2. OIL AND GAS PROPERTIES | 9 Months Ended |
Sep. 30, 2013 |
Oil And Gas Properties | ' |
2. OIL AND GAS PROPERTIES | ' |
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The Company holds working interests in two onshore Petroleum Exploration Licenses (PELs) in Australia. PEL 112, in which the Company holds a 48.5003% working interest, is comprised of 2,196 square kilometers (542,643 gross acres). PEL 444, in which the Company holds a 66.667% working interest, is comprised of 2,358 square kilometers (582,674 gross acres). Both licenses are located on the southwestern flank of the Cooper Basin in the State of South Australia. The Company’s oil and gas properties are unproven. As such, the costs capitalized in connection with those properties are not currently subject to depletion. |
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The Terra Nova Farm-In Agreement |
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Effective May 11, 2012, the Company entered into a definitive Oil and Gas Farm-In Agreement with Terra Nova Energy Ltd., and its wholly owned subsidiary Terra Nova Resources Inc. (“Terra Nova”), Australian-Canadian Oil Royalties Ltd. (“ACOR”) and Eli Sakhai (“Sakhai”) on PEL 112 and PEL 444 (the “Agreement”). The Agreement provides terms under which Terra Nova may earn up to a 55% undivided working interest in PEL 112 and PEL 444 (the “Farm-In Interest”). |
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During 2012, in connection with the Agreement, Terra Nova paid the Company non-refundable cash fees totaling $350,000, and 666,670 shares of its common stock with a fair market value of $193,334. The shares were measured at fair market value on a non-recurring basis using quoted market prices, and are categorized as a Level 1 fair value measurement under ASC Topic 820. The Company agreed to provide ACOR and Sakhai a full accounting of its use of the cash fees, and to share with ACOR and Sakhai, any excess of the cash fees over the transaction costs it incurred in connection with the Agreement. As a result of its analysis, the Company identified a total of $54,719 in excess fees to be refunded to ACOR and Sakhai. Of that amount, the Company withheld $37,340 as a recovery of exploration costs payable to it by ACOR and Sakhai. |
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To earn the entire Farm-In Interest, Terra Nova is required to fund exploration and development expenditures (the “Earning Obligations”) totaling at least AUD$13,700,000 (USD$14,308,000) including: |
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● | AUD$4,700,000 (USD$4,968,000) which was placed in escrow during May 2012 for use in the completion of a seismic acquisition program sufficient to meet the minimum seismic acquisition requirements, and interpretation of the acquired data for PEL 112 and PEL 444 (earning a 20% working interest in each license upon completion of the seismic obligations); |
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● | AUD$4,500,000 (USD$4,670,000) which was placed in escrow on November 1, 2012 to secure Terra Nova’s obligation to sole fund the dry-hole costs of an initial three (3) well drilling program on either PEL 112 or PEL 444, provided that at least one well is drilled on each license (earning a working interest of 5.833% per well in each license upon completion, totaling a working interest of 17.5%); and |
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● | AUD$4,500,000 (USD$4,670,000) to be placed in escrow on or before 45 days following completion or abandonment of the third well in the initial well program, for use in funding the first AUD$4,500,000 in dry-hole costs of an optional three (3) well drilling program on either PEL 112 or PEL 444, provided that at least one well is drilled on each license (earning a working interest of 5.833% per well in each license upon completion, totaling a working interest of 17.5%). |
Terra Nova acts as contract operator with respect to all seismic acquisition and drilling work contemplated by the Agreement. |
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Effective May 29, 2013, the Agreement was amended such that of the AUD$4,500,000 (USD$4,670,000) placed in escrow for the Initial Well Program, AUD$500,000 (USD$482,250) was used to pay costs incurred in the PEL 444 seismic program. Costs incurred in relation to the seismic earning obligations in excess of AUD$5,200,000 (previously AUD$4,700,000), have been borne by Terra Nova, the Company, ACOR and Sakhai in accordance with their working interest percentages calculated as though Terra Nova had successfully completed its Earning Obligations and earned the entire Farm-In Interest. |
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In July 2013, Terra Nova drilled the first well on PEL 112. The well was plugged and abandoned in August 2013. |
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In the event Terra Nova elects to complete the second well drilled in connection with the initial three well drilling program, Terra Nova will pay 50% of the completion costs and the Company will pay the other 50% of the completion costs. In the event Terra Nova elects to complete the third well drilled in connection with the initial three well drilling program, or any well drilled in connection with the optional three well drilling program, Terra Nova will pay 50% of the completion costs, and the Company, ACOR and Sakhai will pay the other 50% of the completion costs in accordance with their working interest at the effective date of the Agreement. |
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In the event any well drilled in connection with either the initial or optional drilling programs is commercially viable, and Terra Nova elects to complete such well, Terra Nova is entitled to a preferential recovery of one hundred percent of the costs it has paid to drill and test that successful well. Terra Nova is entitled to 80% of production from that successful well until either that successful well has ceased production or Terra Nova has received net revenue equal to the reimbursable costs it has incurred. |
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Terra Nova earns the Farm-In Interest in stages based upon successful completion of specific Earning Obligations. In each instance, the Company, ACOR and Sakhai will each contribute a portion of the working interest earned by Terra Nova. In the event Terra Nova earns the entire Farm-In Interest, the Company, ACOR and Sakhai will transfer to Terra Nova the following working interest percentages in both PEL 112 and PEL 444: |
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(a) | The Company will contribute an undivided 38.556% working interest in both PEL 112 and PEL 444 (resulting in a residual working interest position of 28.112% in each license); |
(b) | ACOR will contribute an undivided 8.222% working interest in both PEL 112 and PEL 444; and |
(c) | Sakhai will contribute an undivided 8.222% working interest in both PEL 112 and PEL 444. |
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The Agreement may be terminated by any party upon the occurrence of an uncured breach of any material term. Terra Nova may terminate the Agreement any time before it has earned the Farm-In Interest upon providing written notice of such termination. In the event Terra Nova terminates the Agreement, it shall not be entitled to any interest in either PEL 112 or PEL 444 unless it has satisfied an Earning Obligation with respect to that license. |
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Cooper Basin Exploration Activity |
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Acquisition of 127 square kilometers of 3D seismic data on PEL 112 (the “Mulka Survey”) was completed in late September 2012. The Mulka Survey fulfilled the Company’s minimum work requirements for PEL 112 License Year Four. Geokinetics (Australia) Pty. Ltd. undertook the Mulka Survey on the northern boundary of PEL 112 under the direction of Terra Nova. During February 2013, the Company received copies of the Mulka Survey data and interpretation from Terra Nova. As a result, Terra Nova completed its seismic Earning Obligation with respect to PEL 112, and earned an undivided 20% working interest in that license. The Company, ACOR and Sakhai each contributed the following portion of the working interest earned to Terra Nova: |
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(a) | The Company contributed an undivided 13.3334% working interest in PEL 112 resulting in a residual working interest position of 53.334% in that license; |
(b) | ACOR contributed an undivided 3.3333% working interest in PEL 112; and |
(c) | Sakhai contributed an undivided 3.3333% working interest in PEL 112. |
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On July 17, 2013, the Government of South Australia finalized and registered the transfer of the 20% working interest earned by Terra Nova in PEL 112. |
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On July 23, 2013, the Company spudded the Wolfman #1 exploration well on PEL 112. The well’s primary oil objective, the Namur Sandstone, was encountered at approximately 1,197 meters (3,927 feet) on August 6, 2013. Drilling continued to its secondary targets in the Birkhead formation and Hutton sandstones. Wolfman #1 reached Total Depth of 1,703 meters (5,587 feet), on August 7, 2013. No oil shows were observed while drilling in the primary and secondary oil objectives, and the well was plugged and abandoned. The entire cost of the well was paid by Terra Nova in accordance with the terms of the Agreement. The drilling of Wolfman #1 fulfills the Company’s minimum work requirement for PEL 112 License Year Five. |
Upon completion of Wolfman #1 Terra Nova earned an additional undivided 5.8333% working interest in PEL 112. The Company, ACOR and Sakhai each contributed the following portion of the working interest earned to Terra Nova: |
(a) | The Company contributed an undivided 4.8333% working interest in PEL 112 resulting in a residual working interest position of 48.5003% in that license; |
(b) | ACOR contributed an undivided 0.5000% working interest in PEL 112; and |
(c) | Sakhai contributed an undivided 0.5000% working interest in PEL 112. |
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As of September 30, 2013 the documents required to register the transfer of the working interest earned by Terra Nova were being processed by the Government of South Australia. The Company intends to renew its license on PEL 112 for an additional five year term, and to continue development of the remaining prospects identified on that concession. |
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Acquisition of 80 square kilometers of 3D seismic data on PEL 444 (the “Wingman Survey”) began May 28, 2013 and was completed on July 2, 2013. At September 30, 2013, the processing of seismic data from the Wingman Survey was 85% complete. The completion of the Wingman Survey fulfills the Company’s minimum work requirements for PEL 444 License Year Three, and will earn Terra Nova a 25.8333% working interest in PEL 444. |
On July 5, 2013, the Company paid a cash call from Terra Nova in the amount of AUD$523,259 (USD$475,747) covering its portion of the costs incurred on the Wingman Survey in excess of the funds escrowed by Terra Nova. The entire amount of that cash call was capitalized as of September 30, 2013. |