UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF A FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES ACT OF 1934
For the month of April 22, 2004
Commission File Number 000-17729
FORUM ENERGY CORPORATION
(Address of principal executive office)
700 2 nd st s.w. suite 1400 Calgary, AB, TZP4VS CANADA
(Translation of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F |X| Form 40-F |_|
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1) |_|
Indicate by check mark the registrant urnishing the information contained in
this Form is also thereby furnishing the information to the Commission pursuant
to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes |_| No |X|
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-____________
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FORUM ENERGY CORPORATION
(Registrant)
By:/s/ David M. Thompson
----------------------------------
Date: April 22, 2004 Name: David M. Thompson
Title: CFO
[LOGO] FORUM
ENERGY
CORPORATION
NOTICE OF SPECIAL MEETING OF FORUM ENERGY CORPORATION SHAREHOLDERS
To be held May 18th 2005
April 22nd 2005
TABLE OF CONTENTS
LETTER TO FORUM ENERGY CORPORATION ("FEC") SHAREHOLDERS (i) (ii)
INFORMATION CIRCULAR 6
GLOSSARY OF TERMS 9
ABBREVIATIONS AND CONVERSIONS 13
SUMMARY INFORMATION 14
THE TRANSACTION 20
EFFECT OF THE TRANSACTION 21
INFORMATION CONCERNING FORUM ENERGY CORPORATION 27
INFORMATION CONCERNING NEWCO 27
INFORMATION CONCERNING FORUM (FEI) LIMITED 27
GENERAL PROXY MATTERS 29
Appendix A FEC Resolutions 31
Appendix B Transaction Agreement 32
Appendix C Information Concerning Forum Energy Plc (Newco) 75
Appendix D Information Concerning Forum Philippines Holdings Limited (Holdco) 76
Appendix E Information Concerning Forum (FEI) Limited 77
Appendix F Information Concerning Forum Far East Limited 78
Appendix G Competent persons report on Combined Philippine Petroleum Assets 79
Appendix H Competent persons report on Coal Assets 98
Appendix I Selected consolidated financial information and M D & A for FEC 126
Appendix J Section 190 of the Canadian Business Corporations Act 139
[LOGO] FORUM Forum Energy Corporation
ENERGY Suite 1400
CORPORATION 700 - 2nd street SW
Calgary, Alberta
Canada T2P 4V5
E-mail: enquiries@forumenergy.com
Website: http://www.forumenergy.com
Tel: 1-403-290-1676
Fax: 1-403-398-1382
April 22nd 2005
Dear Shareholders
Re: Forum Energy Corporation ("FEC") special meeting
You are invited to attend a special meeting of Forum Energy Corporation ("FEC or
The Company") common shareholders at 10.00 AM Pacific Standard Time (PST) on
18th May 2005 at the following address:
Computershare Inc, 4th Floor, 510 Burrard Street, Vancouver. BC V6C 3B9, CANADA
At the meeting, you will be asked to consider and adopt resolutions approving,
inter alia, the terms, conditions and the consummation of a Transaction
Agreement dated April 22nd, 2005 (the "Transaction Agreement") between Forum
Energy Corporation and Sterling Energy Plc ("SEY") a United Kingdom ("UK") based
oil and gas company whose common shares are traded on the Alternative Investment
Market of the London Stock Exchange ("AIM") pursuant to which FEC and SEY will
transfer to a newly formed UK company ("Newco or Forum Energy Plc") their
Philippine assets as follows:
o SEY will initially transfer title of its Philippine License GSEC101
(commonly referred to as Reed Bank) ("SEY Philippine asset") to
Newco through a wholly owned subsidiary ("Sterling Gas Philippines
Limited") in exchange for 100% of the issued and outstanding shares
of Newco.
o Forum Energy Corporation will then transfer its 66.67% interest in
Forum Exploration, Inc ("FEC Philippine asset") to Newco through a
newly formed wholly-owned subsidiary ("Forum (FEI) Limited"), in
exchange for 71.4% of the to be issued and outstanding shares of
Newco thus diluting SEY's interest in Newco to 28.6%
Following completion of the foregoing transfers the ownership of Newco will
initially be 71.4% FEC, 28.6%SEY. During May 2005 Newco will subsequently make a
Pre-Initial Public Offering ("Pre-IPO") for approximately (pound)4 million
(Cdn$9.1 million), which is to be followed by an Initial Public Offering ("IPO")
to raise further capital in conjunction with an application for admission to
AIM. Although there is no firm commitment from an underwriter to effect either
the Pre-IPO or the IPO, certain investors sourced by SEY have indicated their
support for the Pre-IPO offering as a "cornerstone" investor.
The proceeds of the contemplated financings will be used by Newco for working
capital and the continued development of the combined FEC and SEY Philippine
assets ("Combined Philippine assets"). The effect of such financings, if
completed, will be to significantly dilute Forum's equity interest in Newco.
Continued
(i)
The accompanying Information Circular provides more complete information on the
Transaction Agreement and the transactions contemplated thereby and the impact
on Forum shareholders. Additionally, in further support of Newco's anticipated
activities and to more fully reflect the Company's significant ownership
interest in Newco, it is further proposed that you consider and adopt
resolutions approving (upon consummation of the transactions contemplated by the
Transaction Agreement):
o A name change from Forum Energy Corporation to FEC Resources, Inc.
so as to allow Newco to adopt the name Forum Energy Plc and thus
avoid any possible confusion, arising from both companies sharing
the same name, as the company continues to pursue the acquisition
and development of other business opportunities.
o The change of the domicile of Forum Energy Corporation from Canada
to another location, to be determined at a later date by the
Company's Board of Directors. Your Board seeking your approval on
this issue because FEC has no Canadian Assets; Canadian shareholders
account for only a minority of the total shareholders, and such a
change in domicile may be affected with a minimal tax impact.
Notwithstanding any change in domicile, the Company expects to
continue its status as a Reporting Issuer in Canada and to continue
its listing on the OTC BB market in the United States. We shall seek
your approval to permit the FEC Board of Directors to complete their
investigation on the issue of change of domicile, and if deemed
appropriate by the FEC Board of Directors, in their sole discretion,
to change the domicile of the Company to such jurisdiction as the
FEC Board of Directors may determine.
Your Board, based upon its own investigations has unanimously concluded that the
above proposed resolutions are in the best interests of our Company as well as
our shareholders and recommends that you vote in favor of the resolutions. In
addition, many of our major shareholders accounting for approximately 81% of the
current issued and outstanding shares in the company, have indicated their
support to these Transactions and have notified us that they intend to vote in
favor of the resolutions.
We look forward to seeing you at the meeting.
Yours very truly,
"David R. Robinson"
David Russell Robinson
President and Chief Executive Officer
(ii)
A Forum Energy Corporation Shareholder may attend the FEC Special Meeting ("FEC
Meeting") in person or may be represented by proxy. FEC Shareholders who are
unable to attend the FEC Meeting or any adjournment thereof in person are
requested to date, sign and return the accompanying applicable form of proxy for
use at the FEC Meeting or any adjournment thereof. To be effective, the
applicable proxy must be received by Computershare, Inc, 4th Floor, 510 Burrard
Street, Vancouver, BC, V6C 3B9, Canada 4:30 p.m. (Vancouver time) on the first
business day prior to the date of the FEC Meeting or any adjournment thereof.
FEC Shareholders who are planning on returning the accompanying form of proxy
are encouraged to review the Information Circular carefully before submitting
the proxy form.
Registered holders of FEC Shares have the right to dissent with respect to the
FEC Resolutions and, if the FEC Resolutions becomes effective, to be paid the
fair value of their FEC Common shares in accordance with the provisions of
Section 190 of the Canadian Business Corporations Act. A FEC Shareholder's right
to dissent is more particularly described in the Information Circular and the
text of Section 190 of the Canadian Business Corporations Act is set forth in
Appendix J to the accompanying Information Circular. A dissenting FEC
Shareholder must send to the President of FEC, a written objection to the FEC
Resolutions, which written objection must be received by FEC, at its registered
office, by 4:00 p.m. on the Business Day immediately preceding the date of the
FEC Meeting.
Failure to strictly comply with the requirements set forth in Section 190 of the
Canadian Business Corporations Act may result in the loss of any right to
dissent. Persons who are beneficial owners of FEC Shares registered in the name
of a broker, custodian, nominee or other intermediary who wish to dissent should
be aware that only the registered holders of FEC Shares are entitled to dissent.
Accordingly, a beneficial owner of FEC Shares desiring to exercise the right to
dissent must make arrangements for the FEC Shares beneficially owned by such
holder to be registered in the holder's name prior to the time the written
objection to the FEC Resolutions is required to be received by FEC or,
alternatively, make arrangements for the registered holder of such FEC Shares to
dissent on behalf of the holder.
Dated at the City of Calgary, in the Province of Alberta, this 22nd day of
April, 2005
BY ORDER OF THE BOARD OF DIRECTORS OF FORUM ENERGY CORPORATION
"David R. Robinson"
David Russell Robinson
President and Chief Executive Officer
Forum Energy Corporation
5
INFORMATION CIRCULAR
Introduction
This Information Circular is furnished in connection with the solicitation of
proxies by and on behalf of the management of FEC for use at the FEC Meeting and
any adjournment thereof. No Person has been authorized to give any information
or make any representation in connection with any of the matters to be
considered at the Meeting other than those contained in this Information
Circular and, if given or made, any such information or representation must not
be relied upon as having been authorized.
The information concerning FEC, SEY, and Newco ("the Parties") contained in this
Information Circular has been provided by FEC. Although SEY and Newco has no
knowledge that would indicate that any of such information is untrue or
incomplete, SEY and Newco does not assume any responsibility for the accuracy or
completeness of such information or the failure by FEC to disclose events which
may have occurred or may affect the completeness or accuracy of such information
but which are unknown to SEY and/or Newco.
All summaries of, and references to, the Transactions in this Information
Circular are qualified in their entirety by reference to the complete text of
the Transaction Agreement between FEC and SEY, a copy of which included in
Appendix B of this Information Circular. The attention of FEC shareholders is
drawn to the notice set out in Appendix B of this information circular.
All capitalized terms used in this Information Circular but not otherwise
defined herein have the meanings set forth under "Glossary of Terms".
Information contained in this Information Circular is given as of April 22nd
2005 unless otherwise specifically stated.
Forward-looking Statements
This Information Circular, including documents incorporated by reference herein,
contains forward-looking statements. All statements other than statements of
historical fact contained in this Information Circular are forward-looking
statements, including, without limitation, statements regarding the future
financial position, business strategy, proposed acquisitions, budgets,
litigation, projected costs and plans and objectives of or involving the
Parties, can identify many of these statements by looking for words such as
"believe", "expects", "will", "intends", "projects", "anticipates", "estimates",
"continues" or similar words or the negative thereof. These forward-looking
statements include statements with respect to: amounts of capital expenditures;
the amount and timing of the payment of the distributions; production rates; the
timing of the Transactions; the satisfaction of listing conditions; and the
consummation of the transactions described in the Transaction Agreement. There
can be no assurance that the plans, intentions or expectations upon which these
forward-looking statements are based will occur. Forward looking statements are
subject to risks, uncertainties and assumptions, including those discussed
elsewhere in this Information Circular. Although FEC believes that the
expectations represented in such forward-looking statements are reasonable,
there can be no assurance that such expectations will prove to be correct. Some
of the risks which could affect future results and could cause results to differ
materially from those expressed in the forward-looking statements contained
herein include: the impact of general economic conditions, industry conditions,
governmental regulation, volatility of commodity prices, currency fluctuations,
imprecision of reserve estimates, environmental risks, competition from other
industry participants, the lack of availability of qualified personnel or
management, stock market volatility and ability to access sufficient capital
from internal and external sources and the risk that actual results will vary
from the results forecasted and such variations may be material, all as more
fully described in the Company's annual report on Form 20-F as filed with the
United States Securities and Exchange Commission.
6
The information contained in this Information Circular, including documents
incorporated by reference herein, identifies additional factors that could
affect the operating results and performance of FEC. You should carefully
consider those factors. The forward-looking statements contained herein are
expressly qualified in their entirety by this cautionary statement.
The forward-looking statements included in this Information Circular are made as
of the date of this Information Circular, and FEC undertakes no obligation to
publicly update such forward-looking statements to reflect new information,
subsequent events or otherwise.
Supplementary Disclosure - Non GAAP Measures
This Information Circular contains references to terms commonly used in the oil
and gas industry. Cash flow from operations, distributable cash available for
distribution and cash-on-cash yield are not defined by Canadian Generally
Accepted Accounting Principles ("GAAP") and are referred to as non-GAAP
measures. Cash flow from operations represents funds from operations as detailed
on the financial statements included or incorporated by reference in this
Information Circular. Distributable cash and income available for distribution
are useful supplemental measures as they provide investors with information on
cash available for distribution. Cash-on-cash yield is a useful and widely used
supplemental measure that provides investors with information on cash actually
distributed relative to trading price. Investors are cautioned that cash flow
from operations, distributable cash, income available for distribution and
cash-on-cash yield should not be construed as an alternate to net income as
determined by Canadian GAAP and may not be comparable to similar measures
disclosed for other issuers.
Information for United States Shareholders
This Information Circular has been prepared in accordance with disclosure
requirements applicable in Canada. Shareholders in the United States should be
aware that such requirements are different from those of the United States
applicable to registration statements under the 1933 Act and proxy statements
under the 1934 Act. Specifically, information concerning the operations of FEC
contained herein has been prepared in accordance with Canadian disclosure
standards, which are not comparable in all respects to United States disclosure
standards. The unaudited pro forma financial statements of Newco, the unaudited
proforma and audited historical financial and operating statements of FEC,
included in or incorporated by reference in this Information Circular have been
prepared in accordance with Canadian GAAP and are subject to Canadian auditing
and auditor independence standards, which differ from United States GAAP and
auditing and auditor independence standards in certain material respects, and
thus may not be comparable to financial statements of United States companies.
Tax considerations, if any, applicable to United States Shareholders have not
been included in this Information Circular. There may be material United States
tax issues for United States Shareholders as a result of the Transactions, which
may include, without limitation, the possibility that any or all of the
Transactions are a taxable transaction, in whole or in part, for United States
federal income tax purposes, and the possibility that FEC may be classified as a
passive foreign investment company, which classification would subject holders
to special, generally adverse tax consequences.
7
US Shareholders are advised to consult their tax advisors to determine the
particular tax consequences, if any, to them of the Transactions in light of
their particular situation, as well as any tax consequences that may arise under
the laws of any other relevant foreign, state, local, or other taxing
jurisdiction.
The enforcement by investors of civil liabilities under the United States
securities laws may be affected adversely by the fact that FEC is, or will be,
settled or organized, as applicable, under the laws of the Province of Alberta,
that their officers and directors, are residents of countries other than the
United States, that the experts named in this Information Circular are residents
of countries other than the United States, and that all of the assets of FEC and
such persons are, or will be, located outside the United States.
Currency Exchange Rates
The financial statements included or incorporated by reference in this
Information Circular are in Canadian dollars. The following table sets forth,
for each period indicated, the high and low exchange rates, the average of such
exchange rates on the last business day of each month during such period, and
the exchange rate at the end of such period, based on the daily noon rate of
exchange as reported by the Bank of Canada (the "noon exchange rate"). These
rates are set forth as United States dollars per Cdn$1.00 and are the inverse of
the rates quoted by the Bank of Canada for Canadian dollars per US $1.00. On
March 31st 2005, the noon exchange rate was Cdn$1.00 equaled US $0.8268
Year Ended December 31 Quarter Ended March 31
---------------------- ----------------------
2004 2003 2005 2004
------------------ -------------------
High 0.8492 0.7738 0.8329 0.7880
Low 0.7158 0.6349 0.7960 0.7418
Average 0.7682 0.7136 0.8150 0.7586
Period ended 0.8309 0.7738 0.8268 0.7633
IMPORTANT NOTICE REGARDING "TRANSACTION AGREEMENT"
As the pricing of the Newco Pre-IPO Placing will not be finalised until shortly
before publication of this document, the Transaction Agreement will also not be
finalised and signed until that time. Accordingly, the form of the Transaction
Agreement set out in Appendix B represents the draft of the agreement as at the
latest practicable time prior to the printing of this document. Other than
changes arising from the pricing of the Newco Pre-IPO Placing, no further
substantive changes are expected to be made to the Transaction Agreement before
signing.
8
GLOSSARY OF TERMS
The following is a glossary of certain terms used in this Information Circular,
including the Summary hereof, and Appendices A, B, C, D, E, F, G, H, I and J
"AIM" means the Alternative Investment Market of London Stock Exchange Plc;
"Applicable Laws" means applicable securities laws, rules of applicable stock
exchanges and applicable corporate laws;
"Board" or "Board of Directors" means the board of directors of any board, as
applicable;
"Business Day" means a day, other than a Saturday, Sunday or statutory holiday,
when banks are generally open in the City of Calgary, in the Province of
Alberta, or London in the United Kingdom for the transaction of banking
business;
"CBCA" means the Canadian Business Corporations Act as amended, including the
regulations promulgated thereunder;
"Closing" means the completion of the transactions contemplated in the
Transaction Agreement;
"Coal Properties" means the South and Central Cebu coal properties wholly owned
by Forum Exploration Inc;
"COGE Handbook" means the Canadian Oil and Gas Evaluation Handbook prepared
jointly by the Society of Petroleum Evaluation Engineers (Calgary chapter) and
the Canadian Institute of Mining, Metallurgy & Petroleum;
"Company" means Forum Energy Corporation;
"Control" means, with respect to control of a body corporate by a person, the
holding (other than by way of security) by or for the benefit of that person of
securities of that body corporate to which are attached more than 50% of the
votes that may be cast to elect directors of the body corporate (whether or not
securities of any other class or classes shall or might be entitled to vote upon
the happening of any event or contingency) provided that such votes, if
exercised, are sufficient to elect a majority of the board of directors of the
body corporate;
"Combined Philippine Assets" means collectively, FEC's Philippine Assets and
SEY's Philippine Assets;
"CPR" means competent person report; "CSA" means CSA Group Limited of 9 John
Street, London, WC1N 2ES, UK, engaged to evaluate the coal interests of Forum
Exploration Inc;
"Dissent Rights" means the right of a registered FEC Shareholder pursuant to
Section 190 of the CBCA to be paid the fair value of the common shares in
respect of which the holder dissents, all in accordance with Section 190 of the
CBCA;
"Dissenting Shareholders" means registered FEC Shareholders who validly exercise
the rights of dissent provided to them under Section 190 of the CBCA;
"DOE" or "Department of Energy" means the Department of Energy of the Government
of the Republic of the Philippines;
"FEC" means Forum Energy Corporation, a corporation incorporated in Alberta,
Canada;
9
"FEC Board" or "FEC Board of Directors" means the board of directors of Forum
Energy Corporation;
"FEC Common Shares" means common shares of Forum Energy Corporation;
"FEC Philippine Assets" means the 66.67% interest in Forum Exploration Inc;
"FEC Record Date" means the close of business on April 18, 2005;
"FEC Resolutions" means the special resolutions in respect of the transactions
contemplated in this Information Circular and other related matters to be
considered at the FEC Meeting, in substantially the form attached as Appendix A
to the Information Circular to be voted upon by FEC Shareholders at the FEC
Meeting;
"FEC Shareholder" means a holder of Forum Energy Corporation Common Shares;
"FEC Stock Option Plan" means the incentive stock option plan of Forum Energy
Corporation, as amended;
"FEC Warrantholder" means a holder from time to time of FEC Warrants;
"FEC Warrants" means the outstanding share purchase warrants to acquire FEC
Common Shares;
"Forum Exploration" or "FEI" means Forum Exploration, Inc., a corporation
incorporated under the laws of the Philippines;
"Forum Exploration Assets" or "FEI Assets" means the Oil and Gas Licenses held
by FEI and which are the subject of the arrangement set out in the Transaction
Agreement;
"Forum Exploration Coal Licenses" or "FEI Coal Licenses" means FEI's 100%
interest in two Coal Operating Contracts ("COC's") situated on Cebu Island;
"Forum Exploration Common Shares" or "FEI Common Shares" means the common shares
of Forum Exploration, Inc;
"Forum Exploration Transfer" or "FEI Transfer" means the transactions whereby
FEC will convey its beneficial ownership of Forum Exploration Common Shares to
the Newco group of companies through a Special purpose vehicle in exchange for
shares in Newco;
"Forum Exploration Engineering Report" or "Competent Persons Report" means the
independent engineering evaluation of certain oil, NGL and natural gas interests
prepared by PGS dated April 15th 2005 and an independent engineering evaluation
of certain Coal property interests prepared by CSA date April 15th 2005;
"Forum Exploration Oil and Gas Licenses" or "FEI Exploration Oil and Gas
Licenses" means 100 per cent interest (FEC holds 66.67% of FEI) in SC40 Cebu
("SC40"), a service contract covering 458,000 hectares over land and water
around the northern part of the island of Cebu in the Philippines. SC40 contains
the Libertad Gas Field, independently evaluated by PGS to contain estimated
recoverable reserves of gas of 3.16814 TCF (mmboe). The service contract also
contains several prospects, including Jibitnil Island, West Toledo, Central
Tanon and Maya;
"Forum Exploration Licenses" or "FEI Exploration Licenses" collectively mean the
Oil and Gas Licenses as well as the Coal properties;
"Forum Philippines Holdings Limited" or "Holdco" a Jersey private company
incorporated on April 1st 2005 in Jersey, Channel Islands as Sterling Far East
Holdings Limited (company number 89858);
10
"Income Tax Act" or "Tax Act" means the Income Tax Act (Canada), R.S.C. 1985, c.
1. (5th Supp), as amended, including the regulations promulgated thereunder;
"Information Circular" means this information circular and proxy statement dated
April 22nd, 2005, together with all appendices hereto, distributed by FEC in
connection with the Meetings;
"Limited" means a private company with limited liabilities
"Meeting" means the FEC Meeting as applicable;
"Newco" or "Forum Energy Plc" means a UK Public Company incorporated on April
1st 2005 in the UK as "Sterling Philippines Plc" (company number 5411224) (a
wholly owned subsidiary of SEY);
"Newco Common Shares" means the common shares of Forum Energy Plc;
"Newco IPO Placing" means the proposed private placement of Newco Common Shares
as described under the heading "IPO" in conjunction with the admission of the
Newco Common Shares to AIM;
"Newco Pre-IPO Placing" means the proposed private placement of up to
STG(pound)4 million Newco Common Shares as described under the heading "Pre-IO".
The Newco Pre-IPO Placing will take place before the Newco IPO Placing;
"Noble & Company" or "Nobles" means Noble & Company of Edinburgh, Nominated
Advisers and Brokers to Newco;
"Notice of Meeting" means, the Notice of Special Meeting of FEC which
accompanies this Information Circular;
"Oil and Natural Gas Properties" or "properties" means the working, royalty or
other interests of Forum Exploration and GSEC 101 in any petroleum and natural
gas rights, tangibles and miscellaneous interests, including properties which
may be acquired by Newco from time to time;
"Option holder" means a holder of FEC Options;
"Options" means FEC Options;
"Parties" means FEC, Newco and SEY and "Party" means either one of them;
"Person" means any individual, partnership, association, body corporate,
trustee, executor, administrator, legal representative, government, regulatory
authority or other entity;
"Plc" means a public company with limited liabilities, as used in the UK;
"PGS" means PGS Reservoir Consultants (UK) Limited of PGS Thames House, 17
Marlow Road, Maidenhead, Berks, SL6 7AA, UK;
"Record Date" or "FEC Record Date" means the 18th April 2005;
"Registered Holder" means the Person whose name appears on the register of FEC,
as the owner of FEC Common Shares;
"Registrar" means the Registrar appointed under section 263 of the ABCA;
"Regulation S" means Regulation S under the 1933 Act;
11
"SEDAR" means the System for Electronic Document Analysis and Retrieval;
"SEY Philippine Assets" means Sterling Energy Plc's 100% interest in the GSEC101
license (Reed Bank);
"Sterling Energy" or "SEY" means Sterling Energy Plc, a Public Company
incorporated under the laws of the United Kingdom with its registered offices at
Mardall House, 7-9 Vaughan Road, Harpenden, Herts AL5 4HU and listed on the AIM
market under the symbol "SEY";
"Shareholders" means the FEC Shareholders and the Newco Shareholders and
"Shareholder" means a FEC Shareholder or a Newco Shareholder, as applicable;
"Sterling Gas Philippines Limited" means Sterling Gas Philippines Limited or to
be renamed "Forum (GSEC101) Limited" subject to shareholders agreement, a
private corporation incorporated under the laws of Jersey;
"Sterling Far East Limited" means Sterling Far East Limited which is to be
renamed "Forum (FEI) Limited" subject to shareholders agreement, a private
corporation incorporated under the laws of Jersey;
"Subsidiary" has the meaning ascribed thereto in the ABCA and shall include all
partnerships directly or indirectly owned by FEC as the case may be;
"STG" or "(pound)" means United Kingdom Pounds;
"Transaction" means the actions contemplated under the Transaction Agreement;
"Transaction Agreement" means the agreement dated April 22nd 2005 between Forum
Energy Corporation, Sterling Energy Plc and Newco s enclosed in Appendix B;
"UK" means the United Kingdom; "United States" or "U.S." means the United States
of America, as defined in Rule 902(l) under Regulation S;
"U.S. Person" means a U.S. person as defined in Rule 902(k) under Regulation S;
"U.S. Shareholder" or "U.S. Shareholders" or "U.S. Shareholder" means any
Shareholder who is, at the Effective Time, either in the United States or a U.S.
Person;
"000s" means thousands;
"1933 Act" means the United States Securities Act of 1933, as amended and
"1934 Act" means the United States Securities Exchange Act of 1934, as amended.
Conventions
Certain terms used herein are defined in the "Glossary of Terms". Unless
otherwise indicated, references herein to "$" or "dollars" are to US dollars.
Unless otherwise stated all financial information herein has been presented in
Canadian dollars in accordance with Canadian GAAP.
12
ABBREVIATIONS AND CONVERSIONS
Abbreviations
Oil and Natural Gas Liquids Natural Gas
--------------------------- -----------
bbl barrel mcf thousand cubic feet
bbls barrels mcf/d thousand cubic feet per day
bbls/d barrels per day mmcf million cubic feet
mbbls thousand barrels mmcf/d million cubic feet per day
mmbbls million barrels mmbtu million British Thermal Units
mstb thousand stock tank barrels bcf billion cubic feet
NGL natural gas liquids GJ gigajoule
stb stock tank barrels
Other
API an indication of the specific gravity of crude oil
measured on the American Petroleum Institute
gravity scale. Liquid petroleum with a specified gravity of 28 API or
higher is generally referred to as light crude oil
boe(1) barrel of oil equivalent of natural gas on the basis of
1 BOE for 6 (unless otherwise stated) mcf of natural gas
(this conversion factor is an industry accepted norm and
is not based on either energy content or current
prices)(1)
boe/d barrel of oil equivalent per day
m(3) cubic metre
mboe thousand barrels of oil equivalent
mmboe million barrels of oil equivalent
M$ thousands of dollars
Conversions
The following table sets forth certain standard conversions from Standard
Imperial Units to the International System of Units (or metric units).
To Convert From To Multiply By
mcf cubic metres 28.174
cubic metres cubic feet 35.494
bbls cubic metres 0.159
cubic metres bbls 6.290
feet metres 0.305
metres feet 3.281
miles kilometres 1.609
kilometres miles 0.621
acres hectares 0.405
hectares acres 2.471
- --------------
(1) Boes may be misleading, particularly if used in isolation. A boe
conversion ratio of six mcf to one boe is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.
13
SUMMARY INFORMATION
The following is a summary of certain information contained elsewhere in this
Information Circular, including the Appendices hereto, and is qualified in its
entirety by reference to the more detailed information contained or referred to
elsewhere in this Information Circular or in the Appendices hereto. Terms with
initial capital letters used in this summary are defined in the "Glossary of
Terms". In this summary, all dollar amounts are stated in United States dollar,
or as otherwise defined..
The FEC Meeting
The FEC Meeting will be held at the offices of Computershare, Inc, 4th Floor,
510 Burrard Street, Vancouver, BC V6C 3B9, Canada, at 10:00 AM (Vancouver time)
on May 18th 2005 for the purposes set forth in the accompanying applicable
Notice of the FEC Meeting. The business of the FEC Meeting will be to consider
and vote upon the FEC Resolutions.
The Transaction
General
SEY will incorporate Newco (a UK company) and sell its GSEC101 (Reed Bank)
license into Sterling Gas Philippines Limited, which in turn will be sold to
Newco in exchange for 100% of the shares of Newco. Subject to shareholder
approval, FEC will then sell its shares in Forum Exploration Inc. to Sterling
Far East Limited (to be renamed Forum (FEI) Limited) and subsequently to Newco
and in consideration will receive 71.4% of Newco shares (SEY will have its
interest diluted to 28.6%).
The Company has been advised that the Coal Properties must be held by a
Philippine based company in which the level of direct foreign ownership does not
exceed 40%. Accordingly, it is proposed as part of the Transactions that the
Coal Properties will be transferred to a new Philippine company ("Philco"),
which will be owned as to 40% by Forum (FEI) Limited and 60%. by a new
Philippine holding company ("Philippine Holdco"). Philippine Holdco will itself
be owned as to 40 % by Forum (FEI) Limited and 60 % by Forum Pacific, Inc.
("FPI"). As a result, Forum (FEI) Limited will be interested, directly through
its shareholding in Philco and indirectly through its shareholding in Philippine
Holdco, in a total of 64% of the Coal Properties. To make up for the shortfall
of 2.67% between that percentage interest and FEI's current 66.67% interest in
the Coal Properties, FPI has agreed that, before any payments are made to
shareholders of Philco, (whether by way of income or capital), a payment shall
first be made to Forum (FEI) Limited of an amount equal to 2.67 x (P x
100/97.33), where P equals the total amount of the payment to be made to
shareholders.
Each of FEC and SEY has agreed to give standard warranties to Newco regarding
their respective Philippine assets which it is transferring to Newco and/or its
subsidiaries.
Newco intends to raise working capital to develop these licenses through the
issue of additional shares in the Newco through a Newco Pre-IPO Placing to raise
up to UKSTG(pound)4 million (Cdn$9.1 million). It is intended that Newco will
seek to raise further funds through the UK capital markets through a secondary
IPO placement of shares in conjunction with an application for admission to AIM
around the middle of July 2005. Newco has appointed Noble & Company Limited in
the UK to act as the Nominated Adviser and Brokers for its proposed listing
(Newco ceasing to be a subsidiary of the Company) to AIM.
Each of FEC and SEY has agreed to give standard warranties and indemnities to
Noble & Company Limited; in the case of warranties, regarding the Philippine
assets as referred to above, and in the case of indemnities, relating to
liabilities which may fall upon Newco in connection with such fund raisings. At
this stage there can be no certainty that the Newco IPO placing will take place
To maintain the current management structure it is recommended that upon
transfer FEC Philippine Assets to Newco the existing executive management of FEC
transfer to Newco. To comply with AIM rules and avoid a conflict, the existing
management will resign from FEC, who will appoint new executive
14
management. It has also been recommended that Forum Energy's name be changed
from Forum Energy Corporation to FEC Resources, Inc. The reason for changing the
name is to permit Newco to adopt the name of Forum Energy Plc and maintain the
continuity of the name with the Philippine Department of Energy, and to permit
FEC to pursue other business opportunities.
Finally, your FEC Board of Directors has proposed that the Company domicile be
moved from Canada to another jurisdiction. The Company has no Canadian Assets,
only a minority of Canadian shareholders and the value of the Forum Exploration
Assets or equivalent holding in Newco shares following the shareholders meeting
have not increased at this time and in all likelihood will not until further
investment is made. The Directors therefore believe that this would be a good
opportunity to relocate to a domicile with a more favorable tax regime and allow
the Company the opportunity to realize its value. The Company will continue to
maintain its status as a Canadian Reporting Issuer with common shares of the
company traded on the OTC BB exchange in the United States. The FEC Board of
Directors shall seek your approval to permit the directors to complete their
investigation on the issue of change of domicile, and if deemed appropriate by
the FEC Board of Directors, in their sole discretion, to change the domicile of
FEC to such jurisdiction as the FEC Board of Directors may in the future
determine.
Pre-Transaction Steps
(a) Sterling Energy plc incorporate Sterling Philippines Plc (Newco) in
the UK as a wholly owned subsidiary
(b) Newco incorporate Sterling Far East Holdings Limited (Holdco) in
Jersey
(c) Holdco incorporate Sterling Far East Limited in Jersey.
(d) Sterling North West Africa Holdings Limited sells its interest in
Sterling Gas Philippines Limited (the owner of GSEC 101) to Sterling
Far East Holdings Limited in exchange for shares.
(e) Sterling North West Africa Holdings Limited sells its shareholding
in Sterling Far East Holdings Limited to Sterling Philippines Plc
for 100% of the issued and outstanding shares in Sterling
Philippines Plc (Newco).
Transaction Steps and Post Transaction Structure
Upon FEC obtaining FEC Shareholder approval the following steps will occur:
a) The name of Sterling Far East Limited will be changed to Forum (FEI)
Limited.
b) Holdco name will be changed from Sterling Far East Holdings Limited
to Forum Philippines Holdings Limited.
c) FEC will transfer the FEI common shares it holds into Forum (FEI)
Limited in exchange for shares in Forum (FEI) Limited.
d) FEC will then sell its shares in Forum (FEI) Limited to Forum
Philippines Holdings Limited in exchange for shares in Forum
Philippines Holdings Limited;
e) FEC will then sell its shares in Forum Philippines Holdings Limited
to Sterling Philippines Plc in exchange for shares in Sterling
Philippines Plc
f) Sterling Philippines Plc will change its name to Forum Energy Plc.
g) Following this, FEC will hold 71.4% of the issued capital of Newco
and SEY (through its subsidiary) will hold 28.6% of the issued share
capital of Newco.
h) The executive management will resign from FEC and join the
management of Newco.
i) Newco intends to raise up to (pound)4 million (Cdn$9.1 million)
through the Newco Pre-IPO Placing
j) Newco intends to raise further funds through an IPO Placing.
k) The Board will continue their deliberation process to decide whether
to relocate the domicile of the Company to another jurisdiction.
Further details of Forum Energy Plc (Newco), Forum Philippines Holdings Limited
(Holdco), Forum (FEI) Limited and Forum (GSEC101) Limited are included in
Appendices C, D, E and F respectively.
15
Structure of Newco before the Newco Pre-IPO placing:
----------- ------------ -------------
Sterling Forum Energy Forum Pacific
Energy Plc Corporation (Philippines)
----------- ------------ -------------
| | |
| 28.6% 71.4% | |
| | |
---------------------------- |
| |
| |
---------------- |
Forum Energy Plc |
UK ("Newco") |
---------------- |
| |
| 100% |
| |
------------------ |
Forum Philippines |
Holding Limited |
Jersey ("Holdco") |
|--------------------| |
| | |
|100% 100%| |
--------------- ----------- |
Forum (GSEC101) Forum (FEI) |
Limited Limited |
(Jersey) (Jersey) | 33.33%
--------------- ----------- |
| |
| |
66.67% ------------------------------ |
|
----------------------
Forum Exploration Inc.
(Philippines)
----------------------
16
Background to and reasons for the Transactions
In March 2003, FEC acquired 125,000,000 common shares in Forum Exploration Inc,
representing 66.67% of all issued and outstanding shares. In consideration FEC
issued shares plus a commitment to fund 100% of the operation of FEI for the
following 18 months. The Company raised US$2.153 million in working capital
through a private placement in July 2003. These funds were used to commence a
drilling programme in the SC40 block and three onshore exploration wells were
drilled during 2003/2004. The Company needed additional funding to continue its
development, test the wells and bring them into production. The management
explored a number of avenues which did not realize the funding required.
Meanwhile the Board and certain major shareholders continued to fund the Company
from their own resources until a more permanent solution could be found. It was
also realized that the Company required some larger assets in order to attract
new financing.
In January 2005, the Company entered into discussions with SEY regarding a
possible Joint Venture whereby Sterling would sell the Reed Bank Asset (GSEC101)
to Newco and FEC would its Philippine asset to Newco. In addition it was
proposed that Newco should be admitted to AIM in the United Kingdom which has
shown support for other junior international energy companies who have
successfully raised funds there. Newco has engaged a Nominated Adviser and
Broker, Noble & Company, to take the Company to AIM and is currently engaged in
preparing the necessary documentation for this listing.
Since AIM opened in 1995, more than 1,300 companies have been admitted and more
than (pound)11 billion has been raised collectively.
An AIM quotation offers:
o A flexible regulatory regime
o Access to a unique, globally respected market
o Access to a wide pool of capital
o Enhanced profile
o Increased status and credibility
o Currency for and easier rules on acquisition
o Eligibility for a range of UK tax benefits
17
Recommendations of the FEC Board of Directors
The FEC Board of Directors unanimously determined that the Transactions
described in this Information circular are fair and equitable to the FEC
Shareholders and gives the FEC Shareholders an opportunity to realize the value
in developing the assets of the Company by allowing it to raise sufficient
working capital for such development through Newco.
Right to Dissent
Pursuant to Section 190 of the CBCA, Registered Holders have the right to
dissent with respect to the FEC Resolutions if the President of FEC receives at
the registered office of FEC by 4:00 p.m. on the Business Day immediately
preceding the date of the FEC Meeting, a written objection and such holder
complies with Section 190 of the CBCA. Provided the Arrangement becomes
effective, each Dissenting Shareholder will be entitled to be paid the fair
value of the Common shares in respect of which the holder dissents in accordance
with Section 190 of the CBCA. See Appendices J for a copy of the provisions of
Section 190 of the CBCA.
The statutory provisions covering the right to dissent are technical and
complex. Failure to strictly comply with the requirements set forth in Section
190 of the CBCA may result in the loss of any right to dissent. Persons who are
beneficial owners of common shares registered in the name of a broker,
custodian, nominee or other intermediary who wish to dissent, should be aware
that only the Registered Holder is entitled to dissent. Accordingly, a
beneficial owner of common shares desiring to exercise the right to dissent must
make arrangements for such Common shares beneficially owned to be registered in
such holder's name prior to the time the written objection to the applicable
resolutions approving the transactions is required to be received by FEC, or
alternatively, make arrangements for the Registered Holder to dissent on such
holder's behalf.
Other Tax Considerations
Shareholders consult a tax advisor with respect to the tax implications of the
Arrangements, including any associated filing requirements, in such
jurisdictions and with respect to the tax implications in such jurisdictions of
owning FEC Common Shares after the Transaction. FEC Shareholders should also
consult a tax advisor regarding provincial or territorial tax considerations of
the Transactions and FEC Common Shares.
18
Selected Pro Forma Financial and Operational Information for FEC
The following is a summary of selected pro forma financial and operational
information for FEC following the transactions:
Forum Energy Corporation
Statement of Net Operating Loss
Balance Sheets as at December 31, 2004
(Cdn$ 000's)
Expenses (unaudited)
Genereal and Administration 1,755
Depreciation 268
Foreign Exchange -8
Interst Expense 162
------------
Net Operating Loss 2127
============
NOTE: The above proforma numbers are the unaudited consolidated results for the
Forum Energy Corporation Group of Companies and have been presented in this
circular purely for comparative purposes to show the effect of the Transactions
to the financial statements of the Company. In particular this has been prepared
to reflect the consolidated results to include the group with Forum Exploration
Inc on a full consolidation basis to results reflecting the transfer of FEC's
interest to an investment in Newco shares (subsequent to the placing of
additional shares) and assuming that FEC's position in Forum Exploration, Inc
will be diluted.
At the time of releasing this circular to the shareholders of FEC the audit is
being finalized and therefore the accounts may be subject to restatement to
reflect Canadian GAAP pronouncements currently in effect. There are no
accompanying notes to these financial statements and the reader is urged to
review the previous financial statements to be aware of the basis of preparation
of this proforma financial information. FEC assumes no responsibility for the
accuracy of these pre-forma financial statements and advise that they will be
subject to change when the final audited results are published.
Details of any proven or probable reserves per PGS and CSA reports are in a
tabular form in Appendices G and H respectively.
19
THE TRANSACTION
Background to and Reasons for the Transaction
Management of FEC continually reviews all options available to them to ensure
that the capital structure is efficient and that shareholder value is being
maximized. The strategy contemplated under the Transactions was initially
considered and selected after considerable scrutiny, modeling and evaluation as
a result of this pursuit of ongoing maximization of value for Shareholders. FEC
management initially discussed the possibility of acquiring the SEY Philippine
Assets from SEY in January 2005. FEC management worked with SEY management and
Nobles to evaluate several alternatives to enhance shareholder value and to make
it possible to raise sufficient working capital to ensure that the properties
could be developed to their maximum potential. With the assistance of the Nobles
FEC embarked on incorporating a new entity in the UK, Newco, with the intention
that this entity would hold the Philippine assets of both FEC and SEY. It is the
FEC Board of Director's view that this approach will permit a much quicker
result in raising the necessary working capital and permit the potential of
these properties to be further developed.
In March, 2005 FEC appointed PGS to evaluate the Oil and Gas reserves of the
Forum Exploration Assets as well as GSEC 101. In addition FEC appointed CSA
Group Limited to valuate the coal reserves of the coal properties which were
awarded to FEI in February 2005. The result of these reports will not only give
FEC a base valuation of its properties but also will form part of the Initial
Public Offering document for Newco when it seeks admission to AIM in the UK.
FEC believes that this structure better aligns the risks and returns of the
Combined Philippine Assets, enhances the value of the assets and will allow
Newco to develop their full potential for the following reasons:
o The transaction is designed to enhance FEC Shareholder value by
combining assets in the same geographical region and creating a
larger asset base.
o Newco will be the only energy company listed on the AIM market that
operates solely in the Philippines, thus potentially making it a
diverse and appealing investment underpinned by a strong balance
sheet and asset base.
o Permits FEC Shareholders to participate, through FEC's ownership
interest, in a company that will have the ability to raise working
capital in the UK market to ensure sufficient financial resources to
develop the licenses to their maximum potential.
o The Board of Newco will combine members from the Boards of both SEY
as well as FEC which will bring greater experience in the energy
industry to the Newco board.
o FEC will be positioned to look at new opportunities to diversify its
portfolio from a sole investment in Newco.
20
EFFECT OF THE TRANSACTION
General
The Transactions will initially result in FEC receiving 71.4% of the shares
initially issued in Newco in exchange for its 66.67% investment in Forum
Exploration Inc (FEC's equity position will be diluted , as will the 28.6%
equity position of SEY, upon completion of the Newco Pre-IPO and IPO placings).
The executive management of FEC will move to the executive management of Newco
and Newco will assume the name of Forum Energy Plc. FEC will continue its
evaluation of the redomicile of FEC from Canada to another jurisdiction. Finally
FEC will be renamed FEC Resources PLC and continue to source and develop natural
resources investments.
Details of the Transactions
The Transactions will result in the creation of new oil and natural gas Company
currently titled Sterling Philippines Plc and ultimately to be named Forum
Energy Plc (Newco). Newco will be interested in the FEC and SEY Combined
Philippine assets on the basis set out in this Information Circular. It is
intended that Newco will ultimately become the operator of the Philippine Assets
directly.
Pre-Transaction Steps
a) Sterling Energy plc incorporate Sterling Philippines Plc (Newco) in
the UK as a wholly owned subsidiary
b) Newco incorporate Sterling Far East Holdings Limited (Holdco) in
Jersey
c) Holdco incorporate Sterling Far East Limited in Jersey.
d) Sterling North West Africa Holdings Limited sells its interest in
Sterling Gas Philippines Limited (the owner of GSEC 101) to Sterling
Far East Holdings Limited in exchange for shares.
e) Sterling North West Africa Holdings Limited sells its shareholding
in Sterling Far East Holdings Limited to Sterling Philippines Plc
for 100% of the issued and outstanding shares in Sterling
Philippines Plc (Newco).
Transaction Steps and Post Transaction Structure
Upon FEC obtaining FEC Shareholder approval the following steps will occur:
a) The name of Sterling Far East Limited will be changed to Forum (FEI)
Limited. b) Holdco name will be changed from Sterling Far East
Holdings Limited to Forum Philippines Holdings Limited.
c) FEC will transfer the FEI common shares it holds into Forum (FEI)
Limited in exchange for shares in Forum (FEI) Limited.
d) FEC will then sell its shares in Forum (FEI) Limited to Forum
Philippines Holdings Limited in exchange for shares in Forum
Philippines Holdings Limited;
e) FEC will then sell its shares in Forum Philippines Holdings Limited
to Sterling Philippines Plc in exchange for shares in Sterling
Philippines Plc
f) Sterling Philippines Plc will change its name to Forum Energy Plc.
g) Following this, FEC will hold 71.4% of the issued capital of Newco
and SEY (through its subsidiary) will hold 28.6% of the issued share
capital of Newco.
h) The executive management will resign from FEC and join the
management of Newco.
i) Newco intends to raise up to (pound)4 million (Cdn$9.1 million)
through the Newco Pre-IPO Placing
j) Newco intends to raise further funds through an IPO Placing.
k) The Board will continue their deliberation process to decide whether
to relocate the domicile of the Company to another jurisdiction.
21
l) Structure of Newco before the Newco Pre-IPO placing:
----------- ------------ -------------
Sterling Forum Energy Forum Pacific
Energy Plc Corporation (Philippines)
----------- ------------ -------------
| | |
| 28.6% 71.4% | |
| | |
---------------------------- |
| |
| |
---------------- |
Forum Energy Plc |
UK ("Newco") |
---------------- |
| |
| 100% |
| |
------------------ |
Forum Philippines |
Holding Limited |
Jersey ("Holdco") |
|--------------------| |
| | |
|100% 100%| |
--------------- ----------- |
Forum (GSEC101) Forum (FEI) |
Limited Limited |
(Jersey) (Jersey) | 33.33%
--------------- ----------- |
| |
| |
66.67% ------------------------------ |
|
----------------------
Forum Exploration Inc.
(Philippines)
----------------------
Post Transaction Steps
Immediately after the Transaction becomes effective Newco will raise working
capital through the Newco Pre-IPO Placing and its Nominated Advisers, Noble &
Company, will bring the Company to AIM along with a Newco IPO Placing. No
assurances can be given that such placing or admission will take place.
Post Arrangement Structure
Newco will be owned 71.4% by FEC (Which by then will have changed its name to
FEC Resources, Inc) and 28.6% by Sterling Energy. This will be subject to
dilution when the Newco Pre-IPO placing occurs, resulting in additional shares
being issued to raise the necessary working capital. The board of directors of
Newco will be comprised of the former executive management of FEC - David
Robinson as CEO and David Thompson as CFO. Alan Henderson will be non-executive
chairman, Ian Baron will be appointed as a non-executive technical director and
Barry Stansfield will be a non-executive director (who will also continue to
serve on the board of FEC). SEY will nominate two members to the Board of
Directors: Harry Wilson (CEO of SEY) and Graeme Thomson (CFO of SEY) as
non-executive directors.
22
Termination of the Transaction
If the Transaction Agreement is not completed due to the failure to achieve the
condition precedents (see below) then the following steps will be taken:
a) SEY will vend 100% of GSEC101 into FEC in exchange for 70 million
FEC Common Shares (28.6% of issued and outstanding shares in FEC)
b) FEC will be responsible for all financial obligations of the license
covering GSEC 101.
c) SEY will appoint a representative to the Board of FEC.
d) FEC will seek alternative sources of working capital
Conditions Precedent to the Transaction
a) The parties hereby agree that Completion shall be conditional upon
the despatch of the FEC Circular by 22 April 2005 and FEC
Shareholder Approval being obtained by no later than 18 May 2005.
b) The parties may by notice in writing to each other party waive any
of the conditions in whole or in part.
c) Each of the Parties undertakes to use their reasonable endeavours
(so far as they are each reasonably able) to procure the fulfilment
of the conditions set out in clause 3.1 of the Transaction Agreement
by 18th May 2005. If all of the conditions have not been fulfilled
or waived by 18th May 2005 the Transaction Agreement shall terminate
with effect from that date, unless the Parties agree otherwise.
d) If this agreement terminates in accordance with clause 3.4 of the
Transaction Agreement then the obligations of the parties shall
automatically terminate save that the rights and liabilities of the
parties which have accrued prior to termination shall continue to
subsist including those under clauses 7 and 9 to 16 (inclusive) of
the Transaction Agreement.
e) Each party shall keep the others promptly advised of the progress
towards the satisfaction of its obligations under clause 3.3 (and
vice versa) of the Transaction Agreement
23
Shareholder Approvals
Pursuant to FEC's By-Laws, the number of votes required to pass the FEC
Resolutions shall be not less than two-thirds of the votes cast by FEC
Shareholders either in person or by proxy, at the FEC Meeting.
Recommendations of the Boards of FEC Board of Directors
The FEC Board of Directors has unanimously concluded that the Resolutions are
fair to FEC Shareholders, and are in the best interests of FEC and the FEC
Shareholders. Members of the FEC Board of Directors hold, or control, an
aggregate of 916,375 FEC Common Shares.
See "Interests of Certain Persons or Companies in the Matters to be Acted Upon".
Each of the members of the FEC Board of Directors and officers of FEC intend to
vote all of their FEC Common Shares in favour of the FEC Resolutions. Holders of
an aggregate of 141,900,461 FEC Common shares representing approximately 81 % of
the outstanding FEC Common shares have agreed to vote these FEC Common Shares in
favour of the Transaction and all other matters to be considered at the Forum
Energy Meeting. These Shareholders have executed an irrevocable proxy and
commitment to confirm their agreement.
Right to Dissent
The following description of the right to dissent and appraisal to which
registered Shareholders (collectively, "Dissenting Shareholders") are entitled
is not a comprehensive statement of the procedures to be followed by a
Dissenting Shareholder who seeks payment of the fair value of such Dissenting
Shareholder's Common shares and is qualified in its entirety by the reference to
the full text of Section 190 of the CBCA which is attached to this Information
Circular as Appendix J. A Dissenting Shareholder who intends to exercise the
right to dissent and appraisal should carefully consider and comply with the
provisions of that Section. Failure to strictly comply with the provisions of
that Section and to adhere to the procedures established therein may result in
the loss of all rights there under.
Registered Shareholders are entitled, in addition to any other right such holder
may have, to dissent and to be paid by FEC the fair value of the Common shares
held by such holder in respect of which such holder dissents, determined as of
the close of business on the last Business Day before the day on which the
resolutions from which such holder dissents were adopted. A registered
Shareholder may dissent only with respect to all of the Common shares held by
such holder or on behalf of any one beneficial owner and registered in the
Dissenting Shareholder's name. Only registered Shareholders may dissent. Persons
who are beneficial owners of Common shares registered in the name of a broker,
custodian, nominee or other intermediary who wish to dissent, should be aware
that they may only do so through the registered owner of such common shares. A
registered holder, such as a broker, who holds Common shares as nominee for
beneficial holders, some of whom wish to dissent, must exercise dissent rights
on behalf of such beneficial owners with respect to the Common shares held for
such beneficial owners. In such case, the demand for dissent should set forth
the number of Common shares covered by it.
A Dissenting Shareholder must send to the President and CEO of FEC a written
objection to the FEC Resolutions, which written objection must be received by
FEC at their registered office, by 4:00 p.m. on the Business Day immediately
preceding the date of the applicable Meeting.
A holder of Common shares, may not exercise the right to dissent in respect of
only a portion of such holder's Common shares, but may dissent only with respect
to all of the Common shares held by the holder. A registered Shareholder wishing
to exercise the right to dissent with respect to such holder's Common shares
shall not vote such Common shares at the applicable Meeting, either by the
submission of a proxy or by personally voting, in favour of the applicable
Resolutions. An application may be made to the Court of Queen's Bench of Alberta
by a Dissenting Shareholder after the adoption of the FEC Resolutions to fix the
fair value of the Dissenting Shareholder's Common shares. If such an application
to the Court is made by a Dissenting Shareholder FEC, must, unless the Court
otherwise orders, send to each Dissenting Shareholder
24
a written offer to pay the Dissenting Shareholder an amount considered by the
FEC board of directors to be the fair value of the Common shares, as applicable.
The offer, unless the Court otherwise orders, will be sent to each Dissenting
Shareholder at least 10 days before the date on which the application is
returnable, if FEC is the applicant, or within 10 days after FEC is served with
notice of the application, if a Dissenting Shareholder is the applicant. The
offer will be made on the same terms to each Dissenting Shareholder of Common
shares, as applicable, and will be accompanied by a statement showing how the
fair value was determined.
A Dissenting Shareholder may make an agreement with FEC for the purchase of such
holder's Common shares in the amount of the offer made by FEC (or otherwise) at
any time before the Court pronounces an order fixing the fair value of the
Common shares.
A Dissenting Shareholder is not required to give security for costs in respect
of an application and, except in special circumstances, will not be required to
pay the costs of the application or appraisal. On the application, the Court
will make an order fixing the fair value of the Common shares, as applicable, of
all Dissenting Shareholders who are parties to the application, giving judgment
in that amount against FEC and in favour of each of those Dissenting
Shareholders, and fixing the time within which FEC must pay that amount payable
to the Dissenting Shareholders. The Court may in its discretion allow a
reasonable rate of interest on the amount payable to each Dissenting Shareholder
calculated from the date on which the Dissenting Shareholder ceases to have any
rights as a Shareholder, until the date of payment.
On the Transaction becoming effective, or upon the making of an agreement
between FEC and the Dissenting Shareholder as to the payment to be made by FEC
to the Dissenting Shareholder, or upon the pronouncement of a Court order,
whichever first occurs, the Dissenting Shareholder will cease to have any rights
as a Shareholder other than the right to be paid the fair value of such holder's
Common shares, in the amount agreed to between FEC and the Dissenting
Shareholder or in the amount of the judgment, as the case may be. Until one of
these events occurs, the Dissenting Shareholder may withdraw the Dissenting
Shareholder's dissent, or if the Arrangement has not yet become effective, FEC
may rescind the FEC Resolutions, and in either event the dissent and appraisal
proceedings in respect of that Dissenting Shareholder will be discontinued.
FEC shall not make a payment to a Dissenting Shareholder under Section 190 if
there are reasonable grounds for believing that FEC is or would after the
payment be unable to pay its liabilities as they become due, or that the
realizable value of the assets of FEC would thereby be less than the aggregate
of its liabilities. In such event, FEC shall notify each Dissenting Shareholder
that it is unable lawfully to pay Dissenting Shareholders for their common
shares, as applicable, in which case the Dissenting Shareholder may, by written
notice to FEC within 30 days after receipt of such notice, withdraw such
holder's written objection, in which case FEC shall be deemed to consent to the
withdrawal and such Dissenting Shareholder shall be reinstated with full rights
as a Shareholder, failing which such Dissenting Shareholder retains status as a
claimant against FEC to be paid as soon as FEC is lawfully entitled to do so or,
in a liquidation, to be ranked subordinate to the rights of creditors of FEC but
in priority to its shareholders.
The above summary does not purport to provide a comprehensive statement of the
procedures to be followed by a Dissenting Shareholder who seeks payment of the
fair value of their Common shares. Section 190 of the CBCA requires adherence to
the procedures established therein and failure to do so may result in the loss
of all rights thereunder. Accordingly, each Dissenting Shareholder who might
desire to exercise the right to dissent and appraisal should carefully consider
and comply with the provisions of that section, the full text of which is set
out in Appendix J to this Information Circular and consult their own legal
advisor.
Interests of Certain Persons or Companies in the Matters to be acted upon
FEC Board of Directors and officers of FEC own beneficially, directly or
indirectly, or exercise control or direction over, an aggregate of approximately
916,375 FEC Common shares (approximately 0.56 % of the issued and outstanding
FEC Common shares). The directors and officers of FEC have agreed to vote the
25
916,375 FEC Common shares beneficially owned by them in favour of the FEC
Resolutions and all other matters to be considered at the FEC Meeting.
None of the principal holders of FEC Common shares or any director or officer of
FEC, or any associate or affiliate of any of the foregoing persons, has or had
any material interest in any transaction in the last three years or any proposed
transaction that materially affected, or will materially affect, FEC or any of
its affiliates except as disclosed above or elsewhere in this Information
Circular or the Appendices hereto.
Expenses of the Arrangement
The estimated costs to be incurred by FEC relating to this Information Circular
are expected to aggregate approximately Cdn$120,000
26
INFORMATION CONCERNING FORUM ENERGY CORPORATION
FEC is incorporated pursuant to the provisions of the CBCA. FEC is a reporting
issuer in the province of British Columbia and listed on the United States OTCBB
stock exchange under the symbol "FRUEF.OB" as well as Frankfurt and Munich
Exchanges under the symbol "FE8". FEC owns a 66.67% interest in Forum
Exploration Inc, a Philippine Company that is engaged in the acquisition,
exploration, development and where applicable, production of crude oil, natural
gas and coal in the Philippines.
FEC's registered office is at Suite 1400, 700-2nd Street SW Calgary, Alberta,
Canada T2B 4V5.
Information has been incorporated by reference in this Information Circular from
documents filed with securities commissions or similar authorities in the
provinces of Canada. Copies of the documents incorporated herein by reference
may be obtained on request without charge from the Chief Financial Officer of
FEC, Suite 1400, 700-2nd Street SW Calgary, Alberta, Canada T2B 4V5, phone (403)
290-1676 or by accessing the disclosure documents available through the Internet
on the SEDAR web site at www.sedar.com.
The following documents of FEC, filed with the various securities commissions or
similar authorities in the provinces of Canada, are specifically incorporated by
reference into and form an integral part of this Information Circular:
a) FEC's Annual Information Form dated May 17, 2004;
b) The Management Information Circular of FEC dated May 10, 2004
relating to the Annual and Special Meeting of Shareholders of FEC
held on June 30th 2004.
c) The audited comparative consolidated financial statements of FEC and
the notes thereto for the year ended December 31, 2003, together
with the Auditors' Report thereon;
d) Management's discussion and analysis of the financial condition and
operations of FEC for the year ended December 31, 2003;
e) The Unaudited comparative consolidated financial statements of FEC
for the nine months ended September 30, 2004;
f) Management's discussion and analysis of the financial condition and
operations of FEC for the nine months ended September 30, 2004;
Any material change reports (excluding confidential reports), comparative
interim financial statements and comparative annual financial statements,
together with the Auditors' Report thereon, and information circulars (excluding
those portions that are not required pursuant to National Instrument 44-101 of
the Canadian Securities Administrators to be incorporated by reference herein)
filed by FEC with the securities commissions or similar authorities in the
provinces of Canada subsequent to the date of this Information Circular and
prior to the termination of this distribution shall be deemed to be incorporated
by reference in this Information Circular.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for the
purposes of this Information Circular to the extent that a statement contained
herein or in any other subsequently filed document which also is, or is deemed
to be, incorporated by reference herein modifies or supersedes such statement.
The modifying or superseding statement need not state that it has modified or
superseded a prior statement or include any other information set forth in the
document that it modifies or supersedes. The making of a modifying or
superseding statement shall not be deemed an admission for any purposes that the
modified or superseded statement, when made, constituted a misrepresentation, an
untrue statement of a material fact or an omission to state a material fact that
is required to be stated or that is necessary to make a statement not misleading
in light of the circumstances in which it was made. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Information Circular.
27
Price Range and Trading Volume of FEC Common Shares
The FEC Common Shares are listed and posted for trading on the OTC BB under the
symbol "FRUEF". The following table sets forth the high and low trading prices
and the aggregate volume of trading of the FEC Common Shares on the OTC BB for
the periods indicated (as quoted by the OTC) intraday:
Period High Low Volume
$ $
2003
First Quarter 0.21 0.085 1,171,400
Second Quarter 0.66 0.08 2,082,200
Third Quarter 0.30 0.15 1,548,700
Fourth Quarter 0.62 0.18 2,672,310
2004
January 0.62 0.40 479,674
February 0.52 0.38 680,338
March 0.52 0.37 336,136
April 0.45 0.31 2,202,680
May 0.35 0.22 1,139,640
June 0.28 0.21 162,500
July 0.34 0.17 297,600
August 0.34 0.16 318,300
September 0.26 0.14 801,900
October 0.26 0.16 577,700
November 0.18 0.07 2,101,100
December 0.125 0.08 804,600
2005
January 0.11 0.055 3,005,100
February 0.17 0.10 1,459,500
March 0.15 0.048 5,247,500
Note:
(1) On February 26th, 2003, FEC acquired 66.67% interest in Forum Exploration
Common Shares and in consideration issued 100,000,000 shares of FEC Shares
to the vendors.
(2) On 25th August, 2003, FEC closed a private placement of 21,538,295 FEC
Shares with gross proceeds of $2,153,829.
INFORMATION CONCERNING FORUM (FEI) Limited
Forum (FEI) Limited is a Jersey, Channel Islands Company. Forum (FEI) Limited
will own all the Forum Exploration Common Shares transferred from FEC. Its
registered office will be located at Channel House
Financial Services Group Limited, P.O.Box 532, Channel House, 7 Esplanade,
St.Helier, Jersey. The authorized Capital is US$10,000,000 divided into
10,000,000 shares of US$1.00 each
INFORMATION CONCERNING NEWCO
Sterling Philippines Plc is a Company registered in the United Kingdom and its
registered offices is located at Mardall House, 7-9 Vaughan Road, Harpenden,
Herts AL5 4HU. The authorized share capital is 100,000,000 shares of par value
10p. Following the shareholders meeting this Company will change its name to
Forum Energy Plc with a registered office at 6th floor, One London Wall, London
EC2Y 5 EB, England.
28
GENERAL PROXY MATTERS
Solicitation of Proxies
This Information Circular is furnished in connection with the solicitation of
proxies by the management of FEC to be used at the FEC Meeting.
Solicitations of proxies will be primarily by mail, but may also be by newspaper
publication, in person or by telephone, fax or oral communication by directors,
officers, employees of FEC. All costs of the solicitation for the FEC Meeting
will be borne by FEC.
Appointment and Revocation of Proxies
Accompanying this Information Circular is a form of proxy for holders of FEC
Common Shares. The Persons named in the enclosed forms of proxy are directors
and officers of FEC.
A Shareholder desiring to appoint a Person (who need not be a Shareholder) to
represent such Shareholder at a Meeting other than the Persons designated in the
applicable accompanying form of proxy may do so either by inserting such
Person's name in the blank space provided in the appropriate form of proxy or by
completing another form of proxy and, in either case, sending or delivering the
completed proxy to the offices of Computershare, 4th Floor, 510 Burrard Street,
Vancouver, BC V6C 3B9, Canada. The applicable form of proxy must be received by
Computershare Trust Company of Canada, as applicable, by 4:30 p.m. (Calgary
time) on the first business day prior to the date of the Meetings or any
adjournment thereof. Failure to so deposit a form of proxy shall result in its
invalidation.
A Shareholder who has given a form of proxy may revoke it as to any matter on
which a vote has not already been cast pursuant to its authority by an
instrument in writing executed by such Shareholder or by his attorney duly
authorized in writing or, if the Shareholder is a corporation, by an officer or
attorney thereof duly authorized, and deposited at the above mentioned office
Computershare Trust Company of Canada, as applicable, on or before the last
Business Day preceding the day of the Meeting or any adjournment thereof or with
the chairman of the FEC Meeting, on the day of the FEC Meeting, or any
adjournment thereof.
The FEC Record Date for determination of FEC Shareholders entitled to receive
notice of and to vote at the FEC Meeting is April 18, 2005. Only FEC
Shareholders whose names have been entered in the registers of the FEC
Shareholders on the close of business on the FEC Record Date and holders of FEC
Common Shares issued by FEC after the FEC Record Date and prior to the FEC
Meeting will be entitled to receive notice of and to vote at the FEC Meeting,
provided that, to the extent a holder of FEC Common Shares transfers the
ownership of any FEC Common Shares after the FEC Record Date and the transferee
of those FEC Common Shares establishes ownership of such FEC Common Shares and
demands, not later than 10 days before the FEC Meeting, to be included in the
list of holders of FEC Common Shares, as the case may be, eligible to vote at
the FEC Meeting, such transferee will be entitled to vote those FEC Common
Shares at the FEC Meeting. FEC Options and FEC Warrants that have been
exercised, cancelled or otherwise terminated prior to the FEC Meeting cannot be
voted at the FEC Meeting.
Signature of Proxy
The form of proxy must be executed by the Shareholder or his or her attorney
authorized in writing, or if the Shareholder is a corporation, the form of proxy
should be signed in its corporate name under its corporate seal by an authorized
officer whose title should be indicated. A proxy signed by a Person acting as
attorney or in some other representative capacity should reflect such Person's
capacity following his or her signature and should be accompanied by the
appropriate instrument evidencing qualification and authority to act (unless
such instrument has been previously filed with FEC).
29
Voting of Proxies
The Persons named in the accompanying forms of proxy will vote the FEC Common
Shares in respect of which they are appointed in accordance with the direction
of the Shareholder appointing them. In the absence of such direction, such
Common shares will be voted FOR the approval of the applicable FEC Resolutions.
Exercise of Discretion of Proxy
The enclosed forms of proxy confer discretionary authority upon the Persons
named therein with respect to amendments or variations to matters identified in
the accompanying Notice of Meetings and this Information Circular and with
respect to other matters that may properly come before the respective Meeting.
Voting and Principal Holders Thereof
As at March 31, 2005 there were 174,583,653 FEC Common Shares, 17,967,000 FEC
Options and 8,239,000 FEC Warrants issued and outstanding. To the knowledge of
the directors and officers of FEC, as at the date
Hereof, with the exception of Westmark Limited and Langley Park Investment Trust
Plc no person or company beneficially own, directly or indirectly, or exercise
control or direction, over more than 10% of the FEC Common shares on a fully
diluted basis.
30
APPENDIX A
FEC Resolutions
BE IT RESOLVED THAT:
1. The transactions contemplated by and described in the Information
Circular and Proxy Statement of the Corporation dated April 22nd
2005 accompanying the notice of this meeting (the "Information
Circular"), including without restricting the generality thereof,
the disposition of all or substantially all of the property of the
Corporation substantially as set forth in Information Circular, be
and are hereby ratified, authorized and approved in accordance with
section 189(5) of the Canada Business Corporations Act;
Notwithstanding that this resolution has been duly passed, the board
of directors of the Corporation may, without further notice to or
approval of the holders of the Corporation's common shares, or other
interested or affected parties, revoke this resolution at any time
prior to this resolution becoming effective; and
Any director or officer of the Corporation is hereby authorized, for
and on behalf of the Corporation, to execute and deliver, with or
without the corporate seal, all other documents and instruments and
to do all other things as in the opinion of such director or officer
may be necessary or desirable to implement this resolution and the
matters authorized hereby, such determination to be conclusively
evidenced by the execution and delivery of any such document or
instrument, and the taking of any such action.
2. The corporation hereby adopts the name change to FEC Resources, Inc
with effect immediately following this meeting and subject to
submission of the prerequisite notices to inform of the name change
of the Corporation.
3. The Board of Directors may determine at their discretion the issue
of changing the domicile of the corporation from Canada to another
jurisdiction, subject to their acceptance of all relevant facts to
make an informed decision.
31
APPENDIX B
Transaction Agreement between FEC, SEY and Sterling Philippines with respect to
Newco
NOTICE REGARDING "TRANSACTION AGREEMENT"
As the pricing of the Newco Pre-IPO placing will not be finalised until shortly
before publication of this document, the Transaction Agreement will also not be
finalised and signed until that time. Accordingly, the form of the Transaction
Agreement set out in Appendix B represents the draft of the agreement as at the
latest practicable time prior to the printing of this document. Other than
changes arising from the pricing of the Newco Pre-IPO placing, no further
substantive changes are expected to be made to the Transaction Agreement.
32
Draft (5): 18 April 2005
ashurst
Transaction Agreement
Forum Energy Corporation
and
Sterling Energy plc
and
Sterling Philippines plc
in respect of the intention of the parties in
relation to the Transactions
o April 2005
33
CONTENTS
CLAUSE PAGE
1. INTERPRETATION ........................................................ 1
2. TRANSACTIONS .......................................................... 4
3. CONDITIONS ............................................................ 6
4. PERIOD TO COMPLETION .................................................. 7
5. WARRANTIES ............................................................ 9
6. UNDERTAKINGS .......................................................... 9
7. ANNOUNCEMENTS ......................................................... 10
8. COSTS ................................................................. 10
9. ENTIRE AGREEMENT ...................................................... 11
10. VARIATIONS ........................................................... 11
11. WAIVER ............................................................... 11
12. INVALIDITY ........................................................... 11
13. NOTICES .............................................................. 12
14. COUNTERPARTS ......................................................... 13
15. THIRD PARTY RIGHTS ................................................... 13
16. GOVERNING LAW AND JURISDICTION ....................................... 13
SCHEDULE 1 ................................................................ 15
Structure paper ........................................................... 15
SCHEDULE 2 ................................................................ 16
FEC Circular .............................................................. 16
SCHEDULE 3 ................................................................ 17
PART A .................................................................... 17
Sterling Warranties ....................................................... 17
PART B .................................................................... 22
FEC Warranties ............................................................ 22
SCHEDULE 4 ................................................................ 30
Form of voting agreement and irrevocable undertaking ...................... 30
SCHEDULE 5 ................................................................ 31
Limitations on Liability .................................................. 31
SCHEDULE 6 ................................................................ 32
The Newco Group ........................................................... 32
SCHEDULE 7 ................................................................ 37
Loan Agreement ............................................................ 37
SCHEDULE 8 ................................................................ 39
Placing Agreement ......................................................... 39
Agreed form documents
o FEC Circular
o Structure paper
o Placing Agreement
o Pre-IPO Information Memorandum
o Cash-flows and KPMG Memorandum
o Voting agreement and irrevocable undertaking
o Service agreements and letters of appointment for Newco directors
o Loan agreement
o Services agreement
34
THIS AGREEMENT is made on 2005.
BETWEEN:
(1) FORUM ENERGY CORPORATION whose principal office is at Suite 1400, 700-2nd
Street SW Calgary, Alberta, Canada T2B 4V5 ("FEC");
(2) STERLING ENERGY PLC (No. 1757721) whose registered office is at Mardall
House, 7-9 Vaughan Road, Harpenden, Herts AL5 4HU ("Sterling"); and
(3) STERLING PHILIPPINES PLC (No. 5411224) whose registered office is at
Mardall House, 7- 9 Vaughan Road, Harpenden, Herts AL5 4HU ("Newco").
RECITALS
(A) The parties have agreed to enter into this agreement in order to set out
their proposed intentions in relation to the sale of their respective
interests in the Licences to Newco in contemplation of Admission.
(B) This agreement is based on the initial intentions of the parties as set
out in the structure paper attached at schedule 1. The structure envisages
that immediately prior to the issue of securities for the pre-IPO
Fundraising Newco will hold each of the Licences through its various Group
Company members with its share capital being held by Sterling Northwest
Africa (a wholly owned subsidiary of Sterling) and FEC as to 28.6 per
cent. and 71.4 per cent. respectively.
(C) Details of each member of the Newco Group are set out in schedule 6.
THE PARTIES AGREE AS FOLLOWS:
1. INTERPRETATION
1.1 The following words and expressions shall, unless the context otherwise
requires, have the following meanings:
"Admission" means the proposed admission to AIM of the whole of the issued
share capital of Newco;
"Admission Document" means the document to be issued by Newco in
connection with Admission, a draft of which is represented by the pre-IPO
Information Memorandum;
"AIM" means AIM, a market of the London Stock Exchange;
"Business Day" means a day (excluding Saturdays) on which banks are
generally open in London for the transaction of normal banking business;
"Completion" means completion of the sale of the FEI Shares to Newco as
set out in clause 2.6;
"Confidential Information" means all information relating to the
Transactions and the Licences which is not in the public domain;
"DOE" means the Department of Energy of the Republic of the Philippines;
1
35
"EGM" means the extraordinary general meeting of the ordinary shareholders
of FEC convened for 18 May 2005;
"Encumbrance" means any mortgage, charge (fixed or floating), pledge,
lien, hypothecation, trust, right of set off or other third party right or
interest (legal or equitable) including any right of set-off, assignment
by way of security, reservation of title or any other security interest of
any kind however created or arising or any other agreement or arrangement
(including a sale and repurchase arrangement) having similar effect;
"FEC Circular" means the circular to FEC shareholders in the agreed terms
despatched on 22 April 2005 setting out the terms of inter alia the
Transactions together with a notice of EGM and a form of proxy in respect
thereof (a copy of which is annexed at schedule 2);
"FEC Shareholder Approval" means approval of each of the resolutions
proposed at the EGM by the requisite majority of FEC shareholders;
"FEC Warranties" means the warranties given pursuant to clause 5 and part
B of schedule 3;
"FEI" means Forum Exploration Inc., of 22/F Citibank Tower, 8741 Paeso de
Roxas, Makati City, Philippines, a corporation incorporated under the laws
of the Republic of the Philippines;
"FEI Licences" means the 66(2)/3 per cent. interest in SC40 Cebu a service
contract which contains the Libertad Gas Field and several prospects
including Jibitnil Island, West Toledo, Central Tanon and Maya; and a 100
per cent. interest in two coal operating contracts each dated 23 February
2005 between the Republic of the Philippines acting by the DOE and FEI
being (a) blocks 34-I-68 and 34-I-69 on the DOE coal blocking map; and (b)
blocks 35-I-219 and 35-I-259 on the DOE coal blocking map each in the
province of Cebu, Republic of the Philippines;
"FEI Shares" means the 125,000,000 ordinary shares held by FEC in FEI
amounting to an
aggregate of 662/3 per cent. of the issued [common] [ordinary] share
capital of FEI;
"FPI" means Forum Pacific Inc., of 22/F Citibank Tower, 8741 Paeso de
Roxas, Makati City, Philippines, a corporation incorporated under the laws
of the Republic of the Philippines being the holder of 62,500,000 ordinary
shares in FEI amounting to an aggregate of 331/3 per cent. of the share
capital of FEI;
"Holdco" means Sterling Far East Holdings Limited being a Jersey private
limited company incorporated for the purpose of being the holding company
of SPV1, SPV2 and SPV3;
"Licences" means all of the Reed Bank Licence, the FEI Licences; and the
Nido and Matinloc Licences;
London Stock Exchange" means the London Stock Exchange plc;
"Newco Group" means Newco and each of its subsidiaries, being Holdco, SPV
1, SPV 2 and SPV 3 and "Group Company" means any of them;
"Nido and Matinloc Licences" means the farm-in option currently being
negotiated by FEC in respect of offshore service contracts SC14A and SC14B
each situated in the South China Sea;
"Noble" means Noble & Company Limited Newco's proposed nominated adviser;
2
36
"Placing Agreement" means the Placing Agreement in the agreed terns
intended to be entered into between amongst others Newco and Noble
substantially in the form set out in schedule 8 to this agreement.
"pre-IPO Fundraising" means the monies raised by Noble on behalf of Newco
being a minimum amount of (pound)3,000,000 (before expenses);
"pre-IPO Information Memorandum" means the information memorandum on Newco
in the agreed terms prepared and distributed by Noble on behalf of Newco
for the purposes of the pre-IPO Fundraising;
"Reed Bank Licence" means the licence in respect of an area covering
approximately 1,036,000 hectares in the Reed Bank area in the form set out
in the Geophysical Survey and Exploration Contract between the Government
of the Republic of the Philippines, acting by the DOE and Sterling Energy
(UK) Limited dated 13 June 2002 and extended by letter from the DOE dated
11 June 2004 to 11 June 2005;
"Related Person" means in relation to any party its holding companies and
the subsidiaries, subsidiary undertakings and associated companies from
time to time of such holding companies, all of them and each of them as
the context admits;
"SPV 1" means Sterling Gas Philippines Limited, details of which are set
out in schedule 6;
"SPV 2" means Sterling Far East Limited, details of which are set out in
schedule 6;
"SPV 3" means Sterling Resources Far East Limited, details of which are
set out in schedule 6;
"Sterling Northwest Africa" means Sterling Northwest Africa Holdings
Limited a Jersey private limited company and wholly-owned subsidiary of
Sterling;
"Sterling Warranties" means the warranties given pursuant to clause 5 and
Part A of schedule 3;
"Transactions" means the acquisition by Newco or a member of the Newco
Group of each of the Licences as set out in clause 2 of this agreement and
the completion of the pre-IPO Fundraising; and
"Warranties" means the Sterling Warranties and the FEC Warranties.
1.2 In this agreement, unless otherwise specified, reference to:
(a) a "subsidiary undertaking" is to be construed in accordance with
section 258 of the Companies Act 1985 and a "subsidiary" or "holding
company" is to be construed in accordance with section 736 of that
Act;
(b) a document in the "agreed terms" is a reference to that document in
the form approved and for the purposes of identification signed by
or on behalf of each party;
(c) "includes" and "including" shall mean including without limitation;
(d) a "party" means a party to this agreement and includes its assignees
(if any) and/or the successors in title to substantially the whole
of its undertaking;
3
37
(e) a "person" includes any person, individual, company, firm,
corporation, government, state or agency of a state or any
undertaking (whether or not having separate legal personality and
irrespective of the jurisdiction in or under the law of which it was
incorporated or exists);
(f) a "statute" or "statutory instrument" or "accounting standard" or
any of their provisions is to be construed as a reference to that
statute or statutory instrument or accounting standard or such
provision as the same may have been amended or re- enacted before
the date of this agreement;
(g) "clauses", "paragraphs" or "schedules" are to clauses and paragraphs
of and schedules to this agreement;
(h) "(pound)" means pounds sterling, the lawful currency of the United
Kingdom;
(i) "writing" includes any methods of representing words in a legible
form (other than writing on an electronic or visual display screen)
or other writing in non-transitory form;
(j) words denoting the singular shall include the plural and vice versa
and words denoting any gender shall include all genders;
(k) any statute, statutory instrument, regulation, by-law or other
requirement of English law and to any English legal term for any
action, remedy, method of judicial proceeding, legal document, legal
status, procedure, court, official or any legal concept or doctrine
or other expression shall in respect of any jurisdiction other than
England be deemed to include that which most nearly approximates in
that jurisdiction to the English term;
(l) the time of day is reference to time in London, England.
1.3 The words and expressions defined in each of the schedules shall have the
meanings set out therein.
1.4 Unless expressly stated to the contrary the obligations and liabilities of
each of the parties under this agreement shall be several.
1.5 The recitals, the schedules and documents in the agreed terms form part of
the operative provisions of this agreement and references to this
agreement shall, unless the context otherwise requires include references
to the recitals, the schedules and documents in the agreed terms.
2. TRANSACTIONS
2.1 Upon the terms and subject to the conditions set out in this agreement the
parties have agreed to implement the Transactions as set out in this
clause 2.
Newco entities
2.2 In anticipation of this agreement Sterling has incorporated the following
entities further details of which are set out in schedule 6:
(a) Newco: such entity being a public limited company incorporated in
England and Wales under the name "Sterling Philippines plc" with an
authorised share capital of
4
38
100,000,000 ordinary shares of 10p each and being a wholly owned
subsidiary of Sterling Northwest Africa;
(b) Holdco: such entity being a private limited company incorporated in
Jersey under the name "Sterling Far East Holdings Limited" with an
authorised share capital of [8,900,000] ordinary shares of (pound)1
each and being a wholly owned subsidiary of Newco;
(c) SPV 1: such entity being a private limited company incorporated in
Jersey under the name of "Sterling Gas Philippines Limited" with an
authorised share capital of [2,600,000] ordinary shares of (pound)1
each and being a wholly owned subsidiary of Sterling Northwest
Africa;
(d) SPV 2: such entity being a private limited company incorporated in
Jersey under the name of "Sterling Far East Limited" with an
authorised share capital of [6,300,000] ordinary shares of (pound)1
each and being a wholly owned subsidiary of Holdco; and
(e) SPV 3: such entity being a private limited company incorporated in
Jersey under the name of "Sterling Resources Far East Limited" with
an authorised share capital of 1,000 ordinary shares of (pound)1
each and being a wholly owned subsidiary of Holdco.
Reed Bank Licence transfer
2.3 In anticipation of this agreement:
(a) Sterling on 1 April 2005 via its wholly owned subsidiary Sterling
Energy (UK) Limited entered into a Deed of Assignment with SPV 1 in
respect of all of its rights, interest, obligations and liabilities
in respect of the Reed Bank Licence in consideration for the sum of
(pound)600,000.
(b) On o April 2005 Sterling Northwest Africa entered into a share sale
agreement with Holdco for the entire share capital of SPV 1 in
consideration for the issue to Sterling Northwest Africa of
[2,600,000] ordinary shares of 10p each in the capital of Holdco.
(c) On o April 2005 Sterling Northwest Africa entered into a share sale
agreement with Newco for the entire share capital of Holdco (not
already held by Newco) in consideration for the issue to Sterling
Northwest Africa of o ordinary shares of 10p each in the capital of
Newco amounting to an aggregate of 28.6 per cent. of the issued
share capital of Newco immediately following Completion (but before
taking account of the effects of the pre-IPO Fundraising).
FEC shareholder approvals
2.4 FEC has today despatched or undertakes today to despatch the FEC circular
to its shareholders with a recommendation from the board of directors of
FEC that FEC shareholders vote in favour of the resolutions to be proposed
at the EGM convened for 18 May 2005 (being resolutions to approve inter
alia the Transactions).
2.5 FEC has procured the signature of such number of voting agreements and
irrevocable undertakings to vote in favour of the resolutions to be
proposed at the EGM from its shareholders amounting to an aggregate of at
least 66(2)/3 per cent. of the entire issued share capital of FEC. Each
voting agreement and irrevocable undertaking is substantially in the form
set out in schedule 4 to this agreement.
FEI Share transfer
5
39
2.6 Conditional upon FEC Shareholder Approval, FEC on o o 2005 entered into
the following agreements:
(a) a share sale agreement between FEC, SPV 2 and Sterling in respect of
the transfer of the FEI Shares to SPV2 the consideration for which
is the issue to FEC of [6,300,000] ordinary shares of 10p each in
the share capital of SPV 2.
(b) conditional upon completion of the share sale referred to in clause
2.6(a) a share sale agreement between FEC, Holdco and Sterling in
respect of the transfer by FEC of the 6,300,000 shares in SPV 2 to
Holdco the consideration for which shall be the issue to FEC of
[6,300,000] ordinary shares in Holdco; and
(c) conditional upon completion of the share sale agreement referred to
in clause 2.6(b) a share sale agreement between FEC, Newco and
Sterling for the transfer by FEC of the ordinary shares it holds in
Holdco to Newco the consideration for which is the issue to FEC of o
ordinary shares in the capital of Newco amounting to an aggregate of
71.4 per cent. of the share capital of Newco then in issue taking
into account the shareholding of Sterling set out in clause 2.3
above (but before taking account of the effects of the pre-IPO
Fundraising).
2.7 Subject always to FEC Shareholder Approval being obtained FEC undertakes
to do all such things as may be reasonably necessary to ensure that the
Nido and Matinloc Licences are either farmed-in by SPV 3, or entered into
directly by SPV 3 including, without limitation, using its best endeavours
to ensure that any option lawfully exercisable by FEC is exercised so that
the Nido and Matinloc Licences are farmed-in by SPV 3. [To be updated if
heads are signed - David Robinson to advise.]
Pre-IPO Fundraising and Admission
2.8 Each of Sterling, FEC and Newco hereby severally undertakes to use their
respective reasonable endeavours to do all such things as may be
reasonably necessary and are reasonably within their power to assist Noble
in respect of the pre-IPO Fundraising.
2.9 In addition Sterling, FEC and Newco each severally undertakes to use all
reasonable endeavours to do all such things and acts as Noble considers
reasonably necessary to procure Admission by no later than 15 July 2005
(or such later date as may be agreed in writing by each of the parties to
this agreement) including entering into the Placing Agreement and taking
all steps reasonably within its power to ensure the Warranties set out in
part 1 of schedule 2 to the Placing Agreement can be given in accordance
with the provisions of clause 10 of the Placing Agreement without breach
and that no claim will arise under clause 11 of the Placing Agreement.
3. CONDITIONS
3.1 The parties hereby agree that Completion shall be conditional upon the
despatch of the FEC Circular by 22 April 2005 and FEC Shareholder Approval
being obtained by no later than 18 May 2005.
3.2 The parties may by notice in writing to each other party waive either of
the conditions in whole or in part.
3.3 Each of the parties undertakes to use their reasonable endeavours (so far
as they are each reasonably able) to procure the fulfilment of the
conditions set out in clause 3.1 by 18 May 2005.
6
40
..4 If both of the conditions have not been fulfilled or waived by 18 May 2005
this agreement shall terminate with effect from that date.
3.5 If this agreement terminates in accordance with clause 3.4 then the
obligations of the parties shall automatically terminate save that the
rights and liabilities of the parties which have accrued prior to
termination shall continue to subsist including those under clauses 7 and
9 to 16 (inclusive).
3.6 Each party shall keep the others promptly advised of the progress towards
the satisfaction of its obligations under clause 3.3 (and vice versa).
4. PERIOD TO COMPLETION
4.1 Throughout the period from the date of this agreement until Completion
Sterling shall:
(a) take all necessary steps to preserve and maintain SPV 1's interest
in the Reed Bank Licence and to operate it in accordance with its
terms;
(b) keep FEC informed of all material acts, matters or things relating
to the Reed Bank Licence, or any operations carried out thereunder;
(c) operate in its usual course and in such a manner so as to ensure
that no act or event shall occur prior to Completion that could
reasonably be expected to result in a breach of the Sterling
Warranties and procure so far as it is able that each of Newco,
Holdco, SPV1, SPV2 and SPV3 operate their businesses and incur
expenditure only in the usual course and in accordance with the
terms of, or as contemplated by this agreement and shall keep FEC
informed of all such activities in relation thereto;
(d) procure so far as it is able that each of Newco, Holdco, SPV 1, SPV
2 and SPV 3 operate their businesses and incur expenditure only in
accordance with the terms of, or as contemplated by this agreement
and shall keep FEC informed of all such activities in relation
thereto; and
(e) without limiting the generality of clause 4.1(c) Sterling undertakes
it will advance to SPV 1 on the terms of the loan agreement set out
in schedule 7 such sums (not exceeding (pound)o) as SPV 1 may be
required to pay on or before 24 May 2005 in respect of commitments
entered into by SPV 1 in connection with the Reed Bank Licence or
its branch office registration in the Republic of the Philippines
(or such other expenditure as Sterling shall agree). Sterling's
obligation to make any such advances shall cease on 24 May 2005.
4.2 Throughout the period from the date of this agreement until Completion FEC
shall:
(a) take all necessary steps and procure that FEI preserves and
maintains its interests in the FEI Licences and operates them in
accordance with their terms;
(b) keep Sterling informed of all material acts, matters or things
relating to the FEI Shares, the FEI Licences and the Nido and
Matinloc Licences or any operation carried out thereunder;
(c) procure so far as it is able that FEI operates its business and
incurs expenditure only in accordance with the terms of, or as
contemplated by this agreement and shall keep Sterling informed of
all such activities in relation thereto; and
7
41
(d) operate in its usual course and procure (so far as it is able) that
FEI operates in the usual course and in such a manner so as to
ensure that no act or event shall occur prior to Completion which
could reasonably be expected to result in a breach of the FEC
Warranties including and without limiting the foregoing paying all
sums payable in so operating the business of FEI to the extent FEI
does not or is not able to do so.
4.3 Immediately after receipt of funds referred to in clause 4.6 the parties
shall procure (so far as each of them is able) that Newco applies such of
the funds from the pre-IPO Fundraising as follows :
(a) in accordance with the cashflow forecast for Newco and [memorandum
in respect thereof prepared by KPMG LLP each] in the agreed terms in
repayment of all sums advanced by Sterling pursuant to clause
4.1(e);
(b) in repayment of any sums paid by FEC pursuant to clause 4.2(d);
(c) in payment to Sterling of the sum of (pound)o being the agreed sum
payable in respect of sums paid by Sterling on behalf of SPV 1 in
the period from 1 February 2005 to the date hereof; and
(d) (pound)o being the agreed sum payable in respect of sums paid by FEC
on behalf of FEI in the period from 1 February 2005 to the date
hereof.
4.4 If at any time prior to Completion:
(a) Sterling is in material breach of any of the Sterling Warranties or
its obligations hereunder; or
(b) there shall occur any act or event which upon Completion would or
might reasonably be expected to result in a material breach of any
of the Sterling Warranties were they repeated at such time;
which in any such case is incapable of remedy or, if capable of remedy
(before Completion), is not remedied by Sterling within seven days after
notice thereof from FEC or Newco requiring the same to be remedied (before
Completion) then in any such case FEC or Newco shall be entitled to elect
by notice in writing to terminate this agreement save that the rights and
liabilities of the parties which have accrued prior to termination shall
continue to subsist including those under clauses 7 and 9 to 16
(inclusive).
4.5 If at any time prior to Completion:
(a) FEC is in material breach of any of the FEC Warranties or its
obligations hereunder; or
(b) there shall occur any act or event which immediately prior to
Completion would, or might reasonably be expected to result in a
material breach of any of the FEC Warranties were they repeated
immediately at such time; or
which in any such case is incapable of remedy or, if capable of remedy
(before Completion), is not remedied by FEC within seven days after notice
thereof from Sterling or Newco requiring the same to be remedied (before
Completion) then in any such case Sterling or Newco shall be entitled to
elect by notice in writing to FEC to terminate this agreement save that
the rights and liabilities of the parties which have accrued prior to
termination shall continue to subsist including those under clauses 7 and
9 to 16 (inclusive).
8
42
4.6 If in the event that the funds raised by Noble on behalf of Newco pursuant
to the pre-IPO Fundraising have not been credited to the account of Newco
by 5 p.m. on 24 May 2005 (or such later date as the parties may agree)
then this agreement shall terminate with immediate effect save that the
rights and liabilities of the parties which have accrued prior to
termination shall continue to subsist including those under clause 7 and 9
to 16 (inclusive).
4.7 Upon Completion each of the parties shall procure that the existing
directors of Newco shall resign and that the following appointments to the
board of Newco be made:
Alan Henderson Non-executive Chairman
David Robinson Chief Executive Officer
David Thompson Chief Financial Officer
Harry Wilson Non-executive director
Graeme Thomson Non-executive director
Barry Stansfield Non-executive director
Ian Baron Non-Executive Director
Each of the parties shall procure that where such appointments have not
already occurred that upon their appointment the above directors enter
into a service agreement or letter of appointment each in the agreed terms
with Newco.
4.8 Upon Completion Sterling will enter into a services agreement, in the
agreed terms, in respect of the provision of technical advice in respect
of the Licences to be provided by Sterling to Newco in accordance with the
requirements of the DOE.
5. WARRANTIES
5.1 Sterling warrants with FEC and Newco in the terms of the Sterling
Warranties. The Sterling Warranties shall be deemed to have been repeated
immediately prior to Completion by reference to the facts and
circumstances then subsisting.
5.2 FEC warrants with Sterling and Newco in the terms of the FEC Warranties.
The FEC Warranties shall be deemed to have been repeated immediately prior
to Completion by reference to the facts and circumstances then subsisting.
5.3 Each of the Warranties shall be construed as a separate warranty, and
(unless expressly provided to the contrary) shall not be limited by the
terms of any of the other Warranties or by any other term of this
agreement.
5.4 The liability of Sterling under the Sterling Warranties and of FEC under
the FEC Warranties shall be limited if and to the extent that the
limitations referred to in schedule 5 apply.
5.5 Each of Sterling and FEC warrants, to the other and to Newco that they are
not aware of any fact, matter, event or circumstance which does, or would,
or might constitute a breach of Warranty as at the date of this Agreement.
6. UNDERTAKINGS
6.1 Each party undertakes that it will not during the term of this agreement
or at any time thereafter use, divulge or communicate to any person,
except its professional representatives or advisers or as may be required
by law or any legal or regulatory authority, any Confidential Information
concerning the other party which may have or may in future come to its
knowledge and each of the parties shall use its reasonable endeavours to
prevent the publication or disclosure of any Confidential Information.
9
43
6.2 In consideration of the Newco Group acquiring the FEI Shares and the Reed
Bank Licence pursuant to the arrangements referred to in clause 2 above
and in order to assure to the Newco Group the full benefit of the FEI
Shares and the Reed Bank Licence, FEC and Sterling each severally
undertake to Newco that neither it nor any of its subsidiaries or any
holding company of any such subsidiary shall either alone or in
conjunction with any other person do or actively encourage or
intentionally assist any other person to do any of the following things
except with the prior written consent of Newco (such consent not to be
unreasonably withheld):
(a) within [three] years after Completion carry on or be engaged,
concerned or interested in (except as the holder of shares in a
listed company which confer not more than three per cent. of the
votes which could normally be cast at a general meeting of that
company) any business whose sole or a material part of whose
business is the exploration and/or development of oil, gas and/or
coal assets in the Republic of the Philippines; and
(b) within [three] years after Completion solicit or seek to entice away
any employee from the employment of the Newco Group.
Each undertaking contained in this clause 6.2 shall be construed as a
separate and independent undertaking.
6.3 FEC undertakes to Newco that it will take no action that would or might
reasonably be expected to cause Newco at any time (including for the
avoidance of doubt, upon the sale of any shares in Newco) to either become
a reporting issuer or become subject to any registration requirements or
reporting obligations pursuant to any US federal securities laws, rules or
regulations or any Canadian securities laws, rules or regulations.
7. ANNOUNCEMENTS
7.1 No party shall disclose the making of this agreement nor its terms (except
those matters set out in the press releases of FEC and Sterling in the
agreed form) and each party shall procure that each of its Related Persons
shall not make any such disclosure without the prior consent of the other
party unless disclosure is:
(a) to its professional advisers; or
(b) required by law or the rules or standards of the London Stock
Exchange or any other regulatory body and disclosure shall then only
be made by that party after it has taken all such steps as may be
reasonable in the circumstances to agree the contents of such
announcement with the other party before making such announcement
and provided that any such announcement shall be made only after
notice to the other party/parties.
7.2 The restrictions contained in clause 7.1 shall apply without limit of time
and whether or not this agreement is terminated.
8. COSTS
Save as expressly otherwise provided in this agreement Newco shall bear
all legal, accountancy and other costs, charges and expenses connected
with the Transactions and as contemplated by this agreement.
10
44
9. ENTIRE AGREEMENT
Each party on behalf of itself and as agent for each of its Related
Persons acknowledges and agrees with the other party (each such party
acting on behalf of itself and as agent for each of its Related Persons)
that:
(a) this agreement, together with those documents included in the
schedules or otherwise referred to as being in the agreed terms
constitutes the entire and only agreement between the parties and
their respective Related Persons relating to the subject matter of
this agreement;
(b) neither party nor any of its Related Persons have been induced to
enter into this agreement in reliance upon, nor have they been
given, any warranty, representations, statement, assurance,
covenant, agreement, undertaking, indemnity or commitment of any
nature whatsoever other than as are expressly set out in this
agreement and, to the extent that any of them have been, it (acting
on behalf of itself and as agent on behalf of each of its Related
Persons) unconditionally and irrevocably waives any claims, rights
or remedies which any of them might otherwise have had in relation
thereto;
provided that the provisions of this clause 9 shall not exclude any
liability which any of the parties or, where appropriate, their Related
Persons would otherwise have to any other party or, where appropriate, to
any other party's Related Persons or any right which any of them may have
to rescind this agreement in respect of any statements made fraudulently
by any of them prior to the execution of this agreement or any rights
which any of them may have in respect of fraudulent concealment by any of
them.
10. VARIATIONS
This agreement may be varied only by a document signed by each of
Sterling, Newco and FEC.
11. WAIVER
11.1 A waiver of any term, provision or condition of, or consent granted under,
this agreement shall be effective only if given in writing and signed by
the waiving or consenting party and then only in the instance and for the
purpose for which it is given.
11.2 No failure or delay on the part of any party in exercising any right,
power or privilege under this agreement shall operate as a waiver thereof,
nor shall any single or partial exercise of any such right, power or
privilege preclude any other or further exercise thereof or the exercise
of any other right, power or privilege.
11.3 The rights and remedies herein provided are cumulative with and not
exclusive of any rights or remedies provided by law.
12. INVALIDITY
If any provision of this agreement is or becomes invalid, illegal or
unenforceable in any respect under the law of any jurisdiction:
(a) the validity, legality and enforceability under the law of that
jurisdiction of any other provision; and
11
45
(b) the validity, legality and enforceability under the law of any other
jurisdiction of that or any other provision,
shall not be affected or impaired in any way.
13. NOTICES
13.1 Any notice, demand or other communication given or made under or in
connection with the matters contemplated by this agreement shall be in
writing and shall be delivered personally or sent by fax or prepaid first
class post (air mail if posted to or from a place outside the United
Kingdom):
In the case of the FEC to:
The Continental Building
25 Charles Street
Hamilton HM12
Bermuda
Fax: 001 44 1 29 23 623
Attention: David Thompson
In the case of Sterling to:
Mardall House
7-9 Vaughan Road
Harpenden
Herts
AL5 4HU
Fax: 01582 462161
Attention: Graeme Thomson
In the case of Newco to:
Mardall House
7-9 Vaughan Road
Harpenden
Herts
AL5 4HU
Fax: 01582 462161
Attention: Graeme Thomson
and shall be deemed to have been duly given or made as follows:
(a) if personally delivered, upon delivery at the address of the
relevant party;
(b) if sent by first class post, two Business Days after the date of
posting;
(c) if sent by air mail, five Business Days after the date of posting;
and
(d) if sent by fax, when despatched;
provided that if, in accordance with the above provisions, any such
notice, demand or other communication would otherwise be deemed to be
given or made outside 9.00 a.m. to 5.00 p.m. on a Business Day such
notice, demand or other communication shall be deemed to be given or made
at 9.00 a.m. on the next Business Day.
12
46
13.2 A party may notify the other party to this agreement of a change to its
name, relevant addressee, address or fax number for the purposes of clause
13.1 provided that such notification shall only be effective on:
(a) the date specified in the notification as the date on which the
change is to take place; or
(b) if no date is specified or the date specified is less than five
Business Days after the date on which notice is given, the date
falling five Business Days after notice of any such change has been
given.
14. COUNTERPARTS
This agreement may be executed in any number of counterparts which
together shall constitute one agreement. Any party may enter into this
agreement by executing a counterpart and this agreement shall not take
effect until it has been executed by all parties.
15. THIRD PARTY RIGHTS
15.1 No provision of this agreement or any side agreement shall be construed as
creating any rights enforceable by any party not a party to this agreement
(a "Third Party"). The Contracts (Rights of Third Parties) Act 1999 shall
therefore not apply to this agreement or any side agreement and this
agreement and any side agreement may be rescinded or varied without the
consent of a Third Party.
16. GOVERNING LAW AND JURISDICTION
16.1 This agreement (and any dispute, controversy, proceedings or claim of
whatever nature arising out of in any way relating to this agreement or
its formation) shall be governed by and construed in accordance with
English law.
16.2 Each of the parties to this agreement irrevocably agrees that the courts
of England shall have exclusive jurisdiction to hear and decide any suit,
action or proceedings, and/or to settle any disputes, which may arise out
of or in connection with this agreement (respectively, "Proceedings" and
"Disputes") and, for these purposes, each party irrevocably submits to the
jurisdiction of the courts of England.
16.3 Each party irrevocably waives any objection which it might at any time
have to the courts of England being nominated as the forum to hear and
decide any Proceedings and to settle any Disputes and agrees not to claim
that the courts of England are not a convenient or appropriate forum for
any such Proceedings or Disputes and further irrevocably agrees that a
judgment in any Proceedings or Disputes brought in any court referred to
in this clause 16 shall be conclusive and binding upon the parties and may
be enforced in the courts of any other jurisdiction.
16.4 Without prejudice to any other permitted mode of service the parties agree
that service of any claim form, notice or other document ("Documents") for
the purpose of any Proceedings begun in England shall be duly served upon
it if delivered personally or sent by registered post, in the case of:
(a) Sterling to Mardall House, 7-9 Vaughan Road, Harpenden, Herts AL5
4HU (marked for the attention of Graeme Thomson) and
(b) FEC to The Continental Building, 25 Charles Street, Hamilton HM12,
Bermuda (marked for the attention of David Thompson)
13
47
or such other person and address in England and/or Wales as Sterling
shall notify the FEC in writing or vice versa from time to time.
IN WITNESS whereof this agreement has been executed on the date first above
written.
14
48
SCHEDULE 1
Structure paper
INTENTIONALLY OMITTED
15
49
SCHEDULE 2
FEC Circular
INTENTIONALLY OMITTED
16
50
SCHEDULE 3
PART A
Sterling Warranties
In this part A of this schedule 3 the following words have the following
meanings unless the context otherwise requires:
"Company" means Sterling Energy (UK) Limited;
"Intellectual Property" means all rights in or in relation to any and all
patents, utility models trade and service marks, rights in designs, get-up,
trade, business or domain names, copyrights, topography rights (whether
registered or not and any applications to register or rights to apply for
registration of any of the foregoing), rights in inventions, Knowhow, trade
secrets and other confidential information, rights in databases and all other
intellectual property rights of a similar or corresponding character which may
now or in the future subsist in any part of the world and any rights to receive
any remuneration in respect of such rights;
"Knowhow" means confidential or proprietary industrial, technical or commercial
information and techniques in any form (including paper, electronically stored
data, magnetic media, files and microfilm) including, without limitation,
drawings, data relating to inventions, formulae, test results, reports, research
reports, project reports and testing procedures, shop practices, instruction and
training manuals, market forecasts, specifications, quotations, lists and
particulars of customers and suppliers, marketing methods and procedures,
show-how and advertising copy; and
"Licence" means the Reed Bank Licence;
"Petroleum" has the meaning given in the Petroleum Act 1988.
1. CAPACITY
1.1 Status and Position
The Company, and Sterling are limited liability companies, duly
incorporated and subsisting under the laws of England and are not in
liquidation, administration or administrative receivership, nor has any
resolution been passed by the shareholders or creditors to put either the
Company or Sterling into liquidation, administration or administrative
receivership.
1.2 Powers and Authority
The Company and Sterling have all requisite corporate power to enter into
and perform this agreement and the transactions and matters contemplated
thereby and have each taken all necessary action to authorise the entry
into and performance of this agreement and the transactions and matters
contemplated thereby.
1.3 Validity
Each of the obligations expressed to be assumed by the Company, Newco and
Sterling under this agreement and any agreement hereby contemplated
constitutes a valid and binding obligation of the Company, Newco and
Sterling respectively.
17
51
1.4 Newco Group
(a) Schedule 6 contains true and accurate details of all Group Companies
and is not misleading because of any omission.
(b) Apart from this agreement, there is no agreement, arrangement or
commitment outstanding which calls for the allotment, issue or
transfer of, or accords to any person the right to call for the
allotment, issue or transfer of, any shares or loan capital of any
Group Company.
(c) Save in respect of SPV 1 which has applied for branch registration
in the Republic of the Philippines, no Group Company resides,
operates or has any branch, agency, place of business or
establishment outside Jersey.
(d) Each Group Company is incorporated and validly subsisting under the
laws of its country of incorporation and is licensed or qualified to
do business as contemplated to be carried on by them under this
agreement under the laws of that country.
(e) Each Group Company has full corporate power to carry on its business
and to own and operate its assets, properties and business as
contemplated to be carried on by them under this agreement.
(f) Newco owns the entire issued share capital of Holdco.
(g) Holdco owns the entire issued share capital of each of SPV 1, SPV 2
and SPV 3.
(h) No Group Company has ever traded save in respect of the Licence.
(i) No Group Company has any assets or liabilities save for its share
capital as set out in schedule 6.
(j) The statutory books of each Group Company are up-to-date, in Newco's
possession and are true and complete in accordance with the laws of
Jersey.
(k) All resolutions, annual returns and other documents required to be
delivered to the Registrar of Companies (or the relevant company
registry of other corporate authority of Jersey) have been properly
prepared and filed and are true and complete.
(l) True, accurate and complete copies of the documents referred to in
paragraph (j) and (k) (including all resolutions of the board of
directors and shareholders of each Group Company) have been
delivered to FEC and Noble (on behalf of Newco).
2. THE LICENCE
2.1 Ownership
(a) The Company is the legal and beneficial owner of the Licence and all
property, rights and interests attributable thereto.
(b) The Company is able freely to dispose of the Licence and all
Petroleum attributable or which may become attributable to the
Licence.
18
52
2.2 Licence documents
(a) The Licence is in full force and effect and neither the Company nor
(so far as Sterling and the Company are aware), any other party to
the Licence is in breach of its obligations under it in any material
respect.
(b) No act or omission by the Company nor (so far as Sterling and the
Company are aware), any other party to the Licence has occurred or
is about to occur which would entitle the DOE to revoke the Licence.
(c) The Licence has not been, or is not in the course of being
surrendered in whole or in part.
(d) All obligations and liabilities required to be performed by the
Company pursuant to the Licence have been duly performed and all
cash calls, required expenditure and other expense due and payable
by the Company as at the date of this agreement have been paid in
full.
(e) The DOE have not given any indication of any intention to require
any works to be carried out in excess of or different from that
referred to in the Licence or in any existing development programme
or to call for the submission of a further development programme in
respect of the Licence.
(f) All permits, licences, consents, approvals, agreements and
certificates required for the carrying out of operations under the
Licence have been obtained and complied with and are in full force
and effect and there are no circumstances indicating that any of
those permits, licences, consents, approvals, agreements or
certificates may be suspended, threatened, revoked or not renewed or
which may prevent or materially delay the obtaining of any further
permits, licences, consents, approvals, agreements or certificates
which are necessary for further planned operations under the
Licence.
2.3 Abandonment
(a) So far as Sterling and the Company are aware, all wells which have
been completed in the area covered by the Licence have been plugged
and abandoned in accordance with good and prudent oil field practice
and in compliance with all requirements under law and the Licence.
(b) No payments have been made to the Company in respect of or on
account of or by way of provision (other than accounting provision)
for any future abandonment obligations relating to the Licence.
2.4 Information
(a) The Company has in its possession or has access to all material data
and information relating to the Licence.
(b) All material data and information relating to the Licence including,
without limitation, all information relating to the Newco Group and
all requirements and future obligations under the Licence (whether
to incur expenditure or otherwise) has been provided to FEC and
Noble (on behalf of Newco) and all such information provided is true
and accurate and not misleading.
19
53
2.5 Insurance
(a) Policies
A list of each current insurance and indemnity policy in respect of which
the Company has an interest (together the "Policies") has been disclosed
to FEC. Each of the Policies is valid and enforceable and is not void or
voidable. So far as Sterling and the Company are aware there are no
circumstances which might make any of the Policies void or voidable or
enable any insurer to refuse payment of any claim under the Policies.
(b) Claims
No claim is outstanding under any of the Policies and so far as Sterling
and the Company are aware no matter exists which might give rise to a
claim under any of the Policies.
2.6 Litigation
The Company is not party to any litigation or arbitration or
administrative proceedings or to any dispute in relation to the Licence
and neither Sterling nor the Company are aware of any circumstances likely
to give rise to any such proceedings or dispute.
2.7 Intellectual Property
(a) Ownership and Validity
(i) The Company is the sole and absolute legal and beneficial
owner of all Intellectual Property used by it in respect of
the Licence and where appropriate such Intellectual Property
is registered or registration is applied for in the name of
the Company.
(ii) The Intellectual Property used by the Company in respect of
the Licence is free from Encumbrances and is subsisting,
valid, exercisable and enforceable and there are no
allegations to the contrary.
(b) Confidentiality
No information by the Company or Sterling in respect of the Licence is
subject to any confidentiality or other agreement or restriction on its
use and disclosure and there is no actual or potential breach of any such
agreement or restriction.
2.8 Environment
The Company is and always has been in compliance with Environmental Laws
and has obtained and is holding and has complied and is complying with all
Environmental Permits which it is required to hold under Environmental
Laws for the operation of its business and there are in relation to the
Company and the Licence no past or present events, conditions,
circumstances, activities, practices, or incidents which materially
interfere with or prevent compliance with Environmental Laws or
Environmental Permits or which have given rise to or are likely to give
rise to any liability under Environmental Laws.
2.9 Placing Agreement
In relation to the warranties set out in part 1 of schedule 2 of the
Placing Agreement (save for those warranties at clauses 3, 4 and 10
therein) (the "General Placing Warranties"), Sterling hereby confirms
that:
20
54
(a) there would be no breach of the General Placing Warranties if given
on the date hereof by reference to the facts and circumstances
applying at such date and as if references therein to the Admission
Document were to the Pre-IPO Information Memorandum and references
to other documents and reports were to the most recent versions of
such documents and reports on the date hereof;
(b) there would be no breach of clause 11 of the Placing Agreement on
the same basis as set out in paragraph (a) above; and
(c) it has no reason to believe that it will not be able to enter into
the Placing Agreement and to give the warranties and indemnities
thereunder.
21
55
PART B
FEC Warranties
In this part B of this schedule 3 the following words have the following
meanings, unless the context otherwise requires:
"Accounts" means the audited financial statements of the Company, comprising the
balance sheet of the Company, the consolidated balance sheet, profit and loss
account and cash flow statement of FEC together in each case with the notes
thereon, directors' report and auditors' report, as at and for the financial
period ended on the Accounts Date.
"Accounts Date" means 31 December 2004;
"Company" means FEI;
"Environmental Laws" means all international, EU, national, federal, state or
local statutes, bylaws, orders, regulations or other law or subordinate
legislation or common law, all orders, ordinances, decrees or regulatory codes
of practice, circulars, guidance notes, agreements with regulators or industry
bodies, and equivalent controls concerning the protection of human health or
which have as a purpose or effect the protection or prevention of harm to the
Environment or health and safety which are binding in relation to the Licences
and/or upon the Company in the relevant jurisdiction in which the Company has
been or is operating (including by the export of its products, or its waste
thereto) on or before Completion;
"Environmental Permits" means any licence, approval, authorisation, permission,
waiver, order or exemption issued or granted under Environmental Law;
"Intellectual Property" means all rights in or in relation to any and all
patents, utility models trade and service marks, rights in designs, get-up,
trade, business or domain names, copyrights, topography rights (whether
registered or not and any applications to register or rights to apply for
registration of any of the foregoing), rights in inventions, Knowhow, trade
secrets and other confidential information, rights in databases and all other
intellectual property rights of a similar or corresponding character which may
now or in the future subsist in any part of the world and any rights to receive
any remuneration in respect of such rights;
"Knowhow" means confidential or proprietary industrial, technical or commercial
information and techniques in any form (including paper, electronically stored
data, magnetic media, files and microfilm) including, without limitation,
drawings, data relating to inventions, formulae, test results, reports, research
reports, project reports and testing procedures, shop practices, instruction and
training manuals, market forecasts, specifications, quotations, lists and
particulars of customers and suppliers, marketing methods and procedures,
show-how and advertising copy;
"Petroleum" has the meaning given in the Petroleum Act 1988;
"Tax" or "Taxation" means any tax, and any duty, contribution, impost,
withholding, levy or charge in the nature of tax, whether domestic or foreign,
and any fine, penalty, surcharge or interest connected therewith and includes
corporation tax, income tax (including income tax required to be deducted or
withheld from or accounted for in respect of any payment), national insurance
and social security contributions, capital gains tax, inheritance tax, value
added tax, customs excise and import duties, stamp duty, stamp duty reserve tax,
stamp duty land tax, insurance premium tax, air passenger duty, rates and water
rates, land fill tax, petroleum revenue tax, advance petroleum
22
56
revenue tax, gas levy, climate change levy and any other payment whatsoever
which any person is or may be or become bound to make to any person and which is
or purports to be in the nature of taxation;
"Taxation Authority" means any local, municipal, governmental, state, federal or
fiscal, revenue, customs or excise authority, body, agency or official anywhere
in the world having or purporting to have power or authority in relation to Tax
including the Inland Revenue and HM Customs and Excise; and
"Taxation Statutes" means all statutes, statutory instruments, orders
enactments, laws, by-laws, directives and regulations, whether domestic or
foreign decrees, providing for or imposing any Tax.
1. THE COMPANY AND THE FEI SHARES AND THE SUBSIDIARIES
1.1 The FEI Shares
(a) FEC is the only legal and beneficial owner of the FEI Shares and
will have the right and power to sell and transfer or procure the
transfer of all of the FEI Shares in accordance with the provisions
of this agreement.
(b) Save for the shares held by FPI being 62,500,000 ordinary shares
each the Company has not allotted any shares other than the FEI
Shares and the FEI Shares are fully paid or credited as fully paid.
(c) There is no Encumbrance in relation to any of the FEI Shares or
unissued shares in the capital of the Company and other than this
agreement, there is no agreement, arrangement or obligation
requiring the creation, allotment, issue, sale, transfer, redemption
or repayment of, or the grant to a person of the right (conditional
or not) to require the allotment, issue, sale, transfer, redemption
or repayment of, a share in the capital of the Company (including an
option or right of pre-emption or conversion).
1.2 The Company does not own any shares or stock in the capital of nor does it
have any beneficial or other interest in any company or business
organisation of whatever nature.
2. ACCOUNTS
2.1 General
(a) The Accounts show a true and fair view of the assets, liabilities
(including all contingent or deferred liability to Tax), financial
position and state of affairs at the Accounts Date.
(b) The Accounts have been prepared and audited in accordance with the
standards, principles and practices specified on the face of the
Accounts applied on a consistent basis and subject thereto in
accordance with the law and Generally Accepted Accounting Standards,
Principles and Policies in Canada consistently applied.
(c) The Accounts have been prepared on a basis consistent with the basis
upon which all audited accounts of the Company have been prepared in
respect of the three years before the Accounts Date.
2.2 Off Balance Sheet Financing
No member of the FEC group is engaged in any financing (including the
incurring of any borrowing or any indebtedness in the nature of
acceptances or acceptance credits) of a type which would not be required
to be shown or reflected in the Accounts.
23
57
2.3 Accounting and Other Records
(a) The books of account and all other records of the Company (including
any which it may be obliged to produce under any contract now in
force) are up-to-date, in its possession and are true and complete
in accordance with the law and applicable standards, principles and
practices generally accepted in the Republic of the Philippines.
(b) All deeds and documents (properly stamped where stamping is
necessary for enforcement thereof) belonging to the Company or which
ought to be in the possession of the Company are in the possession
of the Company.
3. CHANGES SINCE THE ACCOUNTS DATE
Since the Accounts Date:
(a) the Company has carried on its business prudently and in the
ordinary and usual course and so as to maintain the business as a
going concern;
(b) there has been no material adverse change in the financial or
trading position or prospects of the Company; and
(c) there has been no material reduction in the value of those fixed
assets specified in the Accounts, to the extent still owned by the
Company.
4. ASSETS
4.1 Title
There are no Encumbrances, over any part of the Company's undertaking or
assets necessary for the operation of its business as currently conducted
(tangible or intangible) and each such asset is:
(a) legally and beneficially owned by the Company; and
(b) where capable of possession, in the possession of the Company;
and without limitation no rights (other than rights as shareholders in the
Company) relating to the business of the Company are owned or otherwise
enjoyed by or on behalf of any member of the FEC Group.
4.2 Ownership
(a) The Company is the legal and beneficial owner of the FEI Licences
and all property, rights and interests attributable to those
licences.
(b) The Company is able freely to dispose of the FEI Licences and all
Petroleum attributable or which may become attributable to the FEI
Licences.
(c) Save for the Nido and Matinloc Licences the FEI Licences are all of
the permits, licences, consents or authorisations held or obtained
by the Company pursuant to which the Company has rights to explore,
search for, bore for, get, produce or develop Petroleum and the
Company has not by itself or with any other party, made any
application for any other such permit, licence, consent or
authorisation which application is still outstanding.
24
58
4.3 Licence documents
(a) The FEI Licences are in full force and effect and neither the
Company nor (so far as FEC and the Company are aware) any other
party to the Licences is in breach of its obligations under any of
them in any material respect.
(b) No act or omission by the Company nor, so far as FEC is aware, by
any other party to any of the FEI Licences has occurred or is about
to occur which would entitle the DOE to revoke any of the FEI
Licences.
(c) All obligations and liabilities required to be performed by the
Company pursuant to the FEI Licences have been duly performed and
all cash calls required expenditure and other expenses due and
payable by the Company as at the date of this agreement have been
paid in full.
(d) The DOE have not given any indication of any intention to require
any works to be carried out in excess of or different from that
referred to in the FEI Licences or in any existing development
programme or to call for the submission of a further development
programme in respect of any licence.
(e) All permits, licences, consents, approvals, agreements and
certificates required for the carrying out of operations under the
FEI Licences have been obtained and complied with and are in full
force and effect and there are no circumstances indicating that any
of those permits, licences, consents, approvals, agreements or
certificates may be suspended, threatened, revoked or not renewed or
which may prevent or materially delay the obtaining of any further
permits, licences, consents, approvals, agreements or certificates
which are necessary for further planned operations under the
Licences.
4.4 Abandonment
(a) So far as FEC is aware, all wells which have been completed in the
areas of the FEI Licences have been plugged and abandoned in
accordance with good and prudent oil field practice and in
compliance with all requirements under law and the relevant FEI
Licence.
(b) No payments have been made by the Company in respect of or on
account of or by way of provision (other than accounting provision)
for any future abandonment obligations relating to any of the
Licences.
4.5 Information
(a) The Company has in its possession or has access to all material data
and information relating to the FEI Licences.
(b) All material data and information relating to the FEI Licences
including, without limitation, all requirements and future
obligations under the FEI Licences (whether to incur expenditure or
otherwise) has been provided to Sterling and Noble (on behalf of
Newco) and all such information provided is true and accurate and
not misleading.
4.6 Litigation
The Company is not a party to any litigation or arbitration or
administrative proceedings or to any dispute in relation to the FEI
Licences and FEC is not aware of any circumstances likely to give rise to
any such proceedings or dispute.
25
59
5. INTELLECTUAL PROPERTY
5.1 Ownership and Validity
(a) The Company is the sole and absolute legal and beneficial owner of
all Intellectual Property used by it in its business and where
appropriate such Intellectual Property is registered or registration
is applied for in the name of the Company.
(b) The Intellectual Property used by the Company in its business is
free from Encumbrances and is subsisting, valid, exercisable and
enforceable and there are no allegations to the contrary.
5.2 Confidentiality
No information used in the business of the Company is subject to any
confidentiality or other agreement or restriction on its use and
disclosure and there is no actual or potential breach of any such
agreement or restriction.
6. EFFECT OF SALE
6.1 Neither the execution nor performance of this agreement or any document to
be executed pursuant thereto will:
(a) result in the Company losing the benefit of an asset, licence,
grant, subsidy, right or privilege which it enjoys at the date of
this agreement in any jurisdiction; or
(b) conflict with, or result in a breach of, or give rise to an event of
default under, or require the consent of a person under, or enable a
person to terminate, or relieve a person from an obligation under,
an agreement, arrangement or obligation to which the Company is a
party or a legal or administrative requirement in any jurisdiction.
7. CONSTITUTION
7.1 Statutory Books and Filings
(a) The statutory books of the Company are up-to-date, in its possession
and are true and complete in accordance with the law.
(b) All resolutions, annual returns and other documents required to be
delivered to the Registrar of Companies (or other relevant company
registry or other corporate authority in any jurisdiction) have been
properly prepared and filed and are true and complete.
8. INSURANCE
8.1 Policies
A list of each current insurance and indemnity policy in respect of which
the Company has an interest (together the "Policies") has been disclosed
to Sterling. Each of the Policies is valid and enforceable and is not void
or voidable. So far as FEC is aware there are no circumstances which might
make any of the Policies void or voidable or enable any insurer to refuse
payment of any claim under the Policies.
8.2 Claims
26
60
No claim is outstanding under any of the Policies and so far as FEC is
aware no matter exists which might give rise to a claim under any of the
Policies.
9. LIABILITIES
9.1 Debts owed by the Company
(a) The Company does not have outstanding any borrowing or indebtedness
in the nature of borrowing (including, without limitation, any
indebtedness for moneys borrowed or raised under any acceptance
credit, bond, note, bill of exchange or commercial paper, finance
lease, hire purchase agreement, trade bills (other than those on
terms normally obtained), forward sale or purchase agreement or
conditional sale agreement or other transaction having the
commercial effect of a borrowing) and whether or not of a type which
would be required to be shown or reflected in the Accounts.
(b) The Company has not received any notice to repay under any agreement
relating to any borrowing or indebtedness in the nature of borrowing
which is repayable on demand.
(c) There has not occurred any event of default or any other event or
circumstance which would entitle any person to call for early
repayment under any agreement relating to any borrowing or
indebtedness of the Company or to enforce any security given by the
Company.
9.2 Guarantees and Indemnities
(a) The Company is not a party to and is not liable (including
contingently) under a guarantee, indemnity or other agreement to
secure or incur a financial or other obligation with respect to
another person's obligation.
(b) No part of the loan capital, borrowing or indebtedness in the nature
of borrowing of the Company is dependent on the guarantee or
indemnity of, or security provided by, another person.
10. ENVIRONMENT
10.1 The Company is and always has been in compliance with Environmental Laws
and has obtained and is holding and has complied and is complying with all
Environmental Permits which it is required to hold under Environmental
Laws for the operation of its business and there are in relation to the
Company and the Licences no past or present events, conditions,
circumstances, activities, practices, or incidents which materially
interfere with or prevent compliance with Environmental Laws or
Environmental Permits or which have given rise to or are likely to give
rise to any liability under Environmental Laws.
11. TAXATION
11.1 Returns
The Company has complied in full with all its duties under all taxation
statutes and has kept all records, made all returns and supplied all
information and given all notices to the relevant Taxation Authority as
reasonably requested or required by law within any requisite period and
all such returns and information and notices and any statements or
disclosures made to any Taxation Authority are correct and accurate in all
respects and are not the subject of any dispute and so far as FEC is aware
there are no facts or circumstances likely to give rise to or be the
subject of any such dispute.
27
61
11.2 Clearances
No action has been taken by the Company in respect of which any consent or
clearance from the relevant Taxation Authority was required save in
circumstances where such consent or clearance was validly obtained, and
where any conditions attaching thereto were and will, immediately
following completion, continue to be met.
11.3 Payment of Tax
The Company has duly and punctually paid all Tax to the extent that the
same ought to have been paid and is not liable nor has it within three
years prior to the date hereof been liable to pay any penalty or interest
in connection therewith.
11.4 Withholdings
The Company has duly and punctually complied with its obligations to
deduct, withhold or retain amounts of or on account of Tax from any
payments made by it and to account for such amounts to the relevant
Taxation Authority and has complied with all its reporting obligations to
the relevant Taxation Authority in connection with any such payments made.
11.5 Provision for Tax in the pre-IPO Information Memorandum
The pre-IPO Information Memorandum makes full provision or reserve in
respect of any period ended on or before the Accounts Date for all Tax
assessed or liable to be assessed on the Company or for which it is
accountable at the Accounts Date whether or not the Company has or may
have any right of reimbursement against any other person and full
provision has been made and shown in the pre-IPO Information Memorandum
for deferred taxation in accordance with generally accepted accounting
principles.
11.6 Post-Accounts Date Events
Since the Accounts Date, save as set out, described or provided for in the
pre-IPO
Information Memorandum:
(a) the Company has not been involved in any transaction which has
given, may give or would, but for the availability of any relief,
give rise to any Tax other than in respect of actual income earned
by the Company in the course of its trade;
(b) the Company has not made any payment of a revenue nature (or
incurred any liability to make any such payment) which could be
disallowed as a deduction in computing the taxable profits of the
Company or as a charge on the Company's income. The Company has not
been involved in any transaction other than on arm's length terms;
and
(c) no disposal has taken place or other event occurred such that the
Company would be required to bring a disposal value into account or
such that a chargeable gain could or would accrue to the Company.
11.7 Company Residence
The Company has always been resident in the territory in which it was
incorporated and has never been resident in any other territory or treated
as so resident for the purposes of any double Tax agreement nor does the
Company have a permanent establishment or other taxable presence in any
jurisdiction other than that in which it was incorporated.
28
62
12. PLACING AGREEMENT
In relation to the warranties set out in part 1 of schedule 2 to Placing
Agreement (save for those warranties at clauses 3, 4 and 10 therein) (the
"General Placing Warranties"), FEC hereby confirms that:
(a) there would be no breach of the General Placing Warranties if given
on the date hereof by reference to the facts and circumstances
applying at such date and as if references therein to the Admission
Document were to the Pre-IPO Information Memorandum and references
to other documents and reports were to the most recent versions of
such documents and reports on the date hereof;
(b) there would be no breach of clause 11 of the Placing Agreement on
the same basis as set out in paragraph (a) above; and
(c) it has no reason to believe that it will not be able to enter into
the Placing Agreement and to give the warranties and indemnities
thereunder.
29
63
SCHEDULE 4
Form of voting agreement and irrevocable undertaking
INTENTIONALLY OMITTED
30
64
SCHEDULE 5
Limitations on Liability
No claim may be brought under the FEC Warranties or the Sterling Warranties
(save in the event of fraud or wilful non-disclosure by FEC in relation to the
Sterling Warranties or by Sterling in relation to the FEC Warranties):
(a) for any matter disclosed in the pre-IPO Information Memorandum;
(b) unless it shall have given written notice thereof to the relevant
party specifying in reasonable detail the basis of such claim and
the amount thereof on or before the date falling [one month after
the publication of the accounts of Newco for the period ending
o 2006];
(c) unless, within nine months from the date of any claim, the matter
has been settled or Noble has issued legal proceedings in respect
thereof.
31
65
SCHEDULE 6
The Newco Group
Newco
Name: Sterling Philippines plc
Status: Public company limited by shares
Date of incorporation: 1 April 2005
Place of incorporation: England and Wales
Registered number: 5411224
Registered office: Mardall House, 7-9 Vaughan Road, Harpenden, Herts
AL5 7HU
Authorised share capital: o
Issued share capital: o
Directors: Graeme Paul Thomson
Henry George Wilson
Secretary: Graeme Paul Thomson
32
66
Holdco
Name: Sterling Far East Holdings Limited
Status: Private company limited by shares
Date of incorporation: 1 April 2005
Place of incorporation: Jersey
Registered number: 89858
Registered office: Channel House Financial Services Group Limited,
P.O. Box 532, Channel House, 7 Esplanade, St.
Helier, Jersey JE4 5UW
Authorised share capital: o
Issued share capital: o
Directors: o
Secretary: o
33
67
SPV 1
Name: Sterling Gas Philippines Limited
Status: Private company limited by shares
Date of incorporation: 31 March 2005
Place of incorporation: Jersey
Registered number: 89851
Registered office: Channel House Financial Services Group Limited,
P.O. Box 532, Channel House, 7 Esplanade, St.
Helier, Jersey JE4 5UW
Authorised share capital: o
Issued share capital: o
Directors: o
Secretary: o
34
68
SPV 2
Name: Sterling Far East Limited
Status: Private company limited by shares
Date of incorporation: 31 March 2005
Place of incorporation: Jersey
Registered number: 89850
Registered office: Channel House Financial Services Group Limited,
P.O. Box 532, Channel House, 7 Esplanade, St.
Helier, Jersey JE4 5UW
Authorised share capital: o
Issued share capital: o
Directors: o
Secretary: o
35
69
SPV 3
Name: Sterling Resources Far East Limited
Status: Private company limited by shares
Date of incorporation: 4 April 2005
Place of incorporation: Jersey
Registered number: 89867
Registered office: Channel House Financial Services Group Limited,
P.O. Box 532, Channel House, 7 Esplanade, St.
Helier, Jersey JE4 5UW
Authorised share capital: o
Issued share capital: o
Directors: o
Secretary: o
36
70
SCHEDULE 7
Loan Agreement
THIS INTRA-GROUP LOAN AGREEMENT is made on o April 2005
(1) STERLING GAS PHILIPPINES LIMITED (No. 89851) (the "Borrower"); and
(2) STERLING ENERGY PLC (No. 1757721) (the "Lender").
THE PARTIES AGREE AS FOLLOWS:
1. FACILITY
The Lender shall make available to the Borrower a credit facility of up to
a maximum aggregate principal amount of (pound) o (the "Facility").
2. AVAILABILITY
The Facility may be drawn down in amounts agreed between the Lender and
the Borrower by the Borrower giving to the Lender not less than two
business days notice (or such lesser period as the Lender may agree)
specifying the date of drawdown and the amount to be borrowed.
3. REPAYMENT
3.1 All drawings made under the Facility together with accrued interest shall
be repaid in full on demand. Any amounts repaid shall not be available for
redrawing thereafter.
3.2 Final repayment of all outstanding borrowings and accrued interest shall
be made on 24 May 2005 or such later date as the Lender may agree.
4. WITHHOLDING TAX
All sums payable by the Borrower shall be paid without any withholding or
deduction unless required by law, in which event the Borrower will (if
required by the Lender) forthwith pay to the Lender such additional amount
as will result in the receipt by the Lender of the full amount and will
supply the Lender promptly with evidence satisfactory to it that the
Borrower has accounted to the relevant authority for the sum withheld.
5. NO ASSIGNMENT BY BORROWER
The Borrower may not assign and/or transfer any of its rights and/or
obligations under this agreement.
37
71
6. GOVERNING LAW
This agreement shall be governed by and construed in accordance with
English law and the Lender and the Borrower submit to the non-exclusive
jurisdiction of the High Court of Justice in England.
IN WITNESS whereof the parties have executed this agreement the day and year
first above written.
Signed by
for and on behalf of
STERLING GAS PHILIPPINES LIMITED
Signed by
for and on behalf of
STERLING ENERGY PLC
38
72
SCHEDULE 8
Placing Agreement
INTENTIONALLY OMITTED
39
73
Signed for and on behalf of )
STERLING ENERGY PLC )
Signed for and on behalf of )
FORUM ENERGY CORPORATION )
Signed for and on behalf of )
STERLING PHILIPPINES PLC )
40
74
APPENDIX C
Forum Energy Plc (Newco) Information
Current name: Sterling Philippines plc
Status: Public company limited by shares
Date of incorporation: 1 April 2005
Place of incorporation: England and Wales
Registered number: 5411224
Registered office: Mardall House, 7-9 Vaughan Road, Harpenden, Herts
AL5 7HU
Authorised share capital: (pound)10,000,000 divided into 100,000,000 shares
of (pound)0.10 each.
Issued share capital: See "Notice Regarding Transaction Agreement" in
Appendix B
Directors: Graeme Paul Thomson
Henry George Wilson
Secretary: Graeme Paul Thomson
Proposed Directors: David R. Robinson (CEO)
David M. Thompson (CFO)
Alan B. Henderson (Non executive Chairman)
Ian Baron (Non executive director)
Harry George Wilson (Non executive director)
Graeme Paul Thomson (Non executive director)
Barry Stansfield (Non executive director)
75
APPENDIX D
Forum Philippines Holdings Limited (Holdco) Information
Current name: Sterling Far East Holdings Limited
Status: Private company limited by shares
Date of incorporation: 1 April 2005
Place of incorporation: Jersey
Registered number: 89858
Registered office: Channel House Financial Services Group Limited, P.O.
Box 532, Channel House, 7 Esplanade, St. Helier, Jersey
JE4 5UW
Authorised share capital: US$10,000,000 divided into 10,000,000 shares of
US$1.00 each
Issued share capital: 100 shares of $1.00 each
Current directors (pre Transaction): Tobias Mathews
Neil Wakeling
Graeme Thomson
Secretary: Channel House Secretaries
Proposed directors: (Post Transaction) Tobias Mathews
Neil Wakeling
David Thompson
Company description: Holding company formed to hold Forum (FEI) Limited
and Forum (GSEC101) Limited.
76
APPENDIX E
Forum (FEI) Limited Information
Current name: Sterling Far East Limited
Status: Private company limited by shares
Date of incorporation: 31 March 2005
Place of incorporation: Jersey
Registered number: 89850
Registered office: Channel House Financial Services Group Limited, P.O.
Box 532, Channel House, 7 Esplanade, St. Helier, Jersey
JE4 5UW
Authorised share capital: US$10,000,000 divided into 10,000,000 shares of
US$1.00 each
Issued share capital: 100 shares of $1.00 each
Current directors (pre Transaction): Tobias Mathews
Neil Wakeling
Graeme Thomson
Secretary: Channel House Secretaries
Proposed directors: (Post Transaction) Tobias Mathews
Neil Wakeling
David Thompson
Company description: Subsidiary company formed to hold the 66.67% interest in
Forum Exploration Inc.
77
APPENDIX F
Forum (GSEC101) Limited
Current name: Sterling Gas Philippines Limited
Status: Private company limited by shares
Date of incorporation: 31 March 2005
Place of incorporation: Jersey
Registered number: 89851
Registered office: Channel House Financial Services Group Limited, P.O. Box
532, Channel House, 7 Esplanade, St. Helier, Jersey JE4
5UW
Authorised share capital: US$10,000,000 divided into 10,000,000 shares of
US$1.00 each
Issued share capital: 100 shares of $1.00 each
Current directors (pre Transaction): Tobias Mathews
Neil Wakeling
Graeme Thomson
Secretary: Channel House Secretaries
Proposed directors: (Post Transaction) Tobias Mathews
Neil Wakeling
David Thompson
Company description: Subsidiary company formed to hold the Sterling Energy
Philippine assets being a 100% interest in GSEC101
(Reed Bank)
78
APPENDIX G
Competent Persons Report on the Petroleum assets of Newco completed by PGS
Reservoir Consultants (UK) Limited
79
[LOGO] PGS
18th April 2005
The Directors
Forum Energy Corporation
700 - 2nd Street SW
Calgary
Alberta T2P 4V5
Dear Sirs,
Forum Energy Plc ("the Company")
Placing of the Company's Ordinary Shares of 10p each ("the Placing") and
Admission to AIM ("the Admission")
We, PGS Reservoir Limited, refer to a report we have prepared for the Directors
of Forum Energy plc, for inclusion in a prospectus to be issued by the Company
in support of an IPO, and subsequently admission to the AIM market in London.
The report reviews and evaluates the Petroleum Interests of Forum Energy plc in
the Philippines, and was prepared specifically for the purpose outlined above.
The contents of the report do not conform to the standards of disclosure for oil
and gas activities required by Canadian National Instrument 51-101, as these are
primarily concerned with activities and projects that are at a more advanced
stage of maturity than the Company's.
We hereby confirm that we give our consent to the inclusion of the report in its
entirety, and reference to our name, in the circular you propose to issue to the
shareholders on April 22nd 2005.
Yours faithfully
Jeremy Thompson
Manager, Evaluations and Valuations
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
80
[LOGO] PGS
PGS Reservoir Limited
PGS Thames House
17 Marlow Road
Maidenhead
Berks SL6 7AA
The Directors
Forum Energy Plc
2 Temple Back East
Temple Quay
Bristol BS1 6EG
and
The Directors
Noble & Company Limited
76 George Street
Edinburgh EH2 3BU
15 April 2005
Dear Sirs,
Re: The Petroleum Interests of Forum Energy Plc
In response to your request, we have reviewed the proposed petroleum interests
of Forum Energy Plc ("Forum"). Following the signing of the Transaction
Agreement mentioned below, and the conditions being met or waived, Forum will
have an interest in two contract areas in the Philippines, one currently owned
by Forum Energy Corporation ("FEC") and the other by Sterling Energy Plc
("Sterling"). These areas are highlighted on a map of the Philippine archipelago
in Figure 1 (attached). The contract areas encompass undeveloped discoveries and
unexplored and untested exploration prospects.
Our evaluation of those interests is based on a review of information provided
to PGS by FEC and Sterling during March 2005. PGS has performed an independent
review and evaluation of the interpreted data and in preparing this report PGS
have used maps, reports and other pertinent data supplied by FEC and Sterling.
Where possible, PGS have substantiated the existence of oil and gas resources
from well information and other evidence supplied by the Directors of Forum, FEC
and Sterling.
Summary of Interests
FEC and Sterling are to enter into a Transaction Agreement in April 2005,
whereby will FEC transfer its 66.7 per cent. interest in Forum Exploration,
Inc., ("FFI") a Philippine registered company, which has a 100 per cent.
interest in the SC 40 (Cebu) contract area, and Sterling will contribute its 100
per cent. interest in
Page 1 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
81
[LOGO] PGS
the GSEC 101 (Reed Bank) contract area offshore Palawan island to a newly
incorporated UK Plc, Forum Energy Plc. The contract areas are shown plotted on a
map of the Philippine archipelago in Figure 1. GSEC 101 (Reed Bank) covers an
offshore area to the west of Palawan Island, known as the Reed Bank.
The FEC contract area is a service contract (SC) area known as SC 40 (Cebu),
which covers the northern half of Cebu Island plus part of the Visayan sea
offshore to the west of the island. Several exploration prospects and leads have
been identified by FEI within the service contract area, both onshore Cebu, and
offshore in the Visayan Sea. A small gas field named Libertad has been
discovered and appraised onshore Cebu, but its small size has meant that so far
it has not been developed. FEI is currently undertaking a feasibility study
aimed at developing Libertad to provide gas for on-site electricity generation.
The prospects and fields identified within the two contract areas are summarised
in the table below, and discussed in more detail in the following sections.
- -----------------------------------------------------------------------------------------------------------
Prospect and Discovery Summary
- -----------------------------------------------------------------------------------------------------------
Prospect Primary Target Target Water Chance of Potential Reserves
Formation Depth ft Depth ft Discovery (1) Oil(mmbbl)/Gas(bscf)
- -----------------------------------------------------------------------------------------------------------
Central Tanon Barili Limestone 3700 650 0.115 265/660
- -----------------------------------------------------------------------------------------------------------
Jibitnil Island Maingit Limestone 4100 Onshore 0.115 85/450
- -----------------------------------------------------------------------------------------------------------
South Guintacan Maingit Limestone 6000 100 0.099 70/330
- -----------------------------------------------------------------------------------------------------------
West Malapascua Maingit Limestone 2900 120 0.115 80/185
- -----------------------------------------------------------------------------------------------------------
West Toledo (2) Malubog Sand 7500 350 0.113 97/332
- -----------------------------------------------------------------------------------------------------------
Agojo Maingit Limestone 4700 250 0.1 60/210
- -----------------------------------------------------------------------------------------------------------
North Bantayan Cebu Limestone 7600 300 0.08 250/1000
- -----------------------------------------------------------------------------------------------------------
Sampaguita (3) Late Paleocene 10300 260 1 - /2329
- -----------------------------------------------------------------------------------------------------------
Libertad Barili Limestone 650 Onshore 1 - /0.5
- -----------------------------------------------------------------------------------------------------------
CMB (4) Malubog Sand 1500 Onshore 1 0.14/0.64
- -----------------------------------------------------------------------------------------------------------
(1) Prospect chances of success are not independent. Failure to discover
commercial hydrocarbons in one prospect is likely to reduce the chance of
success in the others.
(2) As currently mapped, only a small part of these potential reserves may be
under SC 40 (Cebu).
(3) Potential gas reserves assume a recovery factor of 0.85
(4) Potential oil reserves are limited to primary recovery. Recovery factors
for oil and gas are assumed to be 0.05 and 0.85 respectively.
GSEC 101 (Reed Bank)
The GSEC 101 (Reed Bank) licence is located in the South China Sea to the west
of Palawan in the Reed Bank area and covers an area of 4,023 square miles
(10,420 km(2)). This licence contains the Sampaguita gas
Page 2 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
82
[LOGO] PGS
discovery and a number of leads as illustrated in Figure 2. Sampaguita is
located in 250-270 feet (ca. 75-85 metres) of water, approximately 150 miles
(250 kilometres) southwest of the Malampaya Gas Field and a similar distance
northwest of Palawan. The Malampaya Gas Field produced first gas in October
2001. Figure 3 shows the location of the GSEC (Reed Bank) area in relation to
the Malampaya field, and its associated gas export infrastructure, which
consists of a 504 kilometer long 24 inch diameter pipeline delivering gas to
landfall on Luzon island.
The Reed Bank area consists of two main highs, which are referred to as the
'North Bank' and 'South Bank', separated by a deeper area. The structure is
strongly influenced by a series of northwest - southeast orientated faults
formed as a result of the opening of the South China Sea. The Sampaguita gas
discovery is located at the southwestern end of the smaller 'South Bank'.
Exploration in the GSEC 101 (Reed Bank) area commenced in 1970 with the
acquisition of 2D seismic data. At present 340 miles (ca. 550 kilometres) of
seismic data are available over the South Bank area, which includes the
Sampaguita gas discovery. Exploration drilling during the 1970-80s was focused
on exploration for oil, with gas being considered non-commercial at that time.
The first well, Sampaguita-1, was drilled in 1976 by Salen. This tested gas in
the Late Paleocene sand section. This was followed by well Sampaguita-2 (Salen,
1978; gas shows not tested), Sampaguita 3 (Salen, 1982; failed to reach target,
abandoned) and Sampaguita-3A (Denison Mines, 1984; gas tested in Late Paleocene
sandstone).
The Sampaguita gas discovery is contained within a large faulted four-way dip
closure. This structure is dissected by a series of poorly defined northeast -
southwest orientated faults. All wells drilled to date on this structure are
located at the southwestern end of the structure, with Sampaguita-1, -3 and -3A
located in crestal positions, whilst Sampaguita-2 is located on the southeastern
flank. The current estimate of structural closure is 110 square miles (ca. 290
km(2)).
The current structural interpretation of the Block is based upon reprocessed
1980 2D seismic data and limited 2D data acquired during the mid-1990s. These
data are of moderate to poor quality, particularly at the reservoir level, and
provide broad structural control. Data quality and quantity precludes the
imaging and interpretation of faults in detail. Modern 3D seismic data would be
expected to provide significantly improved imaging and structural detail leading
to significantly reduced risk in reserve estimation and potential development
planning.
The oldest rocks penetrated by drilling within the Sampaguita gas discovery are
Early Cretaceous. These typically consist of terrestrial to shallow marine
sandstones, conglomerates and mudstones, overlain by a distinctive limestone
horizon. The sandstones and conglomerates of the Early Cretaceous potentially
form a secondary reservoir within the Sampaguita gas discovery, but have not
been successfully tested. These sandstones have effective porosity values of 10
- - 20 per cent. and have significantly lower interbedded shale content. Shows are
recorded in most of the sandstones at depths greater than 850 feet (250 metres)
below the distinctive limestone horizon. No shows are recorded in the 660 foot
(200 metre) or greater thickness of silty shale and sands between the
distinctive limestone and the base late Paleocene sandstones, suggesting this
interval provides a regional topseal. Whether or not the silt and shale units
interbedded with the sandstones provide effective intra-formational seals is
unclear.
Page 3 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
83
[LOGO] PGS
The early Cretaceous is erosionally overlain by late Paleocene sandstones and
mudstones deposited in a deep marine fan system, which forms the principal
reservoir horizon within the Sampaguita gas discovery. These sandstones are
informally referred to as the 'Main Sandstone' and 'S1 Sandstone'. These sands
consist of thinly interbedded sandstones and mudstones which in the Sampaguita-2
well are approximately 100 feet (ca. 30 metres) and approximately 70 feet (ca.
20 metres) thick respectively. These sands are correlatable between the three
wells drilled on the structure. The 'Main Sandstone' encountered within the
Sampaguita 3A well is only 40 feet (ca. 12 metres) thick, interpreted to be the
result of fault truncation. The sandstones have moderate reservoir quality with
12 - 20 per cent. porosity, being reduced by clay matrix material and
cementation. The thin-bedded nature of the sands suggests that individual
sandstone bodies could be of limited lateral extent. As a result, vertical and
horizontal communication within the discovery may be impaired. The wireline log
response from the old logging tools provides poor resolution of these thin
interbedded sands, leading to some uncertainty in the estimation of the
reservoir parameters.
The Late Paleocene sandstones are overlain by early to earliest middle Eocene
deep marine mudstones, which will form an effective seal for both the 'S1
Sandstone' and 'Main Sandstone'. These are followed by late Eocene to early
Oligocene sandstones and mudstones. The uppermost part of the stratigraphic
section consists of late Oligocene to Plio-/Pleistocene limestones.
To date a clearly defined source rock interval has not been identified within
the wells on the Sampaguita structure. Geochemical analysis of the Paleocene,
Eocene and Early Cretaceous shales in the Sampaguita-1 well indicates that these
are unlikely to represent good source beds. The shales are generally organically
lean and although containing gas-prone organic material, are unlikely to be a
major gas source. Not withstanding this, testing of the Sampaguita-1 & -3A wells
indicates that a gas source is present. It is presumed that this must be located
within deeper intervals (?Jurassic - early Cretaceous) located either within the
structure or the deeper areas to the northwest and southeast of South Banks.
Wells Sampaguita-1 and -3A successfully tested gas from the Main and S1 sands,
respectively, at rates of 3.6 and 3.2 MMscf/d. However, these tests were
conducted over short time periods and one showed significant depletion;
therefore long term productivity and the effect of compartmentalisation remains
uncertain.
The Sampaguita gas discovery demonstrates the presence of an active hydrocarbon
system and producible gas. The previous Operator (Sterling) estimated the
presence of several TCF of gas in place. PGS estimate the gas initially in place
to be approximately 2.7 Tscf, which makes Sampaguita comparable in size to the
nearby Malampaya Gas Field. The application of modern technology (seismic,
logging and testing) is required to confirm the size, productibility and
commerciality of this discovery.
Eight additional leads and prospects have been identified by various studies,
and these are depicted in Figure 2, although the supporting data for some of
these interpretations is no longer available. The majority of the prospects and
leads are located on the 'North Bank', with one located on a small high to the
northeast of the 'South Bank'. Three additional wells have been drilled in the
Reed Bank area, wells Reed Bank-A1 & -B1 and Kalamansi-1. None of these wells
tested the leads/prospects as they are presently mapped.
Page 4 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
84
[LOGO] PGS
SC 40 (Cebu)
The SC 40 (Cebu) area was originally awarded as a GSEC to a consortium including
one of FEC's predecessor companies in February 1994. In February 1995, the
contract was upgraded to a service contract, and part of the original GSEC area
was relinquished to leave the area now shown in Figure 4. As of 1st January
2003, the title to SC 40 (Cebu) rests 100 per cent. with FEI, the other
co-venturers in the original consortium having relinquished their interests.
The terms of a service contract allow for extensions from the original 7 years
to 10 years if required, and in the case of SC 40 (Cebu) an extension has been
granted, on condition that the work commitments for the contract are fulfilled.
FEI has received an extension to the term of SC 40 (Cebu) until the end of
September 2006, subject to a specified work programme being adhered to. This
work programme includes the acquisition of 250 kilometres of seismic data, plus
the drilling of two wells in 2005 and a further two in 2006.
FEI is in the process of investigating development options for the small
Libertad gas field, and for development to proceed, the field will first have to
be declared commercial. Such a declaration triggers a requirement to relinquish
all but 12.5 per cent of the current SC 40 (Cebu) area. This can be achieved
without relinquishing any of the prospect areas discussed below.
Geological Setting
The SC 40 (Cebu) contract area is located in the Visayan Basin, in the central
part of the Philippines archipelago. It is an intra-arc basin characterised by a
series of north to northeast trending troughs and ridges. The basin comprises
five main depocentres, the Tanon, Bantayan, Cadiz graben, Northwest Leyete
thrust belt and Asid Gulf basins. Numerous narrow and elongate ridges separate
the basins and are exposed in part on the present islands. The key basin that
underlies the SC 40 (Cebu) licence is the Tanon sub-basin, a narrow northeast
trending asymmetric trough filled with a thick Tertiary section (up to 8
kilometres).
Exploration in the Visayan Basin began over 100 years ago and since then
approximately 130 wells have been drilled. The majority of the wells were very
shallow tests and drilled outside of structural closure. Oil and gas shows have
been encountered in a number of wells with oil and gas discoveries made onshore
Cebu Island. Since 1994 fifteen wells have been drilled in the offshore Visayan
Basin, thirteen of which lie within the SC 40 (Cebu) licence. Of these thirteen
wells, nine targeted Miocene reef plays defined on 2D seismic data and good
reservoir quality was established by 9 wells. Hydrocarbon seeps are also common
in the area indicating an active and mature petroleum system. The most likely
source rock intervals are the carbonaceous shales of the Oligocene to Lower
Miocene Malubog Formation and the Cretaceous Pandan formation, they contain TOC
values of 1 to 5.9 per cent.
The majority of the wells are interpreted to have failed due to the integrity of
the trap, although recent results also point to uncertainty in the extent of
reservoir quality sands. Poor top seals, leaky faults and poorly defined
closures are believed to be the main reasons for failure. Drilling results to
date demonstrate the carbonates of the Middle to Upper Miocene Maingit and Upper
Miocene to Pliocene Barili Formations have excellent reservoir characteristics.
The Maingit Formation has been found to have good porosities
Page 5 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
85
[LOGO] PGS
averaging between 15 per cent. and 20 per cent, and frequently mud losses have
been reported during the drilling of the Maingit, which may be indicative the
presence of natural fractures. The underlying lower to middle Miocene Malubog
formation provides an additional target in the Central Maya Bulge ("CMB") area.
The Barili Limestone has excellent reservoir qualities with porosities typically
exceeding 20 per cent., with vuggy porosity often developed. The reservoir for
the Libertad gas field onshore Cebu is the Barili limetone. Other potential
reservoirs include the Middle Miocene Uling Limestone and the Upper Oligocene to
Lower Miocene Cebu Limestone. These secondary targets are generally tight
although occasional patch reefs may provide areas of improved reservoir quality.
A brief description of each of the main prospects and leads within the SC 40
(Cebu) area is given below, and their location is shown on the map included as
Figure 4.
Libertad Gas Field
The Libertad Gas Field lies to the southeast of Bogo town in northern Cebu,
approximately 100 kilometres north of Cebu City. It was discovered in the late
1950s during an exploration drilling campaign by the Acoje Oil and Mineral
Development Corporation of Manila, ("Acoje"), but it has never been developed,
due to its very modest size, and the fact that exploration effort has
historically been concentrated on discovering oil, not gas. Of the twenty-two
wells drilled in the Libertad area by Acoje during their exploration campaign,
two were completed as gas wells, but apart from some tapping of minor amounts of
gas for cooking purposes in a nearby elementary school, there has never been any
commercial production. Acoje subsequently relinquished their interests in Cebu
in the 1970s.
During the 1990s, there was renewed interest in Libertad as a potential source
of gas for power generation, and a testing programme was performed on the two
available gas wells in 1993. Five additional wells were drilled in the Libertad
field area during 1994/95 by the Cophil Exploration Corporation (Cophil - later
to become FEI), one of which tested gas, and it was subsequently completed as a
gas well.
The gas bearing horizon in the Libertad Gas Field is the Upper Miocene Barili
Limestone, which is encountered at shallow depth, approximately 600 - 700 feet
below ground level, or around 300 feet below mean sea level. The gas is
predominantly (> 95 per cent.) methane, with some nitrogen and carbon dioxide,
plus around 400 ppm of hydrogen sulphide. This latter contaminant represents a
health and safety risk, due to its toxicity. Reservoir pressure is approximately
150 psia, which is low, due to the shallow reservoir depth. Nevertheless, two of
the three currently completed gas wells in the field are each capable of flowing
in excess of 1.2 mmscfd, the highest recorded rate being almost 2 mmscfd. The
third well has a tendency to produce water if the gas production rate exceeds
more than a few hundred mscfd.
A top Barili Limestone structure map in depth is included as Figure 5. It can be
seen that the field is divided by a south-west to north-east trending fault. The
division of the field into two parts is reinforced by the results of an
interference test carried out by FEI in 2000. There appeared to be no response
detectable in pressure gauges set in the one accessible well in the northern
fault block to a protracted production period of several days from one of the
two completed wells in the southern block. There was, however, an overall
pressure drop of approximately 1.5 psia in the southern fault block in response
to a produced gas volume of
Page 6 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
86
[LOGO] PGS
just over 5.5 mmscf. This pressure drop suggests that the initial gas in place
in the southern fault block is of the order of 550 mmscf, although
volumetrically derived estimates are almost twice this value.
Old well records report several occurrences of lost circulation whilst drilling
through the Barili Limestone, which suggests that the formation is probably
fractured. The high gas deliverabilities observed on well tests would lend
support to this conclusion.
Maya Area
The Maya area lies at the northern tip of Cebu Island (Figure 4), and it has
been the subject of sporadic exploration activity since the late 1920's when oil
shows were encountered during the drilling of a shallow water well. Several
exploration wells were drilled in the 1960s and early 1970s by the American
Asiatic Oil Company, and by the Chinese Petroleum Company in the area known as
the Central Maya Bulge ("CMB"). Some of these wells were reported to have flowed
oil on test, but sustained production at commercial rates was never established,
and interest in the area waned. Nevertheless, there is anecdotal evidence that
residents local to the Maya area harvested up to 80,000 litres of oil from one
of the old Maya wells before the authorities put a stop to the practice.
The oil-bearing horizon encountered by the Maya wells was the late Miocene
Maingit sandstone trapped within a domal closure. As part of its work commitment
under the service contract, FEI drilled an exploration well (MST 11A) at Maya in
October 2000, but although oil shows were detected in the Maingit sandstones,
the well was terminated at a relatively shallow depth, (300 feet) and only
limited data was gathered from the well. The only data available for the
discovery well is that the well flowed 540 barrels of 44 deg. API oil in a 203
hour test.
A second prospect on the Maya anticline is the deeper lower Miocene Malubog
sandstone, which was oil and gas bearing in a well drilled by the Chinese
Petroleum Corporation in the early 1970s. Well CMB-2 was drilled on the west
flank of the structure and tested 70-100 mscf/d and 106 bopd from a middle
Miocene sandstone. The extent of the sand is poorly constrained with few wells
penetrating this deeper reservoir. CMB-3 was subsequently drilled down-dip and
was dry. The up-dip Well CMB-4 was drilled to target the CMB-2 reservoir but
found the sand to be tight or absent with oil shows.
During 2003 FEI renewed its drilling activity in the CMB area, and drilled a
further three wells to test the anticlinal structure identified from the
drilling of the MST-11A well. The locations of the three wells, Forum-1XA, -2X
and -3X are shown on the map included as Figure 6, and a synopsis of the results
from these wells is included below.
Well Forum-1XA was drilled approximately 400 metres northwest of CMB-2 to test
the crestal portion of the CMB. The primary target was the 480 metre (Malubog)
sand encountered in CMB-2, although secondary objectives occurred in the Maingit
sands and limestones of the Lower Maingit. The well suffered a series of gas
kicks whilst operating resulting in loss of the drill string and a fish in the
hole, and as a result the well could not be tested.
Well Forum-2X was drilled 15 metres to the southeast of the Forum-1XA well to
establish the presence of hydrocarbons in the crest of the structure. Well
Forum-2X did encounter numerous oil and gas shows whilst
Page 7 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
87
[LOGO] PGS
drilling; gas shows were recorded at a depth of 900 feet in a limestone of the
Maingit formation, and further oil and gas shows were recorded between the
depths of 1,576 and 1,606 feet in sands of the Malubog formation. However, the
level of shows was less than in the Forum-1XA well, probably due to the higher
mud weights employed as a precaution against the kicks suffered during the
drilling of the earlier well. The Forum-2X well confirmed the existence of an
active hydrocarbon system in the SC 40 (Cebu) permit, but unfortunately various
operational difficulties and equipment shortcomings conspired to frustrate
attempts to determine definitively the nature of the hydrocarbons present in the
prospective zones, and also to determine the ability these zones to produce
hydrocarbons at sustained commercial rates.
Figure 7 shows a display of the wireline logs from the Malubog sand interval
encountered in the Forum-2X well over the interval 1,576 ft to 1,606 ft. The
calliper log confirms the presence of mud cake over this interval, which is a
positive indicator of permeable formation. FEI interpret that the
neutron-density cross over evident across the interval is indicative of the
presence of gas, and that the interval between 1,603 ft and 1,606 ft at the base
of the section may be oil bearing. PGS agree with the former interpretation, but
consider that overall there is insufficient information to be able to confirm
the latter.
Nevertheless, the presence of oil was noted in the drilling mud whilst drilling.
This oil was reported to be waxy, with a high pour point, and it is unclear how
this description fits with the 44 deg. API oil described as being produced from
the test of the MST-11A well.
An attempt to perform a drill stem test (DST) on the well produced small
quantities of gas and a trace of oil, but there was also evidence that the
formation collapsed. This problem has been recognised in other test attempts in
the area, and any future developments focussed on the Malubog should take this
into consideration.
Well Forum-3X was drilled approximately 265 metres to the southwest of the 2X
well as a downflank appraisal of the CMB structure. The well encountered only
minor gas shows in the interval from 900 feet down to 1,600 feet, and
consequently the well was not tested. The Malubog reservoir sand appears to be
only poorly developed at this location, and although present, it was thinner and
of much poorer quality than the same interval encountered in the 2X well.
Wireline log data from Forum-3X confirms that the interval has a high shale
content and virtually no effective porosity. This indicates that there is a
lateral facies change in this direction away from the crest of the structure,
which causes the unit to thin and grade to shale.
Taken together with the results of the CMB-2 well (200m to the northwest of
Forum-3X) which tested 105 bopd, and other hydrocarbon indications from the
thirty years of exploration activity in the CMB area, PGS conclude that the oil
initially in place of 6.0 mm bbl estimated to be contained in the CMB structure
by FEI is at the upper end of any likely range of outcomes. PGS estimate a most
likely volume of oil initially in place of the order of 2.8 mmbbl, or
approximately 750 mmscf of gas if the zone were to be gas-bearing. This would
represent a development opportunity of similar size to the Libertad Gas Field.
It should be noted that oil recoveries from shallow onshore fields could be very
low if they are exploited by simple pressure depletion, as reservoir pressures
are low in shallow reservoirs, and consequently so are the volumes of gas
dissolved in the oil. Without pressure support, either by water injection or
natural water influx, the production characteristics of the field would involve
a short-lived rush of oil production, which would decline very rapidly, and be
accompanied by increasing volumes of associated gas. Illustrative
Page 8 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
88
[LOGO] PGS
scoping calculations suggest simple depletion of a shallow oil reservoir at
1,500 feet would only recover between 2 and 6 per cent. of the oil initially in
place.
By contrast, waterflood recoveries could be much higher, potentially above 30
per cent., but at the expense of additional wells and equipment. Also, the
reservoirs need to be homogeneous and continuous for such methods to be
effective. Fractured carbonates can present particular challenges to the
implementation of successful secondary recovery techniques, and in general
recovery factors tend to be lower than they are in sandstone reservoirs.
There remain many uncertainties regarding the potential of the CMB area, both in
terms of volumes and nature of the hydrocarbons present, and the ability of the
hydrocarbon bearing zones to produce at sustained commercial rates. FEI plan to
re-enter the Forum-2X well during 2005, in order to evaluate and test the
Malubog sand interval. Nevertheless, significant uncertainties will still remain
in the formation characteristics at large, and the lateral controls on formation
properties, and these make evaluation of the Maya area problematic. However,
looked at from another perspective, since the expected drilling costs are very
modest, the volumes of oil needed to repay the cost of the wells are also very
modest. At current oil prices, less than 10,000 barrels of oil production will
yield enough gross revenue to pay for a well, plus the additional costs of some
oil storage capacity and a gas disposal system.
Central Tanon Prospect
The Central Tanon prospect is located within the Tanon sub-basin of the Visayan
Basin offshore west Cebu. It is an elongate anticlinal structure trending
approximately north-south with three culminations mapped on a sparse grid of 2D
seismic data. The structure has been mapped at the Upper Miocene to Lower
Pliocene Top Barili / Dingle carbonate level, the postulated reservoir horizon.
The structure lies up-dip of Well Tuburan A-1X which encountered moderate to
good oil shows in the Maingit Limestone. The Barili Limestone has been mapped as
on-lapping the Maingit to the east of Tuburan A-1X enabling a possible migration
pathway to the Central Tanon prospect. The structure also lies to the east and
up-dip of Well Bangus-1 which had oil and gas shows in the Barili Limestone.
Evidence for charge to the Barili Formation at the Central Tanon prospect is
therefore encouraging. The top seal for the Barili Limestone is the Barili marl,
a claystone interval composed predominantly of greenish grey calcareous and
foraminiferal mudstones which are extensive over the region.
The reservoir at the Central Tanon prospect is the Barili/Dingle Limestone,
bedded platform carbonates. The prognosed top reservoir depth is 3,700 ft with a
total depth below the Maingit Limestone to assess this secondary objective.
Reservoir quality at Well Bangus-1 was generally good with porosities of 15 to
25 per cent. Local enhancement of porosity by fracturing and dolomitization may
improve reservoir properties. Potential source rocks in the Tanon sub-basin are
believed to be the carbonaceous shales of the oligocene to Lower Miocene Malubog
Formation and the Cretaceous Pandan Formation. Uncertainty concerning the
effectiveness of the source rock is because these intervals have not been
penetrated in the Tanon Strait. They are however believed to exist and in the
central parts of the basin are expected to be buried sufficiently as to be
mature.
Page 9 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
89
[LOGO] PGS
Very limited technical data was available to make an assessment of reserves. A
time map of the Top Barili Limestone and an outline of the Operator's reserves
calculation provided sufficient data to calculate a deterministic value. The
area of closure is over 9,000 acres with a vertical closure mapped of 820 feet.
A total field deterministic value for recoverable reserves of 264 mm bbls of oil
was calculated assuming a recovery factor of 20 per cent. If the structure was
gas bearing, a deterministic gas reserve volume would be 660 bscf. The key risks
associated with the prospect are the integrity of the mapped trap and the
presence and effectiveness of the Barili/Dingle Limestone reservoir. PGS have
assigned a chance of success of 11.5 per cent. to the Central Tanon prospect.
A seismic survey will be performed over the Central Tanon prospect area during
2005, in fulfilment of the work programme obligations associated with the
contract area. A total of 250 line kilometres of 2D seismic will be acquired,
and it is planned that part of the survey will cover the area around Jibitnil
Island.
Jibitnil Island Prospect
The Jibitnil Island prospect as its name implies lies beneath the island of
Jibitnil in the Central Tanon Strait, flanking the western side of the
Daanbantayan Island, northern Cebu. The prospect is a complicated positive
flower structure between two approximately north-northwest trending wrench
faults. A small domal closure underlies the island with an areal closure of 925
acres and a vertical closure of 650 feet mapped on sparse 2D data around the
island. The primary target at the Jibitnil Island prospect is the Maingit
Limestone which was penetrated by Well Bakyad-1 2.5 kilometres to the west. At
Bakyad-1 a tilted Maingit carbonate buildup was penetrated with no structural
closure. Reservoir properties were good with porosities up to 28 per cent.
Secondary targets include the Upper Miocene to Pliocene Barili Formation, the
Maingit sands, Middle Miocene Uling limestone and the Upper Oligocene to Lower
Miocene Cebu Limestone and Malubog sands. Well Jibitnil-1 was drilled 4
kilometres to the east of the island and encountered gas shows in the sandstone
and limestone units of the Middle to Upper Miocene section, and oil shows in the
Lower Miocene Malubog Formation. The well targeted a valid structure mapped at
the Top Maingit Limestone interval but failed due to a lack of reservoir and
charge.
At the Jibitnil Island prospect the primary reservoir objective, the Maingit
Limestone is prognosed at 4,100 feet TVD SS. At Bakyad-1 the interval was chalky
with occasional vuggy porosity, and is developed to a thickness of approximately
1,200 feet. Volumes have been calculated by the operator and with the limited
data available verified. The potential recoverable reserves are 85 mm bbls in an
oil case and 450 Bscf in a gas case. The key risks associated with the prospect
are the presence of a working trap and the presence and effectiveness of the
Maingit Limestone reservoir. PGS have assigned a chance of success of 11.5 per
cent. to the Jibitnil Island prospect.
During 2005, 5 seismic lines will be acquired around Jibitnil Island as part of
the proposed Central Tanon seimic survey.
West Malapascua Prospect
Page 10 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
90
[LOGO] PGS
The West Malapascua prospect is located approximately 10 kilometres north of
Cebu Island. It is a wrench induced fault and dip closed structure mapped at Top
Middle Miocene Maingit Limestone. The structure has 1,950 acres of areal closure
and 600 feet of vertical closure. The primary objective is the Middle Miocene
Maingit Limestone penetrated elsewhere in the Visayan Basin and established as a
viable reservoir. As with other prospects located in the Visayan Basin the most
probable source beds are within the Lower Miocene and older. The top of the
Maingit Limestone is prognosed to be at a depth of 2,900 ft TVDSS.
Volumes have been calculated by the Operator but with the limited data available
cannot be verified. The potential recoverable reserves are reported to be 80 mm
bbls in an oil case and 185 Bscf in a gas case. The key risks associated with
the prospect are the presence of a working trap and the presence and
effectiveness of the Maingit Limestone reservoir. PGS have assigned a chance of
success of 11.5 per cent. to the West Malapascua prospect.
South Guintacan Prospect
The South Guintacan prospect is located to the southwest of Guintacan Island
along the northwestern flank of the Tanon Strait sub-basin. The prospect is a
faulted anticline trending northeast-southwest. The domal structure has been
mapped at Top Maingit Limestone and has an areal closure of 1,700 acres and a
vertical closure of 475 feet. Wells drilled in the vicinity for example
Guintacan-1 and Guintacan-2 have had shows in the shallower Barili Limestone. As
with other prospects located in the Visayan Basin the most probable source beds
are within the Lower Miocene and older. The top of the Maingit Limestone is
prognosed to be at a depth of 6,000 ft TVDSS.
Volumes have been calculated by the Operator but with the limited data available
cannot be verified. The potential recoverable reserves are reported to be 70 mm
bbls in an oil case and 330 Bscf in a gas case. The key risks associated with
the prospect are the presence of a working trap and the presence and
effectiveness of the Maingit Limestone reservoir. PGS have assigned a chance of
success of 9.9 per cent. to the South Guintacan prospect.
West Toledo Prospect
The West Toledo prospect lies in the offshore Tanon Strait approximately 15
kilometres southwest of Toledo City, Cebu. The prospect is defined by only three
seismic lines and lies in shallow water, approximately 300 feet at a potential
well location. The structure has been mapped at an Early Miocene seismic event
interpreted to approximate to the Top Malubog Formation. Closure is the result
of reverse and strike-slip movement on a north east trending splay off a major
north-south wrench system. The prospect is
Page 11 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
91
[LOGO] PGS
further bisected by two normal faults and closure also exists at the shallower
Upper Miocene Maingit and Toledo clastic units providing a secondary target.
Onshore Cebu two oil discoveries were made by Wells Reina Regente-1AX and
Villalon-4. The former produced 250 bbls per day in 1959 and currently produces
30 gallons a day from the Malubog sands. Well Villalon-4 also produced oil on
test from the Malubog sands. It encountered approximately 150 feet of net sand
with porosities in the range from 18 to 30 per cent. Work done in 1994
postulated that improved sand quality may be expected offshore where Late
Oligocene to Early Miocene palaeogeography indicates that sand provenance was
from the west and the East Panay platform. As a result sand quality and
permeabilities might be improved to the west where they are more proximal.
Secondary targets include the sands of the Maingit and Toledo Formations, these
intervals are more speculative but do have reservoir quality and hydrocarbon
indications elsewhere in the basin. Thick shale sections throughout the Miocene
are believed to provide adequate intra-formational seals for the Malubog and the
secondary targets. The critical risk concerns the sealing capacity on the
bounding fault to the east. As yet there is no evidence to support sealing
faults in the basin but the low net to gross section through the Miocene and
presence of considerable argillaceous sections may enable a membrane seal to
develop. The source for the prospect is the same as discussed for the Central
Tanon prospect. Thermal maturity modelling carried out in 1994 indicates that
the West Toledo prospect may be expected to be in communication with mature
source rocks.
The areal closure is in excess of 3,700 acres and has a vertical closure of
3,000 feet. Volumetric estimates were performed during 1994 and have been
verified with the limited data available. The deterministic recoverable reserves
are 97 mm bbls for the oil case and 332 Bscf for the gas case. However, as can
be seen from Figure 4, a relatively small part of the prospect lies within SC
40, and FEI's interest in any successful development of a discovery on this
prospect would most likely be as a participant in a unit operated by another
party.
PGS consider that the critical risk factors for the West Toledo prospect are the
presence of a sealing fault to control closure and the reservoir effectiveness
of the Malubog sands, in particular the validity of the paleo-geographic model
to predict sand quality. The overall chance of success for the West Toledo
prospect is 11.3 per cent. A number analogous leads have been identified in the
vicinity of the West Toledo prospect which would become interesting given
success.
The Agojo Prospect
The Agojo prospect lies in the northern part of the Central Tanon Strait, to the
northeast of Cebu Island. The trap is a 4-way dip closed structure developed due
to wrench movements on a series of approximately north-south trending faults.
Closure is defined by five sparse 2D lines and is a north-south elongate dome.
Page 12 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
92
[LOGO] PGS
The structure has been mapped on the Middle to Upper Miocene Maingit Limestone
horizon and has an areal closure of 1,400 acres with a vertical closure of 650
feet. The top of the Maingit Limestone is prognosed to be at a depth of 4,700 ft
TVDSS.
The Maingit reservoir in the area has been established by nearby Bakyad-1
drilled in 1978 which encountered excellent reservoir quality and gas shows. As
with other prospects located in the Visayan Basin the most probable source beds
are within the Lower Miocene and older.
Volumes have been calculated by the Operator but with the limited data available
cannot be verified. The potential recoverable reserves are reported to be 60 mm
bbls in an oil case and 210 Bscf in a gas case. The key risks associated with
the prospect are the presence of a working trap and the presence and
effectiveness of the Maingit Limestone reservoir. PGS have assigned a chance of
success of 10 per cent. to the Agojo prospect.
The North Bantayan Prospect
The North Bantayan prospect lies in the Bantayan sub-basin of the Visayan Sea.
The trap is a fault and dip closed structure located in the footwall of an
extensional fault down-throwing to the east. A sparse grid of 2D lines define
the north-south striking structure. The structure has been mapped on the near
top early Miocene approximating to the Cebu Limestone horizon and has an areal
closure of 5,000 acres with a vertical closure of 1,800 feet. The top of the
Cebu Limestone is prognosed to be at a depth of 7,600 ft TVDSS.
The Cebu Limestone reservoir in the area has been established by nearby
Philipino-1. The well encountered a unit believed to be equivalent to the
onshore Cebu Limestone. The unit was a thin-bedded fine to medium grained
dolomitized limestone. It was generally tight but in places had porosity
developed to 10 per cent. As with other prospects located in the Visayan Basin
the most probable source beds are within the Lower Miocene and older.
Volumes have been calculated by the Operator but with the limited data available
cannot be verified. The potential recoverable reserves are reported to be 250 mm
bbls in an oil case and 1 TCF in a gas case. The key risks associated with the
prospect are the presence of a working trap and the presence and effectiveness
of the Cebu Limestone reservoir. PGS have assigned a chance of success of 8 per
cent. to the North Bantayan prospect.
Conclusions
Both the GSEC-101 (Reed Bank) area offshore Palawan Island previously operated
by Sterling, and the SC 40 (Cebu) contract area covering northern Cebu and part
of the Visayan Sea each contain confirmed petroleum discoveries, plus an
inventory of prospects and leads which are estimated to have a finite chance of
containing commercial volumes of hydrocarbons.
Page 13 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
93
[LOGO] PGS
The GSEC 101 (Reed Bank) area contains two wells which have successfully tested
gas, although at rates which are not sufficiently high to be economic in an
offshore environment. When interpreted, a 3-D seismic survey over the Sampaguita
gas discovery area, planned to be accomplished during 2005, should provide much
improved structural information which can be used as input to future appraisal
drilling efforts, and should also assist in the estimation of gas initially in
place volumes. The existence of the producing Malampaya Gas Field in the area
could provide access to existing gas export infrastructure should commercial
volumes of reserves be proved.
The SC 40 (Cebu) contract area also contains proven active hydrocarbon systems.
The onshore discoveries are modest in size, and PGS consider that the Libertad
Gas Field is marginally economic to develop at the lower reserves estimate
assumed by FEI. However, its development should safeguard the other prospects
and leads in SC 40 (Cebu) from relinquishment in 2006.
The Central Maya Bulge area requires additional data to be gathered to confirm
the nature and extent of the hydrocarbon accumulations encountered by the wells
to date, and the proposed re-entry and testing of the Forum-2X well should
clarify whether or not sustained production at commercial rates is possible from
the Maingit and/or Malubog reservoir horizons. From the limited information
available, it is likely that the size of any hydrocarbon accumulations in these
reservoirs will be modest, and recoveries will be similarly modest. However,
onshore operations are relatively inexpensive compared to offshore activities,
and the development of small accumulations can be economic at current oil
prices.
The prospects within the SC 40 (Cebu) area are predominantly offshore, but of
potentially much larger size than the discoveries onshore. Seismic acquisition
and exploration drilling costs will be high for such prospects. The chances of
success for the best two prospects have been estimated to be around 11 per cent.
The chances of success for the identified prospects in SC 40 (Cebu) are not
independent of one another. Failure to discover commercial hydrocarbons in one
prospect is likely to reduce the chance of success in the others.
The following table summarises the prospects and discoveries within the two
contract areas.
- -----------------------------------------------------------------------------------------------------------
Prospect and Discovery Summary
- -----------------------------------------------------------------------------------------------------------
Prospect Primary Target Target Water Chance of Potential Reserves
Formation Depth ft Depth ft Discovery (1) Oil(mmbbl)/Gas(bscf)
- -----------------------------------------------------------------------------------------------------------
Central Tanon Barili Limestone 3700 650 0.115 265/660
- -----------------------------------------------------------------------------------------------------------
Jibitnil Island Maingit Limestone 4100 Onshore 0.115 85/450
- -----------------------------------------------------------------------------------------------------------
Page 14 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
94
[LOGO] PGS
- -----------------------------------------------------------------------------------------------------------
South Guintacan Maingit Limestone 6000 100 0.099 70/330
- -----------------------------------------------------------------------------------------------------------
West Malapascua Maingit Limestone 2900 120 0.115 80/185
- -----------------------------------------------------------------------------------------------------------
West Toledo (2) Malubog Sand 7500 350 0.113 97/332
- -----------------------------------------------------------------------------------------------------------
Agojo Maingit Limestone 4700 250 0.1 60/210
- -----------------------------------------------------------------------------------------------------------
North Bantayan Cebu Limestone 7600 300 0.08 250/1000
- -----------------------------------------------------------------------------------------------------------
Sampaguita (3) Late Paleocene 10300 260 1 - /2329
- -----------------------------------------------------------------------------------------------------------
Libertad Barili Limestone 650 Onshore 1 - /0.5
- -----------------------------------------------------------------------------------------------------------
CMB (4) Malubog Sand 1500 Onshore 1 0.14/0.64
- -----------------------------------------------------------------------------------------------------------
(1) Prospect chances of success are not independent. Failure to discover
commercial hydrocarbons in one prospect is likely to reduce the chance of
success in the others.
(2) As currently mapped, only a small part of these potential reserves may be
under SC 40 (Cebu)..
(3) Potential gas reserves assume a recovery factor of 0.85
(4) Potential oil reserves are limited to primary recovery. Recovery factors
for oil and gas are assumed to be 0.05 and 0.85 respectively.
Property Title and Participating Interest
PGS is not in a position to attest to property title, financial interest
relationships or encumbrances related to the properties reviewed in the
evaluation.
A full summary of the properties of the prospects examined in the course of the
review is included as table. The chances of success estimated for these
prospects are not mutually independent; chances for remaining prospects will be
impacted by the results from earlier exploration activities.
Professional Qualifications
PGS Reservoir Limited ("PGS") is an independent consultancy specialising in
petroleum reservoir evaluation and economic analysis. Except for the provision
of professional services on a fee basis, PGS does not have a commercial
arrangement with any other person or company involved in the interests that are
the subject of this letter.
This evaluation has been supervised by Mr. J. R. Thompson, Manager of Reserves
Evaluations at PGS Reservoir Limited. Mr. Thompson has 31 years of varied
petroleum and reservoir engineering experience. He has an MA in Natural
Sciences, and is a Chartered Engineer, and a member of the Society of Petroleum
Engineers. Other PGS employees involved in this work hold at least a bachelor
degree (or its equivalent) in geology, geophysics, petroleum engineering or a
related subject and have at least five years' relevant experience in the
practice of geology, geophysics or petroleum engineering.
Basis of Opinion
Page 15 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
95
[LOGO] PGS
The evaluation presented in this letter reflects our informed judgements based
on accepted standards of professional investigation, but is subject to generally
recognised uncertainties associated with the interpretation of geological,
geophysical and engineering data. The valuation has been conducted within our
understanding of the effects of petroleum legislation, taxation, and other
regulations that currently apply to the Forum Energy's proposed interests in the
Philippines.
It should be understood that any evaluation of hydrocarbon resources is subject
to government policies and market conditions prevailing at the time of the
evaluation. Future changes can cause the total quantities of petroleum recovered
to vary from those endorsed in this letter.
This letter as been written for the Directors of Forum Energy plc and its
financial advisers, Noble & Company Limited. Information contained in this
letter should not be disclosed in part or in whole to third parties without the
approval of PGS. Such permission shall not be unreasonably withheld.
Yours faithfully
For PGS Reservoir Limited.
Jeremy R. Thompson M.A., C.Eng., M.I.M.M.
Manager of Evaluations
Page 16 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
96
[LOGO] PGS
Definitions
"Petroleum" means oil and/or gas.
"Barrel" or "bbl" refers to a volume of 42 US gallons, or 5.615 cubic feet.
"TD" refers to total depth (of a well).
"TVDSS" refers to true vertical depth sub-sea.
"TOC" means Total Organic Content "scf" refers to standard cubic feet.
"BThU" refers to British Thermal Units.
The prefixes "m" and "mm" refer to thousands and millions respectively.
The prefix "b" as in "Bscf" refers to billions, one billion being 1,000 million
(109).
The prefix "T" as in "Tscf" refers to trillions, one trillion being 1,000,000
million (1012).
Page 17 of 16
- --------------------------------------------------------------------------------
PGS Reservoir Ltd Tel: + 44 1628 641 000 Registered Office:
PGS Thames House Fax: + 44 1628 641 200 PGS Reservoir Limited
17 Marlow Road PGS Court, Halfway Green
Maidenhead, Berks SL6 7AA Walton-On-Thames, Surrey KT12
1RS
England Company Registration: 3177228
Registered in England & Wales
97
APPENDIX H
Competent Persons Report on the Coal assets by CSA Group
98
The CSA Group [LOGO]
Forum Energy Plc - Independent Expert Report
The Directors 18 April 2005
Forum Energy Plc
6th Floor
One London Wall
London EC2Y 5EB
and
The Directors
Noble & Company Limited
76 George Street
Edinburgh EH2 3BU
Dear Sirs,
The CSA Group ('CSA') has prepared this independent report ('The CSA Report') at
the request of Forum Energy Plc ("Forum"). The CSA Report has been prepared to
provide an independent geological and mining assessment of Forum's projects in
the Philippines, in preparation for the listing of the company on AIM in the UK.
The CSA Report was prepared by Mr Dexter Ferreira, B.Sc. (Geology), B.Eng.
(Mining), MBA. Mr Ferreira is a member of SACNASP and has 18 years experience as
an exploration geologist and geostatistician, and has worked since 2003 with
LQS, now part of CSA Group, specialising in mineral deposit modelling, due
diligence work for the acquisition/merger/purchase of deposits and ensuring full
disclosure/compliance with NI43-101/Samerc/JORC codes. Amongst other
assignments, he has worked on appraisals and evaluations of mineral deposits,
including coal, in Africa, Latin and North America and Asia. He is responsible
for the reserving process and disclosure to regulatory requirements for mine
operations in South Africa.
The CSA Report is signed on behalf of CSA by Mr. John Cole-Baker, Director. Mr
Cole-Baker is a Chartered Engineer. He has over 35 years experience in the
international infrastructure and mineral industry, including posts as Managing
Director of an exploration company and Director of international consulting
firms. Since joining CSA in 2001, he has played a major role in management of
the international mining business and has been responsible for the CSA Group UK
based operations.
The CSA Report is based on 1) geological reports and information supplied by
Forum, 2) site visits to all the coal concessions in the Philippines held by
Forum. All data available to Forum was released to CSA for review. CSA reviewed
source data where possible but has relied on the accuracy of data as reported by
Forum, and by previous operators in the preparation of The CSA Report. Some of
these reports were written by current employees of Forum while in previous
capacities or as independent consultants. All requests for information to the
employees of Forum were addressed immediately where possible and a candid
approach to all queries was in evidence throughout the review.
CSA checked the current status of the mineral licences based on the documents
provided. Philippine legal opinion has been sought regarding the verification of
the company's interests in the licences. At no time
99
during the course of preparation of the CSA Report did CSA become aware of
either withholding of information or of the changing of records to influence the
conclusion of The CSA Report. CSA has endeavoured to ensure that no error of
fact is contained within the CSA Report. Any such error is not intentional and
is not a deliberate effort to mislead. Other than for the purposes of completing
The CSA Report described in this document, neither CSA nor any CSA staff
involved in its preparation has any commercial interest in Forum or any
associated companies. Neither CSA nor any CSA staff will receive any interest in
Forum or any associated companies as a result of undertaking The CSA Report. CSA
will be paid normal professional rates for completing The CSA Report for Forum.
Yours faithfully,
/s/ John Cole-Baker
John Cole-Baker
Director
100
Competent Person's Report on the Coal Assets of Forum Energy PLC
Prepared by Dexter S. Ferreira on behalf of:
The CSA Group Limited
- --------------------------------------------------------------------------------
101
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
Table of Contents
1 INTRODUCTION ........................................................ 3
2 REVIEW PROCEDURE .................................................... 4
3 COAL OPERATING CONTRACTS ............................................ 4
3.1 Central Cebu .................................................... 4
3.2 South Cebu ...................................................... 5
4 PROPERTY DESCRIPTION ................................................ 5
4.1 Tenement Conditions - Central and South Cebu Programmes ......... 5
5 REGIONAL GEOLOGY - CENTRAL CEBU ..................................... 7
5.1 Geologic Structures ............................................. 7
5.2 Coal Geology .................................................... 8
5.3 Coal Quality .................................................... 9
5.4 Geo-Hydrology ................................................... 9
6 REGIONAL GEOLOGY - SOUTH CEBU ....................................... 9
6.1 Geologic Structures ............................................. 10
6.2 Coal Geology .................................................... 11
6.3 Coal Quality .................................................... 11
7 COAL RESERVES ....................................................... 11
7.1 Central Cebu .................................................... 12
7.2 South Cebu ...................................................... 13
8 MINING - CENTRAL CEBU ............................................... 13
8.1 Mining Method ................................................... 14
8.2 Mine Design ..................................................... 15
8.3 Production Plan ................................................. 15
8.4 Mine Layout ..................................................... 16
8.5 Roof Support .................................................... 16
8.6 Coal and Waste Transport ........................................ 16
9 MINING - SOUTH CEBU ................................................. 17
9.1 Mining Method ................................................... 17
9.2 Mine Design ..................................................... 18
9.3 Production Plan ................................................. 19
9.4 Coal and Waste Transport ........................................ 19
10 QUALIFICATIONS, EXPERIENCE AND INDEPENDENCE ..................... 20
11 PRINCIPAL SOURCES OF INFORMATION ................................ 20
12 GLOSSARY OF TECHNICAL TERMS ..................................... 21
List of Tables
Table 1.0 Coal Quality Analysis of the Luca Coal Seam (DOE-ERL) ........... 9
Table 2.0 Coal Quality Analysis of Maloray Coal ........................... 11
Table 3.0 Reserves Summary for Cebu Projects .............................. 12
Table 4.0 Proposed Production Plan ........................................ 16
Table 5.0 Proposed Production Plan ........................................ 19
List of Figures
Figure 1.0 Project Location Map ........................................... 3
Figure 2.0 Central Cebu Concessions ....................................... 4
Figure 3.0 South Cebu Concessions ......................................... 5
Figure 4.0 Proposed Work Program for Central Cebu ......................... 6
Figure 5.0 Proposed Work Program for South Cebu ........................... 6
Figure 6.0 Regional Geology of Blocks CBS-I-193 and 194 - Central Cebu .... 8
Figure 7.0 Regional Geology of Block CB-179 - South Cebu .................. 10
Figure 8 Typical Mini Longwall Mining Method .............................. 14
Figure 9.0 Typical Diagonal Saw-Teeth Mining Method ....................... 17
- --------------------------------------------------------------------------------
The CSA Group 1
102
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
SUMMARY
The Forum coal properties consists of two main separate project areas; Cebu
Central (North Central and South Central) and Cebu South, collectively
comprising eight granted exploration and mining tenements covering an aggregate
area of approximately 7,000 hectares located on Cebu Island in the Philippines.
The Central Cebu tenements are located in the main coal-bearing formation known
as the Luca Formation of Middle Miocene age. There are three coal seams bearing
an average thickness of 1.2 to 1.5 m, all dipping gently within a range of 15 to
25(degree). Coal in Luca has been ranked as bituminous with an average calorific
value over 11,300 BTU/lb when washed. The inherent moisture is 8%, sulphur
content is 2.75%, ash is 7% and volatile matter is 42%.
The South Cebu tenements are located in the main coal-bearing formations, which
are known as Calagasan and Linut-od Formations. In one tenement block (CB-179),
only Seam B has been mined by the previous operators; a seam bearing an average
thickness of 0.6 to 1.5 m. On average, the coal seams dip at 30(degree) to
40(degree) along a general strike characterized by a NNE-SSW trending elongated
antiform. This geological behaviour is further evidenced by the mining operation
immediately south of the concession. Coal in South Cebu has been ranked as
bituminous coal with a calorific value of over 11,000 BTU/lb. The inherent
moisture is less than 5%, sulphur content is less than 1%, ash content of clean
coal is less than 5% and volatile matter of 40%.
The coal blocks held by Forum Exploration Inc. have a history of mining and one
of the largest former owners has drilled well over 100 surface drillholes -
successfully delineating the various coal seams for considerable lengths. A
summary of the known seam(s) continuation and coal quality in each area is
included in this report. Proven and probable coal reserves for all tenements are
estimated to be 1.4 million metric tonnes and 3.5 million metric tonnes
respectively, whereas resources total over 10 million metric tonnes; a summary
is provided below.
- --------------------------------------------------------------------------------
Region Block Metric Tonnes
---------------------------------------------------
Proven Probable Insitu
- --------------------------------------------------------------------------------
CB 33-I-193 135,887 81,861 2,980,000
Central Cebu CB 33-I-194 55,879 217,635 310,000
CB 34-I-68 73,904 287,840 410,000
CB 34-I-69 234,330 912,664 1,300,000
- --------------------------------------------------------------------------------
Subtotal 500,000 1,500,000 5,000,000
- --------------------------------------------------------------------------------
CB-179 350,985 683,202 806,453
South Cebu CB-180 71,583 171,690 546,773
CB-219 197,391 473,437 1,507,734
CB-259 280,041 671,671 2,139,040
- --------------------------------------------------------------------------------
Subtotal 900,000 2,000,000 5,000,000
- --------------------------------------------------------------------------------
TOTAL 1,400,000 3,500,000 10,000,000
- --------------------------------------------------------------------------------
Note that reserves and resources quoted in this report have not yet been
re-defined to JORC or NI43-101 standards.
- --------------------------------------------------------------------------------
The CSA Group 2
103
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
1 INTRODUCTION
The CSA Group ('CSA') was requested by Forum Exploration Inc. ("FEI") to prepare
an independent report on the two main project areas on Cebu Island in the
Philippines. Mr. Dexter Ferreira, a senior geostatistician and mining engineer
from the CSA GROUP, carried out work on the project. All tenements considered in
this report are held in the name of FEI, a Philippines registered company. The
project areas cover a total of 7,000 hectares and are located at Balamban and
Toledo, Cebu Province for Central Cebu, and Dalaguete, also in the Cebu Province
for South Cebu (Figure 1).
Figure 1.0 Project Location Map
[MAP OMITTED]
- --------------------------------------------------------------------------------
The CSA Group 3
104
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
2 REVIEW PROCEDURE
The chief geologist, Mr. Ray Apostol of FEI, presented an overview of the
tenements and the project specifics at FEI's head office in Manila, Philippines.
This review was followed by field visits to the various project areas held by
the company, led by Mr. Apostol and the author accompanied by two field guides.
The material reviewed by CSA included reports, geological plans and
administrative documents made possible by FEI staff. Drill hole sections and
logs were reviewed in detail by the author at the field but had to be returned
to the holder due to administrative issues. Much of the following information
has been extracted directly from these geological and feasibility reports after
verification of the original data by CSA. The proposed exploration programmes
included here for each of the areas reviewed are summarized from reports, and
discussions with Mr. Apostol and are considered by CSA as the logical, next
steps for each of the areas.
3 COAL OPERATING CONTRACTS
The Department of Energy ("DOE"), through a service contract system known as the
Coal Operating Contract (COC), regulates coal-mining operations in the
Philippines. This was introduced when legislation (Presidential Decree PD 972)
was enacted to accelerate the exploration and exploitation of coal resources. As
proposed in the COCs, should commercial quantities of coal be discovered, the
term will be for a total period of twenty years, renewable for a series of three
years thereafter but not to exceed twelve years. A consulting firm, Careminer,
were commissioned by FEI to prepare the COC applications.
3.1 Central Cebu
In Central Cebu, Forum has applied for and received a COC for blocks CB 33-I-193
and 194 located in Luca, Balamban, Cebu and CB 34-I-68 and 69 located in the
boundaries of Naga and Toledo City (Figure 2). This COC awarded has an aggregate
area of about 4,000 hectares.
Figure 2.0 Central Cebu Concessions
[MAPS OMITTED]
- --------------------------------------------------------------------------------
The CSA Group 4
105
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
3.2 South Cebu
In South Cebu, FEI applied for and received a COC for the former blocks operated
by Jeston Mining Corporation and Kinway Mining Corporation; both COCs had
already been cancelled by the DOE. The locality stretches from Barangay
Mantalongon to Maloray in Dalaguete, Cebu. These are portions of blocks CB-179,
180, 219 and 259 (Figure 3). The awarded COC has an aggregate of about 3,000
hectares.
Figure 3.0 South Cebu Concessions
[MAP OMITTED]
4 PROPERTY DESCRIPTION
4.1 Tenement Conditions - Central and South Cebu Programmes
Exploration is to take place within the first year, leading to subsequent
development and production. Once coal reserves in commercial quantity are
measured, the COC will proceed to the development and production Phase. This
will take place immediately once the coal development /production work program
and feasibility study submitted by FEI is approved by the Department of Energy,
and shall remain in force during the balance of the exploration Phase or any
extension thereof for an additional period of ten years. Once FEI demonstrates
that it has substantiated a reserve base and will apply an efficient mining
method, FEI has the option to begin with production/development on any of the
blocks in both COCs. FEI can proceed with this option even before the end of
Year 1.
Thereafter, the Department of Energy may extend the term of the COC for another
ten years, provided that FEI does not default its obligations. Thereafter, FEI
may again request an extension of the COC term for a series of three-year
periods, not exceeding twelve years, provided that the term may be reduced if a
shorter period of time is required to continue and maintain economic coal
development and production as jointly determined by FEI and the
- --------------------------------------------------------------------------------
The CSA Group 5
106
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
Department of Energy. The work program, as required by the DOE, per COC for Year
1 is detailed below:
---------------------------------------------------------------
Activity Amount
---------------------------------------------------------------
Geological Mapping 1,000 hectares
---------------------------------------------------------------
Boundary Survey 1,000 hectares
---------------------------------------------------------------
Trenching/Test Pitting 100m
---------------------------------------------------------------
Number of Drillholes (>/=100m /ea) 4
---------------------------------------------------------------
The operator is obliged to spend not less than one million Philippine Pesos (PhP
1,000,000.00) per block or PhP 4.0 million per COC per year. The work proposed
by FEI, for both Central and South Cebu, on all owned blocks includes geological
and technical work such as gathering of related data and literature, geologic
investigation, mapping (recon/semi-detailed/detailed), drilling/test
pitting/trenching and related sampling. Schematic Gantt charts of the
DOE-required work programmes as proposed by FEI, for Central and South Cebu are
presented in Figures 4 and 5 below.
Figure 4.0 Proposed Work Program for Central Cebu
CENTRAL CEBU - Exploration Work Program for Year 1
- ------------------------------------------------------------------------------------------------------------------------------------
Year 1 Year 2
- ------------------------------------------------------------------------------------------------------------------------------------
FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB
- ------------------------------------------------------------------------------------------------------------------------------------
I. Geology-Technical
- ------------------------------------------------------------------------------------------------------------------------------------
- CB-33-I-193
- ------------------------------------------------------------------------------------------------------------------------------------
- Gathering of Related Data/Literature --
- ------------------------------------------------------------------------------------------------------------------------------------
- Geologic Investigation
- ------------------------------------------------------------------------------------------------------------------------------------
- Mapping (recon/semi-detailed/detailed) ---------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- Drilling/Test Pitting/Trenching -------------->
- ------------------------------------------------------------------------------------------------------------------------------------
- CB-33-I-194
- ------------------------------------------------------------------------------------------------------------------------------------
- Gathering of Related Data/Literature --
- ------------------------------------------------------------------------------------------------------------------------------------
- Geologic Investigation
- ------------------------------------------------------------------------------------------------------------------------------------
- Mapping (recon/semi-detailed/detailed) ---------------
- ------------------------------------------------------------------------------------------------------------------------------------
- Drilling/Test Pitting/Trenching ------------->
- ------------------------------------------------------------------------------------------------------------------------------------
- CB-34-I-68
- ------------------------------------------------------------------------------------------------------------------------------------
- Gathering of Related Data/Literature --
- ------------------------------------------------------------------------------------------------------------------------------------
- Geologic Investigation ---------------
- ------------------------------------------------------------------------------------------------------------------------------------
- Mapping (recon/semi-detailed/detailed) --------------->
- ------------------------------------------------------------------------------------------------------------------------------------
- Drilling/Test Pitting/Trenching
- ------------------------------------------------------------------------------------------------------------------------------------
- CB-34-I-69
- ------------------------------------------------------------------------------------------------------------------------------------
- Gathering of Related Data/Literature --
- ------------------------------------------------------------------------------------------------------------------------------------
- Geologic Investigation --------------
- ------------------------------------------------------------------------------------------------------------------------------------
- Mapping (recon/semi-detailed/detailed) ------------->
- ------------------------------------------------------------------------------------------------------------------------------------
- Drilling/Test Pitting/Trenching
- ------------------------------------------------------------------------------------------------------------------------------------
II. Enviromental (work leading to ECC acquisition) ---------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
III. Community Relations Activities --------------------------------------------------->
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Note: Mining could be started within Yr-1 in Block 193 upon confirmation with the DOE
- -------------------------------------------------------------------------------------------
Figure 5.0 Proposed Work Program for South Cebu
SOUTH CEBU - Exploration Work Program for Year 1
- ------------------------------------------------------------------------------------------------------------------------------------
Year 1 Year 2
- ------------------------------------------------------------------------------------------------------------------------------------
FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB
- ------------------------------------------------------------------------------------------------------------------------------------
I. Geology-Technical
- ------------------------------------------------------------------------------------------------------------------------------------
- Block 179
- ------------------------------------------------------------------------------------------------------------------------------------
- Gathering of Related Data/Literature --
- ------------------------------------------------------------------------------------------------------------------------------------
- Geologic Investigation ---------------
- ------------------------------------------------------------------------------------------------------------------------------------
- Mapping (recon/semi-detailed/detailed) --------------->
- ------------------------------------------------------------------------------------------------------------------------------------
- Drilling/Test Pitting/Trenching
- ------------------------------------------------------------------------------------------------------------------------------------
- Block 259
- ------------------------------------------------------------------------------------------------------------------------------------
- Gathering of Related data/literature --
- ------------------------------------------------------------------------------------------------------------------------------------
- Geologic Investigation ---------------
- ------------------------------------------------------------------------------------------------------------------------------------
- Mapping (recon/semi-detailed/detailed) --------------->
- ------------------------------------------------------------------------------------------------------------------------------------
- Drilling/Test Pitting/Trenching
- ------------------------------------------------------------------------------------------------------------------------------------
- Blocks 180/219
- ------------------------------------------------------------------------------------------------------------------------------------
- Gathering of Related data/literature --
- ------------------------------------------------------------------------------------------------------------------------------------
- Geologic Investigation ---------------
- ------------------------------------------------------------------------------------------------------------------------------------
- Mapping (recon/semi-detailed/detailed) --------------->
- ------------------------------------------------------------------------------------------------------------------------------------
- Drilling/Test Pitting/Trenching
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
II. Enviromental (work leading to ECC acquisition) --------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
III. Community Relations Activities -------------------------------------------------->
- ------------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The CSA Group 6
107
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
5 REGIONAL GEOLOGY - CENTRAL CEBU
The stratigraphy of the Luca coal measure is similar to the other coal areas in
Cebu being unconformably underlain by the economic basement Mananga Formation
and overlain by Uling and Toledo Formation. The Toledo Formation consists of a
thick sequence of fine tuffaceous clastics and calcirudites. The formation
grades from dark brown mudstones and siltstones at the base to light grey
sandstone at the top. The rock unit is well exposed at Barangay Kabagdalan in
the northeastern part of the coal area.
The Uling limestone is basically coralline limestone with minor calcirudite
facies. The thickness of the unit varies from insignificant to hundreds of
metres. The unit is marked by its distinctive landforms such as sinkholes and
limestone cliff. The unit separates the younger Toledo Formation marine
sediments from the Luca Formation coal measures.
The Luca Formation predominantly consists of interbedded sandstones, siltstones,
mudstones, carbonaceous shale and coal. Marine fossils are common especially
near the top of the formation signifying frequent and longer periods of marine
transgressions toward the end of the deposition of the formation. The most
significant coal seam in the area, Seam S-2 has a consistent fossiliferous
mudstone roof indicating a short-lived but extensive shoreface sedimentation
right after peat formation.
Pyroclastic beds have also been observed within the section although not in the
area being applied for. Their presence would indicate periods of volcanism
during deposition of the formation. The Luca Formation is equivalent to the
Malubog Formation identified by Santos-Inigo, et al, and elsewhere in Cebu.
The Mananga Formation consists primarily of basaltic lava flows intercalated
with pyroclastic rocks of similar composition. The lavas are primarily
amygdaloidal with vesicles and fractures filled with zeolites, carbonates,
quartz, chloride and epidote. The pyroclastic facies consist of siltstones have
also been noted in some sections. Secondary alterations such chloritization,
silification, and oxidation are common. The unit exhibits sharp contacts with
all the younger clastic units.
5.1 Geologic Structures
The Luca coal measures occur within a structural half-basin, which abuts against
the inferred northwest trending Kabagdalan Splay Fault. At least three coal
seams outcrop or subcrop along the periphery of the half basin as traced by both
collapsed and active mine workings. The up thrown western half of the basin has
been completely eroded out.
At least three major folds, namely, the Luca Syncline, Luca Anticline and Suom
Syncline are inferred to occur within the half-basin. Another major fold
structure mapped is the northeast trending Kabagdalan Anticline. This fold
structure does not affect the Luca reserves but is particularly significant in
exploring for coal on the northern blocks of CBS-152 and 153.
Aside from the Kabagdalan Splay Fault, other major fault structures mapped or
inferred include the northeast trending Luca Fault, the east-northeast trending
Amatuga Fault, Suom Fault and the west-northwest trending Kabagdalan Fault.
Except for the Luca Fault, which was mapped in the mine workings, all the other
major faults were inferred from topographic lineaments and sharp contact between
rock units.
Slumps and rolls have been observed near the portal of mine openings. However,
as to be expected, they decrease in intensity as the mines go deeper. Bedding
dips on sediments as well as coal are generally low to moderate, averaging about
25(degree) (Figure 6).
- --------------------------------------------------------------------------------
The CSA Group 7
108
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
Figure 6.0 Regional Geology of Blocks CBS-I-193 and 194 - Central Cebu
[MAP OMITTED]
5.2 Coal Geology
At least three seams appear to have developed to a mineable thickness. The seams
named in this report as S-1, S-2 and S-3 vary in thickness from insignificant (<
0.30 m) to 1.50 m. Interburden between seams averages about 50 m in
Mahangin-Hangin where all three seams occur in mineable thickness. However, at
Luca and Suom, interburden between Seams S-2 and S-3 is only 10-20 m. Dips range
from 15(degree) to 50(degree), averaging about 25(degree).
Seam S-1 was mapped in the Mahangin-hangin area from the numerous small mines.
Coal thickness reportedly varied from 0.75 m up to 1.50 m averaging about 1.0 m.
Seam S-2 was mapped in all three areas. Coal thickness ranged from 0.75 m to
1.40 m averaging about 1.20 m. The coal is generally free of partings but has a
consistent 0.20m fossilliferous mudstone roof, which, although useful as a
marker bed, forms a very weak roof and thus will have to be mined together with
the coal. Thus, the run-of-mine generally contains high ash and therefore coal
washing is necessary.
Seam S-3 was also mapped in all the three areas. Coal thicknesses ranged from
0.60 m to 1.50 m, also averaging about 1.20 m in Mahangin-Hangin and Suom but
only 0.70 m in Luca. However, the seam generally includes mudstone partings,
which comprise up to 40% of the total coal thickness. Thus, run-of-mine also
contains high ash and needs to be washed. Both back and floor generally consist
of mudstone. However, the immediate floor is highly plastic when wet and
therefore heaves. A periodic re-grading of the tunnel floors has to be
anticipated when
- --------------------------------------------------------------------------------
The CSA Group 8
109
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
mining the seam. Providing the timber supports with sills and maintaining good
drainage will be necessary.
As noted, numerous undocumented small-scale mining operations have been ongoing
in the area for the last 15 years, however such operations were only down to a
depth of 20 to 30 m from the outcrop zone.
5.3 Coal Quality
The DOE conducted extensive sampling and washability tests to various coals in
the country in 1997. Only the washed coal had been sampled and analysed in Luca
area but sink-float test of the raw coal has not been conducted; results are
presented in Table 1 below.
Table 1.0 Coal Quality Analysis of the Luca Coal Seam (DOE-ERL)
- --------------------------------------------------------------------------------
ITEMS As Received Air Dried
- --------------------------------------------------------------------------------
Air Drying Loss, % -- 2.23
- --------------------------------------------------------------------------------
Moisture, % 10.31 8.26
- --------------------------------------------------------------------------------
Ash Content, % 7.53 7.70
- --------------------------------------------------------------------------------
Volatile Matter, % 41.13 42.07
- --------------------------------------------------------------------------------
Fixed Carbon, % 41.03 41.97
- --------------------------------------------------------------------------------
Calorific Value Kcal/kg 6,142 6,282
------------------------------------------
BTU/lb 11,055 11,308
- --------------------------------------------------------------------------------
Total Sulphur 2.69 2.75
- --------------------------------------------------------------------------------
Ash Fusion Temperature, softening 1,234 1,252
- --------------------------------------------------------------------------------
HGI 51
- --------------------------------------------------------------------------------
Source: Establishment of Quality Database and Washability Potentials, DOE 1997
5.4 Geo-Hydrology
Limestone occurs above and below the coal, measure and these are of the cavity
solution type. However, since the structures are monoclinal and the surface
topography permits easy water runoff there is no perceived problem on
underground water.
6 REGIONAL GEOLOGY - SOUTH CEBU
The Carcar-Barili Formation is the youngest stratigraphic group in the district.
It consists mainly of limestone, limy tuff and limestone conglomerates. The area
overlain by this type of rock usually exhibits karstic topography with numerous
sinkholes and vertical cliffs. The Argao Group is composed of Linut-od Formation
(upper portion), Butong Limestone (middle portion) and the Calagasan Formation.
The Linut-od Formation consists mainly of thick beds of shale, siltstone,
mudstone and sandstone though thin lenses of limestone are also observed.
Furthermore, it is known to bear two mineable coal seams, locally known
respectively as upper and lower seam. The distance between the two seams varies
from 6 to10 m.
Butong Limestone is dense, fine to medium grained, shaley to sandy, in section.
It is massive to thin bedded in sections with colour ranging from yellowish grey
to light brown. This kind of limestone deposit separated the Linut-od and
Calagasan Formations.
Calagasan Formation is the lowest and the oldest formation of the Argao Group.
It is typically made up of limestone and conglomerates. The lower part is
chiefly conglomerate, sandstone and interbeds of shale and mudstone while
occurrences of coal seams and lenses of limestone mark the upper portion. Figure
7 shows the regional geology covering the blocks applied for mining.
- --------------------------------------------------------------------------------
The CSA Group 9
110
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
The basement, Pandan Formation, possibly of Late Cretaceous age is the oldest
rock in the region. It is unconformably underlying the Argao Group and no local
occurrence of coal had been reported or observed in this formation.
Figure 7.0 Regional Geology of Block CB-179 - South Cebu
[MAP OMITTED]
Regionally, the southern section of Cebu is characterized by a NNE-SSW trending
elongated antiform (DOE report, 1995) wherein the older formations like the
Argao Group have been exposed while the younger ones like the Barili and Carcar
Formations have been exposed along the coastal flanks. This has been interpreted
by early geological work as due to a huge anticline on a NNE-SSW orientation.
6.1 Geologic Structures
The coalfield has been affected by one major fault and several minor faults. At
the southern boundary of CB-179, the Maangtud fault striking NW has cut across
the Butong limestone and dissected the coal seams. Displacement has been
measured at about 60 m in a predominantly lateral direction. Noticeably, the
coal seams dip at opposite directions after this fault. Minor faults have also
cut and caused some displacements to the coal seams identified from Maangtud to
Maloray areas (Figure 7).
- --------------------------------------------------------------------------------
The CSA Group 10
111
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
6.2 Coal Geology
The coal seams of the area occur as part of the NNW erosional window about 15 to
20 km long and 7 km wide. Calagasan and Linut-od Formations are the main
coal-bearing formations and are exposed in the blocks applied for COC.
Calagasan Formation is widely exposed in CB-179 and 180 and at least 3 seams
dipping steeply to the west have been identified and being mined by the
small-scale miners. The seams are traceable from Manguerra mines located south
of CB-179 where a very thick seam dipping steeply to the east is the main object
of present mining activities. The coal seams persist northward up to the blocks
operated by INIMACO and LUVIMIN to a distance of more than 10 km. The coal seams
in CB-179 strike NNW in the southern part then NNE in the northern part and
generally dip from 50(degree) to 70(degree) to the west; however the average dip
in the area is 30(degree) to 40(degree). Some minor faults have cut across the
coal seam where in some instances they have caused displacement.
Linut-od Formation is also exposed in the western portion of CB-179 but this has
not been explored and there is no mining activity in that area. However, the
coal seams previously worked out by Kinway Mining in the block south of
Manguerra belongs to the Linut-od Formation
6.3 Coal Quality
The DOE ERL group conducted sampling and testing of all coals nationwide and
established a database of the coal quality and washability of most coals. Based
on their report, the following coal analyses, as presented in Table 2, have been
taken from the Maloray area; one of the areas to be mined.
Table 2.0 Coal Quality Analysis of Maloray Coal
---------------------------------------------------------------
ITEMS As received Air Dried
---------------------------------------------------------------
Air Drying Loss, % -- 3.97
---------------------------------------------------------------
Moisture, % 10.28 6.57
---------------------------------------------------------------
Ash Content, % 3.17 3.30
---------------------------------------------------------------
Volatile Matter, % 40.35 42.02
---------------------------------------------------------------
Fixed Carbon, % 46.20 48.11
---------------------------------------------------------------
Heating Value, BTU/lb 11,800 12,200
---------------------------------------------------------------
Total Sulphur 0.52 0.54
---------------------------------------------------------------
IT / ST, C 1276 1336
---------------------------------------------------------------
HT / FT, C 1472 1472
---------------------------------------------------------------
HGI 52
---------------------------------------------------------------
7 COAL RESERVES
Based on the DOE accepted standards, the following parameters have been followed
for coal reserve estimation:
o Proven Reserves: in this category, the spacing between points of
measurements and projections is 100 m considering a more persistent
occurrence of the coal seams as had manifested by previous workings.
Points of measurements have been based on actual coal seam thickness
and attitude from underground workings such as shafts, levels,
raises, winzes and adits aside from drillholes,
o Probable Reserves: in this category, the points of measurements are
generally projections of influence that forms the next 200 m
extension beyond that of proven reserves.
- --------------------------------------------------------------------------------
The CSA Group 11
112
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
A summary of the reserves for all the blocks in the COCs is presented in Table 3
below.
Table 3.0 Reserves Summary for Cebu Projects
- --------------------------------------------------------------------------------
Region Block Metric Tonnes
------------------------------------------
Proven Probable Insitu
- --------------------------------------------------------------------------------
CB 33-I-193 135,887 81,861 2,980,000
-----------------------------------------------------------
Central Cebu CB 33-I-194 55,879 217,635 310,000
-----------------------------------------------------------
CB 34-I-68 73,904 287,840 410,000
-----------------------------------------------------------
CB 34-I-69 234,330 912,664 1,300,000
- --------------------------------------------------------------------------------
Subtotal 500,000 1,500,000 5,000,000
- --------------------------------------------------------------------------------
CB-179 350,985 683,202 806,453
-----------------------------------------------------------
South Cebu CB-180 71,583 171,690 546,773
-----------------------------------------------------------
CB-219 197,391 473,437 1,507,734
-----------------------------------------------------------
CB-259 280,041 671,671 2,139,040
- --------------------------------------------------------------------------------
Subtotal 900,000 2,000,000 5,000,000
- --------------------------------------------------------------------------------
TOTAL 1,400,000 3,500,000 10,000,000
- --------------------------------------------------------------------------------
The proven and probable reserve figures for blocks CB 33-I-193 and CB-179
presented above are the volumetric figures taken from the feasibility studies
conducted by Careminer (Consultants to FEI). In those studies, only one block
(as specified) from each COC was addressed for particular emphasis on mine
development and volumetric reserve purposes.
The proven reserves shown for the remaining blocks were derived from ensuring a
persistent occurrence of the coal seam of no more than 100 m between outcrops,
old mine workings and examined drillhole data and related sections. Probable
reserves were determined similarly with the exception that the distance was
increased to 200 m. Insitu reserves were determined by delineating coal seam
occurrence at distances greater than 200 m. These figures come from all
available data, field observations and detailed discussions with previous
miners.
All drillhole logs and cross sections available for both Central (North and
South Central) and South Cebu, were observed in detail by the primary author of
this report. The database comprises over 110 surface drillholes at various
spacings ranging from 100 m to well over 1 km. In all cases, the data confirms a
consistency in both coal seam continuity and coal seam intersection thicknesses
over the entire strike length within each COC. This data is further
substantiated by physical field evidence (seam outcrops), combined with old and
current mine workings.
The figures in Table 3 are, in the authors' (of this report) opinion, very
conservative. At Central Cebu in Uling, for instance, field and drillhole
evidence confirms the existence of 5 additional seams in addition to the 3 (S-1,
S-2 and S-3) already detailed. These additional seams have thicknesses ranging
from 0.5 m to over 1.5 m thereby substantiating that coal resources are much
larger than previously thought.
7.1 Central Cebu
Previous small-scale operations have not mined out of CB 33-I-193 since these
small-scale miners can only mine up to a limited depth. More coal reserves exist
in the other three blocks but further exploration and geological studies have to
be conducted since the data is currently being withheld by the previous
operators.
Seams S-1 and S-3 reserves were excluded in the reserve estimation as mine
design hinges only on the more consistent S-2 seam. Additional seams (as noted
earlier) were also excluded.
The parameters used in the determination of mineable reserves were:
- --------------------------------------------------------------------------------
The CSA Group 12
113
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
o Average true thickness of seam S-2 is 1.20 m,
o Average dip is 25(degree),
o Specific gravity was based on the USBM/USGS scheme or 1.3 metric
tonnes /m(3),
o Area of influence limit for proven reserves is 100 m from the last
observation point,
o For probable reserves, lateral and down dip extension of the coal
seam is 50 m from the proven reserve limit.
For the purpose of mining, the panels and other necessary mine structures are
laid on each seam to define the mining plan. Explicitly, mining reserves based
on what will actually be extracted is calculated after deciding things like
protective pillars in between panels, faults, abandoned underground workings,
seam outcrop, main and ventilation shaft, etc. The coal contained inside the
panels/blocks is calculated and classified as recoverable reserves including the
pillars in between panels as these will also be mined with the longwalls.
Based on actual parameters obtained from previous mines with the same mining
operation, a 90% factor for mining recovery has been applied. Losses during
mining and transporting the coal are also considered. Layouts of the proposed
panels have already been planned out. The mining reserve is the coal contained
in the longwall panels of the approved mine plan. This includes all safety and
protective pillars. Recoverable reserves are obtained by multiplying the mining
reserve with the 90% mining recovery.
All the reserves were either proven or probable considering the persistency of
the seams as proven by the old DGSCM mines and the deeper small-scale mines in
the areas. Significant additional reserves exist in the Suom area below the
level of mining of the small mines and at CB
33-I-194 as indicated by the small mines and the HMDC drain adits but are not
included in Table 3.
7.2 South Cebu
At block 179, only Seam B has been mined by the previous operators and this seam
has a thickness of 0.6 - 1.5 m. The seams dip steeply at 50(degree) to
70(degree) at the general strike changing from north-northeast to
south-southwest, but the average dip is much shallower ranging 30(degree) to
40(degree) as evidenced by the existing mining operation of neighbour
competitor.
All available data and information obtained by IEVI (from its mining operations)
have been taken as the basis of the initial coal panel reserves calculations.
8 MINING - CENTRAL CEBU
A preliminary feasibility was conducted on the Central Cebu coal project. It
proposes a mining method(s), complete with rates and costs including cash flow
diagrams. What follows is a brief description of the suggested mining
methodology.
Mini-longwall (MLW) panels and other mine structures necessary in mining the
coal are laid on mine plans separately for the seams. All the mine designs,
production plans, facilities, infrastructures and operational details are based
on the desired annual production of 45,000 metric tons run-of-mine. Mining has
been programmed to start from the most accessible panels to attain full
production while development proceeds to maintain the availability of two panels
at all times. If, at any point in time, the management decides to increase the
output further, increasing the number of panels would be easy.
Safety and efficiency of MLW extraction dictates that the upper seams should be
mined initially -before the underlying seams. Mining the lower seams first will
render the upper seams inaccessible. Mine development has been programmed to
attain full production at the earliest possible time. This is achieved by
developing the shallow panels of the lower seam that do not in any way affect
overlying panels of the middle and upper seam.
- --------------------------------------------------------------------------------
The CSA Group 13
114
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
Since the attitude of the coal seams, with respect to topography, only perm its
an underground mining method, the shortwall mining method is being considered.
With an average coal seam thickness of 1.2 m and a dip of 25(degree), economics
dictate that the shortwall mining method is advantageous over the typical
room-and-pillar method. The former method will allow for higher reserve recovery
and higher productivities if employed correctly.
Generally, shortwall panels are designed with 25 to 30 m mining faces, with a 10
m separation between panels. Initially, coal extraction will be accomplished by
manual coal pick and shovel but will eventually be upgraded to the use of
pneumatic picks as soon as the cash flow position of the company allows. Coal
transport in the coal face shall be done using hard plastic troughs, which are
possible due to the 25o dip of the seam. At the main gate, the coal will be
directly loaded into mine cars having a capacity of 1.0 metric tonnes. The
loaded cars will then be hand-trammed out to the main shaft and hoisted out of
the mine.
8.1 Mining Method
The selection of the mining method has been based on the characteristics of the
seams, properties of the roof and floor, persistency of thickness, related
advantages and disadvantages of each method as experienced by other mines of
similar conditions. The previous room and pillar mining method employed by
DMC-CERI and the longwall mining operations of then PNOC-MCC were used as
references. A typical MLW operation is shown below in Figure 8.
Figure 8 Typical Mini Longwall Mining Method
[PLAN GRAPHICS OMITTED]
- --------------------------------------------------------------------------------
The CSA Group 14
115
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
The MLW mining method will be employed in general, however in portions where
thinning and swelling persists, shortening of the panel width will be necessary.
Primarily, the advantage of longwall mining over room-and-pillar mining is the
high rate of coal recovery that reaches up to about 90% of the panel reserve
compared to a recovery of less than 50% for the latter. In addition, mining cost
has been established to be much cheaper with the longwall operation given the
same geological conditions.
The planned operation is directed in line with the company's objective of fully
utilizing the cheap labor available in the site at the same time increasing the
productivity. With this objective, gradual but continuous introduction of
appropriate level of mechanization is also planned.
After a thorough review of the geological data and information of the seams, it
has been established that the conventional MLW (shorter width than normal
longwall) method is the most applicable. In the country, only PNOC has mined by
longwall as introduced by the DIA Consultant in the early 80's. MLW mining
method has the following advantages:
o Maximum recovery of reserves
o High productivity
o Ability to deal effectively with week roof and floor
o Suitable to flat and moderately dipping seams
o Ventilation is simpler
It is planned that all the panels will be mined in a retreating fashion because
of the problems experienced in an advancing one like that in PNOC Malangas mine.
To attain the desired production target of 75,000 metric tonnes per year, two
MLWs are needed at a time. Operations will be on two shifts per day and six days
per week for a total of 300 working days per year. The other parameters used
are:
o MLW face length is 30 m. If thin and swell conditions become a
problem method is shifted to room-and-pillar mining,
o Pillars in-between panel are 20 m,
o Pillars shall be mined also together with the panel below, it in
retreat,
o Average daily face advance rate is 1.2 m,
o Average specific gravity is 1.3.
At the desired production output, the conventional MLW system consisting of
timber props as face support, water-assisted flumes for face transport, pick
hammers with occasional drill and blast are deemed adequate.
8.2 Mine Design
The mine is designed based on the detailed geological interpretations done for
every coal seam, geo-technical and hydrological data gathered during the
exploration stage and applied engineering principles and practices on coal
mining.
Selecting and deciding the mode of access to the coal seams is the foremost step
and most critical since it is there that other underground openings are
reckoned. Main mine entries can be tunnels, vertical shafts or inclined shafts
or a combination depending on the location of outcrops, how the seams have
developed towards the depth, topography and surface accessibility.
8.3 Production Plan
At least four separate mines can be developed at Central Cebu. Seam S-2 in
Mahangin-Hangin can be developed as "Mine 1" whilst Seam S-2 in Luca can be
developed as Northwest and Southeast Mines. Pending evaluation of the reserves
in the Suom block and CBS-194 by end of
- --------------------------------------------------------------------------------
The CSA Group 15
116
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
the first year of exploration and delineation, at least another mine can be
developed in the area as well.
For the proposed five-year work program, only seam S-2 in both the Luca and
Mahangin-Hangin areas will be developed. The Southeast Mine will be developed
initially beginning in year 1. The driving of the Northwest Mine twin shafts
will then commence in year 2, four months after commissioning the second panel
in the Southwest Mine. Mine 1 will be developed starting the second month of
year 3 as a replacement for the Southeast Mine. FEI may decide to develop Seam
S-3 and the possible mine in CBS-194 on the fourth or fifth year of this program
as a replacement for the Northwest Mine and Mine 1 - once they are exhausted. On
a yearly basis, the estimated coal production is summarized in Table 4.
Table 4.0 Proposed Production Plan
-----------------------------------
Year Metric Tonnes /Yr
-----------------------------------
2005 --
-----------------------------------
2006 16,000
-----------------------------------
2007 60,000
-----------------------------------
2008 75,000
-----------------------------------
The down dip extension of Seam S-2 will effectively extend the life of the
Northwest, Southeast and Mine 1 mines beyond the proposed five-year program. The
company will have to seek approval of the DOE for such a program and the
respective adjustments in its work commitments.
In general, two slopes shall be driven from the industrial site on a southeast
direction. The Main Slope shall be utilized as the main entry of men and
materials to the underground as well as the coal haulage. The Ventilation Slope
shall be utilized for air exhaust and emergency exit.
8.4 Mine Layout
The mine layouts of each area have already been planned. Both slopes shall be
driven to follow Seam 2 on a southeast direction at least 30 m apart to make
them more stable.
From the slopes, pairs of panel gates 30 m apart shall be driven laterally on
both sides towards the outer limit of the coal seam. At the end of the panel,
the gates (main and return) shall be connected by a face raise which then will
be prepared as the starting MLW face for a retreating coal winning process. Each
panel is separated by a 20 m pillar. This pillar shall also be mined
simultaneous with mining the lower adjacent panel. This way, the construction of
costly stone packs is eliminated just to preserve the stability of the return
gate if mining is without the pillar.
8.5 Roof Support
Three-piece timber sets shall be the primary ground support in all underground
driving such as the slopes, tunnels and gates. Timbers will mostly be round logs
of the sturdy variety.
The slope portals shall be concreted to a distance of 25 m inside. This is to
ensure the stability of the entries to the underground.
8.6 Coal and Waste Transport
Unlike in large longwall operations, a mechanized transport system such as
conveyors is not feasible with the small output. Small capacity but cheap
methods such as water-assisted flume are more appropriate. These flumes are
normally laid at the footwall of mining face at a minimum inclination of
5(degree). At the lower end of the flumes, the coal is directly discharged into
the sieve bends where water is removed and recycled back. Dewatered coal drops
straight to the mine cars parked below the sieve bend.
- --------------------------------------------------------------------------------
The CSA Group 16
117
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
The train of mine cars pulled by a locomotive battery has sufficient capacity to
handle production during the peak hours when at least a longwall face and two
development headings are simultaneously feeding.
During the development of the gates or level roadway hand mucking will be used
to load the coal and rocks into the flumes.
9 MINING - SOUTH CEBU
A preliminary feasibility was conducted on the South Cebu coal project. It
proposes a mining method(s), complete with rates and costs including cash flow
diagrams. What follows is a brief description of the suggested mining
methodology.
The coal seam is subdivided into panels similar to a longwall layout. Each panel
is bounded by two gates, the lower will serve as the main coal haulage and
fresh-air intake to the mining face while the upper one will serve for
ventilation return, emergency exit and haulage ways for supports and filling
materials.
From the farthest end of the panel (maybe limited by fault or thinning) an
initial mining face is driven from the lower gate to the upper gate. Starting
from the bottom of the panel and just on top of the timber support a 2.40m high
horizontal slice is advanced to about 5 m. The succeeding slices are now
oriented 30(degree) on an apparent dip to allow controlled free flow of broken
coal along a laid PVC flume.
Coal is excavated using a drill and blast technique. After blasting, the roof is
supported with timber stulls at a spacing that will allow workers to move freely
at the mining face. By the time the entire face is moved at least a slice,
broken rock from the surface is brought down and filled to the mined-out portion
leaving a gap between the fill material and the coal roof enough for the workers
to stand when working.
The broken coal freely falls down to the mine cars parked below which, when
full, are pulled to the shaft station for surface hoisting. Within the first
five years of operation management desires to have obtained a level of
production of 51,800 metric tonnes per year while doing extensive exploration to
prove the coal reserves at lower depth as well as along the lateral extent of
the seams towards the other blocks. Production is intended to come from the
three areas previously operated and left by the other company 10 years ago.
The areas ready for mine development are the South Ablayan, North Ablayan and
North Maloray areas. Due to lack of drilling information in the deeper portion
of the seams, mining shall be divided in 2 phases. Phase 1 consists of mining
the panels delineated as proven reserves while doing the exploration of the
continuation of the seams at deeper portions. Phase 2 involves mining the
portion of the coal seams below the proven reserves after thorough exploration.
9.1 Mining Method
Diagonal Saw-Teeth method (sometimes called Stepped-Face method) is considered
the most appropriate method to introduce in extracting the coal. As shown in
Figure 9, the method resembles that of a jigsaw blade and was successfully
utilized at very high productivity (over 35 metric tons per man-shift) in
Sumitomo Akabira Mine in north Japan.
- --------------------------------------------------------------------------------
The CSA Group 17
118
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
Figure 9.0 Typical Diagonal Saw-Teeth Mining Method
[GRAPHIC OMITTED]
The hanging column of coal is drilled and blasted for production. Air auger
drill with 1" bit is commonly used because electric equipment is restricted
underground especially when gassy conditions prevail. Holes are drilled normally
at a spacing of one meter from each other and with a depth of 1.5m.
Only permissible type of explosives is allowed in underground and likewise, only
electric blasting cap is used for detonation.
9.2 Mine Design
The objective is to attain full production of 36,000 metric tonnes of clean coal
annually at the earliest time possible and at the most reasonable cost.
Initial mine development includes driving Tunnel 550A and B to coal seam B at
Maangtud area. These two tunnels will interconnect inside to have an alternative
haulage way. Upon intercepting the coal seam B, a ventilation raise shall be
driven upwards at the designated end of the panel and come out on the surface at
the outcrop zone. Even natural ventilation can induce air circulation with such
ventilation raise(s).
From the coal intercept, tunnel 550 will be driven following the coal seam to
the farthest extent or when the coal seam thins out totally. The tunnel will be
driven at a gradient of -0.5% to allow mine water to flow freely out of the
mine.
When full production is attained, development work shall be slowed down, leaving
few development crews only for the roadways and gates. These headings will be
developed only as required. Panel preparation shall continue at a pace
equivalent to, or slightly faster than, the
- --------------------------------------------------------------------------------
The CSA Group 18
119
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
advance rate of panel extraction, which in this case is 1.2m/day/panel. In order
to maintain the availability of a panel at a time, gates shall be developed at a
rate of at least 2m/day/panel. It is estimated that the first panel in stage 1
will be available after 9 months from the start of mine development. From that
time on, the desired production of 1,000 metric tonnes /mo shall be maintained.
As the worker's gain experience and expertise on the new mining method
production will accelerate to 2,000 metric tonnes /mo. By then, the new panels
in the second area shall already be producing and the target production of 3,000
metric tonnes becomes consistent.
9.3 Production Plan
On a panel by panel basis, a production program for Phase 1 is generated
detailing the sequence of mining and tonnage expected to be produced. The
objective of this exercise is to fulfill the desired output of 60,000 metric
tonnes per year of clean coal and to pinpoint where the coal should come from.
On a yearly basis, the estimated coal production (including incidental coal) is
summarized in Table 5.
Table 5.0 Proposed Production Plan
----------------------------------
Year Metric Tonnes /Yr
----------------------------------
2005 --
----------------------------------
2006 20,000
----------------------------------
2007 50,000
----------------------------------
2008 60,000
----------------------------------
9.4 Coal and Waste Transport
Blasted coal drops down and is allowed to flow freely by gravity along PVC coal
flumes. Coal flumes resemble that of a gutter and are made of PVC to make them
lightweight. One end is slightly expanding while the other end tapers slightly
in order for several flumes to be connected with overlaps. Normal PVC flumes for
coal application have lengths of 2.4 m and width of 60 cm inside.
Broken coal is directly loaded to cars waiting at the lower gate. Filled cars
will either be trammed by hand or pulled by small electric hoist at the gate
entrance. For every blast of 5.4 m(3) (bank volume) the resulting volume of
broken coal will be about 6.8 m(3) for which 5 cars of 1.6 m3 capacity (cars are
normally 90% full) are needed.
When mining is still above Tunnel 550 (at elevation 550) a train of 5 mine cars
pulled by a 6-ton battery locomotive out of the mine is the main haulage system.
Tunnel 550 shall be the main haulage tunnel for production as well as bringing
in materials and men to the working areas.
When mining progresses to the lower panels (below 550 elevation) the main slopes
shall be utilized for haulage way and transport of men and materials. At the
staging area in every level, the cars are coupled and brought out using the main
rope haulage system with the main hoist installed on surface. The main haulage
slope is designed to have a maximum gradient of not more than 30% (17(degree))
in order to pull at least 5 cars at a time.
- --------------------------------------------------------------------------------
The CSA Group 19
120
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
10 QUALIFICATIONS, EXPERIENCE AND INDEPENDENCE
The CSA Group is a consulting firm, which has been providing services and advice
to the international mineral industry since 1984. The primary author of the
Competent Person's Report, Mr. Dexter Ferreira, is a senior geostatistician with
over 15 years experience in project evaluation internationally, including
extensive involvement with mineral projects throughout South America and Africa.
He is a member of South African Council for Natural Scientific Professions, and
qualifies as an 'Expert', 'Competent Person' and 'Qualified Person' as defined
in National Instrument 43-101 and the JORC Code respectively.
Neither The CSA Group, nor the author of this report, has or has previously had
any material interest in Forum Exploration Inc. or the mineral properties in
which FEI has an interest. Our relationship with FEI is solely one of
professional association between client and independent consultant. This report
is prepared in return for professional fees based upon agreed commercial rates
and the payment of these fees is in no way contingent on the results of this
report.
11 PRINCIPAL SOURCES OF INFORMATION
The CSA Group has based its review of Forum Exploration Inc's coal properties on
information provided by FEI, along with technical and feasibility reports
prepared by Forum, and other relevant published and unpublished data. National
Instrument 43-101, which sets a standard for reporting, requires that a site
visit be undertaken to the projects or assets. In this instance, site visits
were undertaken to all projects by the primary author in March 2005 (Central
Cebu; both North Central and South Central, and Southern Cebu).
The CSA Group has made all reasonable enquires to ensure the authenticity and
completeness of the technical data on which it has relied, and a final draft of
the report was also provided to Forum Exploration PLC, along with a written
request to identify any material errors or omissions prior to lodgement.
- --------------------------------------------------------------------------------
The CSA Group 20
121
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
12 GLOSSARY OF TECHNICAL TERMS
Adit
A horizontal or sub horizontal tunnel used to access ore.
Aeromagnetic survey
A survey of the earth's magnetic field carried out from a helicopter or
airplane.
Air photo interpretation
The identification of geology and structures from interpretation and examination
of aerial photos.
Alluvial
Descriptive of sediments, which have been deposited by rivers or streams.
Alpine Orogeny
Descriptive of a major period of tectonism that occurred in phases through
Cretaceous to mid-Tertiary.
Anomaly
Value higher or lower than the expected or norm.
Anticline
A fold in rock strata that is convex upward with a core of older rocks.
Argillite
A clay-rich sedimentary rock.
AusIMM
JORC Australasian Institute of Mining and Metallurgy Joint Ore Reserves
Committee.
Ball mill
Machine used to crush rock during the processing phase.
Basin
A regional depression, which may be structural in origin.
Bed/bedding
Distinct tabular unit(s) of rock laid down on the earth's surface.
Bitumen
Naturally occurring tar-like hydrocarbon of indefinite composition.
Block model
A3D array of cells constructed to enable recording of variables of interest such
as grade and geology.
Breccia
Rock fragmented into angular components.
Calcareous
Said of a rock which contains calcium carbonate.
Calcite
Calcium carbonate, CaCO(3).
- --------------------------------------------------------------------------------
The CSA Group 21
122
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
Cap-rock
The uppermost chaotic and insoluble portions of a salt diaper which remain after
salt has ceased to flow.
Carbonaceous
Said of a sedimentary rock containing organic material.
Carbonate
Arock, usually of sedimentary origin, composed primarily of calcium, magnesium
or iron and CO3. Essential component of limestones and marbles, but may also
occur as a product of alteration.
Carbonate platform
The shallow margins of a marine basin where carbonates are being deposited.
Cenozoic
Epoch of Earth's history from 65 million years ago to Recent times.
Channel sample
Sample obtained by cutting a representative channel or grove across a rock face
or profile.
COC
Coal operating contracts is a means by which coal mining is regulated in the
Philippines
Collapse breccias
Breccias resulting from the dissolution of part of the rock and the subsequent
collapse of the rock structure.
Compression
When tectonic elements oppose and form a certain type of resulting structures.
Competent Person
A "Competent Person" is a person who is a Member or Fellow of the Australasian
Institute of Mining and Metallurgy, or of the Australian Institute of
Geoscientists, or of a 'Recognised Overseas Professional Organisation' ('ROPO')
included in a list promulgated from time to time. A 'Competent Person' must have
a minimum of five years experience which is relevant to the style of
mineralization and type of deposit under consideration and to the activity which
that person is undertaking.
Core
A tube of rock produced by diamond drilling.
Cretaceous
Applied to the third and final period of the Mesozoic era.
Decline
An inclined tunnel-like excavation into the ground to allow vehicle and
equipment access for the mining of ore bodies.
Diamond drilling
Method of obtaining cylindrical core of rock by drilling with a diamond set or
diamond impregnated bit.
DOE
Department of Energy in the Philippines.
- --------------------------------------------------------------------------------
The CSA Group 22
123
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
Dolomite
A rock composed of calcium and magnesium carbonate.
Expert
An appropriately qualified person who prepares and is responsible for a report
issued under the JORC and / or National Instrument 43-101 Code, who can
demonstrate independence and competence in the preparation of the Report, and is
a professional having at least ten years of relevant expertise and experience in
the general, mining or petroleum industry.
Face sampling
Sampling of an exposed rock face in underground development fire assay. The
assaying of metallic ores, usually gold and silver, by methods requiring a
furnace heat.
Geological mapping
The process of identifying and recording the distribution and types of rocks and
other geological features.
Geophysical
Use of electrical techniques or the measure of natural phenomena to assist in
determining sub-surface features.
JORC Code
Code and Guidelines for the assessment of Mineral Resources and Ore Reserves
prepared by the Joint Ore Reserves Committee of the Australian Institute of
Mining and Metallurgy.
Limestone
Sedimentary rock wholly or in large part composed of calcium carbonate, CaCO(3).
NI43-101
Canadian legislative code for the assessment of mineral resources and ore
reserves for listing on any Canadian stock exchange.
Neogene
The later of two periods into which the Cenozoic era is divided.
Organic carbon
Carbon derived from organic processes.
Percussion drilling
A drilling method which uses a percussive hammer on a set of drill rods to drill
a hole, using compressed air to power the hammer and remove drill cuttings.
Proterozoic
An era of geological time spanning the period from 2,500 million years to 570
million years before present.
Qualified Person
"Qualified person" means an individual who is an engineer or geoscientist with
at least five years of experience in mineral exploration, mine development or
operation or mineral project assessment, or any combination of these; has
experience relevant to the subject matter of the mineral project and the
technical report; and is a member or licensee in good standing of a professional
association.
Reverse Circulation (RC)
A drilling method in which the fragmented sample is brought to the surface
inside the drill rods, thereby reducing contamination; commonly used with a
percussion hammer bit.
- --------------------------------------------------------------------------------
The CSA Group 23
124
Competent Persons Report - Forum Energy PLC
- --------------------------------------------------------------------------------
Rock chip sampling
The collection of selective or representative samples of rock fragments within a
limited area.
Sandstone
A sedimentary rock composed of cemented or compacted detrital minerals,
principally quartz grains.
Schist
A crystalline metamorphic rock having a foliated or parallel structure due to
the recrystallisation of the constituent minerals.
Shale
A fine-grained, laminated sedimentary rock formed from clay, mud and silt.
Soil sampling
The collection of soil specimens for mineral analysis.
Tertiary
Subdivision of geological time covering the period from 65 million years to 1.6
million years ago.
Thrust
Alow angle (shallowly inclined) fault or shear on which the rocks on the top
have moved up and over the rocks on the bottom.
Trench sampling
A sampling technique in which a shallow linear excavation is made in the ground
surface, which is then methodically sampled, generally along one wall.
- --------------------------------------------------------------------------------
The CSA Group 24
125
APPENDIX I
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND MANAGEMENT'S DISCUSSION AND
ANALYSIS FOR FEC
General
Included in this Appendix are the pro forma financial statements for FEC for the
twelve months ended December 31, 2004, after giving effect to the Transaction.
Notes contained in the schedules hereto
FEC's activities relate to oil and natural gas exploration and development. FEC
follows the "full-cost" method of accounting for oil and natural gas operations
whereby all exploration costs are capitalized until commencement of production.
The costs are then amortized on a unit of production basis.
Forum Energy Corporation
Statement of Net Operating Loss
Balance Sheets as at December 31, 2004
(Cdn$ 000's)
Expenses (unaudited)
Genereal and Administration 1,755
Depreciation 268
Foreign Exchange -8
Interst Expense 162
----------
Net Operating Loss 2127
==========
NOTE: Please see note concerning the above table / proforma numbers at the foot
of the following page:
126
Forum Energy Corporation
Proforma Balance Sheet
As at December 31, 2005 to take into
account effect from Transaction
Pre-Transcation Post-Transaction
Cdn$ 000's Cdn$ 000's
Current Assets (unaudited) (unaudited)
Cash 25 18
Accounts Receivable,deposits & Prepaid 77 5
Investments 397 397
------ ------
499 419
------ ------
Property Plant & Equipment (Less Depr) 10,191 -0
Other Investments 518 518
Investment in Newco Shares 0 2,551
------ ------
10,709 3,069
------ ------
11,208 3,488
====== ======
Current Liabilities
Accounts Payable 1,544 695
Short-term Loans 318 318
------ ------
1,862 1,013
Long-Term debt 6,849 -0
Convertible Debentures (1) 649 649
------ ------
7,498 649
------ ------
9,359 1,662
====== ======
Shareholders Equity
Share Capital 14,909 14,908
Contributed Surplus 729 729
Unrealized Loss on Investment (2) -5,705 -5,728
Deficit -8,084 -8,084
------ ------
1,849 1,825
------ ------
11,208 3,488
====== ======
Notes:
1) Convertible debenture will be split between an equity and debt portion in
accordance with Canadian GAAP
2) Unrealized loss on investment reflects an investment in Langley Park
Investment trust shares which were written down to their market value as
at december 31, 2004.
NOTE: The above proforma numbers are the unaudited consolidated results for the
Forum Energy Corporation Group of Companies and have been presented in this
circular purely for comparative purposes to show the effect of the Transactions
to the financial statements of the Company. In particular this has been prepared
to reflect the consolidated results to include the group with Forum Exploration
Inc on a full consolidation basis to results reflecting the transfer of FEC's
interest to an investment in Newco shares (subsequent to the placing of
additional shares) and assuming that FEC's position in Forum Exploration, Inc
will be diluted.
At the time of releasing this circular to the shareholders of FEC the audit is
being finalized and therefore the accounts may be subject to restatement to
reflect Canadian GAAP pronouncements currently in effect. There are no
accompanying notes to these financial statements and the reader is urged to
review the previous financial statements to be aware of the basis of preparation
of this proforma financial information. FEC assumes no responsibility for the
accuracy of these pre-forma financial statements and advise that they will be
subject to change when the final audited results are published.
127
Forum Energy Corporation
Selected Financial Data CDN GAAP
(CDN $ in '000, except EPS, Weighted
Avg. Shares and Capital Stock Shares
Avg. Shares and Capital Stock Shares
- ---------------------------------------------------------------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/03 12/31/02 12/31/01 12/31/00 12/31/99
- ---------------------------------------------------------------------------------------------------------
Revenue $ -- $ -- $ 1 $ 1 $ 1,080
Operating loss $ (1,397) $ (783) $(1,195) $(1,665) $(2,891)
Net loss $ (1,356) $ (1,058) $(1,514) $(2,028) $(3,225)
Net loss per share $ (0.01) $ (0.10) $ (0.17) $ (0.28) $ (0.74)
Diluted Net loss per share -- -- -- -- --
Dividends per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Weighted Avg. Shares O/S ('000) 113,700 10,404 8,734 7,338 4,351
- ---------------------------------------------------------------------------------------------------------
Working Capital $ (283) $ (587) $ (574) $ (281) $ 592
Resource Properties (1) $ 8,951 $ -- $ -- $ 149 $ --
Long-Term Debt $ 6,882 $ -- $ -- $ Nil $ Nil
Shareholders' Equity/ $ 1,809 $ (576) $ 242 $ 838 $ 986
(deficiency)
Capital Stock Shares ('000) 135,821 10,511 9,529 7,845 5,111
Total Assets $ 9,109 $ 71 $ 852 $ 1,164 $ 1,379
- ---------------------------------------------------------------------------------------------------------
DESCRIPTION OF SHARE CAPITAL OF FEC
The authorized capital of FEC consists of an authorized capital of unlimited
number of common shares (the "Common Shares").
CAPITALIZATION
There is no effect to the share Capitalization in the Transaction. The number of
shares in issue before and after this transaction will be 174,583,646
128
DIRECTORS AND OFFICERS
The names, municipalities of residence of the directors and officers of FEC
after giving effect to the Transaction, their positions and offices to be held
with FEC, and their principal occupations during the past five years are as
follows:
The following table lists as of the date of this report the names, ages,
functions and areas of experience in our operations of all the Directors and
Senior Management. Each Director will serve until the next annual general
meeting or until his/her successor is duly elected, unless his/her office is
vacated in accordance with our charter documents. The Executive Officers serve
at the pleasure of the Board of Directors.
- -------------------------------------------------------------------------------------------------
Name Age Position/Area of Experience/Function
- -------------------------------------------------------------------------------------------------
Larry W. Youell (1) 63 Director since June 1998, CEO since May 18th 2005.
Riaz Sumar (3) 35 CFO since May 18th 2005
Barry Stansfield (1)(2)(3) 53 Non executive Chairman
David G. Wilson (1)(2)(3) 59 Director since June 1998
Robert Lynch Jr. (1)(2)(3) 72 Director since May 18th 2005
Dr. Water Brown 65 Director since May 18th 2005
- -------------------------------------------------------------------------------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee
(3) Member of the Corporate Governance Committee
The following persons were members of our Board of Directors as of
December 31, 2003 and resigned as of the dates indicated:
Mr. David Robinson resigned effective April 30, 2003 but was re-appointed
a director and President and Chief Executive Officer on December 8th, 2003.
Resigned May 18th 2005
Mr. David Thompson resigned effective May 18th 2005. Mr. Riaz Sumar
resigned as Corporate Secretary and was replaced by Mr. David Thompson in August
2003. Re-appointed CFO May 18th 2005.
Mr. Robert Lynch and Dr. Walter Brown were appointed non-executive
directors May 18th 2005.
129
Information about our Directors and Officers
Mr. Larry Youell, CEO and Director
Mr. Youell spent 21 years with Consumers Gas Company Limited and its
subsidiaries ("Consumers"), in a variety of roles with increasing responsibility
including Senior Vice President Operations, and Senior Vice President Business
Support. He was also President of Rose Technology, and General Manager of
Consumers' largest division. Prior to joining Consumers, Mr. Youell was a
Management Consultant with an international base of clients. Mr. Youell was born
and raised in Calgary, Alberta. He received his Honours degree in Business from
the University of Western Ontario in 1963 and a Masters in Business
Administration from that university in 1968. Mr. Youell has been active in
charitable causes, including serving as Chair of the Arthritis Society in
Ontario and lead roles in fund raising for United Way and Skylight Theatre. He
is also Past Chair of the Ontario Natural Gas Association and International
Approvals Services Inc. Mr. Youell is Mr. David Robinson's uncle.
Riaz Sumar, CFO, Corporate Secretary and Director
A resident of Calgary, Mr. Sumar has extensive financial experience with
public companies. Mr. Sumar was previously Financial Controller of Forum Energy
Corporation 1996 - 2003. Currently also CFO of TransAKT corp. and previously CFO
of TSX listed North American Gem Inc. He received his Honors Bachelor of Science
degree from the University of British Columbia in 1990 and received the
designation of Certified General Accountant in 1997.
Mr. David Wilson, Director
A resident of Calgary, Mr. Wilson is a geologist with 34 years of
experience who provides us with international oil and gas exploration and
development expertise. He spent over twelve years with a major Canadian oil and
gas company, lastly as the Senior Director - Strategic Exploration Group. He
currently is a director and Executive Vice President for Mergers and
Acquisitions of Nations Energy Company Limited, a private Canadian company with
operations in Kazakhstan, Azerbaijan, and California. Nations Energy Company
Limited currently produces 40,000 barrels of oil per day.
Mr. Barry Stansfield, Director
A resident of London, England, Mr. Stansfield's expertise lies in
marketing. He spent the last 5 years working as a partner in B&L Estates, a
property management company.
Robert J. Lynch Jr., Director
A resident of New York, USA, Robert Lynch has over 40 years business
experience. Currently also President of American & Foreign Enterprises Inc. and
President and Director of Lynch Farms Inc. Mr. Lynch has extensive experience of
quoted companies and was previously Director of NASDAQ listed Hadron Inc. NYSE
listed Dames & Moore and a Director of NASDAQ listed Data Broadcasting
Corporation.
Dr. Walter Brown, Director
A resident of Manila, Philippines, Dr. Walter Brown has extensive
experience with resource and public companies and is also currently Chairman and
CEO of TSX listed Philex Gold Corporation.
None of our directors and/or executive officers or those persons to be appointed
have been the subject of any order, judgment, or decree of any governmental
agency or administrator or of any court of competent jurisdiction, revoking or
suspending for cause any license, permit or other authority of such person or of
any corporation of which he is a director and/or executive officer, to engage in
the securities business or in the sale of a particular security or temporarily
or permanently restraining or enjoining any such person or any corporation of
which he is an officer or director from engaging in or continuing any conduct,
practice,
130
or employment in connection with the purchase or sale of securities, or
convicting such person of any felony or misdemeanor involving a security or any
aspect of the securities business or of theft or of any felony.
There are no other arrangements or understandings between any two or more
directors or executive officers, pursuant to which he was selected as a director
or executive officer. Except as disclosed above, there are no family
relationships between any two or more directors or executive officers.
B. Compensation.
We have committed to pay our directors the following consulting fees and
directors fees on a monthly basis:
Larry Youell US$5,000
Riaz Sumar US$5,000
Barry Stansfield US$3,000
David Wilson US$1,000
Robert Lynch US$1,000
Dr. Walter Brown US$1,000
In addition, the Board of Directors may award special remuneration to any
Director undertaking any special services on our behalf other than services
ordinarily required of a Director. Other than as indicated below, no Director
received any compensation for his services as a Director, including committee
participation and/or special assignments.
We grant stock options to Directors, Executive Officers and employees; as
described below under, "Options to Purchase Securities from Company or
Subsidiaries".
None of our executive officers/directors received other compensation in
excess of the lesser of US $25,000 or 10% of such officer's cash compensation as
reported in the compensation table above and all executive officers/directors as
a group did not receive other compensation which exceeded US $25,000 times the
number of persons in the group or 10% of the compensation reported in the
compensation table above.
No funds were set aside or accrued by us during the year ending December
31, 2004 to provide pension, retirement or similar benefits for directors or
executive officers. Except for the stock option program discussed below, we have
no bonus or profit sharing plans pursuant to which cash or non-cash compensation
is or may be paid to the our directors or executive officers.
131
Options to Purchase Securities from FEC or Subsidiaries.
Options to purchase securities from us are granted to directors/officers
and employees on terms and conditions acceptable to the relevant regulatory
authorities. We adopted a formal stock option plan on June 19, 2000.
Stock Options Granted and Outstanding
- -------------------------------------------------------------------------------------------------
Name Number of Exercise Expiration Date Issue/ Balance
Common Price (Exercise)
Shares (Expired)
(subsequent
to Y/E)
- -------------------------------------------------------------------------------------------------
David Robinson 500,000 $ 0.08 April 26, 2008 (85,227) 414,773
1,000,000 $ 0.43 April 26, 2004 Nil 1,000,000
$ 0.31 April 26, 2008 68,182 68,182
- -------------------------------------------------------------------------------------------------
Larry W. Youell 1,250,000 $ 0.08 April 26, 2008 (213,068) 1,036,932
$ 0.31 April 26, 2008 170,455 170,455
220,000 $0.0723 January 31, 2010 15,906 15,906
- -------------------------------------------------------------------------------------------------
Barry Stansfield 2,000,000 $ 0.08 April 26, 2008 (340,910) 1,659,090
$ 0.31 April 26, 2008 272,726 272,726
80,000 $0.0723 January 31, 2010 5,784 5,784
- -------------------------------------------------------------------------------------------------
David G. Wilson 500,000 $ 0.08 April 26, 2008 (85,227) 414,773
$ 0.31 April 26, 2008 68,182 68,182
80,000 $0.0723 January 31, 2010 5,784 5,784
- -------------------------------------------------------------------------------------------------
David Thompson 1,250,000 $ 0.08 April 26, 2008 (213,068) 1,036,932
$ 0.31 April 26, 2008 170,455 170,455
- -------------------------------------------------------------------------------------------------
Riaz Sumar 200,000 $ 0.08 April 26, 2008 (34,970) 200,000
Total Officers,
Directors, 7,080,000 6,539,974
Consultants
- -------------------------------------------------------------------------------------------------
Warrants Held by Directors and Officers
- -------------------------------------------------------------------------------
Name Number of share Exercise Price Expiration
Purchase Warrants Date
- -------------------------------------------------------------------------------
Larry Youell 100,000 US$0.25 09/02/05
- -------------------------------------------------------------------------------
David G. Wilson 74,000 US$0.25 09/02/05
- -------------------------------------------------------------------------------
David R. Robinson (1) 340,000 US$0.25 09/02/05
- -------------------------------------------------------------------------------
Total 514,000 US$0.25 09/02/05
- -------------------------------------------------------------------------------
(1) 280,000 share purchase warrants held in the name of DRR Capital
Conflicts of Interest
There are potential conflicts of interest to which the directors and officers of
FEC will be subject to in connection with the operations of FEC. In particular,
certain of the directors and officers of FEC are involved in managerial or
director positions with other oil and gas companies whose operations may, from
time to time, be in direct competition with those of FEC or with entities which
may, from time to time, provide financing to, or make equity investments in,
competitors of FEC, including, but not limited to Newco. In accordance with the
CBCA, directors who have a material interest or any person who is a party to a
material contract or a proposed material contract with FEC are required, subject
to certain exceptions,
132
to disclose that interest and generally abstain from voting on any resolutions
to approve the contract. In addition, the directors are required to act honestly
and in good faith with a view to the best interests of FEC. Certain of the
directors of FEC have either other employment or other business or time
restrictions placed on them and accordingly, these directors of FEC will only be
able to devote part of their time to the affairs of FEC.
PERSONNEL
As at the date of this Information Circular, FEC had no employees. After giving
effect to the Arrangement, FEC does not expect to have any full-time employees
INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
No current or proposed directors, officers or principal shareholders of FEC and
no associate or affiliate of any of them, has or has had any material interest
in any transaction or any proposed transaction which materially affects FEC or
any of its affiliates.
PRINCIPAL SHAREHOLDERS AND DIRECTORS HOLDINGS
To the best of the knowledge of the directors and officers of FEC, save for
Westmark Limited and Langley Park Investment Trust Plc no persons will own,
directly or indirectly, or exercise control or discretion over FEC Common Shares
carrying more than 10 percent of the votes attached to all of the issued and
outstanding FEC Common Shares.
- -----------------------------------------------------------------------------------------------------------
(i) Name of Registered Shareholder owning 10% or Number of Percent
more of the outstanding shares: Shares of Class
- -----------------------------------------------------------------------------------------------------------
Westmark Limited 32,303,850 17.59
- -----------------------------------------------------------------------------------------------------------
Langley Park Investment Trust Plc 27,000,000 15.47
- -----------------------------------------------------------------------------------------------------------
(ii) Name of Director and/or Officer and number of shares held:
- -----------------------------------------------------------------------------------------------------------
David R. Robinson/DRR Capital 20,000/305,000
- -----------------------------------------------------------------------------------------------------------
Larry W. Youell/Cindy Youell 50,060/85,273
- -----------------------------------------------------------------------------------------------------------
David Thompson/AMS Limited Nil/352,614
- -----------------------------------------------------------------------------------------------------------
Barry Stansfield 68,182
- -----------------------------------------------------------------------------------------------------------
David Wilson/Merckwood 35,245
- -----------------------------------------------------------------------------------------------------------
(iii) Number of shares held by all Directors and Officers
as a group: 916,374
- -----------------------------------------------------------------------------------------------------------
INDEBTEDNESS OF DIRECTORS AND OFFICERS
At no time during the most recently completed financial year was there any
indebtedness of any director or officer, or any associate of any such director
or officer, to FEC or to any other entity which is, or at any time since the
beginning of the most recently completed financial year has been, the subject of
a guarantee, support agreement, letter of credit or other similar arrangement or
understanding provided by FEC.
RISK FACTORS
An investment in FEC should be considered highly speculative due to the nature
of the activities of FEC and the present stage of its development. The following
is a summary of certain risk factors relating to the activities of FEC and the
ownership of FEC Common Shares which should be carefully considered before
making an investment decision relating to FEC Common Shares. The risk factors
listed below are in addition to the risk factors in the annual information form
of FEC. These risk factors should be carefully considered and are not in order
of significance.
133
Exploration, Development and Production Risks
Oil and natural gas exploration involves a high degree of risk, which even a
combination of experience, knowledge and careful evaluation may not be able to
overcome. There is no assurance that expenditures made on future exploration by
FEC will result in new discoveries of oil or natural gas in commercial
quantities. It is difficult to project the costs of implementing an exploratory
drilling program due to the inherent uncertainties of drilling in unknown
formations, the costs associated with encountering various drilling conditions
such as over pressured zones, tools lost in the hole and changes in drilling
plans and locations as a result of prior exploratory wells or additional seismic
data and interpretations thereof. The long-term commercial success of FEC will
depend on its ability to find, acquire, develop and commercially produce oil and
natural gas reserves. No assurance can be given that FEC will be able to locate
satisfactory properties for acquisition or participation. Moreover, if such
acquisitions or participations are identified, FEC may determine that current
markets, terms of acquisition and participation or pricing conditions make such
acquisitions or participations uneconomic.
Future oil and gas exploration may involve unprofitable efforts, not only from
dry wells, but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery of
drilling, completion and operating costs. In addition, drilling hazards or
environmental damage could greatly increase the cost of operations, and various
field operating conditions may adversely affect the production from successful
wells. These conditions include delays in obtaining governmental approvals or
consents, shut-ins of connected wells resulting from extreme weather conditions,
insufficient storage or transportation capacity or other geological and
mechanical conditions.
While diligent well supervision and effective maintenance operations can
contribute to maximizing production rates over time, production delays and
declines from normal field operating conditions cannot be eliminated and can be
expected to adversely affect revenue and cash flow levels to varying degrees.
In addition, oil and gas operations are subject to the risks of exploration,
development and production of oil and natural gas properties, including
encountering unexpected formations or pressures, premature declines of
reservoirs, blow-outs, cratering, sour gas releases, fires and spills. Losses
resulting from the occurrence of any of these risks could have a materially
adverse effect on future results of operations, liquidity and financial
condition.
Prices, Markets and Marketing of Crude Oil and Natural Gas
Oil and natural gas are commodities whose prices are determined based on world
demand, supply and other factors, all of which are beyond the control of FEC.
World prices for oil and natural gas have fluctuated widely in recent years. Any
material decline in prices could result in a reduction of net production
revenue. Certain wells or other projects may become uneconomic as a result of a
decline in world oil prices and natural gas prices, leading to a reduction in
the volume of FEC's oil and gas reserves. FEC might also elect not to produce
from certain wells at lower prices. All of these factors could result in a
material decrease in FEC's future net production revenue, causing a reduction in
its oil and gas acquisition and development activities. In addition, any bank
borrowings available to FEC are expected to be determined in part by the
borrowing base of FEC. A sustained material decline in prices from historical
average prices could limit FEC's borrowing base, therefore reducing the bank
credit available to FEC, and could require that a portion of any existing bank
debt of FEC be repaid.
In addition to establishing markets for its oil and natural gas, FEC must also
successfully market its oil and natural gas to prospective buyers. The
marketability and price of oil and natural gas which may be acquired or
discovered by FEC will be affected by numerous factors beyond its control. FEC
will be affected by the differential between the price paid by refiners for
light quality oil and the grades of oil produced by FEC.
The ability of FEC to market its natural gas may depend upon its ability to
acquire space on pipelines which deliver natural gas to commercial markets. FEC
will also likely be affected by deliverability uncertainties related to the
proximity of its reserves to pipelines and processing facilities and related to
operational problems with such pipelines and facilities and extensive government
regulation relating to price, taxes, royalties, land tenure, allowable
production, the export of oil and natural gas and many other
134
aspects of the oil and natural gas business. FEC has limited direct experience
in the marketing of oil and natural gas.
Substantial Capital Requirements and Liquidity
FEC anticipates that it will make substantial capital expenditures for the
acquisition, exploration, development and production of oil and natural gas
reserves in the future. If FEC's revenues or reserves decline, FE may have
limited ability to expend the capital necessary to undertake or complete future
drilling programs. There can be no assurance that debt or equity financing, or
cash generated by operations will be available or sufficient to meet these
requirements or for other corporate purposes or, if debt or equity financing is
available, that it will be on terms acceptable to FEC. Moreover, future
activities may require FEC to alter its capitalization significantly. The
inability of FEC to access sufficient capital for its operations could have a
material adverse effect on FEC financial condition, results of operations or
prospects.
Additional Funding Requirements
FEC's cash flow from its reserves may not be sufficient to fund its ongoing
activities at all times. From time to time, FEC may require additional financing
in order to carry out its oil and gas acquisition, exploration and development
activities. Failure to obtain such financing on a timely basis could cause FEC
to forfeit its interest in certain properties, miss certain acquisition
opportunities and reduce or terminate its operations. If FEC's revenues from its
reserves decrease as a result of lower oil and natural gas prices or otherwise,
it will affect FEC ability to expend the necessary capital to replace its
reserves or to maintain its production. If FEC's cash flow from operations is
not sufficient to satisfy its capital expenditure requirements, there can be no
assurance that additional debt or equity financing will be available to meet
these requirements or available on terms acceptable to FEC.
Insurance
FEC's involvement in the exploration for, and development of, oil and gas
properties may result in FEC becoming subject to liability for pollution,
blow-outs, property damage, personal injury or other hazards. Although FEC
expects to obtain insurance in accordance with industry standards to address
such risks, such insurance has limitations on liability that may not be
sufficient to cover the full extent of such liabilities. In addition, such risks
may not, in all circumstances be insurable or, in certain circumstances, FEC may
elect not to obtain insurance to deal with specific risks due to the high
premiums associated with such insurance or other reasons. The payment of such
uninsured liabilities would reduce the funds available to FEC. The occurrence of
a significant event that FEC are not fully insured against, or the insolvency of
the insurer of such event, could have a material adverse effect on FEC's
financial position, results of operations or prospects.
Competition
FEC actively competes for reserve acquisitions, exploration leases, licenses and
concessions and skilled industry personnel with a substantial number of other
oil and gas companies, many of which have significantly greater financial
resources than FEC. FEC's competitors include major integrated oil and natural
gas companies and numerous other independent oil and natural gas companies and
individual producers and operators. The oil and gas industry is highly
competitive. FEC' competitors for the acquisition, exploration, production and
development of oil and natural gas properties, and for capital to finance such
activities, include companies that have greater financial and personnel
resources available to them than FEC. Certain of FEC's customers and potential
customers are themselves exploring for oil and natural gas, and the results of
such exploration efforts could affect FEC's ability to sell or supply oil or gas
to these customers in the future. FEC's ability to successfully bid on and
acquire additional property rights, to discover reserves, to participate in
drilling opportunities and to identify and enter into commercial arrangements
with customers will be dependent upon developing and maintaining close working
relationships with its future industry partners and joint operators and its
ability to select and evaluate suitable properties and to consummate
transactions in a highly competitive environment.
Environmental Risks
All phases of the oil and natural gas business present environmental risks and
hazards and are subject to environmental regulation pursuant to a variety of
international conventions and state and/or provincial and
135
municipal laws and regulations. Environmental legislation provides for, among
other things, restrictions and prohibitions on spills, releases or emissions of
various substances produced in association with oil and gas operations. The
legislation also requires that wells and facility sites be operated, maintained,
abandoned and reclaimed to the satisfaction of applicable regulatory
authorities. Compliance with such legislation can require significant
expenditures and a breach may result in the imposition of fines and penalties,
some of which may be material. Environmental legislation is evolving in a manner
expected to result in stricter standards and enforcement, larger fines and
liability and potentially increased capital expenditures and operating costs.
The discharge of oil, natural gas or other pollutants into the air, soil or
water may give rise to liabilities to foreign governments and third parties and
may require FEC to incur costs to remedy such discharge. No assurance can be
given that environmental laws will not result in a curtailment of production or
a material increase in the costs of production, development or exploration
activities or otherwise adversely affect FEC's financial condition, results of
operations or prospects.
Reserve Replacement
FEC's future oil and natural gas reserves, production, and cash flows to be
derived therefrom are highly dependent on FEC successfully acquiring or
discovering new reserves. Without the continual addition of new reserves, any
existing reserves FEC may have at any particular time and the production
therefrom will decline over time as such existing reserves are exploited. A
future increase in FEC's reserves will depend not only on FEC's ability to
develop any properties it may have from time to time, but also on its ability to
select and acquire suitable producing properties or prospects. There can be no
assurance that FEC's future exploration and development efforts will result in
the discovery and development of additional commercial accumulations of oil and
natural gas.
Reliance on Operators and Key Employees
To the extent FEC is not the operator of its oil and gas properties, FEC will be
dependent on such operators for the timing of activities related to such
properties and will largely be unable to direct or control the activities of the
operators. In addition, the success of FEC will be largely dependent upon the
performance of its management and key employees and the management and key
employees of the Forum Exploration and Newco, who will provide services to FEC
under the Technical Services Agreement. FEC does not have any key man insurance
policies and there is therefore a risk that the death or departure of any member
of management or any key employee of FEC could have a material adverse effect on
FEC.
Corporate Matters
FEC does not anticipate the payment of any dividends on their Common Shares for
the foreseeable future. Certain of the directors and officers of FEC are also
directors and officers of other oil and gas companies involved in natural
resource exploration and development, and conflicts of interest may arise
between their duties as officers and directors of FEC and as officers and
directors of such other companies. Such conflicts must be disclosed in
accordance with, and are subject to such other procedures and remedies as
applicable under the CBCA.
Permits and Licenses
The operations of FEC may require licenses and permits from various governmental
authorities. There can be no assurance that the issuer will be able to obtain
all necessary licenses and permits that may be required to carry out exploration
and development at its projects.
Issuance of Debt
From time to time FEC may enter into transactions to acquire assets or the
shares of other corporations. These transactions may be financed partially or
wholly with debt, which may increase FEC's debt levels above industry standards.
Neither FEC's articles nor its by-laws limit the amount of indebtedness that may
incur. The level of FEC's indebtedness from time to time could impair their
ability to obtain additional financing in the future on a timely basis to take
advantage of business opportunities that may arise.
136
Dilution
FEC may make future acquisitions or enter into financing or other transactions
involving the issuance of common shares of FEC which may be dilutive.
Title to Properties
Although title reviews will be done according to industry standards prior to the
purchase of most oil and natural gas producing properties or the commencement of
drilling wells, such reviews do not guarantee or certify that an unforeseen
defect in the chain of title will not arise to defeat the aim of FEC which could
result in a reduction of the revenue received by FEC.
Delays in Business Operations
In addition to the usual delays in payments by purchasers of oil and natural gas
to FEC or to the operators, and the delays by operators in remitting payment to
FEC, payments between these parties may be delayed due to restrictions imposed
by lenders, accounting delays, delays in the sale or delivery of products,
delays in the connection of wells to a gathering system, adjustment for prior
periods, or recovery by the operator of expenses incurred in the operation of
the properties. Any of these delays could reduce the amount of cash flow
available for the business of FEC in a given period and expose FEC to additional
third party credit risks.
Assessments of Value of Acquisitions
Acquisitions of oil and gas issuers and oil and gas assets are typically based
on engineering and economic assessments made by independent engineers and FEC's
own assessments. These assessments both will include a series of assumptions
regarding such factors as recoverability and marketability of oil and gas,
future prices of oil and gas and operating costs, future capital expenditures
and royalties and other government levies which will be imposed over the
producing life of the reserves. Many of these factors are subject to change and
are beyond FEC's control. In particular, the prices of and markets for oil and
natural gas products may change from those anticipated at the time of making
such assessment. In addition, all such assessments involve a measure of geologic
and engineering uncertainty which could result in lower production and reserves
than anticipated. Initial assessments of acquisitions may be based on reports by
a firm of independent engineers that are not the same as the firm that FEC uses
for its year end reserve evaluations. Because each of these firms may have
different evaluation methods and approaches, these initial assessments may
differ significantly from the assessments of the firm used by FEC. Any such
instance may offset the return on and value of the FEC's Shares.
Accounting Write-Downs as a Result of GAAP
GAAP require that management apply certain accounting policies and make certain
estimates and assumptions which affect reported amounts in the financial
statements of FEC. The accounting policies may result in non cash charges to net
income and write-downs of net assets in the financial statements. Such non-cash
charges and write-downs may be viewed unfavorably by the market and result in an
inability to borrow funds and/or may result in a decline in the trading price of
the FEC Common Shares. Under GAAP, the net amounts at which petroleum and
natural gas costs on a property or project basis are carried are subject to a
cost-recovery test which is based in part upon estimated future net cash flow
from reserves. If net capitalized costs exceed the future discounted cash flows,
FEC will have to charge the amounts of the excess to earnings. A decline in the
net value of oil and natural gas properties could cause capitalized costs to
exceed the cost ceiling, resulting in a charge against earnings. Emerging GAAP
surrounding hedge accounting may result in non-cash charges against net income
as a result of changes in the fair market value of financial instruments. A
decrease in the fair market value of the financial instruments as a result of
fluctuations in commodity prices and foreign exchange rates may result in a
non-cash charge against net income. Such non-cash charges may be temporary in
nature if the fair market value subsequently increases.
Third Party Credit Risk
FEC may be exposed to third party credit risk through its contractual
arrangements with its current or future joint venture partners, marketers of its
petroleum and natural gas production and other parties. In the event such
entities fail to meet their contractual obligations to FEC, such failures could
have a material adverse effect on FEC and its cash flow from operations.
Failure to Close the Transaction
137
If the transactions contemplated by the Transaction Agreement are not
consummated, it is unlikely that FEC will be able to raise sufficient capital to
continue development of the FEC Philippine Assets, and may, in fact, lose its
interest therein.
INDUSTRY CONDITIONS
The oil and natural gas industry is subject to extensive controls and
regulations governing its operations (including land tenure, exploration,
development, production, refining, transportation and marketing) imposed by
legislation enacted by various levels of government and with respect to pricing
and taxation of oil and natural gas by agreements among the government of the
Philippines all of which should be carefully considered by investors in the oil
and gas industry. It is not expected that any of these controls or regulations
will affect the operations of FEC in a manner materially different than they
would affect other oil and gas companies of similar size. All current
legislation is a matter of public record and FEC are unable to predict what
additional legislation or amendments may be enacted. Outlined below are some of
the principal aspects of legislation, regulations and agreements governing the
oil and gas industry.
Pricing and Marketing -- Oil, Natural Gas and Associated Products
In the Philippines oil, natural gas and associated products are generally sold
at market index based prices. These indices are generated at various sales
points depending on the commodity and are reflective of the current value of the
commodity adjusted for quality and locational differentials. While these indices
tend to track industry reference prices some variances can occur due to specific
supply-demand imbalances. These differentials can change on a monthly or daily
basis depending on the supply- demand fundamental at each location as well as
other non-related changes such as the value of the Canadian dollar and the cost
of transporting the commodity to the pricing point of the particular index.
Environmental Regulation
The oil and natural industry is subject to environmental regulation pursuant to
a variety of international conventions and Philippine legislation. Such
regulation provides for restrictions and prohibitions on the release or emission
of various substances produced in association with certain oil and gas industry
operations. In addition, such regulation requires that well and facility sites
be abandoned and reclaimed to the satisfaction of provincial authorities.
Compliance with such regulation can require significant expenditures and a
breach of such requirements may result in suspension or revocation of necessary
licenses and authorizations, civil liability for pollution damage and the
imposition of material fines and penalties.
LEGAL PROCEEDINGS
There are no outstanding legal proceedings involving FEC as of the date of the
Information Circular which management of FEC believes to be material to any of
the parties hereto, nor are any such proceedings known by the parties hereto to
be contemplated.
MATERIAL CONTRACTS
The only material contracts entered into, or to be entered into coincident with
the Transaction by FEC since incorporation, other than contracts in the ordinary
course of business, are as follows:
(a) The Transaction Agreement as defined
Copies of these agreements, when executed, can be inspected at the registered
office of FEC at Suite 1400, 700-2nd Street SW Calgary, Alberta, Canada T2B 4V5,
during normal business hours from the date of this Information Circular until 30
days following completion of the Arrangement.
AUDITORS, REGISTRAR AND TRANSFER AGENT
The auditors of FEC are KPMG, Chartered Accountants, Suite 1200, Bow Valley
Square II, 205 - 5th Avenue SW, Calgary, Alberta T2P 4B9, Canada
The registrar and transfer agent for the FEC Common Shares is Computershare
principal offices on 4th Floor, 510 Burrard Street, Vancouver, BC, V6C 3B9G-42
138
APPENDIX J
SECTION 190 OF THE CANADA BUSINESS CORPORATIONS ACT
"Right to dissent"
190. (1) Subject to sections 191 and 241, a holder of shares of any class of a
corporation may dissent if the corporation is subject to an order under
paragraph 192(4)(d) that affects the holder or if the corporation resolves
to:
(a) Amend its articles under section 173 or 174 to add, change or remove any
provisions restricting or constraining the issue, transfer or ownership of
shares of that class;
(b) Amend its articles under section 173 to add, change or remove any
restriction on the business or businesses that the corporation may carry
on;
(c) Amalgamate otherwise than under section 184;
(d) Be continued under section 188;
(e) Sell, lease or exchange all or substantially all its property under
subsection 189(3); or
(f) Carry out a going-private transaction or a squeeze-out transaction.
Further right
(2) A holder of shares of any class or series of shares entitled to vote under
section 176 may dissent if the corporation resolves to amend its articles
in a manner described in that section.
If one class of shares
(2.1) The right to dissent described in subsection (2) applies even if there is
only one class of shares. Payment for shares
(3) In addition to any other right the shareholder may have, but subject to
subsection (26), a shareholder who complies with this section is entitled,
when the action approved by the resolutions from which the shareholder
dissents or an order made under subsection 192(4) becomes effective, to be
paid by the corporation the fair value of the shares in respect of which
the shareholder dissents, determined as of the close of business on the
day before the resolution was adopted or the order was made.
No partial dissent
(4) A dissenting shareholder may only claim under this section with respect to
all the shares of a class held on behalf of any one beneficial owner and
registered in the name of the dissenting shareholder.
Objection
(5) A dissenting shareholder shall send to the corporation, at or before any
meeting of shareholders at which a resolution referred to in subsection
(1) or (2) is to be voted on, a written objection to the resolution,
unless the corporation did not give notice to the shareholder of the
purpose of the meeting and of their right to dissent.
Notice of resolution
(6) The corporation shall, within ten days after the shareholders adopt the
resolution, send to each shareholder who has filed the objection referred
to in subsection (5) notice that the resolution has been adopted, but such
notice is not required to be sent to any shareholder who voted for the
resolution or who has withdrawn their objection.
Demand for payment
(7) A dissenting shareholder shall, within twenty days after receiving a
notice under subsection (6) or, if the shareholder does not receive such
notice, within twenty days after learning that the resolution has been
adopted, send to the corporation a written notice containing
(a) the shareholder's name and address;
(b) the number and class of shares in respect of which the shareholder
dissents; and
(c) a demand for payment of the fair value of such shares.
Share certificate
(8) A dissenting shareholder shall, within thirty days after sending a notice
under subsection (7), send the certificates representing the shares in
respect of which the shareholder dissents to the corporation or its
transfer agent.
Forfeiture
(9) A dissenting shareholder who fails to comply with subsection (8) has no
right to make a claim under this section.
139
Endorsing certificate
(10) A corporation or its transfer agent shall endorse on any share certificate
received under subsection (8) a notice that the holder is a dissenting
shareholder under this section and shall forthwith return the share
certificates to the dissenting shareholder.
Suspension of rights
(11) On sending a notice under subsection (7), a dissenting shareholder ceases
to have any rights as a shareholder other than to be paid the fair value
of their shares as determined under this section except where
(a) The shareholder withdraws that notice before the corporation makes an
offer under subsection (12),
(b) The corporation fails to make an offer in accordance with subsection (12)
and the shareholder withdraws the notice, or
(c) the directors revoke a resolution to amend the articles under subsection
173(2) or 174(5), terminate an amalgamation agreement under subsection
183(6) or an application for continuance under subsection 188(6), or
abandon a sale, lease or exchange under subsection 189(9), in which case
the shareholder's rights are reinstated as of the date the notice was
sent.
Offer to pay
(12) A corporation shall, not later than seven days after the later of the day
on which the action approved by the resolution is effective or the day the
corporation received the notice referred to in subsection (7), send to
each dissenting shareholder who has sent such notice
(a) a written offer to pay for their shares in an amount considered by the
directors of the corporation to be the fair value, accompanied by a
statement showing how the fair value was determined; or
(b) if subsection (26) applies, a notification that it is unable lawfully to
pay dissenting shareholders for their shares.
Same terms
(13) Every offer made under subsection (12) for shares of the same class or
series shall be on the same terms.
Payment
(14) Subject to subsection (26), a corporation shall pay for the shares of a
dissenting shareholder within ten days after an offer made under
subsection (12) has been accepted, but any such offer lapses if the
corporation does not receive an acceptance thereof within thirty days
after the offer has been made.
Corporation may apply to court
(15) Where a corporation fails to make an offer under subsection (12), or if a
dissenting shareholder fails to accept an offer, the corporation may,
within fifty days after the action approved by the resolution is effective
or within such further period as a court may allow, apply to a court to
fix a fair value for the shares of any dissenting shareholder.
Shareholder application to court
(16) If a corporation fails to apply to a court under subsection (15), a
dissenting shareholder may apply to a court for the same purpose within a
further period of twenty days or within such further period as a court may
allow.
Venue
(17) An application under subsection (15) or (16) shall be made to a court
having jurisdiction in the place where the corporation has its registered
office or in the province where the dissenting shareholder resides if the
corporation carries on business in that province.
No security for costs
(18) A dissenting shareholder is not required to give security for costs in an
application made under subsection (15) or (16).
Parties
(19) On an application to a court under subsection (15) or (16),
(a) all dissenting shareholders whose shares have not been purchased by the
corporation shall be joined as parties and are bound by the decision of
the court; and
(b) the corporation shall notify each affected dissenting shareholder of the
date, place and consequences of the application and of their right to
appear and be heard in person or by counsel.
Powers of court
140
(20) On an application to a court under subsection (15) or (16), the court may
determine whether any other person is a dissenting shareholder who should
be joined as a party, and the court shall then fix a fair value for the
shares of all dissenting shareholders.
Appraisers
(21) A court may in its discretion appoint one or more appraisers to assist the
court to fix a fair value for the shares of the dissenting shareholders.
Final order
(22) The final order of a court shall be rendered against the corporation in
favor of each dissenting shareholder and for the amount of the shares as
fixed by the court.
Interest
(23) A court may in its discretion allow a reasonable rate of interest on the
amount payable to each dissenting shareholder from the date the action
approved by the resolution is effective until the date of payment.
Notice that subsection (26) applies
(24) If subsection (26) applies, the corporation shall, within ten days after
the pronouncement of an order under subsection (22), notify each
dissenting shareholder that it is unable lawfully to pay dissenting
shareholders for their shares.
Effect where subsection (26) applies
(25) If subsection (26) applies, a dissenting shareholder, by written notice
delivered to the corporation within thirty days after receiving a notice
under subsection (24), may
(a) Withdraw their notice of dissent, in which case the corporation is deemed
to consent to the withdrawal and the shareholder is reinstated to their
full rights as a shareholder; or
(b) Retain a status as a claimant against the corporation, to be paid as soon
as the corporation is lawfully able to do so or, in liquidation, to be
ranked subordinate to the rights of creditors of the corporation but in
priority to its shareholders. Limitation
(26) A corporation shall not make a payment to a dissenting shareholder under
this section if there are reasonable grounds for believing that
(a) The corporation is or would after the payment be unable to pay its
liabilities as they become due; or
(b) The realizable value of the corporation's assets would thereby be less
than the aggregate of its liabilities.
141