boe) represent the movements of PUD locations to PDP locations. The other seven new producing wells (731 Boe) were previously classified Probable, Possible or un-defined. All above Boe represent HNR Finance’s interest, net of a 33.33 percent royalty.

All PUD locations are scheduled to be drilled by 2014; however, there are some PUD locations that are scheduled to be drilled in the sixth year after the PUD locations were first identified. Petrodelta has a track record of identifying, executing and converting its PUD locations to PDP locations, and there are special circumstances to account for this drilling delay. Petrodelta commenced drilling operations in the second quarter of 2008; however, shortly thereafter Petrodelta was advised by the Venezuelan government that Petrodelta’s 2009 production target was to be approximately 16,000 barrels of oil per day following the December 17, 2008 Organization of the Petroleum Exporting Countries (“OPEC”) meeting establishing new production quotas. Subsequently, Petrodelta was allowed to produce at capacity to help fulfill other companies’ production shortfalls. Also, PDVSA has failed to pay on a timely basis certain amounts owed to contractors that PDVSA has contracted to do work for Petrodelta. As a result, Petrodelta has experienced difficulty in retaining contractors who provide equipment and/or services for Petrodelta’s operations. Inability to retain contractors or to pay them on a timely basis is having an adverse effect on Petrodelta’s ability to carry out its business plan. These events have been outside of the control of Petrodelta. Petrodelta has recently taken specific actions to improve its ability to execute on its established business plan in a timely manner.

In summary, Petrodelta has a demonstrated track record of identifying, executing and converting its PUD locations to PDP locations. PUD locations are expected to be drilled at a similar pace with 27 wells drilled in 2010 and an average 36 wells per year in 2011 through 2014.

The tables shown below represent HNR Finance’s interest, net of a 33.33 percent royalty, in Venezuela in each of the years.

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				Minority
				Interest in			32%
	HNR Finance			Venezuela			Net Total
				(in thousands)
Proved Reserves-Crude oil, condensate, and natural gas liquids (MBbls)

As of December 31, 2009
Proved Reserves at January 1, 2009		42,809			(8,561	)		34,248
Revisions		(875	)		175			(700	)
Extensions		7,574			(1,515	)		6,059
Production		(2,089	)		418			(1,671	)

Proved Reserves at end of the year		47,419			(9,483	)		37,936


As of December 31, 2009 Proved
Developed		14,242			(2,848	)		11,394
Undeveloped		33,177			(6,635	)		26,542

Total Proved		47,419			(9,483	)		37,936


As of December 31, 2008
Proved Reserves at January 1, 2008		47,261			(9,452	)		37,809
Revisions		(2,984	)		597			(2,387	)
Production		(1,468	)		294			(1,174	)

Proved Reserves at end of the year		42,809			(8,561	)		34,248


Proved Developed Reserves-Crude oil, condensate, and natural gas liquids (MBbls) at:
December 31, 2008		13,415			(2,683	)		10,732

As of December 31, 2007
Proved Reserves at January 1, 2007		—			—			—
Additions^(a)		50,085			(10,017	)		40,068
Production		(2,824	)		565			(2,259	)

Proved Reserves at end of the year		47,261			(9,452	)		37,809


(a)		Petrodelta was formed in 2007


Proved Developed Reserves-Crude oil, condensate, and natural gas liquids (MBbls) at:
December 31, 2007	14,779		(2,956	)	11,823

Proved Reserves-Natural gas (MMcf)

As of December 31, 2009
Proved Reserves at January 1, 2009	67,804		(13,561	)	54,243
Revisions	(5,862	)	1,172		(4,690	)
Extensions	1,941		(388	)	1,553
Production	(1,173	)	235		(938	)

Proved Reserves at end of the year	62,710		(12,542	)	50,168

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				Minority
				Interest in			32%
	HNR Finance			Venezuela			Net Total
				(in thousands)
As of December 31, 2009 Proved
Developed		24,015			(4,803	)		19,212
Undeveloped		38,695			(7,739	)		30,956

Total Proved		62,710			(12,542	)		50,168


As of December 31, 2008
Proved Reserves at January 1, 2008		43,084			(8,617	)		34,467
Additions		27,574			(5,515	)		22,059
Production		(2,854	)		571			(2,283	)

Proved Reserves at end of the year		67,804			(13,561	)		54,243


Proved Developed Reserves-Natural gas (MMcf) at:
December 31, 2008		30,168			(6,034	)		24,134

As of December 31, 2007
Proved Reserves at January 1, 2007		—			—			—
Additions^(a)		50,019			(10,004	)		40,015
Production		(6,935	)		1,387			(5,548	)

Proved Reserves at end of the year		43,084			(8,617	)		34,467


(a) Petrodelta was formed in 2007

Proved Developed Reserves-Natural gas (MMcf) at:
December 31, 2007		7,755			(1,551	)		6,204


TABLE V –		Standardized Measure of Discounted Future Net Cash Flows Related to Proved Oil and Natural Gas Reserve Quantities

Future cash inflows were estimated by an applying the average price during the 12-month period, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, adjusted for fixed and determinable escalations provided by the contract, to the estimated future production of year-end proved reserves. Our average prices used were $56.83 per barrel for oil and $1.54 per Mcf for gas. Future cash inflows were reduced by estimated future production and development costs to determine pre-tax cash inflows. Future income taxes were estimated by applying the year-end statutory tax rates to the future pre-tax cash inflows, less the tax basis of the properties involved, and adjusted for permanent differences and tax credits and allowances. The resultant future net cash inflows are discounted using a ten percent discount rate.

The table shown below represents HNR Finance’s net interest in Petrodelta.

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				Minority
				Interest in
	HNR Finance			Venezuela			Net Total
				(in thousands)
December 31, 2009
Future cash inflows from sales of oil and gas	$	2,772,840		$	(554,568	)	$	2,218,272
Future production costs		(630,225	)		126,045			(504,180	)
Future development costs		(282,306	)		56,461			(225,845	)
Future income tax expenses		(886,622	)		177,324			(709,298	)

Future net cash flows		973,687			(194,738	)		778,949
Effect of discounting net cash flows at 10%		(473,317	)		94,663			(378,654	)

Standardized measure of discounted future net cash flows	$	500,370		$	(100,075	)	$	400,295


December 31, 2008
Future cash inflows from sales of oil and gas	$	1,576,312		$	(315,262	)	$	1,261,050
Future production costs		(557,043	)		111,409			(445,634	)
Future development costs		(306,500	)		61,300			(245,200	)
Future income tax expenses		(355,746	)		71,149			(284,597	)

Future net cash flows		357,023			(71,404	)		285,619
Effect of discounting net cash flows at 10%		(217,822	)		43,564			(174,258	)

Standardized measure of discounted future net cash flows	$	139,201		$	(27,840	)	$	111,361


December 31, 2007
Future cash inflows from sales of oil and gas	$	3,650,110		$	(730,022	)	$	2,920,088
Future production costs		(685,368	)		137,074			(548,294	)
Future development costs		(358,759	)		71,752			(287,007	)
Future income tax expenses		(1,274,005	)		254,801			(1,019,204	)

Future net cash flows		1,331,978			(266,395	)		1,065,583
Effect of discounting net cash flows at 10%		(677,756	)		135,551			(542,205	)

Standardized measure of discounted future net cash flows	$	654,222		$	(130,844	)	$	523,378

TABLE VI – Changes in the Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves (in thousands):


	Net Venezuela
	2009			2008
Standardized Measure at January 1	$	111,361		$	523,378
Sales of oil and natural gas, net of related costs		(80,725	)		(54,988	)
Revisions to estimates of proved reserves
Net changes in prices, development and production costs		408,054			(673,320	)
Quantities		(25,424	)		(119,678	)
Extensions, discoveries and improved recovery, net of future costs		187,636			50,515
Accretion of discount		24,940			106,481
Net change in income taxes		(262,214	)		457,582
Development costs incurred		26,756			7,791
Changes in estimated development costs		(429	)		13,128
Timing differences and other		10,340			(199,528	)

Standardized Measure at December 31	$	400,295		$	111,361

S-38

~~Independent Auditor’s Report~~INDEPENDENT AUDITOR’S REPORT

To the ~~Shareholders~~Stockholders and Board of ~~Directors~~Director of
Petrodelta, S.A.

~~Report on the financial statements~~
We have audited the accompanying financial statements of ~~Petrodelta,~~PETRODELTA, S.A. ~~(the Company)~~, which comprise the ~~balance sheets~~statement of financial position as ofat December 31, ~~2007~~2009 and ~~2006,~~2008, and the statements of comprehensive income, ~~statement, statement~~statements of changes in equity and statements of cash flow ~~statement~~ for the ~~year~~years then ended, ~~December 31, 2007 and the initial nine-month period ended December 31, 2006,~~ and a summary of significant accounting policies and other explanatory notes.

Management’s ~~responsibility~~Responsibility for the ~~financial statements~~Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting ~~Standards (IFRS).~~Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s ~~responsibility~~Responsibility

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. ~~Those~~These standards require that we plan and perform the ~~audits~~audit to obtain reasonable assurance about whether the financial statements are free ~~from~~of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

Urbanización Valles de Camoruco. Las 4 Avenidas. Reda Building. Torre B. Oficina 5-11. Valencia. Carabobo. Venezuela.
Telf.: 58-241 8253518 / 8255337 Fax: 8259828. RIF: J-30785734-0
PGFA Perales, Pistone & Asociados es firma miembro de

International

~~Petrodelta,~~PETRODELTA, S.A.
~~Balance sheet~~
~~December 31, 2007 and 2006~~(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)

2007 2006
Nominal Nominal
(In thousands) Note U.S. dollars bolivars U.S. dollars bolivars

Assets

Non-current assets

Property, plant and equipment, net 5 176,783 380,084,180 192,095 413,004,190
Deferred income tax 9 38,738 83,286,903 23,415 50,342,336

Total non-current assets 215,521 463,371,083 215,510 463,346,526

Current assets

Deferred income tax 9 6,025 12,954,296 — —
Inventories 4 13,830 29,734,431 8,281 17,803,706
Prepaid expenses 873 1,873,249 — —
Trade accounts receivable 7 444,737 956,184,237 203,717 437,991,291
Other accounts receivable 6,292 13,528,976 3,190 6,859,253
Cash at banks 6,977 15,000,000 — —

Total assets 694,255 1,492,646,272 430,698 926,000,776

Equity and Liabilities

Equity

Capital stock 8 465 1,000,000 — —
Contributions for future capital increases 8 6,512 14,000,000 — —
Share premium 8 212,451 456,769,911 212,451 456,769,911
Legal reserve 8 47 100,000 — —
Distributable retained earnings 8 181,325 389,847,848 89,931 193,350,942

Total equity 400,800 861,717,759 302,382 650,120,853

Liabilities

Non-current liabilities

Provision for abandonment costs 6 5,964 12,823,531 5,420 11,653,500

Current liabilities

Taxes 9 153,037 329,028,853 67,188 144,453,138
Accruals and other payables 10 49,906 107,297,579 20,339 43,730,346
Trade accounts payable 7 84,548 181,778,550 35,369 76,042,939

Total current liabilities 287,491 618,104,982 122,896 264,226,423

Total liabilities 293,455 630,928,513 128,316 275,879,923

Total equity and liabilities 694,255 1,492,646,272 430,698 926,000,776

Statements of Comprehensive Income
(Expressed In Thousands)


	Years ended December 31^st,
	Note			2009			2008			2009			2008
				U.S. dollars						Bolivars
Income											��

Sales of crude oil					451,473			458,113			970,667			984,943
Sales of gas					6,778			16,506			14,572			35,488

		19			458,251			474,619			985,239			1,020,431


Cost and expenses

Operational cost					(48,311	)		(77,609	)		(103,869	)		(166,859	)
Depletion, depreciation and amortization		8			(32,571	)		(24,778	)		(70,029	)		(53,273	)
Sales, general and administrative expenses					(10,841	)		(6,705	)		(23,307	)		(14,416	)
Royalties		7 —	(b)		(157,681	)		(225,167	)		(339,014	)		(484,109	)
Financial expenses					(3,617	)		(2,329	)		(7,777	)		(5,007	)

					(253,021	)		(336,588	)		(543,996	)		(723,664	)


Profit before tax					205,230			138,031			441,243			296,767

Income tax expense		7 —	(a)		(61,946	)		(16,814	)		(133,184	)		(36,150	)


Profit and total comprehensive income for the year					143,284			121,217			308,059			260,617

The accompanying notes from 1 to 23 are an integral part of ~~the~~these financial statements

PETRODELTA, S.A.
~~Petrodelta,~~(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
~~Income statement~~
~~Year~~Statements of changes in equity

Years ended December 31, ~~2007~~2009 and 2008
~~initial nine-month period ended December 31, 2006~~

(Expressed In Thousands of US dollar)

2007 2006
Nominal Nominal
(In thousands) Note U.S. dollars bolivars U.S. dollars bolivars

Income

Income from sale of crude oil and gas 11 335,717 721,790,141 283,421 609,354,791
Production royalties 12 (101,929 ) (219,146,456 ) (85,880 ) (184,641,012 )

Total income 233,788 502,643,685 197,541 424,713,779

Cost of goods sold

Production costs 13 (23,752 ) (51,068,878 ) (22,729 ) (48,868,099 )
Depletion, depreciation and amortization 5 (17,956 ) (38,604,664 ) (16,616 ) (35,724,507 )

Total cost of goods sold (41,708 ) (89,673,542 ) (39,345 ) (84,592,606 )

Gross income 192,080 412,970,143 158,196 340,121,173

Expenses

General and administrative expenses 14 (23,220 ) (49,922,967 ) (13,582 ) (29,203,182 )
Special advantage royalties 9 (12,918 ) (27,773,418 ) (10,910 ) (23,456,247 )

Income before tax 155,942 335,273,758 133,704 287,461,744

Income tax

Current 9 (85,849 ) (184,575,715 ) (67,188 ) (144,453,138 )
Deferred 9 21,348 45,898,863 23,415 50,342,336

(64,501 ) (138,676,852 ) (43,773 ) (94,110,802 )

Net income 91,441 196,596,906 89,931 193,350,942


										Retained earnings
					Shareholder					Legal reserve and
	Note		Capital stock		contribution			Share premium		other reserves		Distributable			Total
Balances at December 31, 2007				465		6,512			212,451		47		181,325			400,800

Profit and total comprehensive income for the year				—		—			—		—		121,217			121,217

Shareholders contribution capitalization		14		6,512		(6,512	)		—		—		—			—

Appropriation to legal reserve		14		—		—			—		651		(651	)		—

Dividends declared		14		—		—			—		—		(181,325	)		(181,325	)


Balances at December 31, 2008				6,977		—			212,451		698		120,566			340,692

Profit and total comprehensive income for the year				—		—			—		—		143,284			143,284

Appropriation to other reserves		14		—		—			—		141,245		(141,245	)		—

Dividends declared		14		—		—			—		—		(51,876	)		(51,876	)


Balances at December 31, 2009				6,977		—			212,451		141,943		70,729			432,100

The accompanying notes from 1 to 23 are an integral part of ~~the~~these financial statements

PETRODELTA, S.A.
~~Petrodelta,~~(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
~~Statement~~Statements of changes in equity
~~Year~~

Years ended December 31, ~~2007~~2009 and 2008
~~initial nine-month period ended December 31, 2006~~

(Expressed in Thousands of bolivars)

Retained earnings
Capital Shareholder Share Legal
(In thousands of U.S. dollars) Note stock contribution premium reserve Distributable Total

Balances at April 1, 2006
— — — — — —

Initial capital contribution 8 — — 212,451 — — 212,451
Net income 8 — — — — 89,931 89,931

Balances at December 31, 2006
— — 212,451 — 89,931 302,382

Initial capital contribution 8 465 — — — — 465
Contributions for future capital increases 8 — 6,512 — — — 6,512
Net income 8 — — — — 91,441 91,441
Appropriation to legal reserve 2-q — — — 47 (47 ) —

Balances at December 31, 2007
465 6,512 212,451 47 181,325 400,800

Retained earnings
Capital Shareholder Share Legal
(In thousands of nominal bolivars) Note stock contribution premium reserve Distributable Total

Balances at April 1, 2006
— — — — — —

Initial capital contribution 8 — — 456,769,911 — — 456,769,911
Net income 8 — — — — 193,350,942 193,350,942

Balances at December 31, 2006
— — 456,769,911 — 193,350,942 650,120,853

Initial capital contribution 8 1,000,000 — — — — 1,000,000
Contributions for future capital increases 8 — 14,000,000 — — — 14,000,000
Net income 8 — — — — 196,596,906 196,596,906
Appropriation to legal reserve 2-q — — — 100,000 (100,000 ) —

Balances at December 31, 2007
1,000,000 14,000,000 456,769,911 100,000 389,847,848 861,717,759


										Retained earnings
					Shareholder					Legal reserve and
	Note		Capital stock		contribution			Share premium		other reserves		Distributable			Total
Balances at December 31, 2007				1,000		14,000			456,770		100		389,846			861,716

Profit and total comprehensive income for the year				—		—			—		—		260,617			260,617

Shareholders contribution capitalization		14		14,000		(14,000	)		—		—		—			—

Appropriation to legal reserve		14		—		—			—		1,400		(1,400	)		—

Dividends declared		14		—		—			—		—		(389,846	)		(389,846	)


Balances at December 31, 2008				15,000		—			456,770		1,500		259,217			732,487

Profit and total comprehensive income for the year				—		—			—		—		308,059			308,059

Appropriation to other reserves		14		—		—			—		303,676		(303,676	)		—

Dividends declared		14		—		—			—		—		(111,533	)		(111,533	)


Balances at December 31, 2009				15,000		—			456,770		305,176		152,067			929,013

The accompanying notes from 1 to 23 are an integral part of ~~the~~these financial statements

PETRODELTA, S.A
~~Petrodelta,~~(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.
)

Statements of Cash ~~flow statement~~
~~Year ended December 31, 2007 and~~
~~initial nine-month period ended December 31, 2006~~

Flow

2007 2006
Nominal Nominal
(In thousands) U.S. dollars Bolivars U.S. dollars Bolivars

Cash flows from operating activities

Net income 91,441 196,596,906 89,931 193,350,942
Adjustments to reconcile net income to net cash provided by operating activities
Depletion, depreciation and amortization 18,550 39,881,397 17,076 36,713,507
Deferred income tax (21,348 ) (45,898,863 ) (23,415 ) (50,342,336 )
Net change in provision for abandonment costs 544 1,170,031 388 11,653,500
Net change in operating assets and liabilities
Trade and other accounts receivable (244,122 ) (524,862,669 ) (206,907 ) (444,850,544 )
Prepaid expenses (873 ) (1,873,249 ) — —
Inventories (5,549 ) (11,930,725 ) 830 1,784,561
Trade accounts payable 49,179 105,735,611 35,369 76,042,939
Accruals and other payables 29,567 63,567,233 20,339 43,730,346
Taxes 85,849 184,575,715 67,188 144,453,138

Net cash provided by operating activities 3,238 6,961,387 799 12,536,053

Net cash used in investing activities

Property, plant and equipment (3,238 ) (6,961,387 ) (799 ) (12,536,053 )

Net cash provided by financing activities

Initial and additional capital contributions 6,977 15,000,000 — —

Net cash increase 6,977 15,000,000 — —

Cash

At the beginning of the period — — — —

At the end of the period 6,977 15,000,000 — —

Supplementary information on non-cash activities

Initial contribution of shareholders of property, plant and equipment — — 212,451 456,769,911

(Expressed In Thousands)


	Years ended December 31^st,
	2009			2008			2009			2008
	U.S. dollars						Bolivars
Cash flow from operating activities
Profit and total comprehensive income for the year		143,284			121,217			308,059			260,617

Adjustments to reconcile net income to net cash (used in) provided by operating activities -
Depletion, depreciation and amortization		33,188			25,508			71,352			54,843
Provision for abandonment cost		(3,603	)		(10,866	)		(7,745	)		(23,362	)
Deferred income tax		(43,922	)		(52,560	)		(94,432	)		(113,004	)
Financial cost on provision for abandonment cost		1,639			2,344			3,523			5.039
Tax credit financial cost		1,792			—			3,853			—
Net changes in operating assets -
Accounts receivable		(113,738	)		(133,756	)		(244,538	)		(287,575	)
Material and supplies Inventories		(8,923	)		(10,833	)		(19,185	)		(23,291	)
Prepaid expenses and other assets		20,918			(20,604	)		44,974			(44,299	)
Net changes in operating liabilities
Accounts payable		16,228			321,555			34,891			691,343
Income taxes payable		54,491			(153,037	)		117,157			(329,030	)
Accruals and other liabilities		(3,480	)		132,090			(7,483	)		283,994


Total adjustments		(45,410	)		99,841			(97,633	)		214,658


Net cash provided by operating activities		97,874			221,058			210,426			475,275


Net cash used in investing activities:

Acquisition of property, plant and equipment		(81,425	)		(39,347	)		(175,062	)		(84,596	)


Net cash used in investing activities		(81,425	)		(39,347	)		(175,062	)		(84,596	)


Net cash provided by (used in) financing activities:
Paid dividends		(20,750	)		(181,325	)		(44,612	)		(389,849	)


Net cash used in financing activities		(20,750	)		(181,325	)		(44,612	)		(389,849	)


Net cash increase		(4,301	)		386			(9,248	)		830

Cash and equivalents at the beginning of the period		7,363			6,977			15,830			15,000


Cash and equivalents at the end of the period		3,062			7,363			6,582			15,830

The accompanying notes from 1 to 23 are an integral part of ~~the~~these financial statements

PETRODELTA, S.A.
~~Petrodelta,~~(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.
)

Notes to the financial statements

December 31, ~~2007~~2009 and ~~2006~~
2008

1.(1)		~~Incorporation and Activities~~Reporting Entity

		~~Activities~~ Petrodelta, S.A. (the Company) was incorporated in Venezuela in October 2007, as published in Official Gazette No. 38,786. Its business objective is ~~primarily~~primary exploration to discover ~~hydrocarbon~~oil reserves, extraction of oil in its natural state, and its subsequent ~~gethering,~~collection, transportation and storage pursuant to Article No. 9 of the Venezuelan Hydrocarbon Law (LOH). The Company operates within an area of approximately 1,000 square kilometers in the Uracoa, Bombal and Tucupita fields (formerly the Monagas Sur Unit) and in the El Salto, El Isleño and Temblador fields in the Monagas and Delta Amacuro states in Venezuela (the assigned operating area).

		The Company was created as a result of the process for conversion into mixed-capital companies of the Operating Agreement signed on July 31, 1992 between PDVSA Petróleo, S.A. (PDVSA Petróleo) (formerly Lagoven, S.A.), Harvest Natural Resources, Inc. (Harvest) (formerly Benton Oil and Gas Company) and Venezolana de Inversiones y Construcciones Clérico, C.A. (Vinccler). As part of this process, on March 31, 2006, PDVSA Petróleo, S.A., Corporación Venezolana del Petróleo, S.A. (CVP) and Harvest Vinccler, S.C.A. (HVSCA), the agreement operator and a related company of Harvest and Vinccler, signed a memorandum of understanding for conversion into a mixed company. In June 2007, the National Assembly of the Bolivarian Republic of Venezuela approved the incorporation of the mixed company Petrodelta, S.A. In August 2006, the National Assembly approved the inclusion of the Temblador, El Isleño and El Salto areas into the Monagas Sur Unit for further development of the Company’s primary activities. An ~~Agreement~~agreement for ~~Conversion~~conversion into a ~~Mixed Company~~mixed company was signed between CVP and HNR Finance B.V. (HNR Finance) in September 2007. The Company will operate for 20 years as from October 2007 when the decree for transfer of field operations ~~to the mixed company~~ was published in the Official Gazette.

		Petrodelta, S.A. is 60%-owned by CVP, a wholly owned subsidiary of Petróleos de Venezuela, S.A. (PDVSA), and 40%-owned by HNR Finance.

		Petróleos de Venezuela, S.A. is owned by the Bolivarian Republic of Venezuela, as the sole Shareholder, and is controlled by the People’s Power Ministry for Energy and Oil (MENPET). PDVSA is responsible for the development of the hydrocarbon industry in Venezuela, as well as planning, coordinating, supervising and controlling its companies’ activities in Venezuela and abroad.

		The Company was incorporated and is domiciled in Venezuela. Its legal address is: Avenida Veracruz con Calle Cali, Urbanización Las Mercedes, Edificio Pawa, Piso 5, Caracas, Distrito Capital. Its main offices are located at Avenida Alirio Ugarte Pelayo, Edificio Harvest Vinccler, Ala Norte, Planta Baja in Maturín, Monagas State.

		On ~~March 6, 2008,~~February 26, 2010, the Board of Directors of the Company approved the issuance of the financial statements under International Financial Reporting Standards and submitted said financial statements to the Shareholders of the Company for approval purposes. Once the aforementioned financial statements are duly approved and issued, no amendment of which applies.

~~This is a free translation into English of a report issued in the Spanish language and is provided solely for the convenience of the English~~
~~speaking readers. This report should be read in conjunction with, and construed in accordance with, Venezuelan law and professional~~
~~International auditing standards and International financial reporting standards.~~

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

			turn, will bill the ~~Company for these expenses during the first half of 2008. Such~~Company. These costs were recognized in the ~~results~~income statements for the ~~corresponding periods. These costs~~respective periods and include, but are not limited to, general, administrative, operating and capital expenses required to continue activities in the assigned operating ~~expenses~~area. At December 31, 2009 the Company had not received all information regarding production during the conversion period for the Temblador field in order to ~~continue operations within~~invoice all volumes produced in that field during that period. As Temblador production was handled in PDVSA system, PDVSA had allocated only partial, estimated production to Petrodelta. As a result, Petrodelta had not, and still has not, received full credit for the ~~operating area.~~Temblador field production. Discussions are ongoing to settle figures. During the third quarter 2009, Petrodelta completed the facilities and pipelines to segregate approximately 80 percent of the Temblador field’s production out of PDVSA’s system.

			During the ~~year~~years ended December 31, ~~2007~~2009 and ~~the initial nine-month period ended December 31, 2006,~~2008, the Company has operated with employees assigned by its shareholders or their related companies since it has no direct employees. At December 31, ~~2007,~~2009, the Company ~~has 255~~had 356 employees assigned by its shareholders or their related companies. During the first quarter of 2008, 238 employees were transferred from HVSCA to ~~PDVSA from HVSCA.~~PDVSA.

			During 2009 the Company drilled 18 development wells, produced approximately 7.8 million barrels of oil and sold 4.4 billion cubic feet of natural gas. Petrodelta’s reserves increased primarily by the drilling of two appraisal wells in the largely undeveloped El Salto field. Production was initiated from El Salto field during the month of July 2009 with the drilling and completion of one well which has produced 349,000 barrels of oil through the end of 2009.

			Applicable regulations

			The Company’s main activities are regulated by the Venezuelan Hydrocarbon Law (LOH), effective from January 2002. Gas-related operations are regulated by the Venezuelan Gaseous Hydrocarbon Law of September 1999 and its Regulations of June 2000.

			Below are the main regulations included in the LOH:

	a)		A 30% royalty ~~of 30%~~ on volumes of hydrocarbon extracted.

	b)		A Partial Reform of the Extraction Tax was enacted and published in Official Gazette No. 38,443 of May 24, 2006, establishing a rate equivalent to one-third of the value of all liquid hydrocarbons extracted from any reservoir, calculated on the same basis as royalties. The taxpayer has the right to deduct from the extraction tax any sum payable as royalties (30%), including the additional royalty paid for special advantages ~~taxes~~ (3.33%). ~~At December 31, 2007 and 2006, this tax was lower than that paid and accrued by the Company for royalties and special advantages.~~

	c)		A surface tax equivalent to 100 tax units for each square kilometer or fraction thereof per year for licensed areas that are not under production. This tax will increase by 2% during the first five years, and by 5% during all subsequent years. Company management considers that there are no nonproductive areas.

	d)		An internal consumption tax equivalent to 10% of the value of each cubic meter of ~~oil products~~hydrocarbon derivatives produced and consumed as fuel in internal operations, calculated on

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

and obligations thereunder, to another company in accordance with Article No. 27 of the LOH. This agreement is for 20 years.


2.(2)		~~Summary~~Basis of ~~Significant Accounting Principles~~Preparation

*(a)*		*Statement of compliance*

	~~Below~~	The financial statements as of December 31, 2009 and 2008 are prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the ~~most significant accounting principles~~International Accounting Standards Board (IASB) and ~~practices used in~~their interpretations, issued by the ~~preparation~~International Financial Reporting Interpretations Committee (IFRIC) of the ~~Company’s financial statements. These practices and policies have been applied consistently throughout all periods presented, except when otherwise indicated.~~IASB.

~~a) Bases of measurement and presentation~~ The financial statements for the initial nine-month period ended December 31, 2006 have been prepared and are presented for purposes of comparison with the financial statements for the year ended December 31, 2007 since, as described in Note 1, the Company was formally incorporated in October 2007 through a decree authorizing transfer of operations, however, the financial statements reflect the historical operations of the entity.


			The financial statements for the year ended December 31, 2008 have been prepared and are presented for purposes of comparison with the financial statements for the year ended December 31, 2009.

	*~~Presentation~~(b)*		*Basis of measurement*

			The financial statements have been prepared on the historic cost basis, except for certain assets and liabilities measured at fair value. Assets measured and stated at fair value are: recoverable tax credits, accounts receivable and cash.

			The methods used for measuring fair value are discussed in Note 5.

	*(c)*		*Functional and presentation currency*

			The financial statements are presented in U.S. dollars, the Company’s functional currency, ~~The~~ since the main economic environment ~~for~~in which the Company ~~operations~~operates is the international market for crude ~~oil. The Company presents~~oil and its ~~financial statements in U.S. dollars since~~products. In addition, a significant portion of its ~~income,~~revenues, as well as ~~a significant portion of its~~most costs, expenses and ~~capital~~ investments are denominated in this currency.

			The financial statements in bolivars are presented for statutory purposes. The Company’s financial statements are ~~presented in U.S. dollars and have been prepared in conformity with IFRS issued by~~translated into bolivars, a currency other than the International Accounting Standards Board ( IASB), which comprise: i) IFRS, ii) International Accounting Standards (IAS) and iii) interpretations issued by the International Financial Reporting Interpretations Committee — IFRIC — of the IASB. However, in order to comply with Venezuelan mercantile legislation, the Company is required to maintain its statutory books in bolivars and prepare its financial statementsfunctional currency, in accordance with ~~accounting principles generally accepted~~International Accounting Standard No. 21The Effects of Changes in ~~Venezuela,~~Foreign Exchange Rates.This standard requires each entity to determine its functional currency based on an analysis of the primary economic environment in which ~~constitute~~ the ~~basis for declaring dividends.~~entity operates, which is normally the one in which it primarily generates and expends cash.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

The financial statements are translated into bolivars based on the following criteria:

	-		Assets and liabilities of each statement of financial position at the exchange rates in effect at date.

	-		Income and expenses at the average exchange rate for each year.

	-		Exchange gains or losses resulting from translation are recognized as a separate equity component under Cumulative translation adjustment. During the year ended December 31, 2009 and 2008 the official exchange rate did not change. Consequently, a cumulative translation adjustment was not originated.

All financial information presented in U.S. dollars has been rounded in thousands.

	*(d)*		*Use of estimates, risks and uncertainty*

			The preparation of financial statements in conformity with IFRS requires management to make estimates, judgments and assumptions that affect the application of accounting policies and the amounts of assets, liabilities, income and expense. The Company applies its best estimates and judgments; however, actual results may differ from initial estimates.

			The related estimates and assumptions are based on experience and other factors which are considered reasonable under current circumstances and form the basis for making judgments on the carrying value of assets and liabilities not easily determined by other means. Estimates and assumptions are reviewed periodically, and revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected.

			Significant areas of uncertainty affecting management’s estimates and judgment in the application of accounting policies, which significantly affect financial statement amounts are:

	-		Note 8 — Depletion, depreciation and amortization

	-		Note 7 — Deferred income tax

	-		Note 9 — Provision for abandonment costs

	-		Note 17 — Valuation of financial instruments

	-		Note 3 -s- Measurement of contract-based retirement benefit obligations and other post-retirement benefits other than pensions, which are being calculated by PDVSA for subsequent billing to the Company.

	-		Note 18 — Liabilities, contingencies and accruals in respect of environmental issues

The Company’s operations may be affected by the political, legislative, regulatory and legal environment, both at the national and international level. In addition, significant changes in

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

prices or availability of crude oil and its products may have an impact on the Company’s results of operations in any given year.

(3)		Summary of Significant Accounting Policies

		The accounting policies used for the preparation of these financial statements have been applied consistently for all periods presented.

	*(a)*		*Transactions in currencies other than the ~~U.S.~~U.S dollar*

			Transactions in currencies other than the U.S. dollar are translated atinto the Company’s functional currency using the exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars using the exchange rate ~~in effect~~prevailing at the ~~balance sheet date.~~date of the statement of financial position. Exchange gains or losses on monetary items in currencies other than the U.S. dollar represent the difference between the net cost in the functional currency at the beginning of the year, adjusted by the effective interest rate and payments made during the year, and the net cost in currencies other than the U.S. dollar translated using the year-end exchange rate. Nonmonetary assets and liabilities in currencies other than the U.S. dollar stated at fair value are retranslated to the functional currency using the exchange rate prevailing at the date fair value was determined. Exchange gains or losses resulting from ~~translation~~retranslation are recognized in the statement of comprehensive income.

	*(b)*		*Financial instruments*

			Non-derivative financial instruments consist of cash and cash equivalents, recoverable tax credits, accounts receivable, accounts payable to suppliers and other liabilities.

			Non-derivate financial instruments classified as at fair value through profit or loss are initially recognized at fair value, plus any direct transaction costs.

			A financial instrument is recorded when the Company engages or commits to the contractual clauses thereof. Financial assets are reversed if the Company’s contractual rights over the asset’s cash flows expire or if the Company transfers the financial asset to another entity without retaining control or a significant portion of the asset’s risks and rewards. Regular purchases and sales of financial assets are accounted for at trade date, which is generally the date on which the Company commits to purchase or sell the asset. Financial liabilities are derecognized when the Company’s specific contractual obligation expires or is paid.

			During the years ended December 31, 2009 and 2008, the Company conducted no transactions with derivative instruments.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

	*(c)*		*Property, plant and equipment*

			Property, plant and equipment are stated at cost, net of accumulated depreciation and impairment losses (See Note 8). The successful efforts accounting method is used for exploration and production activities of crude oil and natural gas. All costs for development wells, related plant and equipment, and property used for oil recovery are capitalized. Costs of exploratory wells are capitalized until it is determined whether they are commercially feasible; otherwise, such costs are charged to operating expenses. Other exploratory expenditures, including geological and geophysical costs, are expensed as incurred. Costs for major maintenance or general repairs are capitalized when identified as a separate component of the asset to which such maintenance and repair corresponds and are depreciated between one maintenance period and the other. Disbursements for minor maintenance, repairs and renewals incurred to maintain facilities in operating conditions are expensed. Gains or losses arising from asset retirement or disposal are included in the income statement.

			The cost of property, plant and equipment also includes, when relevant, the amounts associated with asset retirement obligations (See Note 8).

			Finance costs of projects requiring major investments over long-term construction periods and those incurred for specific projects are capitalized and amortized over the estimated useful lives of the related assets.

			The cost of assets built by the Company includes materials and direct labor, as well as any other direct cost attributable to bringing the asset to working condition. Costs for dismantling and removal from the construction site are also included. All disbursements relating to construction or purchase of property, plant and equipment in the stage prior to implementation are stated at cost as work in progress. Once the assets are ready for use, they are transferred to the respective component of property, plant and equipment and depreciation or amortization commences.

			When parts of a property, plant and equipment asset have different useful lives, they are recorded separately as a significant component of that asset.

			Gains or losses on disposal of a property, plant and equipment item are determined by the difference between the proceeds from disposal, if any, and the net carrying amount of the asset, and is recognized under other income (expense), net in the statement of comprehensive income.

			Depreciation and amortization of capitalized costs related to wells and facilities for the production of crude oil and gas are determined by the units of production method by field, based on proved developed reserves. The rates used are reviewed annually based on an analysis of reserves and are applied retroactively at the beginning of the year. Capitalized costs of other plant and equipment are depreciated over their estimated useful lives, mainly using the straight-line method with an average useful life of 15 years for administrative

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

			buildings and between 3 and 5 years for the remaining assets. Ordinary withdrawals are eliminated against the respective accumulated depreciation; net gains or losses from extraordinary withdrawals are included in the statement of comprehensive income.

			Depreciation methods and average useful lives of property, plant and equipment are reviewed annually.

			Certain materials and supplies accounted for as inventory and considered strategic since they will be used as spare parts for two years operation in the production facilities and in specific investment projects are reported under property, plant and equipment.

	*(d)*		*Inventories*

			Inventories are stated at the lower of cost and net realizable value. The cost of inventories of crude oil and its products is determined using the average cost method. Materials and supplies are valued mainly at average cost, less an allowance for possible losses, and are classified into two groups: current assets and non-current assets.

			Net realizable value is the estimated selling price in the normal course of business, less costs to complete and estimated selling costs.

	*(e)*		*Trade accounts receivable*

			Trade accounts receivable are accounted for according to price formulas established in the hydrocarbon purchase sale agreement between the mixed companies and PDVSA Petróleo, whereby the former undertake to sell and PDVSA Petróleo undertakes to buy all hydrocarbons produced that are not being used in their operations within the delimited operating areas. At December 31, 2009 and 2008, the Company does not expect to incur losses on uncollectible accounts and, therefore, has not set aside a provision in this connection.

	*(f)*		*Cash and cash equivalent*

			Petrodelta, S.A. considers as cash and cash equivalents placements and time deposits maturing within three months that are readily convertible.

	*(g)*		*Impairment in the value of long-lived assets*

			Financial assets

			The Company assesses possible impairment in the value of its financial assets at each reporting date. A financial asset is impaired if there is objective evidence that one or more events have had a negative effect on the estimated future cash flows of the asset.

			Significant financial assets are assessed individually to determine their impairment. All other financial assets sharing similar credit risk characteristics are evaluated as a group.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

			Impairment losses are recognized in the statement of comprehensive income. An impairment loss is reversed if it can be objectively associated with an event occurring after the impairment loss was recognized.

			Non-financial assets

			The carrying value of non-financial assets, excluding inventories and deferred tax, is reviewed for possible impairment at each reporting date. The recoverable amount of the asset is estimated if evidence of impairment exists.

			An impairment loss is recognized for the amount by which the asset’s carrying amount or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the assets grouped at the lowest levels for which there are separately identifiable cash flows. Recoverability of assets to be held and used is measured by comparing their carrying amount to the net discounted future cash flows expected to be generated by these assets. If the carrying amount of the assets exceeds the estimated value of discounted future cash flows, an impairment loss is recognized in the income statement in the amount of such excess. The asset cost is shown net of this impairment charge. Impairment is determined by the Company based on cash-generating units, in accordance with its business segments, geographical locations and the final use of the production generated by each unit. Impairment losses may be reversed only if there has been a change in the estimates used after the impairment loss was recognized.

	*(h)*		*Costs associated with asset retirement obligations*

			The Company capitalizes estimated costs associated with obligations from retirement of assets used for exploration and crude oil and natural gas production activities, based on the future retirement plan for those assets. Cost is capitalized as part of the related long-lived asset and is amortized over its useful life with a charge to operating costs.

			Obligations associated with the retirement of long-lived assets are recorded at fair value as incurred, based on discounted future cash flows. Fair value is determined based on current regulations and technologies.

	*(i)*		*Income tax*

			Income tax expense comprises current and deferred tax. Income tax expense is recognized in the results for each year, except for items that should be directly recognized in other comprehensive income.

			Current tax is the estimated amount payable based on taxable income for the year, using the tax rate and the methodology established in current regulations at the balance sheet date and any adjustment to taxes payable from previous years.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

Deferred income tax is accounted for using the balance sheet method. Deferred assets and liabilities are recognized for future tax consequences attributable to differences between the carrying amounts of assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. The value of deferred assets and liabilities is determined based on tax rates expected to be applicable to taxable income for the year in which temporary differences will be recovered or settled pursuant to law. The effect on deferred assets and liabilities of changes in tax rates is recorded in the results for the year in which such changes become effective.
A deferred tax asset is recognized only to the extent that future taxable income will be available for offsetting. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefit will be realized.

	*(j)*		*Provisions*

			A provision is recorded if as a result of a past event the Company has a present legal or constructive obligation that can be reliably estimated and it is probable that an outflow of economic benefits will be required to settle the obligation.

			In conformity with the environmental policy established by PDVSA and current legislation, the Company recognizes a liability when costs are likely and can be reasonably estimated. Environmental expenditures that relate to income from current or future operations are recorded as expenses or assets, as applicable. Expenditures that relate to past operations that do not contribute to current or future revenue generation are expensed. These provisions are created when an obligation related to environmental remediation is identified, in respect of which the Company has the necessary information to determine a reasonable estimate of the related cost. Subsequent adjustments, if required, are made upon receipt of additional information.

	*(k)*		*Revenue recognition*

			Income from sales of crude oil and gas is recorded in the statement of comprehensive income when risks and significant rights of ownership are transferred to PDVSA Petróleo and MPPEP as stipulated in the hydrocarbon purchase sale agreement. Income is recognized when it can be reasonably measured and it is probable that future economic benefits will flow to the Company. Income from activities other than the Company’s main business is recognized when realized. Income is not recognized when there is significant uncertainty as to the recoverability of the obligation acquired by the buyer. All of the Company results are from continuing operations.

	*(l)*		*Capital stock*

			Common shares are classified as equity. For the years ended December 31, 2009 and 2008, the Company has no preferred shares (See Note 14).

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

	*(m)*		*Share premium*

			The Company recognizes as share premium any excess in the value of contributions made by shareholders for Company incorporation over the par value at the incorporation date (See Note 14).

	*(n)*		*Legal reserve*

			The Venezuelan Code of Commerce requires companies to set aside 5% of their net income each year to a legal reserve until it reaches an amount equivalent to at least 10% of their capital stock in bolivars (See Note 14).

	*(o)*		*Other equity reserves*

			The Company has the policy of transferring from retained earnings to other equity reserves the balance of deferred tax account when the latter is an asset. This reserve is recognized in retained earnings to the extent that such asset gets realized when the temporary differences that gave rise to it are deducted for tax purposes and consequently would be available for dividend payments.

	*(p)*		*Dividend distribution*

			Dividend distribution to the Company’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the shareholders.

	*(q)*		Accounting estimates requiring a high degree of judgment

			The Company continually evaluates judgments used to record its accounting estimates, which are recorded based on historical experience and other factors, including expectation of future events that are believed to be reasonable under the circumstances. Significant future changes to assumptions established by management may significantly affect the carrying value of assets and liabilities.

			Below is a summary of the most significant accounting estimates made by the Company:

			*Estimates of oil reserves*

			Oil and gas reserves are key elements in the Company’s decision-making process. They are also important in evaluating impairment in the carrying amount of long-lived assets. Calculation of depreciation, amortization and depletion of property, plant and equipment accounts related to hydrocarbon production requires quantification of proved developed hydrocarbon reserves expected to be recovered by the Company in the future. Reserve estimates are only approximate amounts due to the high degree of judgment and specialization required to develop the information. Reserves are calculated by specialized technical departments at Petróleos de Venezuela, S.A. (PDVSA) (related company that owns the Company’s main shareholder) and results are submitted for approval by MPPEP

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

			in order to guarantee the reasonableness of the information. Additionally, reserve studies are regularly updated to guarantee that any change in estimates is timely recorded in the Company’s financial statements.

			To date, reserves studies assigned to the Company are currently under revision, update and certification.

			*Assessment of impairment in the value of property, plant and equipment*

			Management annually assesses impairment in the value of property, plant and equipment. The main key assumptions considered by management to determine the recoverable amount of property, plant and equipment were income projections, oil prices, royalties, operating and capital costs and the discount rate. Projections include proved developed reserves to be produced during the development period of production activities in the assigned fields. At December 31, 2009 and 2008, the Company has not identified impairment in the carrying value of property, plant and equipment as a result of these estimates.

			*Abandonment cost calculation*

			The Company’s financial statements include an asset and a provision for property, plant and equipment used in hydrocarbon production that is expected to be abandoned in the future and in relation to which the Company will make future disbursements. Assumptions considered for the calculation of this asset and the provision for abandonment (asset abandonment costs, date of abandonment, and inflation and discount rates) may vary depending on factors such as performance in the field, changes in technology and legal requirements. Assumptions made by the Company are recorded based on technical studies and management’s experience and are regularly reviewed (See Note 9).

	*(r)*		*Related party transactions*

			The Company does not disclose, as part of balances and transactions with related companies (See Note 19), transactions with government entities conducted in the normal course of business, the terms and conditions of which are consistently applied to other public and private entities and for which there are no other suppliers, i.e., electricity, telecommunications, taxes, etc.

	*(s)*		*Accrual for employee benefits*

			Following corporate instructions from PDVSA, the related company PDVSA, S.A. assumed the employer role for employees who accepted the transfer, and are working as assigned employees to Petrodelta, S.A. operations. According to this, PDVSA Petróleo, S.A. administer and prepare those employees’ payroll and invoice direct payroll and benefits of the Company, which recognize those costs against a liability to PDVSA Petróleo, S.A. The direct payroll and benefits costs are determined by PDVSA according the following policies:

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

			*Termination benefits*

			The Company accrues for its liability in respect of employee termination benefits based on the provisions of the Venezuelan Labor Law and the prevailing oil-sector collective labor agreement. Under certain circumstances, the Law provides for an additional indemnity for unjustified dismissals. Most of this accrual for indemnification has been deposited in trust accounts in the name of each employee.

			On October 11, 2007, PDVSA entered into a Collective Labor Agreement, effective through 2009, so improving salaries and labor benefits for staff in the contract payroll in Venezuela. Those liabilities resulting of the application of said Collective Labor Agreement are in full effect as from November 2007. At the end of 2009, the United Federation of Workers for Oil, Gas and Similar (FUTPV) and PDVSA, are waiting for the approval by the president of the Bolivarian Republic of Venezuela to sign the contract for the period 2009 to 2011 (See Note 21).

			*Profit sharing and bonuses*

			Liabilities in respect of labor benefits and bonuses for staff, vacation leaves, and other benefits are accounted for as incurred along with the staff’s provision of services.

			During the years ended December 31, 2009 and 2008, the Company has not had direct employees and, therefore, has not recorded liabilities derived from these labor-related benefits.

			*Retirement Plan*

			The amount to be provision for retirement benefits is received from PDVSA based on actuary studies. Net liabilities in respect of the retirement plan as defined in the contract are accounted for separately per each participant in said plan, by estimating the amount of future benefits to be acquired by staff versus their length of service during current and prior periods; said benefits are discounted in order to determine their current value, then it is deducted the fair market value of those assets associated to the plan. The discount rate reflects the yield rate that, as of the date of the financial statements, is reported through financial instruments issued by credit institutions with high ratings and maturity dates that are in line with those due dates applicable to said liabilities. This calculation is made by an actuary by using the projected unit credit method.

			Improvements made to the plan’s benefits, in connection with past service cost, are expensed in the statement of profit and loss per the estimated period that, on average, will last until the moment said benefits will be paid in full. As said benefits fall under irrevocable acquired rights after approval, said expense is recorded, immediately, in the statement of comprehensive income.

			It is accounted for as income or expense the share corresponding to the total of unrecorded actuarial earnings or loss in excess of 10% of the greater of these sums: a) the current

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

			value of liabilities in respect of those benefits defined as of that date; and b) the reasonable value of the plan’s assets as of that date. Said caps are computed and apply separately per each plan’s benefit so defined.

			*Post-retirement benefits other than retirement*

			Net liabilities in respect of post-retirement benefits other than retirement, as defined in the contract, equal the total of future benefits earned by staff along with their length of service during current and prior periods. Said benefits include mainly: health and dental plans, burial and funeral insurance, and food electronic card. Said liabilities are computed by using the projected unit credit method; then they are deducted to reflect their current value and, if applicable, the fair market value of related assets is deducted as well. The discount rate should reflect the yield rate that, as of the date of the financial statements, is reported through financial instruments issued by credit institutions with high ratings and maturity dates that are in line with those due dates applicable to said liabilities.

			Past service cost and the actuarial income or loss are recorded by using the method set out in the retirement plan per the contract.

			The provision for this concept is provided by PDVSA which is based on actuary studies.

	*(t)*		*New accounting standards ~~and IFRIC interpretations~~not yet adopted* ~~The following~~

			Certain new standards, amendments and interpretations to existing standards ~~which have been published but~~ were not effective for the year ended December 31, ~~2007,~~2009 and have not been applied in the preparation of the Company’s financial ~~statements:~~statements. The most important standards, amendments and interpretations for the Company are as follows:

On November 30, 2006, the IASB issued IFRS 8, Operating Segments, effective for accounting periods beginning on or after January 1, 2009. This standard requires the disclosure of operating segments based on internal reports that are reviewed regularly by the Operations Committee for

	-		In November 2009, IASB issued revised IAS 24,Related Party Transactions. This review applies for accounting periods beginning on or after January 1, 2011. This version simplify the disclosure requirements for government-related entities and clarifies the definition of related parties.

	-		In July 2009, IASB issued amendments to IFRS 1First-time Adoption of International Financial Reporting Standards, effective for accounting periods beginning on or after January 1, 2010 with earlier application permitted. IFRS 1 amendments address the retrospective application of IFRSs to particular situations and are aimed at ensuring that entities applying IFRSs will not face undue cost or effort in the transition process. The amendments 1) exempt entities using the full cost method from retrospective application of IFRSs for oil and gas assets; 2) exempt entities with existing leasing contracts from reassessing the classification of those contracts in accordance with IFRIC 4 Determining whether an Arrangement contains a Lease when the application of their national accounting requirements produced the same result.

	-		In April 2009, the IASB published the annual IFRS improvement project that included amendments to certain existing standards and interpretations not effective for the year

1020

~~Petrodelta,~~PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, ~~2007~~2009 and ~~2006~~

2008

			~~Exploration~~ended December 31, 2009. The most important standards and ~~Production,~~interpretations for the ~~Operations Committee~~Company are: IFRS 2Share-based Payment; IFRS 5Non-current Assets held for ~~Refining~~sale and ~~the Operations Committee for Trade~~discounted operations; IFRS 8Operating Segments; IAS 1Presentation of Financial Statements; IAS 7Statement of Cash Flows; IAS17Leases; IAS 18Revenue; IAS 36Impairment of Assets; IAS 38Intangible Assets; IAS 39Financial Instruments: recognition and ~~Supplies, for purposes~~Measurement; IFRIC 9Reassessment of ~~assessing each segment.~~Embedded Derivatives; and IFRIC 16Hedges of a Net Investment in a Foreign Operation.

	•-		~~IFRIC 12, Service Concession Arrangements (IFRIC 12) was issued by~~In November 2009, the IASB ~~in 2006. This interpretation provides guidance for recognition~~issued IFRS 9 —Financial Instruments —on the classification and measurement of ~~public-to-private service concession arrangements. IFRIC 12~~financial assets. Publication of IFRS 9 represents the completion of the first part of a three part project to replace IAS 39 -Financial Instruments: Recognition and Measurement.IFRS 9 will be ~~in effect~~effective for ~~years~~accounting periods beginning on or after January 1, ~~2008.~~2013. This standard uses a simple approach to determine whether a financial asset is measured at amortized cost or fair value. The new approach is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The standard also requires a single impairment method to be used.

			The Company completed the analysis of these standards and determined no significant effects on its financial statements.

	•*(u)*		~~Revised~~*Recently adopted accounting pronouncements*

			The following standards and interpretations became effective during 2009:

	-		In March 2009, IASB published amendments to IFRIC 9 and IAS ~~23, Borrowing Costs,~~39:Embedded derivatives. The amendment clarifies the treatment of embedded derivatives for entities that make use of the reclassification amendment issued by the IASB in October 2008. The reclassification amendment allows entities to reclassify particular financial instruments out of the ‘at fair value through profit or loss’ category in specific circumstances. The amendments to IFRIC 9 and IAS 39 issued clarify that on reclassification of a financial asset out of the ‘at fair value through profit or loss’ category all embedded derivatives have to be assessed and, if necessary, separately accounted for in financial statements.

	-		In March 2009, IASB published amendments to IFRS 7 —Financial Instruments: Disclosures.The amendments provide enhanced disclosure about fair value measurements and reinforce existing principles for disclosures about liquidity risk. Disclosures introduce a three-level hierarchy for fair value measurement disclosures and require entities to provide additional disclosures about the relative reliability of fair value measurements. These disclosures will help to improve comparability between entities about the effects of fair value measurements.

	-		In January 2008, the IASB issued revised IAS 32,Financial Instruments: Disclosure and Presentation,which requires certain financial instruments to be classified as equity when

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

			they are available and impose an obligation on the Company’s equity. This standard will be effective for accounting periods beginning on or after January 1, 2009.

	-		In September 2007 the IAS 1,Presentation of Financial Statementswas revised and introduced a statement of comprehensive income, which includes the profit or loss for the period and other comprehensive income containing income and expense items not recognized in the results for the period due to requirements of other standards. In addition, according to this standard, the balance sheet will become the statement of financial position since it better reflects the function of the statement and is consistent with the terms used in the Concept Framework of International Accounting Standards.

	-		In March 2007 was revised IAS 23,Borrowing Costseliminates the option to expense borrowing costs and requires capitalization of borrowing costs directly attributable to the ~~respective acquisition. This standard will be in effect for years beginning on~~acquisition, construction or ~~after January 1, 2009.~~

	•		~~IFRIC 11, Treasury Share Transactions. Applies to transactions in which an entity or an entity’s shareholders have granted equity instruments or incurred~~production of a ~~liability to transfer cash or other assets for amounts that are based on the price (or value)~~qualifying asset as part of the entity’s shares or other equity instruments of the entity. This Interpretation applies to such transactions when the identifiable consideration received (or to be received) by the entity, including cash and the fair value of identifiable non-cash consideration (if any), appears to be less than the fair value of the equity instruments granted or liability incurred. However, this Interpretation does not apply to transactions excluded from the scope of IFRS 2 in accordance with paragraphs 3–6cost of that ~~IFRS. IFRIC 11 will be in effect for years beginning on or after March 1, 2007.~~

	•		In July 2007, the IASB issued Interpretation No. 14 (IFRIC 14), IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, which explains when to increase or reduce future contributions in relation to a defined benefit asset considered available, and also provides guidance on the impact of minimum funding requirements on these assets. Likewise, it clarifies when a minimum funding requirement may give rise to a liability. This interpretation will be in effect for years beginning on or after January 1, 2008.asset.

		~~The Company is evaluating the new standards issued and, based on its analysis to date, considers that they will not significantly affect its financial statements.~~

		~~Standards and interpretations to existing standards that have been recently adopted by the Company~~

IFRS 7, Financial Instruments: Disclosures and Complementary Amendment to IAS 1, Presentation of Financial Statements – Capital Disclosures (effective from January 1, 2007). IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

			instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. IFRS 7 replaces IAS 30. The amendment to IAS 1 introduces disclosures about the level of an entity’s capital and how it is managed. Company management is analyzing the impact of IFRS 7 on the Company’s operations and will apply IFRS 7 and the amendment to IAS 1 for annual periods beginning January 1, 2008.

	•		IFRIC 9, Reassessment of Embedded Derivatives, requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the original terms of the contract.

	•		IFRIC 10, Interim Financial Reporting and Impairment (effective from November 1, 2006). IFRIC 10 sets out that the impairment losses recognized in a previous interim period on goodwill, investments in equity instruments and investments in financial assets should not be reversed. The Company has not recognized impairment losses in respect of goodwill, investments in equity instruments or investments in financial assets. Therefore, adoption of this interpretation does not have an impact on the Company’s financial statements.

~~Interpretations to existing standards that are not relevant for the Company’s operations~~
The following interpretations to existing standards have been published and are mandatory for the Company’s accounting periods beginning on or after May 1, 2006, but are not relevant for the Company’s operations:

~~IFRIC 7, Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies.~~

The Company’s accounting policies have been ~~reviewed~~revised and modified, when necessary, to adopt the requirements established in these new standards or interpretations. Adoption of these standards and interpretations did not significantly affect the Company’s financial statements.

~~b) Estimates, risks and uncertainty~~
The preparation of financial statements in conformity with IFRS requires management to make estimates, judgments and assumptions that affect the application of accounting policies and the amounts of assets and liabilities at the balance sheet date, the amounts of income, costs and expenses for the year ended on that date, and the disclosure of contingent assets and liabilities. The Company applies its best estimates and judgments; however, actual results may differ from initial estimates.

(4)	~~Estimates and assumptions are reviewed on a regular basis. Revisions to accounting estimates are recognized in~~	Exchange Agreement with the ~~period in which the estimate is revised and any future periods affected.~~Central Bank of Venezuela (BCV)

	~~Significant areas~~	On November 21, 2005, the Ministry of ~~uncertainty affecting management’s estimates~~Finance and ~~judgment~~BCV published Exchange Agreement No. 9, which establishes that foreign currency obtained from hydrocarbon exports, including gaseous hydrocarbons, must be sold to BCV, except for foreign currency earmarked for activities conducted by PDVSA in conformity with the ~~application of accounting policies, which significantly affect financial statement amounts, are:~~

~~Note 5 — depletion, depreciation and amortization.~~

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

	•		~~Note 6 — provision for abandonment costs.~~

	•		~~Note 9 — deferred income tax.~~

	•		~~Note 2-k — measurement of retirement benefit obligations defined in the collective labor~~BCV Law Reform. Under this agreement, ~~and other post-retirement benefits other than pensions.~~

The Company’s operations may be affected by the political, legislative, regulatory and legal environment, both at the national and international level. In addition, significant changes in prices or availability of crude oilPDVSA and its ~~by-products~~subsidiaries may ~~have an impact on the Company’s results~~not maintain foreign currency funds in Venezuela for more than 48 hours, and establishes how these funds will be used by PDVSA and monthly information to be presented to BCV in respect of ~~operations~~foreign currency flows generated by its activities, asset and liability positions in ~~a given year.~~

~~c) Recognition of revenue, costs and expenses~~
~~Income is recognized at fair value of products sold, net of sales taxes, returns or discounts.~~

		*~~Sales of hydrocarbons~~* ~~Income from sales of hydrocarbons is recognized in the income statement when risks~~foreign currency, and ~~rights of ownership are transferred to~~payments made by PDVSA Petróleo at the delivery point as stipulated in the hydrocarbon sales agreement signed between the Company and PDVSA Petróleo. Income is calculated and recorded at the transaction date based on the agreement. Income is recognized when it can be reasonably measured and it is probable that future economic benefits will flow to the Company.abroad.

		*~~Oil~~*	Exchange Agreement No. 2 of February 6, 2004 was amended on March 2, 2005 to establish exchange rates of Bs. 2,144.60/US$1 (Bs.F. 2.14) (purchase) and ~~gas extraction royalties~~ ~~Royalties paid are recognized as a reduction~~Bs. 2,150/US$1 (Bs.F. 2.15) (sale) (See Note 21).

(5)		Determination of ~~income from sales of hydrocarbons since they do not represent an increase of the economic benefits received by the Company.~~Fair Values

	*~~Interest income~~* ~~Interest income~~	Certain of the Company’s accounting policies and disclosures require the determination of fair values for financial and non-financial assets and liabilities. Fair values have been estimated for purposes of valuation and disclosure using available market information and appropriate

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

			valuation methods. Additional information on fair value estimates is ~~calculated based on past due balances receivable at LIBOR under~~disclosed in the ~~effective interest method. At December 31, 2007~~specific notes to the assets and ~~2006, the Company has not billed PDVSA Petróleo and, therefore, no interest income has been generated.~~liabilities.

		*~~Costs and expenses~~* ~~Costs and expenses are recognized in the income statement as incurred, based on the~~	The fair value of ~~the good or service received.~~

~~d) Local third-party accounts receivable~~
Local third-party accounts receivable are shown at their estimated or billed value, which is reduced to their recoverable amount through estimates of doubtful accounts, which represent losses that may be incurred in respect of accounts receivable. The provision for doubtful accounts is determined based on the review of all balances receivable at period end and the amount so determined is charged to the results for the period. At December 31, 2007 and 2006, the Company considers that no losses will be incurred in respect of uncollectible accounts and, therefore, has not set aside any provision in this connection.

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

~~e)Inventories~~

Inventories of spare parts and supplies for drilling are valued at the lower of cost and net realizable value. The net realizable value is represented by the estimated selling price in the normal course of operations, less applicable costs of sales.

~~f) Property, plant and equipment~~
~~Exploration and evaluation disbursements~~
Exploration and evaluation disbursements are recorded under the successful efforts method. Exploration disbursements, including the cost of license purchases, are capitalized as intangible assets when incurred and other disbursements, such as geology and geophysics disbursements, are recorded in the income statement. Management evaluates the discovery of proved reserves annually. When proved reserves are determined, the relevant disbursements, including the cost of license purchases, are transferred to oil property, accounts and depreciated under the units of production method. Non-successful exploration disbursements are recorded in the income statement. Management evaluates the impairment in the value of exploration assets when events indicate that their carrying value exceeds their recoverable value.

~~Development disbursements~~
Disbursements for construction, installation or completion of infrastructure facilities, such as platforms, pipelines and drilling of proved developed oil wells, are capitalized as part of development accounts included as part of property, plant and equipment. When development activities are completed in a specified field, disbursements are transferred to production asset accounts. Depreciation and amortization are not recorded during the development phase.

~~Production disbursements~~
Petroleum properties are represented, as a whole, by disbursements related to development, exploration and evaluation for production of proved reserves. Oil and gas properties related to production activities are recorded at cost and shown net of accumulated depreciation and any loss recognized for impairment in the value of assets.

Investments capitalized according to the previous criteria are amortized over the field’s useful life on the basis of the annual production to proved developed reserves. Any amount not amortized represents non-proved or probable reserves that are still being developed. The amount of this factor related to non-proved or probable reserves is evaluated annually and is amortized as these reserves are developed.

~~Other~~
Other fixed assets not related to hydrocarbon exploration, development and production (mainly office furniture and equipment, and vehicles) are recorded at cost and shown net of accumulated depreciation.

Additions, renewals and significant improvements are capitalized when it is probable that future economic benefits will flow to the Company from these assets and the cost of assets may be reasonably measured. Disbursements for maintenance, repairs and minor renewals of property, plant and equipment, mainly operating facilities, are recorded in the income statement as incurred. Gains and losses on sale are determined by comparing the amount of the sale with the asset’s book value and are recognized in the income statement as obtained or incurred.

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

		*~~Depreciation and amortization~~* ~~Property,~~ plant and equipment ~~related to hydrocarbon production activities~~recognized as a result of a business acquisition is ~~depreciated by the units of production method~~essentially based on ~~proved developed reserves. Changes~~market values and other suitable valuation methods. The market value of assets is the estimated amount at which these assets could be exchanged on the valuation date between a willing buyer and seller in ~~estimates used are recorded prospectively.~~an arm’s length transaction wherein the parties had each acted knowledgeably, prudently and without compulsion.

		~~Other fixed assets are depreciated~~	The fair value of recoverable tax credits and other liabilities has been determined by discounting net cash flows expected to be generated by the asset, using interest rates applicable in the ~~straight-line method over their estimated useful lives as follows:~~


		~~Years~~

~~Office furniture and equipment~~		~~3-5~~
~~Vehicles~~		5

~~g) Impairment in the value of long-lived assets~~
The Company assesses possible impairment in the value of its assets at each balance sheet date when events indicate that their recorded value may not be recoverable. Recoverability of assets held and used is measured by comparing their carrying amount with income from net discounted future cash flows expected to be generated by these assets. If the carrying amount of the assets exceeds the estimated value of income from discounted future cash flows, an impairment loss is recognized in the income statement for the amount by which the asset’s carrying amount exceeds its recoverable amount. The asset cost is shown net of this impairment charge. Impairment is determined by the Company based on cash-generating units, represented by oil reservoirs in the production area assigned to the Company. At December 31, 2007 and 2006, Company management considers, in conformity with generally accepted accounting principles, that none of its long-lived assets is impaired.

~~h) Fair value of financial instruments~~
Financial instruments are recorded in the balance sheet as either assets or liabilities at their respective fair values. The carrying value of cash, accounts receivable, accounts payable and accruals approximates their fair value due to the short-term maturities of these instruments. The Company has identified no derivative financial instruments. The Company recognizes transactions with financial instruments at their transaction date.

~~i) Income tax~~
Income tax comprises current and deferred tax. Current tax is the estimated amount to be paid based on taxable income for the period, using the tax rate and the methodology established in current regulations. Deferred income tax is recognized using the balance sheet method and arises from temporary differences between the tax base of assets and liabilities and their amounts in the financial statements. Recognition as an asset is given only to those tax benefits that are considered realizable in future periods.

~~Income tax related to dividend distribution, determined based on legal regulations of each fiscal jurisdiction, is recognized as a liability when the obligation to pay such dividends arises.~~

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

~~j) Accrual for employee termination benefits~~
~~Termination benefits~~
The Company accrues for its liability in respect of employee termination benefits based on the provisions of the Venezuelan Labor Law and the prevailing oil-sector collective labor agreement. Under certain circumstances, the Law provides for an additional indemnity for unjustified dismissals.

~~Profit sharing and bonuses~~
Venezuelan Labor Law also requires a mandatory distribution to employees (profit-sharing bonus) of up to 15% of a company’s pre-tax income. The established minimum and maximum amounts for distribution are 15 and 120 days of salary, respectively.

During the year ended December 31, 2007 and the initial nine-month period ended December 31, 2006, the Company has not had direct employees and, therefore, has not recorded liabilities derived from these labor-related benefits.

~~k) Retirement plan and other employee benefits~~
As described in Note 1, during the first quarter of 2008, employees were transferred from HVSCA to PDVSA and, as of that date, are eligible for retirement plans and other labor benefits granted by PDVSA. These plans are based, among other conditions, on length of service, age and salary. During 2008 the Company will record past service costs arising from adoption of these plans on the basis of the actuarial study to be made in 2008 for this purpose, in conformity with IAS 19.

~~As described in Note 1, these employees have been assigned to the Company by PDVSA; consequently, all costs related to their employment will be billed to the Company by PDVSA.~~

~~l) Environmental expenditures~~
In conformity with the Company’s environmental policy and current applicable regulations, a liability is recognized when costs are likely and can be reasonably estimated. Environmental expenditures that relate to income from current or future operations are recorded as expenses or assets, as applicable. Expenditures that relate to past operations that do not contribute to current or future revenue generation are expensed. These provisions are set aside when an obligation related to environmental remediation is identified, in respect of which the Company has the necessary information to determine a reasonable estimate of the related cost. Subsequent adjustments, if required, will be made upon receipt of additional information.

~~m) Costs related to obligations from asset withdrawal~~
Estimated abandonment costs at the end of a field’s useful life are regularly reviewed and recorded based on estimates and internal engineering reports. A provision for estimated abandonment costs is recorded at the balance sheet date. Additionally, the Company recognizes an asset in the property, plant and equipment accounts, which is depreciated as part of the related assets. Changes in the present value of estimated future disbursements are recorded against the provision and the property, plant and equipment accounts (Notes 5 and 6).

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

~~n) Provisions~~
Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Provisions are not recognized for future operating losses.

~~o) Capital stock~~
~~Common shares are classified as equity. At December 31, 2007 and 2006, the Company has no preferred shares (Note 8).~~

~~p) Share premium~~
~~The Company recognizes as share premium any excess in the value of contributions made by shareholders for Company incorporation over the par value at the incorporation date (Note 8).~~

~~q) Legal reserve~~
The Venezuelan Code of Commerce requires companies to set aside 5% of their net income each year to a legal reserve until it reaches an amount equivalent to at least 10% of their capital stock in bolivars.

~~r) Dividend distribution~~
Dividend distribution to the Company’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the Company’s shareholders. The Company did not declare any dividend distribution in 2007 or 2006.

~~s) Exchange agreement with the Central Bank of Venezuela (BCV) and currency availability~~
In conformity with Article No. 5 of Exchange Agreement No. 9, “Companies incorporated by virtue of the joint venture agreements entered into between PDVSA, under the superseded Law Reserving Hydrocarbon Trade and Industry to the State, and the mixed companies referred to under the Hydrocarbon Law and the LOHG, may maintain accounts in foreign currency at banks or similar institutions abroad, to deposit income received for the purpose of making payments and disbursements abroad. These transactions will be followed up by BCV, the entity in charge of publishing applicable regulations. Any remaining currency must be sold to BCV at the official exchange rate in conformity with Article No. 6 of Exchange Agreement No. 1 of February 5, 2003.

Companies referred to in this article are not entitled to receive foreign currency from BCV to cover their obligations and payments in foreign currency, and are subject, under the provisions thereof, to the monitoring mechanisms applied by regulatory entities in conformity with applicable laws.”

~~Exchange agreement No. 2 of February 9, 2004 was amended on March 2, 2005, according to Official Gazette No. 38,138, establishing exchange rates of Bs 2,144,60/US$1 (purchase) and~~
~~Bs 2,150/US$1 (sale).~~

According to Article 2, Paragraph 4 of the agreement by which the National Assembly approved the Company’s incorporation, payments for sales of hydrocarbon liquids made to the Company in U.S. dollars can be maintained by the Company in bank accounts abroad and used to pay all obligations that must be settled abroad.

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

The Currency Exchange Offenses Law became effective in 2004 whereby any demand, offer, purchase or sale of U.S. dollars failing to comply with CADIVI requirements is considered illegal. Similarly, transactions exceeding US$10,000 a year at the free exchange market are also illegal. Imports or exports in foreign currency over US$10,000 should be declared to CADIVI. In addition, exporters of goods and services not related to the oil industry are required to sell their income from business transactions in foreign currency to BCV. Transactions with securities, as well as government bonds denominated in U.S. dollars and issued in local currency are tax exempt. Therefore, all individuals that do not comply with the aforementioned Law will be subject to fines of two to three times the
amount of the transaction, reimbursement of foreign currency and imprisonment for two to seven years. On December 28, 2007, the Venezuelan government enacted a reform of this Law effective January 28, 2008 (Note 15-b).

~~t) Financial risk management~~
Local and international conditions, i.e. recession periods, inflation, interest rates and devaluation, and hydrocarbon price volatility, may have a significant effect on the Company’s financial position. The Company is exposed to a variety of financial risks: market risk (including exchange rate fluctuation risk, interest rate risk and price risk), liquidity risk and capital risk. Financial instruments exposed to concentration of credit risk consist primarily of cash and trade accounts receivable. At December 31, 2007, the Company’s cash is placed with a local financial institution. In addition, there is some concentration of credit risk in trade accounts receivable of its crude oil and all of its gas production are sold to PDVSA Petróleo (Note 7).

~~Market risk~~
The Company’s general risk management focuses on the uncertainty surrounding financial markets and seeks to minimize the potential adverse effects on the Company’s performance. At December 31, 2007 and 2006, the Company is exposed to the following market risks:

~~Exchange rate fluctuation risk~~
The Company operates in Venezuela and is exposed to foreign exchange risk from variations in the exchange rate of the Venezuelan bolivar relative to the U.S. dollar. Foreign exchange risk is mainly derived from future commercial operations and assets and liabilities shown in bolivars.

~~Price risk~~
The Company is exposed to significant sales price risks for the sale of hydrocarbons, which depend on external market factors. At December 31, 2007 and 2006, hydrocarbon sales prices are calculated based on predetermined formulas that consider the price of hydrocarbons in different international markets. Price fluctuations may have a significant impact on the Company’s income. At December 31, 2007 and 2006, the Company has no mechanisms in place to protect against exposure to hydrocarbon sales price fluctuations.

~~Interest rate fluctuation risk~~
~~The Company has no assets or liabilities for significant amounts that could be exposed to interest rate fluctuation risk.~~

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

~~Capital risk management~~
The objectives of the Company are focused on safeguarding the Company’s ability to continue as a going concern in order to provide returns for the shareholders and maintain an optimal capital structure to reduce capital costs. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares.

~~u) Accounting estimates requiring a high degree of judgment~~
The Company continually evaluates judgments used to record its accounting estimates, which are recorded based on historical experience and other factors, including expectation of future events that are believed to be reasonable under the circumstances. Significant future changes to assumptions established by management may significantly affect the carrying value of assets and liabilities.

~~Below is a summary of the most significant accounting estimates made by the Company:~~

~~Estimates of oil reserves~~
Oil and gas reserves are key elements in the Company’s decision-making process. They are also important in evaluating impairment in the carrying amount of long-lived assets. Calculation of depreciation, amortization and depletion of property, plant and equipment accounts related to hydrocarbon production requires quantification of proved developed hydrocarbon reserves expected to be recovered by the Company in the future. Reserve estimates are only approximate amounts due to the high degree of judgment and specialization required to develop the information. Reserves are calculated by specialized technical departments at PDVSA (related company that owns the Company’s main shareholder) and results are subject to the approval of MENPET in order to guarantee the reasonableness of the information. Additionally, reserve studies are regularly updated to guarantee that any change in estimates is timely recorded in the Company’s financial statements (Note 5).

~~Assessment of impairment in the value of property, plant and equipment~~
Management has assessed impairment in the value of property, plant and equipment during the year. The main key assumptions considered by management to determine the recoverable amount of property, plant and equipment were income projections, prices of oil, royalties, operating and capital costs and the discount rate. Projections include proved developed reserves to be produced during the development period of production activities in the assigned fields. At December 31, 2007 and 2006, the Company has not identified an impairment in the carrying value of property, plant and equipment as a result of these estimates.

~~Abandonment cost calculation~~
The Company’s financial statements include an asset and a provision for property, plant and equipment used in hydrocarbon production that is expected to be abandoned in the future and in relation to which the Company will make future disbursements. Assumptions considered for the calculation of this asset and the provision for abandonment (asset abandonment costs, date of abandonment, and inflation and discount rates) may vary depending on factors such as performance in the field, changes in technology and legal requirements. Assumptions made by the Company are recorded based on technical studies and management’s experience and are regularly reviewed (Notes 5 and 6).

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

~~v) Cash~~
~~Cash includes cash on hand and at banks, and deposits with original maturities of three months or less.~~

~~w) Transactions with government entities~~
The Company does not disclose, as part of balances and transactions with related companies (Note 7), transactions with government entities conducted in the normal course of business, the terms and conditions of which are consistently applied to other public and private entities and for which there are no other suppliers, i.e. electricity, telecommunications, taxes, etc.

3.	~~Balances and Transactions in Currencies Other than the U.S. Dollar~~monetary market.

	~~At December 31, 2007~~	The carrying value of cash and ~~2006, the Company has the following monetary~~cash equivalents, accounts receivable, prepaid expenses and other assets, and ~~liabilities denominated in currencies other than the U.S. dollar, which are translated into U.S. dollars at the exchange rate in effect at the balance sheet date:~~

2007 2006
Nominal Nominal
(In thousands) US$ bolivars US$ bolivars

Monetary assets

Bolivars 6,977 15,000,000 — —

Monetary liabilities

Bolivars (259,526 ) (557,981,654 ) (108,214 ) �� (232,660,988 )

Net monetary liabilities (252,549 ) (542,981,654 ) (108,214 ) (232,660,988 )

~~The year-end exchange rate, the average exchange rate for the year and the interannual increase in the exchange rate and the Consumer Price Index (CPI) with respect~~accounts payable to suppliers approximates their estimated fair value due to the ~~U.S. dollar, as published by BCV, were as follows:~~

2007 2006

Exchange rate at year end (Bs/US$1) 2,150.00 2,150.00
Average exchange rate for the year (Bs/US$1) 2,150.00 2,150.00
Interannual increase in the exchange rate (%) — —
Interannual increase in the CPI (%) 22.46 16.97

4.	~~Inventories~~short-term maturities of these instruments.

	~~Inventories at~~	The net carrying value of the account payable to PDVSA approximates the estimated fair value since its payment depends on the volume and nature of transactions conducted by the Company with the Parent Company and its subsidiaries.

	(6)		Financial Risk Management

			Local and international conditions, i.e., recession periods, inflation, interest rates, devaluation, and hydrocarbon price volatility may have a significant effect on the Company’s financial position. The Company is exposed to a variety of financial risks: market risk (including exchange rate fluctuation risk, interest rate risk and price risk), liquidity risk and capital risk. Financial instruments exposed to concentration of credit risk consist primarily of cash and trade accounts receivable.

			At December 31, ~~comprise~~2009 and 2008, the ~~following:~~Company’s cash is placed with a local and foreign financial institution. In addition, there is some concentration of credit risk in trade accounts receivable since all crude oil and gas produced is sold to PDVSA Petróleo.

			*Market risk*

			The Company’s general risk management focuses on the uncertainty surrounding financial markets and seeks to minimize the potential adverse effects on the Company’s performance. At December 31, 2009 and 2008, the Company is exposed to the following market risks:

			*Exchange rate fluctuation risk*

			The Company operates in Venezuela and is exposed to foreign exchange risk from variations in the exchange rate of the Venezuelan Bolívar relative to the U.S. dollar. Foreign exchange risk is mainly derived from future commercial operations and assets and liabilities shown in bolivars.

2007 2006
Nominal Nominal
(In thousands) US$ bolivars US$ bolivars

Materials and supplies, net 13,830 29,734,431 8,281 17,803,706

2023

~~Petrodelta,~~PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, ~~2007~~2009 and ~~2006~~

2008

5.			*Price risk*

			The Company is exposed to risks stemming from changes in the sale price of hydrocarbons, which depend on external market factors. At December 31, 2009 and 2008, hydrocarbon sales prices are calculated based on predetermined formulas that consider the price of hydrocarbons in different international markets. Price fluctuations may have a significant impact on the Company’s income. At December 31, 2009 and 2008, the Company has no mechanisms in place to protect against exposure to hydrocarbon sales price fluctuations.

			*Interest rate fluctuation risk*

			The Company has accounts receivable from PDVSA which earn interest on arrears 45 days after bills are due and are, therefore, exposed to interest rate fluctuation.

			*Capital risk management*

			The Company is focused on safeguarding its ability to continue as a going concern in order to provide returns for the shareholders and maintain an optimal capital structure to reduce capital costs. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares.

			*Liquidity risk*

			Handling prudently liquidity risk implies maintaining sufficient funds in cash and short term marketable securities, as well as having working capital credit facility available. The Company permanently evaluates its future cash flows through short and long term projections from estimated sales and cash requirements which correspond mainly to operation and maintenance of production facilities, payment of payroll, payment of fiscal and financial obligations, etc.

	(7)		Taxes

			Below is a summary of taxes affecting the Company’s operations, stated in thousands:


	Years ended December 31,
	2009		2008		2009		2008
	U.S. Dollars				Bolivars
Income tax		61,946		16,814		133,184		36,150
Royalties (See Note 7-b)		157,681		225,167		339,014		484,109

Total		219,627		241,981		472,198		520,259

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

	*(a)*		*Income tax*

			Net income tax expense is summarized below, stated in thousands:


	Years ended December 31,
	2009			2008			2009			2008
	U.S. Dollars						Bolivars
Estimated income tax expense		(105,868	)		(69,374	)		(227,616	)		(149,154	)
Deferred income tax		43,922			52,560			94,432			113,004

Total		(61,946	)		(16,814	)		(133,184	)		(36,150	)

Reconciliation between the nominal and the effective income tax rates for each year is shown below:


	Years ended December 31,
	2009									2008
				Thousands									Thousands
	%			U.S. Dollars			Bolivar’s			%			U.S. Dollars			Bolivars
Income tax:
Net income					143,284			308,059						121,217			260,617
Income tax					61,946			133,184						16,814			36,150

Net income before income tax					205,230			441,243						138,031			296,767


Oil-sector nominal income tax rate		50			102,615			220,621			50			69,016			148,383
Tax inflation adjustment and effect from translation into U.S. dollars		(11	)		(23,096	)		(49,655	)		(28	)		(38,697	)		(83,199	)
Deferred income tax		(21	)		(43,922	)		(94,432	)		(38	)		(52,560	)		(113,004	)
Non-deductible provisions and other		13			26,349			56,650			28			39,055			83,970

Effective rate		30			61,946			133,184			12			16,814			36,150

			The partial reform of the Income Tax Law, published in Official Gazette No. 38,529 on September 25, 2006, repealed investment tax credits applicable to companies engaged in hydrocarbon production and related activities, and prohibits application of tax credits available for activities other than those related to hydrocarbons.

			Prevailing and former Venezuelan Income Tax Law allows tax losses to be carried forward for three years to offset taxable income, except losses arising from the annual inflation adjustment, which may be carried forward for only one year.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

			Venezuelan Income Tax Law requires an initial inflation adjustment to compute taxable income. The Law provides that the initially adjusted values of property, plant and equipment should be depreciated or amortized for tax purposes over the remaining useful lives of such assets. The Law also requires that an annual inflation adjustment be included in income tax reconciliation as a taxable or deductible item.

			According to the Income Tax Law, taxpayers subject to this tax that conduct import, export and loan transactions with related parties abroad are required to calculate income, costs and deductions applying the methodology set out in the Law. The Company conducts no transactions with related parties abroad.

			Official Gazette No. 38,529 of the Bolivarian Republic of Venezuela, published on September 25, 2006, modifies Article No. 11 of the Law regarding the rate applicable to companies engaged in hydrocarbon production and related activities, establishing a 50% general rate. However, only companies that conduct integrated or non-integrated activities related to exploration and production of non-associated gas, and processing, transportation, distribution, storage, marketing and export of gas and its components, or those exclusively engaged in refining of hydrocarbons or enhancement of heavy and extra-heavy crude oil are subject to a 34% tax rate. Therefore, application of the 34% rate for companies incorporated under the joint venture agreements executed under the superseded Law Reserving Hydrocarbon Trade and Industry to the State is eliminated.

			The components of deferred income tax expense at December 31, 2008 and 2009 shown in the results of each year are as follows (in thousands):


			Benefit
	2008		Recognized in
	Assets		results			2009 Assets
*In U.S. dollars-*
Accounts receivable		—		(2,653	)		(2,653	)
Property, plant and equipment		66,004		38,552			104,556
Inventories		5,184		(664	)		4,520
Accruals and other payables		26,135		8,687			34,822

		97,323		43,922			141,245


*In bolivars-*
Accounts receivable		—		(5,704	)		(5,704	)
Property, plant and equipment		141,909		82,887			224,796
Inventories		11,145		(1,428	)		9,717
Accruals and other payables		56,190		18,677			74,867

		209,244		94,432			303,676

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

	*(b)*		*Royalties*

			Royalties are paid based on crude oil produced and associated natural gas processed in Venezuela. Volumes of hydrocarbons produced in traditional areas are taxed with a 30% rate.

			The partial reform of the Hydrocarbon Law was approved in May 2006, whereby operators should pay 33.33% of the wellhead value of each barrel to the Venezuelan government by means of royalties and additional taxes.

			On November 14, 2006, a new calculation of royalties was established for companies that conduct primary oil activities in the country requiring that contents of sulphur and API gravity of liquid hydrocarbons extracted be measured on a monthly basis and be reported together with taxed production. This information will be part of the royalty payment price and will be used for calculation of any special advantage. This information will result in adjustments for gravity and sulphur, which will be published by Ministry for Energy and Oil (MPPEP).

			The Company pays MPPEP a 30% royalty in kind for crude oil produced and associated natural gas transferred to PDVSA Petróleo, S.A. Royalty expenses for 2009 and 2008 amounted to US$137,925 thousands and US$149,605 thousands (Bs 296,538 thousands and Bs 321,651 thousands), respectively, included in the income statement under Royalties.

			The Company is subject to special advantage taxes, which are determined based on: a) an interest as additional royalty of 3.33% on volumes of hydrocarbons extracted in the delimited areas and delivered to Petróleos de Venezuela, S.A. and b) an amount equivalent to the difference, if any, between (i) 50% of the value of the hydrocarbons extracted in the delimited areas and delivered to Petróleos de Venezuela, S.A. in each calendar year and (ii) the sum of payments made by the mixed companies to the Bolivarian Republic of Venezuela, for activities developed during the calendar year, for royalties on hydrocarbons and investments in endogenous development projects, equivalent to 1% of pre-tax income. Taxes for special advantages must be paid before April 20 of each year, pursuant to Exhibit F of the Agreement for Conversion into a Mixed Company. In relation to a) above, Petrodelta, S.A. incurred in this tax during 2009 and 2008 for US$15,548 thousands and US$16,030 thousands (Bs 33,428 thousands and Bs 34,464 thousands), respectively, included in the statements of comprehensive income under royalties. In relation to b) above, at December 31, 2009 and 2008, this special advantage tax was lower than what the Company paid and accrued for royalties and special advantages tax.

			Official Gazette No. 39.273 of the Bolivarian Republic of Venezuela, published on September 28, 2009, approved the modification of article regulating special advantages tax levied on mix companies to redistribute the use of funds by the additional royalty of 3.33% that mix companies have to pay on hydrocarbons volumes extracted from delimited areas. The modified article establish deliver 1.11% to municipalities where oil activities in the country take place and 2.22% for a special fund to be administered by the Executive branch to finance endogenous development projects.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

Following a detail of the caused royalties is shown:


	Years ended December 31,
	2009		2008		2009		2008
	Dollars				Bolivars
Royalty on oil production		135,442		138,311		291,200		297,369
Royalty on gas production		2,483		11,294		5,338		24,282
Royalty for the municipalities		8,613		10,687		18,518		22,977
Royalty for endogenous development projects		6,935		5,343		14,910		11,487
Surface tax		1,946		1,596		4,184		3,431
Windfall tax		882		56,377		1,896		121,211
Accrual for investments in social project		1,380		1,559		2,968		3,352

		157,681		225,167		339,014		484,109

	*(c)*		*Extraction tax*

			The Venezuelan Hydrocarbon Law Reform establishes a rate equivalent to 33.33% of the value of all liquid hydrocarbons extracted from any reservoir, calculated on the same basis as for royalties. The taxpayer may deduct from the extraction tax any sum payable as royalties, including the additional royalty paid as special advantage. This tax is effective since 2006. The Company incurred no tax in this connection for 2009 and 2008.

	*(d)*		*Value added tax (VAT)*

			A Partial Reform of the Value Added Tax Law was published in Official Gazette No. 38,632 on February 26, 2007 changing the applicable tax rate from 14% to 11% as from March 1 until June 30, 2007 and to 9% as from July 1, 2007. On March 26, 2009, under Official Gazette No. 39,147 modification of applicable tax rate to 12% was published, having effect from April 1, 2009.

			The VAT Law establishes an exemption on trading of certain hydrocarbon-derived fuels. Recoverable amounts bear no interest.

			Below is a summary of the movement of recoverable tax credits (in thousands):


	December 31,
	2009			2008		2009			2008
	U.S. dollars					Bolivars
Recoverable amounts at the beginning of the year		9,604			—		20,649			—
Generate during the year		10,110			9,604		21,736			20,649
Adjustment to net realizable value		(1,792	)		—		(3,853	)		—
Recoverable amounts at end of the year		17,922			9,604		38,532			20,649

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

			At the end of 2009, the Company adjusted the amount of recoverable tax credits to the net realizable value applying a discount rate for assets deterioration of 13%. This rate is calculated by its main shareholder annually with the financial statements of the prior year and using outside parameters updated each year. At December 31, 2009, the adjustment for US$1,792 thousands (Bs. 3,853 thousands) is included in the statement of comprehensive income under the category of financial expenses.

	*(e)*		*Law on Special Contributions over Extraordinary Prices of the International Hydrocarbons Market*

			In April 2008, the Venezuelan government, by means of a decree-law, established a special contribution over extraordinary prices of the international hydrocarbons market, amended in July 2008, which levies the sale of crude oil whenever the average price for the month in question of the Venezuelan oil production exceeds the price of US$70/barrel. The amount of said contribution equals 50% of the difference resulting of the average price per month and the aforementioned cap of US$70/barrel. In addition, this decree-law sets forth that whenever the average price per month exceeds the price of US$100/barrel, the total amount of said special contribution will be equivalent to 60% of the above defined difference.

	(8)		Property, Plant and Equipment, Net

			Property, plant and equipment, net at December 31 ~~comprise~~comprises the ~~following:~~following (in thousands):

Office furniture,
equipment and
(Thousands of U.S. dollars) Production vehicles Total

Cost

Balances at April 1, 2006 200,778 2,562 203,340
Additions 678 58 736
Obligations from asset disposal 5,095 — 5,095

Balances at December 31, 2006 206,551 2,620 209,171

Accumulated depletion, depreciation and amortization

Balances at April 1, 2006 — — —
Depletion, depreciation and amortization expense (16,154 ) (460 ) (16,614 )
Obligations from asset disposal (462 ) — (462 )

Balances at December 31, 2006 (16,616 ) (460 ) (17,076 )

Net cost at December 31, 2006
189,935 2,160 192,095

Cost

Balances at December 31, 2006 206,551 2,620 209,171
Additions 3,052 201 3,253
Obligations from asset disposal (15 ) — (15 )

Balances at December 31, 2007 209,588 2,821 212,409

Accumulated depletion, depreciation and amortization

Balances at December 31, 2007 (16,616 ) (460 ) (17,076 )
Depletion, depreciation and amortization expense (17,412 ) (594 ) (18,006 )
Obligations from asset disposal (544 ) — (544 )

Balances at December 31, 2007 (34,572 ) (1,054 ) (35,626 )

Net cost at December 31, 2007
175,016 1,767 176,783

2129

December 31, ~~2007~~2009 and ~~2006~~

Office furniture,
equipment and
(Thousands of nominal bolivars) Production vehicles Total

Cost

Balances at April 1, 2006 431,673,344 5,508,300 437,181,644
Additions 1,457,425 124,700 1,582,125
Obligations from asset disposal 10,953,928 — 10,953,928

Balances at December 31, 2006 444,084,697 5,633,000 449,717,697

Accumulated depletion, depreciation and amortization

Balances at April 1, 2006 — — —
Depletion, depreciation and amortization expense (34,731,100 ) (989,000 ) (35,720,100 )
Obligations from asset disposal (993,407 ) — (993,407 )

Balances at December 31, 2006 (35,724,507 ) (989,000 ) (36,713,507 )

Net cost at December 31, 2006
408,360,190 4,644,000 413,004,190

Cost

Balances at December 31, 2006 444,084,697 5,633,000 449,717,697
Additions 6,561,643 431,994 6,993,637
Obligations from asset disposal (32,250 ) — (32,250 )

Balances at December 31, 2007 450,614,090 6,064,994 456,679,084

Accumulated depletion, depreciation and amortization

Balances at December 31, 2006 (35,724,507 ) (989,000 ) (36,713,507 )
Depletion, depreciation and amortization expense (37,435,432 ) (1,276,733 ) (38,712,165 )
Obligations from asset disposal (1,169,232 ) — (1,169,232 )

Balances at December 31, 2007 (74,329,171 ) (2,265,733 ) (76,594,904 )

Net cost at December 31, 2007
376,284,919 3,799,261 380,084,180

2008

~~In 2007 oil assets depreciated under~~U.S. dollars -


	Wells and
	production		Furniture and		Construction in
	facilities		equipment		progress			Total
Cost:
Balances at December 31, 2007		215,581		2,821		—			218,402
Additions		—		916		38,431			39,347
Transfers		7,485		—		(7,485	)		—
Strategic Inventories		4,279		—		—			4,279
Assets retirement obligations		10,866		—		—			10,866


Balances at December 31, 2008		238,211		3,737		30,946			272,894
Additions		—		3,729		77,696			81,425
Transfers		75,730		—		(75,730	)		—
Strategic inventories		1,842		—		—			1,842
Asset retirement obligations		3,603		—		—			3,603

Balances at December 31, 2009		319,386		7,466		32,912			359,764


Depreciation and amortization:
Balances at December 31, 2007		34,572		1,054		—			35,626
Depreciation and amortization		21,677		730		—			22,407
Assets retirement obligations		3,101		—		—			3,101

Balances at December 31, 2008		59,350		1,784		—			61,134
Depreciation and amortization		30,198		1,095		—			31,293
Assets retirement obligations		1,895		—		—			1,895

Balances at December 31, 2009		91,443		2,879		—			94,322


Total net cost at December 31, 2009		227,943		4,587		32,912			265,442


Total net cost at December 31, 2008		178,861		1,953		30,946			211,760

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

Bolivars -


	Wells and
	production		Furniture and		Construction in
	facilities		equipment		progress			Total
Cost:
Balances at December 31, 2007		463,500		6,065		—			469,565
Additions		—		1,969		82,627			84,596
Transfers		16,093		—		(16,093	)		—
Strategic Inventories		9,200		—		—			9,200
Assets retirement obligations		23,362		—		—			23,362


Balances at December 31, 2008		512,155		8,034		66,534			586,723
Additions		—		8,017		167,045			175,062
Transfers		162,819		—		(162,819	)		—
Strategic inventories		3,959		—		—			3,959
Asset retirement obligations		7,745		—		—			7,745

Balances at December 31, 2009		686,678		16,051		70,760			773,489


Depreciation and amortization:
Balances at December 31, 2007		74,329		2,267		—			76,596
Depreciation and amortization		46,606		1,570		—			48,176
Assets retirement obligations		6,667		—		—			6,667

Balances at December 31, 2008		127,602		3,837		—			131,439
Depreciation and amortization		64,926		2,352		—			67,278
Assets retirement obligations		4,074		—		—			4,074

Balances at December 31, 2009		196,602		6,189		—			202,791


Total net cost at December 31, 2009		490,076		9,862		70,760			570,698


Total net cost at December 31, 2008		384,553		4,197		66,534			455,284

		During the units of production method resulted in depletion, depreciation and amortization expense (obligations from asset disposal) of approximately US$18 million, equivalent to Bs 38,605 million (US$17 million, equivalent to Bs 35,725 million for the initial nine-month periodyears ended December 31, ~~2006)~~2009 and 2008, the Company made additions to production assets and construction in progress for approximately US$81,425 thousands and US$39,347 thousands (Bs 175,062 thousands and Bs 84,596 thousands), ~~and is shown under Cost of goods sold.~~respectively.

		~~In 2007 non-oil assets depreciated under~~During 2009 and 2008, the ~~straight-line method resulted in depreciation expense~~Company assessed asset impairment, taking into account new market and business conditions, and determined that there was no evidence of approximately US$0.6 million, equivalent to Bs 1,277 million in 2007 (US$0.5 million, equivalent to Bs 989 million for the initial nine-month period ended December 31, 2006), and is shown under General and administrative expenses.impairment of production assets.

2231

~~Petrodelta,~~PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, ~~2007~~2009 and ~~2006~~

2008

6.		~~Provision~~At December 31, 2009 and 2008, accruals and other payables include US$3,603 thousands and US$10,866 thousands (Bs 7,745 thousands and Bs 23,362 thousands), respectively, in respect of the accrual for ~~Abandonment Costs~~asset retirement obligations (See Note 9).

		~~Below is~~The balance of construction in progress mainly comprises investment projects for exploration and production activities related to drilling, maintenance, electrical systems, pipelines, well reconditioning and adaptation, expansion and infrastructure aimed at maintaining production capacity and adapting the ~~movement~~infrastructure to production levels set out in the Corporation’s business plan. At December 31, 2009 and 2008, the balance of construction in progress for investments related to the ~~provision for abandonment costs at December 31:~~aforementioned activities amounts to approximately US$32,912 thousands and US$30,946 (Bs 70,760 thousands and Bs 66,534 thousands).

Nominal
(In thousands) US$ bolivars

Balances at April 1, 2006
— —
Additions 5,095 10,954,250
Utilization and payments (63 ) (135,450 )
Financing cost 388 834,700

Balances at December 31, 2006
5,420 11,653,500

Additions — —
Utilization and payments — —
Financing cost 544 1,170,031

Balance at December 31, 2007
5,964 12,823,531

(9) Accrual for Asset Retirement Obligations

The ~~Company’s business plan~~movement of the accrual for asset retirement obligations at December 31 ~~2007 stipulates performing hydrocarbon drilling and production activities until 2025; therefore,~~is shown below (in thousands):


	U.S. dollars		Bolivars
Balance at December 31, 2007		5,964		12,823

Change on estimation		10,866		23,362
Financial cost		2,344		5,039

Balance at December 31, 2008		19,174		41,224

Change on estimation		3,603		7,745
Financial cost		1,639		3,523

Balance at December 31, 2009		24,416		52,492

		During 2009, Company management reviewed, based on new information, estimates on assumptions used for calculating the provision for abandonment ~~costs was calculated considering disbursements in this connection for existing oil wells during this period~~costs.

		At December 31, ~~2007,~~2009 and 2008, the ~~Company’s dismantling plan includes a total of 166 oil wells to be dismantled during the term~~variation of the ~~agreement. During~~estimation in of the ~~last quarter of 2006, an oil~~provision for well ~~located in the Uracoa field was dismantled at a~~abandonment cost of ~~approximately~~ US$~~63,000, equivalent to~~3,603 thousands and US$10,866 thousands (Bs 7,745 thousands and Bs ~~134 million. Furthermore, in 2007 an oil well~~23,362 thousands) is includes the balance of Property, plant and equipment (See Note 8). The Petrodelta, S.A. business plan as of December 31, 2009, contemplates the realization of hydrocarbons drilling and production activities until the year 2025; therefore, the accrual for asset retirement obligations was ~~added to~~calculated based on the ~~dismantling plan.~~disbursements for this concept during this period.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008


	December 31,
	2009		2008		2009		2008
	U.S. Dollars				Bolivars
Related parties (See Note 19)		361,137		257,292		776,445		553,178
Recoverable tax credits (See Note 7 and 17)		17,922		9,604		38,532		20,649
Other		673		890		1,448		1,913

		379,732		267,786		816,425		575,740

(13) Cash and cash equivalents

Cash and cash equivalent comprises the following (in thousands):


	December 31,
	2009		2008		2009		2008
	U.S. Dollars				Bolivars
Cash on hand		3		2		7		4
Cash at banks		3,059		7,361		6,575		15,826

		3,062		7,363		6,582		15,830

(14) Equity

		Capital stock

		The Company belongs to a group of related companies and conducts transactions and maintains balances for significant amounts with other members of the group, the effects of which are included in the income statement.

		~~Balances with the related company PDVSA Petróleo at December 31 comprise the following:~~

2007 2006
Nominal Nominal
(In thousands) US$ bolivars US$ bolivars

Accounts receivable

PDVSA Petróleo, S.A. 444,737 956,184,237 203,717 437,991,291

Accounts payable

PDVSA Petróleo, S.A. 84,548 181,778,550 35,369 76,042,939

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

		At December 31, 2007, accounts receivable from PDVSA Petróleo include approximately US$445 million, equivalent to Bs 956,184 million (US$204 million, equivalent to Bs 437,991 million in 2006) in respect of estimated billings for hydrocarbons produced2009 and transferred to PDVSA Petróleo under the hydrocarbon sales agreement. Additionally, accounts payable of approximately US$82 million, equivalent to Bs 174,778 million (US$32 million, equivalent to Bs 69,042 million in 2006) are in respect of reimbursement of the Company’s capital costs and operating expenses, which were initially paid by HVSCA on behalf of the Company and subsequently billed by HVSCA to PDVSA Petróleo, which will, in turn, bill the Company; and approximately US$3 million, equivalent to Bs 7,001 million, is in respect of payments of special advantage royalties to municipalities for the second and third quarters of 2006, paid by PDVSA Petróleo on behalf of the Company.

		The most significant transaction conducted with PDVSA Petróleo for the year ended December 31, 2007 and for the initial nine-month period ended December 31, 2006 relates to crude oil and gas sales amounting to approximately US$241 and US$204 million, respectively.

		Members of the Board of Directors of Petrodelta are appointed and remunerated by the shareholders of the Company. They do not receive any separate remuneration or benefits in their capacity as directors of the Company. Some Senior management positions are seconded with shareholders’ employees but their compensation is reimbursed by the Company. Salaries and wages for seconded senior management were approximately US$340,000 in 2007 and US$174,000 in 2006.

8.		~~Shareholders’ Equity~~

		~~Capital stock~~ ~~At December 31, 2007,~~2008, the Company’s nominal capital stock is represented by ~~100,000~~1,500,000 common shares, fully authorized and paid in, with a par value of ~~Bs 10,000 each.~~ US$4.65 each (Bs 10 each).

		The Company’s capital stock is divided into two types of shares: Class “A” and Class “B” shares. Only the Venezuelan government or Venezuelan state-owned companies can own Class “A” shares. In October 2007, when the Company was incorporated, shareholders made ~~the~~an initial capital contribution of approximately Bs 1,000 ~~million (equivalent to US$~~thousands (US$465,000). Capital stock has been fully subscribed and paid in as follows:


	Type of		Number of				Share of
Shareholders	shares		shares		US$		equity			Type of shares		Number of shares		US$		Bs.		Share of equity

Corporación Venezolana del Petróleo, S.A. (CVP)		A		60,000		279,070		60	%		A		900,000		4,186,047		9,000,000		60	%
HNR Finance B.V. (HNR Finance)		B		40,000		186,046		40	%
HNR Finance, B.V. (HNR Finance)											B		600,000		2,790,698		6,000,000		40	%

				100,000		465,116		100	%				1,500,000		6,976,745		15,000,000		100	%

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

		Contributions for future capital increases

		In November 2007, the shareholders made contributions for future capital increases of approximately US$~~6.5 million,~~6,512 thousands, equivalent to approximately Bs 14,000 ~~million.~~thousands. In August 2008, this contribution ~~will be~~was capitalized ~~once the minutes of the related shareholders’ meeting have been signed to comply~~in compliance with Article No. 1, Paragraph 1.4 of the Agreement for Conversion into a Mixed Company.

		Legal reserve

		Venezuelan companies are required to set aside a legal reserve. According to Venezuelan Law, the legal reserve is not available for dividend distribution.

		At December 31, 2008, the Company has set aside a legal reserve of approximately US$651 thousands, equivalent to Bs 1,400 thousands, equivalent to 10% of capital stock.

		Deferred tax asset equity reserve

		In June 2009, CVP issued instructions to all mixed companies regarding the accounting for deferred tax assets. The mixed companies have been instructed to set up a reserve within the equity section of the balance sheet for deferred tax assets. The setting up of the reserve had no effect on the Company financial position, results of operations or cash flows. However, the new reserve reduces the amount of dividends received in the future.

		On August 2009, the Board of Directors of the Company approved the creation of the deferred tax asset equity reserve with retained earnings accumulated to end of June 2009 for US$116,273 thousands (Bs.249.987 thousands). At December 31, 2009 management has recorded as equity reserve and amount equal to the balance of deferred tax asset at that date equivalent to US$141,245 thousands (Bs.303,676 thousands) and which has been approved by the Board of Directors of the Company.

		Share premium ~~Share~~

		The share premium is in respect of contributions of fixed assets and inventories made by shareholders in conformity with the Agreement for Conversion into a Mixed Company, whose value exceeds the par value of common shares issued. At December 31, ~~2007~~2009 and ~~2006,~~2008, the share premium amounts to approximately US$~~212 million,~~212,451 thousands, equivalent to approximately Bs 456,770 ~~million,~~thousands, included in ~~shareholders’~~ equity.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

		equivalent to approximately Bs ~~46,117 million,~~45,677 thousands, pursuant to Exhibit G of the Agreement for Conversion into a Mixed Company.

		In conformity with the Company’s bylaws, in case of Company liquidation, all assets will be transferred only to the Class “A” ~~shareholders.~~shareholder.

		~~At December 31, 2007, the Company set aside a legal reserve of approximately Bs 100,000, equivalent to US$47,000, equivalent to 10% of its capital stock.~~Dividends

9.		~~Taxes~~On May 2008, the shareholders resolved to pay dividends of US$181,325 thousands, equivalent to Bs 389,846 thousands, out of unappropriated retained earnings for December 2007.

		On August 2008, the shareholders resolved to pay dividends in advance based on retained earnings as the end of June 2008 of US$51,876 thousands, equivalent to Bs 111,533 thousands. The dividend in advance approved was paid to HNR Finance for its share in the Company in the amount of US$20,750 thousands, equivalent to Bs 44,612 thousands. At December 31, 2009 the Company decided to record the dividend in advance against unappropriated retained earnings at the end of 2009, recording as dividends payable the unpaid portion to CVP for an amount of US$31,126 thousands equivalent to Bs 66,921 thousands.

~~a) Income tax~~
The Company’s tax year ends on December 31. However, the period from April 1, 2006 to December 31, 2007 is considered the Company’s first tax year because the Company was incorporated in October 2007, as indicated in Note 1, but had rights and obligations over income, costs and expenses as of April 1, 2006.

~~Venezuelan Income Tax Law allows tax losses to be carried forward for three years, except those losses arising from the annual inflation adjustment, which may be carried forward for only one year.~~

Venezuelan Income Tax Law requires taxpayers to make an initial restatement of their nonmonetary assets and liabilities (mainly property, plant and equipment and inventories, as applicable to the Company) at the end of its first tax period. This restatement will give rise to a variation in the net equity amount at that date.

This initial restatement must be registered with the Restated Assets Registry (RAA), in which all taxpayers must be registered. It gives rise to a 3% tax on the increase of the initial inflation adjustment value of depreciable fixed assets. The Company calculated the increase in its depreciable fixed assets for the year ended December 31, 2007, giving rise to an expense of approximately Bs 42 million, equivalent to US$19,000, shown as part of the income tax expense.

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

~~The estimated tax expense for the year ended December 31, 2007 and for the initial nine-month period ended December 31, 2006 comprises the following:~~

2007 2006
Nominal Nominal
(In thousands) US$ bolivars US$ bolivars

Income tax

Current (85,830 ) (184,534,203 ) (67,188 ) (144,453,138 )
Restated Assets Registry (RAA) (19 ) (41,512 ) — —
Deferred 21,348 45,898,863 23,415 50,342,336

(64,501 ) (138,676,852 ) (43,773 ) (94,110,802 )

(15)

Accounts Payable

~~Below are~~Accounts payable comprise the ~~main differences between income tax computed at the 50% statutory rate and the effective rate for the year ended December 31, 2007:~~following (in thousands):

2007 2006
Nominal Nominal
(In thousands) US$ bolivars US$ bolivars

Book income before tax 155,942 335,273,758 133,704 287,461,744

Income tax calculated at the statutory rate of 50% 77,971 167,636,879 66,852 143,730,872

Tax effect of reconciling items

Deferred income tax (21,348 ) (45,898,863 ) (23,415 ) (50,342,336 )
Restated Assets Registry (RAA) 19 41,512 — —
Nondeductible provisions and accruals 7,859 16,897,324 336 722,266

Tax expense for the year at the effective rate 64,501 138,676,852 43,773 94,110,802

Total income tax for the year 64,501 138,676,852 43,773 94,110,802

Effective tax rate (%) 41 % 41 % 33 % 33 %


			December 31,
	2009		2008		2009		2008
	U.S. dollars				Bolivars
Trade		35,021		8,536		75,295		18,353
Related parties (See Note 19)		70,311		80,568		151,170		173,221

Total		105,332		89,104		226,465		191,574

~~b) Deferred income tax~~
~~Deferred income tax at December 31 mainly comprises the effect of temporary differences for the following items:~~

2007 2006
Nominal Nominal
(In thousands) US$ bolivars US$ bolivars

Deferred tax asset

Difference in value of inventories 2,303 4,950,862 3,387 7,281,454
Property, plant and equipment 33,453 71,924,276 13,798 29,665,866
Accruals and other payables 9,007 19,366,061 6,230 13,395,016

Total deferred tax asset 44,763 96,241,199 23,415 50,342,336

Short-term portion (6,025 ) (12,954,296 ) — —

Long-term portion 38,738 83,286,903 23,415 50,342,336

Foreign currency and liquidity risk exposure in respect of accounts payable to suppliers is shown in Note 17.

2636

~~Petrodelta,~~PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, ~~2007~~2009 and ~~2006~~

2008

~~c) Special advantage taxes~~
The Company is subject to special advantage taxes, which are determined based on: a) an additional royalty of 3.33% on the volume of hydrocarbons extracted in the delimited area, distributing 2.22% to municipalities within the delimited area and 1.11% to finance endogenous development projects in these municipalities; and b) an amount equivalent to the difference, if any, between (1) 50% of the value of the hydrocarbons extracted in the delimited area during each calendar year and (2) the sum of payments made by the Company to the Venezuelan government related to activities developed by the former during the calendar year, in respect of royalties applicable to hydrocarbons and investments in endogenous development projects of 1% of pre-tax income. The amount of special advantages determined by subtracting (1) from (2) must be paid every year on April 20, pursuant to Exhibit F of the Agreement for Conversion into a Mixed Company.

~~During 2007 the Company recorded expenses of approximately US$7.6 million, equivalent to~~
Bs 16,241 million (US$6.4 million, equivalent to Bs 13,692 million in 2006) in respect of special advantage royalties paid to municipalities, and expenses of approximately US$5.4 million, equivalent to Bs 11,532 million (US$4.5 million, equivalent to Bs 9,764 million in 2006) in respect of special advantage royalties for investments in endogenous and social development projects, shown in the income statement under Special advantage royalties. The Company determined that the sum of taxes, royalties and other contributions is greater than 50% of the value of hydrocarbons extracted in the delimited area.

~~d) Value added tax (VAT)~~
This tax is based on a tax credit system; it is payable based on the value added at each stage of production or sales. During the initial nine-month period ended December 31, 2006, the applicable tax rate was 14%. A Partial Reform of the Value Added Tax Law was published in Official Gazette No. 38,632 on February 26, 2007, changing the applicable tax rate from 14% to 11% as from March 1, 2007 and to 9% as from July 1.

The Company is not subject to VAT withholdings because LOH-regulated mixed companies selling natural hydrocarbons to PDVSA, or to any of its subsidiaries, are subject to a zero tax rate under the current VAT Law.

This Law also establishes that mixed companies regulated by the LOH will be treated as ordinary exporting taxpayers for purposes of application of the regime for recovery of tax credits from the sales of natural hydrocarbons in the country to PDVSA or any of its subsidiaries.

At December 31, 2007, the Company has not recognized recoverable value added tax credits in connection with disbursements made by PDVSA Petróleo and CVP on behalf of the Company because it has not received any related billings.

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

~~e) Occupation Hazard and Injury Prevention and Employment and Workplace Safety and Health Law~~
The Occupational Hazard and Injury Prevention and Employment and Workplace Safety and Health Law became effective in July 2005. This Law establishes new employer contribution percentages at between 0.75% and 10% of each employee’s salary. This percentage is determined by the type and degree of risk classification for each company. The type and degree of risk will be based on Regulations which classify activities according to the degree of danger to which employees are exposed. However, to date, the respective regulation has not been issued.

~~f) Law for the Advancement of Science, Technology and Innovation~~
The Law for the Advancement of Science, Technology and Innovation was enacted in August 2005. This Law establishes that, beginning January 1, 2006, the country’s major corporations will annually earmark 0.5% of gross income generated in Venezuela to support activities which, according to the Law, relate to investments in science, technology and innovation. This Law defines major corporations as those whose annual gross income exceeds 100,000 tax units. In addition, Article No. 35 of the aforementioned Law requires major corporations in the country engaged in activities covered by the Hydrocarbon and Gaseous Hydrocarbon Law to contribute 2% a year of their gross income generated in Venezuela from any of the activities specified in Article No. 42 of this Law. This Law’s Regulations will establish the mechanisms, methods and procedures for mandatory contributions from major corporations, as well as the timeframe and procedures that must be complied with for the purpose of determining which activities will be considered by the Ministry of Science and Technology in connection with these contributions. At December 31, 2007, management of the Company, per the opinion issued by the corporate legal advisor of one of its shareholders, concluded that since in 2006 the Company was not a duly incorporated entity for fiscal purposes, it did not generate any gross income during that period. Based on the aforementioned statement, the management considers that in 2007 the Company does not have a calculation basis for this contribution. Therefore, the Company has not recorded any amount in this connection in its financial statements at that date.

~~g) Law on Narcotic and Psychotropic Substances (LOCTICSEP)~~
The Law on Narcotic and Psychotropic Substances was published in Official Gazette No. 38,287 on December 16, 2005. This Law repeals the previous Law of September 30, 1993 and requires all companies, public or private, with 50 or more employees to earmark 1% of their annual net income for social programs for the prevention of illegal drug consumption and traffic, one-half of which will be set aside for child welfare protection programs. However, at the issue date of this report, the collection agency for this contribution has not been created. At December 31, 2007, the Company has set aside a provision of approximately US$2 million to cover liabilities arising from application of this Law.

In addition, Company management is evaluating the effects, if any, of the aforementioned Laws on the financial statements and awaiting issuance of the related Regulations and creation of the collection agency to complete its assessment.

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

~~h) Law for the Tax on Financial Transactions~~
On October 3, 2007, the Venezuelan government enacted by Decree the Tax on Financial Transactions for Incorporated and Unincorporated Entities. This tax is levied upon debits or withdrawals made from current and savings accounts, custody deposits or any other type of demand deposits, liquid asset funds, trust funds and other financial market funds or financial instruments transacted by incorporated and unincorporated entities with Venezuelan banks and other financial institutions. The tax rate was set at 1.5% as from November 1, 2007.

~~10.~~(16)		Accruals and Other Payables

Accruals and other payables at December 31 comprise the following:

2007 2006
Nominal Nominal
(In thousands) US$ bolivars US$ bolivars

Accruals and other payables

Royalties for gas production (Note 12) 13,408 28,826,772 6,176 13,277,512
Special advantages (Note 9) 10,666 22,932,136 6,368 13,692,001
Social development 9,905 21,296,585 4,542 9,764,246
LOCTICSEP (Note 9) 1,832 3,938,867 672 1,444,531
Accrued expenses 14,095 30,303,219 2,581 5,552,056

Total accruals and other payables 49,906 107,297,579 20,339 43,730,346


			December 31,
	2009		2008		2009		2008
	U.S. dollars				Bolivars
Royalties		49,277		44,017		105,946		94,637
Provision for abandonment cost (See Note 9)		24,416		19,174		52,492		41,224
Provision for retirement benefits		9,184		1,306		19,746		2,808
Endogenous and social development		5,728		4,347		12,315		9,346
LOCTISEP		6,392		3,056		13,743		6,570
Other		93,466		118,404		200,952		254,569

		188,463		190,304		405,194		409,154
Less: Non current portion of accruals and other payables		33,600		20,480		72,238		44,032


Short-term portion		154,863		169,824		332,956		365,122

		~~Certain capital~~At December 31, 2009 and 2008, included as non-current liabilities: a) US$24,416 thousands and US$19,174 thousands, (Bs 52,492 thousands and Bs 41,224 thousands), in respect of the provision for abandonment cost for retirement obligations for exploration and production assets. Asset retirement costs and ~~operating expenses~~obligations related to the main structures used in ~~the transition period paid by the related company HVSCA on behalf~~drilling activities were not estimated because these assets have an indefinite useful life as a result of ~~the Company have been accrued since they have not been billed by PDVSA Petróleo~~maintenance and mayor repairs and no information is available to reasonably determine their retirement date; and b) US$9,184 thousands and US$1,306 thousands, (Bs.19,746 thousands and Bs. 2,808 thousands), as provision for retirement benefits for personnel assigned to the Company. ~~Management expects~~During 2009, PDVSA completed an actuarial study for their pension and retirement plan. This pension and retirement plan covers all PDVSA employees and mixed companies payroll. In May 2009, PDVSA sent a statement to ~~receive billings during~~ the ~~first semester~~Company for its respective costs associated with the pension and retirement plan. The pension adjustment was for past service costs covering the period from January 2008, when HVSCA employees were migrated to PDVSA payroll. It is a non-recurring adjustment. Pension costs at the end of ~~2008.~~2009 recorded in the books reasonably reflect the Company’s employee demographic and plan conditions. Pension cost is not tax deductible until future periods when the pension is settled in cash. The Company is not required to reimburse the pension costs to PDVSA until PDVSA pays.

		~~Bellow~~Additionally, at December 31, 2009 and 2008, under other, it is included the accruals in respect of drilling services and infrastructure totaling US$47,892 thousands and US$50,845 thousands (Bs 102,968 thousands and Bs 109,317 thousands), approximately, and a special contribution over the extraordinary prices of the international hydrocarbons market totaling US$882 thousands and US$56,377 thousands (Bs 1,896 thousands and Bs 121,211 thousands).

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

Below are the movements of ~~provisions at December 31, 2007:~~accruals and other payables during 2009 (in thousands):

Balance at Balance at
December 31, December 31, Current
(Thousands of U.S. dollars) 2006 Increase 2007 portion

Accruals and other payables

Royalties for gas production 6,176 7,232 13,408 13,408
Special advantages 6,368 4,298 10,666 10,666
Social development 4,542 5,363 9,905 9,905
LOCTICSEP (Note 9) 672 1,160 1,832 1,832
Accrued expenses 2,581 11,514 14,095 14,095

Total accruals and other payables 20,339 29,567 49,906 49,906

Accruals and other payables

Royalties for gas production 13,277,512 15,549,260 28,826,772 28,826,772
Special advantages 13,692,001 9,240,135 22,932,136 22,932,136
Social development 9,764,246 11,532,339 21,296,585 21,296,585
LOCTICSEP (Note 9) 1,444,531 2,494,336 3,938,867 3,938,867
Accrued expenses 5,552,056 24,751,163 30,303,219 30,303,219

Total accruals and other payables 43,730,346 63,567,233 107,297,579 107,297,579


	Balance at							Balance at				Long-
	December 31,							December		Current		term
	2008		Increase		Decrease			31, 2009		portion		portion
U.S. dollars
Royalties		44,017		5,260		—			49,277		49,277		—
Provision for abandonment cost (See Note 9)		19,174		5,242		—			24,416		—		24,416
Provision for retirement benefits		1,306		7,878		—			9,184				9,184
Endogenous and social development		4,347		1,381		—			5,728		5,728		—
LOCTISEP		3,056		3,336		—			6,392		6,392		—
Other		118,404		—		(24,938	)		93,466		93,466		—


Total accruals and other payables		190,304		23,097		(24,938	)		188,463		154,863		33,600


Bolivars

Royalties		94,637		11,309		—			105,946		105,946		—
Provision for abandonment cost (See Note 9)		41,224		11,268		—			52,492		—		52.492
Provision for retirement benefits		2,808		16,938		—			19,746		—		19,746
Endogenous and social development		9.346		2,969		—			12,315		12,315		—
LOCTISEP		6,570		7,173		—			13,743		13,743		—
Other		254,569		—		(53,617	)		200,952		200,952		—


Total accruals and other payables		409,154		49,657		(53,617	)		405,194		332,956		72,238

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008


			December 31,								December 31,
	2009				2008				2009					2008
	Book		Fair		Book		Fair		Book			Fair		Book		Fair
	value		value		value		value		value			value		value		value
			U.S. dollars									Bolivars
Assets:
Accounts receivable		361,137		361,137		257,292		257,292		776,445			776,445		553,178		553,178
Recoverable tax credits		19,714		17,922		9,604		9,604		42,385			38,532		20,649		20,649
Accounts receivable other		673		673		890		890		1,448			1,448		1,913		1,913
Cash and cash equivalents		3,062		3,062		7,363		7,363		6,582			6,582		15,830		15,830


Liabilities:

Accounts payable to suppliers		35,021		35,021		8,536		8,536		75,295			75,295		18,353		18,353
Other liabilities (included in accruals and other payables)		154,863		154,863		169,824		169,824		332,956			332,956		365,122		365,122
Accounts and dividends payables to shareholders and related companies		101,437		101,437		80,568		80,568		218,091			218,091		173,221		173,221

(18)

Commitments, Contingencies and Claims

		At December 31, 2009 and 2008, the Company has not set aside a provision for litigations and other claims. Should the outcome of existing lawsuits and claims be unfavorable to the Company, it could have a material adverse effect on its results of operations. Although it is not possible to predict the outcome, Company management, based in part on the opinion of its legal advisors, does not believe it is likely that losses related to the aforementioned legal procedures will exceed recognized estimated amounts or generate significant amounts that could affect the Company’s financial position or results of operations.

		*Environmental Protection*

		The subsidiaries of CVP are subject to different environmental laws and regulations which may require significant expenditures to modify facilities and prevent or remedy the environmental effects from waste disposal and spills of pollutants.

		Petrodelta, S.A. and its parent company CVP are taking steps to prevent environmental risks, protect employee health and preserve the integrity of their facilities.

		Conditions that require additional expenditures may exist at various sites including, but not limited to, CVP’s operating complexes and crude oil storage terminals. Company management believes that these matters, in the normal course of operations, will not significantly affect the Company’s financial position or liquidity in the results of its operations.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

		*Agreements with the Organization of Petroleum Exporting Countries (OPEC)*

		The Bolivarian Republic of Venezuela is a member of OPEC, an organization mainly dedicated to establishing agreements to maintain stable crude oil prices by setting production quotas. To date, the reduction in crude oil production ~~totaled 5,373,623 barrels (Bbls)~~resulting from changes in the production quotas set by OPEC and ~~5,210,759 barrels (Bbls), respectively (unaudited production data). During 2007~~price fluctuations has not significantly affected the Company’s results of operations, cash flows or financial results.

(19)

Related Party Transactions

		Petrodelta, S.A. considers its shareholders and related subsidiaries and affiliates, Company ~~sold 70%~~directors and executives, as well as other governmental institutions, as related parties.

		A summary of ~~its crude oil production~~transactions and balances with related parties is shown below (in thousands):


			December 31,
	2009		2008		2009		2008
	U.S. dollars				Bolivars
Activities for the year:
Crude oil and natural gas sales		458,251		474,619		985,239		1,020,431

Operating expenses		35,442		21,298		76,200		45,791

General, administrative and selling expenses		6,589		3,506		14,167		7,538

Royalties (See Note 7)		137,925		149,605		296,538		321,651

Reimbursement of expenses		149,058		272,852		320,475		586,632


Balances at the end of the year:
Accounts receivable (See Note 12)		361,137		257,292		776,445		553.178

Prepaid dividends-B Partners (See Note 14)		—		20,750		—		44,612

Accounts payable to Shareholders (See Note 15)		4,060		2,327		8,729		5,003

Dividends payable-A Partners (See Note 14)		31,126		—		66,921		—

Accounts payable to PDVSA (See Note 15)		66,251		78,241		142,441		168,218

		As of April 2006, due to the migration of operating agreements to mixed companies, PDVSA Petróleo signed purchase and sale agreements with these companies, which set out that mixed companies will notify PDVSA Petróleo of the estimated volume of hydrocarbons expected to be delivered the following month. PDVSA Petróleo must pay the mixed companies for delivered volumes, net of volumes for royalties in kind and paid to the Venezuelan government.

		In conformity with the terms and conditions of the agreements, CVP mixed companies agree to sell and deliver to PDVSA Petróleo, and the latter agrees to purchase and receive from these mixed companies, crude oil and natural gas produced in the delimited areas that are not used for primary activities or for payment of royalties in kind to the Venezuelan government.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

		Crude oil delivered from the Petrodelta fields to PDVSA is priced with reference to Merey 16 published prices, weighted for different markets and adjusted for variations in gravity and sulphur content, commercialization costs and distortions that may occur given the reference price and prevailing market conditions. Market prices for crude oil of the type produced in the fields operated by Petrodelta averaged approximately ~~US$220 million, equivalent to Bs 473,497 million (US$186 million, equivalent to Bs 399,731 million~~$57.62 and $84.52 per barrel for the ~~initial nine-month period~~year ended December 31, ~~2006)~~2009 and ~~the remaining 30% amounting to approximately US$95 million, equivalent to~~ Bs 203,597 million (US$80 million, equivalent to Bs 171,364 million for the initial nine-month period ended December 31, 2006) was delivered to MENPET as payment in kind for royalties on hydrocarbon production.2008, respectively.

		During ~~2007~~the years ended December 31, 2009 and ~~2006, gas production totaled 17,338,070 thousand cubic feet (Mcf) and 14,804,976 Mcf, respectively (unaudited production data). During 2007~~2008, the Company sold ~~13,456,164 Mcf of~~crude oil and natural gas to PDVSA Petróleo for ~~approximately~~ US$~~21 million, equivalent to~~458,251 thousands and US$474,619 thousands (Bs 985,239 thousands and Bs 44,696 million (11,518,748 Mcf for approximately US$18 million, equivalent to Bs 38,260 million in 2006). The difference between gas produced and gas sold relates to the portion used by the Company to generate energy and compress gas1,020,431 thousands), respectively, included in the ~~fields.~~income statement under Income. At December 31, ~~2007,~~2009 and 2008, the ~~Company has not received the forms for settlement~~statement of ~~royalties from MENPET~~financial position includes US$361,137 thousands and US$257.292 thousands (Bs 776,445 thousands and Bs 553.178 thousands) of accounts receivable in ~~respect of gas produced in 2007 and 2006.~~

~~12.~~		~~Production Royalties~~this connection.

		~~Royalties on production of hydrocarbons~~During 2009 and 2008, PDVSA Petróleo charged Petrodelta, S.A. US$261 million and US$370 million (Bs 561 million and Bs 798 million), respectively, for ~~the period ended at December 31 comprise the following:~~

2007 2006
Nominal Nominal
(In thousands) US$ bolivars US$ bolivars

Crude oil production 94,696 203,597,195 79,704 171,363,500
Gas production 7,233 15,549,261 6,176 13,277,512

Total production royalties 101,929 219,146,456 85,880 184,641,012

~~Petrodelta, S.A.~~
~~Notes to the financial statements~~
~~December 31, 2007 and 2006~~

		~~The Company is required to pay a 30% royalty~~labor and other costs, included in ~~kind for crude oil produced~~general, administrative and transferred to PDVSA Petróleo. Gas production is taxed with a 30% royalty calculated based on gas volumes produced in any field multiplied by the market value of natural gas less a 10% discount. Crude oil and gas are taxed by MENPET.selling expenses.

		Certain Company directors hold key positions in other related entities; some of their attributions include influencing the operational and financial policies of these entities.

		At December 31, 2009 and 2008, transactions with related parties do not necessarily reflect the results that would have been obtained had these transactions been held with third parties.

		At a Board of Directors’ Meeting in December 2008, it was resolved to offset receivables and payables with PDVSA and its affiliates. In this regard, it was established that 75% of accounts receivable and 100% of accounts payable and billed to PDVSA would be recorded with no interest charges. Subsequently, in December 2008, CVP agreed to offset the remaining unbilled accounts payable. During 2009, in February, July and November it was resolved to offset receivables and payables between PDVSA and the Company. As a result, accounts payable in respect of reimbursement of capital costs and operating expenses were offset against accounts receivable in respect of estimated hydrocarbons extracted and transferred to PDVSA in accordance with the purchase sale agreement.

(20)

Laws, Resolutions and Legal Contributions

	a)		*Laws Decreed within the Framework of the Enabling Law*

			On July 31, 2008, 26 laws were decreed within the framework of the Enabling Law concerning economic, social, legal, and military matters. The following are among the most important laws approved in the social, administrative and financial areas:

Decree No. 6,071 for the Agro-Food Security and Sovereignty Law published in Official Gazette No. 5,889.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

	-		Decree No. 6,128 for the Law for the Creation of the Social Fund Aimed at Gathering and Disposing of Excess Resources of Government Entities published in Official Gazette No. 5,890.

	-		Decree No. 6,215 for the Law for Fostering and Developing Small and Medium-sized Industries and Units of Social Property published in Official Gazette No. 5,890.

	-		Decree No. 6,217 for the Public Administration Law published in Official Gazette No. 5,890.

	-		Decree No. 6,233 for the Reform of the Public Sector Financial Administration Law published in Official Gazette No. 5,891.

	-		Decree No. 6,265 for the Law for the Simplification of Administrative Formalities published in Official Gazette No. 5,891.


			Company management and its legal advisors are assessing the possible impact of these laws on PDVSA.

	b)		*Law for Special Contributions on Extraordinary International Hydrocarbon Market Prices*

			On April 15, 2008, the Law for Special Contributions on Extraordinary International Hydrocarbon Market Prices was published in Official Gazette No. 38,910. Subsequently, Resolutions No. 151 and No. 195 of MPPEP were published in Official Gazette No. 38,939 of May 27, 2008 and Official Gazette No. 38,970 of July 10, 2008. This Law and its resolutions require entities that export or transport liquid hydrocarbons and hydrocarbon derivatives abroad to pay a special monthly contribution. The contribution will be equivalent to: a) 50% of the difference between the average monthly price of the Venezuelan crude oil basket and the threshold price of US$70 per barrel and b) 60% of the difference between the average monthly price of the Venezuelan crude oil basket and the threshold price over US$100 per barrel. This contribution shall be paid on every barrel of oil exported or transported abroad and shall be collected and paid monthly by MPPEP to FONDEN for execution of infrastructure development projects, production and social development projects aimed at strengthening Communal Power. This Law became effective on April 15, 2008.

	c)		*Law on Narcotic and Psychotropic Substances*

			The Law on Narcotic and Psychotropic Substances was published in Official Gazette No. 38,287 on December 16, 2005. This Law repeals the previous Law of September 30, 1993 and requires all companies, public or private, with 50 or more employees to earmark 1% of their annual net income for social programs for the prevention of illegal drug consumption and traffic, one-half of which is to be set aside for child welfare protection programs.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

			In December 29, 2009 providence 007-2009 was published in Official Gazette No. 39,336 whereas the National Anti-Drug Agency (ONA) establishes norms and procedures to collect, control and fiscalize contributions by public and private companies. The providence among other things lay out the amount subject to the calculation set as taxable income and not net income applied in prior years. During the years ended December 31, 2009 and 2008, the Company recorded an expense of approximately US$3,336 thousands and US$1,224 thousands (Bs 7,173 thousands and Bs 2.633 thousands), respectively, in this connection, included in the income statement for each year under General and administrative expenses, net. As a result of the change in the methodology used to calculate the contribution from applying the providence No. 007-2009, for the amount recorded during the year ended December 31, 2009 approximately US$1.082 thousands and US$168 thousands (Bs.2.327 thousands y Bs.362 thousands), correspond to 2008 and 2007, ~~royalty~~respectively.

	d)		*Financial Transaction Tax Law*

			On October 5, 2007, the Venezuelan government enacted by Decree the Tax on Financial Transactions for Incorporated and Unincorporated Entities. This tax is levied upon all financial transactions performed by incorporated and unincorporated entities. The tax rate was set at 1.5% as from November 1, 2007 until December 31, 2008.

	e)		*Enabling Law*

			On February 1, 2007, the National Assembly approved the Enabling Law granting the Venezuelan president special powers for 18 months to pass decrees governing different areas of national interest, including transformation of state institutions, popular, economic and social participation, as well as financial, tax and energy-related matters.

	f)		*Law for the Advancement of Science, Technology and Innovation*

			The Law for the Advancement of Science, Technology and Innovation was enacted in August 2005. This Law establishes that, beginning January 1, 2006, the country’s major corporations will annually earmark 0.5% of gross income generated in Venezuela to support activities which, according to the Law, relate to investments in science, technology and innovation. This Law defines major corporations as those whose annual gross income exceeds 100,000 tax units. In addition, Article No. 35 of the aforementioned Law requires major corporations in the country engaged in activities covered by the Hydrocarbon and Gaseous Hydrocarbon Law to contribute 2% a year of their gross income generated in Venezuela from any of the activities specified in Article No. 42 of this Law. This Law’s Regulations will establish the mechanisms, methods and procedures for mandatory contributions from major corporations, as well as the timeframe and procedures that must be complied with for the purpose of determining which activities will be considered by the Ministry of Science and Technology in connection with these contributions. At December 31, 2009 and 2008 following instructions

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

from its shareholder CVP, the Company Management did not record any provision related to the contribution establish in the Law for the Advancement of Science, Technology and Innovation. According with these instructions, PDVSA will file on consolidated basis the contribution established in this Law.

(21)

Subsequent events

	a)		*Exchange Agreement No. 14*

			On January 8, 2010, the Ministry of Finance and BCV published Exchange Agreement No. 14, which establishes a dual exchange rate of Bs.2.60/1US$ for essentials imports and Bs.4.30/1US$ for other concepts. This agreement allows for the purchase and sale of currency for the following concepts at the Bs 2,60/1US$:

	I.		Imports for food, health, education, machinery and equipment, science and technology, according to commercial policy set by the Executive branch.

	II.		Remittance of funds to famillies living abroad.

	III.		Payments to students undergoing academic activities outside the country.

	IV.		Payments of expenses for health recovery, sport, culture, scientific investigations and other cases of urgent matter authorized by CADIVI.

	V.		Payments to retired individuals living abroad.

	VI.		Purchase of currency by diplomatic representations, consulates, embassies and public individuals assigned to International organizations accredited by the goverment.

	VII.		The Exchange Agreement establishes that the parchase and sale of currency for operations different than those mentioned above are to be at Bs 4,30 /U$1.

			This agreement did not have an effect on the Company’s right to maintain foreign currency funds at financial institutions outside the country on revenues proceeds from sale of crude in order to make payments and disbursements outside the country.

	b)		*Labor Collective Contract*

			On January 12, 2010 a pre-agreement was reached among PDVSA and oil labor union (FUTPV) regarding the approval of the new labor contract and the impact on labor cost affecting mix companies. The pre-agreement establish a salary raise and payroll and retirement benefits which has a significant impact on the Company’s payroll cost. The most significant impacts are:

	I.		A salary raise of Bs.35 daily which represents an increase of 80% of current salary. The increase shall be pay in two portions, the first of Bs.25 at the signing of the contract and the second of Bs.10 from January 1^st, 2011.

	II.		An increase in the monthly amount for electronic food from Bs.1.300 to Bs. 1.700.

	III.		An increase in the retirement benefit from Bs. 1.000 to Bs. 1.600.

	IV.		The increase will be retroactively from October 1, 2009 and not from January 21, 2009, date which expired the prior contract, in compensation it was agreed a one-

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

time bonus of Bs. 8.000 which has no effect in the severance benefits of employees.

The impact of the new collective contract, according to the changes mentioned above, has been estimated and is reflected in the statement of comprehensive income of the Company.

(22)		Subsequent events after Independents Accountant Opinion

		On February 4, 2010, providence No. 0002344 from the National Integrated Service on Tributes and Customs Administration (SENIAT) was published in Official Gazette No. 39,361 in which the current tax unit value was adjusted from Bs. 55 to Bs. 65.

		On February 26, 2010, the Board of Directors of the Company approved the issuance of the financial statements under International Financial Reporting Standards and submitted said financial statements to the Shareholders of the Company for approval purposes.

(23)		Supplementary Information on Oil and Gas Exploration and Production Activities (unaudited)

		The following tables provide supplementary information on oil and gas exploration, development and production activities. All exploration and production activities are conducted mainly by CVP and Mixed Companies in Venezuela.

		Table I — Crude Oil and Natural Gas Reserves

		All crude oil and natural gas reserves located in Venezuela are owned by the Bolivarian Republic of Venezuela. Crude oil and natural gas reserves are estimated by PDVSA and reviewed by the People’s Power Ministry for Energy and Oil using reserve criteria that are consistent with those prescribed by the American Petroleum Institute (API) of the United States of America.

		Proved reserves are the estimated quantities of crude oil and gas ~~produced amount~~which, with reasonable certainty, are recoverable in future years from known deposits under existing economic and operating conditions. Due to ~~approximately US$102 million, equivalent~~the inherent uncertainties and limited nature of reservoir data, reserve estimates are subject to ~~Bs 219,146 million (US$86 million, equivalent~~changes over time, as additional information becomes available. Proved reserves do not include additional volumes which may result from the extension of currently explored areas or from the application of secondary recovery processes not yet tested and determined to ~~Bs 186,641 million for the initial nine-month period ended December 31, 2006).~~be economically feasible.

~~13.~~		Proved developed oil and gas reserves are the quantities that can be recovered from existing wells with existing equipment and methods. Proved undeveloped reserves are those volumes that are expected to be recovered from new wells on undrilled acreage or from existing wells.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

A summary of annual changes in proved crude oil and natural gas reserves is shown below:

(a)

Conventional Crude Oil (in thousands of barrels)


	Years ended December 31
	2009			2008			2007
Proved developed and undeveloped reserves of conventional crude oil at January 1		214,658			220,163			225,537
Revisions		—			—			—
Expansions and discoveries		—			—			—
Production		(7,835	)		(5,505	)		(5,374	)

Proved developed and undeveloped reserves of conventional crude oil at December 31		206,823			214,658			220,163


Proved developed reserves of conventional crude oil at December 31 (included on the previous amount)		54,110			47,298			52,803

At December 31, 2009, 2008 and 2007, certified reserves assigned to the Company amounted to 206,823 thousands, 214,658 thousands and 220,163 thousands barrels, respectively. Production for the year ended December 31, 2009, 2008 and 2007 was 7,835 thousands, 5,505 thousands and 5,374 thousands barrels.

(b)

Natural Gas Reserves (in millions of cubic feet)


	Years ended December 31
	2009			2008			2007
Proved developed and undeveloped reserves of natural gas at January 1		273,281			283,981			297,437
Revisions		(2,592	)		—			—
Expansions and discoveries		—			—			—
Production		(4,397	)		(10,700	)		(13,456	)

Proved developed and undeveloped reserves of natural gas at December 31		266,292			273,281			283,981


Proved developed reserves of natural gas at December 31 (included on the previous amount)		25,641			32,630			43,330

Natural gas production is shown on the basis of actual volumes before the extraction of liquefiable hydrocarbons.

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

		Table II — Costs Incurred in Exploration and Development Activities

		Exploration costs include costs incurred from geological and geophysical activities, and drilling and equipping exploratory wells. The Company did not conduct exploration activities in 2009. Development costs include those for drilling and equipping development wells, enhanced recovery projects and facilities to extract, treat and store crude oil and natural gas. Annual costs, summarized below, include amounts both expensed and capitalized for the Company’s conventional crude oil reserves (In thousands):


	Conventional Crude
	U.S. dollars				Bolivars
	2009		2008		2009		2008
Development costs		83,141		53,576		178,753		115,188


Total costs incurred from development activities		83,141		53,576		178,753		115,188

		Table III — Costs Recorded as Assets in Oil and Gas Production Activities

		Costs recorded as assets for oil and gas exploration and production activities, as well as the related accumulated depreciation and amortization at December 31 for PDVSA’s conventional and extra-heavy crude oil reserves are summarized below (In thousands):


	Conventional Crude
	U.S. dollars						Bolivars
	2009			2008			2009			2008
Assets used in production		319,386			238,211			686,678			512,155

Equipment and facilities		7,466			3,737			16,051			8,034

		326,852			241,948			702,729			520,189

Accumulated Depletion, depreciation and amortization		(94,322	)		(61,134	)		(202,791	)		(131,439	)

Construction in progress		32,912			30,946			70,760			66,534


Total net costs capitalized as assets		265,442			211,760			570,698			455,284

PETRODELTA, S.A.
(Subsidiary owned in a 60% by Corporación Venezolana del Petróleo, S.A.)
Notes to the financial statements

December 31, 2009 and 2008

Table IV — Results of Operations for Oil and Gas Production Activities for Each Year(In thousands):


	Conventional Crude
	Years ended December 31
	U.S. Dollar						Bolivars
	2009			2008			2009			2008
Net production income
Sales		458,251			474,619			985,239			1,020,431
Production costs		(59,152	)		(84,314	)		(127,176	)		(181,275	)
Royalties		(157,681	)		(225,167	)		(339,014	)		(484,109	)
Depletion, depreciation and amortization		(32,571	)		(24,778	)		(70,029	)		(53,273	)


Results of operation before income Tax		208,847			140,360			449,020			301,774

Income tax		(105,868	)		(69,374	)		(227,616	)		(149,154	)


Results production operation		102,979			70,986			221,404			152,620

		Income from oil production is calculated at international market price as if all production were sold.

		Production costs ~~for the period ended at December 31 comprise the following:~~

2007 2006
Nominal Nominal
(In thousands) US$ bolivars US$ bolivars

Maintenance and repair expenses 10,666 22,933,762 13,558 29,150,054
Electric energy 6,315 13,577,250 5,252 11,291,800
Materials and consumables used 6,212 13,355,585 3,531 7,591,650
Other 559 1,202,281 388 834,595

Total production costs 23,752 51,068,878 22,729 48,868,099

~~14.~~		~~General~~are lifting costs incurred to operate and ~~Administrative Expenses~~maintain productive wells and related facilities and equipment, including operating labor costs, materials, supplies, fuel consumed in operations and operating costs of natural liquid gas plants.

		~~General~~Depreciation and ~~administrative~~amortization expenses relate to assets used in exploration and production activities. Income tax expense is computed using the statutory rate for the ~~period ended at December 31 comprise~~year. For these purposes, the ~~following:~~results of production operations do not include finance costs and corporate overhead nor their associated tax effects.

		A summary of average per unit sale prices and production costs is shown below:

2007 2006
Nominal Nominal
(In thousands) US$ bolivars US$ bolivars

Costs of personnel assigned 10,453 22,473,950 6,534 14,048,100
Insurance 2,646 5,688,900 1,878 4,037,700
Service and professional fees 2,236 4,807,400 318 683,700
LOCTICSEP (Note 9) 1,160 2,494,336 672 1,444,531
Depreciation (office furniture and equipment, and vehicles) 594 1,276,733 460 989,000
Other 6,131 13,181,648 3,720 8,000,151

Total general and administrative expenses 23,220 49,922,967 13,582 29,203,182

~~15.~~

~~Subsequent Events~~

~~a) Monetary reconversion~~
In March 2007, the Venezuelan government established that, as from January 1, 2008, the unit of the Venezuelan monetary system (Venezuelan bolivar) was redenominated at a conversion rate of one thousand current bolivars to one new bolivar (“bolívar fuerte”). Therefore, any amount expressed in local currency before January 1, 2008 will be converted to the new unit (“bolívar fuerte”) on that date


	Years ended December 31
	2009		2008		2009		2008
	U.S. dollar				Bolivars
Average sale price

Crude oil per barrel		57.62		84.52		123.88		181.72


Natural gas per barrel		1.54		1.54		3.31		3.31


Average production cost per BOE		6.90		11.57		14.84		24.88

3150


Year	Quarter	High		Low
2008	First quarter	$	13.02	$	10.32
	Second quarter		12.84		9.03
	Third quarter		11.31		9.06
	Fourth quarter		9.59		3.84

2009	First quarter		4.69		2.70
	Second quarter		5.66		3.25
	Third quarter		6.64		4.24
	Fourth quarter		6.39		4.90



31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 executed by ~~Steven W. Tholen, Senior~~Stephen C. Haynes, Vice President, Chief Financial Officer and Treasurer.


32.1		Certification accompanying Annual Report on Form 10-K pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by James A. Edmiston, President and Chief Executive Officer.


32.2		Certification accompanying Annual Report on Form 10-K pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 executed by ~~Steven W. Tholen, Senior~~Stephen C. Haynes, Vice President, Chief Financial Officer and Treasurer.

	99.1		Reserve report dated February 26, 2009 between Harvest (US) Holdings, Inc. and Ryder Scott Company.

	99.2		Reserve report dated February 26, 2009 between HNR Finance B.V. and Ryder Scott Company.


			Page
Part I		~~Report of Independent Registered Public Accounting Firm~~	*

	~~Consolidated Balance Sheets at December 31, 2007 and 2006~~	*

	~~Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005~~Item 1.	*Business		1
	Item 1A.	Risk Factors		16
	Item 1B.	Unresolved Staff Comments		21
	Item 2.	Properties		21
	Item 3.	Legal Proceedings		22
	Item 4.	[Reserved]

Part II
	~~Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005~~	*

	~~Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005~~Item 5.	*Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		23
	Item 6.	Selected Financial Data		25
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		39
	Item 8.	Financial Statements and Supplementary Data		39
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		39
	Item 9A.	Controls and Procedures		40
	Item 9B.	Other Information		40

Part III
	~~Notes to Consolidated Financial Statements~~	*
	Item 10.	Directors, Executive Officers and Corporate Governance		40
	Item 11.	Executive Compensation		41
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		41
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		41
	Item 14.	Principal Accountant Fees and Services		41

Part IV

	Item 15.	Exhibits and Financial Statement Schedules		42

Financial Statements				S-2

Signatures				S-39
EX-21.1
EX-23.1
EX-23.2
EX-23.3
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.1
EX-99.2


(a)		Information represents 100 percent of production.

(b)		Royalty-in-kind paid on gas used as fuel was 3,323 Mcf and 3,830 Mcf for 2009 and 2008, respectively.

(c)		Net of royalty and excluding workovers.

(d)		Information represents our ownership interest.

	4.6		Form of 8.25% Senior Convertible Notes due 2013. (Incorporated by reference to Exhibit 4.3 to our Form 8-K filed on February 18, 2010, File No. 1-10762.)

	10.1		2001 Long Term Stock Incentive Plan. (Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-8 filed on April 9, 2002 (Registration Statement No. 333-85900).)


10.2		Harvest Natural Resources 2004 Long Term Incentive Plan. (Incorporated by reference to Exhibit 4.5 to our Registration Statement on Form S-8 filed on May 25, 2004 (Registration Statement No. 333-115841).)


~~10.17~~10.15		Form of 2006 Long Term Incentive Plan Employee Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.4 to our Form 10-Q filed on August 9, 2006, File No. 1-10762.)


^†		^†Identifies management contracts or compensating plans or arrangements required to be filed as an exhibit hereto pursuant to Item 15(a) and (b) of Form 10-K.


TABLE VI	—	Changes in the Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves (in thousands):


	HARVEST NATURAL RESOURCES, INC. (Registrant)
Date: ~~April 11, 2008~~March 16, 2010	By:	/s/James A. Edmiston
		James A. Edmiston
		Chief Executive Officer


Signature			Title


/s/ James A. Edmiston ~~James A. Edmiston~~			Director, President and Chief Executive Officer
~~/s/ Steven W. Tholen~~ ~~Steven W. Tholen~~ ~~(Principal Financial Officer)~~James A. Edmiston		~~Senior~~	(Principal Executive Officer)

/s/ Stephen C. Haynes Stephen C. Haynes			Vice President -— Finance, Chief Financial Officer and Treasurer
~~/s/ Kurt A. Nelson~~ ~~Kurt A. Nelson~~ ( (Principal Financial Officer and Principal Accounting Officer)
	~~Vice President-Controller, Chief Accounting Officer~~
/s/ Stephen D. Chesebro’ Stephen D. Chesebro’			Chairman of the Board and Director
~~/s/ John U. Clarke~~ ~~John U. Clarke~~		~~Director~~
/s/ Igor Effimoff Igor Effimoff			Director

/s/ H. H. Hardee H. H. Hardee			Director

/s/ R. E. Irelan R. E. Irelan			Director

/s/ Patrick M. Murray Patrick M. Murray			Director

/s/ J. Michael Stinson J. Michael Stinson			Director


			Additions
	Balance at					Charged to Other		Deductions From		Balance at End of
	Beginning of Year		Charged to Income			Accounts		Reserves		Year
At December 31, 2009
Amounts deducted from applicable assets
Accounts receivable	$	2,757	$	—		$	2,757	$	—	$	—
Deferred tax valuation allowance		7,841		9,184			—		—		17,025
Investment at cost		1,350		—			—		—		1,350
At December 31, 2008
Amounts deducted from applicable assets
Accounts receivable	$	2,757	$	—		$	—	$	—	$	2,757
Deferred tax valuation allowance		1,782		6,059			—		—		7,841
Investment at cost		1,350		—			—		—		1,350
At December 31, 2007
Amounts deducted from applicable assets
Accounts receivable	$	2,757	$	—		$	—	$	—	$	2,757
Deferred tax valuation allowance		33,704		(31,922	)		—		—		1,782
Investment at cost		1,350		—			—		—		1,350


	Pages
INDEPENDENT AUDITOR’S REPORT		1 - 2

FINANCIAL STATEMENTS AS OF DECEMBER 31 2009 AND 2008

Statements of financial position		3
Statements of comprehensive income		4
Statements of changes in equity (expressed in thousands of US dollars)		5
Statements of changes in equity (expressed in thousands of US bolivars)		6
Cash flow statements		7

Notes to the financial statement

Nota 1 Reporting Entity		8
Note 2 Basis of Preparation		10
Note 3 Summary of Significant Accounting Policies		12
Note 4 Exchange Agreement with the Central Bank of Venezuela (BCV)		22
Note 5 Determination of Fair Values		22
Note 6 Financial Risk Management		23
Note 7 Taxes		24
Note 8 Property, Plant and Equipment, Net		29
Note 9 Accrual for Asset Retirement Obligations		32
Note 10 Prepaid Expenses and Other Assets		33
Note 11 Inventories		33
Note 12 Accounts Receivable		33
Note 13 Cash and cash equivalents		34
Note 14 Equity		34
Note 15 Accounts Payable		36
Note 16 Accruals and Other Payables		37
Note 17 Financial Instruments		38
Note 18 Commitments and Contingencies		41
Note 19 Related Party Transactions		42
Note 20 Laws, Resolutions and Legal Contributions		44
Note 21 Subsequent events		46
Note 22 Subsequent events after Independent Accountants Opinion		47
Note 23 Supplementary Information on Oil and Gas Exploration and Production Activities (unaudited)		47


	December 31^st,
	Note			2009		2008		2009		2008
				U.S. dollars				Bolivars
Assets

Property, plant and equipment, net		8			265,442		211,760		570,698		455,284
Deferred income tax		7-	(a)		141,245		97,323		303,676		209,244


Total non-current assets					406,687		309,083		874,374		664,528


Prepaid expenses and other assets		10			559		21,477		1,202		46,176
Inventories		11			21,472		14,391		46,167		30,941
Accounts receivable		12			379,732		267,786		816,425		575,740
Cash and cash equivalents		13			3,062		7,363		6,582		15,830


Total current asset					404,825		311,017		870,376		668,687


Total assets					811,512		620,100		1,744,750		1,333,215


Equity
Equity, see statements of changes in equity		14			432,100		340,692		929,013		732,487


Liabilities

Provision for abandonment cost		9 y 16			24,416		19,174		52,492		41,224
Provision for retirement benefits		16			9,184		1,306		19,746		2,808


Total non-current liabilities					33,600		20,480		72,238		44,032


Accounts payable		15			105,332		89,104		226,465		191,574
Dividends payable		14			31,126		—		66,921		—
Accruals and other liabilities		16			154,863		169,824		332,956		365,122
Income tax payable		7			54,491		—		117,157		—


Total current liabilities					345,812		258,928		743,499		556,696


Total liabilities					379,412		279,408		815,737		600,728


Total equity and liabilities					811,512		620,100		1,744,750		1,333,215


		2007				2006
				Nominal				Nominal
(In thousands)	Note	U.S. dollars		bolivars		U.S. dollars		bolivars

Assets
Non-current assets
Property, plant and equipment, net	5		176,783		380,084,180		192,095		413,004,190
Deferred income tax	9		38,738		83,286,903		23,415		50,342,336


Total non-current assets			215,521		463,371,083		215,510		463,346,526


Current assets
Deferred income tax	9		6,025		12,954,296		—		—
Inventories	4		13,830		29,734,431		8,281		17,803,706
Prepaid expenses			873		1,873,249		—		—
Trade accounts receivable	7		444,737		956,184,237		203,717		437,991,291
Other accounts receivable			6,292		13,528,976		3,190		6,859,253
Cash at banks			6,977		15,000,000		—		—


Total assets			694,255		1,492,646,272		430,698		926,000,776


Equity and Liabilities
Equity
Capital stock	8		465		1,000,000		—		—
Contributions for future capital increases	8		6,512		14,000,000		—		—
Share premium	8		212,451		456,769,911		212,451		456,769,911
Legal reserve	8		47		100,000		—		—
Distributable retained earnings	8		181,325		389,847,848		89,931		193,350,942


Total equity			400,800		861,717,759		302,382		650,120,853


Liabilities
Non-current liabilities
Provision for abandonment costs	6		5,964		12,823,531		5,420		11,653,500


Current liabilities
Taxes	9		153,037		329,028,853		67,188		144,453,138
Accruals and other payables	10		49,906		107,297,579		20,339		43,730,346
Trade accounts payable	7		84,548		181,778,550		35,369		76,042,939


Total current liabilities			287,491		618,104,982		122,896		264,226,423


Total liabilities			293,455		630,928,513		128,316		275,879,923


Total equity and liabilities			694,255		1,492,646,272		430,698		926,000,776


		Company management considers that it operates in a single business segment (hydrocarbons) in one country, the Bolivarian Republic of Venezuela, in conformity with its social statutes.

		During the transition period from April 1, 2006 to December 31, 2007, ~~HVSCA~~Harvest Vinccler, S.C.A. (HVSCA) was in charge of managing and developing the Company’s activities and provided its financial and operational structure for this purpose. The Company’s operating costs during this period were paid by HVSCA and CVP and subsequently charged to PDVSA Petróleo, which, in


	2007		2006

Exchange rate at year end (Bs/US$1)		2,150.00		2,150.00
Average exchange rate for the year (Bs/US$1)		2,150.00		2,150.00
Interannual increase in the exchange rate (%)		—		—
Interannual increase in the CPI (%)		22.46		16.97


				Office furniture,
				equipment and
(Thousands of U.S. dollars)	Production			vehicles			Total

Cost
Balances at April 1, 2006		200,778			2,562			203,340
Additions		678			58			736
Obligations from asset disposal		5,095			—			5,095


Balances at December 31, 2006		206,551			2,620			209,171

Accumulated depletion, depreciation and amortization
Balances at April 1, 2006		—			—			—
Depletion, depreciation and amortization expense		(16,154	)		(460	)		(16,614	)
Obligations from asset disposal		(462	)		—			(462	)


Balances at December 31, 2006		(16,616	)		(460	)		(17,076	)


Net cost at December 31, 2006		189,935			2,160			192,095


Cost

Balances at December 31, 2006		206,551			2,620			209,171
Additions		3,052			201			3,253
Obligations from asset disposal		(15	)		—			(15	)


Balances at December 31, 2007		209,588			2,821			212,409


Accumulated depletion, depreciation and amortization
Balances at December 31, 2007		(16,616	)		(460	)		(17,076	)
Depletion, depreciation and amortization expense		(17,412	)		(594	)		(18,006	)
Obligations from asset disposal		(544	)		—			(544	)


Balances at December 31, 2007		(34,572	)		(1,054	)		(35,626	)


Net cost at December 31, 2007		175,016			1,767			176,783


				Office furniture,
				equipment and
(Thousands of nominal bolivars)	Production			vehicles			Total

Cost
Balances at April 1, 2006		431,673,344			5,508,300			437,181,644
Additions		1,457,425			124,700			1,582,125
Obligations from asset disposal		10,953,928			—			10,953,928


Balances at December 31, 2006		444,084,697			5,633,000			449,717,697

Accumulated depletion, depreciation and amortization
Balances at April 1, 2006		—			—			—
Depletion, depreciation and amortization expense		(34,731,100	)		(989,000	)		(35,720,100	)
Obligations from asset disposal		(993,407	)		—			(993,407	)


Balances at December 31, 2006		(35,724,507	)		(989,000	)		(36,713,507	)


Net cost at December 31, 2006		408,360,190			4,644,000			413,004,190


Cost
Balances at December 31, 2006		444,084,697			5,633,000			449,717,697
Additions		6,561,643			431,994			6,993,637
Obligations from asset disposal		(32,250	)		—			(32,250	)


Balances at December 31, 2007		450,614,090			6,064,994			456,679,084


Accumulated depletion, depreciation and amortization
Balances at December 31, 2006		(35,724,507	)		(989,000	)		(36,713,507	)
Depletion, depreciation and amortization expense		(37,435,432	)		(1,276,733	)		(38,712,165	)
Obligations from asset disposal		(1,169,232	)		—			(1,169,232	)


Balances at December 31, 2007		(74,329,171	)		(2,265,733	)		(76,594,904	)


Net cost at December 31, 2007		376,284,919			3,799,261			380,084,180


7.		~~Balances~~Estimated tax paid during 2008 exceeded the final tax liability by US$20,876 thousands (Bs 44,883 thousands), and ~~Transactions with Related Company~~was used to offset part of 2009 tax liability.


		Class “A” share premiums are in respect of fixed assets contributed by CVP. The value of ~~these shares~~this share premium amounts to approximately US$~~191 million,~~191,206 thousands, equivalent to approximately Bs ~~410,650 million,~~411,093 thousands, pursuant to Exhibit H of the Agreement for Conversion into a Mixed Company.

		Class “B” share premiums are in respect of fixed assets and inventories contributed by HNR Finance. The value of ~~these shares~~this share premium amounts to approximately US$~~21 million,~~ 21,245 thousands,

		Credit Risk

		~~Income from sales~~Exposure to Credit Risk

		The book value of ~~hydrocarbons for~~financial assets represents the ~~period ended at December 31 comprises the following:~~highest level of credit risk exposure. A breakdown is shown below (in thousands):

		Liquidity risk

		Maturity of financial liabilities, including estimated interest payments and ~~2006,~~excluding the impact of offset agreements, is shown below (in thousands):


	Book value				Contractual cash flows				6 months or less

			Non-derivative financial liabilities

	2009		2008		2009		2008		2009		2008
U.S. dollars

Accounts payable to suppliers (See Note 15)		35,021		8,536		35,021		8,536		35,021		8,536

Bolivars

Accounts payable to suppliers (See Note 15)		75,295		18,353		75,295		18,353		75,295		18,353

		Foreign Currency Risk

		Petrodelta, S.A. has the following monetary assets and liabilities denominated in currencies other than the U.S. dollar, which were converted into U.S. dollars at the exchange rate in effect at the balance sheet date (in thousands):

		Fair Value of Financial Instruments

		The following estimated amounts do not necessarily reflect the amounts at which the instruments could be exchanged in the current market. The use of different market assumptions and valuation methods can significantly affect the estimated fair values. The bases for determining the fair value are disclosed in Note 5 (in thousands):

/s/ PricewaterhouseCoopers LLP

Houston, Texas

March 16, 2010