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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-29344
INDO-PACIFIC ENERGY LTD.
(Exact name of Registrant as specified in its charter)
Yukon Territory, Canada Not Applicable
(State or Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200-1090 West Pender Street
Vancouver, British Columbia
Canada, V6E 2N7
(Address of Principal Executive Offices, including Postal Code)
Registrant's telephone number, (604) 682-6496
Securities to be registered pursuant to Section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of each class)
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. Yes
[X] No [ ]
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 the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendments to this Form 10-K: Yes [ ].
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of March 28, 2000, was approximately $10,456,656.
As of March 28, 2000 the Registrant had 28,262,398 shares outstanding
without par value.
Documents Incorporated by Reference: None
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PART I
ITEM 1. BUSINESS
Safe Harbor Provisions
Except for the description of historical facts contained herein, this
Form 10-K contains certain forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 concerning future activities, of the
Registrant and the Registrant's future prospects, that involve risks
and uncertainties, including the possibility that the Registrant will:
(i) be unable to find commercial quantities of hydrocarbons, (ii) ever
achieve profitable operations, or (iii) not receive additional
financing as required to support future operations, as detailed herein
and under ITEM 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and from time to time in the
Registrant's future filings with the Securities and Exchange Commission
and elsewhere. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties
which could cause actual results to differ materially from those
described in the forward-looking statements.
General Development of the Business
The Registrant is an oil and gas exploration company based in
Vancouver, British Columbia, Canada with interests in the Austral-
Pacific region in hydrocarbon properties described in Item 2. The
Registrant is to a lesser extent involved in the development and
production of hydrocarbons. Total production revenue for the year ended
December 31, 1999 was $314,698. The majority of the Registrant's
properties are in the exploration stage. The Registrant's focus is on
the acquisition, exploration and development of properties in the
Austral- Pacific region.
The Registrant was incorporated on July 31, 1979 under the name Pryme
Energy Resources Ltd. under the Company Act (British Columbia, Canada).
On March 21, 1980 the Registrant became a reporting or distributing
company in British Columbia with the issuance of a receipt for its
initial prospectus offering. The business of the Registrant was not
successful and the Registrant was reorganized. On August 23, 1985 the
name was changed to Newjay Resources Ltd. and a consolidation of its
common shares on a 2.5 old for one new basis occurred. The business of
the Registrant was the exploration for hydrocarbons in Alberta,
California and Texas. The business of the Registrant was not successful
and the Registrant was again reorganized. The Registrant applied to be,
and was deemed, inactive by the Vancouver Stock Exchange on February
26, 1993 and subsequently completed a reorganization satisfactory to
the Vancouver Stock Exchange and was removed from inactive status on
April 25, 1994. On August 25, 1993 the name of the Registrant was
changed to Consolidated Newjay Resources Ltd. and a consolidation of
its common shares on a 3.5 old for one new basis occurred. The
Registrant did not commence any business after these events until 1996.
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In April 1995, control of the Registrant was acquired by Mr. Alex
Guidi, who is currently a member of the board of directors and the
principal shareholder of the Registrant. On May 9, 1995 the name of the
Registrant was changed to its current name. A subdivision of its common
shares on a 1.5 new for one old basis occurred on April 15, 1996 and a
further subdivision of its common shares on a two new for one old basis
on May 31, 1996 occurred. The Registrant began to acquire its current
hydrocarbon assets in 1996.
The common shares of the Registrant commenced trading in January, 1996
on the Bulletin Board operated by the National Association of
Securities Dealers, Inc.(the "Bulletin Board")and trades under the
symbol "INDX". Trading in the common shares of the Registrant was
halted by the Vancouver Stock Exchange on September 12, 1996 and the
Registrant voluntarily delisted from the Vancouver Stock Exchange on
September 13, 1996.
On September 25, 1997, the Registrant was continued from being a
corporation subsisting under the Company Act (British Columbia) to a
corporation subsisting under the Business Corporations Act (Yukon). The
Registrant maintains its head office in Vancouver, British Columbia and
an exploration office in Wellington, New Zealand.
From 1996 to 1999, the Registrant acquired interests in petroleum
exploration licences and permits in New Zealand, Australia and Papua
New Guinea. The Registrant also acquired the outstanding shares of
Ngatoro Energy Limited [formerly, Minora Energy (New Zealand) Limited]
and entered into an agreement with China National Oil and Gas
Exploration and Development Corporation for a Technical Study Agreement
in the Nanling and Wuwei basins, Anhui province, China. The exploration
of certain of the petroleum interests commenced in 1996. The Registrant
continues to acquire and explore petroleum interests.
On January 31, 2000 the Registrant announced that it had entered into
a letter of intent to acquire all the exploration permit interests (the
"Assets") of Trans-Orient Petroleum Ltd. The terms of the formal
agreement (the "Agreement") have been finalized with formal closing of
the Agreement expected to occur on or about March 31, 2000 while the
effective date of the Agreement is January 1, 2000. The Agreement is
subject to ratification by the shareholders of Trans-Orient Petroleum
Ltd. at a General Meeting of the shareholders to be held on May 23,
2000. Pending May 23, 2000, the parties shall not deal with the
exchanged consideration in a way which makes effective rescission of
the Agreement impossible and in particular Trans-Orient Petroleum Ltd.
shall not deal with the Registrant's securities received and the
Registrant shall not sell, transfer, mortgage or otherwise encumber the
Assets except with the consent of Trans-Orient Petroleum Ltd. which
Trans-Orient Petroleum Ltd. will give for all transactions which can be
said to be in the ordinary course of business. In the event the Trans-
Orient Petroleum Ltd. shareholders do not approve the Agreement by a
requisite extraordinary majority or in the event that a sufficient
number of Trans-Orient Petroleum Ltd. shareholders exercise dissent
rights which, in the opinion of Trans-Orient Petroleum Ltd. acting
reasonably, makes the transaction financially impractical then the
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parties agree that Trans-Orient Petroleum Ltd. and its affiliates who
are parties hereto shall have the right, exercisable for seven days, to
elect to rescind the transactions contemplated by the Agreement or
alternatively to seek judicial direction as to those elements of the
transaction which can be completed without requiring shareholders
consent. While the Registrant believes that the transaction will be
completed, there can be no guarantee that the acquisition of Trans-
Orient Petroleum Ltd's Assets will be completed due to the necessity of
shareholder ratification of the transaction by the shareholders of
Trans-Orient Petroleum Ltd. Like the Registrant, Trans-Orient Petroleum
Ltd. concentrated its exploration efforts within New Zealand, Australia
and Papua New Guinea. The Assets being purchased by the Registrant
consist of the following interests:
Permit Description Participating Interest
New Zealand
PEP 38328 22.5%
PEP 38332 20%
PEP 38335 15%
PEP 38339 50%
PEP 38720 50%
PEP 38723 40%
PEP 38256 35%
Australia and ZOCA
ZOCA 96-16 10%
AC/P 26 35%
Papua New Guinea
PPL 192 20%
PPL 157 7.5%
PPL 215 40%
PPL 213 5%
The Registrant had, prior to the pending acquisition, already owned a
partial interest in a majority of the permits acquired and was
therefore familiar, from a technical and operational point of view,
with the exploration merits of these interests. The value placed upon
the Assets by the Registrant and Trans-Orient Petroleum Ltd. was
$3,054,434 less an intercompany loan from the Registrant to Trans-
Orient Petroleum Ltd. in the amount of $1,042,928; resulting in a net
consideration payable by the Registrant to Trans-Orient Petroleum Ltd.
of $3,053,179 (the "Purchase Price"). Under the terms of the Agreement,
the Registrant will pay the Purchase Price to Trans-Orient Petroleum
Ltd. as follows:
a) transferring 1,800,000 shares of AMG Oil Ltd. that the Registrant
currently owns to Trans-Orient Petroleum Ltd. at a deemed value of
$720,000;
b) transferring 600,000 shares of Gondwana Energy Ltd. that the
Registrant currently owns to Trans-Orient Petroleum Ltd. at a deemed
value of $20,000;
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c) transferring 517,020 shares of Trans-Orient Petroleum Ltd. that
the Registrant currently owns to Trans-Orient Petroleum Ltd. for
cancellation;
d) reserving or causing its wholly owned subsidiary to reserve, in
favour of Trans-Orient Petroleum Ltd. a 1% gross overriding royalty
("GORR") on the interest transferred on any hydrocarbon production from
the following permits: ZOCA 96-16, AC/P 26, PPL 192, PPL 157, PPL 213,
PPL 215 and a 2% GORR on any hydrocarbon production from the following
properties: PEP 38328, PEP 38332, PEP 38335, PEP 38339, PEP 38720, PEP
38723, PEP 38256, and a 5 % GORR on any wells drilled within one
kilometer of the Whakatu-1 well located on License PEP 38328 in Hawkes
Bay, New Zealand.
e) allotting and issuing 4,184,224 Units to Trans-Orient Petroleum
Ltd. Each Unit consists of one common share and one "A" Warrant. Each
"A" Warrant will entitle the holder to purchase one additional common
share of the Registrant in consideration for $0.50 per common share
exercisable up to the end of business on the day that is one year from
the date of issuance and thereafter for $0.75 per common share up to
the close of business on the day that is two years from the date of
issuance. Upon the exercise of the "A" Warrants by Trans-Orient
Petroleum Ltd., and subject to a commercial discovery having occurred
on the Assets or the Subsidiary's Assets, the Registrant shall issue to
Trans-Orient Petroleum Ltd. one "B" Warrant for each "A" Warrant
exercised. The "B" Warrants shall be exercisable at a price of $1.50
for a period of one year from the date of issue of the "B" Warrants.
f) issuing additional units (the "Additional Units") to Trans-Orient
Petroleum Ltd., excluding any existing issued warrants and options, if
within 12 months from the closing date of the transaction, the
registrant completes equity financings (the "Equity Financings") in the
aggregate amount of not less than $500,000, at an average price (the
"Average Price") per share or unit issued of less than $0.50 per share
or unit. If the Registrant completes the Equity Financings, then it
shall issue the number of Additional Units, excluding additional B
Warrants, that Trans-Orient Petroleum Ltd. would have been entitled to
receive had the Units been issued to Trans-Orient Petroleum Ltd. at the
Average Price;
g) granting the right for Trans-Orient Petroleum Ltd. to participate
in up to 25% of any Equity Financing made by the Registrant up until
December 31, 2001, provided that such right is not in contradiction to
any condition of a third party arms-length Equity Financing; and
h) the Registrant shall meet all ongoing costs accruing to Trans-
Orient Petroleum Ltd.'s account after December 31, 1999, and shall hold
Trans-Orient Petroleum Ltd. harmless from any loss or claim arising out
of activities on the Assets or the Subsidiaries Assets after the
closing date of the transaction.
The Registrant's operations are conducted through its wholly owned
subsidiaries, as described below:
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Indo-Pacific Energy Ltd.
Source Rock Holdings Limited Indo Overseas Exploration
Limited (B.C.)
Indo-Pacific Energy (NZ) Limited Indo-Pacific Energy (PNG) Ltd.
Indo-Pacific Energy Pty. Ltd. (Aust.) Ngatoro Energy Limited PEP
38716 Limited
Unless the context indicates otherwise, the "Registrant" will refer to
Indo-Pacific Energy Ltd. and its subsidiaries.
All monetary amounts contained in this Statement are, unless otherwise
indicated, expressed in United States dollars. On December 31, 1999 the
closing rate for Canadian dollars was US$1.00 for CDN$1.4433. Rates of
exchange are obtained from the Bank of Canada and believed by the
Registrant to approximate closely the rates certified for customs
purposes by the Federal Reserve Bank in New York. See Item 6. Selected
Financial Data - Exchange Rates.
Sales and Operating Revenues
Except for the Registrant's interest in Petroleum Mining Permit ("PMP")
38148, the Registrant's petroleum permits are in the exploration stage
and do not generate any production revenues. The Registrant holds a 5%
participating interest and revenue interest in PMP 38148 located in the
Taranaki Basin, North Island, New Zealand. The Registrant's share of
production revenue from oil & gas sales from PMP 38148 was $487,941 for
the year ended December 31, 1997, $234,168 for the year ended December
31, 1998 and $314,698 for the year ending December 31, 1999. Operating
profits or (losses) were $509,192 for the year ended December 31, 1997,
$(316,208) for the year ended December 31, 1998 and $(497,880) for the
year ending December 31, 1999.
Acquisition, Exploration and Development Expenditures.
The Registrant incurred expenditures relating to the acquisition,
exploration and development of its petroleum properties in the amounts
of $1,064,976 for the year ended December 31, 1997, $1,901,030 for the
year ended December 31, 1998 and $1,923,921 for the year ending
December 31, 1999 See ITEM 2 DESCRIPTION OF PROPERTIES for a
description of the Registrant's properties.
Plan of Operations
The Registrant's Plan of Operations, and amounts to be spent in
carrying out these operations for the 2000 fiscal year, are dependant
on completing the purchase of Trans-Orient Petroleum Ltd.'s Assets. For
this reason, the Registrant provides the table below which includes
both a column "A" and column "B." Column A includes the planned
operations and expenditures which the Registrant expects to incur on
the basis that the purchase of Trans-Orient Petroleum Ltd.'s Assets is
completed and the shareholder's of Trans-Orient Petroleum Ltd. ratify
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the Agreement. Column B reflects the planned operations and
expenditures which are expected to be incurred if the purchase of the
Trans-Orient Petroleum Ltd.'s Assets does not occur. Based on the
forgoing the Registrant has committed to carry out, or plans to carry
out the following work by the following date:
Anticipated Total Work Obligation Before December 31, 2000
Column A Column B
Property Description of Work (US$) (US$)
Developed
PMP 38148 Workovers of Ngatoro-1/-9/-11 51,250 51,250
Undeveloped
PEP 38330 Seismic acquisition & studies 10,250 10,250
PEP 38335 Seismic acquisition and 1 well 292,250[2] 116,900
PEP 38328 Drill Whakatu-1 well & studies 432,750[2] 276,960
PEP 38332 Seismic acquisition and 1 well 376,250[2] 255,850
PEP 38736[1]
Seismic acquisition & studies 131,000 131,000
PEP 38716 Administration & geological studies 19,500 19,500
PEP 38720 Well review & 3D seismic data purchase 65,000[2] 32,500
PEP 38723 Seismic acquisition and 1 well 604,000[2] 302,000
PEP 38339 Marine seismic acquisition 80,500[2] 40,250
PEP 38256 Drill 1 well 868,750[2] 434,375
AC/P19 3D seismic data purchase 103,000 103,000
AC/P31 Administration & geological studies 8,000 8,000
AC/P26 Administration & geological studies 18,000[2]
ZOCA 96-16 Drill 1 well (carried through cost)
& administration 22,500[2]
PPL 192 Drill 1 well 3,000,000[2] 2,000,000
PPL 215 Administration & geological studies 67,500[2] 38,750
PPL 157 Administration & geological studies 15,000[2]
PPL 213 Administration & geological studies 9,000[2]
--------- ---------
TOTAL $6,174,500[2] $3,820,585
[1] PEP 38736 includes the permit area formerly covered by PPL 38706.
See ITEM 2 - DESCRIPTION OF PROPERTIES for a detailed discussion.
[2] The anticipated work obligation cost includes the anticipated cost
for the interest of Trans-Orient Petroleum Ltd. which is in the
process of being acquired by the Registrant.
Employees and Consultants
The Registrant employs six people in its Wellington New Zealand office.
The persons employed in the Wellington office are the president and
chief executive officer and four persons occupied with joint venture
accounting, office management and New Zealand, Australian and PNG
corporate affairs. The Registrant is also provided office space in
Vancouver, B.C. in which one person is employed by the Registrant to
provide shareholder relations. The Registrant also receives office use
and management, reception, legal and accounting services from DLJ
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Management Ltd. DLJ Management Ltd. maintains a Vancouver, B.C. office
where it employs seven people who devote approximately 30% of their
time to matters relating to the Registrant. DLJ Management Ltd. charges
the Registrant for the services on a cost recovery basis.
In addition to the foregoing, the Registrant also receives technical
services from exploration consultants. The principal consultants
engaged by the Registrant are Bruce Morris, Roger Brand, David Francis
and Carey Mills.
Dr. Morris trained and lectured as a sedimentologist at University of
Victoria (New Zealand). Over the last nine years, he has been involved
in remote oilfield operations in Papua New Guinea, and with exploration
in the Taranaki and East Coast Basin of New Zealand. Dr. Morris has
also worked as a well site geologist for Exxon in the Gippsland Basin,
Australia.
Mr. Brand has over 20 years experience in the oil industry. After
graduating from Oxford University (United Kingdom) in 1974, he worked
for British Petroleum as a geologist in the North Sea and onshore
United Kingdom. Following a move to New Zealand in 1982, Mr. Brand
served as Chief Geologist for New Zealand Oil and Gas Ltd. for three
years. Since 1986, he has conducted a variety of exploration
assessments and prospect valuations for major and minor oil companies
based in New Zealand, Australia and Papua New Guinea. His main
interests lie in the definition of hydrocarbon plays in New Zealand's
Taranaki Basin.
Mr. Francis is a highly experienced field geologist with over 15 years
specialist activity in New Zealand's East Coast Basin. He has completed
numerous scientific papers and company reports detailing East Coast
petroleum geology.
Mr. Mills provides the group with a broad range of capabilities. Before
joining the Registrant, Mr. Mills worked as a petrophysisist for Exxon
on the West Tuna Field in the Gippsland Basin, Australia, on the Moran
discovery in Papua New Guinea and had other responsibilities.
Hydrocarbon Tenures in New Zealand, Australia and Papua New Guinea
In New Zealand a prospecting license is a form of tenure held under the
Petroleum Act 1937, the predecessor legislation to the Crown Minerals
Act of 1991 and is, as the tenure expires, replaced by an exploration
permit under the later legislation. In New Zealand, permits are granted
for specified minerals to the successful bidder for that area, if
gazetted, or the first applicant for that mineral in a specific area,
and generally prescribe work to be performed over the term of the
permit. In most cases, permits contain a work program approved by the
Minister of Energy. Prospecting permits are limited forms of tenure
granted under the Crown Minerals Act of 1991 for two years on
conditions the Minister of Energy considers appropriate. The Registrant
does not hold any prospecting permits. Under the Crown Minerals Act of
1991, the exploration permit, which replaced the prospecting license,
grants the right to explore a specified mineral for a term of five
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years and may be extended for up to ten years on conditions the
Minister of Energy considers appropriate. If the holder of an
exploration permit discovers a deposit or occurrence to which the
exploration permit relates and satisfies the Minister of Energy that
the results of exploration justify granting a mining permit, the holder
may, on application before the expiry of the exploration permit, obtain
a mining permit for up to 40 years for such part of the land as the
deposit or occurrence relates and exchange the exploration permit for
such part of the land. Changes to the conditions prescribed in a permit
may be made by application to the Minister of Energy if the holder of
a permit is in substantial compliance with the conditions of the
permit. The Crown Minerals Act of 1991 also provides for the revocation
of a permit if the Minister of Energy has reason to believe that the
holder of the permit is contravening, or not making reasonable efforts
to comply with, the Crown Minerals Act or the conditions of the permit
and the Minister of Energy is satisfied that the holder of a permit has
failed to comply with a notice to rectify the contravention or
non-compliance. Any transfer or other dealing with a permit is subject
to the consent of the Minister of Energy on such conditions as he
considers appropriate and an application for consent is made within
three months of the date of the agreement. A transfer or lease of a
permit with respect to petroleum has no effect until a notice of the
transfer has been lodged with the Secretary of Commerce and the
Minister of Energy has given his consent. The Minister of Energy may
also direct that any petroleum products be refined or processed in New
Zealand. The Minister of Energy also has the jurisdiction to unitize
producing permits. Finally, the Crown Minerals Act of 1991 provides
procedures for the resolution of conflict with other forms of land
tenure.
In Australia, the Petroleum (Submerged Lands) Act 1967 governs permits
lying further offshore than three miles from the coast. Coastal waters
and lands are within state jurisdiction. The Australian permits of the
Registrant are granted and regulated under the Petroleum (Submerged
Lands) Act 1967. This statute provides for four types of permits,
exploration permits, retention leases, production licenses and pipeline
licenses. An exploration permit provides the exclusive right to
undertake seismic surveys and drilling in a defined area. Permits are
awarded by a work program bidding system or a cash bidding system over
acreage released each year by the Commonwealth. Work program permits
are issued for an initial term of six years with an unlimited number of
five year renewals. At each renewal, 50% of the permit area must be
relinquished. On discovering petroleum, a holder must notify the
authority. If commercial, the holder may apply for a production
license. Production licenses are issued for 21 years and may be renewed
for a further 21 years. If the holder makes a non-commercial discovery
which has a reasonable chance of becoming commercial within the next 15
years, a retention lease may be granted. Retention leases are issued
for terms of five years with renewal periods of five years. A pipeline
license is usually granted at the same time as a production licence.
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In Papua New Guinea, the Petroleum Act provides for four different
types of license: petroleum prospecting licenses ("PPL") for
exploration, which is the form of tenure held by the Registrant,
petroleum development licenses ("PDL") for petroleum developments,
petroleum retention licenses ("PRL") for gas reserves which are
considered sub-economic and pipeline licenses. A PPL is granted for a
term of six years with one five year extension permitted. At the end of
the first term, the holder must relinquish 50% of the initial size of
the permit, less the area of any PRLs on extension. A PPL usually
contains a work program which is submitted to, and approved by, the
Minister for Petroleum and Energy. The Minister may approve appropriate
variations to a work program at any time during the third to sixth
years of a PPL. The State has the option to acquire a 22.5% interest in
any petroleum development. Where it does so, a two percent interest is
held for the benefit of the landowners in the project area. The price
payable by the State is 22.5% of sunk costs, including the allowable
exploration expenditure of the project. Orogen Minerals Limited
("Orogen"), a publicly listed company 51% owned by the State, has an
option to acquire up to a 20.5% interest in future petroleum projects
out of the State's entitlement of 22.5%. If Orogen does not exercise
its option, the permit holder is obliged to carry the State's
acquisition of its 22.5% interest and all development costs. This
carried interest is repaid with a commercial rate of interest out of
petroleum production attributable to the State's share. If Orogen
exercises its option, the cost of the carried interest is paid
immediately. A PDL is granted for an initial term of 25 years with one
20 year extension. A PRL is granted for an initial term of five years
with two five year extensions. A pipeline licence is granted for a term
of 25 years with one 20 year extension. Assignments of, and dealings
in, all types of petroleum licences are permitted, subject to the
Minister's consent. Any assignment or dealing without such consent is
void. Before drilling an exploration well, the permit holder and the
State generally enter into a production agreement that sets out
additional conditions applying to operations, the procedures which will
lead to a development and the terms on which the state will acquire
itsequity interest in a development.
In November 1998, the PNG parliament passed the Oil and Gas Act 1998
which, when proclaimed, will repeal the Petroleum Act. The material
changes effected by the Oil and Gas 1998 are (1) for new projects,
the royalty benefit equal to the royalty paid by a licensee, which is
currently two percent of the well head value, less tax, which is
currently five per cent, is to be shared among the project area
landowners, local level government and provincial governments; (2)
the carried interest of two percent in a project held for local
landowners is to be provided free to the area landowners and local
government (s); (3) licensing of petroleum processing facilities is
required; (4) third party access arrangements must be adopted where a
pipeline is strategic; (5) social mapping and landowner
identification studies must be carried out by licensees; (6) the
State's entitlement to its 22.5% interest and all development costs
is enshrined in law; (7) provincial governments may form a national
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gas corporation to acquire on commercial terms interests in gas
projects; (8) extended well testing may be carried on with the
State's consent; and (9) development forums must be held before the
development of a project.
Environmental Regulation in New Zealand, Australia and PNG
New Zealand
Since 1990, the government of New Zealand has developed a comprehensive
statutory regime dealing with the effect of development on the
environment. Depending on the location of the petroleum interest,
different laws apply where petroleum exploration and development is
concerned. On land and in waters within twelve miles of the coast, the
Resource Management Act 1991 controls users of natural and physical
resources with a view to managing resource usage in ways that will not
compromise future utilization. Previous legislation in New Zealand
prescribed what activities could, or could not, be carried on. The
Resource Management Act 1991 places the emphasis on assessment of the
effect the proposed activity will, or might, have on the environment
with a view to promoting sustainable management. Under the Resource
Management Act 1991, most of the responsibility for managing resources
and their use is given to local authorities. Regional and district
councils establish their own rules and standards for environmental
effect assessments and required degrees of consultation. Both regional
and district councils must produce and continuously update planning
schemes for their jurisdictions. These schemes may limit industries to
designated areas, depending on the environmental or social effects. The
right to take from, and discharge into, waterways for industrial
purposes requires approval from various regional catchment authorities,
which may require maintenance of water quality standards.
Resource consents authorize the use or development of a natural or
physical resource or permit an activity to be conducted which may
affect the environment. Under the Resource Management Act 1991 there
are five types of resource consents: land use consent, subdivision
consent, water permits, discharge permits and coastal permits. Certain
applications require public notice and allow public involvement in the
assessment process. Adverse decisions made by a regional or district
council may be appealed in the Environmental Court. Prior to conducting
operations on a permit the Registrant must secure the necessary permits
from the applicable authority, the withholding of which may postpone or
prevent the Registrant from conducting the planned operations.
Petroleum exploration and development outside of twelve miles from the
coast comes under the Maritime Transport Act 1994 administered by the
Maritime Safety Authority.
Australia
In Australia, for permit areas lying further offshore than three miles
from the coast, the federal Commonwealth is involved in pollution
control through a number of government departments. Federal and state
government departments and commissions administer pollution control
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laws. These entities enforce a variety of statutes and regulations
relating to air, water and noise pollution. There is an increasingly
significant emphasis on pollution control and breaches of legislation
attract severe penalties.
Papua New Guinea
In Papua New Guinea, the Environmental Planning Act, the Environmental
Contaminants Act, the Water Resources Act and the Conservation Areas
Act are the four main statutes relating to environmental regulation of
the exploration for, and development and production of, hydrocarbons.
Environmental Planning Act requires the preparation of an environmental
plan and prescribes the procedures for submitting, and obtaining the
approval for, a prospecting development license. The Environmental
Contaminants Act regulates the prevention and control of environmental
contamination and provides for other aspects of environmental
protection. The Water Resources Act regulates water use in all of Papua
New Guinea. To use water in the exploration for, or development and
production of, hydrocarbons a permit is required under this statute.
The Conservation Areas Act regulates preservation of the environment
and of natural cultural sites and areas. If the exploration for, or
development and production of, hydrocarbons is to occur in such a site
or area, a permit is required under this statute from the Minister of
the Environment.
Year 2000 Compliance
The Registrant did not experience any material problems associated with
the Year 2000 issue. The Registrant continues to monitor its computer
systems to identify the systems that could be affected by the "Year
2000" issue. Based upon the Registrant's lack of problems after
December 31, 19999 and its current review of its systems, the
Registrant does not believe that the Year 2000 problem will pose a
material operations problem for the Registrant.
Risk Factors
The common shares of the Registrant must be considered a speculative
investment due to a number of factors. The purchase of the common
shares involves a number of significant risk factors. Purchasers of
common shares should consider the following:
1. Limited History of Operations and Reliance on Expertise of Certain
Persons. The Registrant has a limited history of operations and is
dependent on the management by its president and, in the acquisition,
exploration and development of petroleum properties, and on the advice
of consulting geologists retained by the Registrant from time to time.
The current president of the Registrant is experienced in the
acquisition, exploration and development of petroleum properties in New
Zealand and other Asian countries, particularly Papua New Guinea and
Australia. Should the current president leave the Registrant, the
Registrant may have difficulty in finding a person of comparable
education and experience to manage the business of the Registrant.
13
2. Limited Financial Resources and Lack of Sufficient Capital. The
Registrant has limited financial resources and, if the business is not
profitable, may not be able to raise sufficient funds to sustain,
continue or expand its business. Currently the Registrant does not have
sufficient capital to satisfy the required capital expenditures for the
upcoming fiscal years in order to maintain the Registrant's interests
in its permits (See ITEM 1-Plan of Operation). Should the Registrant
fail to raise additional capital the Registrant will be unable to carry
out its plan of operations and will be forced to abandon some or all of
its permit interests (See Risk Factor #18). The Registrant currently
has limited revenues and relies principally on the issuance of common
shares to raise funds to finance the business of the Registrant. In
order to satisfy the required capital expenditures for the upcoming
fiscal year in order to maintain the Registrant's interests in its
permits, the Registrant will have to raise additional capital through
the issuance of common shares. There is no assurance that market
conditions will continue to permit the Registrant to raise funds if
required.
3. Competition with Other Companies. Other companies with greater
financial resources or expertise are in competition with the
Registrant. The Registrant must compete with such companies in bidding
for the acquisition of petroleum interests from various state
authorities, in purchasing or leasing equipment necessary to explore
for, develop and produce hydrocarbons and in obtaining the services of
personnel in the exploration for, and development and production of,
hydrocarbons. While the Registrant has acquired various rights to
explore, there is no assurance that personnel and equipment will be
available to carry out the programs planned by the Registrant.
4. Failure to Locate Commercial Quantities of Hydrocarbons and
Geological Risks. There is no assurance that commercial quantities of
hydrocarbons will be discovered and prices for hydrocarbons may vary,
rendering any deposit discovered uneconomic. In addition, even if
hydrocarbons are discovered, the costs of extraction and delivering the
hydrocarbons to market may render any deposit found uneconomic.
Geological conditions are variable and unpredictable. Even if
production is commenced from a well, the production will inevitably
decline and may be affected or terminated by changes in geological
conditions that cannot be foreseen or remedied by the Registrant.
5. Fluctuation of Oil and Gas Prices. Prices for oil and gas may
fluctuate widely from time to time depending on international demand,
production and other factors which cannot be foreseen by the
Registrant. A decline in price may render a discovery uneconomic.
Production, if any, from the Registrant's properties that might be sold
would, even for a discovery made during the current fiscal year, take
some years to develop and would be sold under financial conditions that
cannot be determined.
6. Governmental Laws and Local Conditions. Claims of aboriginal
peoples in Australia or New Zealand may adversely affect the rights or
operations of the Registrant. There is no assurance that governmental
regulation will not vary, including regulations relating to prices,
14
royalties, allowable production, environmental matters, import and
export of hydrocarbons and protection of water resources and
agricultural lands. The Registrant is subject to numerous foreign
governmental regulations that relate directly and indirectly to its
operations including title to the petroleum interests acquired by the
Registrant, production, marketing and sale of hydrocarbons, taxation,
environmental matters, restriction on the withdrawal of capital from a
country in which the Registrant is operating and other factors. There
is no assurance that the laws relating to the ownership of petroleum
interests and the operation of the business of the Registrant in the
jurisdictions in which it currently operates will not change in a
manner that may materially and adversely affect the business of the
Registrant. In particular, the Registrant is of the view that the laws
of Papua New Guinea relating to he business of the Registrant may be
unable to be determined or may change with little or no notice or the
Registrant may be subject to unofficial or local policies that
materially and adversely affect the usefulness of the Registrant. There
is, however, no assurance that the laws of any jurisdiction in which
the Registrant carries on business may not change in a manner that
materially and adversely affects the business of the Registrant.
7. Environmental Risks. The Registrant is subject to laws and
regulations that control the discharge of materials into the
environment, require removal and cleanup in certain circumstances,
require the proper handling and disposal of waste materials or
otherwise relate to the protection of the environment. In operating and
owning petroleum interests, the Registrant may be liable for damages
and the costs of removing hydrocarbon spills for which it is held
responsible. Laws relating to the protection of the environment have in
any jurisdictions become more stringent in recent years and may, in
certain circumstances, impose strict liability, rendering the
Registrant liable for environmental damage without regard to negligence
fault on the part of the Registrant. Such laws and regulations may
expose the Registrant to liability for the conduct of, or conditions
caused by, others or for acts of the Registrant that were in compliance
with all applicable law at the time such acts were performed. The
application of these requirements or the adoption of new requirements
could have a material adverse effect on the business of the Registrant.
The Registrant believes that it has conducted its business in
substantial compliance with all applicable environmental laws and
regulations.
8. Indemnities may be Unenforceable or Uncollectable. The operating
agreements with participants in a property provide for the
indemnification of the Registrant as operator. There is no assurance
that such indemnification will be enforceable or that a participant
will be financially able in all circumstances to comply with its
indemnification obligations, or that the Registrant will be able to
obtain such indemnification agreements in the future.
15
9. Possible Lack of or Inadequacy of Insurance. The Registrant
maintains insurance against certain public liability, operational and
environmental risks, but there is no assurance that an event causing
loss will be covered by such insurance, that such insurance will
continue to be available to, or carried by, the Registrant or, if
available and carried, that such insurance will be adequate to cover
the Registrant's liability.
10. No Assurance of Earnings or Dividends and Taxation of Dividends.
The Registrant has a limited history of earnings and there is no
assurance that the business of the Company will be profitable and, even
if the business of the Registrant is profitable, there is no assurance
the board of directors will declare dividends on common shares. The
register of members of the Registrant discloses that the majority of
the shares of the Registrant are held of record by persons resident in
the United States of America. If the Registrant should declare a
dividend, a withholding tax of five percent is payable in Canada on
payment of a dividend to a corporate resident of the United States of
America holding more than ten per cent of the shares of the Registrant
and 15% to all other residents of the United States.
11. Marketing of Petroleum Products. The availability of products
sold, or to be sold, by the Registrant may be restricted or rendered
unavailable due to factors beyond the control of the Registrant, such
as change in laws in the jurisdictions in which the properties of the
Registrant are located, changes in the source of supply in foreign
countries, prohibition on use due to testing and licencing requirements
and in certain areas of the world civil disorder or governmental
confiscation without compensation. Even if discoveries in commercial
quantities are made by the Registrant, development of a discovery may
take a number of years and financial conditions at that time cannot be
determined. The Registrant holds its cash reserves in US dollars but
incurs the majority of its expenses in Australian and New Zealand
dollars. An increase in value of the New Zealand dollar versus the US
dollar would have a detrimental effect to the Registrant as the
Registrant's expenses incurred would, in turn, increase in US dollars.
12. Activities of Management. The management of the Registrant and
the growth of the Registrant's business depends on certain key
individuals who may not be easily replaced if they should leave the
Registrant; and persons in management have other business interests
which may result in them devoting, from time to time, some of their
time to such other interests.
13. Inadequacy of Public Market. The Registrant's common shares are
quoted through the facilities of the OTCBB. Management's strategy is
to develop a public market for its common shares by soliciting
brokers to become market makers of the Registrant's common shares. To
date, however, the Registrant has solicited only a limited number of
such securities brokers to become market makers. There can be no
assurance that a stable market for the Registrant's common shares
will ever develop or, if it should develop, be sustained. It should
be assumed that the market for the Registrant's common shares will
continue to be somewhat illiquid, sporadic and volatile. These
16
securities should not be purchased by anyone who cannot afford the
loss of the entire investment. The Registrant is required to maintain
its status as a "reporting" issuer under the Securities Exchange Act
of 1934 (the "34 Act"), in order to be traded by broker-dealers
regulated by the National Association of Securities Dealers. If the
Company is fails to continue to be a reporting issuer, management may
encounter difficulty in maintaining or expanding a trading market in
the near term, if at all, and shareholders may not be able to sell
their shares in the public market. While management currently intends
to obtain and maintain status as a "reporting" issuer under the 34
Act, there can be no assurance that the Registrant can or will obtain
or maintain such status.
14. Restrictions in Applicable Securities Laws. Applicable securities
laws may restrict the transfer of common shares and if an exemption is
not available to a holder wishing to sell, the shares may not be
transferred.
15. Loss of Investment. An investment in common shares of the
Registrant should only be made by persons who can afford a complete
loss of their investment and there is no assurance that the common
shares of the Registrant will increase in value from the amount at
which a member acquired common shares of the Registrant.
16. Risk Inherent in Exploration. Most of the properties of the
Registrant are at the exploration stage and, except for petroleum
mining permit 38148, without known, commercial reserves of oil or gas.
Oil and gas exploration and development involves a high degree of risk
and few properties which are explored are ultimately developed into
producing and profitable properties.
17. Common Management. The acquisition, exploration and development
of hydrocarbon permits and licences by the Registrant is carried on, in
a number of cases, with companies that have common or connected
management or the same principal shareholder.
18. Consequences of Failure to Satisfy Prescribed Permit or License
Terms and Conditions. In all cases, the terms and conditions of the
permit or license granting the right to the Registrant, or the party
from which the Registrant acquired, or agreed to acquire, directly or
indirectly, the right to explore for, and develop, hydrocarbons
prescribe a work program and the date or dates before which such work
program must be done. Varying circumstances, including the financial
resources available to the Registrant, availability of required
equipment, expertise of the management of the Registrant and other
matters relating to the Registrant, reliance on third party operators
of permits and licenses or circumstances beyond the control or
influence of the Registrant may result in the failure to satisfy the
terms and conditions of a permit or license and result in the complete
loss of the interest in the permit or license without compensation to
the Registrant. Such terms and conditions may, in certain cases, be
renegotiated with applicable regulatory authorities, but there is no
17
assurance that if a term or condition of a license or permit that is
required to be satisfied will not, or has not been met and may result
in the loss of the interest in such permit or license that such term or
condition will be renegotiated with the applicable authority.
19. Dilution. The Registrant's Articles of Incorporation authorize the
issuance of 100,000,000 shares of common stock. The Registrant's Board
of Directors has the power to issue any or all of such shares that are
not yet issued without stockholder approval. The Registrant's Board of
Directors will likely issue some or all of such shares to acquire
further capital in order to carry out its intended operations or expand
its current operations, or to provide additional financing in the
future. The issuance of any such shares may result in a reduction of
the book value or market price of the outstanding shares of the
Registrant's common shares. If the Registrant does issue any such
additional shares, such issuance also will cause a reduction in the
proportionate ownership and voting power of all other shareholders.
Further, any such issuance may result in a change of control of the
Registrant.
20. Defeasance of Title. The possibility exists that title to one or
more properties of the Registrant may be lost due to an omission in the
claim of title. The Registrant does not maintain title insurance.
21. Dealings With Associated Companies. The Registrant has acquired
interests in some petroleum properties with, or from, or transferred
interests to, other companies or their respective subsidiaries, being;
Trans-Orient Petroleum Ltd., Durum Cons. Energy Corp., Gondwana Energy
Ltd. and AMG Oil Ltd., which have common or connected management, the
same principal shareholder. The percentage participation of the
Registrant and another associated company in a property is determined
by the boards of directors of each such company in accordance with the
best business judgment of the board based on the assessment of the
relative requirements and abilities of the companies to participate and
applicable law. Persons who are not willing to rely on the exercise of
judgment by the respective boards of directors in determining the
participation in properties should not consider an investment in the
shares of the Registrant or of other associated companies. See ITEM 2 -
DESCRIPTION OF PROPERTY, ITEM 10-DIRECTORS AND OFFICERS OF REGISTRANT
AND ITEM 13-INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS.
22. Penny Stock Regulation. The Securities and Exchange Commission
(the "SEC") has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally
are equity securities with a price of less than $5.00 per share (other
than securities registered on certain national securities exchanges or
quoted on the NASDAQ National Market System, provided that current
price and volume information with respect to transactions in such
securities is provided by the exchange or system). The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock
not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the SEC that provides information about
penny stocks and the nature and level of risks in the penny stock
market. The broker-dealer also must provide the customer with bid and
18
offer quotations for the penny stock, the compensation of the broker-
dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the
customer's account. In addition, the penny stock rules require that
prior to a transaction in a penny stock not otherwise exempt from such
rules, the broker-dealer must make a special written determination that
a penny stock is a suitable investment for the purchaser and receive
the purchaser's written agreement to the transaction. These disclosure
requirements often have the effect of reducing the level of trading
activity in any secondary market for a stock that becomes subject to
the penny stock rules. The Registrant's common stock is currently
subject to the penny stock rules, and accordingly, investors may find
it difficult to sell their shares, if at all.
GLOSSARY
Currency and Measurement All currency amounts in this Statement are
stated in United States dollars unless otherwise indicated.
See ITEM 6. "SELECTED FINANCIAL DATA - Exchange Rates."
Metric and Imperial Units Conversion from metric units into imperial
equivalents is as follows:
Metric Units Imperial Units
Hectare 2.471 acres
meter (m) 3.281 feet
kilometer (km) 0.621 miles (3,281 feet)
Geologic Time
Name of Era Name of Period Number of Years Before Present
(Millions)
Quaternary Holocene 0 to 0.4
Pleistocene 0.4 to 1.8
Tertiary Pliocene 1.8 to 5.0
Miocene 5.0 to 24
Oligocene 24 to 38
Eocene 38 to 56
Paleocene 56 to 6
Mesozoic Cretaceous 66 to 140
Jurassic 140 to 200
Triassic 200 to 250
Paleozoic Permian 250 to 290
Carboniferous 290 to 365
Devonian 365 to 405
Silurian 405 to 425
Ordovician 425 to 500
Cambrian 500 to 570
Precambrian Precambrian > 570
19
Other Geologic Expressions
Anticline is a geologic structure in which the sedimentary strata are
folded to form an arch or dome.
Appraisal Well is a well drilled after an existing discovery well to
determine the extent of the resources of the field.
Basin is a segment of the crust of the Earth in which thick layers of
sediments have accumulated over a long period of time.
Condensate refers to hydrocarbons associated with natural gas which are
liquid under surface conditions but gaseous in the reservoir before
extraction.
Depletion is the reduction in petroleum reserves due to production.
Development refers to the phase in which a proven oil or gas field is
brought into production by drilling and completing production wells and
the wells, in most cases, are connected to the petroleum gathering
system.
Discovery is the location by drilling of a well of an accumulation of
gas, condensate or oil reserves, the size of which may be estimated but
not precisely quantified and which may or may not be commercially
economic, depending on a number of factors.
Dry Hole is a well drilled without finding commercially economic
quantities of hydrocarbons.
Exploration Well is a well drilled in a prospect without knowledge of
the underlying sedimentary rock or the contents of the underlying rock.
Farm In or Farm Out refers to a common form of agreement between or
among petroleum companies where the holder of the petroleum interest
agrees to assign all or part of an interest in the ownership to another
party that is willing to fund agreed exploration activities which may
be more or less than the proportionate interest assigned to such other
party.
Fault is a fracture in a rock or rock formation along which there has
been an observable amount of displacement.
Field is an area that is producing, or has been proven to be capable of
producing, hydrocarbons.
Formation is a reference to a group of rocks of the same age extending
over a substantial area of a basin.
Frontier Exploration is exploration in an area that has seen little
previous exploration but offers the potential for the discovery of
large reserves of hydrocarbons.
20
Geology is the science relating to the history and development of the
Earth.
Hydrocarbon is the general term for oil, gas, condensate and other
petroleum products.
Lead is an inferred geological feature or structural pattern which on
further investigation may be upgraded to a prospect.
Participating Interest or Working Interest is an equity interest, as
compared to a royalty interest, in an oil and gas property whereby the
participating interest holder pays its proportionate or agreed
percentage share of development and operating costs and receives its
proportionate share of the proceeds of hydrocarbon sales after
deduction of royalties due on gross income.
Pay Zone is the stratum or strata of sedimentary rock in which oil or
gas is found.
Permit or License is an area that is granted for a prescribed period of
time for exploration, development or production under specific
contractual or legislative conditions.
Pipeline is a system of interconnected pipes that gather and transport
hydrocarbons from a well or field to a processing plant or to a
facility that is built to take the hydrocarbons for further transport,
such as a gas liquefaction plant.
Play is a combination of geologic features that have the potential for
the accumulation of hydrocarbons.
Prospect is a potential hydrocarbon trap which has been confirmed by
geological and geophysical studies to warrant the drilling of an
exploration well.
Reservoir is a porous and permeable sedimentary rock formation
containing adequate pore space in the rock to provide storage space for
oil, gas or water.
Royalty is the entitlement to a stated or determinable percentage of
the proceeds received from the sale of hydrocarbons calculated as
prescribed in applicable legislation or in the agreement reserving the
royalty to the owner of the royalty.
Seal is an impervious sedimentary rock formation overlying a reservoir
that prevents the further migration of hydrocarbons.
Seep is the natural flow of oil or gas to the Earth's surface from a
formation or through cracks and faults indicating that a formation
containing hydrocarbons may be located somewhere nearby.
Seismic refers to a geophysical technique using low frequency sound
waves to determine the subsurface structure of sedimentary rocks.
21
Show is the detectable presence of hydrocarbons during the drilling of
a well.
Source Rock is sedimentary rock, usually fine-grained shale rich in
organic matter, the geologic conditions, including conditions of
temperature, pressure and time, and history of which is favorable for
the formation of hydrocarbons.
Top Seal is a rock formation through which hydrocarbons cannot move
which lies above a trap and below which hydrocarbons accumulate to form
a pool.
Trap is a geological structure in which hydrocarbons build up to form
an oil, condensate or gas field.
ITEM 2. DESCRIPTION OF PROPERTIES
General
Except for PMP 38148, New Zealand, the properties of the Registrant are
in the exploration stage. The assessment of the potential of the
properties of the Registrant to contain petroleum reserves involves,
among other things, a consideration of discoveries made by third
parties on properties adjacent to, or, depending on circumstances, in
the area of, the properties of the Registrant. Geological conditions
are, however, unpredictable. The discovery of reserves on properties
adjacent to, or in the area of, properties of the Registrant is no
assurance that commercially recoverable reserves of oil and gas will be
discovered on the Registrant's properties. SEE ITEM 1. Risk Factors.
For definitions of technical terms used in the description of
properties, see the Glossary of Industry Terms at the end of ITEM 1.
BUSINESS.
The following properties which are discussed in this ITEM 2, include
the interests which the Registrant is in the process of acquiring from
Trans-Orient Petroleum Ltd. While the Registrant believes that the
transaction will be completed there can be no guarantee that the
acquisition of Trans-Orient Petroleum Ltd.'s Assets will be completed
due to the necessity of shareholder approval of the transaction by the
shareholders of Trans-Orient Petroleum Ltd.
Working
Property Location Interest
PEP 38330 East Coast Basin, New Zealand 28.05% [1]
PEP 38335 East Coast Basin, New Zealand 25.0% [3]
PEP 38328 East Coast Basin, New Zealand 62.5% [1][3]
PEP 38332 East Coast Basin, New Zealand 62.5% [1][3]
PMP 38148 Taranaki Basin, New Zealand 5.0%
PEP 38736 Taranaki Basin, New Zealand 100.0%[4]
PEP 38716 Taranaki Basin, New Zealand 23.8%
PEP 38720 Taranaki Basin, New Zealand 100.0% [1][3]
22
PEP 38723 Taranaki Basin, New Zealand 80.0% [1][3]
PEP 38339 Clarence Basin, New Zealand 100.0% [1][3]
PEP 38256 Canterbury Basin, New Zealand 70.0% [1][2][3]
AC/P19 Offshore Timor Sea, Australia 65.0% [1]
AC/P31 Offshore Timor Sea, Australia 65.0% [1]
AC/P26 Offshore Bonaparte Basin, Timor Sea 35.0%[3]
ZOCA 96-16 The Timor Gap Zone of Cooperation 10%[3]
PPL 192 Onshore Papua New Guinea Foreland 60.0% [1][3]
PPL 215 Onshore Papua New Guinea Foreland 80.0% [1][3]
PPL 157 Onshore Papua New Guinea Foreland 7.5%[3]
PPL 213 Onshore Papua New Guinea Foreland 5%[3]
[1] Operated by the Registrant. See Item 13 - Certain Relationships
and Related Transactions
[2] The Registrant and Trans-Orient Petroleum Ltd., by agreement dated
June 25, 1998, optioned up to 80% of the permit to AMG Oil Ltd. In
August 1998 AMG Oil Ltd. earned 30% of the permit by paying the
cost of a 120 mile seismic survey. To earn an additional 50%, AMG
Oil Ltd. was required to elect before December 4, 1998 to pay the
cost of any additional seismic required to define two drilling
prospects and to pay the dry hole costs of drilling two wells to
a maximum of about US$2,100,000. The option agreement was modified
by three subsequent agreements dated October 26, 1999, December 3,
1998 and February 23, 2000 which extended the period of time in
which the AMG Oil Ltd. must exercise its option to acquire a
further 50% interest in the 38256 permit area to June 16, 2000.
Additionally, the February 23, 2000 amendment provided AMG Oil
Ltd. with a choice of committing to: ( Option A') to earn an
additional 50% in PEP 38256 from the Registrant by funding all
expenditure including an agreed program of seismic work leading up
to and including the drilling of two exploration wells.
Alternatively, AMG Oil Ltd. may, at its election, earn an
additional 35% the Registrant in the permit by funding all work
leading up to and including the drilling of one exploration well
( Option B'). In the event that the AMG Oil Ltd. exercises Option
B, it shall acquire a further option ( Option C') to earn an
additional 15% in the permit by funding all further work up to and
including a second exploration well on a separate exploration
target. Option C must be exercised within 30 days of reaching the
predetermined target depth in the exploration well drilled
pursuant to exercise of Option B.
AMG Oil Ltd. is maintaining the option by funding ongoing costs
including the acquisition of additional seismic and other
technical work. SEE ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
[3] The percentage interest in this permit includes the interest of
Trans-Orient Petroleum Ltd. which is in the process of being
acquired by the Registrant.
[4] PEP 38736 includes the permit area formerly covered by PPL 38706.
See ITEM 2 - DESCRIPTION OF PROPERTIES for a detailed discussion.
23
New Zealand
Unless otherwise indicated, petroleum exploration permits granted in
New Zealand provide for the exclusive right to explore for petroleum
for an initial term of five years, renewable for a further five years
over one-half of the original area. The participants are allowed to
exceed the committed work programs for the permits or apply for
extensions or reductions of such work programs for any particular year.
Any production permits granted will be for a term of up to 40 years
from the date of issue. The New Zealand government has reserved a
royalty of the greater of 5% of net sales revenue or 20% of accounting
profits from the sale of petroleum products.
East Coast Basin, North Island, New Zealand
Petroleum Exploration Permit PEP 38330 (28.05%)
PEP 38330 was granted on July 1, 1996. The other participants are
Mosaic Oil NL (27.225%), Boral Energy Resources (NZ) Ltd (17.5%) and
NWE (ZOCA 96-16) Pty. Ltd. (27.225%). The Registrant is the operator.
The permit area is 1,077,000 acres. The participants have fulfilled all
work requirements of the permit to July 1, 2000, which has included
acquisition of 60 miles of new seismic data, reprocessing of existing
seismic data, and remapping of the permit. On March 12, 1999, the
participants in the permit where granted a Certificate of Change of
Conditions by the New Zealand government. This moved the requirement to
commit to drill a well to the end of year four (July 1, 2000) rather
than the end of year three (July 1, 1999). If committed to, the well
must be drilled in year five (2001) of the permit. Approximately 28
miles of new seismic was acquired during January 2000 over the
Waingaromia, Kanakanaia, Arataha and Kowhai lead areas. This seismic
was funded by Boral Energy Resources (NZ) Ltd. at their sole cost, in
order to earn a 17.5% equity in the permit. The permit area is
geologically complex, with numerous surface structures and oil and gas
seeps, and is lightly explored with considerable discovery potential.
Further participants are likely to be sought prior to any possible
drilling.
For work planned to be done before December 31, 2000 on PEP 38330 and
its estimated cost, See ITEM 1. BUSINESS - Plan of Operations.
Petroleum Exploration Permit PEP 38335 (10.0%) (covering the same area
as the lapsed Petroleum Prospecting License PPL 38312).
PPL 38312 was granted in 1992 to Asia Pacific Oil Sdn. Bhd. of
Malaysia. In August 1997 the Registrant earned a participating interest
of 10.5% by funding 10.5 percent of the costs of drilling the
Waitaria-1 well. The other participants were Asia Pacific Oil Sdn. Bhd.
(64.5%), Northern Oil Ltd. (2.5%), Everest Oil Co. Ltd. (12.5%) Asia
Pacific Oil Sdn. Bhd. was the operator. The license area was
approximately 90,000 acres. The license expired in November 1997.
24
Before the license expired, the participants drilled the Waitaria-1
well to a depth of 1,344 meters (~4,400 feet) and encountered high gas
levels, but was abandoned due to engineering problems encountered while
drilling before the target Tunanui Sandstones were reached.
Application was made by the Registrant and the participants for the
grant of a new permit covering the area. Petroleum Exploration Permit
PEP 38335 was granted on November 29, 1998 for an initial term of five
years, renewable over 50% of the permit area at the end of the five
years. The participants are now registered as Westech Energy NZL Ltd
(35%), Orion Energy Ltd 35%, Everest Energy Ltd. ( 5.0%), Trans-Orient
Petroleum Ltd. (15%) and the Registrant (10.0%). After completing the
purchase of Trans-Orient Petroleum Ltd.'s interest, the Registrant's
interest will be (25%). _Westech Energy NZL Ltd. is the operator. An
operating agreement is being negotiated. Before execution of an
operating agreement, the participants proceed in accordance with
standard local industry conventions. Several exploration leads have
been identified within the permit, including the Waitaria structure
which the Waitaria-1 well did not properly test, due to engineering
problems, and the Kaiponi structure immediately along trend from the
Waitaria structure.
According to the terms of the permit, the Registrant and the other
participants are required to complete the following:
(i) prior to November 29, 2000, complete a work program which
includes drilling one exploration well and either commit to
complete the next stage of the work program detailed below in
(ii) or surrender the permit, and;
(ii) prior to November 29, 2001, evaluate the results of the
exploration well drilled during the second year and either
commit to a satisfactory work program for the remainder of
the permit term or surrender the permit.
PEP 38335 is in good standing with respect to its current work
commitments. The Registrant and its partners acquired fourteen miles of
new seismic in January 2000, over the Waitaria and Kaiponi structures.
A well is being planned for drilling in late 2000.
For work planned to be done before December 31, 2000 on PEP 38335 See
ITEM 1. BUSINESS - Plan of Operations.
Petroleum Exploration Permit PEP 38328 (40.0%)
The participants in the permit are the Registrant (40.0%), Trans-Orient
Petroleum Ltd. (22.5%) and Boral Energy Resources Limited (37.5%).
After completing the purchase of Trans-Orient Petroleum Ltd.'s
interest, the Registrant's interest will be (62.5%). The Registrant is
the operator. The permit area is 785,000 acres (1,226 square miles).
The permit was granted on July 1, 1996.
25
The conditions of the first year of the permit were satisfied by
drilling the Kereru-1 well in 1996 which recorded some gas shows, but
was plugged and abandoned without testing.
Through the past acquisition of nearly 200 miles of new seismic,
reprocessing of over 200 miles of existing seismic and the completion
of a variety of geological studies, a number of exploration leads and
prospects have been identified. These include an anticline feature in
the north of PEP 38328 (the MaiMai Prospect), anticlinal features in
the coastal area around and south of Napier (the Napier Lead, the
Whakatu Prospect and the Haumoana Lead), and several features near the
border of the two permits (the Rosearl Leads).
During the year the Registrant and its partners concentrated their
exploration efforts within this permit on three prospects: the Napier,
Whakatu and Mai Mai by collecting 25 miles of new seismic data over
these areas. Subsequent processing and mapping of the seismic confirmed
the Whakatu Prospect, located near the city of Hastings, as a drillable
prospect with the other prospects also considered as possible future
drilling sites. . The Whakatu-1 well was then drilled during January
and February 2000 to test a large anticlinal structure located near the
city of Hastings The well was drilled to a total depth of 4800 feet;
and although there were some hydrocarbon indications during drilling,
electric logging of the well did not reveal any reservoir zones worthy
of flow testing, The. Whakatu-1 well was, therefore, plugged and
abandoned in early February. The permit area has ongoing exploration
potential, and other prospects and leads will be reviewed in the light
of the results of Whakatu-1 before any further exploration program is
defined.
Current gas consumption in this area is around 2.5 billion cubic feet
per annum. This is supplied by an eight inch pipeline from the Taranaki
area on the west coast of the North Island (220 miles from Hastings).
This pipeline passes through the center of the PEP 38328 permit and the
adjacent PEP 38332 permit area, giving Indo-Pacific excellent access to
the national gas pipeline infrastructure as well as close proximity to
the local market.
The drilling of the Whakatu-1 well fulfills all permit obligations to
June 2001.
An operating agreement has been entered into among the participants.
Among other things, the operating agreement provides that a participant
may not sell, assign, transfer, mortgage, pledge, charge, encumber,
lease, sub-lease, declare itself trustee of or otherwise dispose of or
create a charge or encumbrance over all or part of its participating
interest except to a "related body corporate" as that expression is
defined in the Companies Act (NZ) if that related body corporate holds
the participating interest for at least one year without either the
consent of the other participants or first offering the participating
interest proposed to be dealt with to the other participants.
For work planned to be done before December 31, 2000 on PEP 38328 and
its estimated cost See ITEM 1. BUSINESS-Plan of Operations.
26
Petroleum Exploration Permit PEP 38332 (42.5%)
PPL 38332 was granted on June 24, 1997. The other participants are
Trans-Orient Petroleum Ltd. (20.0%) and Boral Energy Resources Limited.
(37.5%). After completing the purchase of Trans-Orient Petroleum Ltd.'s
interest, the Registrant's interest will be (62.5%).The Registrant is
the operator. The permit area is situated immediately south of PEP
38328 and is 999,700 acres in area.
Through the past acquisition of nearly 68 miles of new seismic,
reprocessing of over 100 miles of existing seismic and the completion
of a variety of geological studies, a number of exploration leads and
prospects have been identified. During the year, the Registrant and the
other participants acquired a further 43 miles of seismic data over the
Tukipo Lead and other areas.. Subsequent processing and mapping of the
seismic have ruled out the Tukipo Lead as a favorable drilling
prospect. The Boar Hill Prospect which has been defined by earlier
seismic mapping is being considered as a possible drilling target by
the permit participants, as also are a number of seismic and surface
geology leads, including Speedy, Waewaepa and Oparae A further four
mile seismic line was acquired over Speedy in January 2000, and
confirmed a closed structure, which is now being considered for
drilling to about 3000 feet depth in mid 2000.
The Registrant and the other participants have completed the work
program required for the first two and a half years, and have made the
permit commitment required by December 24, 1999 to drill one
exploration well prior to June 24, 2000, or surrender the permit. Other
participants may be sought to fund drilling.
An operating agreement is being negotiated. Before execution of an
operating agreement, the participants proceed in accordance with local
industry conventions. Among other things, the operating agreement will
provide that a participant may not sell, assign, transfer, mortgage,
pledge, charge, encumber, lease, sub-lease, declare itself trustee of
or otherwise dispose of or create a charge or encumbrance over all or
part of its participating interest except to a "related body corporate"
as that expression is defined in the Companies Act (NZ) if that related
body corporate holds the participating interest for at least one year
without either the consent of the other participants or offering the
participating interest proposed to be dealt with to the other
participants.
For work planned to be done before December 31, 2000 on PEP 38332 and
its estimated cost see ITEM 1. BUSINESS-Plan of Operations.
New Zealand, Onshore Canterbury Basin, South Island
Petroleum Exploration Permit 38256 (35.0%)
The Canterbury Basin is located both onshore and offshore in the area
surrounding Christchurch, on the east coast of the South Island. The
total area of the Canterbury Basin is about twelve million acres with
the 2,760,120 acre (4,312.7 square miles) PEP 38256 covering most of
27
the onshore area. The sediments in the Canterbury Basin range in age
from Early Cretaceous to Quaternary. The participants in this permit
are the Registrant (35%), Trans-Orient Petroleum Ltd. (35%) and AMG Oil
Ltd. (30%). After completing the purchase of Trans-Orient Petroleum
Ltd.'s interest, the Registrant's interest will be (70.0%).
PEP 38256 was granted on August 25, 1997 to the Registrant and to
Trans-Orient Petroleum Ltd. The Registrant and Trans-Orient Petroleum
Ltd. agreed to assign an interest of 20% to AMG Oil Ltd. (formerly
Trans New Zealand Oil Company) and an interest of 10% to Gondwana
Energy Ltd. This latter transaction was cancelled January 31, 1998. The
Registrant is the operator.
The participants have completed all seismic acquisition requirements
to February 25, 2000. The participants are required by August 25, 2000
to drill an exploration well to the lesser of 1,200 meters (3,940 feet)
or economic basement.
An operating agreement dated June 25, 1998 has been entered into. Among
other things, the operating agreement provides that a participant may
not sell, assign, transfer, mortgage, pledge, charge, encumber, lease,
sub-lease, declare itself trustee of or otherwise dispose of or create
a charge or encumbrance over all or part of its participating interest
except to a "related body corporate" as that expression is defined in
the Companies Act (NZ) if that related body corporate holds the
participating interest for at least one year without either the consent
of the other participants or offering the participating interest
proposed to be dealt with to the other participants.
The Registrant and Trans-Orient Petroleum Ltd. by agreement dated June
25, 1998 optioned up to 80% of the permit to AMG Oil Ltd. In August
1998 AMG Oil Ltd. earned 30% of the permit by paying the cost of a 120
mile seismic survey. To earn an additional 50%, AMG was required to
elect before December 4, 1998 to pay the cost of any additional seismic
required to define two drilling prospects and to pay the dry hole costs
of drilling two wells to a maximum of about US$2,100,000. The option
agreement was modified by three subsequent agreements dated December 3,
1998, October 26, 1999 and February 23, 2000 which extended the period
of time in which the AMG must exercise its option to acquire up to a
further 50% interest in the 38256 permit area to June 16, 2000.
Additionally, the February 23, 2000 amendment provided AMG with a
choice of committing to: ( Option A') to earn an additional 50% in PEP
38256 from the Registrant by funding all expenditure including an
agreed program of seismic work leading up to and including the drilling
of two exploration wells. Alternatively, AMG may, at its election, earn
an additional 35% the Registrant in the permit by funding all work
leading up to and including the drilling of one exploration well
( Option B'). In the event that the AMG exercises Option B, it shall
acquire a further option ( Option C') to earn an additional 15% in the
permit by funding all further work up to and including a second
exploration well on a separate exploration target. Option C must be
exercised within 30 days of reaching the predetermined target depth in
the exploration well drilled pursuant to exercise of Option B.
28
In February 1999, The Registrant and its joint venture partners
completed a 165 mile 2D seismic program as a second stage follow up
survey to the joint venture's earlier 120 mile seismic survey. The
second phase of seismic surveys were paid solely by AMG Oil Ltd. Field
sampling and laboratory analysis has identified several potential
source and reservoir rock sequences.
The participants have completed the interpretation and mapping of the
recently acquired seismic, and a further 112 miles of seismic were
acquired in March 2000 to further define the Ealing and Arcadia
Prospects and the Chertsey South Lead for drilling in late 2000.
The Arcadia Prospect is a well defined four-way dip closed anticline in
excess of 8000 acres as mapped at Oligocene level. The main targets are
the Mt Brown Limestone at approximately 2,100 ft, Homebush Sandstones
at 3,800 ft and Broken River Formation sandstones at 4,500 ft.
The Ealing Prospect is a large paleo-drape structure which is augmented
by monoclinal flexure above a reactivated basement fault on its
northern margin. The main targets are the Homebush and Broken River
Sandstones.
For work planned to be done before December 31, 2000 on PEP 38256 and
its estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Exploration Permit PEP 38339, Cook Strait (50.0%)
PEP 38339 was granted on November 26, 1998 to the Registrant. The
permit area encompasses onshore portions of the South Island and
offshore portions of Cook Strait lying between the North and South
Islands. The participants in this permit are the Registrant (50%) and
Trans-Orient Petroleum Ltd. (50%). After completing the purchase of
Trans-Orient Petroleum Ltd.'s interest, the Registrant's interest will
be (100.0%).The Registrant is the operator.
The permit area is approximately 815,400 acres and encloses the
southern part of a Miocene-Pliocene basin formed in response to
movement along the Alpine Fault and associated plate boundary faults.
No wells have been drilled and there is no previous onshore seismic
data. However, surface geological mapping has identified the Blind
River Anticline as a focus of exploration.
Before February 26, 2000 the participants are required to reprocess
available offshore seismic data and collect additional gravimetric
data, conduct rock sampling and evaluate the database to define the
basin structure and identify prospects and leads for further
evaluation. Before November 26, 2000, the participants are to collect
and interpret a minimum of 12 miles of onshore seismic data and 30
miles of offshore seismic data. Any additional seismic data required to
identify a drilling prospect is to be collected by May 2001 and a well
is to be drilled before November 26, 2001. A work program for the
remainder of the permit is then to be submitted for approval.
29
The initial focus of exploration on this permit has been the onshore
Blind River Anticline, a feature that BP geologists mapped as an area
of interest several decades ago. The Registrant. acquired 15 miles of
new seismic data over the Blind River area in March 1999. The data was
of poor quality, which has hindered interpretation. Further geological
and geophysical work is being considered.
For work planned to be done before December 31, 2000 on PEP 38339 and
its estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
New Zealand, Onshore Taranaki Basin, North Island
The Taranaki Basin is located on the west coast of the North Island.
The sediments in the Taranaki Basin range in age from Late Cretaceous
to the Quaternary and encompass a depth of some 25,000 feet with
complex structure and geology. Compression across the eastern portion
of the Basin during the early Miocene period created a thrusted fold
belt up to ten miles wide, which contains the McKee, Tariki, Ahuroa and
Waihapa-Ngaere fields. Further west in the onshore region are the fault
bounded Kapuni, Ngatoro and Kaimiro fields. All these fields are
currently in production.
Petroleum Mining Permit PMP 38148 (5.0%)
Effective September 1, 1996 the Registrant bought the outstanding
shares of Minora Energy (New Zealand) Limited for AUS$575,000
(CDN$478,755, US$348,790). The name of the company was changed to
Ngatoro Energy Limited. Ngatoro Energy Limited owns a five percent
participating interest and revenue interest in petroleum mining permit
38148, which has six producing oil wells and one producing gas well.
The permit area is 9,400 acres. The permit expires on December 23,
2010. Production is from turbidite sandstones of the Mount Messenger
Formation at depths of 1,500 metres to 2,000 metres. The other
participants are New Zealand Oil & Gas Ltd. (35.43%) and Fletcher
Challenge Energy Taranaki Ltd. (59.57%). New Zealand Oil & Gas Ltd. is
the operator. The Crown in right of New Zealand has reserved a royalty
of the greater of five per cent of net sales revenue from the sale of
petroleum products or 20% of accounting profits.
Oil and gas production and sales revenue during the Registrant's last
three fiscal years:
Oil Sales Oil Revenue Gas Sales Gas Revenue
Year (bbl) (US$) (000 scf) (US$)
1997 26,556 487,941 [1]
1998 20,628 224,921 27,688 9,247
1999 19,786 302,064 38,605 12,634
[1] To August 1998 gas was flared.
30
The Registrant entered into an oil sales contract dated November 9,
1997 with Fletcher Challenge Energy Taranaki Limited and a gas sales
contract dated February 18, 1998 with Fletcher Challenge Energy
Limited. Under the oil sales contract, the Registrant sells its share
of production from the field at the monthly average of the mean of the
Asian Petroleum Price Index published in Hong Kong. The agreement may
be terminated on 30 days' notice on the occurrence of certain events.
Gas sales began in the third quarter of 1998.
A workover of the Ngatoro-1 well was completed successfully in mid-June
1999, adding approximately 280 barrels of oil per day to production.
The joint venture participants have also approved workovers of the
Ngatoro-9, Ngatoro-11 and Ngatoro-1 production wells which should add
at least 100 barrels of oil per day to production. At the 1999 year
end, production from the field was averaging approximately 1100 barrels
of oil per day and 2.6 million cubic foot of gas per day. Drilling of
two new wells to test separate oil prospects is being considered.
For work planned to be done before December 31, 2000 on PMP 38148 and
its estimated cost see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Prospecting License PEP 38736 (100%)(includes the area
formerly held under PPL 38706)
The Registrant has a 100% participating interest in Petroleum
Exploration Permit 38736 ("PEP 38736") which was granted on July 14,
1999. The Registrant had a 7.75% participating interest in Petroleum
Prospecting License 38706 ("PPL 38706") with Fletcher Challenge Energy
Ltd. ("Fletcher Challenge"), as the operator, holding the remaining
92.25% participating interest. PPL 38706 required the participants to
complete a work program including reprocessing 300 kilometers of
seismic data by July 31, 1999 and drilling one exploration well by July
31, 2000. However, Fletcher Challenge relinquished its interest in PPL
38706 and as a result, the Registrant was permitted to add the acreage
of PPL 38706 as part of PEP 38736, subject only to a slight increase in
the work program required under PEP 38736.PEP 38736 now requires the
Registrant to complete a work program including the following
i) prior to January 14, 2002, acquire, process and interpret eight
kilometers of seismic data or equivalent 3D seismic data,
reprocess ten kilometers of seismic data, and either commit to
complete the next stage of the work program detailed below in (ii)
or surrender the permit; and
ii) prior to July 14, 2002, drill one exploration well and either
commit to a satisfactory work program for the remainder of the
permit term or surrender the permit.
At December 31, 1999, PEP 38736 is in good standing with respect to its
work commitments. For work planned to be done before December 31, 2000
on PEP 38706 and its estimated cost, see ITEM 1. BUSINESS-Plan of
Operations.
31
Petroleum Exploration Permit PEP 38716 (23.8%)
PEP 38716 was granted on January 30, 1996. The participants are the
Registrant (23.8%), Marabella Enterprises Ltd. (29.6%), Euro-Pacific
Energy Pty. Ltd. (6.6%), Australia Worldwide Exploration NL (25.0%)
and Antrim Energy Ltd. (15%).
PEP 38716 is situated in the eastern margin of the onshore Taranaki
Basin and covers an area of approximately 67,000 acres. It is located
adjacent to the Waihapa-Ngaere oil and gas field. The gathering station
for the Waihapa-Ngaere oil and gas field is located within a few miles
of the boundary of PEP 38716. The area consists of gently rolling hills
with rural agriculture being the main activity. Previous exploration of
PEP 38716 has resulted in the collection of several hundred miles of
seismic data, and the drilling of several wells, all of which had oil
shows. The Crown Prospect is located in the northern part of PEP 38716.
The main target horizons in the Crown Prospect were prognosed as the
Tikorangi limestones, at an estimated depth near 9,000 feet and the
Tariki sandstones below about 11,500 feet, while Kapuni Group
sandstones are expected to be encountered below 12,500 feet. The Crown
Prospect was interpreted as a thrust block anticline, somewhat similar
in geological style and size to the nearby Waihapa oil field.
On March 31, 1999, drilling of the Huinga-1 well on the Crown Prospect
commenced. The Huinga-1 well was drilled to a total depth of 13,000
feet in order to test several target zones. The well was plugged and
suspended as in order to allow a reassessment of the prospect, given
that the geology drilled so far is somewhat different to that expected.
South of the Crown Prospect lies the Oru Prospect which targets the
Miocene sandstones of the Mount Messenger Formation at depths of less
than 5,000 feet. This is considered to be a secondary target within the
permit area. The Waihapa-8 well, drilled on the very edge of the Oru
structure, flow tested oil from the target sandstones at rates in
excess of 750 barrels per day. Oru Prospect is a potential future
drilling target.
For work planned to be done before December 31, 2000 on PEP 38716 and
its estimated cost see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Exploration Permit PEP 38720 (50.0%)
PEP 38720 was granted on September 2, 1996. The participants in this
permit are the Registrant (50%) and Trans-Orient Petroleum Ltd. (50%).
After completing the purchase of Trans-Orient Petroleum Ltd.'s
interest, the Registrant's interest will be (100.0%).The permit is
approximately 6,322 acres in area.The Registrant has completed the work
program of seismic data collection, seismic reprocessing and modeling
and reservoir engineering studies on offset wells required for the
first two and a half years. The remaining work program required the
Registrant to drill one exploration well prior to September 2, 1999 and
either commit to a satisfactory work program for the remainder of the
permit term or surrender the permit. The Clematis-1 well was spudded in
early December 1999 to test the shallow potential of the Waitoriki
32
Structure. Clematis 1 well reached its Target Depth of 5900 feet on
December 20, 1999. Following a review of electric logs from the well,
the decision was made to plug and abandon the well, as it was not
considered that any zones would flow hydrocarbons at commercially
viable rates. At some later date, the structure's major gas potential
in the deeper play zones to 13,000-foot depth are planned to be tested
with a deep well.
An agreement has been entered into with Westech Energy (NZ) Ltd.
whereby the Registrant will contribute NZ$50,000 to the cost of a 3D
seismic survey which covers an area including about 1000 acres in the
south of PEP 38720, for which the Registrant will receive approximately
2000 acres of 3D seismic data covering an area including that within
PEP 38720. This survey was acquired in February 2000.
For work planned to be done before December 31, 2000 on PEP 38720 and
its estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Exploration Permit PEP 38723 (80%)
PEP 38723 was granted on October 30, 1997. The other participants in
this permit are Trans-Orient Petroleum Ltd. (40%) and Gondwana Energy
Ltd. (20.0%). After completing the purchase of Trans-Orient Petroleum
Ltd.'s interest, the Registrant's interest will be (80.0%).The
Registrant is the operator. The permit is 19,783 acres in area.
The Registrant and the other participants have completed the work
program required, which included reprocessing and interpreting a
minimum of 30 miles of seismic data. On June 2, 1999, the Ministry
approved a change in conditions of the Permit such that the remaining
work program requires the participants to collect a minimum of 5 miles
of 2D seismic data prior to April 30, 2000 and either commit by April
30, 2000 to drill an exploration well by October 30, 2000 or surrender
the permit. The Registrant has committed to the new stage of the
seismic, which will be acquired in April 2000 over the Ratapiko
Prospect. The Ratapiko Prospect is a combination trap with the main
target being Mt Messenger sandstones between 3,500 and 4,600 ft.
For work planned to be done before December 31, 2000 on PEP 38723 and
its estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
AUSTRALIA
Offshore exploration permits granted in Australia provide for the
exclusive right to explore for petroleum for an initial term of six
years, renewable for an unlimited number of five-year terms over
one-half of the remaining area at each renewal. The participants are
allowed to exceed the committed work programs for the permits or apply
for extensions or reductions of such work programs for any particular
year. Any production permits granted will be for a term of 21 years
from the date of issue, renewable for a further 21 years. In addition
to general Australian taxation provisions, most offshore permits,
including all of the Company's Australian permits, are subject to
33
Petroleum Resource Rent Taxation at the rate of 40% on a project's net
income after deduction of allowable project and exploration
expenditures, with undeducted exploration expenditures compounded
forward at the Long-Term Bank Rate ("LTBR") plus 15% and project
expenditures at LTBR plus 5%.
Offshore Petroleum Exploration Permit Ashmore Cartier AC/P19 (65.0%),
Timor Sea
A participating interest of 65.0% was acquired by the Registrant in
AC/P19 in May, 1997. The other participant is Mosaic Oil NL (35.0%).
The Registrant is the operator.
The AC/P19 Permit is approximately 364,500 acres and is located across
the southern Ashmore Platform and Cartier Trough area in the Timor Sea.
Fan sands are one reservoir objective, similar to those found in the
Tenacious-1 well to the southeast of the permit. The Registrants
earlier acquired the Corvus 2D seismic data, which has detailed the
Ursa Prospect as a potential Plover Sands trap covering an area of up
to 5,000 acres.
The Ursa Prospect's expected main reservoir, Middle Jurassic Plover
Formation sandstones, are both sourced and sealed by organic-rich
Oxfordian/Kimmeridgian syn-rift shales and mudstones of the Lower
Vulcan Formation. The Plover sands are a proven high quality producer
at Jabiru and other nearby fields.
By an agreement dated August 12, 1997 the participants granted an
interest to Lonman Pty. Ltd. which is 5% of the premium obtained in
farmout of the first well in the permit, unless previously converted to
an equivalent participating interest by repayment of past costs. Upon
commencement of production, there shall be reimbursement of past costs
related to the carried interest payable out of 50% of attributable, net
production revenue.
The Company has also committed to purchase20 sq. miles of 3D seismic
from PGS Ltd. to further define prospects and identify new leads.
For work planned to be done before December 31, 2000 on AC/P19 and its
estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Permit Area AC/P31 (65%),
On September 12, 1999, the Northern Territory Department of Mines and
Petroleum formally awarded permit AC/P31 in the Timor Sea to the
Registrant as Operator (65%) and Mosaic Oil NL (35%). The permit, of
approximately 18,000 acres, is adjacent to the much larger AC/P19, and
is being explored in conjunction with the program in AC/P 19.
AC/P31 is awarded for six years subject to the Registrant fulfilling
the following minimum work requirements:
34
(i) in the first year, these work requirements comprise the
purchase of geological and geophysical data and the
completion of geological and geophysical studies;
(ii) in the second year, they comprise the reprocessing of 18
miles of 2D seismic data and completion of AVO and pre-stack
depth migration studies over a test line;
(iii) in the third year, they comprise the acquisition of 12 miles
of new 2D seismic and their integration into and
interpretation of the existing database;
(iv) in year four, the obligation is to acquire 12 miles of new
2D seismic to high grade prospects, and
(v) in the fifth year the participants must conduct a re-
evaluation and re-interpretation of seismic data and prior to
September 12, 2005, one exploration well must be drilled.
For work planned to be done before December 31, 2000 on AC/P31 and its
estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
Permit AC/P26, Offshore Bonaparte Basin,
Permit AC/P26 was granted under the Petroleum (Submerged Lands) Act
1967 on February 25, 1997 for a term of six years. The participants in
the permit are the Trans-Orient Petroleum Ltd. (35.0%), West Oil N.L.
(30.0%) and Mosaic Oil N.L. (35.0%). After completing the purchase of
Trans-Orient Petroleum Ltd.'s interest, the Registrant's interest will
be (35.0%). Mosaic Oil N. L. is the operator. The permit is situated in
the Timor Sea on the eastern flank of the oil-rich Vulcan Graben, about
120 miles offshore from the Western Australia coastline and is
administered by the state government of the Northern Territory,
Australia. The water depth is about 300 feet. The permit area is
101,250 acres.
The Vulcan Basin is a northeast-trending, fault bounded to the
northwest and the southeast by the high blocks of the Ashmore Platform
and the Londonderry High. The basin is characterized by several
prominent troughs and a horst and graben terrain. The grabens lie in an
echelon distribution along the flanks of the basin. Pre-rift, rift, sag
and collision phases are recognized in the structural and stratigraphic
development of the area. Up to 30,000 feet of Upper Permian to Cenozoic
sediments occur in the Basin. For the most part, Jurassic sediments are
not present on the Londonderry High and Ashmore Platform.
Nearby commercial oil fields include the Jabiru, Challis and Skua oil
fields with combined reserves of approximately 200 million barrels of
oil. These have been profitable producers using low cost FPSO (floating
production, storage and offloading) technology which enables profitable
production even at low oil prices. Other mostly uneconomic discoveries
including the Montara, Bilyara and Tahbilk (oil and gas) discoveries
west of the permit area and the Talbot oil field adjacent to the permit
area. Petroleum discoveries in the region have been made in Triassic
and Lower to Mid Jurassic sandstones.
35
The occurrence of hydrocarbons at the Skua, Montara and Talbot fields
has proved that hydrocarbons have been generated in this region.
Migration pathways from potential Lower Cretaceous and upper Jurassic
source shales can be traced on existing tectonic and detailed
structural maps out of the Skua Trough and Northern Browse Basin into
the permit area.
By an agreement dated May 5, 1998 the participants granted an interest
to Lonman Pty. Ltd. which is 5% of the premium obtained in farmout of
the first well in the permit, unless, previously converted to an
equivalent participating interest by repayment of past costs. Upon
commencement of production, there shall be reimbursement of past costs
related to the carried interest payable out of 50% of attributable net
production revenue.
The participants in the permit have completed the work program required
for the first and second years. The remaining work program requires
the participants to complete the following:
i) prior to February 25, 2001, drill one exploration well;
ii) prior to February 25, 2002, complete a work program which
includes acquiring 100 kilometers of new 3D seismic data, or
purchase of existing 3D data, or surrender the permit;
iii) prior to February 25, 2003, complete a work program which
includes interpreting seismic data to define prospects, or
surrender the permit; and
iv) prior to February 25, 2004, drill a second exploration well,
or surrender the permit.
Two hydrocarbon traps along trend from the Talbot oil field have been
identified and mapped from interpretation of a100 square mile 3D
seismic survey purchased in 1998. Several other leads have been
identified from interpretation of 2D seismic data, including a
stratigraphic trap in the east of the permit. A large fault trap, the
Rossini Prospect, has been identified as the most attractive drilling
target. Presentations of the results at various industry forums are
being conducted with a view to securing a farm out with third parties
to fund the drilling of an exploration well, planned for late 2000.
An industry standard operating agreement is near finalization. Before
execution of an operating agreement, the participants proceed in
accordance with local industry conventions.
For work planned to be done before December 31, 2000 on AC/P26
and its estimated cost, see Item 1. Business- Plan of Operations.
36
Timor Gap Zone of Cooperation
Zone of Cooperation Area A Block 96-16, Australia and Indonesia
Trans-Orient Petroleum Ltd. acquired a 33 1/3% interest in a venture to
explore the Zone of Cooperation Area A Block 96-16 ("ZOCA 96-16") in
the Timor Gap Zone of Cooperation located between Australia and
Indonesia. The permit area was originally 670,000 acres, however,
pursuant to the terms of the permit grant, the participants were
required to relinquish 25% of the permit area in November 1999. The
other participants in ZOCA 96-16 are Norwest Energy N.L., as operator
(33.33%) and West Oil N.L. (33.33%). The participants have entered into
an agreement with Phillips Petroleum Ltd. which provides that Phillips
will fund the drilling and testing of an exploration well on the
Coleraine Prospect in the western part of the permit during year 2000.
Under the terms of this agreement, Phillips earns a 66% interest in
the permit by paying all costs through the drilling and testing of the
exploration well, which will fulfil the year 2001 well obligation.
Following completion of this well by Phillips Petroleum, the ZOCA 96-16
license interests will be Phillips Petroleum (66%), Norwest Energy NL
(14%), West Oil NL (10%), and the Trans-Orient Petroleum Ltd. (10%).
After completing the purchase of Trans-Orient Petroleum Ltd.'s
interest, the Registrant's interest will be (10.0%).
The Timor Gap Zone of Cooperation was established in 1989 by treaty
between Indonesia and Australia in settlement of a dispute between the
two countries during the 1980's regarding the boundary between their
respective economic zones, which had halted all exploration of this
prospective area. ZOCA 96-16 lies within Area A of the Zone of
Cooperation, which is now administered by the Australia-United Nations
(on behalf of the Republic of East Timor) Joint Authority.
Following signature of the treaty, Area A was divided into a number of
contract areas, most of which were awarded in 1991 and 1992. This
initiated an active phase of exploration, in which many of the world's
leading oil companies were involved, and some 25 exploration and ten
appraisal wells have now been drilled in Area A, with several
significant oil and gas discoveries having already been made. Companies
currently involved in the area include Shell,, Phillips, , Woodside, ,
Santos, Mobil and others. Discoveries in the last few years include
Elang (oil), Elang West (oil), Kakatua (oil), all now in production,
Bayu (gas-condensate), and Undan (gas-condensate), now scheduled for
development by Phillips Petroleum while the Laminaria and Buffalo oil
discoveries, which recently commenced production, are located just
outside Area A, some 25 miles west of ZOCA 96-16.
Discovery wells on two of the permits adjacent to ZOCA 96-16 have
recorded flow rates in production testing exceeding 11,000 barrels of
oil per day, while in the case of Bayu-1 a combined flow rate of 90
million cubic feet of gas per day, with an associated 5,250 barrels of
condensate was achieved.
37
Of particular interest to the ZOCA 96-16 contract area are the Elang
and Undan-Bayu discoveries. The Elang discovery was the first in Area
A, made in February, 1994 when the Elang-1 well was flow tested at a
rate of 5,800 barrels per day, and a 250 foot oil column was
intersected in sandstones of the Montara Beds Formation, immediately
underlying the 'Break-Up Unconformity' at a depth of 10,000 feet.
Production from the combined Elang/Kakatua development commenced in
1998 at initial field production rates of 35,000 barrels a day,
although production is now in decline. A recent new development well
flowed 20,000 barrels per day. The development location is only five
miles from the boundary of ZOCA 96-16 and enhances the value of the
contract area by bringing infrastructure close to it.
Elang is also important to ZOCA 96-16 in that it demonstrates that oil
is being generated in the Flamingo Syncline, which lies north of Elang
and crosses the southern part of ZOCA 96-16, thus improving the chances
of structures close to the syncline within ZOCA 96-16 being charged
with oil. Seismic mapping of the area shows prospects and leads
extending northeast from Elang across the Flamingo Syncline and into
ZOCA 96-16. Other prospects are identified further east within ZOCA 96-
16, particularly on the Basilisk and Minotaur trends. Both Basilisk-1
and Minotaur-1 had extensive oil indications, as also did the third
well in ZOCA 96-16, the Naga-1 well, and petrophysical review of
Minotaur-1 strongly suggests that the well would have been capable of
flowing oil from a similar level to that of the oil column in Elang, if
it had been tested. The Coleraine Prospect is mapped directly along
trend from Minotaur-1. The Foyle Prospect is mapped as a low relief
structure covering an area of about 18 square miles, situated between
Undan-Bayu and Coleraine.
The Undan-Bayu gas-condensate field was discovered by Phillips
Petroleum with the drilling of Bayu-1 in early 1995, and then extended
further west later in 1995 by the drilling of Undan-1 by BHP in the
adjacent Contract Area. Appraisal drilling since that time has
established a gas-condensate reserve of some three trillion cubic foot
(TCF) of gas, and an associated 100-200 million barrels of condensate.
The field covers an area of approximately 40,000 acres, some 15 miles
southeast of ZOCA 96-16. Phillips Petroleum has purchased BHP's
interest in the reserve, and is now proceeding to develop the field
with an early production stage which strips the condensate from the
reservoir and reinjects the gas for later production. The development
of this field will also add value to ZOCA 96-16 due to the proximity of
the Undan-Bayu production infrastructure.
ZOCA 96-16 is subject to an annual contract service fee of US$125,000
and a production sharing agreement with the Australia-Indonesia Joint
Authority. For the first five years of production, the Joint Authority
is entitled to 50% to 70% of the initial 10% of gross production, and
of the initial 20% of gross production for each year thereafter. Any
excess production, after deduction of allowable operating costs and
investment credits of 127% of exploration expenditures, is shared with
the Joint Authority at rates of 50% to 70%. In addition, any taxable
income from the area is also subject to a combined tax regime, with an
effective corporate tax rate of 42%. The production sharing agreement
38
has a stated term of 30 years but if no petroleum has been located in
commercial quantities before November 14, 2002 the participants may by
notice extend the term over the remaining area to November 14, 2006. If
no petroleum has been discovered in commercial quantities by this date,
the contract will terminate. Before November 14, 2002 the participants
are required to relinquish a further 25% of the difference between the
area granted in the production sharing contract less any area allocated
to a commercial discovery. The production sharing contract requires the
following minimum work to be done:
Year of Estimated
Contract Description of Work Cost (US$)
One Data review $ 100,000
Two Data review 100,000
Three 1500 km of seismic survey 800,000
Four Data review 160,000
Five One exploration well 5,000,000
Six Data review 80,000
The work prescribed for the first three years has been completed. The
Registrant has paid its one-third share of the above costs. The
requirements of the remaining work program are as follows:
i) prior to November 14, 2000, complete a work program which includes
seismic data review, or surrender the permit; prior to November
14, 2001, drill one exploration well, or surrender the permit; and
ii) prior to November 14, 2002, complete a work program which includes
seismic data review, or surrender the permit.
Following the agreement with Phillips Petroleum Ltd, they will fund the
drilling and testing of an exploration well in the permit during Year
2000, at no cost to the Registrant. This well will fulfill the Year
2001 well obligation.
The Registrant's equity in the permit is reduced to 10%, following
Phillips entry and assumption of permit operatorship and the obligation
to the other parties to drill the well during 2000.
After recovery of investment credits for exploration and capital costs
and of operating costs, the value of production, if any, of petroleum
is to be divided as follow;
(i) for average daily production up to 50,000 barrels, 50% to the
Joint Authority and 50% to the participants;
(ii) for average daily production of between 50,001 and 150,000
barrels, 60% to the Joint Authority and 40% to the
participants; and
(iii) for average daily production over 150,000 barrels, 70% to the
Joint Authority and 30% to the participants;
39
and for any production of gas, after recovery of investment credits for
exploration and capital costs and of operating costs, the value of
production, if any, of gas is to be divided 50% to the Joint Authority
and 50% to the participants.
An operating agreement exists among the participants. Among other
things, the operating agreement provides that a participant may not
sell, assign, transfer, charge, mortgage, or otherwise dispose of, deal
with, encumber, make a declaration of trust or undertake any other act
whereby any legal or equitable interest is created over all or part of
its participating interest except to an "affiliated corporation" as
that expression is defined in the production sharing contract of
November 14, 1996 without the written consent of the other participants
or permit a transfer or allotment of shares not outstanding on February
10, 1998 without the consent of the other participants.
A seismic grid totaling some 4,000 miles of data already existed within
ZOCA 96-16, and under the terms of the ZOCA 96-16 Contract, the joint
venture has carried out a reinterpretation of this data, together with
a reanalysis of the wells in and around the Contract Area, and has now
acquired an additional 1500 km of new seismic, which is presently being
computer processed, prior to interpretation which will rank and risk
the prospects.
For work planned to be done before December 31, 2000 on ZOCA 96-16 and
its estimated cost see ITEM 1. BUSINESS-Plan of Operations.
Offshore Gippsland Basin, Bass Strait Permit VIC/P-39 (33.33%
relinquished in 1999)
After extensive geological and geophysical work in this permit the
participants determined that there is a lack of sufficient
prospectivity in this permit area. This conclusion has resulted in the
Joint Venture's formal offer to surrender the permit. The Joint
Venture awaits a response from the Federal Government of Australia.
PAPUA NEW GUINEA
Petroleum Prospecting Licence PPL 192 (40.0%)
PPL 192 was granted in on January 28, 1997. The participants in the
permit are the Registrant (40%), Trans-Orient Petroleum Ltd. (20%),
Durum Cons. Energy Corp. (20%) and Mosaic Oil Niugini Pty. Ltd. (20%).
After completing the purchase of Trans-Orient Petroleum Ltd.'s
interest, the Registrant's interest will be (60.0%).The Registrant is
the operator.
PPL 192 grants the exclusive right to explore for petroleum for an
initial six year term commencing January 28, 1997, extendable for a
further five year term over 50% of the original area, and the exclusive
right to enter into a production agreement upon a discovery. A
production agreement provides the right to produce any oil and gas
discovered for a period of up to 30 years from discovery, subject to a
40
maximum 22.5% participating interest that can be acquired by the
Government of Papua New Guinea and a two per cent participating
interest that can be acquired by local landowners. See Item 2
Hydrocarbon tenures in New Zealand, Australia and Papua New Guinea.
PPL 192 comprises some 1,200,000 acres located in the foreland of the
Papuan Basin, immediately south of the Highlands fold belt. The area is
covered by forests and is relatively flat and sparsely populated and
the lack of roads leaves the principal mode of transport as the
Strickland River.
The participants have not entered into an operating agreement. Before
execution of an operating agreement, the participants proceed in
accordance with local industry conventions.
Reprocessing and remapping of the existing seismic data and various
geologic studies were completed to better define the potential size and
exploration uncertainties of the existing prospects and leads,
particularly focusing on the Kamu and Douglas Prospects and the Langia
Field. The participants then completed the acquisition of approximately
30 miles of 2D seismic in November - December, 1999 ( the Kamu Seismic
Survey ) to delineate the two main prospects: Kamu and Douglas, and to
further evaluate the Langia gas discovery. The Kamu Prospect, a
structure in the center part of the area, is defined on seismic as
covering an area of approximately 4,500 acres, with a vertical relief
of about 260 feet at the Toro Sands level at about 5,500 feet depth.
The Douglas Prospect is now mapped as a closed feature incorporating
several separate culminations, covering a total area of approximately
15,000 acres, with maximum vertical relief of approximately 250 foot at
Toro Sands level at about 5,500 foot depth. The Toro Sands are widely
developed across the Papuan Basin, and are the main producing reservoir
sequence in virtually all the onshore discoveries. In addition to the
Toro Sands, the Digimu and Imburu Formations may also hold reservoir
quality sandstones and be targets in Kamu and other structures in PPL
192.
The license required the participants to reprocess seismic and other
data in the first year of the license at a cost of $100,000 and in the
second year of the license to spend $100,000 on an area review and an
analysis of gas development in a "Kamu" type gas discovery. This work
has been done.
The Kamu Seismic Survey has met the license requirement to acquire 30
miles of seismic in Year 3. The remaining work program requires the
participants to complete the following:
i) prior to January 28, 2001, complete a work program which
includes drilling one exploration well. In addition, the
participants must commit to a minimum work program prior to
November 28, 2000 for the fifth and sixth years, or surrender
the permit;
41
ii) prior to January 28, 2002, complete a work program which
includes acquiring 240 miles of new 2D or equivalent 3D
seismic data; and
iii) prior to January 28, 2003, complete a work program which
includes drilling a second exploration well.
Farm-in parties will now be sought to assist in funding the drilling of
one of the prospects in late 2000.
For work planned to be done before December 31, 2000 on PPL 192 and its
estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Prospecting Licence PPL 215 (40.0%)
PPL 215 was awarded in May 1999. The participants in the permit are the
Registrant holding 40%, Trans-Orient Petroleum Ltd. (40%) and Mosaic
Oil of Australia with 20%. After completing the purchase of Trans-
Orient Petroleum Ltd.'s interest, the Registrant's interest will be
(80.0%). The Registrant is the operator. The PPL 215 license covers
approximately 600,000 acres situated in the lightly explored Papuan
Basin Foreland, and adjoins the Registrant's PPL 192 permit.
With regard to the work program on the permit, the Registrant and the
other participants are required to complete the following:
i) prior to May 7, 2001, complete a work program which includes
reprocessing 120 miles of existing seismic data. In
addition, the participants must commit to a minimum work
program prior to March 7, 2001 for the third and fourth
years, or surrender the permit;
ii) prior to May 7, 2003, complete a work program which includes
acquiring, processing and interpreting 60 miles of seismic
data. In addition, the participants must commit to a minimum
work program prior to March 7, 2003 for the fifth and sixth
years, or surrender the permit; and
(iii) prior to May 7, 2005, complete a work program which includes
drilling one exploration well.
The seismic program conducted in PPL 192 during fiscal 1999 included
the acquisition of 18 miles of seismic in PPL 215, to evaluate the
Aiema Lead area, which counts towards part fulfillment of the Year
Three seismic obligation.
For work planned to be done before December 31, 2000 on PPL 215 and its
estimated cost, see ITEM 1. BUSINESS-Plan of Operations.
Petroleum Prospecting License 157,
After completing the purchase of Trans-Orient Petroleum Ltd.'s
interest, the Registrant's interest in this permit will be (7.5%). By
an agreement dated August 3, 1998 among Santos Niugini Exploration Pty.
Limited ("Santos"), Trans-Orient Petroleum Ltd. agreed to pay ten
43
percent of the costs of drilling the Stanley-1 well, the lesser of ten
percent of testing the Stanley-1 well or US$130,000 and 7.5% of feeding
costs over US$1,300,000 with respect to the Stanley-1 well to earn a
participating interest of 7.5% in PPL 157. The other participants in
the license are Santos Ltd. (35.25%), as the operator, Omega Oil N.L.
(15%), Carnarvon Petroleum N.L. (15%), Bligh Oil & Minerals N.L.
(7.25%) and SPI Ltd. (20%).
PPL 157 was granted to Santos on June 2, 1993 for a term of six years.
The license area is about 1,248,600 acres. The Stanley Prospect is
located in the northwest of PPL 157.
Santos is the operator of the license. An operating agreement dated
December 1, 1997 sets out the procedures for work on PPL 157. Among
other things, the operating agreement provides that a participant may
assign its participating interest to an affiliate, as defined in the
operating agreement, if the affiliate continues to be an affiliate for
one year after the date of execution of the documents effecting the
assignment. If there is a change of control of a participant that is
not listed on a stock exchange, the other participants may within 45
days of receipt of notice elect to acquire the participating interest
of the participant of which control is to change. If a participant
wishes to sell, or receives an offer to purchase all or part of its
participating interest, the participant must give notice to the other
participants which have 45 days to elect to acquire such interest
subject to regulatory acceptance. The participant wishing to sell has,
generally, 90 days to close the sale of its participating interest
subject to regulatory acceptance.
The Stanley-1 well was spudded on January 17, 1999, to test a large dip
and fault closure at the Toro sandstones level (~10,000 feet). Good
reservoir sandstones were encountered during drilling at the shallower
Upper Ieru level (~7,000 feet), but the formation did not contain
hydrocarbons. The well was drilled to a total depth of approximately
10,600 feet, and encountered good reservoir sandstones at the main
objective level- the Toro Formation - at a depth of approximately
10,300 feet. Electric logs run in the well have been interpreted by the
operator, Santos Ltd, to be gas charged over a 40 foot interval, with
at least 25 feet of this interval being good pay. It is considered that
the well will flow gas at high rates when tested. However, on March 9,
1999 all the companies in PPL 157 joint venture decided to defer any
flow testing of the Stanley-1 well until some future date. The Stanley-
1 well has been left plugged and suspended and can be reopened for
future flow testing at the appropriate time should the joint venture
decide to do so. The PPL 157 permit has numerous other prospects
identified for future exploration drilling, as well as the already
drilled Elevala and Ketu gas discoveries.
An extension license over part PPL 157 and retention licenses (APRL4
over the Stanley field and APRL5 over the Elevala and Ketu fields) were
offered to the joint venture partners on September 9, 1999 and from the
end of 1999 the existing license will be replaced by these new
licenses.
44
Both PPL 192 and the adjacent PPL 157 lie within the foreland of the
Papuan Basin. PPL 213 lies within the fold and thrust belt portion of
this same basin. This is a Mesozoic-Cenozoic basin situated on the
northern margin of the Australian craton. Following some Triassic
fluvial deposition, a rifted passive margin was formed by continental
break-up in the Jurassic. At the end of the Jurassic, a sequence of
marine transgressions deposited clean quartz sands on a broad marine
shelf, which now forms the main reservoir units in the basin. The most
important of these are the Lower Cretaceous Toro Formation sands and
the closely underlying sandstones of the Upper Jurassic Digimu and
Iagifu Members of the Imburu Formation. Through the Cretaceous period
a thick sequence of siltstones and shales with localised sandstones
(the Ieru Formation) was deposited across the basin. These form a
blanket seal to the Toro Formation sandstones. Within the upper part of
the Ieru Formation, locally developed sandstones can form good
potential reservoirs and these were a secondary objective in the
Stanley-1 well in PPL 157, and were well developed but not charged.
During much of the Lower and Mid-Tertiary, platform carbonates of the
Darai Limestone were deposited over much of the basin. Major
deformation and uplift commenced in the late Miocene, with the
collision of the Australian plate into the Bismark Arc to the
northeast. This created the rugged, uplifted terrain of the Papuan
Highlands as a fold and thrust belt within which PPL 106 is situated,
and deposited the thick, dominantly siltstone Era Beds to the south
across the largely undeformed foreland area, in which PPL157, PPL 192
and PPL 215 are all situated.
Petroleum Prospecting License 213
After completing the purchase of Trans-Orient Petroleum Ltd.'s
interest, the Registrant's interest in this permit will be (5.0%). By
agreement dated January 11, 1999 among Trans-Orient Petroleum Ltd.,
Highland Petroleum Pty. Ltd. (with respect to 1.87%), First Australian
Resources (PNG) Pty. Ltd. (with respect to 1.75%), Victoria Exploration
(PNG) Pty. Ltd. (with respect to 0.92%) and TPEX Exploration (PNG) Pty
Ltd. (with respect to 0.46%), Trans-Orient Petroleum Ltd. agreed to pay
the lesser of 8.45% percent of dry hole drilling costs of the Tumuli-1
well or US$929,500 and five percent of costs over US$11,000,000 with
respect to the Tumuli-1 well to earn a participating interest of five
percent in PPL 213. The other participants in the permit are Santos
Ltd. (35%), as the operator, Woodside Petroleum Ltd. (25%), First
Australian Resources N.L. (8.25%), Bligh Oil & Minerals N.L. (7.5%),
Highland Petroleum Pty Ltd (5.63%), Lakes Oil N.L. (5%), Victoria
Petroleum N.L. (4.08%), Farpuri Ltd (2.5%) and TPEX Exploration (PNG)
Pty Ltd. (2.04%). PPL 213 was granted on February 11, 1999 for an
initial term of six years. The permit area is approximately 900,000
acres.
Santos, through its subsidiary Barracuda Property Limited, is the
operator of the license. An operating agreement for the preceding
PPL106 dated December 14, 1989 sets out the procedures for work on PPL
213. Among other things, the operating agreement provides that a
participant may assign or transfer, which includes any and all means of
disposition, including the effects of financing arrangements, its
45
participating interest to an affiliate, as defined in the operating
agreement, if the affiliate continues to be an affiliate for one year
after the date of the assignment. Any other assignment requires the
consent of the other participants regarding the technical and financial
competence of the assignee and regulatory acceptance. Any financial
encumbrance of a participating interest requires the consent of the
other participants and must be made subject to regulatory acceptance
and in compliance with certain other conditions. If a participant
wishes to sell, or receives an offer to purchase all or part of its
participating interest, the participant must give notice to the other
participants which have 30 days to elect to acquire such interest. The
participant wishing to sell has, generally, 180 days to close the sale
of its participating interest.
PPL 213 is situated in the rugged terrain of the Papuan Highlands,
which have been created by the thrust faulting, folding and uplift
associated with the Upper Tertiary plate collision event. This has
created numerous potential petroleum traps in the form of compressional
fold features. Some 30 of these are currently recognized within PPL 213
alone and many more are identified in the surrounding area outside PPL
213. During the past 20 years, a number of these features have been
drilled as successful oil or gas discoveries. These include the
P'nyang, Juha, Hides and Angore gas fields within 50 miles of PPL 213,
and the Moran, Paua, Iagifu, Hedinia and Gobe oil fields further along
trend to the southeast. The Hides field is in production, as are the
Moran, Iagifu and Hedina (collectively, the Kutubu oil fields) and the
Gobe. Oil production from these fields currently amounts to about
130,000 barrels a day. The gas accumulations typically have high
condensate (light oil) content and the oil accumulations typically have
an overlying gas cap. Plans by Chevron and other participants to
construct a gas pipeline from the Kutubu fields across the Coral Sea to
Queensland, Australia are now proceeding, and may bring many more of
the gas fields into production in the next few years.
The Tumuli-1 well was spudded in April 1999 to test a large
compressional fold anticline which has been mapped from surface geology
as a potential petroleum trap at the Toro Formation level covering an
area of about twelve square miles. The well was plugged and abandoned
at a depth of 6,600 feet. High formation pressures and unstable rock
conditions encountered during drilling resulted in the decision to
terminate the well several hundred metres above the level at which the
seismic data indicated the Toro sandstone objective would be reached.
In addition, a deviation of some 30 degrees from vertical built up
during drilling, due to the steep dips of the rock strata, and it was
considered that given the range of problems encountered, it was
unlikely the Toro objective could be reached using this particular
drilling operation.
The Registrant and the other participants have completed the work
program required for the first year of PPL 213 by drilling the Tumuli-1
exploration well. The remaining work program requires the participants
to complete the following:
45
i) prior to February 11, 2001, complete a work program which
includes reprocessing existing seismic data and acquisition
of 30km of geotraverse data. In addition, the participants
must commit to a minimum work program prior to December 11,
2000 for the third and fourth years, or surrender the permit;
ii) prior to February 11, 2003, complete a work program which
includes drilling a second exploration well. In addition,
the participants must commit to a minimum work program prior
to December 11, 2003 for the fifth and sixth years, or
surrender the permit; and
iii) prior to February 11, 2005, complete a work program which
includes drilling a third exploration well.
The PPL 213 joint venture has now reviewed all exploration
possibilities in the licence and had to decide in January whether or
not to continue exploration of the area or collectively withdraw from
the permit at the end of Year One. However, under the Petroleum Act of
Papua New Guinea, since less than all parties have now elected to
withdraw at end of Year One, the permit must continue to the end of
Year Two before the Registrant is entitled to withdraw.
CHINA
Technical Study Area, Nanling and Wuwei Basins, Anhui Province, China
(50%)
The Production Sharing Contract entered into by the Registrant and its
other joint venture partner , Moondance Energy Ltd., with Sinopec
(China Petrochemical Corporation) has expired. The joint venture
participants have not yet decided whether to attempt to renegotiate a
new agreement with the Chinese authorities. Due to the expiry of the
PSC, the joint venture does not have an interest in the permit area.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Registrant is
subject or which are anticipated or threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted for the vote of security holders in the
fourth quarter of the year.
46
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market Price of and Dividends on the Registrant's Common Equity
The shares of the Registrant traded on the Vancouver Stock Exchange
("VSE") in Vancouver, British Columbia, Canada to September 12, 1996.
Since January, 1996 the shares of the Registrant have traded and
continue to trade on the OTC Bulletin Board under the symbol "INDX".
Summary trading by quarter for the two most recently competed fiscal
periods ending December 31, 1999: The Registrant believes that its
market price is a reflection of actual sales and purchases. OTC BB
quotations may reflect interdealer prices, without retail markup,
markdown or commission and may not necessarily reflect actual
transactions.
Year and
Quarter High Low
1998
First Quarter 3.563 2.406
Second Quarter 3.000 1.492
Third Quarter 1.813 0.563
Fourth Quarter 1.031 0.6875
1999
First Quarter 1.281 0.42
Second Quarter 1.25 0.5625
Third Quarter 0.781 0.50
Fourth Quarter 0.656 0.3125
2000
First Quarter [1] 0.875 0.3125
[1] Prices to March 16, 2000
As at March 27, 2000 there were 28,262,398 shares outstanding. At
February 16, 2000 there were 213 shareholders of record resident in
Canada holding 8,713,458 shares and 1,149 shareholders of record
resident in the United States holding 19,316,901 shares.
No cash dividends have been declared by the Registrant nor are any
intended to be declared. The Registrant is not subject to any legal
restrictions respecting the payment of dividend (except that they may
not be paid to render the Registrant insolvent). Dividend policy will
be based on the Registrant's cash resources and needs and it is
anticipated that all available cash will be needed for property
development for the foreseeable future.
47
Recent Sales of the Registrant's Securities
No securities were issued by the Registrant during the 1999 fiscal
year, however as part of the consideration to be paid by the Registrant
to Trans-Orient Petroleum Ltd. for the purchase of Trans-Orient
Petroleum Ltd.'s Assets, the Registrant will issue 4,184,224 Units. At
March 27, 2000 these units have not yet been issued but it is expected
that these units will be issued in the very near future upon formal
closing of the asset purchase. The total value of the Trans-Orient
Petroleum Ltd. Assets to be acquired by the Registrant were valued by
the parties at $4,097,362. Each Unit consists of one common share and
one "A" Warrant. Each "A" Warrant will entitle the holder to purchase
one additional common share of the Registrant in consideration for
$0.50 per common share exercisable up to the end of business on the
date which is one year from their issuance and thereafter for $0.75 per
common share up to the close of business on the date which is two years
from the date of issuance. Upon the exercise of the "A" Warrants by
Trans-Orient Petroleum Ltd. and subject to a commercial discovery
having occurred on the Assets, the Registrant shall issue to Trans-
Orient Petroleum Ltd. one "B" Warrant for each "A" Warrant exercised.
The "B" Warrants shall be exercisable at a price of $1.50 for a period
of one year from the date of issue of the "B" Warrants. The securities
are to be issued pursuant to the exemptions from registration under the
1933 Securities Act contained with Regulation S (Rules 901-905).
Rights to Acquire Common Shares on Exercise of Options
No options to acquire the common shares of the Registrant were issued
during the fiscal year ending December 31, 1999. At the Annual General
Meeting of Shareholders held in June 1998, the Registrant did receive
approval to grant options to directors, officers and employees. In
March 1999 the registrant announced that it intended to cancel all
previously granted but unexercised options and grant directors,
officers and employees new options to acquire 5.6 million common shares
in the capital stock of the Registrant at a price of US$0.85 per share.
However the original options were not cancelled nor were the options to
acquire 5.6 million shares granted to any individuals as of December
31, 1999. The names, holdings, exercise price and expiry date of
outstanding options to acquire common shares of the Registrant are as
follows:
Exercise
Number Expiration
Name Of Shares Price Date
Under Option [1]
DJ and JM Bennett
Family Trust [2][3][4] 200,000 $2.50 10/30/00
Alex Guidi [3][4] 500,000 $2.50 10/30/00
Brad Holland[3][5] 300,000 $2.50 05/13/00
[1] In the year ended December 31, 1999, no options to acquire shares
were exercised.
48
[2] Beneficially owned by David Bennett and his spouse Jenni Bennett
[3] Term extended pursuant to agreements dated May 7, 1998.
[4] The options were originally granted on October 30, 1996.
[5] The option was originally granted on May 13, 1996.
Rights to Acquire Common Shares on Exercise of Warrants
No warrants to acquire the common shares of the Registrant were issued
during the fiscal year ending December 31, 1999. The names, holdings,
exercise price and expiry date of outstanding warrants to purchase
common shares of the Registrant are as follows:
Number of
Share Purchase Purchase Expiration
Name Warrants [1] Price Date
Tracy Godoy[2] 160,000 $.90 05/27/00
Alex Guidi[2] 494,000 $.90 05/27/00
Peter Loretto[3][2] 146,000 $.90 05/27/00
1,000,000 $.90 07/03/00
Tanya Loretto[2] 150,000 $.90 05/27/00
[1] In the year ended December 31, 1999, no warrants to acquire shares
were exercised.
[2] During the 1999 fiscal year the Registrant amended the exercise
price from Cdn. $3.485 to US$.90 and extended the expiry date from
May 27, 1999 to May 27, 2000.
[3] By an agreement dated June 2, 1997, Mr. Loretto purchased
1,000,000 units for Cdn. $1.80 per unit. Each unit is comprised of
one common share and one non-transferable share purchase warrant.
Each share purchase warrant entitles the holder to purchase a
common share for Cdn. $1.90 before July 4, 1998, for Cdn. $2.00
from July 4, 1998 to July 3, 1999 and for Cdn. $2.10 from July 4,
1999 to July 3, 2000. During the 1999 fiscal year the Registrant
amended the exercise price at which the holder may exercise his
warrant from Cdn. $2.10 to US$.90.
ITEM 6. SELECTED FINANCIAL DATA
The following constitutes selected financial data for the Registrant
prepared in accordance with United States generally accepted accounting
principles for the last five completed financial periods. The
information, expressed in United States dollars unless otherwise
indicated, must be read in conjunction with the more detailed financial
information contained in the accompanying audited financial statements.
49
1999 1998 1997 1996 1995[1] 1995[2]
Current
assets $6,408,980 $ 9,047,114 $10,872,800 $ 9,597,265 $1,024,635 $ 575,210
Invest-
ments 740,000 1,500,000 - - - -
Pet. &
Gas 3,656,224 2,819,946 1,929,839 1,113,928 60,438 10,320
Prop. &
Equip 143,961 134,076 115,244 34,933 6,150 -
Incorp costs - - - - 867 867
Total
assets 10,949,165 13,501,136 12,917,883 10,746,126 1,092,090 586,397
Share
capital 18,245,867 18,253,992 18,376,476 15,512,578 4,993,739 4,397,920
Deficit (7,644,685) (6,471,552) (5,591,864) (4,853,487)(3,968,214) (3,824,570)
Cum. comp.
adjustment 70,000 1,561,800 87,567 - - -
Gross rev. 673,609 684,765 870,059 426,432 38,980 25,768
Net loss (1,173,133) (879,688) (738,377) (885,273) (143,644) (50,706)
Other comp.
income
(loss) (1,491,800) 1,474,233 87,567 - - -
Comp.
income
(loss) (2,664,933) 594,545 (650,810) (885,273) (143,644) (50,706)
Net Loss
per Share (0.04) (0.03) (0.03) (0.04) (0.01) (0.01)
[1] For the eleven month period ended December 31, 1995.
[2] For the year ended January 31, 1995.
Exchange Rates
On December 31, 1999 the buying rate for Canadian dollars was US$1.00:
Cdn$1.4433. The following table sets out the buying rate for Canadian
dollars for the period indicated. Rates of exchange are obtained from
the Bank of Canada and believed by the Registrant to approximate
closely the rates certified for customs purposes by the Federal Reserve
Bank in New York.
1994 1995 1996 1997 1998 1999
Year End 1.4018 1.3640 1.3706 1.4305 1.5333 1.4433
Average 1.3659 1.3726 1.3636 1.3844 1.4831 1.4868
High [1] 1.4065 1.4243 1.3855 1.4393 1.5795 1.5287
Low [1] 1.3109 1.3303 1.3295 1.3365 1.4082 1.4433
[1] The high and low buying rate figures are selected from daily high
and low figures.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary
The Registrant is in the exploration and evaluation stage on nearly all
its oil and gas properties and hence has not yet achieved profitability
or break even cash flow. The Registrant has experienced losses in each
fiscal period reported on and expects to continue to incur losses for
the upcoming fiscal year. Total losses incurred from incorporation to
December 31, 1999 were $7,644,685. The level of future operations is
limited by the availability of capital resources, the sources of which
50
are not predictable. The sales value of any oil and gas discovered by
the Registrant will be largely dependent on factors beyond the
Registrant's control such as the market value of the hydrocarbons
produced.
Liquidity
As of December 31, 1999 the Registrant had $6,130,997 in working
capital as compared with $8,890,218 as of December 31, 1998 and
$10,827,096 as of December 31, 1997. For the upcoming fiscal year, the
Registrant does not have sufficient capital to satisfy all the capital
expenditures which are necessary to satisfy the prescribed work
commitments contained within the Registrant permit license grants and
joint venture agreements see ITEM 1 BUSINESS- Plan of Operations. The
required permit expenditures for the upcoming fiscal year will, if
fully committed to, exhaust the Registrant's current working capital
with the result that the Registrant will not have sufficient working
capital to continue its operations without further infusions of
capital. The production revenue and interest income which the
Registrant receives is not sufficient to satisfy the Registrant's
operating expenses and as such these revenues will not improve the
Registrant's anticipated deficiency in working capital. In order to
satisfy the required capital expenditures for the upcoming fiscal year,
the Registrant will need to raise additional capital from outside
sources. The Registrant relies on its ability to raise additional
capital through the issuance of common shares, which has a dilutive
effect on the Registrant's shareholders. It is uncertain whether the
Registrant will be able to secure outside sources of capital in an
amount that is sufficient for it to continue with its current
operations on its permits. Should the Registrant fail to raise
sufficient capital, the Registrant will have to endeavor to enter into
farm out arrangements with third parties to reduce its capital exposure
on exploration drilling programs and/or withdraw and/or dispose of some
or all of its permit interests in order to reduce the capital
requirements attributable to the Registrant.
Capital Resources
For a description of the Registrant's material capital commitments for
the upcoming fiscal year see ITEM 1 BUSINESS- Plan of Operations. The
Registrant has no other anticipated capital expenditures of a material
amount. However, the Registrant intends to acquire additional petroleum
interests, which may give rise to further capital expenditures.
The Registrant's capital resources have been comprised primarily of
private investors, including members of management, who are either
existing contacts of the Registrant's management or who come to the
attention of the Registrant through personal and business contacts,
financial institutions and other intermediaries. The Registrant's
management is of the view that conventional banking is unavailable to
resource companies which are in the exploration stage. The Registrant's
access to capital is always dependent upon general financial market
conditions, especially those which pertain to venture capital
situations such as oil and gas exploration companies. The Registrant
51
has no agreements with management, investors, shareholders or anyone
else respecting additional financing at this time. Due to the
speculative nature of the Registrant's business and its lack of revenue
generating assets, potential investors are generally limited to those
willing to accept a high degree of risk. Therefore the number of
outside sources of capital for the Registrant are somewhat limited.
Other than the foregoing, there are no other trends in the nature of
its capital resources which could be considered predictable.
Results of Operations
The Registrant is an exploration company. The Registrant's primary
focus as of December 31, 1999 is the investigation and acquisition of
oil and gas properties. The Registrant's policy is to acquire interests
and where possible, minimize its risk exposure by farming out or joint
venturing these interests to other industry participants.
The Registrant's current property focus is on the acquisition and
exploration of properties primarily in the Austral Pacific region with
the objective of establishing a solid cash flow base and participating
in high potential exploration blocks in under explored countries with
attractive fiscal regimes.
Revenues for the year ended December 31, 1999 were $673,609 compared
with $684,765 for the year ended December 31, 1998 and $870,059 for the
year ended December 31, 1997. The revenue figures reported by the
Registrant include both production revenues and interest income earned
on the Registrant's cash and short-term deposits.
Except for the Registrant's interest in Petroleum Mining Permit ("PMP")
38148, the Registrant's petroleum permits are in the exploration stage
and do not generate any production revenues. The Registrant holds a 5%
participating interest and revenue interest in PMP 38148 located in the
Taranaki Basin, North Island, New Zealand. PMP 38148 has six producing
oil wells, four producing gas wells and two shut-in gas and oil wells.
Production revenue for the year ending December 31, 1999 was $314,698
compared with gross 1998 production revenue of $234,168. The increase
is due to a rise in the average oil sale price of US$4.30 per barrel of
oil to US$15.30 per barrel, partially offset by by a fall in production
volume from 20,629 barrels to 19,786 barrels. The above includes
revenue from gas production of $12,634 (year ended December 31, 1998:
$9,247).
Costs and Expenses
In the year ended December 31, 1999 the Registrant incurred
expenditures in the acquisition, exploration and development of
petroleum interests of $1,923,921. The amount incurred in the
acquisition, exploration and development of petroleum interests for the
year ended December 31, 1998 was $1,901,030. The amount incurred in the
acquisition, exploration and development of petroleum interests for the
year ended December 31, 1997 was $1,064,976. The increase is largely
attributable to the Registrant's participation in the drilling of the
52
Huinga-1 and Whakatu-1 and Clematis-1 wells, the acquisition of
additional petroleum interests and development and implementation
exploration programs. After the purchase of the Assets from Trans-
Orient Petroleum Ltd. it is expected that costs attributable to the
acquisition, exploration and development of petroleum interests will
materially increase from those incurred in the past.
Depletion and amortization expense for the year ended December 31, 1999
was $176,855. For the year ended December 31, 1998 the depletion and
amortization expense was $148,875 and for the year ended December 31,
1997 was $97,827.
General and administrative expenses for the year ended December 31,
1999 were $532,497. For the year ended December 31, 1998 the general
and administrative expenses were $563,480 and for the year ended
December 31, 1997 were $1,247,569.
Interest Expense
The Registrant finances its business primarily from the issuance of
common shares and to a lesser extent from the receipt of petroleum
revenues from its interest in the Ngatoro oil field, New Zealand. The
Registrant has not effected any borrowing and has consequently not
incurred any interest expense.
Interest Income
Interest income for the year ended December 31, 1999 was $358,911.
Interest income for the year ended December 31, 1998 was $450,597 and
for the year ended December 31, 1997 was $382,118.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant operates in the international crude oil, refined
product, natural gas and natural gas liquids markets and is exposed to
fluctuations in hydrocarbon prices, foreign currency rates, and
interest rates that can affect the revenues and cost of operating,
investing and financing. The Registrant has not established any
policies to protect against the foregoing risks.
Commodity Price Risk
The Registrant's policy is to generally be exposed to market pricing
for commodity purchases and sales. The Company has not taken any steps
to protect against the fluctuating market price of oil or gas and as
such the Registrant's operating revenue will be affected by changes in
the market price for oil & gas. All other things being equal, where the
oil & gas prices decrease it can be expected that the Registrant's
revenues will in turn be reduced, whereas where oil & gas prices
increase it can be expected that the Registrant's revenues will in turn
increase.
53
Currency Risk
The Registrant has foreign currency exchange rate risk resulting from
operations in overseas countries in the south Pacific and Canada. The
Registrant generally holds its cash reserves in Canadian dollars while
its operations expenditures are incurred in Papua New Guinea, New
Zealand and Australia dollars ("Foreign Currencies"). As such any
strengthening of Foreign Currencies against the Canadian dollar will
cause an increase in the Registrant's operating costs. The Registrant
does not hedge its exposure to currency rate changes, although it may
choose to selectively hedge exposure to foreign currency exchange rate
risk. The Registrant, however, has no policies relating to the
foregoing.
Interest Rate Risk
The Registrant believes that it has no material interest rate risk to
manage, as the Registrant has not made use of debt as a means of
financing its operations.
ITEM 8. FINANCIAL STATEMENTS.
Financial statements begin on following page.
54
AUDITORS' REPORT
To the Shareholders of Indo-Pacific Energy Ltd.
We have audited the accompanying consolidated balance sheets of Indo-
Pacific Energy Ltd. and its subsidiaries as of December 31, 1999 and
1998 and the related consolidated statements of operations and
comprehensive income (loss), changes in stockholders' equity and cash
flows for each of the years in the three year period ended December 31,
1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, these consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Indo-Pacific Energy Ltd. and its subsidiaries as of December 31,
1999 and 1998 and the results of their operations and cash flows for
each of the years in the three year period ended December 31, 1999, in
conformity with generally accepted accounting principles in the United
States.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to
the financial statements, there is substantial doubt regarding the
ability of the Company to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ SADOVNICK TELFORD & SKOV
CHARTERED ACCOUNTANTS
Vancouver, British Columbia
Canada
March 28, 2000
F-1
55
INDO-PACIFIC ENERGY LTD.
Consolidated Balance Sheets
(Expressed in United States Dollars)
As at December 31, 1999 1998
ASSETS
Current
Cash and short-term deposits $ 4,863,254 $ 8,194,849
Accounts receivable 148,419 102,194
Loan receivable from related party
(Note 3) 1,062,211 -
Marketable securities (Note 4) 222,319 694,875
Due from related parties (Note 8) 62,667 46,161
Prepaid expenses (Note 8) 50,110 9,035
------------ ------------
6,408,980 9,047,114
Investments (Note 5) 740,000 1,500,000
Property and equipment (Note 6) 143,961 134,076
Oil and gas properties (Note 7) 3,656,224 2,819,946
------------ ------------
Total Assets $ 10,949,165 $ 13,501,136
============ ============
LIABILITIES
Current
Accounts payable and
accrued liabilities $ 277,983 $ 156,896
------------ ------------
Total Liabilities 277,983 156,896
------------ ------------
Commitments and Contingencies
(Notes 1 and 9)
STOCKHOLDERS' EQUITY
Common stock without par value (Note 10);
100,000,000 shares authorized;
Issued and outstanding at December 31,
1999 and 1998: 28,262,398 shares 18,245,867 18,253,992
Accumulated deficit (7,644,685) (6,471,552)
Cumulative comprehensive adjustment 70,000 1,561,800
------------ ------------
Total Stockholders' Equity 10,671,182 13,344,240
------------ ------------
Total Liabilities and
Stockholders' Equity $ 10,949,165 $ 13,501,136
============ ============
Approved by the Directors:
/s/ David Bennett /s/ Alex Guidi
Director Director
See accompanying notes to the consolidated financial statements
F-2
56
INDO-PACIFIC ENERGY LTD.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Expressed in United States Dollars)
For the Years Ended December 31,
1999 1998 1997
REVENUES
Oil and gas sales $ 314,698 $ 234,168 $ 487,941
Interest income 358,911 450,597 382,118
------------ ----------- ----------
673,609 684,765 870,059
COST OF SALES ------------ ----------- ----------
Production costs 50,598 129,781 67,593
Royalties 15,248 10,269 44,209
Depletion 104,475 95,779 87,017
Write-off of oil and
gas properties 983,168 765,144 162,048
------------ ----------- ----------
1,153,489 1,000,973 360,867
------------ ----------- ----------
(479,880) (316,208) 509,192
EXPENSES ------------ ----------- ----------
General and administrative
(Schedule) 532,497 563,480 1,247,569
Write-down of marketable
securities 160,756 - -
------------ ----------- ----------
693,253 563,480 1,247,569
------------ ----------- ----------
Net loss for the year (1,173,133) (879,688) (738,377)
Other comprehensive income (loss)
Unrealized gain (loss)
on marketable securities
and investments (1,491,800) 1,474,233 87,567
------------ ----------- ----------
Comprehensive income
(loss) for the year $ (2,664,933) $ 594,545 $ (650,810)
============ =========== ==========
Basic and diluted loss
per share (Note 11) $ (0.04) $ (0.03) $ (0.03)
============ =========== ==========
See accompanying notes to the consolidated financial statements
F-3
57
INDO-PACIFIC ENERGY LTD.
Consolidated Statements of Changes in Stockholders' Equity
(Expressed in United States Dollars)
For the Years Ended December 31, 1999, 1998 and 1997
Total
Cumulative Compre- Stock-
Common Accumulated hensive holders'
Shares Amount Deficit Adjustment Equity
Balance at
December 31, 1996 26,933,398 $15,512,578 $(4,853,487) $ - $10,659,091
Common stock issued
for private
placement 1,000,000 1,800,000 - - 1,800,000
Common stock issued
for exercise of
stock options 279,000 652,151 - - 652,151
Common stock issued
for exercise of
warrants 50,000 125,667 - - 125,667
Net compensation
expense from
stock options - 286,080 - - 286,080
Net loss during
the year - - (738,377) - (738,377)
Unrealized gain
on marketable
securities - - - 87,567 87,567
---------- ----------- ----------- ------------ -----------
Balance at
December 31, 1997 28,262,398 $18,376,476 $(5,591,864) $ 87,567 $ 12,872,179
Common stock issued
for private
placements 1,406,250 9,774 - - 9,774
Cancellation of
previously issued
common stock (1,406,250) (3,258) - - (3,258)
Net compensation recovery
from stock options - (129,000) - - (129,000)
Net loss during
the year - - (879,688) - (879,688)
Unrealized gain on
marketable securities
and investments - - - 1,474,233 1,474,233
---------- ----------- ----------- ------------ ------------
Balance at
December 31, 1998 28,262,398 $18,253,992 $(6,471,552) $ 1,561,800 $ 13,344,240
Net compensation
recovery from
stock options - (8,125) - - (8,125)
Net loss during
the year - - (1,173,133) - (1,173,133)
Unrealized loss on
marketable securities
and investments - - - (1,491,800) (1,491,800)
---------- ----------- ----------- ----------- ------------
Balance at
December 31, 1999 28,262,398 $18,245,867 $(7,644,685) $ 70,000 $ 10,671,182
========== =========== =========== =========== ============
See accompanying notes to the consolidated financial statements
F-4
58
INDO-PACIFIC ENERGY LTD.
Consolidated Statements of Cash Flows
(Expressed in United States Dollars)
For the Years Ended December 31,
1999 1998 1997
OPERATING ACTIVITIES
Net loss for the year $ (1,173,133) $ (879,688) $ (738,377)
Adjustments to reconcile
net loss to cash applied
to operating activities:
Depletion 104,475 95,779 87,017
Write-off of oil and
gas properties 983,168 765,144 162,048
Compensation expense
(recovery) (8,125) (129,000) 286,080
Depreciation 72,380 53,096 10,810
Write-down of
marketable securities 160,756 - -
Changes in non-cash
working capital:
Accounts receivable (46,225) 32,280 8,361
Loan receivable from
related party (1,062,211) - -
Due from related parties (16,506) 106,212 (157,821)
Prepaid expenses
and deposits (41,075) 434 2,003
Accounts payable and
accrued liabilities 121,087 111,192 (35,479)
------------ ------------ ------------
Net cash provided by
(used in) operating
activities (905,409) 155,449 (375,358)
------------ ------------ ------------
FINANCING ACTIVITY
Common shares issued
for cash - 6,516 2,577,818
------------ ------------ ------------
Net cash provided by
financing activity - 6,516 2,577,818
------------ ------------ ------------
See accompanying notes to the consolidated financials statements.
F-5a
59
INDO-PACIFIC ENERGY LTD.
Consolidated Statements of Cash Flows
(Expressed in United States Dollars)
For the Years Ended December 31,
1999 1998 1997
INVESTING ACTIVITIES
Purchase of marketable
securities - (149,565) (233,510)
Purchase of investments (420,000) (250,000) -
Purchase of property and
equipment (82,265) (71,928) (91,121)
Oil and gas properties,
net of recoveries (1,923,921) (1,901,030) (1,064,976)
Proceeds from sale of
license interest - 150,000 -
------------ ------------ ------------
Net cash used in
investing activities (2,426,186) (2,222,523) (1,389,607)
------------ ------------ ------------
Net increase (decrease)
in cash during the year (3,331,595) (2,060,558) 812,853
Cash and short-term
deposits - Beginning
of year 8,194,849 10,255,407 9,442,554
------------ ------------ ------------
Cash and short-term
deposits - End of year $ 4,863,254 $ 8,194,849 $ 10,255,407
============ ============ ============
See accompanying notes to the consolidated financial statements
F-5b
60
INDO-PACIFIC ENERGY LTD.
Consolidated Schedules of General and Administrative Expenses
(Expressed in United States Dollars)
For the Years Ended December 31,
1999 1998 1997
GENERAL AND ADMINISTRATIVE EXPENSES
Accounting and audit $ 46,189 $ 43,576 $ 54,165
Compensation expense
(recovery), net (8,125) (129,000) 286,080
Consulting fees (Note 8) 29,751 44,081 150,298
Corporate relations
and development 46,775 57,938 71,548
Depreciation 72,380 53,096 10,810
Filing and transfer
agency fees 4,836 11,413 9,803
Foreign exchange
loss (gain) (42,886) 14,771 239,713
Legal 50,795 113,101 61,395
Office and miscellaneous 110,152 127,988 68,614
Printing 67,243 109,453 104,901
Rent (Note 8) 57,294 70,132 33,791
Telephone 39,823 51,176 23,005
Travel and accommodation 52,530 54,470 101,567
Wages and benefits 159,618 64,922 31,879
Recovery of general and
administrative expenses (153,878) (123,637) -
---------- ---------- -----------
$ 532,497 $ 563,480 $ 1,247,569
========== ========== ===========
See accompanying notes to the consolidated financial statements
F-6
61
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 1 - NATURE OF OPERATIONS AND CONTINGENCIES
The Company was incorporated under the Company Act (British Columbia)
and continued its jurisdiction of incorporation to the Yukon Territory
under the Business Corporations Act (Yukon).
The Company is primarily engaged in the acquisition, exploration and
development of its oil and gas properties and, with the exception of
PMP 38148, has yet to determine whether its properties contain oil and
gas reserves that are economically recoverable. The recoverability of
the amounts capitalized for oil and gas properties is dependent upon
the completion of exploration work, the discovery of oil and gas
reserves in commercial quantities and the subsequent development of
such reserves.
The Company does not generate sufficient cash flow from operations to
fund its entire exploration and development activities and has
therefore relied principally upon the issuance of securities for
financing. Additionally, the Company has periodically reduced its
exposure in oil and gas properties by farming out to other
participants. The Company intends to continue relying on these
measures to finance its exploration and development activities to the
extent such measures are available and obtainable under terms
acceptable to the Company. Accordingly, the Company's consolidated
financial statements are presented on a going concern basis.
Refer to Note 9
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Accounting Principles and Use of Estimates
These financial statements are prepared in conformity with generally
accepted accounting principles in the United States and requires the
Company's management to make informed judgements and estimates that
affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the
year reported. Actual results could differ from these estimates.
Material differences between United States and Canadian generally
accepted accounting principles which affect the Company are referred to
in Note 16.
b) Basis of Consolidation
These consolidated financial statements include the accounts of Indo-
Pacific Energy Ltd. and its wholly-owned subsidiaries, Indo Overseas
Exploration Ltd., Indo-Pacific Energy Pty. Ltd., Indo-Pacific Energy
(PNG) Limited, Source Rock Holdings Limited, Indo-Pacific Energy (NZ)
Limited, Ngatoro Energy Limited and PEP 38716 Limited. All significant
intercompany balances and transactions have been eliminated upon
consolidation.
F-7
62
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
c) Joint Operations
The Company's exploration and development activities are conducted
jointly with other companies and accordingly, these financial
statements reflect only the Company's proportionate interest in these
activities.
d) Translation of Foreign Currencies
The Company's foreign operations through its subsidiaries are of an
integrated nature and accordingly, the remeasurement method of foreign
currency translation is used for conversion into United States dollars.
Monetary assets and liabilities are translated into United States
dollars at the rates prevailing on the balance sheet date. Other
assets and liabilities are translated into United States dollars at the
rates prevailing on the transaction dates. Revenues and expenses
arising from foreign currency transactions are translated into United
States dollars at the average rate for the year. Exchange gains and
losses are recorded as income or expense in the year in which they
occur.
e) Financial Instruments
The Company's financial instruments consist of current assets and
current liabilities. The fair values of these assets and liabilities
approximate the carrying amounts due to the short-term nature of these
instruments.
f) Accounting Pronouncements Recently Issued
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133: Accounting for Derivative Instruments and
Hedging Activities ("SFAS 133"), effective for fiscal periods beginning
after June 15, 1999. SFAS 133 requires that the fair-market value of
derivatives be reported on the balance sheet and any changes in the
fair value of the derivative be reported in income or other
comprehensive income, as appropriate. The Company does not expect
adoption of this new standard to have a material effect on its
financial reporting.
g) Cash and Short-Term Deposits
Cash and short-term deposits include government treasury bills and
bankers' acceptances with original maturities of three months or less,
together with accrued interest.
h) Property and Equipment
Property and equipment consist of furniture and office equipment and
are recorded at cost and depreciated over their estimated useful lives
on a declining-balance basis at annual rates of 10% to 20%.
F-8
63
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
i) Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas
operations whereby all costs associated with the acquisition,
exploration and development of oil and gas reserves are capitalized in
cost centers on a country-by-country basis. Such costs include property
acquisition costs, geological and geophysical studies, carrying charges
on non-producing properties, costs of drilling both productive and non-
productive wells, and overhead expenses directly related to these
activities.
Depletion is calculated for producing properties by using the unit-of-
production method based on proved reserves, before royalties, as
determined by management of the Company or independent consultants.
Sales or dispositions of oil and gas properties are credited to the
respective cost centers and a gain or loss is recognized when all
properties in a cost center have been disposed of, unless such sale or
disposition significantly alters the relationship between capitalized
costs and proved reserves of oil and gas attributable to the cost
center. Costs of abandoned oil and gas properties are accounted for as
adjustments of capitalized costs and written off to expense.
A ceiling test is applied to each cost center by comparing the net
capitalized costs to the present value of the estimated future net
revenues from production of proved reserves discounted by 10%, net of
the effects of future costs to develop and produce the proved reserves,
plus the costs of unproved properties net of impairment, and less the
effects of income taxes. Any excess capitalized costs are written off
to expense. The calculation of future net revenues is based upon
prices, costs and regulations in effect at each year end.
Unproved properties are assessed for impairment on an annual basis by
applying factors that rely on historical experience. In general, the
Company may write-off any unproved property under one or more of the
following conditions:
i) there are no firm plans for further drilling on the unproved
property;
ii) negative results were obtained from studies of the unproved
property;
iii) negative results were obtained from studies conducted in the
vicinity of the unproved property; or
iv) the remaining term of the unproved property does not allow
sufficient time for further studies or drilling.
j) Stock Options
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Company elected to apply
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees to account for stock options and provide pro forma
disclosures of net loss as if the fair value method had been applied.
F-9
64
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
k) Income Taxes
The Company accounts for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, all expected future
events other than enactment of changes in the tax laws or rates are
considered.
NOTE 3 - LOAN RECEIVABLE FROM RELATED PARTY
The Company is owed $1,062,211 including interest of $18,051 by Trans-
Orient Petroleum Ltd. ("Trans-Orient") for payments relating to oil and
gas exploration on behalf of Trans-Orient. This amount is unsecured
with no fixed terms for repayment and accrues interest on a monthly
basis at the average three-month bankers' acceptance rate plus 3%.
Refer to Note 8 and 15
NOTE 4 - MARKETABLE SECURITIES
Marketable securities comprise of 517,020 shares (December 31, 1998:
517,020 shares) of Trans-Orient Petroleum Ltd. acquired at a cost of
$383,075 and recorded at an estimated market value of $222,319
(December 31, 1998: $694,875).
Refer to Notes 8 and 15
NOTE 5 - INVESTMENTS
Investments comprise of 1,800,000 shares (December 31, 1998: 1,000,000
shares) of AMG Oil Ltd. acquired at a cost of $650,000 (December 31,
1998: $250,000) and 600,000 shares (December 31, 1998: Nil) of Gondwana
Energy, Ltd. acquired at a cost of $20,000 (December 31, 1998: Nil),
recorded at estimated market values of $720,000 (December 31, 1998:
$1,500,000) and $20,000 (December 31, 1998: Nil), respectively.
The Company holds an option to purchase a further 200,000 shares of AMG
Oil Ltd. at a price of $0.50 per share expiring on December 31, 2000.
Refer to Note 8
F-10
65
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment are comprised as follows:
1999 1998
Furniture and office equipment $ 263,868 $ 181,603
Automobile - 5,043
---------- ----------
263,868 186,646
Accumulated depreciation (119,907) (52,570)
---------- ----------
$ 143,961 $ 134,076
========== ==========
NOTE 7 - OIL AND GAS PROPERTIES
Oil and gas properties are comprised as follows:
Net Book Additions Depletion/ Net Book
Value at During the Recoveries/ Value at
12/31/98 Year Write Downs 12/31/99
Proved:
New Zealand
PMP 38148
Ngatoro Oil Field $ 417,435 $ 61,457 $ (104,475) $ 374,417
----------- ----------- ------------ -----------
Total Proved 417,435 61,457 (104,475) 374,417
----------- ----------- ------------ -----------
Unproved:
New Zealand
PEP 38256 - Exploration 29,920 16,670 - 46,590
PEP 38328 - Exploration 645,836 218,100 (142,207) 721,729
PEP 38330 - Exploration 194,286 16,893 - 211,179
PEP 38332 - Exploration 194,961 43,451 - 238,412
PEP 38335 - Exploration 3,829 6,979 - 10,808
PEP 38339 - Exploration 4,270 35,427 - 39,697
PEP 38716 - Exploration 370,781 490,657 (449,115) 412,323
PEP 38720 - Exploration 208,335 338,814 - 547,149
PEP 38723 - Exploration 17,957 4,470 - 22,427
PEP 38736 - Exploration - 28,428 - 28,428
PPL 38706 - Exploration 79,038 - (79,038) -
New licenses 29,322 - (26,620) 2,702
Australia
AC/P 19 183,073 107,033 - 290,106
AC/P 31 - 9,489 - 9,489
VIC/P 39 - 21,023 (21,023) -
Papua New Guinea
PPL 192 - Exploration 125,677 402,827 - 528,504
PPL 215 - Exploration 3,784 168,480 - 172,264
People's Republic of China
Nanling-Wuwei Blocks 311,442 - (311,442) -
----------- ----------- ------------ -----------
2,402,511 1,908,741 (1,029,445) 3,281,807
----------- ----------- ------------ -----------
$ 2,819,946 $ 1,970,198 $ (1,133,920) $ 3,656,224
=========== =========== ============ ===========
66
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
NEW ZEALAND
Unless otherwise indicated, petroleum exploration permits granted in
New Zealand provide for the exclusive right to explore for petroleum
for an initial term of five years, renewable for a further five years
over one-half of the original area. The participants can apply for
extensions or reductions of the committed work programs for the permits
under certain circumstances. Any production permits granted will be
for a term of up to 40 years from the date of issue. The New Zealand
government has reserved a royalty of the greater of 5% of net sales
revenue or 20% of accounting profits from the sale of petroleum
products.
a) PMP 38148 Ngatoro Oil Field
The Company has a 5% participating interest in Petroleum Mining Permit
38148 which includes seven producing oil and/or gas wells. The New
Zealand government has reserved a royalty of the greater of 5% of net
sales revenue or 20% of accounting profits from the sale of petroleum
products amounting to $15,248 for the 1999 fiscal year (1998 fiscal
year: $10,269).
At December 31, 1999, PMP 38148 is in good standing with respect to its
work commitments and does not require the Company to incur minimum
exploration expenditures for the 2000 fiscal year.
b) PEP 38256
The Company has a 35% participating interest in, and is the operator
of, Petroleum Exploration Permit 38256 ("PEP 38256") which was granted
on August 25, 1997. At least one-half of the original area must be
relinquished by August 25, 2000 in addition to the area which would
normally be required to be relinquished upon renewal of PEP 38256. The
other participants of PEP 38256 are Trans-Orient Petroleum Ltd. (35%)
and AMG Oil Ltd. (30%).
By an agreement dated June 25, 1998, AMG Oil Ltd. ("AMG") acquired a
right to earn up to an 80% participating interest in PEP 38256 from
Trans-Orient Petroleum Ltd. and the Company. In December 1998, AMG
earned a 30% participating interest in PEP 38256 by funding all of the
costs of acquiring, processing and interpreting 200 kilometers of
seismic data. AMG has the right to earn an additional 50%
participating interest by funding all of the costs of drilling two
exploration wells including any further seismic data required prior to
drilling. By agreements dated December 3, 1998 and October 26, 1999,
this right has been extended to May 31, 2000.
The Company and the other participants have completed the work program
required for the first two and a half years. PEP 38256 requires the
participants to complete the remaining work program that includes
committing by February 25, 2000 to drill one exploration well prior to
August 25, 2000, or surrender the permit.
F-12
67
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
At December 31, 1999, PEP 38256 is in good standing with respect to its
work commitments. Upon committing to drill one exploration well prior
to August 25, 2000, the Company's share of work commitments for the
2000 fiscal year requires an estimated $455,000 of exploration
expenditures to be incurred.
Refer to Notes 8 and 15
c) PEP 38328
The Company has a 40% participating interest in, and is the operator
of, Petroleum Exploration Permit 38328 ("PEP 38328") which was granted
on June 19, 1996. The other participants of PEP 38328 are Boral
Limited (37.5%) and Trans-Orient Petroleum Ltd. (22.5%).
The Company and the other participants have completed the work program
required for the first four years that included drilling the Kereru-1
exploration well. PEP 38328 requires the participants to complete the
remaining work program that includes committing by June 19, 2000 to
drill one exploration well prior to June 19, 2001, or surrender the
permit.
At December 31, 1999, PEP 38328 is in good standing with respect to its
work commitments and does not require the Company to incur minimum
exploration expenditures for the 2000 fiscal year.
Refer to Note 8
d) PEP 38330
The Company has a 34% participating interest in, and is the operator
of, Petroleum Exploration Permit 38330 ("PEP 38330") which was granted
on July 1, 1996. The other participants of PEP 38330 are Norwest
Energy N.L. (33%) and Mosaic Oil N.L. (33%).
The Company and the other participants have completed the work program
required for the first three years. PEP 38330 requires the
participants to complete the remaining work program that includes
acquiring, processing and interpreting 25 kilometers of seismic data
and committing prior to July 1, 2000 to drill an exploration well by
July 1, 2001, or surrender the permit.
At December 31, 1999, PEP 38330 is in good standing with respect to its
work commitments and does not require the Company to incur minimum
exploration expenditures for the 2000 fiscal year.
Refer to Note 15
F-13
68
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
e) PEP 38332
The Company has a 42.5% participating interest in, and is the operator
of, Petroleum Exploration Permit 38332 ("PEP 38332") which was granted
on June 24, 1997. The other participants of PEP 38332 are Boral
Limited (37.5%) and Trans-Orient Petroleum Ltd. (20%).
The Company and the other participants have completed the work program
required for the first two and a half years. PEP 38332 requires the
participants to complete the remaining work program that includes
drilling one exploration well prior to June 24, 2000.
At December 31, 1999, PEP 38332 is in good standing with respect to its
work commitments. The Company's share of work commitments for the 2000
fiscal year requires an estimated $268,000 of exploration expenditures
to be incurred.
Refer to Note 8
f) PEP 38335
The Company has a 10% participating interest in Petroleum Exploration
Permit 38335 ("PEP 38335") which was granted on November 29, 1998. The
other participants of PEP 38335 are Westech Energy Corporation (70%),
as the operator, Trans-Orient Petroleum Ltd. (15%) and Everest Energy
Inc. (5%).
The Company and the other participants are required to complete the
work program originally due by November 29, 1999 and extended to March
31, 2000 that includes acquiring, processing and interpreting 20
kilometers of seismic data or equivalent 3D seismic data.
Additionally, PEP 38335 requires the participants to complete the
remaining work program that includes the following:
i) prior to November 29, 2000, drill one exploration well and either
commit to complete the next stage of the work program detailed below in
ii) or surrender the permit; and
iii) prior to November 29, 2001, evaluate the results of the
exploration well drilled during the second year and either commit to a
satisfactory work program for the remainder of the permit term or
surrender the permit.
At December 31, 1999, PEP 38335 is in good standing with respect to its
work commitments. The Company's share of work commitments for the 2000
fiscal year requires an estimated $122,000 of exploration expenditures
to be incurred.
Refer to Note 8
F-14
69
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
g) PEP 38339
The Company has a 50% participating interest in, and is the operator
of, Petroleum Exploration Permit 38339 ("PEP 38339") which was granted
on November 26, 1998. The other participant of PEP 38339 is Trans-
Orient Petroleum Ltd. (50%).
The Company and the other participant have completed the work program
required to February 26, 2000. PEP 38339 requires the participants to
complete the remaining work program that includes the following:
i) prior to November 26, 2000, acquire, process and interpret a
minimum of 20 kilometers of onshore and 50 kilometers of
offshore seismic data, and either commit to complete the next
stage of the work program detailed below in (ii) or surrender
the permit;
ii) prior to May 26, 2001, acquire, process and interpret
additional seismic data and either commit to complete the
next stage of the work program detailed below in (iii) or
surrender the permit; and
iii) prior to November 26, 2001, drill one onshore or offshore
exploration well and either commit to a satisfactory work
program for the remainder of the permit term or surrender the
permit.
At December 31, 1999, PEP 38339 is in good standing with respect to its
work commitments. The Company's share of work commitments for the 2000
fiscal year requires an estimated $42,000 of exploration expenditures
to be incurred.
Refer to Note 8
h) PEP 38716
The Company has a 23.8% participating interest in Petroleum Exploration
Permit 38716 ("PEP 38716") which was granted on January 30, 1996. The
other participants of PEP 38716 are Marabella Enterprises Ltd. (29.6%),
as the operator, Australian Worldwide Exploration N.L. (25%), Antrim
Oil and Gas Limited (7.5%), Swift Energy International Inc. (7.5%) and
Euro-Pacific Energy Pty. Ltd. (6.6%).
In December 1999, Durum Cons. Energy Corp. relinquished its 4%
participating interest in PEP 38716 in favor of the Company for no
consideration.
By an agreement effective July 30, 1998 with Antrim Oil and Gas Limited
("Antrim"), the Company and one other participant agreed to assign a
15% participating interest in PEP 38716 to Antrim for a total amount of
$450,000. The Company received $150,000 for assigning a 5%
participating interest in PEP 38716 to Antrim.
F-15
70
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
The Company and the other participants have completed the work program
required to June 30, 1999 that included drilling the Huinga-1
exploration well. A work program has been submitted for approval for
the remaining term of PEP 38716 which expires on January 30, 2001
unless renewed.
At December 31, 1999, PEP 38716 is in good standing with respect to
its work commitments. The Company's share of work commitments for
the 2000 fiscal year, if approved as submitted, requires an estimated
$20,000 of exploration expenditures to be incurred.
Refer to Note 8
i) PEP 38720
The Company has a 50% participating interest in, and is the operator
of, Petroleum Exploration Permit 38720 ("PEP 38720") which was granted
on September 2, 1996. The other participant of PEP 38720 is Trans-
Orient Petroleum Ltd. (50%).
The Company and the other participant have completed the work program
required for the first three years that included drilling the Clematis-
1 exploration well. A work program has been submitted for approval for
the remaining term of PEP 38720 which expires on September 2, 2001
unless renewed.
At December 31, 1999, PEP 38720 is in good standing with respect to its
work commitments. The Company's share of work commitments for the 2000
fiscal year, if approved as submitted, requires an estimated $60,000 of
exploration expenditures to be incurred.
Refer to Note 8
j) PEP 38723
The Company has a 40% participating interest in, and is the operator
of, Petroleum Exploration Permit 38723 ("PEP 38723") which was granted
on October 30, 1997. The other participants of PEP 38723 are Trans-
Orient Petroleum Ltd. (40%) and Gondwana Energy, Ltd. (20%).
The Company and the other participants have completed the work program
required to March 30, 1999. PEP 38723 requires the participants to
complete the remaining work program that includes acquiring, processing
and interpreting eight kilometers of seismic data and committing by
April 30, 2000 to drill an exploration well by October 30, 2000 or
surrender the permit.
At December 31, 1999, PEP 38723 is in good standing with respect to its
work commitments. The Company's share of work commitments for the 2000
fiscal year requires an estimated $316,000 of exploration expenditures
to be incurred.
Refer to Note 8
71
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
k) PEP 38736 and PPL 38706
The Company has a 100% participating interest in Petroleum Exploration
Permit 38736 ("PEP 38736") which was granted on July 14, 1999. The
Company had a 7.75% participating interest in Petroleum Prospecting
License 38706 ("PPL 38706") with Fletcher Challenge Energy Ltd.
("Fletcher Challenge"), as the operator, holding the remaining 92.25%
participating interest. PPL 38706 required the participants to
complete a work program that included reprocessing 300 kilometers of
seismic data by July 31, 1999 and drilling one exploration well by July
31, 2000. However, Fletcher Challenge relinquished its interest in PPL
38706 and as a result, the Company was permitted to add the acreage of
PPL 38706 as part of PEP 38736 and subject only to the work program
required under PEP 38736. All costs associated with PPL 38706 have
been written off during the 1999 fiscal year.
PEP 38736 requires the Company to complete a work program that includes
the following:
i) prior to January 14, 2002, acquire, process and interpret eight
kilometers of seismic data or equivalent 3D seismic data, reprocess ten
kilometers of seismic data, and either commit to complete the next
stage of the work program detailed below in (ii) or surrender the
permit; and
ii) prior to July 14, 2002, drill one exploration well and either
commit to a satisfactory work program for the remainder of the permit
term or surrender the permit.
At December 31, 1999, PEP 38736 is in good standing with respect to its
work commitments and does not require the Company to incur minimum
exploration expenditures for the 2000 fiscal year.
AUSTRALIA
Unless otherwise indicated, offshore exploration permits granted in
Australia provide for the exclusive right to explore for petroleum for
an initial term of six years, renewable for an unlimited number of
five-year terms over one-half of the remaining area at each renewal.
The participants can apply for extensions or reductions of the
committed work programs for the permits under certain circumstances.
Any production permits granted will be for a term of 21 years from the
date of issue, renewable for a further 21 years. In addition to
general Australian taxation provisions, most offshore permits,
including all of the Company's Australian permits, are subject to
Petroleum Resource Rent Taxation at the rate of 40% on a project's net
income after deduction of allowable project and exploration
expenditures, with undeducted exploration expenditures compounded
forward at the Long-term Bank Rate ("LTBR") plus 15% and project
expenditures at LTBR plus 5%.
F-17
72
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
l) AC/P19
The Company has a 65% participating interest in, and is the operator
of, Ashmore-Cartier Permit 19 ("AC/P19") which was granted on May 30,
1997. The other participant of AC/P19 is Mosaic Oil N.L. (35%).
AC/P19 is subject to a maximum 5% carried interest to the original
participants, convertible to an equivalent participating interest upon
commencement of production through the reimbursement of past costs
payable out of 50% of net production revenue.
The Company and the other participant have completed the work program
required for the first two years. AC/P19 requires the participants to
complete the remaining work program that includes the following:
i) prior to May 30, 2000, acquire, process and interpret 300
kilometers of seismic data;
(ii) prior to May 30, 2001, acquire, process and interpret
additional seismic data;
(iii) prior to May 30, 2002, drill one exploration well; and
(iv) prior to May 30, 2003, reinterpret and evaluate results.
The participants have the right to withdraw from AC/P19 at the end of
each year's work program starting in the third year.
At December 31, 1999, AC/P19 is in good standing with respect to its
work commitments. The Company's share of work commitments for the 2000
fiscal year requires an estimated $108,000 of exploration expenditures
to be incurred.
m) AC/P31
The Company acquired a 65% participating interest in, and is the
operator of, Ashmore-Cartier Permit 31 ("AC/P31") which was granted on
September 12, 1999. The other participant of AC/P31 is Mosaic Oil N.L.
(35%).
AC/P31 requires the participants to complete a work program that
includes the following:
(i) prior to September 12, 2000, conduct geological and
geophysical studies;
(ii) prior to September 12, 2001, reprocess 30 kilometers of
seismic data;
(iii) prior to September 12, 2002, acquire, process and interpret
20 kilometers of seismic data;
(iv) prior to September 12, 2003, acquire, process and interpret
20 kilometers of seismic data;
(v) prior to September 12, 2004, reinterpret and evaluate seismic
data; and
(vi) prior to September 12, 2005, drill one exploration well.
The participants have the right to withdraw from AC/P31 at the end of
each year's work program starting in the third year.
F-18
73
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
At December 31, 1999, AC/P31 is in good standing with respect to its
work commitments. The Company's share of work commitments for the 2000
fiscal year requires an estimated $13,000 of exploration expenditures
to be incurred.
PAPUA NEW GUINEA
Petroleum prospecting licenses granted in Papua New Guinea provide for
the exclusive right to explore for petroleum for an initial term of six
years, renewable for a further five years over one-half of the original
area, and the right to enter into a Petroleum Agreement upon a
discovery. The Petroleum Agreement provides the right to produce any
oil and gas discovered for a period of up to 30 years from discovery,
subject to a maximum 22.5% participating interest that can be acquired
by the Government of Papua New Guinea and a 2% participating interest
that can be acquired by local landowners. The participants can apply
for extensions or reductions of the committed work programs for the
licenses under certain circumstances.
n) PPL 192
The Company has a 40% participating interest in, and is the operator
of, Petroleum Prospecting License No. 192 ("PPL 192") which was granted
on January 28, 1997. The other participants of PPL 192 are Trans-
Orient Petroleum Ltd. (20%), Durum Cons. Energy Corp. (20%) and Mosaic
Oil N.L. (20%).
The Company and the other participants have completed the work program
required for the first three years. PPL 192 requires the participants
to complete the remaining work program that includes the following:
i) prior to January 28, 2001, drill one exploration well. In
addition, the participants must commit to a minimum work
program prior to November 28, 2000 for the fifth and sixth
years, or surrender the permit;
ii) prior to January 28, 2002, acquire, process and interpret 400
kilometers of seismic data or equivalent 3D seismic data; and
iii) prior to January 28, 2003, drill a second exploration well.
At December 31, 1999, PPL 192 is in good standing with respect to its
work commitments. The Company's share of work commitments for the 2000
fiscal year requires an estimated $2,045,000 of exploration
expenditures to be incurred.
Refer to Note 8
o) PPL 215
The Company acquired a 40% participating interest in, and is the
operator of, Petroleum Prospecting License No. 215 ("PPL 215") which
was granted on May 6, 1999. The other participants of PPL 215 are
Trans-Orient Petroleum Ltd. (40%) and Mosaic Oil N.L. (20%).
F-19
74
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 7 - OIL AND GAS PROPERTIES (continued)
PPL 215 requires the participants to complete a work program that includes the
following:
i) prior to May 7, 2001, reprocess 200 kilometers of seismic data. In
addition, the participants must commit to a minimum work program prior to
March 7, 2001 for the third and fourth years, or surrender the permit;
ii) prior to May 7, 2003, acquire, process and interpret 100 kilometers of
seismic data. In addition, the participants must commit to a minimum work
program prior to March 7, 2003 for the fifth and sixth years, or surrender
the permit; and
iii) prior to May 7, 2005, drill one exploration well.
At December 31, 1999, PPL 215 is in good standing with respect to its work
commitments. The Company's share of work commitments for the 2000 fiscal year
requires an estimated $35,000 of exploration expenditures to be incurred.
Refer to Note 8
PEOPLE'S REPUBLIC OF CHINA
p) Nanling-Wuwei Blocks
By a Joint Study Agreement dated March 18, 1996 with China National Oil and Gas
Exploration and Development Corp. ("CNODC"), the Company acquired a 50%
participating interest to study the Nanling and Wuwei Blocks ("the Blocks").
The other participant in the Blocks was Moondance Energy Limited (50%).
The Company had an exclusive right to obtain partners to enter into a
Production Sharing Contract which expired in July 1999. Accordingly, the
Company has written off the Blocks in its entirety.
NOTE 8 - RELATED PARTY TRANSACTIONS
a) Prepaid Expenses
The Company prepaid $41,571 relating to general and administative expenses to
DLJ Management Corp., a wholly-owned subsidiary of a company having directors,
officers and/or principal shareholders in common with the Company.
b) Loan Receivable from Related Party
The Company is owed $1,062,211 (December 31, 1998: Nil) by Trans-Orient
Petroleum Ltd., a company having directors, officers and/or principal
shareholders in common with the Company.
Refer to Note 3
c) Marketable Securities and Investments
Marketable securities and investments consist entirely of common shares of
companies having directors, officers and/or principal shareholders in common
with the Company. These companies are Trans-Orient Petroleum Ltd., AMG Oil
Ltd. and Gondwana Energy, Ltd.
Refer to Notes 4 and 5
F-20
75
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 8 - RELATED PARTY TRANSACTIONS
d) Due from Related Parties
At December 31, 1999, the Company is owed $62,667 (December 31, 1998:
$46,161) by certain public companies with directors, officers and/or
principal shareholders in common with the Company. This amount is non-
interest bearing and has no fixed terms for repayment.
e) Oil and Gas Properties
Certain participants of oil and gas properties have directors, officers
and/or principal shareholders in common with the Company. These
participants are Trans-Orient Petroleum Ltd., AMG Oil Ltd., Durum Cons.
Energy Corp. and Gondwana Energy, Ltd.
Refer to Note 7
f) Other
During the 1999 fiscal year, the Company incurred $60,899 (1998 fiscal
year - $57,123, 1997 fiscal year - $132,214) in consulting fees and
$27,177 (1998 fiscal year - $19,480, 1997 fiscal year - Nil) in rent to
the President of the Company.
During the 1997 fiscal year, the Company paid $12,820 to a private
company owned by a former director of the Company pursuant to a
consulting agreement cancelled during the same year.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
a) Work Commitments
The Company participates in oil and gas exploration and development
activities as a joint venturer with third and related parties and is
contractually committed under agreements to complete certain
exploration programs.
The Company's management estimates that the total commitments under
various agreements is approximately $3,484,000 of which a related party
participant has farmed into PEP 38256 to contribute approximately
$455,000.
b) Political Risks
Papua New Guinea is subject to political uncertainty and instability
and the Company faces a number of risks and uncertainties which may
adversely impact on its ability to pursue its exploration and
development activities.
F-21
76
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)
c) Environmental Laws and Regulations
The Company is not aware of any events of noncompliance in its
operations with any environmental laws or regulations nor of any
potentially material contingencies related to environmental issues.
However, the Company cannot predict whether any new or amended
environmental laws or regulations introduced in the future will have a
material adverse effect on the future business of the Company.
NOTE 10 - COMMON STOCK
a) Authorized and Issued Share Capital
The authorized share capital of the Company is 100,000,000 shares of
common stock without par value. At December 31, 1999 and 1998, there
were 28,262,398 shares of common stock issued and outstanding.
b) Incentive Stock Options
The Company applies Accounting Principles Board Opinion No. 25:
Accounting for Stock Issued to Employees ("APB 25") to account for all
stock options granted. Further, Statement of Financial Accounting
Standards No. 123: Accounting for Stock-Based Compensation ("SFAS 123")
requires additional disclosure to reflect the results of the Company
had it elected to follow SFAS 123. SFAS 123 requires a fair value
based method of accounting for stock options using the Black-Scholes
option pricing model. This model was developed for use in estimating
the fair value of traded options and require the input of and are
highly sensitive to subjective assumptions including the expected stock
price volatility. Stock options granted by the Company have
characteristics significantly different from those of traded options.
In the opinion of management, the existing model does not provide a
reliable single measure of the fair value of stock options granted by
the Company.
In accordance with SFAS 123, the following is a summary of the changes
in the Company's stock options for the 1999, 1998 and 1997 fiscal
years:
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
Fixed options of Shares Price of Shares Price of Shares Price
Balance at
beginning
of year 1,066,000 $ 2.51 2,098,000 $ 2.50 1,949,000 $ 4.05
Granted - - - - 570,000 2.52
Exercised - - - - (279,000) 2.34
Expired/cancelled (66,000) 2.64 (1,032,000) 2.50 (142,000) 0.60
--------- ------ ---------- ------ --------- ------
Outstanding and
exercisable at
end of year 1,000,000 $ 2.50 1,066,000 $ 2.51 2,098,000 $ 2.50
========= ====== ========== ====== ========= ======
Weighted-average fair
value of options granted
during the year $ - $ - $ 1.16
====== ====== ======
77
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 10 - COMMON STOCK (continued)
There were no stock options granted during the 1999 and 1998 fiscal
years thus no weighted-average fair values have been assigned. For the
1997 fiscal year, the weighted-average fair value for stock options
granted was estimated at the date of grant or amendment using a Black-
Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.23%; volatility factors of
the expected market price of the Company's common stock of 0.66; option
lives of 1.64 years; and no expected dividends. A stock option grant
during the 1997 fiscal year to purchase 500,000 shares at a price of
$2.50 per share has been excluded from the fair value calculations as
this stock option was cancelled without exercise subsequent to the
year.
The following is a summary of the Company's net loss and basic and
diluted loss per share as reported and pro forma as if the fair value
based method of accounting defined in SFAS 123 had been applied for the
1999, 1998, and 1997 fiscal years:
1999 1998 1997
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
Net loss
for the
year $(1,173,133) $(1,090,738) $(879,688) $(1,008,688) $(738,377) $(1,346,697)
----------- ----------- --------- ----------- --------- -----------
Basic and
diluted
loss per
share $ (0.04) $ (0.04) $ (0.03) $ (0.04) $ (0.03) $ (0.05)
=========== =========== ========= =========== ========= ===========
The following stock options are outstanding at December 31, 1999:
Number Price Expiry
of Shares per Share Date
300,000 $2.50 May 13, 2000
700,000 $2.50 October 30, 2000
---------
1,000,000
=========
During the 1999 fiscal year, previously granted stock options to
purchase 50,000 shares at a price of $2.50 per share, 6,000 shares at
a price of $3.00 per share and 10,000 shares at a price of $3.125 per
share expired without exercise. No stock options were granted or
amended by the Company during the 1999 fiscal year.
During the 1998 fiscal year, previously granted stock options to
purchase 832,000 shares exercisable at a price of $2.50 per share until
May 13, 1998 were amended to 300,000 shares exercisable at a price of
$2.50 per share until May 13, 2000 and previously granted stock options
to purchase 700,000 shares exercisable at a price of $2.50 per share
until October 30, 1998 were extended to October 30, 2000.
Additionally, previously granted stock options to purchase 500,000
shares exercisable at a price of $2.50 per share until March 25, 1999
were cancelled. No stock options were granted by the Company during
the 1998 fiscal year.
78
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 10 - COMMON STOCK (continued)
c) Share Purchase Warrants
The following share purchase warrants to purchase shares of the Company
are outstanding at December 31, 1999:
Number Price Expiry
of Shares per Share Date
950,000 $0.90 May 27, 2000
1,000,000 $0.90 July 3, 2000
---------
1,950,000
=========
During the 1999 fiscal year, previously issued share purchase warrants
to purchase 950,000 shares exercisable at a price of Cdn$3.485 per
share until May 27, 1999 were amended to 950,000 shares exercisable at
a price of $0.90 per share until May 27, 2000. Additionally,
previously issued share purchase warrants to purchase 1,000,000 shares
exercisable at a price of $2.00 per share until July 3, 1999 and
thereafter at a price of $2.10 per share until July 3, 2000 were
amended to 1,000,000 shares exercisable at a price of $0.90 per share
until July 3, 2000.
During the 1998 fiscal year, share purchase warrants to purchase
950,000 shares exercisable at a price of Cdn$3.485 per share until
May 27, 1998 were extended to May 27, 1999.
d) Escrow Shares
During the 1998 fiscal year, 1,406,250 shares at a price of Cdn$0.00333
per share, subject to escrow restrictions, were cancelled. To replace
these cancelled escrow shares, 1,406,250 shares at a price of Cdn$0.01
per share were issued by private placements.
NOTE 11 - LOSS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted loss per share calculations for the 1999, 1998
and 1997 fiscal years:
1999 1998 1997
Numerator, net loss
for the year $ (1,173,133) $ (879,688) $ (738,377)
------------ ----------- ------------
Denominator:
Weighted-average
number of shares 28,262,398 27,861,713 26,176,186
------------ ----------- ------------
Basic and diluted
loss per share $ (0.04) $ (0.03) $ (0.03)
============ =========== ============
F-24
79
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 11 - LOSS PER SHARE (continued)
Due to net losses incurred for the 1999, 1998 and 1997 fiscal years,
stock options and share purchase warrants outstanding were not
included in the computation of diluted loss per share as the
inclusion of such securities would be antidilutive.
NOTE 12 - INCOME TAXES
There are no income taxes payable for the 1999 and 1998 fiscal years.
At December 31, 1999, the Company has approximately CDN$1.62 million
(December 31, 1998 - CDN$1.59 million) of resource and other unused tax
pools to offset future taxable income derived in Canada. Additionally,
the Company has non-capital losses of approximately CDN$1.28 million
(December 31, 1998 - CDN$1.13 million) available for future deductions
from taxable income derived in Canada, which expire as follows:
2000 CDN$ 10,071
2001 52,731
2002 251,664
2003 662,559
2004 -
2005 153,875
2006 153,478
-----------
CDN$ 1,284,378
===========
The Company also has losses and deductions of approximately NZ$9.79
million (December 31, 1998: NZ$6.39 million) available to offset future
taxable income derived in New Zealand, Australia and Papua New Guinea.
The benefits of these excess resource tax pools and non-capital loss
carryforwards have been offset by a valuation allowance of the same
amount.
NOTE 13 - COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
current year's presentation.
F-25
80
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 14 - UNCERTAINTY DUE TO THE YEAR 2000
The year 2000 issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as the year 1900 or some other date, resulting
in errors when information is processed using year 2000 dates. In
addition, similar problems may arise in some systems which use certain
year 1999 dates to represent something other than a date. Although the
change in date has occurred, it is not possible to conclude that all
aspects of the year 2000 issue affecting the Company, including those
related to the efforts of suppliers and other third parties, have been
fully resolved.
NOTE 15 - SUBSEQUENT EVENTS
a) PEP 38256
The participants of PEP 38256 have committed to drill one exploration
well prior to August 25, 2000.
By an amended agreement dated February 23, 2000 between AMG Oil Ltd.
("AMG"), Trans-Orient Petroleum Ltd. and the Company, AMG will fund the
acquisition of additional seismic data in return for an extension of
AMG's right to earn up to an additional 50% participating interest in
PEP 38256 to June 15, 2000. Additionally, AMG's right to increase its
participating interest in PEP 38256 has been amended as follows:
i) earn an additional 50% participating interest in PEP 38256 by
funding all of the costs of drilling two exploration wells
including any further seismic data required prior to drilling; or
ii) earn an additional 35% participating interest in PEP 38256 by
funding all of the costs of drilling one exploration well
including any further seismic data required prior to drilling and,
at the option of AMG upon completion of the first exploration
well, earn a further 15% participating interest in PEP 38256 by
funding all of the costs of drilling a second exploration well
including any further seismic data required prior to drilling.
b) PEP 38330
By a farmout agreement dated January 20, 2000, the participants of PEP
38330 assigned a 17.5% participating interest in PEP 38330 to Boral
Limited ("Boral") in return for funding by Boral of certain survey
costs up to NZ$385,000. The other participants of PEP 38330 are
Norwest Energy N.L. (27.225%), Mosaic Oil N.L. (27.225%) and the
Company (28.05%).
F-26
81
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 15 - SUBSEQUENT EVENTS
c) Purchase of Oil and Gas Properties
By a letter of intent dated January 30, 2000 and under an effective date of
January 1, 2000 between Trans-Orient Petroleum Ltd. ("Trans-Orient") and the
Company, the Company agreed to acquire all of Trans-Orient's onshore and
offshore oil and gas interests located in New Zealand, Australia and Papua
New Guinea at a purchase price of $4,097,360, representing an aggregate 20%
premium of the total book value of the interests. At the request of the boards
of directors of both Trans-Orient and the Company, an independent party
reviewed the proposed transaction and determined that the transaction was fair
to both companies. As part of the transaction, the loan receivable from Trans-
Orient to the Company will be offset against the purchase price.
The Company will issue 4,184,224 units of the Company to Trans-Orient at a
deemed value of $0.50 per unit for a total value of $2,092,112. Each unit
consists of one common share of the Company, one Series A warrant and one
Series B warrant. Each Series A warrant is exercisable to purchase one common
share at a price of $0.50 during the first year and thereafter at a price of
$0.75 during the second year. Each Series B warrant will, upon a commercial
discovery on any one of the oil and gas interests in the transaction, replace
each Series A warrant exercised and is exercisable to purchase one common
share at a price of $1.50 until expiry during the first two years.
Additionally, the Company will provide Trans-Orient with anti-dilution
protection for a period of our year from the closing date if the aggregate
amount raised is greater than $500,000 and the average price is less than
$0.50 per share or unit.
The Company will provide Trans-Orient additional consideration for the
transaction, as follows:
i) 1,800,000 common shares of AMG Oil Ltd. ("AMG Oil") acquired
at a cost of $650,000 and valued at $720,000 for the
transaction, including the option to purchase a further
200,000 shares of AMG Oil at a price of $0.50 per share
expiring on December 31, 2000;
ii) 600,000 shares of Gondwana Energy, Ltd. acquired at a cost of
and valued at $20,000 for the transaction;
iii) 517,020 shares of Trans-Orient Petroleum Ltd. acquired at a
cost of $383,075 and valued at $222,319 for the transaction;
and
iv) gross overriding royalties, valued at $1 for the transaction,
on all oil and gas interests purchased from Trans-Orient
ranging from 1% to 5%.
This transaction is subject to approval by the shareholders of Trans-
Orient and upon closing, will be subject to certain exchange gains or
losses.
F-27
82
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 16 - DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with United
States generally accepted accounting principles ("U.S. GAAP") which
conform in all material respects with Canadian generally accepted
accounting principles ("Canadian GAAP") except for the following
differences:
CONSOLIDATED BALANCE SHEETS
a) Assets
i) Marketable Securities
Under U.S. GAAP, the Company's marketable equity securities are
classified as available-for-sale securities and reported at market
value, with unrealized gains and losses included as a component of
comprehensive income. Under Canadian GAAP, the Company's marketable
equity securities are valued at the lower of cost or market value.
December 31, December 31,
1999 1998
Marketable securities under U.S. GAAP $ 222,319 $ 694,875
Adjustment required under Canadian GAAP 311,800 (224,233)
Cumulative historical adjustments
required under Canadian GAAP (311,800) (87,567)
---------- ----------
Marketable securities
under Canadian GAAP $ 222,319 $ 383,075
========== ==========
Total current assets under Canadian GAAP as at December 31, 1999 and
1998 are $6,408,980 and $8,735,314, respectively.
ii) Investments
Under U.S. GAAP, the Company's long-term investments are classified as
available-for-sale securities and reported at market value, with
unrealized gains and losses included as a component of comprehensive
income. Under Canadian GAAP, the Company's long-term investments are
valued at the lower of cost or market value.
F-28
83
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 16 - DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (continued)
December 31, December 31,
1999 1998
Investments under U.S. GAAP $ 740,000 $ 1,500,000
Adjustment required under
Canadian GAAP 1,180,000 (1,250,000)
Cumulative historical adjustments
required under Canadian GAAP (1,250,000) -
----------- ------------
Investments under Canadian GAAP $ 670,000 $ 250,000
=========== ============
Total assets under Canadian GAAP as at December 31, 1999 and 1998 are
$10,879,165 and $11,939,336, respectively.
b) Stockholders' Equity
i) Common Stock
Under U.S. GAAP, compensation cost must be considered for all stock
options granted requiring the Company to utilize both the intrinsic
value-based and the fair value based methods of accounting and
reporting stock-based compensation. Under Canadian GAAP, no such cost
is recognized.
December 31, December 31,
1999 1998
Common stock under U.S. GAAP $ 18,245,867 $ 18,253,992
Adjustment required under Canadian GAAP 8,125 129,000
Cumulative historical adjustments
required under Canadian GAAP (867,739) (996,739)
------------ ------------
Common stock under Canadian GAAP $ 17,386,253 $ 17,386,253
============ ============
ii) Accumulated Deficit
The effects of Note 16(b)(i) on accumulated deficit are as follows:
December 31, December 31,
1999 1998
Accumulated deficit under U.S. GAAP $ (7,644,685) $ (6,471,552)
Adjustment required under Canadian GAAP (8,125) (129,000)
Cumulative historical adjustments
required under Canadian GAAP 867,739 996,739
------------ ------------
Accumulated deficit under Canadian GAAP $ (6,785,071) $ (5,603,813)
============ ============
F-29
84
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 16 - DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (continued)
iii) Cumulative Comprehensive Adjustment
Under U.S. GAAP, the components of other comprehensive income (loss)
are required to be reported as part of the basic financial statements.
Under Canadian GAAP, no such requirement exists.
The effects of Note 16(a) on cumulative comprehensive adjustment are as
follows:
December 31, December 31,
1999 1998
Cumulative comprehensive adjustment
under U.S. GAAP $ 70,000 $ 1,561,800
Adjustments required under
Canadian GAAP 1,491,800 (1,474,233)
Cumulative historical adjustments
required under Canadian GAAP (1,561,800) (87,567)
----------- ------------
Cumulative comprehensive adjustment
under Canadian GAAP $ - $ -
=========== ============
As a result of these adjustments under Canadian GAAP, total
stockholders' equity as at December 31, 1999 and 1998 are $10,601,182
and $11,782,440, respectively.
CONSOLIDATED STATEMENTS OF OPERATIONS
c) Net Loss for the Year
The following are the effects of Note 16 (b) on net loss for the 1999,
1998 and 1997 fiscal years:
1999 1998 1997
Net loss for the year
under U.S. GAAP $ (1,173,133) $ (879,688) $ (738,377)
Compensation expense
(recovery), net (8,125) (129,000) 286,080
------------ ------------ ----------
Net loss for the year
under Canadian GAAP $ (1,181,258) $ (1,008,688) $ (452,297)
============ ============ ==========
d) Loss per Share
Under U.S. GAAP, shares held in escrow are excluded from the
calculation of the weighted-average number of shares outstanding until
such shares are released for trading. Under Canadian GAAP, shares held
in escrow are included in the calculation of loss per share.
F-30
85
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 16 - DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (continued)
The following is a reconciliation of the numerators and denominators of
the basic and diluted loss per share calculations for the 1999, 1998
and 1997 fiscal years:
1999 1998 1997
Numerator, net loss
for the year
under Canadian GAAP $ (1,181,258) $ (1,008,688) $ (452,297)
------------ ------------ ------------
Denominator:
Weighted-average number
of hares under U.S.GAAP 28,262,398 27,861,713 26,176,186
Adjustment required
under Canadian GAAP - 400,685 1,406,250
------------ ------------ ------------
Weighted-average
number of shares
under Canadian GAAP 28,262,398 28,262,398 27,582,436
------------ ------------ ------------
Basic and diluted
loss per share
under Canadian GAAP $ (0.04) $ (0.04) $ (0.02)
============ ============ ============
Due to net losses incurred for the 1999, 1998 and 1997 fiscal years,
stock options and share purchase warrants outstanding were not included
in the computation of diluted loss per share as the inclusion of such
securities would be antidilutive.
CONSOLIDATED STATEMENTS OF CASH FLOWS
e) Operating Activities
The following are the effects of the adjustments required to reconcile
from U.S. to Canadian GAAP for the 1999, 1998 and 1997 fiscal years:
1999 1998 1997
Net loss for the year
under Canadian GAAP $ (1,181,258) $ (1,008,688) $ (452,297)
Compensation expense
(recovery), net - - -
Other components of
operating activities which
are similar under U.S. and
Canadian GAAP 1,338,060 1,164,137 76,939
------------ ------------ ----------
Net cash provided by
(used in) operating
activities under
Canadian GAAP $ 156,802 $ 155,449 $ (375,358)
============ ============ ==========
86
INDO-PACIFIC ENERGY LTD.
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Years Ended December 31, 1999 and 1998
NOTE 16 - DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (continued)
CONSOLIDATED SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES
f) General and Administrative Expenses
The following are the effects of Note 16(b) on general and
administrative expenses for the 1999, 1998 and 1997 fiscal years:
1999 1998 1997
General and administrative
expenses under U.S.GAAP $ 517,671 $ 563,480 $ 1,247,569
Compensation expense
(recovery), net 8,125 129,000 (286,080)
--------- --------- -----------
General and administrative
expenses under Canadian
GAAP $ 525,796 $ 692,480 $ 961,489
========= ========= ===========
F-32
87
INDO-PACIFIC ENERGY LTD.
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(EXPRESSED IN UNITED STATES DOLLARS)
AS AT DECEMBER 31, 1999
(Unaudited - Prepared by Management)
PROVED PETROLEUM AND NATURAL GAS RESERVE QUANTITIES
12/31/99 12/31/98 12/31/97 12/31/96
PETROLEUM RESERVES
Proved developed reserves,
end of period
Oil (barrels) 70,400 90,000 110,500 70,000
Gas (billion cubic feet) 0.03 0.13 0.17 0.17
Proved reserves,
end of period
Oil (barrels) 70,400 90,000 110,500 145,000
Gas (billion cubic feet) 0.03 0.13 0.17 0.40
All petroleum and natural gas reserves are located in New Zealand.
Petroleum and natural gas reserves cannot be measured exactly. Reserve
estimates are based on many factors related to reservoir performance which
require evaluation by engineers interpreting available date, as well as
price, costs and other economic factors. The reliability of these estimates
at any point in time depends on both the quantity of the technical and
economic data, the production performance of the reservoirs as well as
extensive engineering judgement. Consequently, reserve estimates are
subject to revision as additional data becomes available during the
producing life of a reservoir. When a commercial reservoir is discovered,
proved reserves are initially determined based on only limited data from
the first well or wells. Further drilling may better define the extent of
the reservoir and additional production performance, well tests and
engineering studies will likely improve the reliability of the estimate.
Proved developed reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Proved
reserves are reserves which geological and engineerying data demonstrate with
reasonable certainty to be recoverable in future years from known reserves
under existing economic and operating conditions. Reserves are considered
proved if economic producibility is supported by either production or
conclusive formation tests.
SF-1
88
INDO-PACIFIC ENERGY LTD.
SUPPLEMENTARY INFOMRATION ON OIL AND GAS PRODUCING ACTIVITIES
(EXPRESSED IN UNITED STATES DOLLARS)
AS AT DECEMBER 31, 1999
(Unaudited - Prepared by Management)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED OIL AND GAS RESERVES
12/31/99 12/31/98 12/31/97 12/31/96
Future cash inflows $ 1,645,840 $ 1,222,000 $ 1,493,878 $ 850,040
Future production and
development costs to
abandonment at
December 31, 2006 572,996 644,500 639,322 314,576
Future income taxes - - - -
----------- ----------- ----------- ---------
1,072,844 577,500 854,556 535,464
Discount at 10% annual
rate for estimated
timing of cash flows 202,174 117,000 169,983 54,025
----------- ----------- ----------- ---------
$ 870,670 $ 460,500 $ 684,573 $ 481,439
=========== =========== =========== =========
Undiscounted future net cash flows from proved producing oil and natural
gas reserves is largely based on information provided by in-house reserve
calculations. A discount factor of 10% was applied to estimated future
cash flows to compute the estimated present value of proved oil and natural
gas reserves. This valuation procedure does not necessarily result in an
estimate of the fair market value of the Company's oil and natural gas
properties.
There has been no provision for income taxes, as the Company has resource
and other usused tax pools to offset future taxable income.
The only change in the standardized measure of future cash flows from
production has been due to the purchase of Ngatoro Energy Limited (formerly
Minora Energy (New Zealand) Limited), a company whose sole asset was a 5%
interest in the producing Ngatoro oil field. This is the only interest the
Company holds in a proven oil property. The standarized measure calculation
for the property, at December 31, 1999, was $870,670, as compared to the Net
Book Value of $374,417.
SF-2
89
INDO-PACIFIC ENERGY LTD.
RESULTS OF OPERATION FOR PRODUCING ACTIVITIES
(EXPRESSED IN UNITED STATES DOLLARS)
FOR THE YEAR ENDED DECEMBER 31, 1999
(Unaudited - Prepared by Management)
Total New Zealand
REVENUES
Petroleum and natural gas $ 314,698 $ 314,698
----------- ----------
Amortization and depletion 104,475 104,475
Production costs 50,598 50,598
Royalties 15,248 15,248
Write-down of petroleum properties 983,168 650,703
----------- ----------
1,153,489 821,024
----------- ----------
RESULTS OF OPERATIONS FROM
PRODUCING ACTIVITIES
(excluding corporate overhead
and interest costs) $ (838,791) $ (506,326)
============ ==========
SF-3
90
ITEM 9.
There have been no disagreements on accounting and financial
disclosures during the last three fiscal years to the date of this
annual report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The names, municipality of residence, age and position held of the
directors and officers of the Registrant are as follows:
Name Age Position Held
Dr. David Bennett[1] 54 President, Chief Executive Officer and
Director
Ronald Bertuzzi[1][2] 63 Director
Alex P. Guidi[3] 41 Chairman of the Board and Director
Brad J. Holland[1] 43 Director
Mark Katsumata 34 Secretary
[1] Member of audit committee.
[2] Appointed on March 31, 1998.
[3] Subsequent to the year end, Mr. Guidi has stepped down as Chairman
of the Registrant. David R. McDonald has joined the Board of
Directors and has assumed the position of Chairman.
Dr. David Bennett has been a member of the board of directors and an
officer since October, 1996. Dr. Bennett received a Bachelor of Arts
(Natural Sciences) from Cambridge University in 1968 and a Master of
Science in Exploration Geophysics from the University of Leeds in 1969.
In 1973, Dr. Bennett received his doctorate in Geophysics from the
Australian National University and from 1973 to 1975 conducted post-
doctoral research at the University of Texas (Dallas). From 1975 to
1977, Dr. Bennett was a post-doctoral fellow and lecturer at the
University of Wellington, New Zealand. From 1977 to 1982, Dr. Bennett
was employed by the Department of Scientific and Industrial Research,
Government of New Zealand and from 1982 to 1994 was employed as
geophysicist, exploration manager and finally general manager by New
Zealand Oil and Gas Ltd. Dr. Bennett was an independent consultant from
1994 to 1996 when he joined the Registrant and other associated
companies. Dr. Bennett has been the president and a member of the board
directors of the Registrant since October, 1996. Since November, 1996,
Dr. Bennett has been a member of the board of directors, and since
April, 1997 the president, of Trans-Orient Petroleum Ltd., since April,
1997 a member of the board of directors of Durum Cons. Energy Corp. and
since June 25, 1998 a member of the board of directors of AMG Oil Ltd.
91
Mr. Bertuzzi was a member of the board of directors from October 2,
1992 to October 30, 1996 and was appointed on March 31, 1998 to fill
the vacancy resulting from the passing of Mr. John Holland. Mr.
Bertuzzi received a Bachelor of Arts from the University of British
Columbia in 1965 and has worked in the medical sales and product
development industries since that time. Mr. Bertuzzi is a member of the
board of directors of several companies, including AMG Oil Ltd., of
which he is president, and Gondwana Energy, Ltd., of which he is a
member of the Board of Directors.
Mr. Alex Guidi has been a member of the board of directors and an
officer since October 1996. Mr. Guidi has been involved in public
markets since 1985 and since 1989 in the oil and gas sector. Mr. Guidi
has organized and financed several oil and gas companies. Mr. Guidi has
been chairman of the board and a member of the board of directors of
the Registrant since October, 1996. From July, 1988 to December, 1995,
Mr. Guidi was a member of the board of directors of Trans-Orient
Petroleum Ltd. and was elected a member of the board of directors on
January 28, 1998 and chairman on April 22, 1998. From December, 1990 to
May, 1996, Mr. Guidi was a member of the board of directors of Durum
Cons. Energy Corp. and was president from August, 1992 to May, 1996.
From August 6, 1997 Mr. Guidi has been a member of the board of
directors of AMG Oil Ltd.
Mr. Brad Holland was a member of the board of directors from May 1996
to February 1997, an officer from February 1997 to October 15, 1997 and
was appointed a member of the board on October 15, 1997. Mr. Holland
received a Bachelor of Science in Chemical Engineering from the
University of Alberta in 1979. Mr. Holland was initially employed for
two years by John Holland Consultants Ltd. in property valuation,
production management, evaluation and financing for production
acquisition. From 1982 to 1988, Mr. Holland was employed by Canadian
Western Natural Gas, a natural gas utility. From 1988 to 1992, Mr.
Holland was employed as a senior project engineer with Nova Corp. where
he was responsible for the design and construction of large diameter
pipeline projects. Since 1992, Mr. Holland has been employed by
ARAMCOin Saudi Arabia in the construction of pipelines.
Mr. Mark Katsumata was a director and officer from December, 1994 to
November, 1995 and an officer from November, 1995 to February, 1997.
Mr. Katsumata was appointed Secretary on October 15, 1997. Mr.
Katsumata is a certified general accountant who was in public practice
from 1990 to 1994 in Vancouver, B.C. In 1994 Mr. Katsumata joined the
Registrant. Mr. Katsumata is also the secretary of Trans-Orient
Petroleum Ltd., Durum Cons. Energy Corp., AMG Oil Ltd. and Gondwana
Energy, Ltd. Mr. Katsumata is also the Corporate Secretary and Chief
Financial Officer of Verida Internet Corp.
All directors have a term of office expiring at the next annual general
meeting of the Registrant to be scheduled in June 2000 unless
re-elected or unless a director's office is earlier vacated in
accordance with the by-laws of the Registrant or the provisions of the
Business Corporations Act (Yukon). All officers have a term of office
lasting until their removal or replacement by the board of directors.
92
Indemnification of Directors and Officers
Except with respect to an action by the Registrant to obtain a
judgment, the constating documents of the Registrant provide for the
indemnification of any director, officer, employee or agent of the
Registrant if the person acted honestly and in good faith with a view
to the best interests of the Registrant and, with respect to any
criminal action or administrative proceeding, had reasonable grounds to
believe that his action was lawful. The Registrant has not, however,
entered into any agreement with a director and officer providing for
the grant of a covenant of indemnity by the Registrant pursuant to this
provision in the constating documents of the Registrant.
With respect to an action to obtain a judgment, the Registrant is
required under the Business Corporations Act (Yukon) before performing
its obligation to indemnify to obtain the approval of the Supreme Court
(Yukon) of the indemnity and any payment to be made in connection with
the indemnity.
To date, no agreements to contractually provide indemnities have been
executed and delivered.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities and Exchange Act of 1934 requires
officers, directors and persons who own more than ten percent of a
registered class of a company's equity securities to file initial
reports of beneficial ownership and to report changes in ownership of
those securities with the Securities and Exchange Commission. They are
also required to furnish the Company with copies of all Section 16(a)
forms they file. To the Company's knowledge, based solely on review of
the copies of Forms 3, 4 and 5 furnished to the Company or written
representations that no other transactions were required, the Company
has determined that the pertinent officers, directors and principal
shareholders have complied with all applicable Section 16(a)
requirements during fiscal 1998.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the period indicated:
93
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities All
Annual Restricted Under Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) (#) (#) ($) ($)
David Bennett 1999 0 0 60,899 0 0 0 0
[2][3]
President, 1998 0 0 57,123 560,936[1] 0 0 0
CEO & Director 1997 0 0 132,214 0 200,000 0 0
Ronald Bertuzzi 1999 0 0 0 0 0 0 0
Director 1998 0 0 0 0 0 0 0
1997 0 0 0 0 0 0 0
Alex P. Guidi 1999 0 0 0 0 0 0 0
Director 1998 0 0 0 2,944,914[1] 500,000 0 0
1997 0 0 0 0 0 0 0
Brad J. Holland 1999 0 0 0 0 0 0 0
Director 1998 0 0 0 0 1,082,000 0 0
1997 0 0 0 0 0 0 0
Mark Katsumata 1999 0 0 0 0 0 0 0
Secretary 1998 0 0 0 0 0 0 0
1997 0 0 0 0 10,000 0 0
[1] In fiscal 1998, 1,406,250 shares held in escrow and previously issued
for CDN$4,688 in 1994 were cancelled. International Resource
Management Corporation, a private company wholly-owned by Alex Guidi,
held 1,361,250 of these shares with the remaining 45,000 shares held
by two former directors. To replace the cancelled shares, 1,406,250
shares for total proceeds of CDN$14,063 were reallocated through
private placements to International Resource Management Corporation as
to 1,181,250 shares and to the DJ and JM Bennett Family Trust as to
225,000 shares.
[2] During the year Ms Jenni Lean, spouse of Dr. David Bennett, received
$24,125 in salary. Ms Lean is the Corporate Affairs Manager for the
Registrant
[3] David Bennett and Jenni Lean, via the DJ and JM Bennett Family Trust,
own the building in which the Registrant's New Zealand office is
located. During the year the Registrant paid $27,177 in office rental
costs for the use of the building.
Cash Compensation.
During the year ended December 31, 1999 the Registrant had two executive
officers: David Bennett, president and chief executive officer and Alex
Guidi, chairman of the board. The aggregate cash compensation paid or
payable by the Registrant and its subsidiaries to its executive officers
during the year ended December 31, 1999 was $60,899 all of which was
compensation paid to Dr. Bennett.
During the year ended December 31, 1998 the Registrant had two executive
officers: David Bennett, president and chief executive officer and Alex
Guidi, chairman of the board. The aggregate cash compensation paid or
payable by the Registrant and its subsidiaries to its executive officers
during the year ended December 31, 1998 was $57,123 all of which was
compensation paid to Dr. Bennett.
94
During the year ended December 31, 1997 the Registrant had two executive
officers: David Bennett, president and chief executive officer and Alex
Guidi, chairman of the board. The aggregate cash compensation paid or
payable by the Registrant and its subsidiaries to its executive officers
during the year ended December 31, 1997 was $132,214 all of which was
compensation paid to Dr. Bennett.
Compensation of Directors.
The Company's Board of Directors unanimously resolved that members receive
no compensation for their services, however, they are reimbursed for travel
expenses incurred in serving on the Board of Directors.
No other cash compensation, including salaries, fees, commissions, and
bonuses, was paid or is to be paid to the directors and officers of the
Registrant for services rendered for the financial years ended December 31,
1999.
No profit sharing, pension or retirement benefit plans have been instituted
by the Registrant and none are proposed at this time. There are no
arrangements for payments on termination of any member of management in the
event of a change of control.
Aggregated Option/SAR Exercises and Fiscal 1999 Year-End Option/SAR
Value Table.
The following table sets forth certain information with respect to each
exercise of stock options and SARs during fiscal 1999 by each of the Named
Executive Officers, and the fiscal 1999 year-end value of unexercised
options and SARs. The dollar values are calculated by determining the
difference between the exercise or base price of the options and the fair
market value of the underlying stock at the time of exercise and at fiscal
year-end if unexercised, respectively. The unexercised options, some of
which may be exercisable, have not been exercised and it is possible they
might never be exercised. Actual gains realized, if any, on stock option
exercises and common stock holdings are dependent on the future performance
and value of the Common Stock and overall stock market conditions. There
can be no assurance that the projected gains and values shown in this Table
will be realized.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1999 AND OPTION/SAR VALUES AT
DECEMBER 31, 1999
No Options were granted to the directors or executive officers during the
1999 fiscal year.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
Shares Dollar 12/31/99 (#) 12/31/99 ($)
Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized Unexercisable Unexercisable
______________________________________________________________________________
David Bennett 0 0 200,000 N/A
Alex Guidi 0 0 500,000 N/A
Brad Holland 0 0 300,000 N/A
95
There were no directors' or senior officers' options exercised in the year
ended December 31, 1999. There were no directors' or senior officers'
options exercised in the year ended December 31, 1998. The aggregate value
of directors' and senior officers' options exercised below the market price
of the shares at the time of exercise for the year ended December 31, 1997
was $570,660. These benefits are calculated as the difference between the
market price and option exercise price on the date of exercise. Actual
proceeds of the disposition will usually vary from the date of the exercise
to the date of actual disposition of such shares.
Long-Term Incentive Plan Awards.
The Company does not have any formalized long-term incentive plans,
excluding restricted stock, stock option and SAR plans, which provide
compensation intended to serve as incentive for performance to occur over
a period longer than one fiscal year, whether such performance is measured
by reference to financial performance of the Company or an affiliate, the
Company's stock price, or any other measure.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Beneficial Holders of More Than Five Percent of Outstanding Shares
The following schedule sets forth the Common Stock ownership of each person
known by the Company to be the beneficial owner of five percent or more of
the Company's Common Stock, each director, individual, and all officers and
directors of the Company as a group. Each person or entity has sole voting
and investment power with respect to the shares of Common Stock shown, and
all ownership is of record and beneficial.
Name and address Number of Percent
of owner Shares Position of Class
David Bennett[1] 225,000 President, CEO 0.8%
Karori, Wellington and Director
New Zealand
Ronald Bertuzzi 1,790 Director 0.0%
Vancouver, BC
Canada
Alex Guidi 5,724,076 Chairman of Board 20.3%
Vancouver, BC
Canada
Brad Holland Nil Director Nil
Dhahran,
Saudi Arabia
Mark Katsumata 4,000 Secretary 0.0%
Surrey, BC
Canada
ALL OFFICERS AND
DIRECTORS AS A
GROUP (5 persons) 5,954,866 21.1%
[1] By an agreement dated April 15, 1998 the DJ and JM Bennett Family
Trust purchased 225,000 shares at Cdn$0.01 per share, subject to
release on board approval from time to time.
96
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No director or senior officer, and no associate or affiliate of the
foregoing persons, and no insider has, or has had any material interest,
direct or indirect, in any transactions, or in any proposed transaction
which in either such case has materially affected or will materially affect
the Registrant or its predecessors except as disclosed herein.
Mr. Alex Guidi is a member of the board of directors, the chairman and
principal shareholder of the promoter of the Registrant. Mr. Guidi is the
chairman, a member of the board of directors, principal shareholder and the
promoter of Trans-Orient Petroleum Ltd. Mr. Guidi is the principal
shareholder of Durum Cons. Energy Corp.
Mr. Guidi is a member of the member of the board of directors, the
principal shareholder and the promoter of AMG. Oil Ltd. Mr. Guidi is the
principal shareholder and promoter of Gondwana Energy Ltd. See below
regarding shareholdings and options, warrants and rights to acquire shares
beneficially held by Mr. Guidi.
Dr. David Bennett is the president, chief executive officer shareholder and
a member of the boards of directors of the Registrant, Trans-Orient
Petroleum Ltd. and Durum Cons. Energy Corp. Dr. Bennett is a member of the
board of directors and shareholder of AMG Oil Ltd.
Mr. Ronald Bertuzzi is a member of the boards of directors and shareholder
of the Registrant Trans-Orient Petroleum Ltd. and AMG Oil Ltd. Mr. Bertuzzi
is also a member of the board of directors and shareholder of Gondwana
Energy Ltd.
Mr. Brad Holland is a director of the Registrant and is a shareholder in
Trans-Orient Petroleum Ltd., Durum Cons. Energy Corp., AMG Oil Ltd. and
Gondwana Energy Ltd.
Mr. Mark Katsumata is the secretary and a shareholder of the Registrant,
Trans-Orient Petroleum Ltd., Durum Cons. Energy Corp., AMG Oil Ltd. and
Gondwana Energy Ltd.
The related transactions in the year ended December 31, 1999 are:
(a) On January 31, 2000 the Registrant announced that it had entered into
a letter of intent to acquire all the Assets of Trans-Orient Petroleum Ltd.
A formal agreement has been finalized with formal closing of the Agreement
expected to occur on or about March 31, 2000 while the effective date of
the Agreement is January 1, 2000. The Agreement is subject to ratification
by the shareholders of Trans-Orient Petroleum Ltd. at a General Meeting of
the shareholders of Trans-Orient Petroleum Ltd. which is to be held on May
23, 2000. In the event the Trans-Orient Petroleum Ltd. shareholders do not
approve this Agreement by a requisite extraordinary majority or in the
event that a sufficient number of Trans-Orient Petroleum Ltd. shareholders
exercise dissent rights which, in the opinion of Trans-Orient Petroleum
Ltd. acting reasonably, makes the transaction financially impractical then
the parties agree that Trans-Orient Petroleum Ltd. and its affiliates who
are parties hereto shall have the right, exercisable for seven days, to
elect to rescind the transactions contemplated by the Agreement or
alternatively to seek judicial direction as to those elements of the
transaction which can be completed without requiring shareholders consent.
Pending May 23, 2000 the parties shall not deal with the exchanged
consideration in a way which makes effective rescission of the Agreement
impossible and in particular Trans-Orient Petroleum Ltd. shall not deal
97
with the Registrant's securities received and the Registrant shall not
sell, transfer, mortgage or otherwise encumber the Assets except with the
consent of Trans-Orient Petroleum Ltd. which Trans-Orient Petroleum
Ltd.will give for all transactions which can be said to be in the ordinary
course of business. The value placed upon the Assets by the Registrant and
Trans-Orient Petroleum Ltd. was $4,089,836 less an intercompany loan from
the Registrant to Trans-Orient Petroleum Ltd. in the amount of $1,042,928;
resulting in a net consideration payable by the Registrant to Trans-Orient
Petroleum Ltd. of $3,054,434. See ITEM 1. BUSINESS for a description of the
Assets acquired.
(b) At December 31, 1999, Trans-Orient Petroleum Ltd. owed a total of
$1,062,211 including interest charges of $18,051 to the Registrant as a
result of accrued joint venture permit expenditures which were paid by the
Registrant on behalf of joint venture operations in which Trans-Orient
Petroleum Ltd. was a participant with the Registrant. The majority of this
amount relates to drilling the Whakutu-1 and Clematis-1 wells. The
$1,062,211 outstanding was offset against the purchase price paid by the
Registrant to Trans-Orient Petroleum Ltd. for the purchase of its permit
interests.
(c) In December 1999. Durum Cons. Energy Corp. relinquished its (4%)
interest in PEP 38716 in favor of the Registrant for no costs. After being
assigned this interest the Registant holds a 23.8% interest in the permit.
(d) The Registrant and Trans-Orient Petroleum Ltd. by agreement dated June
25, 1998 optioned up to 80% of the permit to AMG Oil Ltd. In August 1998
AMG Oil Ltd. earned 30% of the permit by paying the cost of a 120 mile
seismic survey. To earn an additional 50%, AMG was required to elect before
December 4, 1998 to pay the cost of any additional seismic required to
define two drilling prospects and to pay the dry hole costs of drilling two
wells to a maximum of about US$2,100,000. The option agreement was modified
by three subsequent agreements dated December 3, 1998, October 26, 1999 and
February 23, 2000 which extended the period of time in which the AMG must
exercise its option to acquire up to a further 50% interest in the 38256
permit area to June 16, 2000. Additionally, the February 23, 2000 amendment
provided AMG with a choice of committing to: ( Option A') to earn an
additional 50% in PEP 38256 from the Registrant by funding all expenditure
including an agreed program of seismic work leading up to and including the
drilling of two exploration wells. Alternatively, AMG may, at its election,
earn an additional 35% the Registrant in the permit by funding all work
leading up to and including the drilling of one exploration well ( Option
B'). In the event that the AMG exercises Option B, it shall acquire a
further option ( Option C') to earn an additional 15% in the permit by
funding all further work up to and including a second exploration well on
a separate exploration target. Option C must be exercised within 30 days of
reaching the predetermined target depth in the exploration well drilled
pursuant to exercise of Option B.
(e) On March 17, 1999 the Registrant partially exercised its share purchase
option in AMG Oil Ltd. and acquired 800,000 common shares at a cost of
$400,000.
(f) During the year ending December 31, 1999, the Registrant paid $27,177
in office rental fees to the DJ & JM Bennett Family Trust, which owns the
building in which the Registrant's New Zealand office is located.
98
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
All schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.
B. Reports on Form 8-K
During the 1999 fiscal year the Company filed no reports on Form 8-K.
C. Index to Exhibits
The following Exhibits are filed herewith:
Exhibit
Number Document Description
27 Financial Data Schedule
99.1 PEP 38256 Option Amending Agreement
99.2 Change in conditions to permit PEP 38723
99.3 Farm-out Agreement on PEP38330
99
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report and any
amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized.
INDO-PACIFIC ENERGY LTD.
By: /s/ David J. Bennett April 11, 2000
David J. Bennett,
President and Chief Executive Officer
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report and any
amendment thereto to be signed on its behalf by the undersigned, thereunto
duly authorized.
INDO-PACIFIC ENERGY LTD.
By: /s/ Alex Guidi April 11, 2000
Alex Guidi,
Chairman of the Board of Directors
By: /s/ D. J. Bennett April 11, 2000
Dr. David Bennett,
Member of the Board of Directors