SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
| Filed by the Registrant þ | |
| Filed by a Party other than the Registrant o | |
| Check the appropriate box: | |
| o | Preliminary Proxy Statement |
| o | Confidential, For Use of the Commission Only (As Permitted by Rule 14a-6(e)(2)) |
| þ | Definitive Proxy Statement |
| o | Definitive Additional Materials |
| o | Soliciting Material under Rule 14a-12 |
| PACIFIC ASIA PETROLEUM, INC. |
| (Name of Registrant as Specified In Its Charter) |
(Name of
Person(s) Filing Proxy Statement, if other than the Registrant)
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Payment
of Filing Fee (Check the appropriate box):
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þ
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No
fee required
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o
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Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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| (1) | Title of each class of securities to which transaction applies:_____________________________________________________________ |
| (2) | Aggregate number of securities to which transaction applies:____________________________________________________________ |
| (3) |
Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule
0-11
(set forth the amount on which the filing fee is calculated and state how
it was determined):
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| ___________________________________________________________________________________________________________ | |
| (4) | Proposed maximum aggregate value of transaction: ____________________________________________________________________ |
| (5) | Total fee paid:________________________________________________________________________________________________ |
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o
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Fee
paid previously with preliminary materials.
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| o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. |
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(1)
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Amount Previously Paid:_________________________________________________________________________________________ |
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(2)
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Form, Schedule or Registration Statement No.: _________________________________________________________________________ |
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(3)
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Filing
Party:___________________________________________________________________________________________________
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| (4) | Date Filed: ____________________________________________________________________________________________________ |
March 19,
2010
Dear
Stockholder:
On behalf of the Board of Directors of
Pacific Asia Petroleum, Inc. (the “Company”), you are cordially invited to
attend a special meeting (the “Meeting”) of all the stockholders of the Company,
to be held on
April
5,
2010, at the Marriot Westchester, 670 White Plains Road,
Tarrytown, NY 10591, at 10:00 a.m., Eastern Standard Time. The Notice
of Special Meeting of Stockholders and the Proxy Statement accompany this
letter.
At the
Meeting, you will be asked to consider and vote upon the following proposals
(the “Proposals”):
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(1)
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To
approve the Purchase and Sale Agreement, dated November 18, 2009, as
amended March 4, 2010 (the “Purchase Agreement”), between the Company,
CAMAC Energy Holdings Limited and certain of its affiliates (“CAMAC”), as
described in the attached Proxy Statement, pursuant to which the Company
agreed to acquire all of CAMAC’s interest in a Production Sharing Contract
(the “PSC”) with respect to that certain oilfield asset known as the Oyo
Field (the “Contract Rights”) and the transactions contemplated thereby
(the “Transaction”);
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(2)
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To
approve the issuance by the Company to CAMAC of Company common stock, par
value $0.001 per share, equal to 62.74% of the Company’s issued and
outstanding common stock (the “Consideration Shares”) after giving effect
to the Transaction and the Financing (as defined in the Proxy Statement)
at the closing of the Transaction as partial consideration for the
acquisition by the Company of the Contract Rights;
and
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(3)
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To
amend the Company’s Certificate of Incorporation to change the Company’s
name to CAMAC Energy Inc., effective as of the closing of the
Transaction.
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The Purchase Agreement, which is
described in, and attached to, the Proxy Statement, provides that, among other
things: (i) CAMAC will transfer the Contract Rights to CAMAC Petroleum Limited,
a newly formed Nigerian entity wholly owned by the Company (“Newco”), in
consideration for the Company’s payment of an aggregate of $38.84
million in cash (subject to adjustment as described in the Proxy Statement), $32
million of which shall be paid by the Company to CAMAC at Closing, with the
balance of $6.84 million due and payable post-Closing on the earlier of
sufficient receipt of oil proceeds from the Oyo Field or six months from the
Closing Date, and the issuance of the Consideration Shares equal to 62.74% of
the Company’s issued and outstanding common stock after giving effect to the
Transaction and the Financing; and (ii) for a period commencing on the closing
of the transactions contemplated by the Purchase Agreement (the “Closing”) and
ending on the date that is one year following the Closing, the Company’s Board
of Directors will consist of seven members, four of whom will be nominated by
CAMAC, with three of the Company’s current directors continuing to serve as
directors of the Company.
As
a result of the consummation of the Transaction and effective immediately upon
its closing, the Company will experience a change of control, with CAMAC owning
62.74% of the Company’s outstanding common stock after giving effect to the
Transaction and the Financing and CAMAC will control the Company’s Board of
Directors with four designees on the Company’s seven person Board.
In its
meetings on November 13, 2009 and March 1, 2010, the Company’s Board of
Directors unanimously concluded that the Transaction is advisable and in the
best interests of the Company and its stockholders. All of the
Proposals listed above are conditioned upon each other and the approval of each
Proposal is required for completion of the Transaction.
THE
COMPANY’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” EACH OF
THE PROPOSALS.
Our Board of Directors reviewed the
Transaction, examined the various aspects of the Transaction, analyzed various
factors relating to the Company, and after careful consideration, approved the
Transaction and unanimously determined that the Transaction is advisable and in
the best interests of the Company and its stockholders. In making their
decision, our Board of Directors examined various factors, including, among
other things:
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·
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The
potential benefits arising from the consummation of the
Transaction;
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·
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the
Company’s size and resources and the competitive business environment in
which the Company operates;
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·
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the
status of the Company’s current operations, projections and business
prospects and the potential effect of a change of control on such
operations and business prospects;
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·
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the
structure of the Transaction as an asset
purchase;
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·
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the
estimated proved and probable reserves that the Company might acquire
rights to as a result of the Transaction and the operating contractor
under the PSC;
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·
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the
potential opportunities provided by the Contract Rights acquired;
and
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·
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the
requisite stockholder majority approval of the
Transaction;
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as well
as countervailing factors such as:
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·
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the
lack of a recent independent reserve engineering report covering the Oyo
Field;
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·
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the
substantial dilution in the percentage ownership interest of the
stockholders in the Company; and
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·
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the
impact on our stockholders of a sale of a controlling interest in the
Company to CAMAC.
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Stockholders
of record of the Company as of the close of business in New York on March 8,
2010 are entitled to vote at the Meeting.
In
the event that the Transaction is not approved by our stockholders or otherwise
not consummated, the Purchase Agreement may be subject to
termination.
The Transaction is subject to the
satisfaction of certain conditions to Closing, including, without
limitation:
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·
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the
negotiation and entry by the parties into certain other agreements as set
forth in the Purchase Agreement in forms reasonably satisfactory to the
parties; and
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·
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the
approval of the Company’s stockholders of the Purchase Agreement and
transactions contemplated thereby, the issuance of the Consideration
Shares, and the amendment of the Company’s Certificate of Incorporation to
change the Company’s name to CAMAC Energy
Inc.
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The
Company has already raised $37.5 million through two registered direct offerings
that closed on February16, 2010 and March 5, 2010 (as described in this Proxy
Statement) (collectively the “Financing”). For a detailed description
of the material terms of the Financing, please read “Registered Direct
Offerings” on page 45 of this Proxy Statement.
The enclosed Proxy Statement provides
detailed information about the Proposals, including the voting requirements
necessary to approve each of them at the Meeting and how you may vote your
shares.
We know
that many of our stockholders will be unable to attend the Meeting. We are
soliciting proxies so that each stockholder has an opportunity to vote on the
Proposals. Whether or not you plan to attend, we encourage you to read the Proxy
Statement carefully and vote and submit your proxy by signing, dating and
returning your proxy card promptly in the enclosed postage-paid envelope, or by
casting your vote via facsimile, the Internet or by telephone as directed on the
proxy card. You may revoke your proxy at any time before it is exercised.
Regardless of the number of Company shares you own, your presence in person or
by proxy is important for quorum purposes and your vote is important for proper
corporate action.
If you
have any questions about the Proxy Statement, please contact Clark Moore,
Corporate Counsel, at (415) 685-5622.
Thank you
for your continuing interest in Pacific Asia Petroleum, Inc. We look forward to
seeing you at our Special Meeting.
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Frank
C. Ingriselli
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Chief
Executive Officer, President and
Secretary
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NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
TO
BE HELD ON APRIL 5, 2010
To the
Stockholders of PACIFIC ASIA PETROLEUM, INC.:
NOTICE IS
HEREBY GIVEN that on April 5, 2010, at 10:00 a.m., Eastern Standard Time, a
special meeting (the “Meeting”) of all of the stockholders of Pacific Asia
Petroleum, Inc., a Delaware corporation (the “Company”) as of the close of
business in New York on March 8, 2010 (the “Record Date”), will be held at the
Marriot Westchester, 670 White Plains Road, Tarrytown, New York
10591.
ON THE
AGENDA:
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Proposal
1:
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To
approve the Purchase and Sale Agreement, dated November 18, 2009, as
amended March 4, 2010 (as amended, the “Purchase Agreement”), between the
Company, CAMAC Energy Holdings Limited and certain of its affiliates
(“CAMAC”), as described in the attached Proxy Statement, pursuant to which
the Company agreed to acquire all of CAMAC’s interest in a Production
Sharing Contract (the “PSC”) with respect to that certain oilfield asset
known as the Oyo Field (the “Contract Rights”) and the transactions
contemplated thereby (the
“Transaction”);
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|
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Proposal
2
:
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To
approve the issuance by the Company to CAMAC of Company common stock, par
value $0.001 per share, equal to 62.74% of the Company’s issued and
outstanding common stock (the “Consideration Shares”) after giving effect
to the Transaction and the Financing (as defined in the Proxy Statement)
at the closing of the Transaction as partial consideration for the
acquisition by the Company of the Contract Rights;
and
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|
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Proposal
3
:
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To
amend the Company’s Certificate of Incorporation to change the Company’s
name to CAMAC Energy Inc., effective as of the closing of the
Transaction.
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As a result of the consummation of the
Transaction and effective immediately upon its closing, the Company will
experience a change of control, with CAMAC owning 62.74% of the Company’s
outstanding common stock after giving effect to the Transaction and the
Financing and CAMAC will control the Company’s Board of Directors with four
designees on the Company’s seven person Board.
In its
meetings on November 13, 2009 and March 1, 2010, the Company’s Board of
Directors unanimously concluded that the Transaction is advisable and in the
best interests of the Company and its stockholders.
All of the Proposals
listed above are conditioned upon each other and the approval of each Proposal
is required for completion of the Transaction.
THE
COMPANY’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” EACH OF
THE PROPOSALS.
Each
share of Company Common Stock outstanding on the Record Date will be entitled to
one vote on all matters. Proposal 1 (approval of the Transaction) and Proposal 2
(approval of the issuance of the Consideration Shares) requires the vote of a
majority of the shares present in person or by proxy at the Meeting for
approval, and Proposal 3 (amendment of the Company’s Certificate of
Incorporation to change the Company’s name) requires the vote of a majority of
the Company’s outstanding shares.
As an
NYSE Amex-listed company, the Company is subject to Sections 712 and 713 of
the NYSE Amex Company Guide (the “Company Guide”) which require stockholder
approval for the issuance of additional shares of the Company’s common stock
under certain circumstances. Section 712 of the Company Guide provides that
an issuer is required to seek stockholder approval for the listing of additional
shares that are to be issued as consideration for an acquisition of stock or
assets of another company where the “present or potential issuance of common
stock or securities convertible into common stock could result in an increase in
outstanding common shares of 20% or more” (the “Acquisition Rule”). In addition,
Section 713 of the Company Guide provides that an issuer is required to
seek stockholder approval when “additional shares will be issued in a connection
with a transaction involving the sale, issuance, or potential issuance by the
issuer of common stock (or securities convertible into common stock) at a price
less than the greater of book value or market value which equals 20% or more of
presently outstanding shares of common stock” (the “20% Rule”). The
Company is seeking stockholder approval of Proposal 2 to be able to issue shares
of its common stock in excess of the Acquisition Rule and the 20%
Rule.
Stockholders
who have a “personal interest” in any of the Proposals, may not vote with
respect to such Proposal. A “personal interest” is a stockholder’s personal
interest in the approval of an act or a transaction of a company, and includes:
(i) the personal interest of any members of his or her immediate family
(including the spouses thereof), or a personal interest of an entity in which
the stockholder or such family member thereof serves as a director or the chief
executive officer, owns at least 5% of its issued share capital or its voting
rights or has the right to appoint a director or chief executive officer, and
excludes (ii) a personal interest that arises solely from the fact of holding
shares in the Company or another entity. If any stockholder casting a
vote in respect of a Proposal does not notify us whether or not he or she has a
“personal interest,” such stockholder’s vote with respect to such Proposal will
be disqualified.
The
accompanying Proxy Statement contains additional information with respect to the
proposals on the agenda and certain related matters. A stockholder who wishes to
vote at the Meeting but who is unable to attend in person may appoint a
representative to attend the Meeting and vote on such stockholder’s behalf. In
order to do so, such stockholder must execute an instrument of appointment and
deposit it at the offices of the Company (or its designated representative) no
later than 48 hours before the time appointed for the Meeting. In addition,
whether or not a stockholder plans to attend, a stockholder can insure his or
her vote is represented at the Meeting by promptly completing, signing, dating
and returning a proxy (in the form attached) in the enclosed envelope. Whether
or not a stockholder intends to attend the Meeting, all stockholders are urged
to promptly complete, date and execute the enclosed proxy and mail it in the
enclosed envelope. Return of the proxy does not deprive the stockholder of such
stockholder’s right to attend the Meeting and to vote its shares in
person.
Only the
Company’s stockholders of record (the “Record Holders”) at the close of business
in New York on the Record Date are entitled to notice of, and to participate in
and vote at the Meeting and any adjournment thereof.
It
is important that your shares are represented at the Meeting. We urge you to
review the attached Proxy Statement and, whether or not you plan to attend the
Meeting in person, please vote your shares promptly by either completing,
signing and returning the accompanying proxy card or casting your vote via
facsimile, the Internet or by telephone as directed on the proxy card. You do
not need to affix postage to the enclosed reply envelope if you mail it within
the United States. If you attend the Meeting, you may withdraw your proxy and
vote your shares personally.
For a
discussion of certain significant matters that you should consider before voting
on the Proposals, see “Risk Factors Associated With The Transaction” beginning
on page 37 of this Proxy Statement.
If you
plan to attend the Meeting, please mark the accompanying proxy card in the space
provided and return it to us, or notify us of your intentions via facsimile, the
Internet or by telephone as directed on the proxy card. This will assist us with
preparations for the Meeting. If your shares are not registered in
your own name and you would like to attend the Meeting, please ask the broker,
trust, bank or other nominee that holds your shares to provide you with evidence
of your share ownership. This will enable you to gain admission to the
Meeting.
By Order
of the Board of Directors,
Pacific
Asia Petroleum, Inc.
March 19,
2010
TABLE OF
CONTENTS
| Page | ||
| PROXY STATEMENT | 1 | |
| General Information | 1 | |
| Who May Vote | 2 | |
| Voting Your Proxy | 3 | |
| Revoking Your Proxy | 4 | |
| Solicitation of Proxies | 4 | |
| Delivery of Proxy Materials to Households | 4 | |
| Absence of Dissenters’ Rights | 4 | |
|
CAUTIONARY STATEMENT
RELEVANT TO FORWARD-LOOKING INFORMATION FORTHE PURPOSE OF “SAFE HARBOR”
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
|
4 | |
| QUESTIONS AND ANSWERS ABOUT THE TRANSACTION | 6 | |
| PROPOSAL 1 AND PROPOSAL 2 APPROVAL OF THE TRANSACTION AND THE ISSUANCE OF THE CONSIDERATION SHARES | 10 | |
| Reasons for the Transaction | 10 | |
| The Company's Valuation Analysis | 11 | |
| No Fairness Opinion | 12 | |
| No Recent Independent Reserve Engineering Report | 12 | |
| Background and Negotiations Related to the Transaction | 12 | |
| SUMMARY OF THE PURCHASE AGREEMENT | 15 | |
| General | 15 | |
| Ancillary Agreements | 17 | |
| Interest of Officers and Directors in Matters to be Acted Upon | 19 | |
| Material Tax Consequences to the Company and its Stockholders | 19 | |
| Regulatory Matters | ||
| Third Party Approvals | 19 | |
| 20 | ||
| DISCUSSION OF THE OYO FIELD AND THE PSC | 20 | |
| The Oyo Field | 20 | |
| Overview of the Nigerian Economy and Oil and Gas Industry | 20 | |
| The Oyo Field Oil Mining Lease (“OML 120”) | 24 | |
| Production Sharing Contract | 25 | |
| Summary of the Contract Rights | 28 | |
| Oyo Field First Production | 29 | |
| Valuation of the Contract Rights | 29 | |
| Risks Inherent to Operating in Nigeria | 31 | |
| ACCOUNTING FOR THE TRANSACTION | 31 | |
| COMPANY BOARD OF DIRECTORS AND MANAGEMENT UPON THE CLOSING OF THE TRANSACTION | 31 | |
| RISK FACTORS ASSOCIATED WITH THE TRANSACTION | 37 | |
| THE COMPANY’S BUSINESS | 42 | |
| General | 42 | |
| Organization | 42 | |
| Subsidiaries and Joint Ventures | 43 | |
| Registered Direct Offerings | 45 | |
| Market Overview | 46 | |
| Market Opportunity | 48 | |
| Principal Business Strategy | 48 | |
| Financing | 51 | |
| Competitive Business Conditions and the Company’s Competitive Position | 53 | |
| Regulation | 53 | |
| Environmental Matters | 55 | |
| Product Research and Development | 55 | |
| Properties | 56 | |
| Employees and Contractors | 56 | |
| Intellectual Property | 56 | |
| Off-Balance Sheet Arrangements | 56 | |
| Legal Proceedings | 56 | |
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 57 | |
| Our Business | 57 | |
| Recent Developments | 59 | |
| Results of Operations | 61 | |
| Liquidity and Capital Resources | 63 | |
| Long-Lived Assets | 64 | |
| Obligations under Material Contracts | 64 | |
| Critical Accounting Policies and Estimates | 64 | |
| Recently Issued Updates to the Codification Not Yet Adopted | 66 | |
| Inflation | 66 | |
| RECENT SALES OF UNREGISTERED SECURITIES | 67 | |
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 67 | |
| Foreign Currency Risk | 67 | |
| Interest Rate Risk | 67 | |
| FINANCIAL STATEMENTS | 67 | |
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS | 68 | |
| SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE | 70 | |
| CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 70 | |
| Director Independence | 72 | |
| PROPOSAL 3 AMENDMENT TO CERTIFICATE OF INCORPORATION | 73 | |
| STOCKHOLDER COMMUNICATIONS | 74 | |
| 74 | ||
| OTHER MATTERS | ||
LIST OF
ANNEXES
|
Annex
A:
|
The
Purchase Agreement
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|
Annex
B:
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Amendment
No. 1 to Purchase Agreement, dated March 4, 2010
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Annex
C:
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Report
of Somerley Limited, dated July 17, 2009
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Annex
D:
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Company
Update on March 1, 2010 of Somerley Report dated July 17, 2009, and
Updated Pro Forma Cash Flow Projections
|
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Annex
E:
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Production
Sharing Contract, dated July 22, 2005, by and among Allied Energy Plc
(formerly, Allied Energy Resources Nigeria Limited), CAMAC International
(Nigeria) Limited, and Nigerian Agip Exploration
Limited
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Annex
F:
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Audited
Financial Statements for the Year Ended December 31,
2009
|
250
East Hartsdale Ave., Suite 47
Hartsdale,
New York 10530
(914)
472-6070
____________________
PROXY
STATEMENT
____________________
General
Information
This
Proxy Statement and the accompanying proxy are being furnished with respect to
the solicitation of proxies by the Board of Directors of Pacific Asia Petroleum,
Inc., a Delaware corporation (the “Company,” “Pacific Asia,” or “we”), for a
special meeting (the “Meeting”) of all of the stockholders of the Company, to be
held at the Marriot Westchester, 670 White Plains Road, Tarrytown, New York
10591, on 10:00 a.m., Eastern Standard Time, April 5, 2010, along with any
adjournment or adjournments thereof.
The
approximate date on which the Proxy Statement and proxy card are intended to be
sent or given to stockholders is March 8, 2010.
The
purpose of the Meeting is to seek stockholder approval of three
proposals:
|
|
Proposal
1:
|
To
approve the Purchase and Sale Agreement, dated November 18, 2009, as
amended March 4, 2010 (the “Purchase Agreement”), between the Company,
CAMAC Energy Holdings Limited and certain of its affiliates (“CAMAC”), as
described in the attached Proxy Statement, pursuant to which the Company
agreed to acquire all of CAMAC’s interest in a Production Sharing Contract
(the “PSC”) with respect to that certain oilfield asset known as the Oyo
Field (the “Contract Rights”) and the transactions contemplated thereby
(the “Transaction”);
|
|
|
Proposal
2
:
|
To
approve the issuance by the Company to CAMAC of Company common stock, par
value $0.001 per share, equal to 62.74% of the Company’s issued and
outstanding common stock (the “Consideration Shares”) after giving effect
to the Transaction and the Financing (as defined in the Proxy Statement)
at the closing of the Transaction as partial consideration for the
acquisition by the Company of the Contract Rights;
and
|
|
|
Proposal
3
:
|
To
amend the Company’s Certificate of Incorporation to change the Company’s
name to CAMAC Energy Inc., effective as of the closing of the
Transaction.
|
Unless
the context otherwise requires, the term “Company” as used herein collectively
refers to the Company and its wholly-owned subsidiaries and joint ventures,
including (i) Inner Mongolia Production Company (HK) Limited, (ii) Pacific Asia
Petroleum Energy Limited, (iii) Pacific Asia Petroleum, Limited, (iv) CAMAC
Petroleum Limited, (v) Inner Mongolia Sunrise Petroleum Co. Ltd, (vi) Beijing
Dong Fang Ya Zhou Petroleum Technology Service Company Limited, and (vii)
Pacific Asia Petroleum (HK) Limited.
Who
May Vote
Only
stockholders of record of our common stock, $.001 par value (the “Common
Stock”), as of the close of business on March 8, 2010 (the “Record Date”) are
entitled to notice and to vote at the Meeting and any adjournment or
adjournments thereof.
A list of
stockholders entitled to vote at the Meeting will be available at the Meeting,
and will also be available for ten days prior to the Meeting, during office
hours, by contacting our Corporate Secretary at the executive offices of the
Company at:
Corporate
Secretary
Pacific
Asia Petroleum, Inc.
250 East
Hartsdale Ave., Suite 47
Hartsdale,
New York 10530
The
presence at the Meeting of a majority of the outstanding shares of Common Stock
as of the Record Date, in person or by proxy, is required for a quorum. Votes
cast by proxy or in person at the Meeting will be tabulated by an Inspector of
Elections appointed for the Meeting. Should you submit a proxy, even though you
abstain as to one or more proposals, or you are present in person at the
Meeting, the Inspector of Elections will treat abstentions as shares that are
present for purposes of determining the presence of a quorum but as unvoted for
purposes of determining the approval of any matter submitted to the stockholders
for a vote. The Company has designated Issuer Direct Corporation, the Company’s
proxy management service, as the Inspector of Elections for the
Meeting.
Broker
“non-votes” are not included for the purposes of determining whether a quorum of
shares is present at the Meeting. A broker “non-vote” occurs when a nominee
holder, such as a brokerage firm, bank or trust company, holding shares of
record for a beneficial owner does not vote on a particular proposal because the
nominee holder does not have discretionary voting power with respect to that
item and has not received voting instructions from the beneficial
owner.
Each
holder of Common Stock on the Record Date is entitled to one vote for each share
then held on all matters to be voted at the Meeting. No other class of voting
securities was then outstanding.
Voting
Your Proxy
You may
vote by one of the following methods:
| · | completing and signing the proxy card and mailing it in the enclosed postage-paid envelope; |
| · | completing and signing the proxy card and faxing it to the fax number provided on the proxy card; |
| · | voting on the Internet at the website provided on the proxy card; or |
| · | calling the toll-free telephone number provided on the proxy card. |
Voting by
telephone is not available to persons outside of the United States. Complete
instructions for voting by any of the above methods are included on the proxy
card. If your shares are held through a broker, trust, bank or other nominee,
you should refer to information forwarded to you by such holder of record for
your voting options.
The
shares represented by any proxy duly given will be voted at the Meeting in
accordance with the instructions of the stockholder. If no specific instructions
are given, the shares will be voted FOR approval of the Transaction and FOR
the election of the
nominees for director set forth herein.
Each
share of Common Stock outstanding on the record date will be entitled to one
vote on all matters. Proposal 1 (approval of the Transaction) and Proposal 2
(approval of the issuance of the Consideration Shares) require the vote of a
majority of the shares present in person or by proxy at the Meeting for
approval, and Proposal 3 (amendment of the Company’s Certificate of
Incorporation to change the Company’s name) requires the vote of a majority of
the Company’s outstanding shares.
Shares
which abstain from voting on the Proposals, and shares held in “street name” by
brokers or nominees who indicate on their proxies that they do not have
discretionary authority to vote such shares on the Proposals, will not be
counted as votes in favor of the Proposals, and will also not be counted as
shares voting on the Proposals. Accordingly, abstentions and “broker non-votes”
will have no effect on the voting on the Proposals which requires the
affirmative vote of a plurality or a majority of the votes cast or the shares
voting on the matter.
Revoking
Your Proxy
Even if
you execute a proxy, you retain the right to revoke it and to change your vote
by notifying us at any time before your proxy is voted. Mere attendance at the
meeting will not revoke a proxy. Such revocation may be effected by calling the
toll-free telephone number listed above (within the United States only), or in
writing by execution of a subsequently dated proxy, or by a written notice of
revocation, sent to the attention of the Secretary at the address of our
principal office set forth above in the Notice to this Proxy Statement or by
your attendance and voting in person at the Meeting. Unless so revoked, the
shares represented by proxies, if received in time, will be voted in accordance
with the directions given therein.
If the
Meeting is postponed or adjourned for any reason, at any subsequent reconvening
of the Meeting, all proxies will be voted in the same manner as the proxies
would have been voted at the original convening of the Meeting (except for any
proxies that have at that time effectively been revoked or withdrawn), even if
the proxies had been effectively voted on the same or any other matter at a
previous Meeting.
You are
requested, regardless of the number of shares you own or your intention to
attend the Meeting, to sign the proxy and return it promptly in the enclosed
envelope.
Solicitation
of Proxies
The
expenses of solicitation of proxies will be paid by the Company. We may solicit
proxies by mail, and the officers and employees of the Company, who will receive
no extra compensation therefore, may solicit proxies personally or by telephone.
The Company will reimburse brokerage houses and other nominees for their
expenses incurred in sending proxies and proxy materials to the beneficial
owners of shares held by them.
Delivery
of Proxy Materials to Households
Only one
copy of the Proxy Statement for the Meeting will be delivered to an address
where two or more stockholders reside unless we have received contrary
instructions from a stockholder at the address. A separate proxy card will be
delivered to each stockholder at the shared address.
If you
are a stockholder who lives at a shared address and you would like additional
copies of this Proxy Statement, or any future Proxy Statements, please contact
the Company’s Corporate Secretary at the address below and we will promptly mail
you copies:
Corporate
Secretary
Pacific
Asia Petroleum, Inc.
250 East
Hartsdale Ave., Suite 47, Hartsdale
New York
10530
Absence
of Dissenters
’
Rights
No dissenters’ or appraisal rights are
available to the Company’s stockholders under Delaware Corporation Law, the
Certificate of Incorporation, or the Company’s bylaws in connection with the
Proposals.
CAUTIONARY
STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF “SAFE
HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Proxy Statement contains
forward-looking statements relating to the operations of Pacific Asia Petroleum
Inc. and its subsidiaries and joint-ventures, including, (i) Pacific Asia
Petroleum, Limited, (ii) Inner Mongolia Production Company (HK) Limited, (iii)
Pacific Asia Petroleum (HK) Limited, (iv) Inner Mongolia Sunrise
Petroleum Co. Ltd., (v) Pacific Asia Petroleum Energy
Limited, (vi) Beijing Dong Fang Ya Zhou Petroleum Technology Service Company
Limited, and (vii) CAMAC Petroleum Limited (collectively, the
“Company”). This Proxy Statement also contains forward-looking
statements relating to the Oyo Field and the anticipated recovery of
hydrocarbons from the Oyo Field. These forward-looking statements are
based on management’s current expectations, estimates and projections about the
petroleum, chemicals, and other energy-related industries. In our capacity
as Company management, we may from time to time make written or oral
forward-looking statements with respect to our long-term objectives or
expectations which may be included in our filings with the Securities and
Exchange Commission (the “SEC”), reports to stockholders and information
provided in our web site.
The words
or phrases “will likely,” “are expected to,” “is anticipated,” “is predicted,”
“forecast,” “estimate,” “project,” “plans to continue,” “believes,” or similar
expressions identify “forward-looking statements.” Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. We wish to caution you not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made. We are calling to your attention important
factors that could affect our financial performance and could cause actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
The following list of important factors
may not be all-inclusive, and we specifically decline to undertake an obligation
to publicly revise any forward-looking statements that have been made to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events. Among the factors
that could have an impact on our ability to achieve expected operating results
and growth plan goals and/or affect the market price of our stock
are:
|
·
|
We
may not realize the intended benefits of the Transaction if the revenues
and cash flows from the PSC are not as
projected.
|
|
·
|
Our
exposure to security and political risks associated with operations in the
Federal Republic of Nigeria.
|
|
·
|
Lack
of operating history in Nigeria, operating revenue, cash flows or earnings
history.
|
|
·
|
Risks
and uncertainties associated with exploration, development and production
of oil and natural gas, drilling and production
risks.
|
|
·
|
Our
ability to successfully integrate and operate acquired or newly formed
entities and multiple foreign energy ventures and
subsidiaries.
|
|
·
|
Fluctuation
in quarterly operating results and seasonality in certain of our
markets.
|
|
·
|
Possible
significant influence over corporate affairs by significant stockholders,
such as CAMAC.
|
|
·
|
Our
ability to enter into definitive agreements to formalize foreign energy
ventures and secure necessary exploitation
rights.
|
|
·
|
Our
ability to raise capital to fund our
operations.
|
|
·
|
Competition
from large petroleum and other energy
interests.
|
|
·
|
Expropriation
and other risks associated with foreign
operations.
|
|
·
|
Dependence
on key personnel.
|
|
·
|
Changes
in laws and regulations that affect our operations and the energy industry
in general.
|
|
·
|
Risks
associated with anticipated and ongoing third party pipeline construction
and transportation of oil and natural
gas.
|
|
·
|
The
lack of availability of oil and natural gas field goods and
services.
|
|
·
|
Environmental
risks and economic conditions.
|
For a discussion of certain significant
matters that you should consider before voting on the Proposals, please read
“Risk Factors Associated With The Transaction” beginning on page 37 of this
Proxy Statement.
QUESTIONS
AND ANSWERS ABOUT THE TRANSACTION
Following
are some commonly asked questions that may be raised by our stockholders and
answers to each of those questions. The following questions and answers
regarding the proposed Transaction are not meant to be a substitute for the
information contained in the remainder of this Proxy Statement, and the
information contained in this summary is qualified in its entirety by the more
detailed descriptions and explanations contained in the later pages of this
Proxy Statement and the other annexes to this Proxy Statement. You are urged to
carefully read this entire Proxy Statement and accompanying documents carefully
prior to making any decision on how to vote your shares.
|
Q:
|
Why
am I receiving this Proxy Statement?
|
A:
|
To
consummate the Transaction, the Company’s stockholders must vote to adopt
and approve the Proposals. You are receiving this Proxy Statement in
connection with the solicitation of proxies to be voted at the Meeting for
this purpose, or at any adjournments, postponements or continuations of
such meeting.
You
should carefully read this Proxy Statement, including its annexes and the
other documents we refer to in this Proxy Statement, as they contain
important information about the Transaction, the Purchase Agreement and
the Meeting of the stockholders of the Company. The enclosed voting
materials allow you to vote your shares without attending the Meeting in
person.
Your
vote is very important. We encourage you to vote as soon as
possible.
|
|
Q:
|
What
is being voted on?
|
A:
|
You
are being asked to vote to approve and adopt the Purchase Agreement and
the transactions contemplated thereby, including, but not limited to, the
issuance to CAMAC, in consideration for the Contract Rights, of shares of
the Company’s common stock equal to 62.74% of the Company’s issued and
outstanding common stock after giving effect to the Transaction and the
Financing, all as described below and in the Purchase
Agreement.
|
|
Q:
|
Who
is CAMAC?
|
A:
|
CAMAC
International Limited is a privately-held, global energy corporation with
interests in the exploration and production of crude oil and natural gas
in West Africa and South America, engineering and consulting services, and
crude oil and refined products trading for markets in Africa, Europe,
North America and South America.
|
|
Q:
|
Will
I continue to be a stockholder of Pacific Asia Petroleum, Inc. after the
consummation of the Transaction?
|
A:
|
Yes.
After the consummation of the Transaction, you will continue to hold
shares of the Company and the Company will remain engaged in the
development, production and distribution of oil and
gas.
|
|
Q:
|
Why
is the Company proposing the Transaction?
|
A:
|
We
are proposing the Transaction because we believe that the acquisition of
the Contract Rights will deliver additional long-term value to our Company
and its stockholders. Additionally, our Board of Directors
unanimously concluded that the Transaction is advisable and in the best
interest of our company and its stockholders.
|
|
Q:
|
When is the Transaction
expected to be completed?
|
A:
|
The
Company is working to complete the Transaction as quickly as practicable.
However, we cannot predict the exact timing of the completion of the
Transaction because it is subject to certain conditions and approvals. We
expect to complete the Transaction on April 7, 2010, however, there can be
no assurance that the Transaction will be consummated on April 7, 2010, if
at all.
|
|
Q:
|
Will
my holdings in the Company be diluted as a result of the
Transaction?
|
A:
|
Yes.
Under the terms of the Transaction, as consideration for the Contract
Rights, we will issue to CAMAC Energy Holdings Limited shares of our
common stock equal to 62.74% of our issued and outstanding common stock
after giving effect to the Transaction and the Financing.
In
addition, the Company has already raised $37.5 million from qualified
investors through the sale of 5,000,000 shares of Company common stock in
an equity financing that closed on February 16, 2010, and an additional
4,146,922 shares of Company common stock in an equity financing that
closed on March 5, 2010 (as described in more detail in this Proxy
Statement) (together, the “Financing”). The Company’s stockholders do not
have any preemptive rights with respect to shares to be issued by us in
the future in connection with any additional equity
financing. For a detailed description of the material terms of
the Financing, please read “Registered Direct Offerings” on page
45 of this Proxy Statement.
Furthermore,
it is likely that we will issue in the future options to purchase shares
of the Company to attract, retain and reward our key directors, managers,
employees, consultants and service providers, an act that would be
dilutive to you as well.
|
|
Q:
|
Will
approval of the Proposals result in a Change of Control?
|
A:
|
Yes. As
a result of the consummation of the Transaction and effective immediately
upon its closing, the Company will experience a change of control, with
CAMAC owning 62.74% of the Company’s common stock after giving effect to
the Transaction and controlling the Company’s Board of Directors with four
designees on the Company’s seven person Board.
As a result,
among other things, CAMAC will have the ability to approve any matter
submitted to our stockholders where a simple majority vote is required to
obtain stockholder approval, whether such action is sought through a
special or annual meeting or through written
consent. Additionally, CAMAC will own and control enough shares
to elect our directors at annual meetings.
CAMAC
has agreed, for a one-year period following the Closing, to appear in
person (through a representative) or by proxy at any annual or special
meeting of the Company’s stockholders to vote the shares it receives in
consideration for the Contract Rights in favor of electing or removing
directors nominated by the PAPI Representatives (as defined in the
Purchase Agreement). For more information relating to the
voting agreement, please read “Summary of the Purchase Agreement –Voting
Agreement” on page 16 of this Proxy
Statement.
|
|
Q:
|
Did
the Board of Directors request or receive a fairness opinion in connection
with the Transaction?
|
A:
|
No. Our
Board of Directors did not request a fairness opinion as to whether the
Transaction was fair to the Company from a financial point of
view. Our Board of Directors did, however, evaluate and
consider a number of factors in determining that that this transaction is
advisable and in the best interest of the Company and its
stockholders.
For
a discussion of our Board of Director’s consideration of a fairness
opinion, please read “No Fairness Opinion” beginning on page 12 of this
Proxy Statement.
|
|
Q:
|
What do I need to do
now?
|
A:
|
We
urge you to carefully read this Proxy Statement, including its annexes and
the other documents we refer to in this Proxy Statement, consider how the
Transaction affects you, and then mail your completed, dated and signed
proxy card in the enclosed return envelope in accordance with the
instructions as soon as possible so that your shares can be voted at the
Meeting.
|
|
Q:
|
How
does the Company's Board of Directors recommend that I
vote?
|
A:
|
At
meetings held on November 13, 2009 and March 1, 2010, the
Company’s Board of Directors unanimously determined that the Purchase
Agreement and the transactions contemplated thereby are advisable and in
the best interests of the Company’s stockholders.
The Board of Directors
unanimously recommends that you vote “FOR” the approval of the Proposals
at the Meeting
.
|
| Q: | May I vote in person? | A: | Yes. If your shares are not held through a broker or bank you may attend the Meeting and vote your shares in person, rather than signing and returning your proxy card. If your shares are held through a broker or bank you must get a proxy from your broker or bank in order to attend the Meeting and vote in person. Even if you plan to attend the Meeting in person, we urge you to complete, sign, date and return the enclosed proxy to ensure that your shares will be represented at the Meeting. | |
| Q: | What happens if I sell my shares of the Company before the Meeting? | A: | The Record Date is earlier than the date of the Meeting. If you transfer your shares of the Company after the Record Date but before the Meeting, you will retain your right to vote at the Meeting, but will transfer ownership of the shares and will not hold an interest in the Company in respect of such shares after the Transaction is consummated. | |
| Q: | If my broker or bank holds my shares, will my broker or bank vote my shares for me? | A: | Your broker or bank will not be able to vote your shares without instructions from you. You should instruct your broker or bank to vote your shares following the procedure provided by your bank or broker. Without instructions, your shares will not be voted. | |
| Q: | What will happen if I abstain from voting or fail to instruct my broker to vote? | A: | An abstention or the failure to instruct your broker how to vote (also known as a broker non-vote) is not considered a vote cast at the Meeting with respect to the Transaction, and therefore your vote will have no effect on the vote relating to the Transaction. | |
| Q: | May I change my vote after I have voted? | A: |
Yes. You
may change your vote if your shares are registered in your name, in one of
the following three ways:
|
|
| ● |
First,
you can deliver to the Company a written notice bearing a later date than
the proxy you delivered to the Company, stating that you would like to
revoke your proxy, provided the notice is received no less than 48 (forty
eight) hours prior to the Meeting.
|
|||
| ● |
Second, you
can complete, execute and deliver to the Company, no less than 48 (forty
eight) hours prior to the Meeting.
|
|||
| ● |
Third, you can
attend the Meeting and vote in person.
|
|||
| Any written notice of revocation or subsequent proxy should be delivered to Corporate Secretary, Pacific Asia Petroleum, Inc., 250 East Hartsdale Ave., Suite 47, Hartsdale, New York 10530 at least 48 (forty eight) hours prior to the Meeting.If you have instructed a broker or bank to vote your shares, you must follow the directions received from your broker or bank to change your vote. | ||||
| Q: | What should I do if I receive more than one set of voting materials? | A: | You may receive more than one set of voting materials, including multiple copies of this Proxy Statement and multiple proxy cards or voting instruction cards. If you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a stockholder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive. | |
| Q: | Who can help answer my questions? | A: |
If
you would like additional copies, without charge, of this Proxy Statement
and/or its annexes, or if you have questions about the Transaction,
including the procedures for voting your shares, you should contact Issuer
Direct Corporation, our proxy solicitor, at (919)
481-4000.
|
|
PROPOSAL
1 AND PROPOSAL 2
APPROVAL
OF THE TRANSACTION AND THE ISSUANCE OF THE CONSIDERATION SHARES
On
November 18, 2009, the Company entered into a Purchase and Sale Agreement with
CAMAC Energy Holdings Limited and certain of its affiliates (together, “CAMAC”),
pursuant to which the Company agreed to acquire all of CAMAC’s interest in a
Production Sharing Contract with respect to that certain oilfield asset known as
the Oyo Field (the “Contract Rights”), for a purchase price of $38.84 million in
cash (the “Cash Consideration”) and shares of the Company’s common stock (the
“Consideration Shares”) equaling 62.74% of the Company’s issued and outstanding
common stock after giving effect to the transaction (the “Transaction”) and the
Financing (as defined below). For a detailed summary of the
material terms of the Purchase Agreement, please read “Summary of the Purchase
Agreement” beginning on page 15 of this Proxy Statement.
The
Proposals
At the
Meeting, the stockholders will be asked to vote on:
|
|
Proposal
1:
|
To
approve the Purchase Agreement between the Company and CAMAC, as described
in this Proxy Statement, pursuant to which the Company agreed to acquire
all of CAMAC’s interest in the Contract Rights, and the Transaction;
and
|
|
|
Proposal
2
:
|
To
approve the issuance by the Company to CAMAC of the Consideration Shares,
equal to 62.74% of the Company’s issued and outstanding common stock after
giving effect to the Transaction and the Financing, at the closing of the
Transaction as partial consideration for the acquisition by the Company of
the Contract Rights.
|
Reasons
for the Transaction
In
approving the Transaction and in recommending that the Company’s stockholders
approve the Purchase Agreement and the Transaction and issuance of the
Consideration Shares, the Company’s Board of Directors carefully considered a
number of factors, including, without limitation, the following factors which
the Company believes include all material factors:
|
·
|
information
concerning the Company’s size, resources, businesses, prospects, business
plans, financial performance and condition, results of operations, and
competitive positions;
|
|
·
|
industry
and financial due diligence investigation conducted by the Company’s
management, legal, technical and financial
advisors;
|
|
·
|
terms
of the Purchase Agreement and the other transaction documents, including
price and structure, which were considered by the Company’s Board of
Directors to provide a fair and equitable basis for the
Transaction;
|
|
·
|
independent
valuation of the Contract Rights conducted for the Company by Somerley
Limited, attached hereto as Annex
C;
|
|
·
|
presentation
and related materials delivered by CAMAC to representatives of the
Company;
|
|
·
|
the
Company Update on March 1, 2010 of the Somerley Report dated July 17,
2009, and update on pro forma financial projections, attached hereto as
Annex D;
|
|
·
|
the
fact that CAMAC’s partner and operating contractor under the production
sharing contract for the Oyo Field is ENI Agip, one of the largest energy
companies in the world;
|
|
·
|
potential
benefits of the Transaction’s structure as an acquisition of CAMAC’s
interest under a production sharing contract rather than the acquisition
of a business, operations or
personnel;
|
|
·
|
potential
impact of the Transaction on the Company in light of the current state of
the Company’s operations, projections and business
prospects;
|
|
·
|
potential
short- and long-term opportunities provided by the Contract Rights being
acquired; and
|
|
·
|
current
financial market conditions and historical stock market prices, volatility
and trading information.
|
The Board
of Directors also considered countervailing factors such as the:
|
·
|
risk
that the potential benefits sought in the Transaction of the Contract
Rights might not be fully realized;
|
|
·
|
lack
of a recent independent reserve engineering report covering the Oyo
Field;
|
|
·
|
potential
negative effect on the Company’s stock price associated with public
announcement of the proposed
Transaction;
|
|
·
|
substantial
dilution in the percentage ownership interest of the stockholders in the
Company;
|
|
·
|
impact
of having a large number of our shares held by a single stockholder, such
as CAMAC;
|
|
·
|
potential
dilutive effect on the Company’s common stock price if revenue
and earnings expectations for the Contract Rights are not met;
and
|
|
·
|
other
risks and uncertainties discussed under “Risk Factors Associated With The
Transaction.”
|
The Company’s Board of Directors also
considered the valuation of the Contract Rights in relation to the 62.74%
interest in the Company to be delivered to CAMAC as equity consideration in the
Transaction. The Company initially negotiated and agreed upon the
consideration to be paid for the Contract Rights on September 1, 2009 in the
Memorandum of Understanding entered into with CAMAC (the “MOU”), pursuant to
which the Company and CAMAC agreed upon an approximate valuation of the
unburdened Contract Rights at such time of $198.84 million, and agreed that the
equity component of the consideration to be paid by the Company to CAMAC would
equal exactly 62.74% of the Company’s issued and outstanding capital stock after
giving effect to the Transaction and the Financing. The value of such
equity consideration at that time equaled approximately $160 million, assuming a
deemed fair market value of the Company’s common stock at $2.25 per share, which
reflected approximately a 15% premium over the Company’s 30-day average trailing
closing price prior to such date. Subsequent to the September 1, 2009
entry into the MOU and the Company announcement of the Transaction, the
Company’s common stock closing price rose from $2.30 per share on September 1,
2009 to $5.56 per share on November 13, 2009, with a closing price per share of
$3.85 on March 18, 2010.
The Company’s Board of Directors
discussed at length the value of the 62.74% interest in the Company to be issued
to CAMAC upon consummation of the Transaction and its increase since the signing
of the MOU on September 1, 2009, and considered the impact that the September 4,
2009 public announcement of the Transaction and the recent increases to the
price of oil may have made on the Company’s stock price. After an
extensive discussion, and acknowledgement that, among other things, (i) the
price of oil has increased significantly, which correspondingly increases the
value of the Contract Rights under the Company’s valuation models and is
supported by such models as adjusted to reflect the increased oil prices, and
(ii) the Board believes that the Company’s increased stock price is in large and
substantial part due to the public announcement of the pending Transaction and
the market’s anticipation of its consummation, the Board of Directors concluded
that the 62.74% stock consideration proposed to be issued to CAMAC in the
Transaction is reasonable and in the best interests of the Company and its
stockholders.
The Company’s Board of Directors also
carefully considered the Transaction from the perspective of Company management,
culture, strategic positioning and stockholder value.
The Board also
considered:
|
·
|
the
status of the Company’s current operations, projections and business
prospects and the potential effect of a change of control on such
operations and business prospects, and CAMAC’s indications that it had no
present intention of changing Company management or discontinuing its
existing operations in China;
|
|
·
|
the
obligations CAMAC would have post-closing to the Company’s minority
stockholders and approval and disclosure obligations under Delaware law
with respect to potential future related party transactions involving
other CAMAC entities and opportunities;
and
|
|
·
|
the
intangible value that consummating the Transaction might have, including
enhancement of the Company’s position and perception in China and
potential to be perceived by the Chinese government as a legitimate global
player.
|
The Company’s Board of Directors also
reviewed and discussed the consolidated pro forma cash flow projections prepared
by the Company (selected data from which is included in Annex D attached
hereto), and considered the potential value that immediate cash flows from the
Oyo Field could deliver to the Company and its stockholders over the
long-term.
In view
of the variety of factors considered in connection with its evaluation of the
Transaction, the Company’s Board of Directors did not find it practical to, and
did not quantify or otherwise attempt to, assign relative weight to the specific
factors considered in reaching its conclusions. Additionally, the Company’s
Board of Directors did not undertake to make any specific determination as to
whether any particular factor, or any aspect of any particular factor, was
favorable or unfavorable to its ultimate determination, but rather conducted an
overall analysis of the factors described above. In considering the factors
described above, individual members of the Board of Directors may have given
different weight to different factors. After taking into account all of the
factors set forth above, the members of the Company’s Board of Directors
concluded that the Purchase Agreement and the related Transaction were advisable
and in the best interests of the Company and its stockholders and that the
Company should proceed with the Transaction.
In addition, at its meeting held on
March 1, 2010, the Company’s Board of Directors reviewed and analyzed the
Company’s valuation models updated and revised based on actual production
performance data received from the two currently producing Oyo Field wells, the
fluctuating price of oil and projections made on the future price of oil, and
new trade comparables. At this meeting, the Board also discussed the
potential positive impact the drilling of additional production wells within the
Oyo Field is expected to have on the current production numbers if additional
wells are drilled and the negative impact that would result if no additional
wells are drilled. In consideration of the updated valuation models,
the Board confirmed that the 62.74% stock consideration proposed to be issued to
CAMAC in the Transaction is reasonable and in the best interests of the Company
and its stockholders.
For a detailed discussion of the
valuation process, please read “Valuation of Contract Rights” beginning on page
29 of this Proxy Statement.
No
Fairness Opinion
The Board
of Directors did not request or receive a fairness opinion with respect to
whether the Transaction is fair to the Company from a financial point of
view. Because of the absence of a fairness opinion, there can
be no independent assurance from an expert to the Board of Directors that the
Transaction is fair from a financial point of view to the Company or its our
stockholders.
The Company was advised by Somerley
Limited and Ernst & Young in connection with evaluating the Transaction, but
did not request or receive an opinion. The Company has already incurred
approximately $145,500 in fees and expenses due and owing to Somerley Limited
and Ernst & Young for their advice to date, and the Company estimates the
cost of a fairness opinion would be at least an additional $50,000 and could
take four
to six weeks to
obtain. The Board of Directors of the Company does not believe that obtaining
such an opinion would be an appropriate use of corporate funds, considering the
limited financial resources of the Company, and the Board of Directors of the
Company believes that the Transaction is fair and in the best interests of the
Company and its stockholders.
No
Recent Independent Reserve Engineering Report
The most recent independent reserve
engineering report considered by the Board of Directors is the Estimate of
Reserves and Future Reserves report prepared for Allied Energy Corporation by
Netherland, Sewell & Associates, Inc., dated May 1, 2008. The
Board of Directors of the Company did not request a more recent independent
reserve engineering report from Netherland, Sewell & Associates, Inc. in
evaluating the Transaction.
Background
and Negotiations Related to the Transaction
The
Company is a U.S. publicly-traded energy company engaged in the development,
production and distribution of oil and gas and is focused on early cash flow,
high return projects. The Company controls the rights to significant gas acreage
under contract in China and is involved with several energy companies with
respect to high-value oil fields in China. The Company was founded in
2005 by a group of senior Texaco executives and is led by President and CEO
Frank C. Ingriselli. The Company is headquartered in Hartsdale, New
York, and also has offices in Beijing, China.
In
December 2005, Frank Ingriselli and Dr. Kase Lawal, the Chairman of CAMAC, met
for the first time in Houston, Texas to discuss a possible investment by CAMAC
in Inner Mongolia Production Company LLC (“IMPCO”), the predecessor-in-interest
to the Company. A non-disclosure agreement was signed between the
companies and more information was exchanged and evaluated regarding not only a
possible investment by CAMAC in IMPCO, but also the possibility of doing an
initial public offering on the London Stock Exchange (“LSE”). The strategy at
that time was that IMPCO would be absorbed into the CAMAC LSE-listed company,
and Mr. Ingriselli and IMPCO’s senior management team would continue in their
executive positions for the new LSE-listed CAMAC company.
Over the
ensuing months, Mr. Ingriselli and IMPCO’s Chief Financial Officer, Stephen
Groth, made a number of trips to CAMAC’s offices in Houston, Texas and London,
England on behalf of IMPCO to discuss the opportunity with CAMAC and its
advisors. Investment banks and other advisors were engaged by the parties to
evaluate this opportunity. The discussions and negotiations between the parties
continued throughout the first half of 2006. Following extensive evaluations and
discussions by the parties during this period, and due in part to the changing
market conditions both for the energy industry and the equity markets in London,
it was mutually decided by the parties to withdraw from consideration a possible
exchange listing and the contemplated acquisition of IMPCO by
CAMAC.
The
Company and CAMAC, however, continued to explore avenues for a mutually
acceptable combination of the parties. These efforts included several meetings
between representatives of CAMAC and the Company in China in 2006 wherein they
explored potential combinations including some of the major Chinese energy
companies. The Company believed that these combinations would benefit its
developing business operations in China, and could provide additional capital to
the Company to pursue its business strategy.
During
this period of time and through May 2007, the Company was also pursuing other
business strategies to bring additional capital into the Company in order to
aggressively develop a coal bed methane business, which included the possible
acquisition of certain properties held by ChevronTexaco in
China. These ongoing discussions with CAMAC were discontinued in May
2007 upon the consummation by the Company of the Mergers and $17 million private
offering as described in “The Company’s Business – Organization” and “The
Company’s Business – The Mergers” below, through which the Company emerged as
the surviving entity named “Pacific Asia Petroleum, Inc.”
Following
the Company’s Mergers in May 2007, Mr. Ingriselli and Dr. Lawal of CAMAC resumed
discussions regarding the possible reverse merger of the CAMAC group into the
newly-public Pacific Asia Petroleum, Inc., but no combination between the
Company and CAMAC was pursued at such time.
Between
2005 and 2007 while CAMAC and IMPCO, and then CAMAC and the Company, were in
discussions regarding potential combinations between the companies, CAMAC, with
its partner ENI Agip of Italy, continued their development operations with
respect to the Oyo Field discovery offshore Nigeria. Meanwhile, CAMAC and the
Company continued to explore possible joint ventures with respect to the Oyo
Field that CAMAC and the Company could pursue. Several more meetings between the
Company and CAMAC took place during the period of May 2007 and early
2008. However, no venture between the parties was pursued during the
period. Thereafter, both the Company and CAMAC continued to seek to execute on
their respective corporate strategies and business plans, while Mr. Ingriselli
and Dr. Lawal continued to maintain frequent contact regarding possible
cooperative ventures and combinations between the companies.
In April
2009, Dr. Lawal and Mr. Ingriselli met again several times in New York and
Houston to discuss the re-opening of formal discussions between the companies
regarding a possible combination. The proposed transaction became more
attractive to CAMAC as the price of the Company’s publicly-traded common stock
had fallen to approximately $0.50 per share. Discussions and negotiations
between the companies continued and it became clear that the best strategy for
the stockholders of the Company and for CAMAC would be a simpler venture whereby
the Company would only acquire one of the assets of CAMAC, its interest in the
Oyo Field under a production sharing contract. For several years the Company had
followed the progress CAMAC had made toward the commercialization of the Oyo
Field, and it was now near the final stages where commencement of production was
imminent.
Following
these discussions between CAMAC and the Company in April 2009, the Company
assembled its management team and legal, financial, technical and operational
advisors to conduct extensive due diligence review and evaluation of the Oyo
Field asset and related contracts. This was done internally by using our
financial, modeling, legal, technical and operating expertise, and was also done
by securing the expertise of outside advisors, including Hong Kong-based
financial advisor Somerley Limited to prepare an independent valuation of the
Oyo Field asset. Based on all of these studies and analyses both inside and
outside the Company, and after numerous discussions and meetings with the Board
of Directors of the Company, the Company and CAMAC reached a mutually agreed
price for the acquisition of CAMAC’s interests in the Oyo Field asset. This
price was below the valuation the Company obtained from Somerley Limited and the
Company’s own internal valuations. The Company also successfully negotiated with
CAMAC a deemed price per share of the Company’s common stock significantly above
the price per share the Company’s publicly-traded stock was trading when
negotiations with CAMAC commenced in earnest in April 2009 (approximately $0.50
per share), and at an approximately 15% premium to the 30 day volume weighted
average selling price of the Company’s common stock prior to entering into the
MOU which was signed on September 1, 2009 between the Company and
CAMAC.
Following
execution by the Company and CAMAC of the MOU on September 1, 2009, the Company
continued with its due diligence activities, including technical and operating,
financial, international and domestic legal and tax, and other relevant due
diligence. Messrs. Ingriselli and Groth traveled to Lagos, Nigeria to
meet with Nigerian-based CAMAC personnel and various Company advisors, including
Ernst & Young and the Company’s local Nigerian legal counsel, Aluko &
Oyebode. Somerley Limited and Ernst & Young assisted with the
Company’s financial due diligence, Ernest & Young assisted with the
Company’s international financial and tax due diligence, Pillsbury Winthrop Shaw
Pittman LLP advised the Company regarding U.S. legal and U.S. and international
legal and tax matters, and Aluko & Oyebode advised the Company regarding
Nigeria legal and tax matters and related due diligence, and assisted in the
formation of the Company’s Nigerian subsidiary. Additional advice and
guidance was received by Mr. Ingriselli through numerous meetings with
representatives from other energy companies operating in Nigeria and financial
institutions active in funding Nigerian projects. In addition, Mr.
William Dozier, an independent director on the Company’s Board of Directors,
conducted a technical and operating due diligence review of the Oyo Field asset
at CAMAC’s offices located in Houston, during which Mr. Dozier attended meetings
with CAMAC’s technical and operating group. Throughout the Company’s due
diligence process, Company management provided the Company’s Board of Directors
detailed updates and results of the Company’s various due diligence efforts, and
extensive discussions were held to analyze the data.
In
carrying out the due diligence, numerous meetings and discussions took place on
almost a daily basis between representatives of CAMAC and the Company in person,
by e-mail and on the phone from locations in New York, Houston, California and
Lagos, Nigeria. Through the Company’s due diligence process, the
Company confirmed its decision to proceed with the transaction as a purchase of
assets as a preferred structure that could afford protection against certain
unknown liabilities and enhance value to the Company and its
stockholders.
On November 13, 2009, the Company held a
special meeting of its Board of Directors to discuss the terms of the Purchase
Agreement and the Transaction. The meeting was attended by all but one member of
the Board of Directors of the Company. After discussion and considering various
issues, the Board of Directors voted unanimously to approve the Transaction. The
Board of Directors then directed management to complete the negotiations with
CAMAC’s management, and to execute the Purchase Agreement, with such changes as
deemed necessary and advisable by management of the Company.
On November 18, 2009, the Purchase
Agreement and related documents were executed and delivered, with no material
changes to the draft of the Purchase Agreement as reviewed and approved by the
Board of Directors.
On November 23, 2009, the Company and CAMAC issued a public announcement of the
Transaction.
Subsequent to the signing of the
Purchase Agreement, CAMAC has had several meetings with members of the Company’s
management team and the Chairman of the Company's Technical Operating Committee,
wherein CAMAC provided the Company with certain updates regarding engineering
information, reserve estimates, production performance, and future plans with
respect to the Oyo Field, which information the Company has considered and
integrated, as appropriate, into its updated cash flow models.
On March
1, 2010, the Company held a special meeting of its Board of Directors to review
and analyze the Company’s valuation models updated and revised based on actual
production performance data received from the two currently producing Oyo Field
wells, the fluctuating price of oil and projections made on the future price of
oil, and new trade comparables. The meeting was attended by all the
members of the Board of Directors of the Company. At this meeting, the Board
also discussed the potential positive impact the drilling of additional
production wells within the Oyo Field is expected to have on the gross
production numbers from where they are today and the negative impact that would
result if no additional wells are drilled. The Board of Directors
agreed that the estimated current value of the Contract Rights was between $326
million and $193 million, and that the $198.84 million value the Company and
CAMAC originally ascribed to the Contract Rights under the MOU ($160 million
payable in equity, $38.84 payable in cash) was within the updated valuation
range. The Board again acknowledged that subsequent to the September
1, 2009 entry into the MOU and the Company announcement of the Transaction, the
Company’s common stock closing price rose from $2.30 per share on September 1,
2009 to $5.56 per share on November 13, 2009, with a closing price per share of
$3.85 on March 18, 2010, and believed that, among other things, (i) the price of
oil has increased significantly, which correspondingly increases the value of
the Contract Rights under the Company’s valuation models and is supported by
such models as adjusted to reflect the increased oil prices, and (ii) the Board
believes that the Company’s increased stock price is in large and substantial
part due to the public announcement of the pending Transaction and the market’s
anticipation of its consummation. In consideration of these factors
and the updated valuation models, the Board unanimously agreed that the 62.74%
stock consideration proposed to be issued to CAMAC in the Transaction and the
$38.84 million cash consideration to be paid to CAMAC in the Transaction is
reasonable and in the best interests of the Company and its stockholders, and
again approved the Transaction. In addition, at this meeting the
Board set the Record Date, time and location for the Company’s stockholder
meeting to approve the Proposals.
SUMMARY
OF THE PURCHASE AGREEMENT
The
following is a brief summary of the some of the material terms of the Purchase
Agreement. This summary does not purport to be complete, and is qualified in its
entirety by reference to the text of the Purchase Agreement, which is attached
to this Proxy Statement. The Purchase Agreement is the legal document
that governs the Transaction, including the purchase and sale of the Contract
Rights. To better understand the Transaction, you should read
carefully this Proxy Statement and the other documents to which this Proxy
Statement refers you, including the Purchase Agreement.
On November 18, 2009, Company entered
into the Purchase Agreement with CAMAC, as amended on March 4,
2010. The Purchase Agreement provides that, among other things: (A)
CAMAC will transfer to CAMAC Petroleum Limited, a newly formed Nigerian entity
wholly owned by the Company (“Newco”), all of CAMAC’s rights and interest in a
Production Sharing Contract (the “PSC”) with respect to that certain oilfield
asset known as the Oyo Field (the “Contract Rights”); and (B) in exchange
for the Contract Rights, the Company will pay CAMAC $38.84 million in cash
(subject to certain adjustments), and issue common stock to CAMAC equal to
62.74% of the Company’s issued and outstanding common stock (the “Consideration
Shares”), after giving effect to the Transaction and the Financing.
|
Companies
involved in the Transaction:
|
|
The
Company, Newco, CAMAC Energy Holdings Limited, a Cayman Islands company
(“CEHL”); CAMAC International (Nigeria) Limited, a company incorporated in
the Federal Republic of Nigeria (“CINL”) and a wholly-owned subsidiary of
CEHL; and Allied Energy Plc (formerly, Allied Energy Resources Nigeria
Limited), a company incorporated in the Federal Republic of Nigeria and a
wholly-owned subsidiary of CEHL (“Allied”).
|
|
Contract
Rights:
|
|
All
of CINL and Allied’s interest in the PSC with respect to that certain
oilfield asset known as the Oyo Field, that is located on Oil Mining Lease
120, as well as the joint and several obligations of CINL and Allied to
NAE under the PSC in connection with the Oyo Field, subject to the rights
and obligations set forth in the PSC and the Oyo Field Supplemental
Agreement (as defined in the Purchase Agreement).
|
|
Purchase
Price:
|
|
$38.84
million in cash (subject to certain adjustments), $32 million of which
shall be paid by the Company to CAMAC at Closing, with the balance due of
$6.84 million payable post-Closing on the earlier of sufficient
receipt of oil proceeds from the Oyo Field or six months from the Closing
Date, and common stock equal to 62.74% of the Company’s issued and
outstanding common stock (the “Consideration Shares”) after giving effect
to this Transaction and the Financing.
On
February 16, 2010, the Company raised $20 million from qualified investors
through the sale of 5 million shares of Company common stock in an equity
financing, and on March 5, 2010, the Company raised an additional $17.5
million from qualified investors through the sale of 4,146,922 shares of
Company common stock in an equity financing. For a detailed
discussion of the equity financings, please read “Registered Direct
Offerings” on page 45 of this Proxy Statement.
As
of March 5, 2010, the Company had cash, cash equivalents and short-term
investments of approximately $38.937 million (unaudited), which is
sufficient to fund the $32 million Cash Consideration amount due upon
Closing of the Transaction and fund all of the Company’s current committed
operations through 2011. The balance $6.84 million due to CAMAC
post-Closing is anticipated to be paid from proceeds received by the
Company under the PSC in connection with the Oyo
Field.
|
|
Assumed
Liabilities:
|
|
Except as otherwise provided for in the Novation Agreement (discussed below) the Company will not assume, and will expressly disclaim any and all CAMAC liabilities, costs, debts, claims and obligations relating to the Contract Rights or otherwise. | |
|
Novation
Agreement:
|
|
The Contract Rights will be assigned and assumed pursuant to a Novation Agreement, by and among Allied, CINL, Newco and NAE, to be entered in by the parties. The Novation Agreement will include a waiver pursuant to which NAE waives the enforcement of certain provisions of the PSC relating to the allocation of profit sharing allocation. | |
|
Right
of First Refusal:
|
For five years after the closing of the Transaction (the “Closing”), the Company will have a right of first refusal with respect to any upstream oil and gas assets, licenses or rights currently held or arising and inuring to CAMAC, which it offers for sale, transfer, license or other disposition, other than in the ordinary course of business, pursuant to the terms and conditions of a Right of First Refusal Agreement to be entered in by the parties. | ||
|
Registration
Rights Agreement:
|
The
Company will register for resale, on Form S-3, from time to time, the
Consideration Shares issued to CAMAC as consideration for the Contract
Rights, pursuant to a registration rights agreement to be entered into by
the parties at Closing.
|
||
| Material Closing Conditions: |
The
Transaction is subject to the satisfaction of customary and other
conditions to Closing, including, without
limitation:
|
||
| ● | the negotiation and entry by the parties into certain other agreements as set forth in the Purchase Agreement in forms reasonably satisfactory to the parties; and | ||
|
|
|
● |
the
approval of the Company’s stockholders of the Purchase Agreement and the
transactions contemplated thereby.
|
|
Voting
Agreement:
|
CAMAC has agreed, for a one-year period following the Closing, to appear in person (through a representative) or by proxy at any annual or special meeting of the Company’s stockholders to vote the shares it receives in consideration for the Contract Rights in favor of electing or removing directors nominated by the PAPI Representatives (as defined in the Purchase Agreement), provided that any persons nominated by the PAPI Representatives must be reasonably acceptable to a majority of the Board of Directors or a majority of the members of the nominating and corporate governance committee. | ||
| Termination Events: |
The
Purchase Agreement may be terminated by mutual written consent of the
Parties or as follows:
|
||
| ● | by any Party, if the Closing has not occurred by the later of (i) April 7, 2010 or (ii) such other date that has been agreed by the Parties; | ||
| ● | by CAMAC, if there has been a breach by the Company of any representation, warranty, covenant or agreement contained in the Purchase Agreement which has prevented CAMAC from satisfying its closing obligations (if the violation or breach has not been waived by CAMAC or cured by the Company within ten (10) business days following notice); | ||
| ● |
by
the Company if there has been a breach by the CAMAC of any representation,
warranty, covenant or agreement contained in the Purchase Agreement which
has
prevented
the Company from satisfying its closing obligations (if the violation or
breach has not been waived by the Company or cured by CAMAC within ten
(10)
business
days following notice); or
|
||
| ● |
by
either the Company or CAMAC if the Transaction is not approved and adopted
by the Company’s stockholders at the
Meeting.
|
||
|
Cash Consideration
Adjustment:
|
The
portion of the Cash Consideration ($6.84 million) payable by the Company
to CAMAC following the Closing of the Transaction shall be decreased by an
amount equal to the amount, if any, of payments CAMAC receives for its
allocation of Cost Oil and Profit Oil (each as defined in the PSC) prior
to the Closing with respect to any petroleum operations conducted on the
Oyo Field.
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|
|
Liquidated
Damages:
|
In
the event of certain termination events, the party responsible for the
termination will be obligated to pay the non-breaching party damages in
the amount of Five Hundred Thousand Dollars ($500,000) immediately upon
such termination.
|
|
|
Company
Representations,
Warranties
and
Covenants:
|
Customary
representations, warranties and covenants.
|
|
|
Indemnification
Obligations:
|
Each
party has agreed to indemnify the other party for losses, costs, expenses
or damages resulting from any breach of a representation, warranty or
agreement set forth in the Purchase Agreement and to defend the other
party against any third party claim or litigation in certain
circumstances.
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|
|
Other
Terms
and
Conditions:
|
See
questions and answers set forth
above.
|
Ancillary
Agreements
Technical
Services Agreement
At the Closing of the Transaction,
Newco and Allied Energy PLC (“Allied”), an affiliate of CAMAC, will enter into a
Technical Services Agreement (the “Service Agreement”) pursuant to which Allied
will continue to perform similar services as it currently provides to CAMAC with
respect to the Oyo Field to facilitate the post-transfer ownership and operation
of the Contact Rights of the Company. Pursuant to the Services
Agreement, there will be no charge or service fee for the services provided by
Allied, except for reimbursement of Allied by Newco for (i) Allied’s
out-of-pocket costs and expenses incurred by Allied in connection with
performing the services, and (ii) Allied’s actual direct overhead and allocated
indirect overhead costs incurred with respect to providing or performing the
services. In addition, following the Closing and due and payable from proceeds
received by the Company under the PSC, the Company shall pay to Allied an amount
to be determined by the parties prior to Closing based on expenses incurred by
Allied pre-Closing as reimbursement of costs and expenses incurred by Allied in
connection with performing the services prior to Closing for which the Company
receives the benefit through post-Closing payments under the PSC.
The
charges under the Service Agreement have not yet been agreed upon, so there is
uncertainty at this point as to how significant such charges may be and
therefore could have an impact on the financial projections of the Company.
The
Service Agreement will have an initial term of five years, but will be
terminable upon 30 days’ prior written notice by Newco.
Oyo
Field Agreement
At the Closing of the Transaction, the
Company and CAMAC will enter into an Oyo Field Agreement (the
“
Oyo Field
Agreement
”
)
pursuant to which (i) CAMAC will agree to indemnify and hold harmless Newco from
any negative effect on Newco
’
s share of Profit
Oil (as defined in the PSC) from the Oyo Field that may result from future
operating costs from areas on OML 120 and/or OML 121 that are outside of the Oyo
Field, and (ii) Newco shall be granted certain management, notice and
documentation rights to maintain orderly supervision, direction, and control of
matters pertaining to the Petroleum Operations, Work Programme and Budget (each
as defined in the PSC) as it relates to the Contract Rights. In
addition, pursuant to the Oyo Field Agreement, the parties will agree that to
the extent any non-Oyo Field operating costs incurred prior to the date of the
Oyo Field Agreement exceed $80,000,000, Allied shall indemnify and hold Newco
harmless from and against any diminution in the sum of Newco
’
s allocation of
Profit Oil and Cost Oil from the Oyo Field from what would have otherwise been
allocated to Newco in the absence of such prior non-Oyo Field operating costs in
excess of $80,000,000. The Oyo Field Agreement shall expire at such
time as the Oyo Field has been abandoned and all applicable filing and reporting
requirements relating to Newco
’
s interest in the
Oyo Field have been satisfied or are no longer applicable.
Right
of First Refusal Agreement
At the Closing, CAMAC and the Company
will enter into a Right of First Refusal Agreement (the “ROFR Agreement”)
pursuant to which, for a period of five years following the Closing, CAMAC will
grant to the Company a right of first refusal with respect to any and all
licenses, leases and other contract rights for the exploration or production of
oil or natural gas currently held by or hereafter acquired by or arising and
inuring to CAMAC that CAMAC offers for sale, transfer, license or other
disposition, other than such sales that occur in the ordinary course of
business, subject to certain terms and conditions as set forth in the ROFR
Agreement.
Registration
Rights Agreement
At the Closing, the Company and CAMAC
shall enter into a Registration Rights Agreement (the “Registration Rights
Agreement”), pursuant to which the Company shall prepare and file with the SEC a
registration statement on Form S-3 covering the resale of the Consideration
Shares (the “Registration Statement”) issuable to CAMAC at the Closing, in
addition to providing certain “piggyback” registration rights to CAMAC with
respect to the Consideration Shares, in each case subject to certain limitations
and conditions. If the Company fails to have the Registration
Statement declared effective by a date to be determined by CAMAC and the
Company, then certain penalties may be imposed against the Company.
Material Tax Consequences to the
Company and its Stockholders
The
Transaction standing alone is not expected to result in any material tax
consequences to the Company or the Company’s stockholders for United States or
Nigerian income tax purposes. This expectation does not address or consider tax
consequences that may vary with, or are contingent on, individual circumstances.
Moreover, it does not address any non-income tax or any other foreign, state, or
local tax consequences of the Transaction. Tax matters are very complicated, and
the tax consequences of the Transaction to you will depend upon the facts of
your particular situation. Accordingly, the Company strongly urges you to
consult with a tax advisor to determine the particular federal, state, local or
foreign income or other tax consequences to you of the Transaction.
Interest
of Officers and Directors in Matters to Be Acted Upon
As
disclosed above, the Purchase Agreement provides that three of the Company’s
current directors will continue on in their positions on the Company’s Board of
Directors and the balance of the directors will resign to make room for four
directors to be nominated by CAMAC. Current Company directors Frank Ingriselli,
William E. Dozier, and James F. Link, Jr. will continue on as directors of the
Company following the closing of the Transaction.
As
directors of the Company, Messrs. Ingriselli, Dozier and Link owe certain
fiduciary duties to the Company. The Company expects that Messrs. Ingriselli,
Dozier and Link will honor these duties; however, such duties could conflict (or
have the appearance of a conflict) with their personal interests in their
continued positions. Additionally, Messrs. Ingriselli, Dozier and Link are
stockholders in the Company and thus have the ability to vote their shares in
favor of the Transaction.
Regulatory
Matters
As an
NYSE Amex-listed company, the Company is subject to Sections 712 and 713 of
the NYSE Amex Company Guide (the “Company Guide”) which require stockholder
approval for the issuance of additional shares of the Company’s common stock
under certain circumstances. Section 712 of the Company Guide provides that
an issuer is required to seek stockholder approval for the listing of additional
shares that are to be issued as consideration for an acquisition of stock or
assets of another company where the “present or potential issuance of common
stock or securities convertible into common stock could result in an increase in
outstanding common shares of 20% or more” (the “Acquisition Rule”). In addition,
Section 713 of the Company Guide provides that an issuer is required to
seek stockholder approval when “additional shares will be issued in a connection
with a transaction involving the sale, issuance, or potential issuance by the
issuer of common stock (or securities convertible into common stock) at a price
less than the greater of book value or market value which equals 20% or more of
presently outstanding shares of common stock” (the “20% Rule”). The
Company is seeking stockholder approval of Proposal 2 to be able to issue shares
of its common stock in excess of the Acquisition Rule and the 20%
Rule.
No other
approvals under U.S. or Nigerian law are required.
Third
Party Approvals
The
Transaction is subject to the receipt of NAE’s approval and execution of the
Novation Agreement.
DISCUSSION
OF THE OYO FIELD AND THE PSC
The
Oyo Field
The Oyo
Field is located approximately 75 miles off the Southern Nigerian coast in
deep-water and located on OML 120, an area governed by an Oil Mining Lease
awarded to affiliates of CAMAC in 2002 by the Federal Republic of
Nigeria.
CAMAC group holds a 60%
interest in OML 120, on which the Oyo Field is located, with the remaining 40%
held by the field’s operating contractor, Nigerian Agip Exploration Ltd (“NAE”),
a subsidiary of Italy’s ENI SpA (one of the world’s largest international energy
companies). The 60% interest held by the CAMAC Group and the 40%
interest held by NAE are not indicative of the manner in which proceeds from the
production of oil or other hydrocarbons from the Oyo Field are allocated under
the PSC. As a result, you should not assume that the Contract Rights
being transferred in connection with the Transaction will result in the Company
being entitled to 60% of the production from the Oyo Field. For a
detailed description of the manner in which production from the Oyo Field is
allocated, please read “Production Sharing Contract” beginning on page 25
of this Proxy Statement.
On December 15, 2009, NAE and CAMAC
announced that they had started the production of the Oyo Field, less than 2
years from the date of the Oyo Field’s initial sanctioning. The
initial two subsea production wells are in water depths of up to 400 meters, and
are connected to the Armada Perdana Floating Production Storage and Offloading
(“FPSO”) vessel. The FPSO has a treatment capacity of 40,000 barrels of
liquids per day (“bbl/d”) , with gas treatment and re-injection facilities, and
is capable of storing up to 1 million barrels of crude oil. The associated gas
will be re-injected into the Oyo Field reservoir by a third well, to prevent
flaring and to maximize oil recovery. CAMAC has reported to the
Company that production from the two producing wells has averaged between 12,000
bpd and 20,000 bbl/d since December 2009, and associated gas production has
been in excess of 15 million cubic feet per day. The current development
plan of the Oyo Field is for 10 years and consists of initially four wells: two
producer wells, one gas injection well and one water injection well to maintain
pressure. Gas injection is expected to occur in the next several
weeks. Additional production wells have been proposed and a third production
well may be drilled as early as the fourth quarter of 2010. With the
possible drilling of a third production well, average production in 2011 is
expected to possibly rise to between 23,000 and 25,000 bbl/d.
Overview
of the Nigerian Economy and Oil and Gas Industry
The
Nigerian Economy
Nigeria
is classified as an emerging market, and is rapidly approaching middle income
status, with its abundant supply of resources, well-developed financial, legal,
communications, transport sectors and stock exchange (the Nigerian Stock
Exchange), which is the second largest in Africa. Nigeria is ranked 37th in the
world in terms of GDP (PPP) as of 2007. Nigeria is the United States' largest
trading partner in sub-Saharan Africa and supplies a fifth of the U.S.’s
imported oil (11% of oil imports). It has the seventh-largest trade surplus with
the U.S. of any country worldwide. Nigeria is currently the 50th-largest export
market for U.S. goods and the 14th-largest exporter of goods to the U.S. The
United States is the country's largest foreign investor. The bulk of economic
activity is centered in four main cities: Lagos, Kaduna, Port Harcourt, and
Abuja. Beyond these four economic centers, development is marginal.
Nigerian
Oil and Gas Industry
According to Oil and Gas Journal
(“OGJ”), Nigeria had an estimated 36.2 billion barrels of proven oil reserves as
of January 2009. The majority of reserves are found along the country’s Niger
River Delta and offshore in the Bight of Benin, the Gulf of Guinea and the Bight
of Bonny. Current exploration activities are mostly focused in the deep and
ultra-deep offshore with some activities planned in the Chad basin, located in
the northeast of the country.
Nigeria is an important oil supplier to
the United States. Over half of the country’s oil production is exported to the
United States (see exports below) and the light, sweet quality crude is a
preferred gasoline feedstock. Consequently, disruptions to Nigerian oil
production impacts trading patterns and refinery operations in North America and
often affect world oil market prices.
Since December 2005, Nigeria has
experienced increased pipeline vandalism, kidnappings and militant takeovers of
oil facilities in the Niger Delta. The Movement for the Emancipation of the
Niger Delta (“MEND”) is the main militant organization attacking oil
infrastructure for political objectives, claiming to seek a redistribution of
oil wealth and greater local control of the sector. Additionally, kidnappings of
oil workers for ransom are also common and security concerns have led some oil
services firms to pull out of the country and oil workers unions threatening to
strike over security issues for their members.
The instability in the Niger Delta has
caused significant amounts of shut-in production and several companies declaring
force majeure on oil shipments. The U.S. Energy Information
Administration (“EIA”) estimates Nigeria’s effective oil production capacity to
be around 2.7 million barrels per day (bbl/d) but as a result of attacks on oil
infrastructure, 2008 monthly oil production ranged between 1.8 million bbl/d and
2.1 million bbl/d. Additional supply disruptions for the year were the result of
worker strikes carried out by the Petroleum and Natural Gas Senior Staff
Association of Nigeria (“PENGASSAN”) that shut-in 800,000 bbl/d of ExxonMobil’s
production for about 10 days in late April/early May.
In 2008, Nigerian crude oil production
averaged 1.94 million bbl/d, making it the largest crude oil producer in Africa.
If current shut-in capacity were to have been online, EIA estimates that
Nigerian production could have reached 2.7 million bbl/d in 2008. As a member of
the Organization of Petroleum Exporting Countries (“OPEC”), Nigeria has agreed
to abide by allotted crude production limits that have varied over the years but
do not appear to have an impact on production volumes or investment decisions to
the same degree as unrest in the Niger Delta.
The major foreign producers in Nigeria
are Shell, Chevron, ExxonMobil, Total, and Eni/Agip. Recent developments in the
upstream sector include the start up of the Chevron-operated Agbami field in
September 2008, with expected peak production of 250,000 bbl/d by the end of
2009.
Non-crude petroleum production was
about 230,000 bbl/d in 2008, bringing total oil production to 2.17 million bbl/d
for the year. This amount should increase in the short-term with Total’s Akpo
condensate field coming onstream in 2009 and expected to peak at 180,000
bbl/d.
In 2008,
Nigerian exported most of its 2.17 million bbl/d of oil production
(approximately 1.9 million bbl/d were exported). Of this, 990,000 bbl/d (44
percent) was exported to the United States, making Nigeria the 5th largest
foreign oil supplier to the United States. Over the past year, volatility in
Nigerian oil supplies has led some U.S. refiners to stop purchasing Nigerian
crudes.
Additional importers of Nigerian crude
oil include Europe (25 percent), Brazil (7 percent), India (11 percent) and
South Africa (4 percent). Despite shut-in production, Nigerian trade patterns
appear to have remained stable over the past year, most of which can be
attributed to capacity additions from the Chevron-operated Agbami oilfield in
September 2008 combined with slightly decreasing domestic consumption and
declining world demand.
Nigeria has six export terminals
including Forcados and Bonny (operated by Shell); Escravos and Pennington
(Chevron); Qua Iboe (ExxonMobil) and Brass (Agip) with deeper offshore
production being exported directly from the Floating Production Storage and
Offloading (“FPSO”) vessels. According to the Energy Intelligence Group’s
International Crude Oil Market Handbook, Nigeria’s export blends are light,
sweet crudes, with gravities ranging from API 29 – 47 degrees and low sulfur
contents of 0.05 – 0.3 percent. Most Nigerian crudes trade at a premium to
Brent, the North Sea benchmark crude.
Regulation
and Legislation in the Oil and Gas Industry in Nigeria
After the closing of the Company’s
acquisition from CAMAC of the Contract Rights with respect to the Oyo Field
located in Nigeria, the Company will also be subject to various regulations in
Nigeria. The following is a list of the primary Nigerian government
authorities that exercise control over various aspects of Nigeria’s oil and gas
industry:
|
·
|
The
Minister for Petroleum Resources, who is supported by 3 junior ministers
overseeing different aspects of the energy
sector.
|
|
·
|
The
National Assembly as the legislative arm of government is empowered to
pass legislation regarding petroleum matters, which are on the Exclusive
Legislative List.
|
|
·
|
The
Federal Ministry of Petroleum is responsible for formulating and
implementing Government policy.
|
|
·
|
The
Department of Petroleum Resources is the regulatory arm of the oil and gas
industry.
|
|
·
|
The
Ministry of Environment/The Federal Environmental Protection Agency was
established in 1988 (Decree No. 50) to protect, restore and preserve the
ecosystem of the Nigerian
environment.
|
|
·
|
The
Federal Inland Revenue Service is responsible for collection of royalties
and PPT on behalf of the Nigerian
Government.
|
The
primary petroleum legislation in Nigeria is the Petroleum Act of 1969, Section 1
of which provides that:
|
1.
|
The
entire ownership and control of all petroleum in, under or upon any lands
to which this section applies shall be vested in the
State.
|
|
2.
|
This
section applies to all land (including land covered by water) which “is in
Nigeria; or is under the territorial waters of Nigeria; or forms part of
the continental shelf; or forms part of the Exclusive Economic Zone of
Nigeria.”
|
The Petroleum Act of 1969 provides for
the grant by the Minister of Petroleum Resources of three types of interests –
exploration, prospecting and production rights.
|
1.
|
Exploration:
An
Oil Exploration License (“OEL”) is necessary to conduct preliminary
exploration surveys. The license is non-exclusive and is granted for a
period of one year. It is renewable
annually.
|
|
2.
|
Prospecting:
An
Oil Prospecting License (“OPL”) allows for more extensive exploration
surveys. It is an exclusive license given for a period not exceeding 5
years. It includes the right to take away and dispose of oil discovered
while prospecting. Presently Production Sharing Contracts (PSC) are
awarded to parties pursuant to a successful bid process. Under the PSC the
NNPC is the holder of the legal title to the OPL, while the participating
company (the contractor) carries out all operations on a sole risk basis.
Upon making a commercial discovery, the proceeds realized are shared
between the NNPC and the contractor pursuant to commercial terms set out
in the PSC.
|
|
3.
|
Production:
The grant of an Oil Mining Lease (“OML”) allows for full scale
commercial production once oil is discovered in commercial quantities
(currently defined as a flow rate of 10,000 bpd or above). The lease
confers the exclusive right to carry out prospecting, exploration,
production and marketing activities in and under the specified acreage for
a period of 20 years.
|
The Minister of Petroleum Resources
exercises general supervision over all operations carried on under licenses and
leases and may make regulations prescribing anything required to be done under
the Petroleum Act.
A draft Petroleum Industry Bill (“PIB”)
is currently undergoing legislative process at the Nigerian National Assembly.
The draft PIB seeks to introduce significant changes to legislation governing
the oil and gas sector in Nigeria, including new fiscal regulatory and tax
obligations and expanded fiscal and regulatory oversight that may impose
additional operational and regulatory burdens on operating contractors under
PSCs. See “Risks Related to the Transaction” below.
The
Oyo Field Oil Mining Lease (
“
OML 120
”
)
CAMAC is
a global energy services corporation. Its wholly owned subsidiary, Allied Energy
Plc (“Allied”), is a company focused on the upstream oil and gas exploration and
production activities in Nigeria.
Allied
was awarded a deep offshore OPL 210 on June 3, 1992 by the Ministry of Petroleum
Resources of Nigeria and assigned on September 30, 1992 an undivided 2.5%
interest in the OPL 210 to CINL, a subsidiary of CAMAC. After commercial
quantities of oil were identified in the OPL 210, Allied successfully converted
the OPL 210 into two OMLs: (1) the OML 120 and (2) and the OML 121,
each with a term of 20 years, commencing from February 27, 2001.
The Oyo
Field within OML 120 has an average water depth of approximately 400 meters. The
Oyo Field came on stream with production in December 2009. CAMAC has reported to
the Company that production from the two producing wells has averaged between
12,000 bpd and 20,000 bpd since December 2009 and associated gas production has
been in excess of 15 million cubic feet per day. Gas will be re-injected
into the field. The current development plan of the Oyo Field is for 10 years
and consists of initially four wells: two producer wells, one gas injection well
and one water injection well to maintain pressure. Gas injection is
expected to occur in the next several weeks. Additional production wells have
been proposed and a third production well may be drilled as early as the fourth
quarter of 2010. With the possible drilling of a third production
well, average production in 2011 is expected to possibly rise to between 23,000
and 25,000 bpd. The Oyo Field produces into a FPSO vessel constructed by Bumi
Armada Berhad, the
Armada
Perdana.
Some of
the nearby oilfields to the Oyo Field include (as shown in the above
map):
|
·
|
OML
125 (“Abo Oilfield”) and OPL 211 operated by Eni
S.p.A.;
|
|
·
|
OML
118 (“Bonga Oilfield”) operated by Shell;
and
|
|
·
|
OML
133 (“Erha Oilfield”) operated by
Exxon.
|
Production
Sharing Contract
On July
22, 2005, a PSC was signed among Allied, CINL and NAE, a subsidiary of Italy's
ENI SpA (one of the world’s largest international energy companies). Pursuant to
the PSC, NAE assumed the rights and obligations as the Operating Contractor to
the petroleum operations in the Oyo Field and was assigned an undivided 40%
interest in the OML 120. The parties to the OML 120 are represented
by the following diagram:
The
allocation of oil proceeds from the OML 120 is governed by the
PSC. The 60% interest held by the CAMAC Group and the 40% interest
held by NAE are not indicative of the manner in which proceeds from the
production of oil or other hydrocarbons from the Oyo Field are allocated under
the PSC. As a result, you should not assume that the Contract Rights
being transferred in connection with the Transaction will result in the Company
being entitled to 60% of the production from the Oyo Field. A copy of
the PSC is attached hereto as Annex E.
Following
are some key terms from the PSC:
The
allocation between the parties of oil production is governed by the PSC.
Available crude oil is allocated to four categories of oil: royalty oil
(“Royalty Oil”), cost oil (“Cost Oil”), tax oil (“Tax Oil”) and profit oil
(“Profit Oil”), in that order. Proceeds from available crude oil should be
first used to pay royalty (“Royalty Oil”), recover Opex and Capex (“Cost Oil”)
and pay tax (“Tax Oil”). The rest of the proceeds will be distributed as Profit
Oil to Contractors and First Party (refer to the PSC attached as Annex
E).
Profit
oil is allocated to the parties according to the following
schedule:
|
Date
of signing:
|
July
22, 2005.
|
|
Signing
Parties:
|
Allied,
NAE and CINL.
|
|
Lease
Term:
|
Twenty
years, commencing on February 27, 2001 (starting from the date the OML 120
was granted).
|
|
Scope:
|
The
agreement covers the area of OMLs 120-121, governs the conduct of
petroleum operations on the leased area, and governs the allocation of
crude oil produced from the leased area between the
parties.
|
|
Operating
Contractor:
|
NAE,
who is responsible for daily operation.
|
|
Contractors:
|
The
term “Contractor” includes both NAE and Allied. On a month by month
basis, Contractor’s share of profit oil is to be allocated between NAE and
Allied in accordance with the same proportion of the actual accumulated
operating costs (excluding past costs) funded by each of NAE and Allied
out of the total accumulated operating costs (excluding past costs) at the
end of the preceding month.
|
|
First
Party:
|
Parties
that are entitled to the allocation of Profit Oil based on interest in the
PSC, i.e. CINL, Allied and NAE. According to Article 8.1(e) of the PSC,
“
NAE waives its right to
receive Profit Oil as First Party. However, if Allied sells, assigns or
otherwise transfers all or part of its legal or beneficial interests
and/or obligations to any third party or if Allied disposes of control of
Allied to any third party, the waiver shall not inure or be extended to
such third party and NAE shall be entitled to its 40% share of the Profit
Oil as First Party.”
Currently, the allocation of the First Party’s
share of Profit Oil is Allied 97.5% and CINL 2.5%. NAE’s continued waiver
of this right is a condition precedent to the closing of the Purchase
Agreement,
in order to
maintain the current profit sharing allocation after the
Closing.
|
| Oil Allocation: |
The
allocation between the parties of oil production is governed by the
PSC. Available crude oil is allocated to four categories of oil:
royalty oil (“Royalty Oil”), cost oil (“Cost Oil”), tax oil (“Tax Oil”)
and profit oil (“Profit Oil”), in that order. Proceeds from
available crude oil should be first used to pay royalty (“Royalty Oil”),
recover Opex and Capex (“Cost Oil”) and pay tax (“Tax Oil”). The rest of
the proceeds will be distributed as Profit Oil to Contractors and First
Party (refer to the PSC attached as Annex E).
Profit
oil is allocated to the parties according to the following
schedule:
|
||
| Cumulative Production (mmbbls) | Contractor | First Party | |
| Up to 350 | 70.0% | 30.0% | |
| 351 to 750 | 65.0% | 35.0% | |
| 751 to 1000 | 52.5% | 47.5% | |
| 1001 to 1500 | 45.0% | 55.0% | |
| 1501 to 2000 | 35.0% | 65.0% | |
| Cost Recovery: |
Each
party can share Cost Oil based on the share of Opex and Capex actually
incurred by such party in proportion to the sum of Opex and Capex. Allied
may elect to contribute up to 30% of Cash Calls. NAE has also agreed to
pay, on behalf of Allied, 30% of the Opex up to the amount of $10,000,000
as a “free-carry” to Allied. Cost Oil cannot exceed 80% of the
available oil proceeds net of
Royalty
Oil.
Cost
Oil is allocated to Allied and NAE on a 50/50 basis until Allied has
recovered the sum of $10,000,000 of costs funded by NAE following the
approval of the first Development Plan by the Government.
Thereafter, the participating interest of each party in cost oil is to be
construed from time to time on the basis of the ratio of the operating
costs actually incurred and not yet recovered by each party in proportion
to the total operating costs incurred and not yet recovered. Total
operating costs include past costs that are considered deductible by the
government of Nigeria for purposes of the petroleum profits tax
(“PPT”). NAE received a credit for $50,000,000 of such past costs
upon the execution of the PSC and the balance of the past costs is
allocated to Allied. The aggregate amount of past costs is capped at
$120,000,000. The parties are in the process of confirming the
deductibility of past costs in relation to the PPT with the government of
Nigeria. Past costs are considered recoverable from Cost Oil only after
they have been approved as allowable for PPT purposes by the relevant
Nigerian tax authorities (with a priority for the $50,000,000 dollars
credited to NAE).
|
||
| Assignment: | Neither party shall sell or assign its rights interests or obligations under the agreement without the consent of the other party, such consent not to be unreasonably withheld. | ||
| Governing Law; Disputes: | The agreement is governed by the laws of Nigeria. Disputes between the parties are to be resolved through arbitration in Paris. | ||
| Termination: | The agreement may be terminated by either Party in the event that the other party assigns its rights under the agreement to a third party without the consent of the non-assigning party or the other party is dissolved, liquidated, wound up, or otherwise terminates its existence; becomes insolvent, bankrupt or makes and assignment for the benefit of its creditors; or a receiver is appointed for the whole or a substantial portion of its assets. | ||
Oil
Proceeds Allocation Flowchart
| * | Petroleum profit tax of 50 plus education tax of 2%, chargeable on the total remainder oil after deduction of amortization and investment allowance. |
| ** | Y-Factor: NAE and Allied will share the Profit Oil to Contractor based on their contribution on Capex and Opex. |
Summary
of the Contract Rights
Following the consummation of the
Transaction, the Company will have a contract interest in Allied’s and CINL’s
allocation of production from the Oyo Field under the PSC. We use the
term “Contract Rights” to describe the series of related agreements that govern
the Company’s interest in the PSC with respect to the Oyo Field. For
example, the Novation Agreement: (i) novates to the Company all of Allied’s and
CINL’s respective interests in and all rights and obligations under the PSC in
relation to the Oyo Field, and (ii) the Company has agreed to assume, the joint
and several obligations of Allied and CINL in relation to the Oyo Field to NAE
under the PSC. As another example, the Oyo Field Agreement, among
other things, provides for certain management, notice and documentation rights
to allow the Company to maintain orderly supervision, direction, and control of
matters pertaining to the Petroleum Operations, Work Programme and Budget (each
as defined in the PSC) as it relates to the Contract Rights. The
Contract Rights specifically exclude: (i) any Royalty Oil and Tax Oil (each as
defined in the PSC); and (ii) Cost Oil (as defined in the PSC).
Oyo
Field First Production
On December 15, 2009, NAE and CAMAC
announced that they had commenced production of the Oyo Field, less than two
years from the date of the Oyo Field’s initial sanctioning. CAMAC has
reported that the Oyo Field has been producing at a rate of between 12,000 and
20,000 barrels of oil per day (“bbl/d”) from two subsea wells in a water depth
of greater than 300 meters, which are connected to the
Armada Perdana
Floating
Production Storage and Offloading (“FPSO”) vessel. The FPSO has a
treatment capacity of 40,000 barrels of liquids per day, with gas treatment and
re-injection facilities, and is capable of storing up to one million barrels of
crude oil. The associated gas will be re-injected into the Oyo Field reservoir
by a third well, to prevent flaring and to maximize oil recovery. This gas
reinjection operation is scheduled to commence in March, 2010. Additional
production wells have been proposed and may be drilled as early as the 4
th
quarter of 2010. If an additional production well is drilled, we
believe that we can increase the production rate at the Oyo Field to 23,000 to
25,000 bbl/d based on internal engineering data.
Valuation
of the Contract Rights
The Company received an independent
Valuation Report, dated July 17, 2009, attached hereto as Annex B (the “Somerley
Report”), prepared by Somerley, the Company’s financial advisor, based on year
2008 information and reserve data provided by various third parties and the
Company. The Somerley Report evaluated the value of the interest held
by Allied, a subsidiary of CAMAC, under the PSC with respect to the Oyo
Field.
The Somerley Report relies upon certain
publicly-available information as well as information provided by the Company
and CAMAC, including a confidential reserve and cost estimate report prepared by
Netherland, Sewell & Associates, Inc. (“NSAI”) for CAMAC in May 2008, and
referenced in the Somerley Report, and certain assumptions related to the Oyo
Field, including:
|
·
|
Oil
price of $60/bbl in 2009, increasing to $85/bbl by 2012 and remaining flat
at $85/bbl thereafter through 2019
|
|
·
|
Pre-July
2005 capital expenditures of $77
million
|
|
·
|
Tangible
capital cost of $315 million from July 2005 to
2008
|
|
·
|
Tangible
capital cost of $406 million in
2009
|
|
·
|
Capital
cost amortized based on straight-line method over 5 years for tax
purposes
|
|
·
|
Fiscal
Terms: 12% Royalty; 50% Petroleum Profit Tax; 2% Education Tax;
50% Investment Tax Allowance; 85% Maximum Capital
Allowance
|
|
·
|
Discount
Rate of 12%
|
|
·
|
Production
reaching a peak rate of approximately 30,000
bbl/d
|
|
·
|
Assumed
Transaction Closing Date: September 30,
2009
|
Under a
discounted cash flow model, and based on the foregoing assumptions and others
set forth in the Somerley Report, Somerley estimated that Allied’s interest
under the PSC with respect to the Oyo Field was valued at between $251 million
to $278 million as of September 23, 2009. Applying a trade
comparables model which analyzed 6 major oil field operators in Africa,
including Tullow Oil plc, Addax Petroleum Corp, Heritage Oil Limited, Maurel et
Prom, Afren plc and Vaalco Energy, Inc., which companies Somerley deemed to be
comparable companies based on their business nature and geographic focus,
Somerley estimated the value of Allied’s interest under the PSC with respect to
the Oyo Field at between $122 million and $145 million. Lastly,
applying a transaction comparables model which analyzed 13 merger and
acquisition transactions in the African oil sector announced between February
2007 and June 2009, Somerley estimated that Allied’s interest under the PSC with
respect to the Oyo Field was valued at between $91 million and $114
million.
Based on the three valuation approaches
described above and outlined in the Somerley Report, Somerley concluded that the
value of Allied’s interest under the PSC with respect to the Oyo Field was in
the range of $114 million to $251 million.
Following the execution of the Purchase
Agreement, the Company has been continuously updating the assumptions and
valuations set forth in the Somerley Report based on actual production
performance data received from the two currently producing Oyo Field wells, the
fluctuating price of oil and projections made on the future price of oil, and
new trade comparables. In addition, the Company has assessed the
potential positive impact of drilling additional production wells within the Oyo
Field is expected to have on current production rates and the negative impact
that would result if no additional wells are drilled. As a result of
these updates and their impact on the valuation methodologies set forth in the
Somerley Report, the Company has determined that the value of the Contract
Rights proposed to be acquired by the Company in the Oyo Field is currently in
the range of $250 million to $326 million based on a discounted cash
flow model using a 10% discount rate and assuming that production in 2010 will
average 15,000 bbl/d and that a third well will be drilled with production
from 3 producing wells averaging 24,000 bbl/d in 2011.
Using the analysis used by Somerley in
the Somerley Report, and applying a trade comparables model as described above,
and updating that to include several additional companies which the Company
deems to be comparable companies based on their business nature and geographic
focus, the value of the interest that the Company would acquire in the Oyo Field
is estimated to be between $193 million and $217 million.
The
updated valuation estimates set forth above would be materially and negatively
affected if the parties to the PSC determine not to drill additional wells in
the Oyo Field, or if there are any material disruptions of production from the
Oyo Field, oil prices significantly fall, or any other material adverse events
occur that negatively impact any of the assumptions upon which the valuation
estimates are based. For a discussion of certain risk factors that
you should consider before voting on the Proposals, please read “Risk Factors
Associated With The Transaction” beginning on page 37 of this Proxy
Statement.
Please see the full Somerley Report
attached hereto as Annex C, and also an internal update dated March 1, 2010 to
the Somerley Report and also updated selected data from the cash flow
projections made by the Company and provided to and discussed with its Board of
Directors, attached as Annex D, as prepared by the Company to reflect certain
corrected information and to update oil price assumptions and current market
conditions. In that discussion with its Board of Directors, and as a
result of further due diligence done by the Company, among other considerations,
the Board of Directors considered what impact a stepped-up increase of the
applicable tax rate, lower production and reserves, and additional costs would
have on the Company’s interest in the Oyo Field.
On March 1, 2010, the Company held a
special meeting of its Board of Directors to review and analyze the Company’s
valuation models updated and revised based on actual production performance data
received from the two currently producing Oyo Field wells, the fluctuating price
of oil and projections made on the future price of oil, and new trade
comparables. The meeting was attended by all the members of the Board
of Directors of the Company. At this meeting, the Board also discussed the
potential positive impact the drilling of additional production wells within the
Oyo Field is expected to have on the gross production numbers from where they
are today and the negative impact that would result if no additional wells are
drilled. The Board of Directors agreed that the estimated current
value of the Contract Rights was between $326 million and $193 million, and that
the $198.84 million value the Company and CAMAC originally ascribed to the
Contract Rights under the MOU ($160 million payable in equity, $38.84 payable in
cash) was within the updated valuation range, and unanimously agreed that the
62.74% stock consideration proposed to be issued to CAMAC in the Transaction and
the $38.84 million cash consideration to be paid to CAMAC in the Transaction is
reasonable and in the best interests of the Company and its stockholders, and
approved the Transaction.
We have not requested to have Somerley
update the Somerley Report applying information developed since the date of its
report, and we have not received an independent third party valuation report
based on such new information. While the Company applied the same
analysis used by Somerley in preparing the Somerley Report, the Company Update
to the Somerley Report is not an independent third party valuation prepared for
the Company by Somerley. You should consider the Company Update to
the Somerley Report as an internal estimate of valuation of the Contract Rights
with respect to the Oyo Field prepared by the Company only.
Risks
Inherent to Operating in Nigeria
The Oyo
Field is located approximately 75 miles off the Southern Nigerian coast in
deep-water. The government of Nigeria originally granted the rights
to the Oyo Field to CAMAC. The government of Nigeria has historically
experienced volatility, which is out of management’s control. The Company’s
ability to exploit its interests in this area pursuant to the PSC may be
adversely impacted by this circumstance. The future success of the Company’s Oyo
Field interest may also be adversely affected by risks associated with
international activities, including economic and labor conditions, political
instability, risk of war, expropriation, repatriation, termination,
renegotiation or modification of existing contracts, tax laws (including
host-country import-export, excise and income taxes and United States taxes on
foreign subsidiaries) and changes in the value of the U.S. dollar versus the
local currencies in which future oil and gas producing activities may be
denominated. Changes in exchange rates may also adversely affect the Company’s
future results of operations and financial condition. Realization of
any of these factors could materially and adversely affect our financial
position, results of operations and cash flows.
In addition, there are risks inherent
to oil production in Nigeria. Since December 2005, Nigeria has experienced
increased pipeline vandalism, kidnappings and militant takeovers of oil
facilities in the Niger Delta. The Movement for the Emancipation of the Niger
Delta (“MEND”) is the main militant organization attacking oil infrastructure
for political objectives, claiming to seek a redistribution of oil wealth and
greater local control of the sector. Additionally, kidnappings of oil workers
for ransom are also common and security concerns have led some oil services
firms to pull out of the country and oil workers unions threatening to strike
over security issues for their members. For example, in June 2008, Shell’s Bonga
Oilfield, which is located near the Oyo Field, was attacked by Nigerian
militants, causing Shell to shut down the operation of the field. In June 2009,
another Nigerian offshore oilfield of Shell, the Ofirma Field, and a flow
station of Chevron were attacked by Nigerian Militants. Subsequently, Shell was
forced to shut down some of its oil production in the region. In addition, an
attack like that of September 11, 2001 or longer-lasting wars or international
hostilities, including those currently in Afghanistan and Iraq could damage the
world economy and adversely affect the availability of and demand for crude oil
and petroleum products and negatively affect our investment and our customers’
investment decisions over an extended period of time. Despite undertaking
various security measures and being situated 75 miles offshore the Nigerian
coast, the FPSO vessel may become subject to terrorist acts and other acts of
hostility like piracy. Such actions could adversely impact our overall business,
financial condition and operations. In addition, the Oyo Field’s financial
viability may also be negatively affected by changing economic, political and
governmental conditions in Nigeria. Moreover, we operate in a sector of the
economy that is likely to be adversely impacted by the effects of political
instability, terrorist or other attacks, war or international
hostilities.
Furthermore, the instability in the
Niger Delta has caused significant amounts of shut-in production and several
companies declaring force majeure on oil shipments. EIA estimates Nigeria’s
effective oil production capacity to be around 2.7 million barrels per day
(bbl/d) but as a result of attacks on oil infrastructure, 2008 monthly oil
production ranged between 1.8 million bbl/d and 2.1 million bbl/d. Additional
supply disruptions for the year were the result of worker strikes carried out by
the Petroleum and Natural Gas Senior Staff Association of Nigeria (“PENGASSAN”)
that shut-in 800,000 bbl/d of ExxonMobil’s production for about 10 days in late
April/early May.
ACCOUNTING
FOR THE TRANSACTION
The
Transaction will be accounted for as an asset purchase at the fair value of
consideration paid. The assets to be acquired do not qualify as a
separate business. The underlying assets to be acquired are 60%
undivided interests in (i) the Oyo Field portion of the OML 120 Production
Sharing Contract (“PSC”), without any rights in the remainder of that PSC, and
(ii) the Oyo Field accumulated expenditures and assets. The Oyo Field
constitutes an unincorporated joint venture with two undivided interest shares,
60% and 40%. The Company will not be responsible for physical
development and operation of the assets and lacks the staff to do
so. NAE will remain as the operating contractor of the entire PSC,
with the 40% undivided interest owner as the operating
contractor. Currently the Company has no employees in Africa and no
present activities in Africa.
Subsequent to the closing of the
Transaction, the Company will account for its share of the Oyo Field using
undivided interest accounting, whereby the Company records only its
proportionate shares of assets, liabilities, revenues and
expenses. In addition, any costs which by agreement are 100% for the
account of the other owner will not be recorded by the Company.
COMPANY
BOARD OF DIRECTORS AND MANAGEMENT
UPON
THE CLOSING OF THE TRANSACTION
There are
currently five directors serving on the Company’s Board of
Directors. Pursuant to the terms of the Purchase Agreement, the Board
of Directors of the Company has approved, for a period of one year, commencing
at the Closing date of the Transaction, to increase the size of the Board of
Directors from five members to seven members, four of whom will be nominated by
CAMAC, and three of whom will continue on as current Company directors. In
connection with the foregoing, Frank Ingriselli, James F. Link, Jr. and William
E. Dozier will continue on as directors of the Company, and, effective as at the
Closing date, the following CAMAC-designated directors will be appointed to the
Company’s Board of Directors to serve until the Company’s next annual meeting of
stockholders:
|
Name
|
Age
|
Position/s
|
Director
Since
|
|||
|
Dr.
Kase Lukman Lawal
|
55
|
Director
|
---
|
|||
|
John
Hofmeister
|
61
|
Director
|
---
|
|||
|
Dr.
Lee Patrick Brown
|
72
|
Director
|
---
|
|||
|
Hazel
O’Leary
|
72
|
Director
|
---
|
|||
|
Frank
Ingriselli
|
55
|
Director
|
May
2007
|
|||
|
James
F. Link, Jr.
|
65
|
Director
|
July
2008
|
|||
|
William
E. Dozier
|
57
|
Director
|
May
2009
|
DR. KASE LUKMAN
LAWAL.
As Chairman and Chief Executive Officer of CAMAC
International Corporation, Dr. Kase Lawal leads a diverse group of affiliated
companies that comprise the second largest African-American owned corporation in
the United States. He is also chairman of CAMAC’s Allied Energy Corporation.
Committed to public service, he contributes valuable leadership as a
commissioner on the Port of Houston Authority and as vice chairman of the
Houston Airport Development System Corporation. He is also a member of the
National Urban League’s Board of Directors and the Fisk University Board of
Trustees. Dr. Lawal is a member of the board of directors and a majority
shareholder in Unity National Bank, the only federally insured and licensed
African American-owned bank in Texas. Dr. Lawal earned a bachelor’s degree in
chemistry from Texas Southern University and an MBA in finance and marketing
from Prairie View A&M University in Prairie View, Texas. He was awarded an
honorary doctorate in philosophy from Fort Valley (Georgia) State University and
an honorary doctorate in humane letters from Texas Southern
University.
JOHN
HOFMEISTER.
Upon retirement from Shell Oil Company in July
2008, John Hofmeister founded the not-for-profit (501(c)(3)), nationwide
membership association, Citizens for Affordable Energy, which he currently
heads. This Washington D.C.-registered, public policy education firm
exists to promote sound U.S. energy security solutions for the nation, including
a range of affordable energy supplies, efficiency improvements, essential
infrastructure, sustainable environmental policies and public education on
energy issues.
Mr.
Hofmeister was named President of Houston-based Shell Oil Company in March 2005,
heading the U.S. Country Leadership Team, which included the leaders of all
Shell businesses operating in the United States. He became President
after serving as Group Human Resource Director of the Shell Group, based in The
Hague, The Netherlands.
A
business leader who has participated in the inner workings of multiple
industries for over 35 years Mr. Hofmeister also has held key leadership
positions in General Electric, Nortel and AlliedSignal (now Honeywell
International). Mr. Hofmeister serves as Chairman of the National
Urban League and is a member of the U.S. Department of Energy’s Hydrogen and
Fuel Cell Technical Advisory Committee, and the Sodexo Business Advisory
Board. He also serves as a non-executive director of Hunting
PLC. He serves on the boards of the Foreign Policy Association,
Strategic Partners, LLC, the Gas Technology Institute and the Center for
Houston’s Future. Mr. Hofmeister is a Fellow of the National Academy
of Human Resources. He also is a past Chairman and serves as a
Director of the Greater Houston Partnership.
Mr.
Hofmeister earned Bachelor’s and Master’s Degrees in Political Science from
Kansas State University.
DR. LEE PATRICK
BROWN.
Capping a career of public service dedicated to law
enforcement, Dr. Lee P. Brown was elected Mayor of the City of Houston on
December 6, 1997, sworn in on January 2, 1998; and reelected in 1999 and again
in 2001, serving the maximum of three terms in office. Prior to his
election as Mayor of the Nation's fourth-largest city, Dr. Brown served in
President Bill Clinton's Cabinet as Director of the White House Office of
National Drug Control Policy from 1993 to 1996. Dr. Brown rose through the
law enforcement ranks - first as a patrolman with the San Jose, California
Police Department; then as a Sheriff of Multnomah County, Oregon; followed by
Commissioner of Public Safety in Atlanta Georgia; Chief of Police in Houston,
Texas and Police Commissioner for New York City, New York.
Dr. Brown
has an undergraduate degree in criminology from Fresno State University, a
master's degree in sociology from San Jose State University and holds a master's
degree and doctorate degree in criminology from the University California at
Berkeley, where he also is an UC-Berkeley Fellow. He was selected as
UC-Berkeley's 2004 Alumnus of the Year. He also holds honorary doctorate
degrees from Florida International University, Portland State University, State
University of New York, Fresno State University, John Jay College of Criminal
Justice, Paul Quinn College and Howard University. He is an honorary visiting
professor at four universities in China.
Dr. Brown
also has been a part time Professor at San Jose State University; Professor and
Chairman of the Department of Administration of Justice at Portland State
University; Associate Director of the Institute for Urban Affairs and Research
and Professor of Public Administration at Howard University; University
Professor at Texas Southern University and a Senior Scholar at the James A.
Baker III Institute for Public Policy and Professor of Sociology at Rice
University. After leaving the Office of the Mayor, he served as a Visiting
Scholar in the School of Social Sciences at Rice University.
Dr. Brown
is currently the Chairman and CEO of Brown Group International, member of the
Board of CAMAC International Corporation and Chairman of the Board of Unity
National Bank.
HAZEL
O’LEARY.
Since 2004, Ms. O'Leary has served as the President
of Fisk University in Nashville, Tennessee. She also currently serves on
the boards of directors of the ITC Holdings, Corp., Nashville Alliance for
Public Education, Nashville Business Community for the Arts, World Wildlife Fund
and Arms Control Association. Ms. O'Leary served as an assistant attorney
general and assistant prosecutor in the state of New Jersey and was appointed to
the Federal Energy Administration under President Gerald Ford and to the
Department of Energy under President Jimmy Carter. Ms. O'Leary worked in the
private sector as a principal at the independent public accounting firm of
Coopers and Lybrand from 1977 to 1979. In 1981 she was named vice president and
general counsel of O'Leary and Associates, a company focused on international
economics as related to energy issues. She served in that capacity until 1989
and then returned as president from 1997 to 2001. In 1989, she became executive
vice president for environmental and public affairs for the Minnesota Northern
States Power Company and, in 1992, was promoted to president of the holding
company's gas distribution subsidiary. Ms. O'Leary served as the Secretary of
Energy from 1993 to 1997 and as president and chief operating officer for the
investment banking firm Blaylock and Partners in New York from 2000 to 2002. Ms.
O'Leary also served on the board of directors of AES Corporation from 1991 to
1993 and from 1997 to 2002. After earning a bachelor's degree at Fisk
University, Ms. O'Leary earned her law degree from Rutgers School of
Law.
FRANK C.
INGRISELLI.
Mr. Ingriselli has served as the President, Chief
Executive Officer, Secretary and a member of the Board of Directors of the
Company since May 2007. Mr. Ingriselli has over 29 years experience
in the energy industry. Mr. Ingriselli began his career at Texaco, Inc.
(“Texaco”) in 1979 and held management positions in Texaco’s Producing-Eastern
Hemisphere Department, Middle East/Far East Division, and Texaco’s International
Exploration Company. While at Texaco, Mr. Ingriselli negotiated a successful
foreign oil development investment contract in China in 1983. In 1992, Mr.
Ingriselli was named President of Texaco International Operations Inc. and over
the next several years directed Texaco’s global initiatives in exploration and
development. In 1996, he was appointed President and CEO of the Timan Pechora
Company, a Houston, Texas headquartered company owned by affiliates of Texaco,
Exxon, Amoco and Norsk Hydro, which was developing a large international
investment in Russia. In 1998, Mr. Ingriselli returned to Texaco’s Executive
Department with responsibilities for Texaco’s power and gas operations, merger
and acquisition activities, pipeline operations and corporate development. In
August 2000, Mr. Ingriselli was appointed President of Texaco Technology
Ventures, which was responsible for all of Texaco’s global technology
initiatives and investments. In 2001, Mr. Ingriselli retired from Texaco after
its merger with Chevron, and founded Global Venture Investments LLC (“GVI”), an
energy consulting firm, for which Mr. Ingriselli served as the President and
Chief Executive Officer. Mr. Ingriselli is no longer active with GVI. In 2005,
Mr. Ingriselli co-founded Inner Mongolia Production Company, LLC (“IMPCO”) with
Mr. Stephen F. Groth, the Vice President and Chief Financial Officer of the
Company, and others, and served as the President, Chief Executive Officer and a
Manager of IMPCO prior to the May 2007 merger of IMPCO into the
Company.
From 2000
to 2006, Mr. Ingriselli sat on the Board of the Electric Drive Transportation
Association (where he was also Treasurer) and the Angelino Group, and was an
officer of several subsidiaries of Energy Conversion Devices Inc., a U.S. public
corporation engaged in the development and commercialization of environmental
energy technologies. From 2001 to 2006, he was a Director and Officer of General
Energy Technologies Inc., a “technology facilitator” to Chinese industry serving
the critical need for advanced energy technology and the growing demand for
low-cost high quality components, and Eletra Ltd, a Brazilian hybrid electric
bus developer. Mr. Ingriselli currently sits on the Advisory Board of
the Eurasia Foundation, a Washington D.C.-based non-profit that funds programs
that build democratic and free market institutions in the new independent states
of the former Soviet Union. Since 2006, Mr. Ingriselli has also served on the
Board of Directors and as an executive officer of Brightening Lives Foundation
Inc., a New York charitable foundation headquartered in San Ramon,
California.
Mr.
Ingriselli graduated from Boston University in 1975 with a Bachelor of Science
degree in Business Administration. He also earned a Master of Business
Administration degree from New York University in both Finance and International
Finance in 1977 and a Juris Doctor degree from Fordham University School of Law
in 1979.
JAMES F. LINK,
JR.
Mr. Link has served on the Company’s Board of
Directors since July 2008. Mr. Link retired from the position of Vice
President of Finance and Risk Management of Texaco Inc. upon its merger with
Chevron Inc. in 2001. He earned a bachelor of Business Administration
degree in Accounting in 1966 and a Master of Business Administration degree in
1968, both from University of Memphis. Mr. Link served from 1969 to
1971 as a Lieutenant in the U.S. Army Finance Corps. He joined the
Comptroller’s Department of Texaco in New York in 1971. Mr. Link was
named Manager of Texaco’s Corporate Financial Reporting Office in
1979. In 1984 he was named Assistant to the Senior Vice President and
Chief Financial Officer of Texaco. He was named as Texaco’s Director
of Corporate Finance in the Finance Department in 1986. He was
appointed Assistant Treasurer of Texaco in 1989 and was named Senior Assistant
Treasurer in 1991. Mr. Link assumed in 1993 the responsibilities of
Fiscal Director and Comptroller of Texaco U.S.A. headquartered in Houston,
Texas. In 1995, Mr. Link was elected Treasurer of Texaco and, in
1999, he was elected Vice President of Finance and Risk
Management. He served as a Director of Caltex Corporation, Texaco’s
refining, marketing joint venture with Chevron, which operated throughout Asia,
Africa, the Middle East and Australia. He also served as a Director
of Equilon LLC, a refining, marketing joint venture with Shell Oil, operating
primarily in the Western and Mid-Western United States.
Mr. Link
is a Board Member of Nehemiah Commission, a not-for-profit social services
agency providing services to at-risk children in Fairfield and New Haven
counties in Connecticut. He also is a Board Member of the Oak Hill
School-CT Institute for the Blind Foundation, headquartered in Hartford,
Connecticut which helps people with disabilities in communities throughout
Connecticut.
WILLIAM E.
DOZIER.
Mr. William Dozier has been a member of Pacific Asia
Petroleum's Board of Directors and the Chairman of the Company’s
Technical/Operating Committee since May 2009. Mr. Dozier has over 34
years of technical and operational experience in the US and the international
oil and gas industry. Since 2005, Mr. Dozier has served as an
independent consultant and President of Extex Consulting, Inc. based in Tulsa,
Oklahoma and Houston, Texas, and since late 2005 has also served on the Board of
Directors of Evolution Petroleum Corporation, a Houston-based public company
involved in the acquisition, exploitation, development, and production of crude
oil and natural gas resources.
Mr.
Dozier held several key executive positions including Senior Vice President –
Business Development and Vice President Operations during his 13-year career at
Vintage Petroleum, Inc. (a large publicly-traded independent oil and gas
company), which was acquired by Occidental Petroleum for $3.8 billion in
2006. At Vintage, Mr. Dozier demonstrated his outstanding leadership
in a wide spectrum of business activities in the global oil and gas industry,
including the acquisition and establishment of engineering, administrative and
field operations for both U.S. and international projects. From 1983
to 1992, Mr. Dozier was Manager of Operations Engineering for Santa Fe Minerals
Inc., an independent oil and gas company. Mr. Dozier began his career
with Amoco Production Company in 1975, working in all phases of production,
reservoir evaluations, drilling and completions in the Mid-Continent and Gulf
Coast areas.
Throughout
his career, Mr. Dozier has been active in multiple industry and charitable
groups. Being a member of the Society of Petroleum Engineers (SPE)
since 1973, he has served as Local Section Chairman and board member, and on
three national SPE committees, where he chaired the Career Guidance Committee
and the Technical Information Committee. In addition to SPE, he has
been involved in the International Petroleum Association of America (IPAA), the
Texas Independent Producers and Royalty Owners (TIPRO), Texas Alliance of Energy
Producers (TAEP), the Oklahoma Independent Petroleum Association (OIPA), and the
California Independent Petroleum Association (CIPA) where he served on the board
of directors and membership committee. He is also a member of the
Tulsa Petroleum Club, the Houston Producers Forum, and the National Association
of Corporate Directors. Mr. Dozier also serves on the Advisory
Board for Happy Hands Education Center for deaf and hearing impaired children
located in Tulsa, Oklahoma.
Mr.
Dozier is a licensed petroleum engineer in the State of Texas with a B.S. Degree
in Petroleum Engineering from The University of Texas.
All directors will hold office
for the terms indicated, or until their earlier death, resignation, removal or
disqualification, and until their respective successors are duly elected and
qualified. Except with respect to the Purchase Agreement, there are no
arrangements or understandings between any of the nominees, directors or
executive officers and any other person pursuant to which any of our nominees,
directors or executive officers have been selected for their respective
positions. No nominee, member of the Board of Directors or executive officer is
related to any other nominee, member of the Board of Directors or executive
officer.
Our
Executive Officers
Following
the Transaction, the executive officers of our Company will be the current
executive officers of Pacific Asia Petroleum, Inc. The executive
officers of the Company are as follows:
|
Name
|
Age
|
Position/s
|
||
|
Frank
C. Ingriselli
|
55
|
President,
Chief Executive Officer, Secretary and Director
|
||
|
Stephen
F. Groth
|
56
|
Vice
President and Chief Financial Officer
|
||
|
Richard
Grigg
|
56
|
Senior
Vice President and Managing
Director
|
STEPHEN F.
GROTH.
Mr. Groth has served as the Vice President and Chief
Financial Officer of the Company since May 2007. Mr. Groth brings to the Company
more than 30 years experience in the energy industry providing financial
analysis, financial modeling, corporate reporting and financial reporting system
expertise. Mr. Groth joined Texaco in 1979 and held various positions in
financial groups at Texaco, and from 1999 to 2001 held a position in the
corporate executive group at Texaco with the responsibility of reviewing all of
its investments and divestments (capital expenditures, acquisitions, and
divestitures) greater than $10 million. From 2001 until May 2007, Mr. Groth
served as Vice President of GVI. In his roles at both Texaco and GVI, Mr. Groth
reviewed numerous transactions, assuring that evaluations were done in
accordance with appropriate corporate standards and that the assumptions
underlying the economic valuations were valid, and regularly advised client
operating departments on appropriate ways to evaluate investment alternatives,
providing support for the negotiation of major acquisitions and divestitures. In
2005, Mr. Groth co-founded IMPCO with Mr. Ingriselli and others, and served as
the Vice President, Chief Financial Officer and Manager of IMPCO prior to the
May 2007 merger of IMPCO into the Company.
Mr. Groth
received his Bachelor of Arts in Philosophy in 1975 from Fordham University and
his MBA in Accounting from New York University in 1977. Before joining Texaco in
1979, he worked as an auditor for Price Waterhouse, and as an internal auditor
for American Airlines.
RICHARD
GRIGG.
Richard Grigg was promoted to the position of
Senior Vice President and Managing Director of the Company, effective August 1,
2008. Mr. Grigg has served as the Company’s Managing Director of its Beijing
office since October 2007, and has 38 years experience in the petroleum and
resource industries, with broad experience in both the operating and service
sectors of the petroleum industry as well as extensive management and
operational experience. Prior to joining the Company, Mr. Grigg was
the Chief Operating Officer for Sino Gas & Energy Limited (“SGE”) based in
Beijing and responsible from 2005 to October 2007 for all activities of the
company within China and in particular for negotiating SGE’s operatorship of,
and farm into, the Chevron owned Linxing, San Jiao Bei and Shenfu production
sharing contracts, and the subsequent exploration and appraisal operations in
those areas. Prior to joining SGE, from 2000 through 2005 Mr. Grigg served as a
consultant to various Australian-based coalbed methane (“CBM”) operators where
he was involved in managing the project development of some of the largest
Australian CBM commercialization projects including the Moranbah Gas Project in
North Central Queensland for CH4 Ltd (now Arrow Energy Limited). In
1987, Mr. Grigg founded Surtron Technologies, taking it to leadership within the
resources industry in Australia and the Asia Pacific region before selling the
company in 1997 to publicly listed Imdex Limited. From 1992 to 1998, Mr. Grigg
was also involved in a technology transfer venture in Vietnam and other
countries in the Asia Pacific region.
Prior to
1987, Mr. Grigg worked with many of the largest multinational oilfield service
companies where he gained broad ranging experience across the areas of drilling,
reservoir engineering, petroleum engineering and production. These companies
included Sperry Sun (now part of the Halliburton Group), Core Laboratories
(NYSE:CLB), Dowell Schlumberger (now Anadrill and part of the Schlumberger
Group), and Eastman Whipstock (now BH/Inteq and part of the Baker Hughes
Group).
Mr. Grigg
started his career in 1970 with West Australian Petroleum (WAPET) – owned at the
time by Texaco Inc. and Chevron Corporation – and worked on the Barrow Island
oilfield development gaining valuable grass roots experience in all aspects of
bringing an oilfield to full commercialization.
RISK
FACTORS ASSOCIATED WITH THE TRANSACTION
You should carefully consider
the risks described below, together with all of the other information included
in this Proxy Statement, including the financial statements and the related
notes, before you decide whether to approve the Transaction. There can be no
assurance that the Transaction will be consummated in a timely manner or at all
or that actual results will not differ materially from our expectations,
statements or projections. Factors that could cause actual results to differ
from our expectations, statements or projections include the risks and
uncertainties described below. The Company’s business, operating results and
financial condition could be harmed by any of these risks. The trading price of
the Company’s common stock could decline due to any of these risks, and you
could lose all or part of your investment.
We
cannot be sure if or when the Transaction will be completed, if at
all.
The consummation of the Transaction is
subject to the satisfaction of various conditions, many of which are beyond our
control, including, but not limited to, the approval of the Transaction by the
Company’s stockholders, and a termination right by either party if the
Transaction is not completed by April 7, 2010. Under the terms of the
Purchase Agreement, the Company is obligated to pay $32 million in cash at
Closing and issue shares equaling 62.74% of the Company’s issued and outstanding
Common Stock, after giving effect to the Transaction and the Financing, to
consummate the Transaction, and is obligated to pay an additional $6.84 million
in cash to CAMAC post-Closing on the earlier of sufficient receipt of oil
proceeds from the Oyo Field or six months from the Closing Date. The
Company successfully raised an aggregate of approximately $37.5 million
through the offering and issuance of 5,000,000 shares of its Common Stock on
February16, 2010 and 4,146,922 shares of its Common Stock on March 5, 2010,
as described elsewhere in this Proxy Statement. Although the Company has
raised sufficient cash to meet the cash purchase price payment requirements at
Closing, we cannot guarantee that we will be able to successfully satisfy the
other Closing conditions set forth in the Purchase Agreement. If we
are unable to satisfy the other Closing conditions in the Purchase Agreement,
CAMAC will not be obligated to complete the Transaction and we may still incur
the significant transaction costs described below.
We
will incur significant costs in connection with the Transaction, whether or not
it is completed.
We
currently expect to incur approximately $500,000 in costs related to the
Transaction. These expenses include, but are not limited to, financial advisory,
legal and accounting fees and expenses, employee expenses, filing fees, printing
expenses, proxy solicitation and other related charges. We may also incur
additional unanticipated expenses in connection with the Transaction.
Approximately $400,000 of the costs related to the Transaction, such as legal
fees and due diligence fees, will be incurred regardless of whether the
Transaction is completed. The incurrence of these expenses will reduce the
amount of cash available to be used for other corporate purposes, including for
use in our ongoing operations.
The
Purchase Agreement will expose the Company to contingent
liabilities.
Under the
Purchase Agreement, we have agreed to indemnify CAMAC for a number of matters
including the breach of our representations, warranties and covenants contained
in the Purchase Agreement. See discussion of indemnification
obligations set forth above.
We may not realize the intended
benefits of the CAMAC Transaction if revenues from the Production Sharing
Contract are not as projected.
The Company conducted extensive legal,
financial and technical due diligence on the PSC and the Oyo Field, reviewed and
analyzed the Estimate of Reserves and Future Revenue report prepared for Allied
Energy Corporation by Netherland, Sewell & Associates, Inc., dated May 1,
2008 (the “NSAI Report”), and commissioned Somerley Limited to prepare a
valuation of the Contract Rights based, in part, on the anticipated future
revenues to be derived through its interests in the Oyo
Field. However, the reserve information provided in the NSAI Report
and the assumptions underlying the Company’s valuation models, including, but
not limited to, actual quantities of oil produced from the Oyo Field, projected
oil prices, anticipated tax rates, and historic and future operating expenses
allocable to the Oyo Field, are subject to change. For example, since the
Company's initial December 2009 assessment of the valuation of the interests
being acquired in the Oyo Field and PSC, CAMAC has reported to the Company that
actual production from the two producing wells has averaged between 12,000 bpd
and 20,000 bpd since December 2009, associated gas production has been in excess
of 15 million cubic feet per day, and that the possible drilling of a third
production well is expected to increase average production in 2011 to between
approximately 23,000 bpd and 25,000 bpd. As a result, the Company
has updated its view of the current estimated net present value of the interests
being acquired from approximately $380 million to approximately $330 million,
using a new oil price scenario and an average production rate of 15,000 bpd in
2010, and 24,000 bpd in 2011. Likewise, it was assumed that a total of
approximately 50 million barrels of oil would be produced over the next 10 years
with the addition of a 4
th
well. If any of the assumptions underlying the Company’s valuation
models undergo further material changes, then the estimated net present value of
the Company’s interests in the Oyo Field and PSC may be subject to further
change. If the value of the interests decrease substantially as a
result of such changes, the interests being acquired may ultimately prove to be
worth less than the total consideration the Company will be paying to CAMAC for
such intetests under the Purchase Agreement, and the Company may not realize the
intended benefits of the Transaction.
For a
detailed discussion of the valuation process, please read “Valuation of the
Contract Rights” beginning on page 29 of this Proxy Statement.
The
Board of Directors did not request or receive a fairness opinion with respect to
whether the Transaction is fair to the Company from a financial point of
view. Because of the absence of a fairness opinion, there can
be no independent assurance from an expert to the Board of Directors that the
Transaction is fair from a financial point of view to the Company or its
stockholders.
The Company was advised by Somerley
Limited and Ernst & Young in connection with evaluating the Transaction, but
did not request or receive an opinion. The Company has already incurred
approximately $145,500 in fees and expenses due and owing to Somerley Limited
and Ernst & Young for their advice to date, and the Company estimates the
cost of a fairness opinion would be at least an additional $50,000 and could
take four
to six weeks to
obtain. The Board of Directors of the Company does not believe that obtaining
such an opinion would be an appropriate use of corporate funds, considering the
limited financial resources of the Company. Because of the absence of
a fairness opinion, there can be no independent assurance from an expert to the
Board of Directors that the Transaction is fair from a financial point of view
to the Company or its stockholders.
Applicable Nigerian income tax rates
could adversely affect the value of the Oyo Field asset.
The Oyo
Field, income derived therefrom, and Newco will be subject to the jurisdiction
of the Nigerian taxing authorities. The Nigerian government applies
different tax rates upon income derived from Nigerian oil operations ranging
from 50% to 85%, based on a number of factors. The final
determination of the tax liabilities with respect to the Oyo Field involves the
interpretation of local tax laws and related authorities. In addition, changes
in the operating environment, including changes in tax law and
currency/repatriation controls, could impact the determination of tax
liabilities with respect to the Oyo Field for a tax year. While CAMAC
believes the tax rate applicable to the Oyo Field and the PSC is 50%, the actual
applicable rate could be higher, which could result in a material decrease in
the profits allocable to the Company under the PSC.
Failure
to complete the Transaction could cause our stock price to decline.
If
the Transaction is not completed for any reason, our stock price may decline
because costs related to the Transaction, such as legal and accounting, must be
paid even if the Transaction is not completed. In addition, if the Transaction
is not completed, our stock price may decline to the extent that the current
market price reflects a market assumption that the Transaction will be
completed.
The
Company and CAMAC may waive one or more of the conditions to the Transaction
without re-soliciting stockholder approval for the Transaction.
Each
of the conditions to the Company’s and CAMAC’s obligations to complete the
Transaction may be waived, in whole or in part, to the extent permitted by
applicable laws, by agreement of the Company and CAMAC. The Board of Directors
of the Company will evaluate the materiality of any such waiver to determine
whether amendment of this Proxy Statement and resolicitation of proxies is
warranted. However, the Company generally does not expect any such waiver to be
sufficiently material to warrant resolicitation of the stockholders. In the
event that the Board of Directors of the Company determines any such waiver is
not sufficiently material to warrant resolicitation of stockholders, the Company
may determine to complete the Transaction without seeking further stockholder
approval.
The issuance of the Consideration
Shares to CAMAC and the issuance of securities in the Financing may dilute our
earnings per share, could lower our stock price and adversely affect our ability
to raise additional capital in a subsequent financing. If we are unable to
obtain additional capital in future years, we may be unable to proceed with our
plans and we may be forced to curtail our operations.
The Company successfully raised an
aggregate of approximately $37.5 million through the offering and issuance
of 5,000,000 shares of its Common Stock on February 16, 2010, and
4,146,922 shares of its Common Stock on March 5, 2010, as described
elsewhere in this Proxy Statement. The securities issued in these
financings, as well as other securities issuable in connection with the
Purchase Agreement, may result in dilution to our earnings per share and could
lead to the issuance of securities with rights superior to our current
outstanding securities.
We will also require additional working
capital to support our long-term growth strategies and we may not be able to
obtain adequate levels of additional financing, whether through equity
financing, debt financing or other sources. Any additional financing
that involves the issuance of Company Common Stock or other securities that are
convertible into or exercisable for the Company’s Common Stock may result in
dilution to the Company’s stockholders, including CAMAC following the
Transaction. In addition, we may grant registration rights to investors
purchasing our equity or debt securities in the future. If we are unable to
raise additional financing, we may be unable to implement our long-term growth
strategies, develop or enhance our products and services, take advantage of
future opportunities or respond to competitive pressures on a timely basis, if
at all. In addition, a lack of additional financing could force us to
substantially curtail operations.
The
passage into law of the Nigerian Petroleum Industry Bill could create additional
fiscal and regulatory burdens on the parties to the PSC, which could have a
material adverse effect on the profitability of the production.
A draft
Petroleum Industry Bill (“PIB”) is currently undergoing legislative process at
the Nigerian National Assembly. The draft PIB seeks to introduce significant
changes to legislation governing the oil and gas sector in Nigeria, including
new fiscal regulatory and tax obligations and expanded fiscal and regulatory
oversight that may impose additional operational and regulatory burdens on the
operating contractor under the PSC and impact the economic benefits anticipated
by the parties to PSC. Any such fiscal and regulatory changes could
have a negative impact on the profits allocable to the Company under the
PSC.
The Oyo Field is subject to the
volatility of the Nigerian Government.
The
government of Nigeria originally granted the rights to the Oyo Field to CAMAC.
The government of Nigeria has historically experienced volatility, which is out
of management’s control. The Company’s ability to exploit its interests in this
area pursuant to the PSC may be adversely impacted by unanticipated governmental
action. The future success of the Company’s Oyo Field interest may also be
adversely affected by risks associated with international activities, including
economic and labor conditions, political instability, risk of war,
expropriation, repatriation, termination, renegotiation or modification of
existing contracts, tax laws (including host-country import-export, excise and
income taxes and United States taxes on foreign subsidiaries) and changes in the
value of the U.S. dollar versus the local currencies in which future oil and gas
producing activities may be denominated. Changes in exchange rates may also
adversely affect the Company’s future results of operations and financial
condition. Realization of any of these factors could materially and
adversely affect our financial position, results of operations and cash
flows.
The
Oyo Field is located in an area where there are high security risks, which could
result in harm to the Oyo Field operations and our interest in the Oyo
Field.
The Oyo Field is located approximately
75 miles off the Southern Nigerian coast in deep-water. There are
some risks inherent to oil production in Nigeria. In June 2008, Shell’s Bonga
Oilfield, which is near the Oyo Field, was attacked by Nigerian militants,
causing Shell to shut down the operation of the field. In June 2009, another
Nigerian offshore oilfield operated by Shell, the Ofirma Field, and a flow
station operated by Chevron were attacked by Nigerian Militants. Subsequently,
Shell was forced to shut down some of its oil production in the region. In
addition, an attack like that of September 11, 2001 or longer-lasting wars or
international hostilities, including those currently in Afghanistan and Iraq
could damage the world economy and adversely affect the availability of and
demand for crude oil and petroleum products and negatively affect our investment
and our customers’ investment decisions over an extended period of time. Despite
undertaking various security measures and being situated 75 miles offshore the
Nigerian coast, the FPSO vessel currently being used for petroleum production in
the Oyo Field may become subject to terrorist acts and other acts of hostility
like piracy. Such actions could adversely impact our overall business, financial
condition and operations. In addition, the Oyo Field’s financial viability may
also be negatively affected by changing economic, political and governmental
conditions in Nigeria. Moreover, we operate in a sector of the economy that is
likely to be adversely impacted by the effects of political instability,
terrorist or other attacks, war or international hostilities.
The FPSO vessel may be requisitioned by
the Nigerian without adequate compensation.
The Nigerian government could
requisition or seize the FPSO vessel. Under requisition for title, a government
takes control of a vessel and becomes its owner. Under requisition for hire, a
government takes control of a vessel and effectively becomes its charterer at
dictated charter rates. Generally, requisitions occur during periods of war or
emergency. Although we would be entitled to compensation in the event of a
requisition, the amount and timing of payment would be uncertain.
Maritime disasters and other
operational risks may adversely impact our reputation, financial condition and
results of operations.
The operation of the FPSO vessel has an
inherent risk of maritime disaster, environmental mishaps, cargo and property
losses or damage and business interruptions caused by, among
others:
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mechanical
failure;
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damages
requiring dry-dock repairs;
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human
error;
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labor
strikes;
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adverse
weather conditions;
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vessel
off hire periods;
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regulatory
delays; and
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political
action, civil conflicts, terrorism and piracy in countries where vessel
operations are conducted, vessels are registered or from which spare parts
and provisions are sourced and
purchased.
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Any of these
circumstances could adversely affect the operation of the FPSO vessel, and
result in loss of revenues or increased costs and adversely affect our
profitability. Terrorist acts and regional hostilities around the world in
recent years have led to increase in insurance premium rates and the
implementation of special “war risk” premiums for certain
areas. Such increases in insurance rates may adversely affect
our profitability with respect to the Oyo Field asset.
We will depend on NAE as the operating
contractor under the PSC, which may result in operating costs, methods and
timing of operations and expenditures beyond the Company’s control, and
potential delay or discontinuation of operations and production.
As
operating contractor of the Oyo Field under the PSC, NAE will manage all of the
physical development and operations with respect to the Oyo Field under the PSC,
including, but not limited to, the timing of drilling, production and related
operations, the timing and amount of operational costs, the technology and
service providers employed. We would be materially adversely affected
if NAE does not properly and efficiently manage operational and production
matters, or becomes unable or unwilling to continue acting as the operating
contractor under the PSC.
Stock
sales following the issuance of the Consideration Shares to CAMAC or issuance of
shares in the Financing may affect the stock price of the Company’s common
stock.
After the
issuance of the Consideration Shares to CAMAC in the Transaction and issuance of
shares in the Financing, the recipients of such shares may sell all or a
substantial portion of their shares in the public market, which could result in
downward pressure on the stock price of all the Company’s capital stock.
Moreover, in connection with the issuance of the Consideration Shares to CAMAC,
the Company will enter into a registration rights agreement with CAMAC, pursuant
to which the Company shall prepare and file with the SEC a registration
statement on Form S-3 covering the resale of the Consideration Shares (the
“Registration Statement”) issuable to CAMAC at the Closing, in addition to
providing certain “piggyback” registration rights to CAMAC with respect to the
Consideration Shares, in each case subject to certain limitations and
conditions. These registrations could also result in downward
pressure on the stock price of all the Company’s capital stock.
Following
the Closing of the Transaction, CAMAC will be our controlling stockholder, and
CAMAC may take actions that conflict with the interests of the other
stockholders.
Following
the Closing of the Transaction, CAMAC will beneficially own 62.74% of our
outstanding shares of common stock. Accordingly, subject to the
voting agreement described above pursuant to which CAMAC has agreed to elect or
remove the three directors designated by PAPI Representatives (as defined in the
Purchase Agreement) for one year following the Closing, CAMAC will control the
power to elect our directors, to appoint members of management and to approve
all actions requiring the approval of the holders of our common stock, including
adopting amendments to our Certificate of Incorporation and approving mergers,
acquisitions or sales of all or substantially all of our assets, subject to
certain restrictive covenants. The interests of CAMAC as our controlling
stockholder could conflict with your interests as a holder of Company common
stock. For example, CAMAC as our controlling stockholder may have an interest in
pursuing acquisitions, divestitures, financings or other transactions that, in
its judgment, could enhance its equity investment, even though such transactions
might involve risks to you, as minority holders of the Company.
A
substantial or extended decline in oil and natural gas prices may adversely
affect our business, financial condition or results of operatio
The price
NAE as operating contractor under the PSC may receives for production with
respect to the Oyo Field will heavily influence our revenue, profitability,
access to capital and future rate of growth. Oil is a commodity and, therefore,
its price is subject to wide fluctuations in response to relatively minor
changes in supply and demand. Historically, the market for oil has been
volatile. This market will likely continue to be volatile in the future. The
prices NAE will receive for its production under the PSC with respect to the Oyo
Field, and the levels of its production, depend on numerous factors beyond our
and NAE’s control. These factors include the following:
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changes
in global supply and demand for
oil;
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the
actions of the Organization of Petroleum Exporting
Countries;
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the
price and quantity of imports of foreign
oil;
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political
and economic conditions, including embargoes, in oil producing countries
or affecting other oil-producing
activity;
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the
level of global oil exploration and production
activity;
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the
level of global oil inventories;
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weather
conditions;
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technological
advances affecting energy
consumption;
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domestic
and foreign governmental
regulations;
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proximity
and capacity of oil pipelines and other transportation
facilities; and
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the
price and availability of alternative
fuels.
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Lower oil
prices may not only decrease our revenues on a per unit basis but also may
reduce the amount of oil that NAE can produce economically under the PSC with
respect to the Oyo Field. A substantial or extended decline in oil prices may
materially and adversely affect our future business, financial condition,
results of operations, liquidity or ability to finance planned capital
expenditures.
Fluctuations
in exchange rates could result in foreign currency exchange losses.
Because
some or all of our revenues arising under the PSC may be denominated in foreign
currencies, including the Nigerian naira, European Union euro and British pound
sterling, and our cash is denominated in U.S. dollars, fluctuations in the
exchange rates between the U.S. dollar and foreign currencies will affect our
balance sheet and earnings per share in U.S. dollars. In addition, we will
report our financial results in U.S. dollars, and appreciation or depreciation
in the value of such foreign currencies relative to the U.S. dollar would affect
our financial results reported in U.S. dollars terms without giving effect to
any underlying change in our business or results of operations. Fluctuations in
the exchange rates will also affect the relative value of earnings from and the
value of any U.S. dollar-denominated investments we make in the
future.
Very
limited hedging transactions are available in the Federal Republic of Nigeria to
reduce our exposure to exchange rate fluctuations with respect to the Nigerian
naira, although there are many hedging transactions available with respect to
the European Union euro and the British pound sterling. We have not entered into
any hedging transactions in an effort to reduce our exposure to foreign currency
exchange risk. While we may decide to enter into hedging transactions in the
future, the availability and effectiveness of these hedging transactions may be
limited and we may not be able to successfully hedge our subsidiaries' exposure
at all. In addition, our currency exchange losses with respect to the Nigerian
naira may be magnified by Nigerian exchange control regulations that restrict
our ability to convert Nigerian naira into foreign currency.
THE
COMPANY’S BUSINESS
We
are a development stage company formed to develop new energy ventures, directly
and through joint ventures and other partnerships in which it may participate.
Members of the Company’s senior management team have experience in the fields of
petroleum engineering, geology, field development and production, operations,
international business development and finance. Members of the
Company’s management team have held management and executive positions with
Texaco Inc. and other international energy companies and have managed energy
projects in the People’s Republic of China and elsewhere. Members of the
Company’s management team also have experience in oil drilling, operations,
geology, engineering and sales in China’s energy sector. The Company
considers itself currently to be engaged in a single business segment--oil and
gas exploration, development and production.
Organization
The
Company was incorporated in the State of Delaware in 1979 under the name “Gemini
Marketing Associates, Inc.” In 1994, the Company changed its name
from “Gemini Marketing Associates, Inc.” to “Big Smith Brands, Inc.,” in 2006 it
again changed its name to “Pacific East Advisors, Inc.,” and in 2007 it again
changed its name to “Pacific Asia Petroleum, Inc.” As Big Smith Brands, Inc.,
the Company operated as an apparel company engaged primarily in the manufacture
and sale of work apparel, and was listed on the Nasdaq Stock Market’s Small-Cap
Market from 1995 until December 4, 1997, and the Pacific Stock Exchange from
1995 until April 1, 1999. In 1999, the Company sold all of its assets
related to its workwear business to Walls Industries, Inc., and in 1999 filed
for voluntary bankruptcy under Chapter 11 of the United States Bankruptcy Code.
The final bankruptcy decree was entered on August 8, 2001, and thereafter the
Company existed as a “shell company,” but not a “blank check” company, under
regulations promulgated by the SEC and had no business operations and only
nominal assets until May 2007, when it consummated the mergers of Inner Mongolia
Production Company LLC (“IMPCO”) and Advanced Drilling Services, LLC (“ADS”)
into wholly-owned subsidiaries of the Company. See “The Mergers”
below. In December 2007, the Company merged these wholly-owned
subsidiaries into the parent company, resulting in the cessation of the separate
corporate existence of each of IMPCO and ADS and the assumption by the Company
of the businesses of IMPCO and ADS. In connection with the mergers,
the Company changed its name from “Pacific East Advisors, Inc.” to “Pacific Asia
Petroleum, Inc.” In July 2008, the Company consummated the merger of
Navitas Corporation, a Nevada corporation whose sole assets were comprised of
Company Common Stock and certain deferred tax assets, with and into the Company,
and the separate corporate existence of Navitas Corporation ceased upon
effectiveness of the merger. On November 5, 2009, the Company’s
common stock became listed on the NYSE Amex under the symbol “PAP.”
Unless
the context otherwise requires, the term “Company” as used herein collectively
refers to the Company and its wholly-owned subsidiaries and joint ventures,
including (i) Inner Mongolia Production Company (HK) Limited, (ii) Pacific Asia
Petroleum Energy Limited, (iii) Pacific Asia Petroleum, Limited, (iv) Inner
Mongolia Sunrise Petroleum Co. Ltd, (v) Beijing Dong Fang Ya Zhou Petroleum
Technology Service Company Limited, (vi) Pacific Asia Petroleum (HK) Limited,
and (vii) CAMAC Petroleum Limited.
The
Company’s executive offices are located at 250 East Hartsdale Ave., Suite 47,
Hartsdale, New York 10530. The Company also has an office located in Beijing,
China. PAP may be contacted by telephone at (914) 472-6070, and its website
is
www.papetroleum.com
. The
Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) are available on the Company’s website free of charge as
soon as practicable after such reports are electronically filed or furnished to
the SEC. Investors may register on the site to receive updates about
the Company.
Subsidiaries
and Joint Ventures
The following
summarizes the corporate structure of PAP and its subsidiaries (“we,” “our,”
“us,” or the “Company”), and its joint venture partners.
Inner Mongolia Production Company
(HK) Limited
In
December 2005, the Company formed a Hong Kong corporation, Inner Mongolia
Production Company (HK) Limited, which is a wholly owned subsidiary of the
Company (“IMPCO HK”), for the purpose of entering into certain business
transactions in China. IMPCO HK is a joint venture partner in Inner
Mongolia Sunrise Petroleum Co. Ltd., described in more detail
below.
Inner
Mongolia Sunrise Petroleum Co. Ltd. and Beijing Jinrun Hongda Technology Co.,
Limited
In
March 2006, we formed Inner Mongolia Sunrise Petroleum Co. Ltd., or IMPCO
Sunrise, a Chinese joint venture company which is owned 97% by IMPCO HK and 3%
by Beijing Jinrun Hongda Technology Co., Ltd. (“BJHTC”), an unaffiliated Chinese
corporation. We formed IMPCO Sunrise as an indirect subsidiary to
engage in Chinese energy ventures. Under Chinese law, a
foreign-controlled Chinese joint venture company must have a Chinese partner.
BJHTC is IMPCO HK’s Chinese partner in IMPCO Sunrise. IMPCO Sunrise is governed
and managed by a Board of Directors comprised of three members, two of whom are
appointed by IMPCO HK and one by BJHTC. Through December 31, 2008
IMPCO HK advanced a total of $400,507 to BJHTC, which then invested that amount
in IMPCO Sunrise and issued notes to IMPCO HK for that amount. The notes were
repayable in Chinese yuan (“RMB”). As of December 31, 2008, IMPCO HK
recorded an impairment adjustment of $273,618 on these notes to reduce the
carrying amount to $386,415. Based upon the delay in achieving net income in
IMPCO Sunrise, the impact of the significant decline in the price of oil in the
second half of 2008, the amount of uncollected interest on the note, and the
required date for repayment, it was determined in the fourth quarter of 2008
that the note was impaired. The impairment adjustment included the write-off of
accrued interest included in the principal balance. BJHTC is
obligated to apply any remittances received from IMPCO Sunrise directly to IMPCO
HK. IMPCO Sunrise is authorized to pay these remittances directly to IMPCO HK on
BJHTC’s behalf, until the debt is satisfied. On December 31, 2009 the total
recorded capital of IMPCO Sunrise was reduced by agreement among IMPCO Sunrise
and its owners, and the reduction (including the BJHTC share) was reclassified
as an intercompany loan from IMPCO HK to IMPCO Sunrise. The outside
note receivable of IMPCO HK from BJHTC was reduced as a result, without
recording any additional impairment adjustment. The recorded
balance for this note receivable was $33,015 at December 31, 2009. IMPCO
Sunrise is a party to the Chifeng Agreement and is pursuing the Chifeng
opportunity as described in greater detail below.
Pacific
Asia Petroleum, Limited
In
September 2007, the Company formed Pacific Asia Petroleum, Limited (“PAPL”) as a
wholly-owned Hong Kong corporate subsidiary of the Company for the purpose of
entering into certain business transactions in China. The Company is
the sole shareholder of PAPL. PAPL is currently a party to the
Zijinshan PSC, described in greater detail below.
Pacific
Asia Petroleum (HK) Limited
In May
2008, the Company formed a Hong Kong corporation, Pacific Asia Petroleum (HK)
Limited, which is a wholly owned subsidiary of PAPL (“PAP HK”), for the purpose
of entering into certain business transactions in China. PAP HK has
not entered into any transactions to date.
Pacific
Asia Petroleum Energy Limited
In April 2009, the Company formed a
Hong Kong corporation, Pacific Asia Petroleum Energy Limited (“PAPE”), which is
70% owned by PAP and 30% owned by Best Source Group Holdings Limited, an
unaffiliated Hong Kong company, in connection with the establishment of the
Company’s Enhanced Oil Recovery and Production program and operations (“EORP”),
as described in greater detail below.
Beijing
Dong Fang Ya Zhou Petroleum Technology Service Company
Limited
In
September 2009, the Company formed Beijing Dong Fang Ya Zhou Petroleum
Technology Service Company Limited, (“Dong Fang”), a Chinese joint venture
company which is owned 75.5% by PAPE and 24.5% by Mr. Li
Xiangdong. Dong Fang was formed in connection with the Company’s EORP
program and operations, as described in greater detail below.
CAMAC
Petroleum Limited
In
December 2009, the Company formed a Nigerian corporation, CAMAC Petroleum
Limited (“Newco”), which is a wholly owned subsidiary of the Company, for the
purpose of acquiring the Contract Rights in the Transaction as described in more
detail in this Proxy Statement.
Registered
Direct Offerings
February
2010 Offering
On February 16, 2010, the Company
consummated the offer and sale (the “February 2010 Offering”) of 5,000 000
shares (the “February 2010 Offering Shares”) of its common stock, par value
$0.001 per share ("Common Stock"), for an aggregate purchase price of $20
million, or $4.00 per share (the "February 2010 Offering Purchase Price"),
pursuant to a Securities Purchase Agreement, dated February 10, 2010, among the
Company and certain purchasers signatory thereto (the “February 2010 Offering
Purchasers”). In addition, the Company issued to the February 2010
Offering Purchasers (1) warrants to purchase up to an additional 2,000,000
shares of Common Stock of the Company, in the aggregate, at an exercise price
of $4.50 (subject to customary adjustments), exercisable commencing
six months following the closing for a period of 36 months after such
commencement date (the “Series A Warrants”); and (2) warrants to purchase up to
an additional 2,000,000 shares of Common Stock of the Company, in the
aggregate, at an exercise price $4.00 per share (subject to customary
adjustments), exercisable immediately at the closing until November 1, 2010 (the
“Series B Warrants” and together with the Series A Warrants, the “February 2010
Offering Warrants”). If all the February 2010 Offering Warrants are
exercised, the Company would receive additional gross proceeds of $17 million.
The February 2010 Offering Shares and the February 2010 Offering Warrant Shares
were sold pursuant to a shelf registration statement on Form S-3 declared
effective by the SEC on February 3, 2010 (File No. 333-163869), as amended by
the prospectus supplement filed with the SEC on February 12, 2010 and delivered
to the February 2010 Offering Purchasers.
Rodman & Renshaw, LLC (“Rodman”)
served as the Company’s exclusive placement agent in connection with the
February 2010 Offering. As consideration for its services as
placement agent, Rodman received a cash fee equal to 6.0% of the gross proceeds
of the February 2010 Offering ($1.2 million), as well as a 5-year warrant to
purchase shares of Common Stock of the Company equal to 3.0% of the aggregate
number of shares sold in the February 2010 Offering (150,000 shares of Common
Stock). Rodman’s warrant has the same terms as the February 2010
Offering Warrants issued to the February 2010 Offering Purchasers except that
the warrant is not exercisable until the 6-month anniversary of the closing and
the exercise price is 125% of the per share purchase price of the shares issued
in the February 2010 Offering ($5.00 per share). In addition, subject
to compliance with Financial Industry Regulatory Authority ("FINRA") Rule
5110(f)(2)(D), the Company reimbursed Rodman’s out-of-pocket accountable
expenses actually incurred in the amount of $25,000.
March
2010 Offering
On March 5, 2010, the Company
consummated the offer and sale (the “March 2010 Offering”) of 4,146,922 shares
(the “March 2010 Offering Shares”) of its common stock, par value $0.001 per
share ("Common Stock"), for an aggregate purchase price of $17.5 million, or
$4.22 per share (the "March 2010 Offering Purchase Price"), pursuant to a
Securities Purchase Agreement, dated March 2, 2010, among the Company and
certain purchasers signatory thereto (the “March 2010 Offering
Purchasers”). In addition, the Company issued to the March 2010
Offering Purchasers (1) warrants to purchase up to an additional 1,658,769
shares of Common Stock of the Company, in the aggregate, at an exercise price
of $4.50 (subject to customary adjustments), immediately exercisable
following the closing for a period of 42 months (the “Series C Warrants”); and
(2) warrants to purchase up to an additional 1,658,769 shares of
Common Stock of the Company, in the aggregate, at an exercise price $4.12 per
share (subject to customary adjustments), exercisable immediately at the closing
until December 5, 2010 (the “Series D Warrants” and together with the Series C
Warrants, the “March 2010 Offering Warrants”). If all the March 2010
Offering Warrants are exercised, the Company would receive additional gross
proceeds of approximately $14.3 million. The March 2010 Offering Shares and the
March 2010 Offering Warrant Shares were sold pursuant to a shelf registration
statement on Form S-3 declared effective by the SEC on February 3, 2010 (File
No. 333-163869), as amended by the prospectus supplement filed with the SEC on
March 3, 2010 and delivered to the March 2010 Offering Purchasers.
Rodman served as the Company’s
exclusive placement agent in connection with the March 2010
Offering. As consideration for its services as placement agent,
Rodman received a cash fee equal to 6.0% of the gross proceeds of the March 2010
Offering ($1,050,000 million), as well as a 5-year warrant to purchase shares of
Common Stock of the Company equal to 3.0% of the aggregate number of shares sold
in the March 2010 Offering (124,408 shares of Common Stock). Rodman’s
warrant has the same terms as the March 2010 Offering Warrants issued to the
March 2010 Offering Purchasers except that the warrant is not exercisable until
the 6-month anniversary of the closing and the exercise price is 125% of the per
share purchase price of the shares issued in the March 2010 Offering ($5.275 per
share). In addition, subject to compliance with FINRA Rule
5110(f)(2)(D), the Company reimbursed Rodman’s out-of-pocket accountable
expenses actually incurred in the amount of $25,000.
CAMAC will receive Consideration Shares
equal to 62.74% of the Company’s issued and outstanding shares of common stock
after giving effect to the Transaction and the February 2010 Offering and March
2010 Offering (together, the “Registered Direct Offerings” or the
“Financing”). Therefore, if the Transaction closes, then the
Financing (including any future exercise of warrants) and any related Financing
costs will have a dilutive impact on your shares of common stock, but such
Financing will have no dilutive effect on the Consideration
Shares. For a discussion of the risk of dilution, please read “Risk
Factors Associated With The Transaction – The issuance of the Consideration
Shares to CAMAC and the issuance of securities in the Financing may dilute our
earnings per share, could lower our stock price and adversely affect our ability
to raise additional capital in a subsequent financing. If we are unable to
obtain additional capital in future years, we may be unable to proceed with our
plans and we may be forced to curtail our operations” beginning on page
35
of this Proxy
Statement.
Net proceeds from the Financing are
planned to be used by the Company for working capital purposes, and also may be
used by the Company to fund the Company’s cash portion ($38.84 million, $32
million of which is due upon Closing) of the consideration for the acquisition
of the Contract Rights with respect to the Oyo Field, which field began
production in December 2009. As of March 5, 2010, the Company had
cash, cash equivalents and short-term investments of approximately $38.937
million (unaudited), which is sufficient to fund the $32 million Cash
Consideration amount due upon Closing of the Transaction and fund all of the
Company’s current committed operations through 2011. The balance
$6.84 million due to CAMAC post-Closing is anticipated to be paid from proceeds
received by the Company under the PSC in connection with the Oyo
Field.
Market
Overview
After slowing in 2008 and early 2009,
economic growth in China accelerated in recent quarters and is expected to
continue at a faster pace than in the countries of the Organization of Economic
Cooperation and Development (“OECD”) and most other developing countries, as
will China’s consumption of increasing amounts of energy. Despite significant
recent improvements in energy efficiency, China’s economy is still less
energy-efficient than the U.S. economy, requiring nearly twice as many BTUs per
dollar of Gross Domestic Product (“GDP”). As a result, China's growth
is expected to continue to amplify the country’s increasing energy demand for
some time (U.S. Department of Energy:
International Energy Annual
&
International
Petroleum
Monthly)
. China’s GDP grew to
$4.33 trillion in 2008 at market exchange rates (World Bank data), making China
the 3
rd
largest economy in the world, with output only 12% below that of
Japan. China passed Japan in late 2003 to become the world’s second
largest petroleum consumer. According to data from the U.S. Department of
Energy, between 2000 and 2008, oil use in China grew by an average of 6.3% per
year. In 2008, Chinese demand reached 7.8 million barrels per day, more than
one-third the level in the United States. At the same time, domestic crude oil
output in China has grown more slowly over the past five years, forcing imports
to expand rapidly to meet demand. Since 2000 China’s oil imports have more than
doubled, growing from 1.4 million barrels per day to 3.6 million barrels per day
in 2008, when they accounted for nearly half of Chinese oil demand.
According to testimony by Jeffrey
Logan, Senior Energy Analyst and China Program Manager at the International
Energy Agency, to the U.S. Senate Committee on Energy and Natural Resources on
February 3, 2005, China has become an economic superpower and now plays a key
role in the supply and demand of many global commodity markets, including oil.
He indicated that while China’s historical growth was not dependent on energy,
its growth was now very dependent on the development and growth of oil and gas,
with every one percent increase in GDP causing energy demand to grow by over 1.5
percent. Although the Chinese government has set a goal of reducing
per-GDP energy consumption by 20% between 2005 and 2010, the strong linkage
between energy and China’s economic growth is reflected in the forecasts of the
International Energy Agency (“IEA”). In its 2008 World Energy
Outlook, the IEA projected that China’s petroleum demand would continue to grow
at 3.5% per year through 2030, increasing by 9 million barrels per day and
accounting for 43% of global oil demand growth over this period. Nor is the
energy impact of China’s growth confined to oil. In its latest
forecast, the IEA expects China and India together to account for more than half
of all incremental global energy demand through 2030, including over 1.3 million
MW of new power generation in China, along with a rapid increase in natural gas
consumption.
Natural gas represents a particularly
under-utilized energy source in China, supplying only 3% of the country’s energy
needs, compared with 23% globally and in the U.S. We believe that its low
emissions, combined with the low cost and high efficiency of gas turbines, make
gas an attractive fuel for meeting China’s future electric power demand. This
will be particularly important in light of China's newly-announced goal of
reducing the carbon-intensity of its economy by 40-45% by 2020, compared to
2005, in light of the much lower emissions from gas-fired power plants relative
to those burning coal. The Chinese government has indicated that it would like
to expand gas use significantly, and the National Development and Reform
Commission has set a goal of increasing gas’s share of the market to 5.3% by
2010 (U.S. Department of Energy:
International
Energy Annual
&
International Petroleum
Monthly)
.
China’s
domestic natural gas production increased to 76 billion cubic meters (2.7
trillion cubic feet) in 2008 (China National Bureau of Statistics) and is
planned to double to 160 billion cubic meters (5.7 trillion cubic feet) by 2015
(
China Daily
, quoting
an official of the Ministry of Land and Resources). In spite of this
expansion, some sources foresee a gas supply shortfall as large at 90 billion
cubic meters per year by 2020.
The government of China has taken a
number of steps to encourage the exploitation of oil and gas within its own
borders to meet the growing demand for oil and to try to reduce its dependency
on foreign oil. Notably, the government has reduced complicated restrictions on
foreign ownership of oil exploitation projects and has passed legislation
encouraging foreign investment and exploitation of oil and gas.
Through successive “Five Year Plans”
China has undertaken a strategic reorganization in the oil industry by means of
market liberalization, internalization, cost-effectiveness, scientific and
technological breakthrough and sustainable development. Changes were made in the
structures of oil reservation and exploration such as permitting more oil
imports into the domestic market and allocating a greater percentage of oil and
gas in non-renewable energy consumption. The reorganization was aimed at
ensuring a smooth and sustainable oil supply, at low cost and meeting a goal for
sound economic growth. The guiding principles of reform focused on developing
the domestic market by expanding exploration efforts while practicing
conservation and building oil reserves. These efforts focused on building key
infrastructure for oil and gas transportation and storage by targeting the
development of oil and gas pipelines to a target of 14,500 km in total length,
and building storage facilities, including a strategic petroleum reserve of
approximately 100 million barrels and facilities for 1.14 billion cubic meters
of gas (40 billion cubic feet). In order to further technical development and
innovation, substantial resources were devoted to oil and gas
exploration.
Chinese policymakers and state-owned
oil companies have embarked on a multi-pronged approach to improve oil security
by diversifying suppliers, building strategic oil reserves, purchasing equity
oil stakes abroad, and enacting new policies to lower demand. When it became a
net oil importer in 1993, almost all of China’s crude imports came from
Indonesia, Oman and Yemen. After diversifying global oil purchases over the past
decade, Chinese crude imports now come from a much wider range of suppliers. In
2008, Saudi Arabia was China’s largest supplier, accounting for 20 percent of
imports, followed by Angola, Iran, Oman and Russia. 50% of China’s
crude oil imports come from the Middle East, and 30% from Africa (U.S.
Department of Energy:
China
Country Analysis Brief
.)
The
three major government-owned oil companies in China are (i) China Petroleum
& Chemical Company, or “Sinopec,” (ii) China National Offshore Oil
Corporation, or “CNOOC,” and (iii) PetroChina Company Limited, or “PetroChina”
(also sometimes referred to as “China National Petroleum Corporation” or “CNPC,”
which is the government company owning the majority of PetroChina). PetroChina
is China’s largest producer of crude oil and natural gas and has operations in
29 other countries. Sinopec is China’s largest refining, storage and
transmission company. CNOOC is China’s largest offshore oil and gas exploration
and development company. Each of these companies has been granted a charter by
the Chinese government to engage in various stages of oil and gas procurement,
transportation and production in China. Substantially all oil and gas
exploration, storage and transportation by foreign entities in China must be
conducted via joint ventures with one of these companies, or with another
Chinese company that has entered into an arrangement with one of these companies
and been authorized by the appropriate government authorities to engage in such
activities in China.
Unlike the developed petroleum markets
of the member countries of the OECD, the oil market in China still includes
important elements of central planning. Each year, the National Development and
Reform Commission publishes the projected target for the production and sale of
crude oil by the three state oil companies, based on the domestic consumption
estimates submitted by domestic producers, including PetroChina, Sinopec and
CNOOC, the production capacity of these companies, and the forecast of
international crude oil prices. The actual production levels are determined by
the producers themselves and may vary from the submitted estimates. PetroChina
and Sinopec set their crude oil median prices each month based on the average
Singapore market FOB prices for crude oil of different grades in the previous
month. In addition, PetroChina and Sinopec negotiate a premium or discount to
reflect transportation costs, the differences in oil quality, and market supply
and demand. The National Development and Reform Commission will mediate if
PetroChina and Sinopec cannot agree on the amount of premium or
discount.
Market
Opportunity
While the barriers to entry for foreign
entities to engage in the development of oil and gas resources in China have
recently eased, we believe that many small companies still face significant
hurdles due to their lack of experience in the Chinese petroleum industry.
Development requires specialized grants and permits, experience with operating
in and China and dealing with challenging cultural and political environments in
remote regions and the ability to manage projects efficiently during times of
resource shortages. The Company hopes to take advantage of the energy
development opportunities that exist in China today by leveraging its management
team’s prior exploration experiences in China and existing relationships with
oil industry executives and government officials in China. In addition, we
believe that members of the Company’s production team have the hands-on
experience with projects in Asia that we believe is essential to any successful
petroleum project in China.
China’s economic growth has been
affected by the global financial crisis and recession, declining to a
year-on-year rate of 6.8% in the fourth quarter of 2008. However, by
the third quarter of 2009 growth had rebounded to 8.9%, due in large part to a
government fiscal stimulus amounting to 4 trillion RMB ($586 billion), which
included investment in energy infrastructure (World Bank:
China Quarterly Update, December
2008 and November 2009
). Estimates indicate growth should
average 8% for 2009 and continue at or above that level into 2010 (World Bank
website.) We believe China remains a very attractive investment opportunity as
the global economy begins to recover.
Principal
Business Strategy
The Company is a development-stage
company formed to develop new energy ventures, directly and through joint
ventures and other partnerships in which it may participate.
China
Strategy
In 2006, the Company commenced
operations in China and is currently engaged in the business of oil and gas
exploration, development, production and distribution in China. The Company has
entered into a production sharing contract for CBM, an oil development
opportunity, letters of intent for joint cooperation on a gas distribution
venture, and agreements related to EORP activities in China.
Enhanced
Oil Recovery and Production (“EORP”)
On May 13, 2009, PAP and its
wholly-owned Hong Kong subsidiary, PAPE, entered into a Letter of Understanding
(“LOU”), which was amended and further detailed in various other associated
agreements that were executed on June 7, 2009, with Mr. Li Xiangdong (“LXD”) and
Mr. Ho Chi Kong (“HCK”), pursuant to which the parties agreed to form Beijing
Dong Fang Ya Zhou Petroleum Technology Service Company Limited (“Dong Fang”) as
a new Chinese joint venture company, to be 75.5% owned by PAPE and 24.5% owned
by LXD, into which LXD would assign certain pending patent rights related
to chemical enhanced oil recovery (the “LXD Patents”). Dong Fang was
officially incorporated under Chinese law on September 24, 2009. As required by
the LOU, and pursuant to that certain Agreement on Cooperation, dated June 7,
2009, and as amended on June 25, 2009 (the “AOC”), entered into by and between
PAPE and LXD, upon the effectiveness of the assignment of the LXD Patents to
Dong Fong by LXD on November 27, 2009, (i) the Company paid LXD and HCK $100,000
each, (ii) PAP issued shares of PAPE to Best Source Group Holdings Limited, a
Hong Kong company designated by HCK (“BSG”), to provide BSG with a 30% ownership
interest in PAPE, with the Company retaining the balance 70% ownership interest
in PAPE, and (iii) the Company issued to HCK’s designee 100,000 shares of Common
Stock of the Company and options to purchase up to 400,000 additional shares of
Common Stock of the Company. These options were approved for issuance by the
Board of Directors at an exercise price of $4.62 per share, which was the
closing sale price of the Company’s Common Stock at that date the Company’s
issuance obligation was triggered upon achievement of the applicable milestone
under the LOU on November 27, 2009 as reported by NYSE Amex. The Company has
also agreed to issue 300,000 more shares of Company Common Stock to HCK or his
designee upon the signing of certain contracts by Dong Fang with respect to the
Fulaerjiqu oilfield. All the options granted to HCK do not vest
immediately; vesting will be contingent upon the achievement of certain
milestones related to the entry by Dong Fang into certain EORP-related
development contracts pertaining to oilfield projects in the Fulaerjiqu
Oilfield. These contracts are anticipated to each deliver to Dong Fang a
significant percentage of the incremental oil production and/or fixed fees per
ton for the incremental production which results from using the technology
covered by the LXD Patents.
In addition, LXD has been engaged as a
consultant by Dong Fang to provide research and development services, training,
and assistance in promoting certain other opportunities developed by him that
target the application of the technology embodied in the LXD Patents, including
assistance with entering into a contract with respect to the Liaohe Oilfield
(the “Liaohe Contract”), and helping to develop projects in both the Shandong
Province and the Xinjiang autonomous region of the People’s Republic of China
for the provision and application of technology and chemicals developed by
LXD.
The Company has agreed to loan up to $5
million to PAPE, which may then invest up to RMB 30,000,000 (approximately $ 4.4
million) into Dong Fang, with a portion of this being a requirement to invest
RMB 22,650,000 as PAPE’s share of the registered capital of Dong Fang, when and
to the extent required under applicable law. PAPE’s capital
investment will be used by Dong Fang to carry out work projects, fund
operations, and to make, together with PAPE, aggregate payments of up to $1.5
million in cash to LXD and HCK. The payments of up to $1.5 million in cash to
LXD and HCK are subject to the achievement of certain milestones pursuant to the
LOU, including the formation of Dong Fang, the transfer of the LXD Patents to
Dong Fang, and the signing of the contracts with respect to the Fularjiqu
Oilfield and the Liaohe Contract by Dong Fang, as well as certain
production-based milestones resulting from the implementation of these
contracts. As of December 31, 2009, $500,000 of milestone payments has been paid
or accrued by PAPE. The loan from the Company to PAPE will be repaid from funds
distributed to PAPE by way of dividends or other appropriate payments from Dong
Fang. As of December 31, 2009, the Company has loaned a total of $1.3
million to PAPE, and PAPE has invested a total of RMB 4.8 million (approximately
$700,000) into Dong Fang.
In accordance with the terms of the
LOU, as amended on June 7, 2009, PAPE, LXD and the Company’s existing Chinese
joint venture company, Inner Mongolia Sunrise Petroleum Co. Ltd. (“IMPCO
Sunrise”), entered into an Assignment Agreement of Application Right for Patent,
Consulting Engagement Agreement, and an Interest Assignment
Agreement. Upon formation of Dong Fang on September 24, 2009, all
these and other agreements entered into by IMPCO Sunrise on behalf of Dong Fang
were assigned by IMPCO Sunrise to Dong Fang.
With these EORP-related agreements
signed and in place, the Company through Dong Fang has commenced operations in
various oil fields located in the Liaoning, Shandong, and Xinjiang Provinces in
China. In the year ended December 31, 2009, the Company recorded
initial revenues, cost of sales and expenses from the EORP business
activities.
The
Zijinshan PSC
On
October 26, 2007, PAPL entered into a production sharing contract with China
United Coalbed Methane Co., Ltd. (“CUCBM”) (the Chinese Government-designated
company holding exclusive rights to negotiate with foreign companies with
respect to coalbed methane (“CBM”) production in China), for the exploitation of
CBM resources in the CUCBM Contract Area (the "Zijinshan PSC"), which Zijinshan
PSC was approved by the Ministry of Commerce of The People’s Republic of China
on April 2, 2008. The Zijinshan PSC provides, among other things, that
PAPL,
following
approval of the Zijinshan PSC by the Ministry of Commerce of China,
has a minimum commitment for the first three years to drill three
exploration wells and to carry out 50 km of 2-D seismic data acquisition (an
estimated expenditure of $2.8 million), and in the fourth and fifth
years PAPL will drill four pilot development wells at an estimated
cost of $2 million (in each case subject to PAPL’s right to terminate the
Zijinshan PSC). That five year period constitutes the exploration period, which
is subject to extension. During the development and production
period, CUCBM will have the right to acquire a 40% participating interest and to
work jointly to develop and produce CBM under the Zijinshan PSC. Pursuant to the
Zijinshan PSC, all CBM resources (including all other hydrocarbon resources)
produced from the CUCBM Contract Area are shared as follows: (i) 70%
of production is provided to PAPL and CUCBM for recovery of all costs incurred;
(ii) PAPL has the first right to recover all of its exploration costs from such
70% and then development costs are recovered by PAPL and CUCBM pursuant to their
respective participating interests; and (iii) the remainder of the production is
split by CUCBM and PAPL receiving between 99% and 90% of such remainder
depending on the actual producing rates (a sliding scale) and the balance of the
remainder (between 1% and 10%) is provided to the Government of
China.
The
Zijinshan PSC has a term of thirty (30) years. In December 2008, the Company and
CUCBM finalized a mutually agreed work program pursuant to which the Company has
now commenced exploration operations under the Zijinshan PSC. The Zijinshan PSC
is in close proximity to the major West-East and the Ordos-Beijing gas pipelines
which link the gas reserves in China’s western provinces to the markets of
Beijing and the Yangtze River Delta, including Shanghai. The Zijinshan PSC
covers an area of approximately 175,000 acres (the “Zijinshan
Block”).
The Company has completed seismic data
acquisition operations on the Zijinshan Block and spent approximately $1.5
million to shoot 162 kilometers of seismic under the work program. This seismic
data has since been processed and interpreted. Based on the seismic
interpretation, four (4) potential well locations have been identified. A
regional environmental impact assessment study (“EIA”) has also been completed.
Following completion of a site specific EIA study the Company spudded well ZJS
001 on September 30, 2009. This well intersected the 4/5 coal seams in the
Shanxi formation and 8/9 coal seams in the Taiyuan formation as anticipated. The
well reached total depth in mid-November 2009. Core samples have
undergone laboratory testing, including tests for gas content, gas saturation
and coal characteristics. Based on the results of these tests, at the
latest Zijinshan PSC Joint Management Committee (JMC) meeting, the Company
agreed to a 2010 work program which includes undertaking further technical
studies related to the CUCBM Contract Area and drilling at least two additional
wells there.
The
Chifeng Oil Development Opportunity in Inner Mongolia
Inner
Mongolia, China’s northern border autonomous region, features a long, narrow
strip of land sloping from northeast to southwest. It stretches 2,400 km from
west to east and 1,700 km from north to south. Inner Mongolia traverses between
northeast, north, and northwest China. The third largest among China’s
provinces, municipalities, and autonomous regions, the region covers an area of
1.18 million square km, or 12.3% of the country’s territory. It neighbors eight
provinces and regions in its south, east and west and Mongolia and Russia in the
north, with a borderline of 4,200 km. In 2005, China and the Inner Mongolia
Municipality awarded to Chifeng Zhongtong Oil and Natural Gas Co. (“Chifeng”)
the exclusive authority to develop and exploit resources in the area known as
the “ShaoGen Contract Area,” an area of approximately 353 square kilometers
located in Chifeng, China. In 2005 and 2006, Chifeng drilled several
wells throughout the ShaoGen Contract Area and discovered oil.
In August 2006, the Company (through
IMPCO Sunrise) and Chifeng entered into a Contract for Cooperation and Joint
Development (the “Chifeng Agreement”), setting forth the terms and conditions
for carrying out work and exploiting the development acreage in the ShaoGen
Contract Area owned by Chifeng.
Pursuant to the Chifeng Agreement,
drilling operations commenced in October 2006. The first well drilled
by Chifeng discovered oil and has been completed as a producing well, but
production operations were suspended in 2007 pending receipt of a production
license from the Chinese government. Chifeng has accounted for the Company’s
share of the production revenue from the first producing well in the form of a
credit, which will be allocated to the Company retroactively when and if the
Production License is issued. Operations are anticipated to resume when and if
the Production License is received. To date, the total production from the well
has been approximately 400 tons of crude oil (all of which has been sold) and
total producing revenues credited to the Company (after costs and royalties)
were approximately $135,000. If a Production License is not received, the
Company will seek, but is not contractually guaranteed, reimbursement from
Chifeng for the Company’s outstanding costs.
The Company is pursuing a combination
of strategies to have such production license awarded, including a possible
renegotiation of the Chifeng Agreement with the goal of increasing the financial
incentives to all the parties involved, and the Company is also pursuing a
strategy focused on entering into negotiations with respect to an opportunity to
participate in enhancing the existing production from the 22 sq. km. Kerqing
Oilfield. Participation in enhancing production from the Kerqing Oilfield could
significantly enhance the Chifeng Agreement in scale and value. If
this Production License is not issued, the opportunities to drill additional
long-term production wells under the contract, including future production from
this first well, will be at risk. There is no certainty that any of these
strategies will ultimately succeed in the Company obtaining a Production License
for the Chifeng area, but the Company intends to continue in these
efforts. Due to these significant uncertainties, the Company recorded
an impairment loss on its Chifeng investment in the fourth quarter of
2009.
Gas
Distribution Network
The Company entered into a Letter of
Intent in November 2008, to possibly acquire a 51% ownership interest in the
Handan Chang Yuan Natural Gas Co., Ltd. (“HGC”) from the Beijing Tai He Sheng Ye
Investment Company Limited. HCG owns and operates gas distribution assets in and
around Handan City, China. HGC was founded in May 2001, and is the primary gas
distributer in Handan City, which is located 250 miles south of Beijing, in the
Hebei Province of the People’s Republic of China. HGC has over 300,000 customers
and owns 35 miles of a main gas pipeline, and more than 450 miles of delivery
gas pipelines, with a delivery capacity of 300 million cubic meters per
day. HGC also owns an 80,000 sq. ft. field distribution facility. Gas
is being supplied by Sinopec and PetroChina from two separate
sources. On July 7, 2009 the Company entered into a revised Letter of
Intent with Handan Hua Ying Company Limited (“Handan”) relating to the possible
acquisition of a 49% ownership interest in HGC. The Company will
continue its evaluation of this possible acquisition including the possibility
of bringing in partners.
Strategy
in Nigeria
Oyo
Field Production Sharing Contract Interest
On November 18, 2009, the Company
entered into the Purchase and Sale Agreement with CAMAC, as amended on March 4,
2010, and as described in greater detail in this Proxy Statement under
“Proposals 1and Proposal 2 Approval of the Transaction and Issuance of the
Consideration Shares” and “Discussion of the Oyo Field and the PSC” above,
pursuant to which the Company agreed to acquire all of CAMAC’s interest in a
Production Sharing Contract with respect to that certain oilfield asset known as
the Oyo Field (the “Contract Rights”) and the transactions contemplated thereby,
including the election of directors of the Company (the
“Transaction”). The Purchase Agreement which is described in, and
attached to, this Proxy Statement, provides that, among other things: (i) CAMAC
will transfer the Contract Rights to a newly formed Nigerian entity to be wholly
owned by the Company, in consideration for the Company’s payment
of $38.84 million in cash (subject to adjustment) and the issuance of
the Company’s common stock, par value $0.001 per share, equal to 62.74% of the
Company’s issued and outstanding common stock; and (ii) for a period commencing
on the closing of the transactions contemplated by the Purchase Agreement (the
“Closing”) and ending on the date that is one year following the Closing, the
Company’s Board of Directors will consist of seven members, four of whom will be
nominated by
CAMAC.
The Transaction is expected to close on
or before April 7, 2010, and is subject to the satisfaction of customary and
other conditions to Closing, including, without limitation: (i) the
negotiation and entry by the parties into certain other agreements as set forth
in the Purchase Agreement in forms reasonably satisfactory to the parties; and
(ii) the approval of the Company’s stockholders of the Purchase Agreement and
the transactions contemplated thereby. The Purchase Agreement also
contains other customary terms, including, but not limited to, representations
and warranties, indemnification and limitation of liability provisions,
termination rights, and break-up fees if either party terminates under certain
circumstances. The Company has already raised $37.5 million through two
registered direct offerings (disclosed elsewhere in this Proxy Statement) which
were consummated on February 16, 2010 and March 5, 2010. Net proceeds
from these offerings are planned to be used by the Company for working capital
purposes, and also may be used by the Company to fund the Company’s acquisition
of the Contract Rights from CAMAC as described in this Proxy Statement.
As
of March 5, 2010, the Company had cash, cash equivalents and short-term
investments of approximately $38.937 million (unaudited), which is sufficient to
fund the $32 million Cash Consideration amount due upon Closing of the
Transaction and fund all of the Company’s current committed operations through
2011. The balance $6.84 million due to CAMAC post-Closing is
anticipated to be paid from proceeds received by the Company under the PSC in
connection with the Oyo Field.
Please refer to “Proposal 1 and
Proposal 2 Approval of the Transaction and Issuance of the Consideration Shares”
above and “Discussion of the Oyo Field and the PSC” above.
Financing
Through
March 5, 2010, although the Company has generated minimal operating revenue, it
has raised approximately $59.1 million in equity financings, including through
the Registered Direct Offerings described below, to fund its ongoing working
capital requirements, as well as possible acquisition and development
activities.
Registered
Direct Offerings
February 2010 Offering
On February 16, 2010, the Company
consummated the offer and sale (the “February 2010 Offering”) of 5,000,000
shares (the “February 2010 Offering Shares”) of its common stock, par value
$0.001 per share ("Common Stock"), for an aggregate purchase price of $20
million, or $4.00 per share (the "February 2010 Offering Purchase Price"),
pursuant to a Securities Purchase Agreement, dated February 10, 2010, among the
Company and certain purchasers signatory thereto (the “February 2010 Offering
Purchasers”). In addition, the Company issued to the February 2010
Offering Purchasers (1) warrants to purchase up to an additional 2,000,000
shares of Common Stock of the Company, in the aggregate, at an exercise price
of $4.50 (subject to customary adjustments), exercisable commencing
six months following the closing for a period of 36 months after such
commencement date (the “Series A Warrants”); and (2) warrants to purchase up to
an additional 2,000,000 shares of Common Stock of the Company, in the
aggregate, at an exercise price $4.00 per share (subject to customary
adjustments), exercisable immediately at the closing until November 1, 2010 (the
“Series B Warrants” and together with the Series A Warrants, the “February 2010
Offering Warrants”). If all the February 2010 Offering Warrants are
exercised, the Company would receive additional gross proceeds of $17 million.
The February 2010 Offering Shares and the February 2010 Offering Warrant Shares
were sold pursuant to a shelf registration statement on Form S-3 declared
effective by the SEC on February 3, 2010 (File No. 333-163869), as amended by
the prospectus supplement filed with the SEC on February 12, 2010 and delivered
to the February 2010 Offering Purchasers.
Rodman & Renshaw, LLC (“Rodman”)
served as the Company’s exclusive placement agent in connection with the
February 2010 Offering. As consideration for its services as
placement agent, Rodman received a cash fee equal to 6.0% of the gross proceeds
of the February 2010 Offering ($1.2 million), as well as a 5-year warrant to
purchase shares of Common Stock of the Company equal to 3.0% of the aggregate
number of shares sold in the February 2010 Offering (150,000 shares of Common
Stock). Rodman’s warrant has the same terms as the February 2010
Offering Warrants issued to the February 2010 Offering Purchasers except that
the warrant is not exercisable until the 6-month anniversary of the closing and
the exercise price is 125% of the per share purchase price of the shares issued
in the February 2010 Offering ($5.00 per share). In addition, subject
to compliance with Financial Industry Regulatory Authority ("FINRA") Rule
5110(f)(2)(D), the Company reimbursed Rodman’s out-of-pocket accountable
expenses actually incurred in the amount of $25,000.
March 2010 Offering
On March 5, 2010, the Company
consummated the offer and sale (the “March 2010 Offering”) of 4,146,922 shares
(the “March 2010 Offering Shares”) of its common stock, par value $0.001 per
share ("Common Stock"), for an aggregate purchase price of $17.5 million, or
$4.22 per share (the "March 2010 Offering Purchase Price"), pursuant to a
Securities Purchase Agreement, dated March 2, 2010, among the Company and
certain purchasers signatory thereto (the “March 2010 Offering
Purchasers”). In addition, the Company issued to the March 2010
Offering Purchasers (1) warrants to purchase up to an additional 1,658,769
shares of Common Stock of the Company, in the aggregate, at an exercise price
of $4.50 (subject to customary adjustments), immediately exercisable
following the closing for a period of 42 months (the “Series C Warrants”); and
(2) warrants to purchase up to an additional 1,658,769 shares of
Common Stock of the Company, in the aggregate, at an exercise price $4.12 per
share (subject to customary adjustments), exercisable immediately at the closing
until December 5, 2010 (the “Series D Warrants” and together with the Series C
Warrants, the “March 2010 Offering Warrants”). If all the March 2010
Offering Warrants are exercised, the Company would receive additional gross
proceeds of approximately $14.3 million. The March 2010 Offering Shares and the
March 2010 Offering Warrant Shares were sold pursuant to a shelf registration
statement on Form S-3 declared effective by the SEC on February 3, 2010 (File
No. 333-163869), as amended by the prospectus supplement filed with the SEC on
March 3, 2010 and delivered to the March 2010 Offering Purchasers.
Rodman served as the Company’s
exclusive placement agent in connection with the March 2010
Offering. As consideration for its services as placement agent,
Rodman received a cash fee equal to 6.0% of the gross proceeds of the March 2010
Offering ($1,050,000 million), as well as a 5-year warrant to purchase shares of
Common Stock of the Company equal to 3.0% of the aggregate number of shares sold
in the March 2010 Offering (124,408 shares of Common Stock). Rodman’s
warrant has the same terms as the March 2010 Offering Warrants issued to the
March 2010 Offering Purchasers except that the warrant is not exercisable until
the 6-month anniversary of the closing and the exercise price is 125% of the per
share purchase price of the shares issued in the March 2010 Offering ($5.275 per
share). In addition, subject to compliance with FINRA Rule
5110(f)(2)(D), the Company reimbursed Rodman’s out-of-pocket accountable
expenses actually incurred in the amount of $25,000.
CAMAC will receive Consideration Shares
equal to 62.74% of the Company’s issued and outstanding shares of common stock
after giving effect to the Transaction and the February 2010 Offering and March
2010 Offering (together, the “Registered Direct Offerings” or the
“Financing”). Therefore, if the Transaction closes, then the
Financing (including any future exercise of warrants) and any related Financing
costs will have a dilutive impact on your shares of common stock, but such
Financing will have no dilutive effect on the Consideration
Shares. For a discussion of the risk of dilution, please read “Risk
Factors Associated With The Transaction – The issuance of the Consideration
Shares to CAMAC and the issuance of securities in the Financing may dilute our
earnings per share, could lower our stock price and adversely affect our ability
to raise additional capital in a subsequent financing. If we are unable to
obtain additional capital in future years, we may be unable to proceed with our
plans and we may be forced to curtail our operations” beginning on page 35
of this Proxy Statement.
Net proceeds from the Financing are
planned to be used by the Company for working capital purposes, and also may be
used by the Company to fund the Company’s cash portion ($38.84 million, $32
million of which is due upon Closing) of the consideration for the acquisition
of the Contract Rights with respect to the Oyo Field, which field began
production in December 2009. As of March 5, 2010, the Company had
cash, cash equivalents and short-term investments of approximately $38.937
million (unaudited), which is sufficient to fund the $32 million Cash
Consideration amount due upon Closing of the Transaction and fund all of the
Company’s current committed operations through 2011. The balance
$6.84 million due to CAMAC post-Closing is anticipated to be paid from proceeds
received by the Company under the PSC in connection with the Oyo
Field.
In order to fully implement its
business strategy, the Company may need to raise additional
capital. In the event the Company is unable to raise such capital on
satisfactory terms or in a timely manner, the Company would be required to
significantly revise its business plan.
Competitive
Business Conditions and the Company
’
s Competitive
Position
The
Company anticipates that it will be competing with numerous large international
oil companies and smaller oil companies that target opportunities in markets
similar to the Company’s, including the CBM, natural gas and petroleum markets.
Many of these companies have far greater economic, political and material
resources at their disposal than the Company. The Company believes
that its management team’s prior experience in the fields of petroleum
engineering, geology, field development and production, operations,
international business development, and finance, together with its prior
experience in management and executive positions with Texaco Inc. and other
energy companies and prior experience managing energy projects in China and
elsewhere in Asia, may provide the Company with a competitive advantage over
some of its competitors active in the region, particularly with respect to
relatively small opportunities that tend to be bypassed by larger companies.
Nevertheless, the market in which we plan to operate is highly competitive and
the Company may not be able to compete successfully against its current and
future competitors. See “Risks Related to the Company’s Industry”
disclosed in the Company’s Annual Report on Form 10-K for the year-ended
December 31, 2009 for risk factors associated with competition in the oil and
gas industry.
Regulation
Regulation
in China
China’s
oil and gas industry is subject to extensive regulation by the Chinese
government with respect to a number of aspects of exploration, production,
transmission and marketing of crude oil and natural gas as well as production,
transportation and marketing of refined products and chemical products. The
following is a list of the primary Chinese central government authorities that
exercise control over various aspects of China’s oil and gas
industry:
|
·
|
The
Ministry of Land and Resources, which has the authority for granting,
examining and approving oil and gas exploration and production licenses,
the administration of registration and the transfer of exploration and
production licenses.
|
|
·
|
The
Ministry of Commerce, which was established in March 2003 to consolidate
the authorities and functions of the former State Economic and Trade
Commission and the former Ministry of Foreign Trade and Economic
Cooperation. Its responsibilities
include:
|
| o | setting the import and export volume quotas for crude oil and refined products according to the overall supply and demand for crude oil and refined products in China as well as the World Trade Organization requirements for China; |
| o | issuing import and export licenses for crude oil and refined products to oil and gas companies that have obtained import and export quotas; and |
| o | examining and approving production sharing contracts and Sino-foreign equity and cooperative joint venture contracts. |
|
·
|
The
National Development and Reform Commission, which was established in March
2003 to consolidate the authorities and functions of the former State
Development Planning Commission and the former State Economic and Trade
Commission. Its responsibilities
include:
|
| o | exercising industry administration and policy coordination authority over China’s oil and gas industry; |
| o | determining mandatory minimum volumes and applicable prices of natural gas to be supplied to certain fertilizer producers; |
| o | publishing guidance prices for natural gas and retail median guidance prices for certain refined products, including gasoline and diesel; |
| o | approving significant petroleum, natural gas, oil refinery and chemical projects set forth under the Catalogues of Investment Projects Approved by the Central Government; and |
| o | approving Sino-foreign equity and cooperative projects exceeding certain capital amounts. |
Regulation
and Legislation in the Oil and Gas Industry in Nigeria
After the closing of the Company’s
acquisition from CAMAC of the Contract Rights with respect to the Oyo Field
located in Nigeria, the Company will also be subject to various regulations in
Nigeria. The following is a list of the primary Nigerian government
authorities that exercise control over various aspects of Nigeria’s oil and gas
industry:
|
·
|
The
Minister for Petroleum Resources, who is supported by 3 junior ministers
overseeing different aspects of the energy
sector.
|
|
·
|
The
National Assembly as the legislative arm of government is empowered to
pass legislation regarding petroleum matters, which are on the Exclusive
Legislative List.
|
|
·
|
The
Federal Ministry of Petroleum is responsible for formulating and
implementing Government policy.
|
|
·
|
The
Department of Petroleum Resources is the regulatory arm of the oil and gas
industry.
|
|
·
|
The
Ministry of Environment/The Federal Environmental Protection Agency was
established in 1988 (Decree No. 50) to protect, restore and preserve the
ecosystem of the Nigerian
environment.
|
|
·
|
The
Federal Inland Revenue Service is responsible for collection of royalties
and PPT on behalf of the Nigerian
Government.
|
The
primary petroleum legislation in Nigeria is the Petroleum Act of 1969, Section 1
of which provides that:
|
|
1.
|
The
entire ownership and control of all petroleum in, under or upon any lands
to which this section applies shall be vested in the
State.
|
|
|
2.
|
This
section applies to all land (including land covered by water) which “is in
Nigeria; or is under the territorial waters of Nigeria; or forms part of
the continental shelf; or forms part of the Exclusive Economic Zone of
Nigeria.”
|
The Petroleum Act of 1969 provides for the grant by the Minister of Petroleum
Resources of three types of interests – exploration, prospecting and production
rights.
|
|
1.
|
Exploration:
An
Oil Exploration License (“OEL”) is necessary to conduct preliminary
exploration surveys. The license is non-exclusive and is granted for a
period of one year. It is renewable
annually.
|
|
|
2.
|
Prospecting:
An
Oil Prospecting License (“OPL”) allows for more extensive exploration
surveys. It is an exclusive license given for a period not exceeding 5
years. It includes the right to take away and dispose of oil discovered
while prospecting. Presently Production Sharing Contracts (PSC) are
awarded to parties pursuant to a successful bid process. Under the PSC the
NNPC is the holder of the legal title to the OPL, while the participating
company (the contractor) carries out all operations on a sole risk basis.
Upon making a commercial discovery, the proceeds realized are shared
between the NNPC and the contractor pursuant to commercial terms set out
in the PSC.
|
|
|
3.
|
Production:
The grant of an Oil Mining Lease (“OML”) allows for full scale
commercial production once oil is discovered in commercial quantities
(currently defined as a flow rate of 10,000 bpd or above). The lease
confers the exclusive right to carry out prospecting, exploration,
production and marketing activities in and under the specified acreage for
a period of 20 years.
|
The Minister of Petroleum Resources
exercises general supervision over all operations carried on under licenses and
leases and may make regulations prescribing anything required to be done under
the Petroleum Act.
A draft Petroleum Industry Bill (“PIB”)
is currently undergoing legislative process at the Nigerian National Assembly.
The draft PIB seeks to introduce significant changes to legislation governing
the oil and gas sector in Nigeria, including new fiscal regulatory and tax
obligations and expanded fiscal and regulatory oversight that may impose
additional operational and regulatory burdens on operating contractors under
PSCs. See “Risks Related to the Transaction” below.
Environmental
Matters
China
China has
adopted extensive environmental laws and regulations that affect the operation
of its oil and gas industry. There are national and local standards applicable
to emissions control, discharges to surface and subsurface water, and the
generation, handling, storage, transportation, treatment and disposal of waste
materials.
The
environmental regulations require a company to register or file an environmental
impact report with the relevant environmental bureau for approval before it
undertakes any construction of a new production facility or any major expansion
or renovation of an existing production facility. A new, expanded or renovated
facility will not be permitted to operate unless the relevant environmental
bureau has inspected it and is satisfied that all necessary equipment has been
installed as required by applicable environmental protection requirements. A
company that wishes to discharge pollutants, whether it is in the form of
emission, water or materials, must submit a pollutant discharge declaration
statement detailing the amount, type, location and method of treatment. After
reviewing the pollutant discharge declaration, the relevant environmental bureau
will determine the amount of discharge allowable under the law and will issue a
pollutant discharge license for that amount of discharge subject to the payment
of discharge fees. If a company discharges more than is permitted in the
pollutant discharge license, the relevant environmental bureau can fine the
company up to several times the discharge fees payable by the offending company
for its allowable discharge, or require that the offending company cease
operations until the problem is remediated.
Compliance
and enforcement of environmental laws and regulations may cause the Company to
incur significant expenditures and require resources which it may not
have. The Company cannot currently predict the extent of future
capital expenditures, if any, required for compliance with environmental laws
and regulations, which may include expenditures for environmental control
facilities.
Product
Research and Development
The
Company has to date not engaged in any product research or development, however,
it does anticipate that Dong Fang will engage in research and development
related to its new EORP technology during the twelve-month period ending
December 31, 2010 (the “Next Year”).
Properties
The Company has two primary leased
office facilities, one located in Hartsdale, New York (the “Hartsdale
Facility”), and the other located in Beijing, China (the “Beijing
Facility”).
The Hartsdale Facility is occupied
under a lease which commenced on December 1, 2006, and was extended two
additional years to November 30, 2010 under an amendment entered into in
September 2008. At December 31, 2009, the Hartsdale Facility lease
covered 1,978 rentable square feet, and the rental expense is currently $5,300
per month, plus a 7.96% share of operating expenses of the
property.
The Beijing Facility covers
approximately 5,300 square feet of office space. The Beijing Facility is
occupied under a tenancy agreement that commenced on September 1, 2009 and ends
on August 31, 2011. The Company’s rental expense recorded for the
Beijing Facility is $11,283 per month, plus allocated share of utility
charges.
The
Company believes that its current office facilities have the capacity to meet
its needs for the foreseeable future. However, in the event the
Transaction contemplated under the Purchase Agreement is consummated, the
Company may be required to open a branch office in
Nigeria.
Employees
and Contractors
As of December 31, 2009 the Company had
34 full-time employees and 13 part-time contractors/employees employed as
follows:
|
Employees
|
Part-Time
Contractors/
Employees
|
|||||||
|
Administration
|
26 | 7 | ||||||
|
Research
and Development/Technical Support
|
8 | 6 | ||||||
In order for us to attract and retain
quality personnel, we anticipate we will have to offer competitive salaries to
future employees. During the next calendar year, the Company may need to hire
additional personnel in certain operational and other areas as required for its
expansion efforts, and to maintain focus on its then-existing and new projects.
The number and skill sets of individual employees will be primarily dependent on
the relative rates of growth of the Company’s different projects, and the extent
to which operations and development are executed internally or contracted to
outside parties. Subject to the availability of sufficient working capital and
assuming initiation of additional projects, the Company currently plans to
further increase full-time staffing to a level adequate to execute the Company’s
growth plans. As we continue to expand, we will incur additional cost for
personnel.
Intellectual
Property
The Company through its 75.5%-owned
subsidiary, Dong Fang, owns Patent Application Rights with respect to six
patents pending before the PRC Patent Administration covering certain enhanced
oil recovery technologies to be used in connection with EORP
operations.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements other than the
operating leases disclosed herein.
Legal
Proceedings
From
time to time, we may become involved in various lawsuits and legal proceedings
in the ordinary course of our business. We are currently not aware of any
legal proceedings the ultimate outcome of which, in our judgment based on
information currently available, would have a material adverse affect on our
business, financial condition or operating results.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Our
Business
The Company is a
development stage company formed to develop new energy ventures, directly and
through joint ventures and other partnerships in which it may participate.
Members of the Company’s senior management team have experience in the fields of
international business development, finance, petroleum engineering, geology,
field development and production, and operations. Members of the Company’s
management team have held management and executive positions with Texaco Inc.
and with other international energy companies and have managed energy projects
in China and elsewhere. Members of the Company’s management team also have
experience in oil drilling, operations, geological engineering, sales and
government relations in China’s energy sector.
The cumulative net
losses of the Company from inception through December 31, 2009 attributable to
common stockholders are $20,457,442. Our losses have resulted primarily from
exploration activities on our Zijinshan Block, start-up of EORP activities,
general and administrative expenditures associated with developing a new
enterprise, and consulting, legal and accounting expenses.
The Company’s current operations commenced in 2005 through IMPCO, formed as a
limited liability company under New York State law on August 25, 2005. These
operations currently consist of development of oil production in Inner Mongolia,
China, exploration and development operations with respect to CBM opportunities
in the Shanxi Province of China, and enhanced oil recovery production activities
in the Liaoning, Shandong and Xinjiang Provinces of China. We consider the
Company to be a single line of business.
In the fourth quarter
of 2006, pursuant to a joint development contract with Chifeng Zhongtong Oil and
Natural Gas Co. (“Chifeng”), a company incorporated in Inner Mongolia, China,
the Company drilled its first oil well in Inner Mongolia. This well was
producing during part of 2007 under an exploration and development license
issued by the relevant Chinese authorities. However, no revenue or related
depletion expense have been recognized to date due to uncertainty of realization
of the revenue until a permanent production license is obtained. Chifeng has
accounted for our share of the production revenue in the form of a credit which
will be allocated to the Company retroactively when and if the production
license is issued. Operations from the well were suspended in 2007, and it is
planned to resume operations when and if the production license is received. To
date, the total production from the well has been approximately 400 tons of
crude oil (all of which has been sold), and total producing revenues credited to
the Company (after costs and royalties) were approximately $135,000.The Company
is pursuing a combination of strategies to have such production license awarded,
including a possible renegotiation of the Chifeng Agreement increasing the
financial incentives to all the parties involved and the Company is also
pursuing a strategy focused on entering into negotiations with respect to an
opportunity to acquire the existing production from the 22 sq. km. Kerqing
Oilfield. The acquisition of the Kerqing Oilfield could significantly enhance
the Chifeng Agreement in scale and value. If this Production License is not
issued, the opportunities to drill additional long-term production wells under
the contract, including future production from this first well, will be at risk.
In year 2010 the Company will be continuing to evaluate the available approaches
toward securing this Production License. As of December 31, 2009 there was no
certainty that any of these strategies will ultimately be successful in
resulting in a production license for the Chifeng area, but the Company intends
to continue in these efforts. Due to these significant uncertainties, the
company recorded an impairment loss on its Chifeng investment in the fourth
quarter of 2009.
On October 26, 2007, PAPL, a wholly-owned subsidiary of the Company, entered
into the Zijinshan PSC with CUCBM for the exploitation of CBM resources in the
Zijinshan Block, which is located in the Shanxi Province in China. The Zijinshan
PSC provides, among other things, that PAPL, following approval of the PSC by
the Ministry of Commerce of China, has a minimum commitment for the first three
years to drill three exploration wells and to carry out 50 km of 2-D seismic
data acquisition (an estimated expenditure of $2.8 million), and in the fourth
and fifth years PAPL will drill four pilot development wells at an estimated
cost of $2 million (in each case subject to PAPL’s right to terminate the
Zijinshan PSC). That five year period constitutes the exploration period. During
the development and production period, CUCBM will have the right to acquire a
40% participating interest and to work jointly and pay its participating share
of costs to develop and produce CBM under the Zijinshan PSC. The Zijinshan PSC
has a term of 30 years. Pursuant to the Zijinshan PSC, all CBM resources
(including all other related hydrocarbon resources) produced from the Zijinshan
block is to be shared as follows: (i) 80% of production is provided to PAPL and
CUCBM for recovery of all costs incurred; (ii) PAPL has the first right to
recover all of its exploration costs from such 80% and then development costs
are recovered by PAPL and CUCBM pursuant to their respective participating
interests; and (iii) the remainder of the production is split by CUCBM and PAPL
receiving between 99% and 90% of such remainder depending on the actual
producing rates (a sliding scale) and the balance of the remainder (between 1%
and 10%) is provided to the Government of China. On April 2, 2008, the Company
received written confirmation that the Ministry of Commerce of The People’s
Republic of China approved the entry by PAPL into the above Production Sharing
Contract. On December 9, 2008 the Company and CUCBM finalized a mutually agreed
work program pursuant to which the Company may immediately commence development
operations under the Zijinshan PSC.
The Company has completed seismic data acquisition operations on the Zijinshan
Block and spent approximately $1.5 million to shoot 162 kilometers of seismic
under the work program. This seismic data has since been processed and
interpreted. Based on the seismic interpretation, four potential well locations
have been identified. A regional environmental impact assessment study (“EIA”)
has also been completed. Following completion of a site specific EIA study the
Company spudded well ZJN 001 on September 30, 2009. This well was targeted at
the 4/5 coal seams in the Shanxi formation and 8/9 coal seams in the Taiyuan
formation. The well reached total depth in November 2009. Core samples have
undergone laboratory testing, including tests for gas content, gas saturation
and coal characteristics. Based on the results of these tests, the Company has
at the latest Zijinshan PSC Joint Management Committee (JMC) meeting agreed to a
2010 work program which includes undertaking further technical studies related
to the CUCBM Contract Area and drilling at least two additional wells
there.
The Company entered
into a Letter of Intent in November 2008 to possibly acquire a 51% ownership
interest in the Handan Chang Yuan Natural Gas Co., Ltd. (“HGC”) from the Beijing
Tai He Sheng Ye Investment Company Limited. HGC owns and operates gas
distribution assets in and around Handan City, China. HGC was founded in May
2001, and is the primary gas distributer in Handan City, which is located 250
miles south of Beijing, in the Hebei Province of the People’s Republic of China.
HGC has over 300,000 customers and owns 35 miles of a main gas pipeline, and
more than 450 miles of delivery gas pipelines, with a delivery capacity of 300
million cubic meters per day. HGC also owns an 80,000 sq. ft. field distribution
facility. Gas is being supplied by Sinopec and PetroChina from two separate
sources. On July 7, 2009 the Company entered into a revised Letter of Intent
with Handan Hua Ying Company Limited (“Handan”) relating to the possible
acquisition of a 49% ownership interest in HGC. The Company will continue its
evaluation of this possible acquisition including the possibility of bringing in
partners.
On May 13, 2009, Pacific Asia Petroleum, Inc. and its wholly-owned Hong Kong
subsidiary, PAPE, entered into a Letter of Understanding (“LOU”), which was
amended and further detailed in various other associated agreements that were
executed on June 7, 2009, with Mr. Li Xiangdong (“LXD”) and Mr. Ho Chi Kong
(“HCK”), pursuant to which the parties agreed to form Beijing Dong Fang Ya Zhou
Petroleum Technology Service Company Limited (“Dong Fang”) as a new Chinese
joint venture company, to be 75.5% owned by PAPE and 24.5% owned by LXD, into
which LXD would assign certain pending patent rights related to chemical
enhanced oil recovery (the “LXD Patents”). Dong Fang was officially incorporated
under Chinese law on September 24, 2009. As required by the LOU, and pursuant to
that certain Agreement on Cooperation, dated June 7, 2009, and as amended on
June 25, 2009 (the “AOC”), entered into by and between PAPE and LXD, upon the
effectiveness of the assignment of the LXD Patents to Dong Fong by LXD on
November 27, 2009, (i) the Company paid LXD and HCK $100,000 each, (ii) PAP has
issued shares of PAPE to Best Source Group Holdings Limited, a Hong Kong company
designated by HCK (“BSG”), to provide BSG with a 30% ownership interest in PAPE,
with the Company retaining the balance 70% ownership interest in PAPE, and (iii)
the Company has issued to HCK’s designee 100,000 shares of Common Stock of the
Company and options to purchase up to 400,000 additional shares of Common Stock
of the Company. These options were approved for issuance by the Board of
Directors on January 21, 2010 at an exercise price of $4.62 per share, which was
the closing sale price of the Company’s Common Stock at that date the Company’s
issuance obligation was triggered upon achievement of the applicable milestone
under the LOU on November 27, 2009 as reported by NYSE Amex. The Company has
also agreed to issue 300,000 more shares of Company Common Stock to HCK or his
designee upon the signing of certain contracts by Dong Fang with respect to the
Fulaerjiqu oilfield. All the options granted to HCK do not vest immediately;
vesting will be contingent upon the achievement of certain milestones related to
the entry by Dong Fang into certain EORP-related development contracts
pertaining to oilfield projects in the Fulaerjiqu Oilfield. These contracts are
anticipated to each deliver to Dong Fang a significant percentage of the
incremental oil production and/or fixed fees per ton for the incremental
production which results from using the technology covered by the LXD
Patents.
In addition, LXD has
been engaged as a consultant by Dong Fang to provide research and development
services, training, and assistance in promoting certain other opportunities
developed by him that target the application of the technology embodied in the
LXD Patents, including assistance with entering into a contract with respect to
the Liaohe Oilfield (the “Liaohe Contract”), and helping to develop projects in
both the Shandong Province and the Xinjiang autonomous region of the People’s
Republic of China for the provision and application of technology and chemicals
developed by LXD.
The Company has agreed to loan up to $5 million to PAPE, which may then invest
up to RMB 30,000,000 (approximately $ 4.4 million) into Dong Fang, with a
portion of this being a requirement to invest RMB 22,650,000 as PAPE’s share of
the registered capital of Dong Fang, when and to the extent required under
applicable law. PAPE’s capital investment will be used by Dong Fang to carry out
work projects, fund operations, and to make, together with PAPE, aggregate
payments of up to $1.5 million in cash to LXD and HCK. The payments of up to
$1.5 million in cash to LXD and HCK are subject to the achievement of certain
milestones pursuant to the LOU, including the formation of Dong Fang, the
transfer of the LXD Patents to Dong Fang, and the signing of the contracts with
respect to the Fularjiqu Oilfield and the Liaohe Contract by Dong Fang, as well
as certain production-based milestones resulting from the implementation of
these contracts. As of December 31, 2009, $500,000 of milestone payments had
been paid or accrued by PAPE. The loan from the Company to PAPE will be repaid
from funds distributed to PAPE by way of dividends or other appropriate payments
from Dong Fang. As of December 31, 2009, the Company has loaned a total of $1.3
million to PAPE, and PAPE has invested a total of RMB 4.8 million (approximately
US$700,000) into Dong Fang.
In accordance with the
terms of the LOU, as amended on June 7, 2009, PAPE, LXD and the Company’s
existing Chinese joint venture company, Inner Mongolia Sunrise Petroleum Co.
Ltd. (“IMPCO Sunrise”), entered into an Assignment Agreement of Application
Right for Patent, Consulting Engagement Agreement, and an Interest Assignment
Agreement. Upon formation of Dong Fang on September 24, 2009, all these and
other agreements entered into by IMPCO Sunrise on behalf of Dong Fang were
assigned by IMPCO Sunrise to Dong Fang.
With these EORP-related agreements signed and in place, the Company through Dong
Fang has commenced operations in various oil fields located in the Liaoning,
Shandong, and Xinjiang Provinces in China. In the year ended December 31, 2009,
the Company recorded initial revenues, cost of sales and expenses from the EORP
business activities.
Recent
Developments
Oyo
Field Production Sharing Contract Interest
On November 18, 2009, the Company
entered into the Purchase and Sale Agreement with CAMAC, as amended on March 4,
2010, and as described in greater detail in this Proxy Statement under
“Proposals 1and Proposal 2 Approval of the Transaction and Issuance of the
Consideration Shares” and “Discussion of the Oyo Field and the PSC” above,
pursuant to which the Company agreed to acquire all of CAMAC’s interest in a
Production Sharing Contract with respect to that certain oilfield asset known as
the Oyo Field (the “Contract Rights”) and the transactions contemplated thereby,
including the election of directors of the Company (the
“Transaction”). The Purchase Agreement which is described in, and
attached to, this Proxy Statement, provides that, among other things: (i) CAMAC
will transfer the Contract Rights to a newly formed Nigerian entity to be wholly
owned by the Company, in consideration for the Company’s payment
of $38.84 million in cash (subject to adjustment) and the issuance of
the Company’s common stock, par value $0.001 per share, equal to 62.74% of the
Company’s issued and outstanding common stock; and (ii) for a period commencing
on the closing of the transactions contemplated by the Purchase Agreement (the
“Closing”) and ending on the date that is one year following the Closing, the
Company’s Board of Directors will consist of seven members, four of whom will be
nominated by
CAMAC.
The Transaction is expected to close on
or before April 7, 2010, and is subject to the satisfaction of customary and
other conditions to Closing, including, without limitation: (i) the
negotiation and entry by the parties into certain other agreements as set forth
in the Purchase Agreement in forms reasonably satisfactory to the parties; and
(ii) the approval of the Company’s stockholders of the Purchase Agreement and
the transactions contemplated thereby. The Purchase Agreement also
contains other customary terms, including, but not limited to, representations
and warranties, indemnification and limitation of liability provisions,
termination rights, and break-up fees if either party terminates under certain
circumstances. The Company has already raised $37.5 million through two
registered direct offerings (disclosed elsewhere in this Proxy Statement) which
were consummated on February 16, 2010 and March 5, 2010. Net proceeds
from these offerings are planned to be used by the Company for working capital
purposes, and also may be used by the Company to fund the Company’s acquisition
of the Contract Rights from CAMAC as described in this Proxy Statement.
As
of March 5, 2010, the Company had cash, cash equivalents and short-term
investments of approximately $38.937 million (unaudited), which is sufficient to
fund the $32 million Cash Consideration amount due upon Closing of the
Transaction and fund all of the Company’s current committed operations through
2011. The balance $6.84 million due to CAMAC post-Closing is
anticipated to be paid from proceeds received by the Company under the PSC in
connection with the Oyo Field.
Please refer to “Proposal 1 and
Proposal 2 Approval of the Transaction and Issuance of the Consideration Shares”
above and “Discussion of the Oyo Field and the PSC” above.
Registered
Direct Offerings
February 2010 Offering
On February 16, 2010, the Company
consummated the offer and sale (the “February 2010 Offering”) of 5,000,000
shares (the “February 2010 Offering Shares”) of its common stock, par value
$0.001 per share ("Common Stock"), for an aggregate purchase price of $20
million, or $4.00 per share (the "February 2010 Offering Purchase Price"),
pursuant to a Securities Purchase Agreement, dated February 10, 2010, among the
Company and certain purchasers signatory thereto (the “February 2010 Offering
Purchasers”). In addition, the Company issued to the February 2010
Offering Purchasers (1) warrants to purchase up to an additional 2,000,000
shares of Common Stock of the Company, in the aggregate, at an exercise price
of $4.50 (subject to customary adjustments), exercisable commencing
six months following the closing for a period of 36 months after such
commencement date (the “Series A Warrants”); and (2) warrants to purchase up to
an additional 2,000,000 shares of Common Stock of the Company, in the
aggregate, at an exercise price $4.00 per share (subject to customary
adjustments), exercisable immediately at the closing until November 1, 2010 (the
“Series B Warrants” and together with the Series A Warrants, the “February 2010
Offering Warrants”). If all the February 2010 Offering Warrants are
exercised, the Company would receive additional gross proceeds of $17 million.
The February 2010 Offering Shares and the February 2010 Offering Warrant Shares
were sold pursuant to a shelf registration statement on Form S-3 declared
effective by the SEC on February 3, 2010 (File No. 333-163869), as amended by
the prospectus supplement filed with the SEC on February 12, 2010 and delivered
to the February 2010 Offering Purchasers.
Rodman &
Renshaw, LLC (“Rodman”) served as the Company’s exclusive placement agent in
connection with the February 2010 Offering. As consideration for its
services as placement agent, Rodman received a cash fee equal to 6.0% of the
gross proceeds of the February 2010 Offering ($1.2 million), as well as a 5-year
warrant to purchase shares of Common Stock of the Company equal to 3.0% of the
aggregate number of shares sold in the February 2010 Offering (150,000 shares of
Common Stock). Rodman’s warrant has the same terms as the February
2010 Offering Warrants issued to the February 2010 Offering Purchasers except
that the warrant is not exercisable until the 6-month anniversary of the closing
and the exercise price is 125% of the per share purchase price of the shares
issued in the February 2010 Offering ($5.00 per share). In addition,
subject to compliance with Financial Industry Regulatory Authority ("FINRA")
Rule 5110(f)(2)(D), the Company reimbursed Rodman’s out-of-pocket accountable
expenses actually incurred in the amount of $25,000.
March 2010 Offering
On March 5, 2010, the Company
consummated the offer and sale (the “March 2010 Offering”) of 4,146,922 shares
(the “March 2010 Offering Shares”) of its common stock, par value $0.001 per
share ("Common Stock"), for an aggregate purchase price of $17.5 million, or
$4.22 per share (the "March 2010 Offering Purchase Price"), pursuant to a
Securities Purchase Agreement, dated March 2, 2010, among the Company and
certain purchasers signatory thereto (the “March 2010 Offering
Purchasers”). In addition, the Company issued to the March 2010
Offering Purchasers (1) warrants to purchase up to an additional 1,658,769
shares of Common Stock of the Company, in the aggregate, at an exercise price
of $4.50 (subject to customary adjustments), immediately exercisable
following the closing for a period of 42 months (the “Series C Warrants”); and
(2) warrants to purchase up to an additional 1,658,769 shares of
Common Stock of the Company, in the aggregate, at an exercise price $4.12 per
share (subject to customary adjustments), exercisable immediately at the closing
until December 5, 2010 (the “Series D Warrants” and together with the Series C
Warrants, the “March 2010 Offering Warrants”). If all the March 2010
Offering Warrants are exercised, the Company would receive additional gross
proceeds of approximately $14.3 million. The March 2010 Offering Shares and the
March 2010 Offering Warrant Shares were sold pursuant to a shelf registration
statement on Form S-3 declared effective by the SEC on February 3, 2010 (File
No. 333-163869), as amended by the prospectus supplement filed with the SEC on
March 3, 2010 and delivered to the March 2010 Offering Purchasers.
Rodman served
as the Company’s exclusive placement agent in connection with the March 2010
Offering. As consideration for its services as placement agent,
Rodman received a cash fee equal to 6.0% of the gross proceeds of the March 2010
Offering ($1,050,000 million), as well as a 5-year warrant to purchase shares of
Common Stock of the Company equal to 3.0% of the aggregate number of shares sold
in the March 2010 Offering (124,408 shares of Common Stock). Rodman’s
warrant has the same terms as the March 2010 Offering Warrants issued to the
March 2010 Offering Purchasers except that the warrant is not exercisable until
the 6-month anniversary of the closing and the exercise price is 125% of the per
share purchase price of the shares issued in the March 2010 Offering ($5.275 per
share). In addition, subject to compliance with FINRA Rule
5110(f)(2)(D), the Company reimbursed Rodman’s out-of-pocket accountable
expenses actually incurred in the amount of $25,000.
CAMAC will receive Consideration Shares
equal to 62.74% of the Company’s issued and outstanding shares of common stock
after giving effect to the Transaction and the February 2010 Offering and March
2010 Offering (together, the “Registered Direct Offerings” or the
“Financing”). Therefore, if the Transaction closes, then the
Financing (including any future exercise of warrants) and any related Financing
costs will have a dilutive impact on your shares of common stock, but such
Financing will have no dilutive effect on the Consideration
Shares. For a discussion of the risk of dilution, please read “Risk
Factors Associated With The Transaction – The issuance of the Consideration
Shares to CAMAC and the issuance of securities in the Financing may dilute our
earnings per share, could lower our stock price and adversely affect our ability
to raise additional capital in a subsequent financing. If we are unable to
obtain additional capital in future years, we may be unable to proceed with our
plans and we may be forced to curtail our operations” beginning on page 35
of this Proxy
Statement.
Net proceeds
from the Financing are planned to be used by the Company for working capital
purposes, and also may be used by the Company to fund the Company’s cash portion
($38.84 million, $32 million of which is due upon Closing) of the consideration
for the acquisition of the Contract Rights with respect to the Oyo Field, which
field began production in December 2009. As of March 5, 2010, the
Company had cash, cash equivalents and short-term investments of approximately
$38.937 million (unaudited), which is sufficient to fund the $32 million Cash
Consideration amount due upon Closing of the Transaction and fund all of the
Company’s current committed operations through 2011. The balance
$6.84 million due to CAMAC post-Closing is anticipated to be paid from proceeds
received by the Company under the PSC in connection with the Oyo
Field.
In order to fully implement its
business strategy, the Company may need to raise additional
capital. In the event the Company is unable to raise such capital on
satisfactory terms or in a timely manner, the Company would be required to
significantly revise its business plan.
Plan
of Operation
The following describes in general terms the Company’s plan of operation and
development strategy for the twelve-month period ending December 31, 2010 (the
“Next Year”). During the Next Year, the Company plans to focus its efforts
toward consummating the Oyo Field PSC interest acquisition and to continue
operations under its 100% owned and operated Zijinshan PSC. The Zijinshan
operations will include the possible drilling of two additional wells and
continuing geological modeling and mapping. The Company also plans to continue
putting into commercial use the new EORP technology to produce incremental oil
in oilfields located in the Heilongjiang, Liaoning, Shandong, Henan and Xinjiang
Provinces in China through the operations of Dong Fang. The Company
will also assess the applicability of the new EORP technology to the Company’s
August 2006 Contract for Cooperation and Joint Development with Chifeng pursuant
to which drilling operations were suspended in 2007 pending receipt of a
production license from the Chinese government. The Company’s revised strategy
with regards to Chifeng is to seek to enhance all the relevant parties’ economic
positions and use these benefits to acquire the necessary production licenses in
order to carry out the plans under that agreement. As of December 31, 2009,
there was no certainty that any of these strategies will ultimately be
successful in resulting in a production license for the Chifeng area, but the
Company intends to continue in these efforts.
In addition to these
opportunities, the Company is continuing to seek to identify other opportunities
in the energy sectors in China and the Pacific Rim, and elsewhere around the
world that will enhance its production and cash flow, particularly with respect
to oil and gas exploration, development, production, refining and distribution.
Since we are a development stage company, we are limited in our ability to grow
by the availability of capital for our businesses and each project. The
Company’s ability to successfully consummate any of its projects, including the
projects described above, is contingent upon the making of any required
deposits, obtaining the necessary governmental approvals and executing binding
agreements to obtain the rights we seek within limited timeframes.
Additionally, assuming the consummation of the Transaction contemplated by the
Purchase and Sale Agreement with respect to the Oyo Field PSC, the Company plans
to focus significant efforts on developing corporate infrastructure, accounting
controls, policies and procedures, and establishing foreign and domestic human
and operational resources necessary to integrate, support and maximize its
contract rights acquired from CAMAC, and to realize and maximize value under the
related Oyo Field PSC in coordination with the Oyo Field’s operating contractor,
Nigerian Agip Exploration Ltd (“NAE”), a subsidiary of Italy's ENI SpA (one of
the world’s largest international energy companies).
The Company has assembled a management team with experience in the fields of
international business development, petroleum and geologic engineering, geology,
petroleum field development and production, operations, sales, government
relations and finance. Members of the Company’s management
team previously held management and executive positions at Texaco
Inc. and other international energy companies and have managed energy
projects in China and elsewhere. They will seek to utilize their
contacts in Asia to provide us with access to a variety of energy projects.
Among the strategies that we plan to use are:
|
·
|
Focusing
on projects that play to the expertise of our management
team;
|
|
·
|
Leveraging
our productive asset base and capabilities to develop
value;
|
|
·
|
Actively
managing our assets and ongoing operations while attempting to limit
capital exposure;
|
|
·
|
Enlisting
external resources and talent as necessary to operate/manage our
properties during peak operations;
and
|
|
·
|
Implementing
an exit strategy with respect to each project with a view to maximizing
asset values and returns
|
Results
of Operations
As a development stage company, we have had only minimal revenues from
operations. We may experience fluctuations in operating results in future
periods due to a variety of factors, including our ability to obtain additional
financing in a timely manner and on terms favorable to us, our ability to
successfully develop our business model, the amount and timing of operating
costs and capital expenditures relating to the expansion of our business,
operations and infrastructure and the implementation of marketing programs, key
agreements, and strategic alliances, and general economic conditions specific to
our industry.
As a result of limited capital resources and minimal revenues from operations
from the date of IMPCO’s inception on August 25, 2005, the Company has relied on
the issuance of equity securities as a means of compensating employees and
non-employees for services. The Company enters into equity compensation
agreements with non-employees if it is in the best interest of the Company and
in accordance with applicable federal and state securities laws. In order to
conserve its limited operating capital resources, the Company anticipates
continuing to compensate employees and non-employees partially with equity
compensation for services during the Next Year. This policy may have
a material effect on the Company’s results of operations during the Next
Year.
Revenues
We have generated $66,802 in total revenues from operations since IMPCO’s
inception on August 25, 2005 through December 31, 2009. Revenues
commenced in the year ended December 31, 2009, and all revenues were in China.
We expect to generate additional revenues from operations in 2010, as the
Company transitions from a development stage company to an active growth stage
company.
Costs
and Operating Expenses
|
Years
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Salaries
and cash bonus
|
$ | 2,140,166 | $ | 1,672,694 | $ | 898,875 | ||||||
|
Consulting
and PSC management fees
|
2,606,728 | 669,441 | 803,485 | |||||||||
|
Stock-based
compensation
|
2,432,006 | 1,355,590 | 195,442 | |||||||||
|
Exploratory
|
1,705,217 | 249,440 | - | |||||||||
|
Legal
fees
|
321,851 | 361,096 | 300,228 | |||||||||
|
Travel,
meals and entertainment
|
314,130 | 332,565 | 194,071 | |||||||||
|
Payroll
taxes
|
239,947 | 74,029 | 38,010 | |||||||||
|
Rent
|
233,042 | 110,013 | 78,183 | |||||||||
|
Auditing
|
182,668 | 169,368 | 135,305 | |||||||||
|
Impairment
of assets
|
219,388 | 273,618 | - | |||||||||
|
All
other
|
1,260,638 | 515,966 | 338,648 | |||||||||
|
Total
Costs and Operating Expenses
|
$ | 11,655,781 | $ | 5,783,820 | $ | 2,982,247 | ||||||
For the fiscal year
2009, total pre-tax costs and operating expenses were $11,655,781 as compared to
$5,783,820 in 2008 and $2,982,247 in 2007. Over this three
year period, the Company’s expenses have increased as the commencement of
physical operations has occurred in the Zijinshan PSC area and in EORP activity.
The Company has only generated nominal revenues to date
and as such is still a development stage company. The major components of
expense differences are as follows:
Year 2009 versus Year
2008
|
·
|
Salaries and cash
bonus:
The increase of $467,472 ($2,140,166 versus
$1,672,694) resulted from an increase in the number of employees and
increased compensation associated with expanded activity in
China.
|
|
·
|
Consulting and PSC management
fees:
The increase of $1,937,287 ($2,606,728 versus
$669,441) was due to an increase of $886,965 in consulting fees payable as
vested equity compensation and an increase of
$1,050,322 in cash consulting fees. The increase in consulting
payable as equity was principally due to public relations work and an
accrual of $462,000 for a milestone payment obligation related
to start-up of EORP activities. The increase in cash
consulting was principally due to $500,000 in milestone payments paid or
accrued related to the start-up of EORP activities and
increased PSC and other management consulting fees
relative to Zijinshan and other operations in
China.
|
|
·
|
Stock-based
compensation:
The increase of $1,076,416 ($2,432,006
versus $1,355,590) reflects a larger value of restricted stock and stock
option awards subject to amortization in 2009 versus
2008.
|
|
·
|
Exploratory:
The
increase of $1,455,777 ($1,705,217 versus $249,440) reflects increased
seismic and drilling activity for Zijinshan in
2009.
|
|
·
|
Legal
fees:
The decrease of $39,245 ($321,851 versus $361,096)
was principally due to decreased legal expense related to transactions and
proposed transactions in China.
|
|
·
|
Travel, meals, and
entertainment:
Expenses decreased by $18,435 ($314,130
versus $332,565), reflecting travel in connection with China activities
and reviews of other oil and gas
opportunities.
|
|
·
|
Payroll taxes:
The
increase of $165,918 ($239,947 versus $74,029) was principally due to
increased U.S. payroll and increased expatriate payroll in
China.
|
|
·
|
Rent:
The increase of
$123,029 ($233,042 versus $110,013) was principally due to increased
expense in China.
|
|
·
|
Auditing:
The increase
of $13,300 ($182,668 versus $169,368) was due to increased auditor
involvement from expanded
operations.
|
|
·
|
Impairment of
assets:
The decrease of $54,230 ($219,388 versus
$273,618) reflects the net effect of two nonrecurring items occurring in
different years: the 2009 write-off of Chifeng property, plant
and equipment versus the 2008 write-down of the notes receivable from the
noncontrolling interest investor in a China subsidiary
company.
|
|
·
|
All other:
The increase
of $744,672 ($1,260,638 versus $515,966) was principally due to 2009
start-up expenses of EORP operations that have not yet generated
significant revenues, increased corporate promotional activity, 2009
write-off of deferred expenses on terminated transactions, and increased
China employee housing allowances.
|
Year 2008 versus Year
2007
|
·
|
Salaries and bonus:
The
increase of $773,819 ($1,672,694 versus $898,875) resulted principally
from an increase in the number of
employees.
|
|
·
|
Consulting and PSC management
fees:
The decrease of $134,044 ($669,441 versus $803,485) was
principally due to a decrease of $197,312 in non-cash fees paid as equity,
mainly from increased activity involving potential oil and gas
opportunities, an increase of $124,776 in cash consulting fees related to
Sarbanes-Oxley compliance work, and a decrease of $46,212 in other cash
consulting fees due to nonrecurring 2007 financing and merger-related
negotiation assistance.
|
|
·
|
Stock-based
compensation:
The increase of $1,160,148 ($1,355,590 versus
$195,442) reflects a larger value of restricted stock and stock option
awards subject to amortization in 2008 versus
2007.
|
|
·
|
Exploratory:
The
increase of $249,440 ($249,440 versus zero) reflects initial activity in
2008.
|
|
·
|
Legal fees:
The
increase of $60,868 ($361,096 versus $300,228) was due to the legal
requirements to prepare SEC filings, assistance in compliance with
Sarbanes-Oxley requirements and the general increase in the Company’s
activities.
|
|
·
|
Travel, meals and
entertainment:
The increase of $138,494 ($332,565 versus $194,071)
was due to increases in travel to review potential oil and gas
opportunities and related financing
activities.
|
|
·
|
Payroll taxes:
The
increase of $36,019 ($74,029 versus $38,010) was due to increased number
of employees.
|
|
·
|
Rent:
The increase of
$31,830 ($110,013 versus $78,183) was due to increased rental expense
principally in China.
|
|
·
|
Auditing:
The increase
of $34,063 ($169,368 versus $135,305) was due to the increased
requirements for SEC filings subsequent to the Merger in May
2007.
|
|
·
|
Impairment of assets:
The increase of $273,618 ($273,618 versus zero) was due to the 2008
write-down of notes receivable from the noncontrolling interest investor
in a China subsidiary company.
|
|
·
|
All other:
The increase
of $177,318 ($515,966 versus $338,648) reflects the increase in activity
of the Company in 2008 versus 2007.
|
Liquidity
and Capital Resources
The Company has sufficient funds to fund all of its current committed operations
for the next two years. The following table provides summarized
statements of net cash flows for the years ended December 31, 2009 and 2008
:
|
Cash
Flows
|
Years
Ended December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Net
Cash Used in Operating Activities
|
$ | (7,111,002 | ) | $ | (3,208,017 | ) | ||
|
Net
Cash Provided by Investing Activities
|
191,553 | 11,511,505 | ||||||
|
Net
Cash Provided by (Used in) Financing Activities
|
13,944 | (2,513 | ) | |||||
|
Effect
of Exchange Rate Changes on Cash
|
(8,041 | ) | 5,713 | |||||
|
Net
(decrease) increase in Cash and Cash Equivalents
|
(6,913,546 | ) | 8,306,688 | |||||
|
Cash
and Cash Equivalents – Beginning of Period
|
10,515,657 | 2,208,969 | ||||||
|
Cash
and Cash Equivalents – End of Period
|
3,602,111 | 10,515,657 | ||||||
As of December 31, 2009, the Company had net working capital of $3,909,991 and
cash, cash equivalents and short-term investments of
$5,337,507. For the year ended December 31, 2009, the Company
incurred a net loss attributable to common stockholders of
$11,489,378.
As a result of our operating losses from our inception through December 31,
2009, we generated a cash flow deficit of $13,204,001 from operating activities.
Cash flows used in investing activities were $2,936,985 during the period from
inception through December 31, 2009. We met our cash requirements
during this period through net proceeds of $19,671,092 from the private
placement of restricted equity securities.
Net cash used in operating activities was $7,111,002 in 2009 compared to
$3,208,017 in 2008. The increase in 2009 versus 2008 was due to
increases in expenses, principally for exploratory expenses incurred on the
Zijinshan Block, consulting and Zijinshan PSC management fees, and milestone
payments related to start-up of EORP activity.
Net cash provided by investing activities was $191,553 in 2009, as compared to
$11,511,505 in 2008. The net change was principally due to $475,397
in net purchases of available for sale short-term securities in 2009 versus net
sales of $9,940,000 of such securities in 2008. Also affecting the
decrease in cash flows were lower net cash refunds of prior deposits from
Chevron and BHP in 2009 versus 2008, for amounts the Company had previously paid
to them in connection with transactions that were later
terminated.
Net cash provided by or used in financing activities was not significant in 2009
and 2008 on a total basis or on an individual item basis.
Our available working capital and capital requirements will depend upon numerous
factors, including progress of our exploration and development programs,
progress of our EORP efforts, market developments, the status of our competitors
and completion of the CAMAC Transaction.
Our continued operations will depend on whether we are able to raise additional
funds through various potential sources, such as equity and debt financing and
strategic alliances. Such additional funds may not become available on
acceptable terms, if at all, and any additional funding obtained may not be
sufficient to meet our needs in the long-term. Through December 31, 2009
virtually all of our financing had been raised through private placements of
equity instruments. The Company at December 31, 2009 had no credit
lines for financing and no short-term or long-term debt.
In February 2010 the
Company raised $20 million of equity financing through a registered direct
offering. Proceeds from this offering are planned to be used for
working capital purposes, and also may be used by the Company to fund the
acquisition from CAMAC of the Contract Rights with respect to the Oyo
Field. The Company does expect to raise additional funds to complete
the Transaction.
Whether or not the CAMAC Transaction is completed, the Company
expects to have sufficient cash flow to fund its current operational and
development plans over the next two years. To the extent the Company
acquires additional energy- related investments and rights, consistent with its
business plan, the Company may need to raise additional funds for such
projects.
Long-Lived
Assets
The
Company’s long-lived assets (other than financial instruments) by geographic
area were as follows.
|
As
of December 31,
|
2009
|
2008
|
||||||
|
Property, plant
and equipment, net
|
||||||||
|
United
States
|
$ | 118,627 | $ | 94,352 | ||||
|
China
|
332,076 | 474,951 | ||||||
|
Total
|
$ | 450,703 | $ | 569,303 | ||||
Obligations
under Material Contracts
The
following table summarizes the Company’s significant contractual obligations at
December 31, 2009. See also Part I Item 2. Properties for
further information regarding the Company’s operating leases payment
obligations shown in the table below.
|
Payments
Due By Period
|
|||||||||
|
Contractual
Obligations
|
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
||||
|
Operating
Lease Obligations
|
$297,106
|
$210,748
|
$86,358
|
$-
|
$-
|
||||
Critical
Accounting Policies and Estimates
The discussion and analysis of our plan and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect our reported results of operations and the
amount of reported assets, liabilities and proved oil and gas reserves. Some
accounting policies involve judgments and uncertainties to such an extent that
there is reasonable likelihood that materially different amounts could have been
reported under different conditions, or if different assumptions had been used.
Actual results and timing may differ from the estimates and assumptions used in
the preparation of our consolidated financial statements. Described below are
the most significant policies we apply, or intend to apply, in preparing our
consolidated financial statements, some of which are subject to alternative
treatments under accounting principles generally accepted in the United States
of America. We also describe the most significant estimates and assumptions we
make in applying these policies.
Oil
and Gas Activities
Accounting for oil and gas activities is subject to special, unique rules. Two
generally accepted methods of accounting for oil and gas activities are
available — successful efforts and full cost. The most significant differences
between these two methods are the treatment of exploration costs and the manner
in which the carrying value of oil and gas properties are amortized and
evaluated for impairment. The successful efforts method requires exploration
costs to be expensed as they are incurred while the full cost method provides
for the capitalization of these costs. Both methods generally provide for the
periodic amortization of capitalized costs based on proved reserve quantities.
Impairment of oil and gas properties under the successful efforts method is
based on an evaluation of the carrying value of individual oil and gas
properties against their estimated fair value, while impairment under the full
cost method requires an evaluation of the carrying value of oil and gas
properties included in a cost center against the net present value of future
cash flows from the related proved reserves, using period-end prices and costs
and a 10% discount rate.
The Company at present reports no proved oil and gas reserves as we are a
development stage company. Management, in making investment decisions
regarding the acquisition and development of oil and gas properties, performs
economic and technical evaluations including assessment of commerciality based
upon estimates and assumptions that it believes are reasonable. In
order to recognize new proved reserves, the positive technical assessment of
producibility, our financial capability for development, and management
commitment for capital expenditures must be demonstrated to ensure that the
reserves will be developed and are producible under existing economic and
operating conditions.
Successful
Efforts Method
We use the successful efforts method of accounting for our oil and gas
activities. Under this method, costs of drilling successful wells are
capitalized. Costs of drilling exploratory wells not placed into production are
charged to expense. Geological and geophysical costs are charged to expense as
incurred.
Depreciation,
Depletion and Amortization
The
quantities of estimated proved oil and gas reserves are expected to be a
significant component of our calculation of future depreciation and depletion
expense related to oil and gas properties and equipment, and revisions in such
estimates may alter the rate of future expense. Holding all other factors
constant, if reserves are revised upward, earnings would increase due to lower
depletion expense. Likewise, if reserves are revised downward, earnings would
decrease due to higher depletion expense.
Future
Development and Abandonment Costs
Future development
costs include costs incurred to obtain access to proved reserves such as
drilling costs and the installation of production equipment. Future abandonment
costs include costs to dismantle and relocate or dispose of our production
platforms, gathering systems and related structures and restoration costs of
land and seabed. Our operators develop estimates of these costs for each of our
properties based upon their geographic location, type of production structure,
well depth, currently available procedures and ongoing consultations with
construction and engineering consultants. Because these costs typically extend
many years into the future, estimating these future costs is difficult and
requires management to make judgments that are subject to future revisions based
upon numerous factors, including changing technology and the political and
regulatory environment. We review our assumptions and estimates of future
development and future abandonment costs on an annual basis.
Liabilities for future
abandonment costs are recorded at the discounted fair value of the asset
retirement obligation in the period in which it is incurred, and the
corresponding cost capitalized by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Holding all other factors constant, if our estimate of future abandonment
and development costs is revised upward, earnings would decrease due to higher
depreciation, depletion and amortization (“DD&A”) expense. Likewise, if
these estimates are revised downward, earnings would increase due to lower
DD&A expense.
Consolidation
The financial statements include Pacific Asia Petroleum, Inc. (successor company
to IMPCO) and its majority owned direct and indirect subsidiaries in the
respective periods. Periods prior to the Merger date of May 7, 2007
included in the 2007 and prior year financial statements include only the
results of IMPCO and IMPCO’s subsidiaries.
Allocation
of Purchase Price in Business Combinations
As part of our business strategy, we actively pursue the acquisition of oil and
gas properties. The purchase price in an acquisition is allocated to the assets
acquired and liabilities assumed based on their relative fair values as of the
acquisition date, which may occur many months after the announcement date.
Therefore, while the consideration to be paid may be fixed, the fair value of
the assets acquired and liabilities assumed is subject to change during the
period between the announcement date and the acquisition date. Our most
significant estimates in our allocation typically relate to the value assigned
to future recoverable oil and gas reserves and unproved properties. As the
allocation of the purchase price is subject to significant estimates and
subjective judgments, the accuracy of this assessment is inherently
uncertain.
Revenue
Recognition
Revenues are
recognized only when the earnings process is complete and an exchange
transaction has taken place. An exchange transaction may be a physical sale, the
providing of services, or an exchange of rights and privileges. The
recognition criteria are satisfied when there exists a signed contract with
defined pricing, delivery and acceptance (as defined in the contract) of the
product or service have occurred, there is no significant uncertainty of
collectibility, and the amount is not subject to refund.
Short-Term
Investments
Debt and equity securities are classified into one of three categories:
held-to-maturity, available-for-sale, or trading. Securities may be
classified as held-to-maturity only if the Company has the positive intent and
ability to hold them to maturity. Trading securities are defined as
those bought and held principally for the purpose of selling them in the near
term. All other securities are classified as
available-for-sale. Declines in the fair value of held-to-maturity
and available-for-sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses. The
Company’s short-term investments are classified as
available-for-sale.
Foreign
Currency Translation
The Company uses both
the U.S. dollar and local currency as functional currencies based upon the
principal currency of operation of each subsidiary. The functional currency for
operations in China (other than Hong Kong) is the local currency. The
Company at present expects that the future revenues from its operations in China
will be in local currency. Balance sheet translation effects from
translating local functional currency into U.S. dollars (the reporting currency)
are recorded directly to other comprehensive income.
Stock-based
Compensation
The Company values its stock options awarded on or after January 1, 2006 at the
fair value at grant date using the Black-Scholes option pricing
model. Compensation expense for stock options and restricted stock
awards is recorded over the vesting periods on a straight line basis for each
award group. Compensation paid in stock fully vested at award date is valued at
fair value at that date and charged to expense at that time. The Company made no
stock-based compensation grants before 2006.
Recently
Issued Accounting Standards Not Yet Adopted
Information on
accounting standards not yet adopted is contained in Note 4 to the consolidated
financial statements in this Form 10-K.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements other than the
operating leases disclosed below.
Inflation
It is the
opinion of the Company that inflation has not had a material effect on its
operations.
RECENT
SALES OF UNREGISTERED SECURITIES
The
Company did not sell any unregistered securities during the quarter ending
December 31, 2009 that were not otherwise reported on a Current Report on Form
8-K during the quarter or in the Annual Report on Form 10-K for the year ended
December 31, 2009.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company may be exposed to
certain market risks related to changes in foreign currency exchange and
interest rates.
Foreign
Currency Exchange Risk
In addition to the U.S. dollar, the
Company conducts its business in RMB and therefore is subject to foreign
currency exchange risk on cash flows related to expenses and investing
transactions.
In July 2005, the Chinese government
began to permit the RMB to float against the U.S. dollar. All of our costs to
operate our Chinese office and operations are paid in RMB. Our exploration costs
in China may be incurred under contracts denominated in RMB or U.S.
dollars. To date the Company has not engaged in hedging activities to
hedge our foreign currency exposure. In the future, the Company may enter into
hedging instruments to manage its foreign currency exchange risk or continue to
be subject to exchange rate risk.
The Company currently holds notes
carried at $33,015 as of December 31, 2009 after impairment adjustment. The
notes are denominated and receivable in RMB and are held by Inner Mongolia
Production Company (HK) Limited, which recognizes appreciation and depreciation
of the RMB note. A 20% appreciation of the RMB would result in
a gain of approximately $7,000. A 20% decline of the RMB would result
in a loss of approximately $7,000.
Interest
Rate Risk
See Note 6 to the financial statements
in Part II, Item 8. “Financial Statements and Supplementary Data” for
information regarding our financial instruments. At December 31, 2009
the Company had investments in fixed rate financial instruments
subject to interest rate risk affecting fair value. However, those instruments
were bank certificates of deposit with remaining terms of less than one year or
break clauses permitting withdrawal in less than one year, with the exception of
$25,141 of principal with a remaining term of 15 months. Therefore, the effect
of an increase or decrease in interest rates on the fair value of those
financial instruments would not be material.
MANAGEMENT
AND RELATED STOCKHOLDERS MATTERS
The
following table sets forth certain information regarding the beneficial
ownership of Common Stock as of March 8, 2010, by (i) each person who is known
by the Company to own beneficially more than 5% of the outstanding Common Stock;
(ii) each of the Company’s directors; (iii) each executive officer identified in
the Summary Compensation Table; and (iv) all executive officers and directors of
the Company as a group:
|
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of
Beneficial ownership (1) |
Percent
of
Class
|
||||
|
|
|
|
|||||
|
Common
Stock
|
Frank
C. Ingriselli
250
East Hartsdale Ave.
Hartsdale,
NY 10530
|
3,652,717 |
(2)
|
6.78%
|
|||
|
Common
Stock
|
Richard
Grigg
250
East Hartsdale Ave.
Hartsdale,
NY 10530
|
1,056,701 |
(3)
|
1.97 %
|
|||
|
Common
Stock
|
Stephen
F. Groth
250
East Hartsdale Ave.
Hartsdale,
NY 10530
|
1,040,492 |
(4)
|
1.94%
|
|||
|
Common
Stock
|
Elizabeth
P. Smith
250
East Hartsdale Ave.
Hartsdale,
NY 10530
|
275,496
|
|
*
|
|||
|
Common
Stock
|
Robert
C. Stempel
250
East Hartsdale Ave.
Hartsdale,
NY 10530
|
116,549
|
|
*
|
|||
|
Common
Stock
|
James
F. Link, Jr.
250
East Hartsdale Ave.
Hartsdale,
NY 10530
|
126,549
|
|
*
|
|||
|
Common
Stock
|
William
E. Dozier
250
East Hartsdale Ave.
Hartsdale,
NY 10530
|
89,704
|
|
*
|
|||
|
Common
Stock
|
All
Directors and
Executive
Officers as a Group (7 persons)
|
6,358,208 |
(5)
|
11.72%
|
|||
———————
* Less
than 1%.
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities.
Shares of Common Stock subject to options, warrants or convertible
securities that are currently exercisable, or exercisable within 60 days
of March 8, 2010, are deemed outstanding for computing the percentage
of the person holding such options, warrants or convertible securities but
are not deemed outstanding for computing the percentage of any other
person. Except as indicated by footnote and subject to community property
laws where applicable, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
|
|
(2)
|
Includes: (i)
3,109,049 shares of the Company’s Common Stock held directly by
Mr. Ingriselli; (ii) options to purchase shares of the Company's
Common Stock pursuant to an option grant exercisable for an aggregate of
340,000 shares of Common Stock of the Company that vests with respect to
136,000 shares on September 29, 2007, and 68,000 shares on
September 29 of each year thereafter; (iii) options to
purchase shares of Common Stock pursuant to an option grant
exercisable for an aggregate of 80,000 shares of Common Stock of the
Company that vests with respect to 13,336 shares on December 17,
2007, and 16,666 shares on December 17 of each year thereafter; (iv)
options to purchase shares of Common Stock pursuant to an option grant
exercisable for an aggregate of 350,000 shares of Common Stock of the
Company that vests with respect to 175,000 shares on December 9, 2009,
70,0000 shares on December 9 of each of December 9, 2010 and December 9,
2011, and 35,000 shares on December 9, 2012; and (v) 50,000 shares of the
Company’s Common Stock owned by Mr. Ingriselli’s
son.
|
|
(3)
|
Includes: (i)
929,701 shares of the Company’s Common Stock held directly by
Mr. Grigg and by KKSH Holdings Ltd., a company registered in the
British Virgin Islands in which Mr. Grigg holds a minority interest and on
whose board of directors Mr. Grigg sits; (ii) options to purchase shares
of Common Stock of the Company that vests with respect to 5,000 shares on
December 17, 2008, 2,000 shares on December 17, 2009 and 2010,
and 1,000 shares on December 17, 2011; and (iii) options to purchase
shares of the Company's Common Stock pursuant to an option grant
exercisable for an aggregate of 240,000 shares of Common Stock of the
Company that vests with respect to 120,000 shares on December 9, 2009,
48,000 shares on each of December 9, 2010 and December 9, 2011, and 24,000
shares on December 9, 2012.
|
|
(4)
|
Includes: (i)
396,872 shares of the Company’s Common Stock held directly by
Mr. Groth; (ii) options to purchase shares of the Company's Common
Stock pursuant to an option grant exercisable for an aggregate of 156,400
shares of Common Stock of the Company that vests with respect to 62,560
shares on September 29, 2007, and 31,280 shares on September 29
of each year thereafter; (iii) options to purchase shares of Common Stock
of the Company that vests with respect to 3,334 shares on
December 17, 2007, 16,666 shares on December 17, 2008, 8,000
shares on December 17, 2009, 8,000 shares on December 17, 2010,
and 4,000 shares on December 17, 2011; (iv) options to purchase
shares of the Company's Common Stock pursuant to an option grant
exercisable for an aggregate of 165,000 shares of Common Stock of the
Company that vests with respect to 82,500 shares on December 9, 2009,
33,000 shares on each of December 9, 2010 and December 9, 2011, and 16,500
shares on December 9, 2012; and (v) 408,000 shares of the Company’s Common
Stock owned by Mr. Groth’s
spouse.
|
|
(5)
|
Includes
all shares of the Company’s Common Stock, immediately exercisable warrants
to purchase Company Common Stock, and options to purchase Company Common
Stock exercisable within sixty (60) days of March 8, 2010, beneficially
owned or held by (i) Messrs. Ingriselli who served as Chief Executive
Officer of the Company during the last completed fiscal year, (ii)
Messrs. Dozier, Stempel, and Link, and Ms. Smith, who currently
serve as directors of the Company, and (iii) Messrs. Grigg and Groth,
who currently serve as executive officers of the
Company.
|
SECTION 16(A)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under
Section 16(a) of the Securities Exchange Act of 1934 and rules promulgated
thereunder, the Company’s directors, executive officers, and any person holding
beneficially more than 10% of the Company’s common stock are required to report
their ownership of the Company’s securities and any changes in that ownership to
the Securities and Exchange Commission and to file copies of the reports with
the Company. Specific due dates for these reports have been established,
and the Company is required to report in this Proxy Statement any failures to
file by these dates during the last fiscal year.
Based
upon a review of filings with the SEC and written representations that no other
reports were required, the Company believes that all of its directors, executive
officers and persons owning more than 10% of the Company’s common stock complied
during the year ended December 31, 2009 with the reporting requirements of
Section 16(a) of the Exchange Act.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
Company has entered into the following transactions with related
parties:
|
·
|
Financial
Advisory Agreement
– The Company was a party to an Advisory
Agreement, effective December 1, 2006 (“Advisory Agreement”), and
terminated effective June 10, 2009, with Cagan McAfee Capital
Partners, LLC (“CMCP”), pursuant to which CMCP provided certain financial
advisory and management consulting services to the Company in exchange for
a monthly advisory fee of $9,500 payable to CMCP. Laird Q. Cagan, the
Managing Director and 50% owner of CMCP, served as a member of the
Company’s Board of Directors from May 2007 to May 2009 and is a
holder of more than 5 percent of the beneficial ownership of the
Company.
|
|
·
|
Public
Relations Agreement
– In March 2005, the Company engaged
Liviakis Financial Communications, Inc. as its public relations firm
pursuant to a Consulting Agreement, as amended on April 22, 2009,
that expires on May 7, 2011 (“Consulting Agreement”), and John
Liviakis, a former holder of more than 5 percent of the beneficial
ownership of the Company, is the sole shareholder, President and Chief
Executive Officer of Liviakis Financial Communications, Inc. Pursuant to
the Consulting Agreement, as amended, and as sole compensation thereunder,
Liviakis Financial Communications, Inc. and an employee thereof were
issued an aggregate of 2,119,000 shares of the Company’s Common
Stock.
|
|
·
|
SG&E
Share Exchange
– On March 2, 2009, the Company entered into a
Subscription Agreement for Shares (“Subscription Agreement”) with Richard
Grigg, the Company’s Senior Vice President and Managing Director, pursuant
to which Mr. Grigg purchased 970,000 shares of the Company’s Common
Stock (the “Company Shares”) in exchange for 3,825,000 shares of Ordinary
Fully Paid Shares (the “SG&E Shares”) of Sino Gas & Energy
Holdings Limited, a privately-held company incorporated in Western
Australia (“SG&E”) engaged in the exploration and development of coal
bed methane and unconventional gas projects in China. The SG&E Shares
represent approximately a 3.5% ownership interest in SG&E, and
represented full consideration for the issuance of the Company Share to
Mr. Grigg as determined by the Board of Directors as being a fair and
equivalent exchange of economic interests and payment of fair market value
for the Company Shares based on a number of factors. Mr. Grigg was
formerly an employee and founding member of SG&E before joining the
Company in October 2007. Given that the Company is considering a
number of possible transactions that may involve SG&E as a partner or
party, which transactions Mr. Grigg may be instrumental in
negotiating and overseeing, the Company believed that it was in the best
interests of the Company and its stockholders to exchange Mr. Grigg’s
SG&E Shares for the Company Shares in order to eliminate potential
conflicts of interest on the part of Mr. Grigg and to further align
Mr. Grigg’s interests with those of the
Company.
|
|
·
|
Consulting
Agreement with KKSH
– On January 27, 2009, the Company revised
the terms of its employment relationship with Richard Grigg, the
Company’s Senior Vice President and Managing Director, by entering into
two separate agreements pursuant to which Richard Grigg currently performs
services to the Company: (i) an Amended and Restated Employment
Agreement, dated January 27, 2009 (the “Amended Employment
Agreement”), entered into directly with Richard Grigg that governs the
employment of Mr. Grigg in the capacity of Managing Director of the
Company and covers services provided by Mr. Grigg to the Company
within the PRC; and (ii) a Contract of Engagement, dated January 27,
2009 (“Contract of Engagement”), entered into with KKSH Holdings Ltd.
(“KKSH”), a company registered in the British Virgin Islands in which
Mr. Grigg holds a minority interest and on whose board of directors
Mr. Grigg sits, which agreement governs the provision of
services related to the development and management of business
opportunities for the Company outside of the PRC by Mr. Grigg through
KKSH. The basic fee for the services provided under the Contract of
Engagement is 919,000 RMB (approximately $135,000) per year, to be
prorated and paid monthly and subject to annual review and increase upon
mutual agreement by the Company and KKSH. Pursuant to the Contract of
Engagement, the Company shall also provide Mr. Grigg with medical
benefits and life insurance coverage, and pay KKSH an annual
performance-based bonus award targeted at between 54% and 72% of the basic
fee, awardable in the discretion of the Company’s Board of Directors. In
addition, in the event the Company terminates the Contract of Engagement
without Cause (as defined in the Contract of Engagement), the Company must
pay to KKSH a lump sum amount equal to 215% of the then-current annual
basic fee.
|
|
·
|
Consulting
Agreement with Jamie Tseng
– The Company was a party to a
consulting agreement, dated November 8, 2005, with Jamie Tseng, the
Company’s Executive Vice President (“Tseng Consulting Agreement”), which
was assigned on September 1, 2006 by Mr. Tseng to Golden Ring
International Consultants Limited, a British Virgin Islands registered
company wholly-owned and controlled by Mr. Tseng, and which was later
superseded in its entirety effective January 1, 2009 by that certain
Employment Agreement, dated April 22, 2009 and effective
January 1, 2009, entered into by and between the Company and
Mr. Tseng. Pursuant to the Tseng Consulting Agreement, Mr. Tseng
served in the role of Executive Vice President to the Company from
November 2005 to December 31, 2008, for a monthly fee of
$11,667, plus reasonable expenses incurred in carrying out the services
required thereunder. Effective January 15, 2010, Mr. Tseng
retired from the Company and no longer serves as an officer, employee or
consultant to the Company.
|
|
·
|
Indemnification
Agreements
– The Company has entered into a stockholder-approved
Indemnification Agreement with all of its current officers and
directors.
|
|
·
|
Chemical
Sales Agent Arrangement
– During the third quarter of 2009, the
Company conducted the business of its Chinese joint venture company Dong
Fang through an arrangement with Tongsheng, a subsidiary of the family
owned business of Mr. Li Xiangdong (“LXD”). Upon the incorporation of Dong
Fang in China on September 24, 2009, LXD became a 24.5% interest owner of
Dong Fang. This arrangement with Tongsheng was necessary because, pending
the incorporation of Dong Fang, the Company was not licensed in China to
purchase, blend or sell chemicals. Under the arrangement with
Tongsheng, Tongsheng manufactured specialty blends of chemicals using
technology developed by LXD and sold the finished product to customers of
the Company. The patent rights and related technology for the specialty
chemicals and processes were contributed to Dong Fang by LXD following the
formation of Dong Fang. Tongsheng collected and remitted to the Company
revenues collected in advance of delivery of product to the customer and
billed the Company for the related costs. Beginning in the fourth quarter
of 2009, Dong Fang commenced dealing directly with its
customers. For details regarding Dong Fang and the EORP
venture, see “
Principal
Business Strategy - Enhanced Oil Recovery and Production
(“EORP”).
”
|
On
August 15, 2007, the Company adopted a Code of Ethics and Business Conduct
(the “Code”) applicable to the Company’s Chief Executive Officer, Chief
Financial Officer and all other employees, the text of which has been posted on
the Company’s website (www.papetroleum.com). Among other provisions, the Code
provides that all officers, directors and employees shall avoid all conflicts of
interest or improper or unlawful conduct and even the appearance thereof, and,
further, that only the Board of Directors of the Company may waive a conflict of
interest or any other non-compliance with the Code. Although the Company has not
adopted a formal policy that covers the review and approval of related party
transactions by the Board of Directors, in accordance with the Code and
Section 144 of the Delaware General Corporation Law, it is the practice of
the Board of Directors to review each contract or transaction between the
Company and its directors, officers or employees, including the material facts
as to the relationship or interest and as to the contract or transaction,
determine in good faith whether such contract or transaction is fair as to the
Company, and to approve or ratify such contract or transaction if the Board of
Directors determines the contract or transaction to be fair as to the Company
and in good faith authorizes the contract or transaction by affirmative vote of
a majority of the disinterested directors, even though the disinterested
directors be less than a quorum.
Other
than the SG&E Agreement, the Contract of Engagement, the amendment to the
Consulting Agreement entered into with Liviakis Financial Communications, Inc.,
and the Company’s form of Indemnification Agreement, which were each approved by
the Company’s Board of Directors, none of the Advisory Agreement entered into
with CMCP, the original Consulting Agreement entered into with Liviakis
Financial Communications, Inc., the Chadbourn Agreement, or the Tseng Consulting
Agreement have been directly approved by the Company’s Board of Directors,
although the Company’s Board of Directors did approve the mergers of ADS and
IMPCO into the Company in May 2007 pursuant to which these agreements were
assumed by the Company from ADS and IMPCO. In addition, while the Chemical Sales
Agent Arrangement was not directly approved by the Company’s Board of Directors,
the Company’s Board of Directors did approve the acquisition of the EORP
technology, the formation of Dong Fang, and transactions related thereto and in
furtherance thereof. Additionally, the Board of Managers of ADS
approved each of the Advisory Agreement entered into with CMCP, the original
Consulting Agreement entered into with Liviakis Financial Communications, Inc.,
and the Chadbourn Agreement prior to the consummation of the merger of ADS into
the Company in May 2007, and the Managers of IMPCO approved the Tseng
Consulting Agreement prior to the consummation of the merger of IMPCO into the
Company in May 2007.
Director
Independence
The Board
of Directors has determined that of its five members, William E. Dozier, James
F. Link, Jr., Elizabeth P. Smith and Robert C. Stempel are “independent” within
the meaning of Section 803A of the NYSE Amex Company Guide.
THE BOARD OF
DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT YOU
VOTE “FOR” THE
ADOPTION OF PROPOSALS 1 AND 2.
PROPOSAL
3
AMENDMENT
TO CERTIFICATE OF INCORPORATION
Subject to the closing of the
Transaction, the Board of Directors has approved an amendment to our Amended and
Restated Certificate of Incorporation to change the Company’s name to “CAMAC
Energy Inc.” The name change is intended to more accurately reflect
the scope our business operations following consummation of the
Transaction.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL OF AN AMENDMENT TO THE
COMPANY’S CERTIFICATE OF INCORPORATION AT THE CLOSING OF THE
TRANSACTION
STOCKHOLDER
COMMUNICATIONS
The
Company has a process for stockholders who wish to communicate with the Board of
Directors. Stockholders who wish to communicate with the Board of Directors may
write to it at the following address:
Board of
Directors
Pacific
Asia Petroleum, Inc.
250 East
Hartsdale Ave., Suite 47
Hartsdale,
New York 10530
These
communications will be reviewed by one or more employees of the Company
designated by the Board of Directors, who will determine whether they should be
presented to the Board of Directors. The purpose of this screening is to allow
the Board of Directors to avoid having to consider irrelevant or inappropriate
communications.
OTHER
MATTERS
As of the
date of this Proxy Statement, the Board of Directors has no knowledge of any
business which will be presented for consideration at the Meeting other than the
approval and adoption of the Transaction. Should any other matters be properly
presented, it is intended that the enclosed proxy card will be voted in
accordance with the best judgment of the persons voting the
proxies.
|
March
19, 2010
|
By
Order of the Board of Directors
|
|
|
|
|
Frank
C. Ingriselli
|
|
|
Chief
Executive Officer, President and
Secretary
|
|
SPECIAL
MEETING OF THE STOCKHOLDERS OF
PACIFIC
ASIA PETROLEUM, INC.
|
PLEASE
COMPLETE, DATE, SIGN AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
PLEASE MARK YOUR VOTE IN BLUE OR
BLACK INK AS SHOWN HERE:
x
|
|
| PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS | ||
| Proposal 1 | Approve and adopt the Purchase Agreement and the Transaction. | à | FOR | AGAINST | ABSTAIN | |||||
| o | o | o | ||||||||
| Proposal 2 | Approve issuance of the Consideration Shares: | à | FOR | AGAINST | ABSTAIN | |||||
| o | o | o | ||||||||
| CONTROL ID: | ||||||||||
| PROXY ID: | ||||||||||
| PASSWORD: |
| Proposal 3 | Approve the amendment of the Company’s Amended and Restated Certificate of Incorporation to change the Company’s name to “CAMAC Energy Inc.,” as at the closing of the Transaction. | à | FOR | AGAINST | ABSTAIN | |||||
| o | o | o | ||||||||
ANNEX
A
EXECUTION
COPY
PURCHASE
AND SALE AGREEMENT
BY
AND AMONG
PACIFIC
ASIA PETROLEUM, INC.
CAMAC
ENERGY HOLDINGS LIMITED
CAMAC
INTERNATIONAL (NIGERIA) LIMITED
AND
ALLIED
ENERGY PLC
Dated:
November 18, 2009
TABLE
OF CONTENTS
| ARTICLE I TRANSFER OF CONTRACT RIGHTS; RELATED TRANSACTIONS | A-5 | |
| Section 1.1 | Oyo Field | A-6 |
| Section 1.2 | Transfer of Contract Rights | A-6 |
| Section 1.3 | Complete Transfer. | A-7 |
| Section 1.4 | Release and Discharge. | A-7 |
| Section 1.5 | No Assumption of Liabilities. | A-7 |
| ARTICLE II CONSIDERATION | A-7 | |
| Section 2.1 | Consideration Shares. | A-7 |
| Section 2.2 | Cash Consideration. | A-8 |
| ARTICLE III THE CLOSING | A-8 | |
| Section 3.1 | Closing. | A-8 |
| Section 3.2 | Deliveries of the Parties. | A-8 |
| ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE CAMAC PARTIES | A-8 | |
| Section 4.1 | Organization and Standing. | A-9 |
| Section 4.2 | Power and Authority. | A-9 |
| Section 4.3 | No Conflicts. | A-9 |
| Section 4.4 | Representations Related to the Oyo Field and Oyo Related Agreements. | A-11 |
| Section 4.5 | Litigation. | A-11 |
| Section 4.6 | Consents and Approvals. | A-11 |
| Section 4.7 | Licenses, Permits, Etc. | A-11 |
| Section 4.8 | Material Contracts and Commitments. | A-11 |
| Section 4.9 | Taxes. | A-11 |
| Section 4.10 | Brokers; Schedule of Fees and Expenses. | A-12 |
| Section 4.11 | Foreign Corrupt Practices. | A-12 |
| Section 4.12 | Money Laundering Laws. | A-12 |
| Section 4.13 | OFAC. | A-12 |
| Section 4.14 | Environmental Matters. | A-13 |
| Section 4.15 | Bankruptcy. | A-13 |
| ARTICLE V REPRESENTATIONS AND WARRANTIES OF PAPI | A-14 | |
| Section 5.1 | Organization and Standing. | A-14 |
| Section 5.2 | Organizational Documents. | A-14 |
| Section 5.3 | Power and Authority. | A-15 |
| Section 5.4 | No Conflicts. | A-15 |
| Section 5.5 | Material Contracts. | A-15 |
| Section 5.6 | Capitalization. | A-17 |
| Section 5.7 | Shares Validly Issued. | A-18 |
| Section 5.8 | Litigation. | A-18 |
| Section 5.9 | Consents and Approvals. | A-20 |
| Section 5.10 | Brokers; Schedule of Fees and Expenses. | A-20 |
| Section 5.11 | Financial Statements; Undisclosed Liabilities. | A-20 |
| Section 5.12 | Absence of Certain Changes or Events. | A-21 |
| Section 5.13 | Foreign Corrupt Practices. | A-23 |
| Section 5.14 | Money Laundering Laws. | A-23 |
| Section 5.15 | OFAC. | A-23 |
| Section 5.16 | Environmental Matters. | A-23 |
| Section 5.17 | Taxes. | A-24 |
| Section 5.18 | Title. | A-25 |
| Section 5.19 | Accounts Receivable | A-25 |
| Section 5.20 | SEC Reports. | A-25 |
| Section 5.21 | Investment Company | A-26 |
| ARTICLE VI COVENANTS OF THE CAMAC PARTIES | A-26 | |
| Section 6.1 | General Conduct of Business. | A-26 |
| Section 6.2 | Notice of CAMAC Material Adverse Effect. | A-27 |
| Section 6.3 | Consultation; Compliance. | A-27 |
| Section 6.4 | PAPI Consent Required. | A-27 |
| Section 6.5 | Related Tax. | A-28 |
| Section 6.6 | Access to Information. | A-28 |
| Section 6.7 | Exclusivity; No Other Negotiations. | A-28 |
| Section 6.8 | Fulfillment of Conditions. | A-29 |
| Section 6.9 | Regulatory and Other Authorizations; Notices and Consents. | A-29 |
| Section 6.10 | Proxy Statement. | A-30 |
| Section 6.11 | Certain PSC and Oyo Field Covenants. | A-20 |
| ARTICLE VII COVENANTS OF THE PAPI PARTIES | A-30 | |
| Section 7.1 | Conduct of Business. | A-33 |
| Section 7.2 | Proxy Statement Filing and Special Meeting. | A-34 |
| Section 7.3 | SEC Filings. | A-34 |
| Section 7.4 | Notice of PAPI Material Adverse Effect. | A-34 |
| Section 7.5 | CAMAC Consent Required. | A-34 |
| Section 7.6 | Fulfillment of Conditions. | A-35 |
| Section 7.7 | Regulatory and Other Authorizations; Notices and Consents. | A-35 |
| Section 7.8 | Exclusivity; No Other Negotiations. | A-35 |
| Section 7.9 | Related Tax. | A-36 |
| Section 7.10 | Valid Issuance of PAPI Shares. | A-36 |
| Section 7.11 | Oyo Agreements. | A-36 |
| Section 7.12 | PAPI Newco. | A-36 |
| ARTICLE VIII ADDITIONAL AGREEMENTS AND COVENANTS | A-37 | |
| Section 8.1 | Disclosure Schedules. | A-37 |
| Section 8.2 | Confidentiality. | A-37 |
| Section 8.3 | Public Announcements. | A-38 |
| Section 8.4 | Board Composition. | A-38 |
| Section 8.5 | Voting Agreement. | A-38 |
| Section 8.6 | ROFR Agreement. | A-39 |
| Section 8.7 | Fees and Expenses. | A-39 |
| Section 8.8 | Certain Disclaimers. | A-39 |
| Section 8.9 | Further Assurances | A-40 |
| ARTICLE IX CONDITIONS TO CLOSING | A-40 | |
| Section 9.1 | Joint Conditions Precedent | A-40 |
| Section 9.2 | CAMAC Parties Conditions Precedent | A-41 |
| Section 9.3 | PAPI Conditions Precedent. | A-43 |
| ARTICLE X INDEMNIFICATION | A-44 | |
| Section 10.1 | Survival. | A-44 |
| Section 10.2 | Indemnification by the CAMAC Parties. | A-44 |
| Section 10.3 | Indemnification by PAPI. | A-45 |
| Section 10.4 | Limitations on Indemnity. | A-46 |
| Section 10.5 | Defense of Third Party Claims. | A-46 |
| Section 10.6 | Determining Damages. | A-47 |
| Section 10.7 | Right of Setoff. | A-48 |
| Section 10.8 | Limitation on Recourse; No Third Party Beneficiaries. | A-48 |
| ARTICLE XI TERMINATION | A-48 | |
| Section 11.1 | Methods of Termination. | A-48 |
| Section 11.2 | Effect of Termination. | A-49 |
| Section 11.3 | Termination Recovery and Fee. | A-50 |
| ARTICLE XII MISCELLANEOUS | A-50 | |
| Section 12.1 | Notices. | A-50 |
| Section 12.2 | Amendments; Waivers; No Additional Consideration. | A-50 |
| Section 12.3 | Adjustments to Payment of Purchase Price. | A-51 |
| Section 12.4 | Interpretation. | A-51 |
| Section 12.5 | Severability. | A-51 |
| Section 12.6 | Counterparts; Facsimile Execution. | A-51 |
| Section 12.7 | Entire Agreement; Third Party Beneficiaries. | A-51 |
| Section 12.8 | Governing Law. | A-51 |
| Section 12.9 | Dispute Resolution. | A-51 |
| Section 12.10 | Assignment. | A-52 |
| Section 12.11 | Publicity. | A-52 |
| Section 12.12 | Governing Language. | A-52 |
| ANNEX | ||
| ANNEX A | Definitions | A-56 |
| SCHEDULES | ||
| SCHEDULE A | Description of the Oyo Field | A-65 |
| SCHEDULE B | CAMAC Disclosure Schedule | A-66 |
| SCHEDULE C | PAPI Disclosure Schedule | A-69 |
PURCHASE
AND SALE AGREEMENT
THIS
PURCHASE AND SALE AGREEMENT, dated as of November 18, 2009 (this “
Agreement
”),
by and among PACIFIC ASIA PETROLEUM, INC., a corporation incorporated in the
State of Delaware, USA (“
PAPI
” and
together with the new entity to be formed by PAPI pursuant to Section 7.12
hereof (“
PAPI
Newco
”), the “
PAPI
Parties
”); CAMAC ENERGY HOLDINGS LIMITED, a Cayman Islands company
(“
CEHL
”);
CAMAC INTERNATIONAL (NIGERIA) LIMITED, a company incorporated in the Federal
Republic of Nigeria (“
CINL
”) and
a wholly-owned subsidiary of CEHL; and ALLIED ENERGY PLC (formerly, Allied
Energy Resources Nigeria Limited, a company incorporated in the Federal Republic
of Nigeria and a wholly-owned subsidiary of CEHL (“
Allied
,”
and together with CEHL, and CINL, the
“CAMAC
Parties
”). Each of the Parties to this Agreement is
individually referred to herein as a “
Party
” and
collectively as the “
Parties
.” Capitalized
terms used herein that are not otherwise defined herein shall have the meanings
ascribed to them in
Annex A
hereto.
BACKGROUND
A. PAPI
and its subsidiary companies are engaged in the business of oil and gas
development, production and distribution.
B. On
June 3, 1992, Allied was awarded Oil Prospecting License 210 (“
OPL
210
”
) by the
Federal Republic of Nigeria, 2.5% of the interest in which Allied subsequently
assigned to CINL, on September 30, 1992 pursuant to an assignment agreement by
and between Allied and CINL (the “
Allied
Assignment
”).
C. On
August 28, 2002, Allied and CINL were granted Oil Mining Lease 120 and Oil
Mining Lease 121 (the “
OMLs
”
) by the Federal Republic of
Nigeria, with respect to OPL 210, for a term of 20 years commencing on February
27, 2001. Pursuant to a Deed of Assignment, dated July 22, 2005,
Allied and CINL assigned to the Nigerian AGIP Exploration Limited (the “
NAE
”), a
40% participating interest in the OMLs, with the remaining 60% participating
interest in the OMLs being retained by Allied and CINL (the “
NAE
Assignment
”).
D. On
July 22, 2005, Allied, CINL and the NAE entered into a Production Sharing
Contract (the “
PSC
”
) setting out the terms of
agreement in relation to petroleum operations in the area covered by the
OMLs.
E. PAPI
desires to acquire from Allied and CINL, through PAPI Newco, all of the CAMAC
Parties’ interest in the PSC with respect to that certain oilfield asset known
as the Oyo Field (as such term is defined herein), that is the subject of Oil
Mining Lease 120 (“
OML 120
”),
as well as the joint and several obligations of CINL and Allied to the NAE under
the PSC in connection with the Oyo Field (such interest in the PSC with respect
to the Oyo Field,
subject to the rights and
obligations set forth in the PSC and the Oyo Field Supplemental Agreement (as
defined herein),
is referred to herein as the “
Contract
Rights
”), for stock consideration consisting of shares of PAPI’s common
stock, par value $0.001 per share (the “
Common
Stock
”), representing 62.74% of the issued and outstanding Common Stock
of the Company, and cash in the amount of USD $38.84 million. Allied
and CINL shall retain all right, title and interest in and to the PSC with
respect to the OMLs, other than with respect to the Oyo Field, that is subject
to OML 120.
F. Concurrently
with the Closing (as described below), the Parties hereto will enter into, or
cause their affiliates to enter into, certain other agreements contemplated by
this Agreement (together, the “
Transaction
Documents
”), including but not limited to the Novation Agreement by and
among Allied, CINL, PAPI Newco and NAE (the “
Novation
Agreement
”); the right of first refusal agreement between the CAMAC
Parties and the PAPI Parties (the “
ROFR
Agreement
”); the technical services agreement between PAPI Newco and
Allied (the “
Technical
Services Agreement
”); the cost allocation and
management agreement between PAPI Newco and Allied (the “
Oyo Field
Supplemental Agreement
”); and the registration rights agreement with
respect to the Consideration Shares between PAPI and the CAMAC Parties (the
“
Registration
Rights Agreement
”).
G. As
a condition precedent to the Closing, PAPI will consummate an equity financing
with certain qualified investors, on terms reasonably acceptable to the CAMAC
Parties and the PAPI Parties, resulting in gross proceeds of at least Forty-Five
Million Dollars ($45,000,000) (the “
Financing
”).
H. The
boards of directors of each of PAPI, CINL, Allied and PAPI Newco have considered
and have declared advisable this Agreement and the other transactions
contemplated hereby (together, the “
Transactions
”).
AGREEMENT
NOW,
THEREFORE, in consideration of the foregoing and the respective representations,
warranties, covenants and agreements set forth herein, and intending to be
legally bound hereby, the Parties agree as follows:
ARTICLE
I
Transfer
of Contract Rights; Related Transactions
Section
1.1 Oyo Field
. The
Parties agree and acknowledge that the description set forth in Schedule A
attached hereto is the “
Oyo Field
”
for purposes of this Agreement, the Transaction Documents, and the transactions
contemplated hereby and thereby and the CAMAC Parties further acknowledge and
agree that the Oyo Field is an oil field subject to the provisions of the Oyo
Related Agreements.
Section
1.2 Transfer of Contract Rights
. Subject
to the terms and conditions contained herein, each of the PAPI Parties agrees to
acquire, and the CAMAC Parties agree to transfer, all of the rights, title and
interest of the CAMAC Parties’ in and to the Contract Rights. The
transfer of the Contract Rights related to the PSC shall be made by novation of
all of Allied’s and CINL’s right, title and interest in and to the PSC with
respect to the Oyo Field, together with all of Allied’s and CINL’s liabilities
and obligations to the NAE under the PSC in relation to the Oyo
Field. Such novation shall be subject to the terms of a Novation
Agreement in form and substance satisfactory to the Parties, which shall be
effective on the effective date set forth in the Novation Agreement (the “
Novation
Date
”).
Section
1.3 Complete Transfer.
Each
of the CAMAC Parties expressly agrees that the transfer of the Contract Rights
pursuant to the Novation Agreement and this Agreement, constitutes a complete
transfer of all of the Contract Rights, free and clear of (a) all Liens on the
Contract Rights or the Oyo Field, and (b) any material adverse contractual
obligations other than the Oyo Related Agreements, and the CAMAC Parties reserve
no rights to market or otherwise transfer any interest in and to the Contract
Rights. For the avoidance of doubt, upon the consummation of the
Transactions neither PAPI nor PAPI Newco shall have any obligation to any of the
CAMAC Parties to support, maintain, offer, or do any other act relating to the
OMLs or the PSC other than as set forth herein or in the Transaction
Documents.
Section
1.4 Release and Discharge.
At
the Novation Date, except as otherwise provided for herein, or in the
Transaction Documents, the CAMAC Parties and PAPI Newco hereby release and
discharge from further obligations to each other with respect to the Contract
Rights (other than as shareholders of PAPI) and their respective rights against
each other with respect to the Contract Rights are cancelled;
provided
that such release
and discharge shall not affect any rights, liabilities or obligations of any of
them with respect to claims, causes of actions, payments or other
obligations due and payable or due to be performed on or prior to the Novation
Date or related to the facts or events occurring prior to the Novation
Date.
Section
1.5 No Assumption of
Liabilities.
Except
as otherwise provided for herein, in the Novation Agreement or in any of the
other Transaction Documents, this Agreement does not transfer, the PAPI Parties
do not assume, and the PAPI Parties expressly disclaim any and all liabilities,
costs, debts, claims and obligations of the CAMAC Parties relating to the
Contract Rights or otherwise. Except as otherwise provided for herein
or the Transaction Documents, neither PAPI nor PAPI Newco shall have any
obligation with respect to the CAMAC Parties arising prior to the Closing
Date.
ARTICLE
II
Consideration
Section
2.1 Consideration Shares.
At
the Closing, PAPI shall issue to CEHL or its designee(s), shares of Common Stock
equal to 62.74% of the issued and outstanding Common Stock after giving effect
to the Transactions and the Financing, excluding shares issued in the Excluded
Transaction (as defined below) (the “
Consideration
Shares
”). The Parties agree and acknowledge that any issuances of Equity
Interests by PAPI prior to the Closing (or pursuant to any existing
agreement or arrangement, or any agreement or arrangement entered into after the
date of this Agreement but before Closing, to issue Equity Interests
before or after the Closing) shall not reduce the 62.74% post-Closing Equity
Interest in PAPI to be issued to CEHL or its designee(s) at Closing, except with
respect to: (i) the reservation or issuance of up to one million (1,000,000)
shares of the Common Stock in connection with awards granted under PAPI’s
employee stock incentive plan after the date of this Agreement and prior to
Closing; or (ii) the issuance of shares of Common Stock in connection with the
exercise of existing awards granted under PAPI’s employee stock incentive plan
prior to the date of this Agreement (the “
Excluded
Transactions
”).
Other
than the Excluded Transactions, the Parties further agree that no other existing
agreements or arrangements, or any agreement or arrangement entered into after
the date of this Agreement but before Closing, for the issuance of any Equity
Interests in PAPI before or after Closing shall reduce the CAMAC Parties’ 62.74%
Equity Interest in PAPI, and PAPI shall issue such additional shares Common
Stock to the CAMAC Parties at the Closing (or within five (5) business days of
issuance if any such shares of PAPI Common Stock are issues following the
Closing ) as is required to preserve CAMAC’s 62.74% post-Closing Equity Interest
in PAPI.
Section
2.2 Cash Consideration.
At
the Closing PAPI shall pay to CEHL, cash in the amount of thirty eight million
eight hundred forty thousand dollars ($38,840,000) in immediately available
funds to an account designated by CEHL at least two (2) business days prior to
Closing (the “
Cash
Consideration”
).
ARTICLE
III
The
Closing
Section
3.1
Closing.
The
Closing (the “
Closing
”)
of the Transactions, shall take place at the offices of Pillsbury Winthrop Shaw
Pittman LLP in Houston, TX, commencing at 9:00 a.m. local time on the third
business day following the satisfaction or waiver of all conditions and
obligations of the Parties to consummate the Transactions contemplated hereby
(other than conditions and obligations with respect to actions that the
respective Parties will take at Closing), or on such other date and at such
other time as the Parties may mutually determine (the “
Closing
Date
”).
Section
3.2 Deliveries of the
Parties.
At
the Closing, (i) the CAMAC Parties shall deliver or cause to be delivered to the
PAPI Parties, the certificates, opinions, instruments, agreements and documents
required by Article IX hereof and (ii) the PAPI Parties shall deliver or cause
to be delivered to the CAMAC Parties, the Cash Consideration, the Consideration
Shares and the certificates, opinions, instruments, agreements and documents
required by Article IX hereof.
ARTICLE
IV
Representations
and Warranties of the CAMAC Parties
Subject
to the exceptions set forth in the schedule of exceptions, which shall state the
specific subsection of this Article IV to which each disclosure or exception is
made by the CAMAC Parties and attached hereto as
Schedule B
, each of
the CAMAC Parties jointly and severally represents and warrants to the PAPI
Parties as of the date hereof and as of the Closing as follows:
Section
4.1 Organization and
Standing.
Each of
the CAMAC Parties is duly organized, validly existing and in good standing under
the laws of its respective jurisdiction of incorporation or
organization. Each of the CAMAC Parties is duly qualified to do
business in each of the jurisdictions in which the property owned, leased or
operated by it or the nature of the business which it conducts requires
qualification, except where the failure to so qualify
would not
reasonably be expected, individually or in the aggregate, to result in a CAMAC
Material Adverse Effect. Each of the CAMAC Parties has all requisite
power and authority to own, lease and operate the Oyo Field and to carry on its
business as now being conducted pursuant to the Oyo Related
Agreements. The CAMAC Parties have made available to PAPI true and
complete copies of the CAMAC Constituent Instruments.
Section
4.2 Power and Authority.
Each
of the CAMAC Parties has all requisite corporate power and authority to execute
and deliver this Agreement and the Transaction Documents to which it is a party
and to consummate the Transactions contemplated hereby and
thereby. The execution and delivery by the CAMAC Parties of this
Agreement and the Transaction Documents and the consummation by them of the
Transactions have been duly authorized and approved by the boards of directors
or other governing body of each of the CAMAC Parties (if an entity), such
authorization and approval remains in effect and has not been rescinded or
qualified in any respect, and no other proceedings on the part of any
such entities are necessary to authorize this Agreement, the Transaction
Documents or the consummation of the Transactions contemplated hereby and
thereby. Each of this Agreement and the Transaction Documents to
which any CAMAC Party is a party has been duly executed and delivered by such
party and constitutes the valid and binding obligation of each of the CAMAC
Parties, enforceable against the CAMAC Parties in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or similar laws of general
application now or hereafter in effect affecting the rights and remedies of
creditors and by general principles of equity (regardless of whether enforcement
is sought in a proceeding at law or in equity).
Section
4.3 No Conflicts.
The
execution and delivery of this Agreement or any of the Transaction Documents
contemplated hereby by each of the CAMAC Parties and the consummation of the
Transactions and compliance with the terms hereof and thereof will not, (a)
conflict with, or result in any violation of or Default (with or without notice
or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss of a material benefit
under, or result in the creation of any Lien upon any of the Contract Rights
under any provision of: (i) any CAMAC Constituent Instrument; (ii) any
material contract to which any of the CAMAC Parties is a party or to
or by which it (or any of its assets and properties) is subject or bound; (iii)
any applicable Law or Legal requirement of and Governmental Authority; or (iv)
any Material Permit of any of the CAMAC Parties; (b) result in any material
Judgment applicable to any of the Contract Rights or (c) terminate or modify, or
give any third party the right to terminate or modify, the provisions or terms
of any of the Oyo Related Agreements.
Section
4.4 Representations Related to the Oyo Field
and Oyo Related Agreements.
(a) Oyo
Related Agreements.
Each of
the OMLs, the Allied Assignment, the NAE Assignment and the PSC (the “
Oyo Related
Agreements
”) are valid, binding and in full force and effect in all
material respects and enforceable by and against the CAMAC Parties, as
applicable, in accordance with its terms. None of the CAMAC Parties
is in violation of, or in Default under (nor does there exist any condition
which upon the passage of time or the giving of notice would cause such a
violation of, or Default under), any of the Oyo Related Agreements to which any
CAMAC Party is a party, except for violations or Defaults that would not,
individually or in the aggregate, reasonably be expected to result in a CAMAC
Material Adverse Effect; and, except as set forth on Schedule 4.4, to the CAMAC
Parties’ Knowledge, no other Person has violated or breached, or committed any
Default under, any Oyo Related Agreement, except for violations, breaches and
Defaults that,
A-9
individually
or in the aggregate, have not had and would not reasonably be expected to have a
CAMAC Material Adverse Effect. No party to an Oyo Related Agreement has
terminated or, the CAMAC Parties’ Knowledge, threatened termination of any such
agreement with any of the CAMAC Parties. To the CAMAC Parties’ Knowledge, no
other party to any of the Oyo Related Agreements is in material Default
thereunder and none of the CAMAC Parties has received any written notice
regarding any actual or possible violation or breach of, or Default under, any
Oyo Related Agreement, except in each such case for Defaults, acceleration
rights, termination rights and other rights that have not had and would not
reasonably be expected to have a CAMAC Material Adverse Effect. No
event or claim of force majeure has occurred under any of the Oyo Related
Agreements. There have been no written claims by any Governmental
Authority to terminate the Oyo Related Agreements. To the CAMAC Parties’
Knowledge, the Oyo Related Agreements do not infringe upon the rights of any
third party.
(b) Completeness
of Oyo Related Agreements.
The OMLs
contain the entirety of the obligation of the CAMAC Parties to the Government of
Nigeria with respect to the Oyo Field and the interests thereon that are subject
to the PSC. No CAMAC Party is a party to any Contract relating to or
affecting the Oyo Field or Contract Rights other than the Oyo Related
Agreements.
(c) No
Claims.
There are
no claims, actions, suits, audits, demands, arbitrations, mediations, formal
investigations or proceedings pending, or, to the CAMAC Parties’ Knowledge,
threatened, before any Governmental Authority, mediator or arbitrator with
respect to the Oyo Field or the Oyo Related Agreements.
(d) Funding
and Other Obligations.
No work program or operations or funding commitment exists or has been proposed
by the CAMAC Parties or any other party to any of the Oyo Related Agreements
under such agreements, except as has been disclosed to the PAPI Parties in
writing or as set forth in the PSC. Upon the consummation of the
Transactions, neither PAPI nor PAPI Newco will be subject to any obligation to
pay any other party any net profits interests, production payments, royalties or
other fixed or contingent amounts based upon the sale, license, distribution or
other use or exploitation of the Oyo Field, except as set forth in the PSC or
applicable Law. There are no bonds, letters of credit, guarantees,
deposits or other security furnished by the CAMAC Parties or any Affiliate of
CAMAC Parties relating to the Oyo Field or the Oyo Related Agreements that will
require expenditures in excess of $100,000, other than the Oyo
Debt. The interests of the CAMAC Parties in the PSC and the OMLs are
not subject to any preferential rights to purchase, rights of first opportunity
or similar rights, or any required third party consents to assignment that may
be applicable to the Transactions other than as may be specified in the Oyo
Related Agreements.
(e) No
Limitations on Transfer.
PAPI
Newco shall not be subject to any limitations, obligations or restrictions with
regard to the sale, license, distribution or other transfer or exploitation of
the Contract Rights, except as set forth in the Oyo Related Agreements,
applicable stock exchange rules or applicable Law.
(f) The
transfer of the Contract Rights pursuant to the Novation Agreement constitutes a
complete transfer of all of the CAMAC Parties’ rights, title and interest in and
to the Oyo Field, and the CAMAC Parties reserve no rights to market or otherwise
transfer any interest in the Oyo Field. For the avoidance of doubt,
neither PAPI nor PAPI Newco shall have any obligation to any of the CAMAC
Parties to support, maintain, offer, or do any other act relating to the OMLs or
the PSC other than as set forth in the Transaction Documents, and the PAPI
Parties may dispose of the Contract Rights, at their sole discretion, subject
only to any approval rights maintained by NAE, the Nigerian government,
applicable stock exchange rules, and applicable shareholder and board approval
requirements.
Section
4.5 Litigation.
As
of the date of this Agreement, there is no private or governmental action, suit,
inquiry, notice of violation, claim, arbitration, audit, proceeding or
investigation (“
Action
”)
pending or threatened in writing against any of the CAMAC Parties or, to the
CAMAC Parties’ Knowledge, any of the other parties to the Oyo Related
Agreements, before or by any Governmental Authority which (a) adversely affects
or challenges the legality, validity or enforceability of this Agreement or the
Oyo Related Agreements (b) could, if there were an unfavorable decision,
individually or in the aggregate, have or would reasonably be expected to result
in a CAMAC Material Adverse Effect. As of the date of this Agreement,
there is no judgment imposed upon any of the CAMAC Parties or, to the CAMAC
Parties’ Knowledge, any of the parties to the Oyo Related Agreements, that would
prevent, enjoin, alter or materially delay any of the Transactions contemplated
by this Agreement, or that would reasonably be expected to have a CAMAC Material
Adverse Effect.
Section
4.6 Consents and
Approvals.
Except as disclosed on Schedule 4.6, no consent, approval, license, permit,
order or authorization of, or registration, declaration or filing with any
Governmental Authority (“
Consent
”)
to which any of the Oyo Related Agreements or the Oyo Field are subject is
required to be obtained or made by any of the CAMAC Parties, in connection with
the execution, delivery and performance of this Agreement or the consummation of
the Transactions, except for (a) such Consents as may be required under
applicable state securities laws and the securities laws of any foreign country;
and (b) such other Consents which, if not obtained or made, would not have a
CAMAC Material Adverse Effect.
Section
4.7 Licenses, Permits,
Etc.
The CAMAC
Parties possesses or will possess prior to the Closing all licenses, franchises,
permits and other governmental authorizations held by them that are material in
connection with business related to the Oyo Related Agreements and the Oyo Field
(the “
Material
Permits
”). As of the date of this Agreement, all such Material
Permits are in full force and effect.
Section
4.8 Material Contracts and
Commitments.
Other
than the Oyo Related Agreements and the Transaction Documents, there are no
material contracts, agreements or other instruments to which any CAMAC Party or
any affiliate of a CAMAC Party is a party that will be binding on PAPI and PAPI
Newco after the consummation of the Transactions.
Section
4.9 Taxes.
Each of
the CAMAC Parties have timely, or have caused to be timely filed on their
behalf, all Tax Returns required by any law or regulation to be filed by or with
respect to it in connection with the Contract Rights, the Oyo Related Agreements
or the Oyo Field, either separately or as a member of group of corporations,
pursuant to applicable
Legal
Requirements. All such Tax Returns filed by (or that include on a consolidated
basis) any of the CAMAC Parties were (and, as to a Tax Return not filed as of
the date hereof, will be) in all respects true, complete and accurate, except to
the extent any failure to file or any inaccuracies in any filed Tax returns,
individually or in the aggregate, have not and would not reasonably be expected
to have a CAMAC Material Adverse Effect. There are no unpaid Taxes in
respect to the Contract Rights, the Oyo Related Agreements or the Oyo Field
claimed to be due by any Governmental Authority in charge of taxation of any
jurisdiction, nor any claim for additional Taxes in respect to the Contract
Rights, the Oyo Related Agreements or the Oyo Field for any period for which Tax
Returns have been filed, except to the extent any failure to file or any
inaccuracies in any filed Tax returns, individually or in the aggregate, have
not and would not reasonably be expected to have a CAMAC Material Adverse
Effect. Any deficiencies proposed as a result of any governmental
audits or such Tax Returns have been paid or settled, and there are no present
disputes as to Taxes in respect to the Contract Rights, the Oyo Related
Agreements or the Oyo Field payable by any of the CAMAC
Parties. There are no tax liens against any of the Contract Rights
and, to the CAMAC Parties’ Knowledge, there is no basis for any such
lien.
Section
4.10 Brokers; Schedule of Fees
and Expenses.
No
broker, investment banker, financial advisor or other Person is entitled to any
broker’s, finder’s, financial advisor’s or other similar fee or commission in
connection with this Agreement or the Transactions based upon arrangements made
by or on behalf of the CAMAC Parties.
Section
4.11 Foreign Corrupt
Practices.
Neither
the CAMAC Parties, nor to the CAMAC Parties’ Knowledge, any of their respective
Representatives, has, in the course of its actions for, or on behalf of, the
CAMAC Parties, directly or indirectly, (a) used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; (b) made any direct or indirect unlawful payment to any
Governmental Authority or any foreign or domestic government official or
employee from corporate funds; (c) violated or is in violation of any provision
of the U.S. Foreign Corrupt Practices Act of 1977, as amended, and the rules and
regulations thereunder (the “
FCPA
”); or
(d) made any unlawful bribe, rebate, payoff, influence payment, kickback or
other unlawful payment in connection with the operations of CAMAC Parties to any
foreign or domestic government official or employee, except, in the case of
clauses (a) and (b) above, any such items that, individually or in the
aggregate, have not had and would not reasonably be expected to have a CAMAC
Material Adverse Effect.
Section
4.12 Money Laundering
Laws.
To the
CAMAC Parties’ Knowledge, none of the CAMAC Parties has violated any money
laundering statute or any rules and regulations relating to money laundering
statutes (collectively, the “
Money Laundering
Laws
”) and no proceeding involving any CAMAC Parties with respect to the
Money Laundering Laws is pending or, to the Knowledge of the officers of the
CAMAC Parties, is threatened.
Section
4.13 OFAC.
None of
the CAMAC Parties, any director or officer of the CAMAC Parties, or, to the
CAMAC Parties’ Knowledge, any agent, employee, affiliate or Person acting on
behalf of the CAMAC Parties is currently identified on the specially designated
nationals or other blocked person list or otherwise currently subject to any
U.S. sanctions administered by the Office of Foreign Asset Control of the U.S.
Treasury Department (“
OFAC
”);
and the
CAMAC Parties have not, directly or indirectly, used any funds, or loaned,
contributed or otherwise made available such funds to any Subsidiary, joint
venture partner or other Person, in connection with any sales or operations in
Cuba, Iran, Syria, Sudan, Myanmar or any other country sanctioned by OFAC or for
the purpose of financing the activities of any Person currently subject to, or
otherwise in violation of, any U.S. sanctions administered by OFAC.
Section
4.14 Environmental
Matters.
Except
as set forth on
Schedule 4.14,
with
respect to the Oyo Field:
(a) The
CAMAC Parties and all associated operations are and, during the relevant time
periods specified in all applicable statutes of limitations, have been in
compliance with Environmental Laws in all material respects;
(b) The
CAMAC Parties have all Environmental Authorizations required for their
operations as presently conducted, all such Environmental Authorizations are in
the name of the proper entity and in full force and effect, and the CAMAC
Parties are in compliance in all material respects with such Environmental
Authorizations;
(c) The
CAMAC Parties are not subject to any pending or, to the CAMAC Parties’
Knowledge, threatened Action pursuant to Environmental Laws, nor has any CAMAC
Party received any written notice of violation, noncompliance, or enforcement or
any written notice of investigation or remediation from any Governmental
Authority pursuant to Environmental Laws;
(d) There
has been no Release of Hazardous Materials at, on, under or from the assets or
in connection with the operations of the Acquired Entities in violation of any
Environmental Laws or in a manner that could give rise to any Environmental
Liabilities or any other remedial or corrective action obligations pursuant to
Environmental Laws;
(e) To
the CAMAC Parties’ Knowledge, there has been no exposure of any Person or
property to any Hazardous Materials that could reasonably be expected to form
the basis for any Environmental Liabilities or any Action for other Damages or
compensation; and
(f) The
CAMAC Parties have made available for inspection by the PAPI Parties complete
and correct copies of all environmental assessment and audit reports and studies
and all correspondence addressing environmental obligations that are in the
possession or control of the CAMAC Parties.
(g) Notwithstanding
any other provision of this Agreement, the representations and warranties made
in this Section 4.14 are the sole and exclusive representations and warranties
made in this Agreement by the CAMAC Parties with respect to environmental
matters.
Section
4.15 Bankruptcy.
The
CAMAC Parties do not contemplate filing for relief under the provision of any
applicable bankruptcy code. The Contract Rights are not the proceeds
of, nor are they intended for, or being transferred in, the furtherance of any
concealment of assets or any effort by conspiracy or otherwise to defeat,
defraud or otherwise evade, any party or the court in any bankruptcy proceeding,
a receiver, a custodian, a trustee, a marshall, or any other officer of the
court or government or regulatory official of any kind.
ARTICLE
V
Representations
and Warranties of PAPI
Subject
to the exceptions set forth in the schedule of exceptions, which shall state the
specific subsection of this Article V to which each disclosure or exception is
made by the PAPI Parties with respect to themselves and their respective
Subsidiaries, and attached hereto as
Schedule C
(the
“
PAPI
Disclosure Schedule
”), each of the PAPI Parties jointly and severally
represents and warrants to the CAMAC Parties as of the date hereof and as of the
Closing Date as follows:
Section
5.1 Organization and
Standing.
Each of
the PAPI Parties and their respective Subsidiaries is duly organized, validly
existing and in good standing under the laws of its respective jurisdiction of
incorporation. Each of the PAPI Parties and their respective
Subsidiaries is duly qualified to do business in each of the jurisdictions in
which the property owned, leased or operated by it or the nature of the business
which it conducts requires qualification, except where the failure to so qualify
would not reasonably be expected, individually or in the aggregate, to result in
a PAPI Material Adverse Effect. Each of the PAPI Parties and their
respective Subsidiaries has all requisite power and authority to own, lease and
operate its tangible assets and properties and to carry on its business as now
being conducted. The PAPI Parties have delivered to the CAMAC Parties
true and complete copies of the PAPI Constituent Instruments.
Section
5.2 Organizational
Documents.
The PAPI
Parties have made available to the CAMAC Parties true, complete and correct
copies of the PAPI Constituent Instruments, in each case as amended or restated
to date and presently in effect. Except as set forth on
Schedule 5.2
, neither
PAPI nor any of its Subsidiaries is in violation of any of the provisions of its
PAPI Constituent Instruments. The minute books and stock records of
PAPI heretofore made available to the CAMAC Parties correctly and completely
reflect in all material respects all actions taken at all meetings of, or by
written consents of, directors, managers and holders of equity interests of PAPI
(including any analogous governing bodies thereof or committees of governing
bodies thereof).
Section
5.3 Power and
Authority.
Each of
the PAPI Parties and their respective Subsidiaries (and their respective
nominees) has all requisite corporate power and authority to execute and deliver
this Agreement and the Transaction Documents to which it is a party and to
consummate the Transactions contemplated hereby and thereby. The
execution and delivery by the PAPI Parties of this Agreement and the
consummation by them of the Transactions have been duly authorized and approved
by the boards of directors or other governing body of each of the PAPI Parties
and their respective Subsidiaries (if an entity), such authorization and
approval remains in effect and has not been rescinded or qualified in any way,
and no other proceedings on the part of any such entities are necessary to
authorize this Agreement and the Transactions. Each of this Agreement
and the Transaction Documents to which any PAPI Party is a party has been duly
executed and delivered by such party and constitutes the valid, binding, and
enforceable
obligation of each of them, enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or similar laws of general
application now or hereafter in effect affecting the rights and remedies of
creditors and by general principles of equity (regardless of whether enforcement
is sought in a proceeding at law or in equity).
Section
5.4 No
Conflicts.
Neither
the execution nor delivery by the PAPI Parties of this Agreement nor compliance
by any of them with the terms and provisions hereof will conflict with, or
result in a breach of (a) the terms, conditions or provisions of, or constitute
a Default under, or result in any violation of, any PAPI Constituent Instrument
or any Material Contract to which any PAPI Party or their respective
Subsidiaries is a party, which would prevent any of the transactions
contemplated under this Agreement or any of the Transaction Documents
contemplated hereby and thereby, or (b) any regulation, law, judgment, order or
the like to which any such PAPI Party or their respective Subsidiaries is
subject, the Default or violation of which would prevent any of the transactions
contemplated under this Agreement or any of the Transaction Documents
contemplated hereby and thereby.
Section
5.5 Material
Contracts.
Except
as set forth in the SEC Reports and on Schedule 5.5, none of the PAPI Parties or
their respective Subsidiaries is a party to any of the following (each such
Contract, a “
Material
Contract
”):
(a) any
Contract involving payments by or to a PAPI Party or any of their respective
Subsidiaries in excess of $100,000;
(b) any
Contract that constitutes a purchase order or other Contract relating to the
sale, purchase, lease or provision by a PAPI Party or any of their respective
Subsidiaries of goods or services in excess of $100,000 in any 12 month
period;
(c) any
Contract pursuant to which any party is required to purchase or sell a stated
portion of its requirements or output from or to another party;
(d) any
Contract under which a PAPI Party or any of their respective Subsidiaries has
agreed to indemnify any third Person in any manner, other than such Contracts
that were made in the ordinary course of business consistent with past practice,
or to share the Tax liability of any third Person;
(e) any
Contract pursuant to which a PAPI Party or any of their respective Subsidiaries
is required to make on or after the date of the Latest Balance Sheet a capital
expenditure, capital addition or betterment in excess of $100,000 in the
aggregate;
(f) any
power of attorney (other than powers of attorney given in the ordinary course of
business with respect to routine export, Tax or securities
matters);
(g) any
Contract in respect of Intellectual Property involving a license granted, title
conveyed or royalty payment to or by a PAPI Party or any of their respective
Subsidiaries;
(h) any
bond, indenture, note, loan or credit agreement or other Contract relating to
indebtedness for borrowed money, any Contract creating a capital lease
obligation, any Contract for the sale of accounts receivable, any Contract
relating to the direct or indirect guarantee or assumption of the obligations of
any other Person or any Contract requiring a PAPI Party or any of their
respective Subsidiaries to maintain the financial position of any other
Person;
(i) any
outstanding loan or advance by a PAPI Party or any of their respective
Subsidiaries to, or investment by such Person in, any Person, or any Contract or
commitment relating to the making of any such loan, advance or investment
(excluding trade receivables and advances to employees for normally incurred
business expenses each arising in the ordinary course of business consistent
with past practice);
(j) any
Contract involving interest rate swaps, cap or collar agreements, commodity or
financial future or option contracts or similar derivative or hedging
Contracts;
(k) any
Contract providing for the deferred payment of any purchase price (other than
trade payables incurred in the ordinary course of business consistent with past
practice) including any “earn out” or other contingent fee
arrangement;
(l) any
Contract creating a Lien, other than any Permitted Lien, on any of the PAPI
Parties or any of their respective Subsidiaries that will not be discharged at
or prior to the Closing;
(m) any
Contract purporting to limit or restrict the freedom of a PAPI Party or any of
their respective Subsidiaries or, to the PAPI Parties’ Knowledge, any of their
respective officers, directors or key employees (A) to engage in any line of
business, (B) to own, operate, sell, transfer, pledge or otherwise dispose of or
encumber any asset, (C) to compete with any Person or (D) to engage in any
business or activity in any geographic region;
(n) any
(A) distributorship agreement or (B) Contract that grants any Person the
exclusive right to sell products or provide services within any geographical
region other than a Contract that (1) is terminable by any party thereto giving
notice of termination to the other party thereto not more than 30 days in
advance of the proposed termination date and (2) even if so terminable, contains
no post-termination obligations (other than payment obligations for
pre-termination sales or services), termination penalties, buy-back obligations
or similar obligations;
(o) any
Contract under which a PAPI Party or any of their respective Subsidiaries is the
lessor of, or makes available for use by any third Person, any tangible personal
property owned by a PAPI Party or any of their respective Subsidiaries, in each
case for an annual rent in excess of $100,000;
(p) any
Contract constituting a partnership, joint venture or other similar
Contract;
(q) any
Contract that contains restrictions with respect to the payment of any dividends
in respect of a PAPI Party or any of their respective Subsidiaries or the
purchase, redemption or other acquisition of any such Equity
Interests;
(r) any
Contract relating to the acquisition or divestiture by a PAPI Party or any of
their respective Subsidiaries of Equity Interests, assets or business of any
Person, which provides for consideration or payments in excess of $100,000 and
is not made in the ordinary course of business;
(s) any
Contract between a PAPI Party or any of their respective Subsidiaries, on the
one hand, and the present or former officers, directors, stockholders, other
equity holders of a PAPI or other Affiliates of a PAPI Party or any of their
respective Subsidiaries on the other hand;
(t) any
Contract containing provisions applicable upon a change of control of a PAPI
Party or any of their respective Subsidiaries;
(u) any
Contract granting to any Person a right of first refusal, first offer or other
right to purchase any of the assets of a PAPI Party or any of their respective
Subsidiaries;
(v) any
Contract requiring a PAPI Party or any of their respective Subsidiaries to make
a payment as a result of the consummation of the Transactions contemplated
hereby; and
(w) any
other agreement which is material to the PAPI Parties or any of their respective
Subsidiaries taken as a whole.
True and
complete copies (including all amendments) of each Material Contract have been
made available to the CAMAC Parties. Each Material Contract is the
legal, valid obligation of each PAPI Party or any of their respective
Subsidiaries, as the case may be, and to the PAPI Parties’ Knowledge, any other
Person party thereto, binding and enforceable against each such PAPI Party or
any of their respective Subsidiaries, as the case may be and, to the PAPI
Parties’ Knowledge, any other Person party thereto, in accordance with its terms
subject to, except as enforcement may be limited by applicable bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium or other similar
Laws relating to or affecting the enforcement of creditors’ rights generally and
subject, as to enforceability, to legal principles of general applicability
governing the availability of equitable remedies (whether enforcement is sought
in a proceeding in equity or at law); (ii) no Material Contract has been
terminated, and neither a PAPI Party or any of their respective Subsidiaries,
nor, to the PAPI Parties’ Knowledge, any other Person is in material breach or
Default thereunder, and to the PAPI Parties’ Knowledge no event has occurred
that with notice or lapse of time, or both, would constitute a material breach
or Default, or permit termination, modification in any manner materially adverse
to a PAPI Party or any of their respective Subsidiaries, as the case may be, or
acceleration thereunder; (iii) no party has asserted or has any right to offset,
discount or otherwise abate any amount owing under any Material Contract; and
(iv) there are no material waivers regarding any Material Contract that have not
been disclosed in writing to the CAMAC Parties.
Section
5.6
Capitalization.
Schedule
5.6 sets forth a correct and complete description of the following: (i) all of
the authorized Equity Interests of the PAPI Parties and each of its Subsidiaries
and (ii) the amount of outstanding Equity Interests of the PAPI Parties and each
of its Subsidiaries. Except as described in Schedule 5.6 no Equity
Interests of any PAPI Party or any of its Subsidiaries are issued or outstanding
or reserved for any purpose.
All of
the outstanding Equity Interests of the PAPI Parties and their respective
Subsidiaries are duly authorized, validly issued and fully paid and
nonassessable, and have not been issued in violation of (nor are any of the
authorized Equity Interests of a PAPI Party or any of their respective
Subsidiaries is subject to) any preemptive or similar rights created by the PAPI
Constituent Instruments or any Contract to which a PAPI Party or their
respective Subsidiary is a party or bound.
There are
no outstanding securities, options, warrants or other rights (including
registration rights), agreements, arrangements or other Contracts to which a
PAPI Party or any of their respective Subsidiaries is a party or is bound
relating to the issued or unissued Equity Interests of a PAPI Party or any of
their respective Subsidiaries or obligating a PAPI Party or any of their
respective Subsidiaries to grant, issue, deliver or sell, or cause to be
granted, issued, delivered or sold, any Equity Interests of a PAPI Party or any
of their respective Subsidiaries, by sale, lease, license or
otherwise. Except as set forth on Schedule 5.6, there are no
obligations, contingent or otherwise, of a PAPI Party or any of their respective
Subsidiaries to (i) repurchase, redeem or otherwise acquire any Equity Interests
of a PAPI Party or any of their respective Subsidiaries, (ii) dispose of any
Equity Interests of a PAPI Party or any of their respective Subsidiaries or
(iii) provide funds to, or make any investment in (in the form of a loan,
capital contribution or purchase of Equity Interests or otherwise), or provide
any guarantee with respect to the obligations of, any other
Person. No PAPI Party or any of their respective Subsidiaries
directly or indirectly owns, has agreed to purchase or otherwise acquire or
holds any interest convertible into or exchangeable or exercisable for, Equity
Interests of any Person. There are no agreements, arrangements or
other Contracts (contingent or otherwise) to which a PAPI Party or any of their
respective Subsidiaries is a party or otherwise bound pursuant to which any
Person is or may be entitled to receive any payment based on the revenues or
earnings, or calculated in accordance therewith, of a PAPI Party or any of their
respective Subsidiaries. Except as set forth on Schedule 5.6, are no
voting trusts, proxies or other agreements or understandings with respect to the
voting of any Equity Interests of a PAPI Party or any of their respective
Subsidiaries. There are no bonds, debentures, notes or other
indebtedness of a PAPI Party or any of their respective Subsidiaries having the
right to vote (or convertible into, or exchangeable for, securities having the
right to vote) on any matters on which holders of Equity Interests of a PAPI
Party or any of their respective Subsidiaries may vote.
(a) Rights;
Liens; Encumbrances
. Except
as disclosed in Schedule 5.6 of the PAPI Disclosure Schedule, (i) none of
the capital stock of the PAPI Parties or their Subsidiaries is subject to
preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by any of them; (ii) there are no outstanding options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into, or exercisable
or exchangeable for, any capital stock of any of the PAPI Parties or their
Subsidiaries, or contracts, commitments, understandings or arrangements by which
any of the PAPI Parties or their Subsidiaries is or may become bound to issue
additional capital stock of any of the PAPI Parties or their Subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any capital stock of any of the PAPI Parties or
their
A-18
Subsidiaries;
(iii) there are no outstanding debt securities, notes, credit agreements, credit
facilities or other agreements, documents or instruments evidencing indebtedness
of any of the PAPI Parties or their Subsidiaries or by which any of them is or
may become bound which are required to be disclosed in any SEC Report (as
defined below) but not so disclosed in the SEC Reports, (iv) there are no
agreements or arrangements under which any of the PAPI Parties or their
Subsidiaries is obligated to register the sale of any of their securities under
the Securities Act; (v) there are no outstanding securities or instruments of
any of the PAPI Parties or their Subsidiaries which contain any redemption or
similar provisions, and there are no contracts, commitments, understandings or
arrangements by which any of them is or may become bound to redeem a security of
any of the PAPI Parties or their Subsidiaries; (vi) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance or reservation of the Consideration Shares; (vii) PAPI
does not have any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement; (viii) none of the PAPI Parties or
their Subsidiaries have any liabilities or obligations required to be disclosed
in the SEC Reports but not so disclosed in the SEC Reports, other than those
incurred in the ordinary course of the their respective businesses and which,
individually or in the aggregate, do not or would not have a PAPI Material
Adverse Effect; and (ix) there are no financing statements securing obligations
in any material amounts, either singly or in the aggregate, filed in connection
with any of the PAPI Parties or their Subsidiaries. PAPI has filed in
its SEC Reports with the SEC true, correct and complete copies of its
Certificate of Incorporation and its Bylaws, both as amended and as in effect on
the date hereof, and the form of all securities convertible into, or exercisable
or exchangeable for, shares of Common Stock.
(b)
Effect of Consideration
Shares
. The
Consideration Shares shall equal 62.74% of PAPI’s issued and outstanding Common
Stock after giving effect to the consummation of the Transactions and the
Financing, excluding shares issued in the Excluded Transaction.
Section
5.7
Shares
Validly Issued.
When
issued in compliance with the provisions of this Agreement, the Consideration
Shares will be validly issued, fully paid and nonassessable, and will be free of
any liens or encumbrances;
provided
,
however
, that the
Consideration Shares may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein or as otherwise required by
such laws.
Section
5.8 Litigation.
As of the
date of this Agreement, there is no private or governmental Action pending or
threatened in writing against any of the PAPI Parties or their respective
Subsidiaries, or, to the PAPI Parties’ Knowledge, any of their respective
executive officers or directors (in their capacities as such) or any of their
respective properties before or by any Governmental Authority. As of
the date of this Agreement, there is no Judgment imposed upon any of the PAPI
Parties or their respective Subsidiaries or any of their respective properties,
that would prevent, enjoin, alter or materially delay any of the Transactions
contemplated by this Agreement. Neither the PAPI Parties, nor any
director or executive officer of any of them (in his or her capacity as such),
is or has been the subject of any Action involving a material claim or material
violation of or material liability under the securities laws of any Governmental
Authority or a material claim of breach of fiduciary duty.
Section
5.9
Consents and Approvals.
Except as
disclosed on
Schedule
5.9
of the PAPI Disclosure Schedule, no Consent to which any of the PAPI
Parties or any of their respective Subsidiaries are subject is required to be
obtained or made by or with respect to any of the PAPI Parties or any of their
respective Subsidiaries, in connection with the execution, delivery and
performance of this Agreement or the consummation of the Transactions, except
for (a) such Consents as may be required under applicable state securities laws
and the securities laws of any foreign country; and (b) such other Consents
which, if not obtained or made, would not have a PAPI Material Adverse Effect
and would not prevent or materially alter or delay any of the
Transactions.
Section
5.10 Brokers;
Schedule of Fees and Expenses.
There
are no broker, investment banker, financial advisor or other Person is entitled
to any broker’s, finder’s, financial advisor’s or other similar fee or
commission in connection with this Agreement or the Transactions based upon
arrangements made by or on behalf of PAPI Parties.
Section
5.11 Financial
Statements; Undisclosed Liabilities.
(a) The
SEC Reports contain true and complete copies of the combined financial
statements of PAPI consisting of (i) audited combined balance sheets of PAPI as
of December 31, 2007 and 2008, and the related audited combined statements of
income and stockholder’s equity and cash flows for the years then ended
(including the notes or other supplementary information thereto) (collectively,
the “
Year-End
Financial Statements
”) and (ii) an unaudited balance sheet of PAPI as of
September 30, 2009 (the “
Latest Balance
Sheet
”), and the related unaudited combined statements of income and
stockholders’ equity and cash flows for the nine-month period then ended (the
“
Interim
Financial Statements
,” and, collectively with the Year-End Financial
Statements, the “
Financial
Statements
”).
(b) Each
of the Financial Statements (including the notes or other supplementary
information thereto) (i) has been prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved and (ii) present fairly, in all
material respects, the financial position of PAPI as of the respective dates
thereof and the results of each such entity’s operations and cash flows for the
periods indicated, subject, however, in the case of the Interim Financial
Statements, to normal year-end audit adjustments and to the absence of notes and
other textual disclosure required by GAAP. The books and records of
PAPI have been and are being maintained in all material respects in accordance
with applicable legal and accounting requirements to permit preparation of the
financial statements in accordance with GAAP and to maintain asset
accountability.
(c) No
PAPI Party has any liability (and, to the PAPI Parties’
Knowledge, there is no reasonable basis for any action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand against a
PAPI Party or any of their respective Subsidiaries giving rise to any
liability), other than (i) liabilities reserved or disclosed on the face of the
Latest Balance Sheet, (ii) liabilities which have arisen after the date of
Latest Balance Sheet in the ordinary course of business of the PAPI (none of
which results from, arises out of, relates to, is in the nature of or was caused
by any breach of contract, breach of warranty, tort, infringement or violation
of Laws), (iii) liabilities which have been discharged or paid in full after the
date of the Latest Balance Sheet in the ordinary course of business of PAPI
(none of which results from,
A-20
arises
out of, relates to, is in the nature of or was caused by any breach of contract,
breach of warranty, tort, infringement or violation of Laws) or (iv) liabilities
that are obligations to perform pursuant to the terms of any Contract binding on
the PAPI Parties or any of their respective Subsidiaries.
Section
5.12
Absence
of Certain Changes or Events.
Except
as set forth in the SEC Reports or on
Schedule 5.12
,
since December 31, 2008, PAPI has conducted its businesses only in the ordinary
course and in a manner consistent with past practice and there has not
been:
(a) any
PAPI Material Adverse Effect;
(b) any
damage, destruction or loss (whether or not covered by insurance) with respect
to a PAPI Party or any of their respective Subsidiaries, having a replacement
cost of more than $50,000 for any single loss or $200,000 for all such
losses;
(c) except
as required by changes in GAAP or any Law regarding Taxes, any material change
by a PAPI Party or any of their respective Subsidiaries in their accounting or
Tax reporting methods, principles or practices;
(d) any
declaration, setting aside or payment of any dividends on or dividends in
respect of any Equity Interests of a PAPI Party;
(e) any
(A) issuance of any Equity Interests in a PAPI Party or any of their respective
Subsidiaries, (B) redemption, purchase or other acquisition by a PAPI Party or
any of their respective Subsidiaries of any Equity Interests of a PAPI Party or
any of their respective Subsidiaries or (C) any split, combination or
reclassification of any Equity Interests of a PAPI Party or any of their
respective Subsidiaries;
(f) any
entry into, or amendment of, any employment, consulting, severance, change in
control or indemnification agreement or any agreement with respect to any
retention bonus with any employee of a PAPI Party or any of their respective
Subsidiaries or any other Person, or any incurrence of, entry into or amendment
of any collective bargaining agreement or obligation to any labor
organization;
(g) any
increase or acceleration of the benefits under, or the establishment or
amendment of, any bonus, insurance, severance, deferred compensation, pension,
retirement, profit sharing, option (including the granting of equity options,
equity appreciation rights, performance awards or restricted equity awards),
equity purchase or other employee benefit plan, or any increase in the
compensation payable or to become payable to partners, members, directors,
officers, employees or contractors of a PAPI Party or any of their respective
Subsidiaries, except for (A) increases in salaries or wages payable or to become
payable in the ordinary course of business and consistent with past
practice;
(h) any
making by a PAPI Party or any of their respective Subsidiaries of any material
election relating to Taxes, the rescission by a PAPI Party or any of their
respective Subsidiaries of any material election relating to Taxes or the
settlement or compromise of any material claim relating to Taxes;
(i) any
entry by a PAPI Party or any of their respective Subsidiaries into any
commitment, arrangement or transaction with any director, officer, member,
partner or holder of any Equity Interest in a PAPI Party or any of their
respective Subsidiaries;
(j) any
revaluation by a PAPI Party or any of their respective Subsidiaries of any of
its assets or properties, including the writing down of the value of inventory
or the writing down or off of notes or accounts receivable, other than in the
ordinary course of business and consistent with past practices;
(k) any
material acquisition of any assets, business or Person (other than the purchase
of assets from suppliers or vendors in the ordinary course of business
consistent with past practice);
(l) any
sale, transfer, lease, exchange or other disposition of any material assets or
properties owned or leased by a PAPI Party or any of their respective
Subsidiaries (other than in the ordinary course of business consistent with past
practice);
(m) any
pending order for, any capital expenditures, or capital additions or betterments
made by or on behalf of a PAPI Party or any of their respective Subsidiaries in
excess of $100,000 in the aggregate;
(n) any
waiver, release, discharge, transfer or cancellation by a PAPI Party or any of
their respective Subsidiaries of any debt or claim or the amendment,
cancellation, termination, relinquishment, waiver or release of any Contract or
right, other than such actions in the ordinary course of business consistent
with past practice and, in the aggregate, not material to a PAPI Party and their
respective Subsidiaries;
(o) any
commencement or settlement of any material legal actions, suits or other legal
proceedings;
(p) the
creation of any Lien, other than Permitted Liens, on any assets or properties
owned or leased by a PAPI Party or any of their respective
Subsidiaries;
(q) any
discharge or satisfaction of any Lien, or payment of any obligation or liability
(fixed or contingent), except as is in the ordinary course of business
consistent with past practice and not material to a PAPI Party or any of their
respective Subsidiaries;
(r) any
entry by a PAPI Party or any of their respective Subsidiaries into any
commitment, arrangement or transaction material to the PAPI Parties and their
respective Subsidiaries, taken as a whole;
(s) any
material increase (including by way of guaranteeing or assuming the obligations
of third Persons to repay indebtedness for borrowed money) in the PAPI Parties
indebtedness for borrowed money;
(t) any
failure by the PAPI Parties or any of their respective Subsidiaries to pay trade
accounts payable or any other liability of a PAPI Party or any of their
respective Subsidiaries when due (other than trade accounts payable that are
subject to dispute in the ordinary course of business and are, individually and
in the aggregate, not material to the PAPI Parties and their respective
Subsidiaries);
(u) any
loan to or from any PAPI Party to or from any partner, member, director,
officer, employee or contractor of such PAPI Party; or
(v) any
Contract to do any of the foregoing, except as expressly permitted by this
Agreement.
Section
5.13 Foreign
Corrupt Practices.
Neither
the PAPI Parties and their respective Subsidiaries, nor to the PAPI Parties’
Knowledge, any of their respective Representatives, has, in the course of its
actions for, or on behalf of, the PAPI Parties or their respective Subsidiaries,
directly or indirectly, (a) used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; (b) made any direct or indirect unlawful payment to any
Governmental Authority or any foreign or domestic government official or
employee from corporate funds; (c) violated or is in violation of any provision
of the FCPA; or (d) made any unlawful bribe, rebate, payoff, influence payment,
kickback or other unlawful payment in connection with the operations of PAPI
Parties or any of their respective Subsidiaries to any foreign or domestic
government official or employee, except, in the case of clauses (a) and (b)
above, any such items that, individually or in the aggregate, have not had and
would not reasonably be expected to have a PAPI Material Adverse
Effect.
Section
5.14 Money
Laundering Laws.
To the
PAPI Parties’ Knowledge, none of the PAPI Parties or their respective
Subsidiaries has violated any Money Laundering Laws, and no proceeding involving
any PAPI Parties or any of their respective Subsidiaries with respect to the
Money Laundering Laws is pending or, to the Knowledge of the officers of the
PAPI Parties, is threatened.
Section
5.15 OFAC.
None of
the PAPI Parties or their respective Subsidiaries, any director or officer of
the PAPI Parties, or, to the PAPI Parties’ Knowledge, any agent, employee,
affiliate or Person acting on behalf of the PAPI Parties is currently identified
on the specially designated nationals or other blocked person list or otherwise
currently subject to any U.S. sanctions administered by OFAC; and none of the
PAPI Parties nor any of their respective Subsidiaries have, directly or
indirectly, used any funds, or loaned, contributed or otherwise made available
such funds to any Subsidiary, joint venture partner or other Person, in
connection with any sales or operations in Cuba, Iran, Syria, Sudan, Myanmar or
any other country sanctioned by OFAC or for the purpose of financing the
activities of any Person currently subject to, or otherwise in violation of, any
U.S. sanctions administered by OFAC.
Section
5.16 Environmental
Matters.
Except
as set forth on
Schedule
5.16
:
(a) The
PAPI Parties and their respective Subsidiaries and all associated operations are
and, during the relevant time periods specified in all applicable statutes of
limitations, have been in compliance with Environmental Laws in all material
respects;
(b) The
PAPI Parties and their respective Subsidiaries all Environmental Authorizations
required for their operations as presently conducted, all such Environmental
Authorizations are in the name of the proper entity and in full force and
effect, and the PAPI Parties are in compliance in all material respects with
such Environmental Authorizations;
(c) The
PAPI Parties and their respective Subsidiaries are not subject to any pending
or, to the PAPI Parties’ Knowledge, threatened Action pursuant to Environmental
Laws, nor has any PAPI Party received any written notice of violation,
noncompliance, or enforcement or any written notice of investigation or
remediation from any Governmental Authority pursuant to Environmental
Laws;
(d) There
has been no Release of Hazardous Materials at, on, under or from the assets or
in connection with the operations of the PAPI Parties in violation of any
Environmental Laws or in a manner that could give rise to any Environmental
Liabilities or any other remedial or corrective action obligations pursuant to
Environmental Laws;
(e) To
the PAPI Parties’ Knowledge and their respective Subsidiaries, there has been no
exposure of any Person or property to any Hazardous Materials in connection with
the Acquired Assets or the operations of the PAPI Parties that could reasonably
be expected to form the basis for any Environmental Liabilities or any Action
for other Damages or compensation; and
(f) The
PAPI Parties and their respective Subsidiaries have made available for
inspection complete and correct copies of all environmental assessment and audit
reports and studies and all correspondence addressing environmental obligations
relating to the PAPI Parties that are in the possession or control of
the PAPI Parties.
(g) Notwithstanding
any other provision of this Agreement, the representations and warranties made
in this Section 5.16 are the sole and exclusive representations and warranties
made in this Agreement by the PAPI Parties with respect to environmental
matters.
Section
5.17 Taxes.
Each of
the PAPI Parties and their Subsidiaries have timely, or have caused to be timely
filed on their behalf, all Tax Returns required by any law or regulation to be
filed by or with respect to it, either separately or as a member of group of
corporations, pursuant to applicable Legal Requirements. All Tax Returns filed
by (or that include on a consolidated basis) any of the PAPI Parties and their
Subsidiaries were (and, as to a Tax Return not filed as of the date hereof, will
be) in all respects true, complete and accurate, except to the extent any
failure to file or any inaccuracies in any filed Tax returns, individually or in
the aggregate, have not and would not reasonably be expected to have a PAPI
Material Adverse Effect. There are no unpaid Taxes claimed to be due by any
Governmental Authority in charge of taxation of any jurisdiction, nor any claim
for additional Taxes for any period for which Tax Returns have been filed,
except to the extent any failure to file or any inaccuracies in any filed Tax
returns, individually or in the aggregate, have not and would not reasonably be
expected to have a PAPI Material Adverse Effect. Each of the PAPI
Parties and their Subsidiaries has set aside on its books provision reasonably
adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. Any deficiencies
proposed as a result of any governmental audits or such Tax Returns have been
paid or settled, and there are no present disputes as to such Taxes payable by
any of the PAPI Parties or their Subsidiaries. There are no tax liens against
any property for assets of the PAPI Parties or their Subsidiaries and, to the
PAPI Parties’ Knowledge, there is no basis for any such lien.
Section
5.18 Title.
Each of
PAPI and its Subsidiaries has good and marketable title to all real property and
good and marketable title to all personal property owned by them which is
material to their respective businesses, in each case free and clear of all
liens, encumbrances and defects except (i) such as are described in
Schedule 5.18
of the
PAPI Disclosure Schedule, or (ii) such as do not materially affect the value of
such property and do not interfere with the use made and proposed to be made of
such property by any of them. Any real property (including mineral,
mining or similar rights) and facilities held under lease by PAPI or any of its
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by any of
them.
Section
5.19 Accounts
Receivable
.Except
as set forth on
Schedule 5.19
, all
accounts receivable reflected on the Latest Balance Sheet or accrued after the
date thereof and existing as of the Closing are due and valid claims against
account debtors for goods or services delivered or rendered, collectible and
subject to no defenses, offsets or counterclaims, except to the extent reserved
against on the Latest Balance Sheet, as would be adjusted for operations and
transactions during the period after the date of the Latest Balance Sheet
through the Closing Date in accordance with the past custom and practice of the
PAPI. PAPI good and valid title to such accounts receivable free and
clear of all Liens except Permitted Liens. No PAPI Party has any obligation
pursuant to any rule or regulation of any Governmental Authority (whether in
bankruptcy or insolvency proceedings or otherwise) to repay, return, refund or
forfeit any accounts receivable previously collected. All accounts
receivable of PAPI reflected on the Latest Balance Sheet or accrued after the
date thereof arose in the ordinary course of business. None of the
obligors of such receivables have refused or given written notice that it
refuses to pay the full amount thereof and none of the obligors of such accounts
receivable is an affiliate of any PAPI Party or, to the PAPI Parties’ Knowledge,
is involved in a bankruptcy or insolvency proceeding. Except as set
forth in
Schedule
5.19
, no accounts receivable are subject to prior assignment or Lien.
Except as reflected on the Latest Balance Sheet as would be adjusted for
operations and transactions during the period after the date of the Latest
Balance Sheet through the Closing Date in accordance with the past custom and
practice of PAPI, no PAPI Party has incurred any liabilities to customers for
discounts, returns, promotional allowances or otherwise.
Section
5.20 SEC
Reports.
The
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it under the Securities Act and the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof (the foregoing materials
including all exhibits and schedules thereto, being collectively referred to
herein as the “
SEC
Reports
” and, together with the Schedules to this Agreement, and any
other materials prepared by the Company and delivered to the CAMAC Parties in
writing, the “
Disclosure
Materials
”). The Company has delivered to the CAMAC Parties or
their representatives, true, correct and complete copies of the SEC Reports not
available on the EDGAR system. As of their respective dates, the SEC
Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, none of the SEC Reports or the other
Disclosure Materials, when filed or prepared, as applicable, contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading.
Section
5.21
Investment
Company
.
None of
the PAPI Parties, nor any of their subsidiaries, is, and after giving
effect to this Agreement, the Transaction Documents, and the transactions
contemplated hereby and thereby, none of them will be, (i) an “investment
company” within the meaning of such term under the Investment Company Act of
1940, as amended (the “
Investment
Company Act
”), and the rules and regulations of the SEC thereunder or
(ii) a “business development company” (as defined in Section 2(a)(48) of the
Investment Company Act).
ARTICLE
VI
Covenants
of the CAMAC Parties
Section
6.1 General
Conduct of Business.
During
the period from the date of this Agreement and continuing until the earlier of
the termination of this Agreement or the Closing Date, each of the CAMAC Parties
agree, unless consented to in writing by the PAPI Parties, it will (x) operate
its business with respect to the Contract Rights and the Oyo Related Agreements
in the usual and ordinary course consistent with past practices and (y) with
respect to the Contract Rights and the Oyo Related Agreements, preserve
substantially intact its business organization, maintain its rights and
franchises and maintain its relationships and goodwill with its suppliers,
customers, distributors, licensors, licensees and other Persons doing business
with it. Without limiting the generality of the foregoing, except as
otherwise consented to in writing by the PAPI Parties, from the date of this
Agreement until the earlier of the Closing or the termination of this Agreement,
the CAMAC Parties will not, and will prevent their respective Subsidiaries from
doing any of the following:
(a) sell,
transfer, lease, exchange or otherwise dispose of, whether by merging,
consolidating or in any other manner, or grant any Lien with respect to the
Contract Rights or the Oyo Field;
(b) incur,
create, assume, guarantee or otherwise become liable for any obligation for
borrowed money, purchase money indebtedness or any obligation of any other
Person, that is secured by the Contract Rights or the Oyo Field;
(c) take
or cause to be taken any action (including inaction) that could reasonably be
expected to delay or adversely affect the consummation of the transactions
contemplated hereby or that could reasonably be expected to result in any of the
representations and warranties contained in
Article IV
becoming
untrue or inaccurate in any material respect; or
(d) agree
in writing or otherwise to do any of the foregoing.
Section
6.2 Notice
of CAMAC Material Adverse Effect.
Each of
the CAMAC Parties agree to promptly notify the PAPI Parties of any material
event or occurrence not in the ordinary course of its business that would have
or reasonably be expected to have a CAMAC Material Adverse Effect, including but
not limited to: (i) any written notice of Default or termination received or
given by any of the CAMAC Parties with respect to any of the Oyo Related
A-26
Agreements,
Oyo Debt Documents or the Oyo Field; (ii) any written notice of any pending or
threatened claim, demand, action, suit, inquiry or proceeding relating to any of
the Oyo Related Agreements, Oyo Debt Documents or the Oyo Field; (iii) any
material damage, destruction or loss to all or any part of the Oyo Field or any
assets used in connection with the Oyo Field or any of the Oyo Related
Agreements or (iv) any event or condition occurring or arising on or after the
date hereof that (A) would render unenforceable, the PAPI Parties’ rights under
this Agreement, or, after giving effect to this Agreement, under any of the Oyo
Related Agreements or (B) would require any amendment or supplement to the Proxy
Statement (as defined below).
Section
6.3 Consultation;
Compliance.
The CAMAC
Parties agree to (i) consult with the PAPI Parties before voting on material
decisions under any of the Oyo Related Agreements; (ii) continue to pay all
amounts due and owing under each of the Oyo Related Agreements; and (iii) comply
in all material respects with all covenants, agreements and other provisions of
each of the Oyo Related Agreements required to be complied with by the CAMAC
Parties.
Section
6.4 PAPI
Consent Required.
Without
limiting the generality of the forgoing, during the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Closing Date, except as listed on
Schedule 6.4
of the
CAMAC Disclosure Schedule or as otherwise expressly permitted by or provided for
in this Agreement, none of the CAMAC Parties shall do, allow, cause or permit
any of the following actions to occur with respect to any of the Contract Rights
without the prior written consent of the PAPI Parties, which shall not be
unreasonably delayed or withheld:
(a)
Material
Contracts
. Except as set forth in
Schedule 6.4(a)
,
enter into any new material contract relating to the PSC or the Oyo Field, or
violate, amend or otherwise materially modify or waive any of the terms of any
existing Oyo Related Agreement or waive or fail to enforce any material right
thereunder, other than (x) in the ordinary course of business consistent with
past practice or (y) upon prior consultation with, and prior written consent of
the PAPI Parties;
(b)
Dispositions
. Sell,
lease, license or otherwise dispose of or encumber all or part of the Contract
Rights, except in the ordinary course of business consistent with past
practice;
(c)
Litigation
. Compromise
or settle any material litigation or arbitration proceedings related to the PSC
or the Oyo Field; or
(d)
Capital
Commitments
. Enter into any capital commitment in excess of
$100,000 relating to the Oyo Field.
Section
6.5 Related
Tax.
From the
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Closing Date, each of the CAMAC Parties, consistent with
past practice, shall (i) duly and timely file all Tax Returns and other
documents, with respect to the Oyo Related Agreements or the Oyo Field, required
to be filed by it with applicable Governmental Authorities, the failure to file
of which could have a CAMAC Material Adverse Effect, subject to extensions
permitted by law and properly granted by the appropriate authority; and (ii) pay
all Taxes shown as due on such Tax Returns
A-27
(subject
to good faith disputes over such Taxes). The CAMAC Parties shall be jointly and
severally responsible for any and all sales or other transaction taxes, duties
and other similar charges payable in connection with the sale and transfer of
the interest in the Contract Rights.
Section
6.6
Access to Information.
Except as
required pursuant to any confidentiality agreement or similar agreement or
arrangement to which any CAMAC Party is subject, between the date of this
Agreement and the Closing Date, subject to the PAPI Parties’ undertaking to use
commercially reasonable efforts to keep confidential and protect the
Intellectual Property of CAMAC Parties against any disclosure, the CAMAC Parties
will permit the PAPI Parties and its Representatives reasonable access at
dates and times agreed upon by the applicable CAMAC Party and the PAPI Parties,
to all of their books and records and other data with respect to the Oyo Related
Agreements and the Oyo Field, including, but not limited to, exploration
operations, oil screening assessments and drilling and reconnaissance programs,
which the PAPI Parties determine are necessary for the preparation and amendment
of the Proxy Statement and such other filings or submissions required by SEC
rules and regulations as are necessary to consummate the Transactions and as are
necessary to respond to requests of the SEC’s staff, the PAPI Parties’
accountants and relevant Governmental Authorities.
Notwithstanding
anything to the contrary contained herein, the failure to use commercially
reasonable efforts to protect against any disclosure of any Intellectual
Property of the CAMAC Parties by any PAPI Party or its Representatives in
violation of this Section, shall constitute a breach of a covenant in a material
respect pursuant to Section 11.1(c) hereof;
provided, however,
that the
PAPI Parties may make a disclosure otherwise prohibited by this Section if
required by applicable Law or regulation or regulatory, administrative or legal
process (including, without limitation, by oral questions, interrogatories,
requests for information, subpoena of documents, civil investigative demand or
similar process) or the rules and regulations of the SEC or any stock exchange
having jurisdiction over the PAPI Parties. In the event that any PAPI
Party or any of its Representatives is requested or required to disclose any
Intellectual Property of the CAMAC Parties as provided in the proviso in the
immediately preceding sentence, such PAPI Party shall provide the CAMAC Parties
with prompt written notice of any such request or requirement so that the CAMAC
Parties may seek a protective order or other appropriate remedy. If
any or all seismic data or other information obtained by any of the CAMAC
Parties in connection with the Oyo Field or the Oyo Related Agreements from a
third party is subject to restrictions on disclosure, the CAMAC Parties shall
use commercially reasonable efforts to enter into an agreement with such third
party allowing disclosure of such data to the PAPI Parties.
Section
6.7 Exclusivity;
No Other Negotiations.
(a) None
of the CAMAC Parties shall take (or authorize or permit any investment banker,
financial advisor, attorney, accountant or other Person retained by or acting
for or on behalf of any of the CAMAC Parties to take) directly or indirectly,
any action to initiate, assist, solicit, negotiate, or encourage any offer,
inquiry or proposal from any Person other than the PAPI Parties:
(i) relating to the acquisition of the Oyo Field, or any interest thereon,
or any interest in and to the Contract Rights (including any acquisition
structured as a merger, consolidation, share exchange or other business
combination) (an “Acquisition Proposal”); (ii) to reach any agreement or
understanding (whether or not such agreement or
A-28
understanding
is absolute, revocable, contingent or conditional) for, or otherwise attempt to
consummate, any Acquisition Proposal with any of the CAMAC Parties;
(iii) to participate in discussions or negotiations with or to furnish or
cause to be furnished any information with respect to the CAMAC
Parties or afford access to such assets and properties or books and
records of any of the CAMAC Parties to any Person who any of the CAMAC Parties
(or any such Person acting for or on their behalf) knows or has reason to
believe is in the process of considering any Acquisition Proposal relating to
any of the CAMAC Parties; (iv) to participate in any discussions or negotiations
regarding, furnish any material non-public information with respect to, assist
or participate in, or facilitate in any other manner any effort or attempt by
any Person to do or seek any of the foregoing, or (v) to take any other action
that is inconsistent with the Transactions and that has the effect of avoiding
the Closing contemplated hereby.
(b) The
CAMAC Parties will immediately cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the actions set forth in Section 6.7(a) above, if applicable. The
CAMAC Parties will promptly (i) notify the PAPI Parties if
any of the CAMAC Parties receives any
proposal or inquiry or request for information in connection with an Acquisition
Proposal, and (ii) notify the PAPI Parties of the significant terms and
conditions of any such Acquisition Proposal including the identity of the Party
making an Acquisition Proposal.
(c) Notwithstanding
the other provisions of this Section 6.7, from and after, March 31,
2010, the CAMAC Parties may engage in the activities described in
Section 6.7(a) with respect to an Acquisition Proposal; provided, that any
definitive agreement entered into by a CAMAC Party relating to an Acquisition
Proposal must provide that the closing of any Acquisition Proposal be
conditioned on the prior termination of this Agreement in accordance with its
terms and include a provision which provides that such agreement will
automatically terminate upon the Closing of the Transactions. The
CAMAC Parties will promptly notify the PAPI Parties of the entry into any such
definitive agreement.
Section
6.8 Fulfillment
of Conditions.
The
CAMAC Parties shall use their commercially reasonable efforts to fulfill the
conditions specified in Article IX hereof, to the extent that the fulfillment of
such conditions is within their control. The foregoing obligation includes
(a) good faith negotiation, the execution and delivery of documents
necessary or desirable to consummate the Transactions contemplated hereby, (b)
participate in meetings at mutually agreed to times and places, in connection
with the Financing, and (c) taking or refraining from such actions as may
be necessary to fulfill such conditions (including using their commercially
reasonable efforts to conduct their business in such manner that on the Closing
Date the representations and warranties of the each of the CAMAC Parties
contained herein shall be accurate as though then made, except as contemplated
by the terms hereof).
Section
6.9 Regulatory
and Other Authorizations; Notices and Consents.
The
CAMAC Parties shall use their commercially reasonable efforts to obtain all
material Consents that may be or become necessary for their execution and
delivery of, and the performance of their obligations pursuant to, this
Agreement and the Transaction Documents and will cooperate with the PAPI Parties
in promptly seeking to obtain all such Consents. Each of the CAMAC
Parties shall give promptly such notices to third parties and use its or their
commercially reasonable efforts to obtain such Consents as are required to
consummate the Transactions (and
in such
regard use commercially reasonable efforts to cause the relevant Government
Authorities to permit the PAPI Parties and/or its counsel to participate in the
conversation and correspondence with such Government Authorities together with
the PAPI Parties’ counsel);
provided, however
, that the
PAPI Parties shall have no obligation to give any guarantee or other
consideration of any nature in connection with any such notice, consent or
estoppel certificate or to consent to any change in the terms of any agreement
or arrangement which could reasonably be expected to result in a PAPI Material
Adverse Effect.
Section
6.10 Proxy
Statement.
Each
of the CAMAC Parties shall direct that its counsel and auditors cooperate with
the PAPI Parties’ counsel in the preparation of the Proxy
Statement. None of the information supplied or to be supplied by or
on behalf of the CAMAC Parties for inclusion or incorporation by reference in
the Proxy Statement will, at the time the Proxy Statement is filed with the SEC
contain any untrue statement of a material fact, or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. The CAMAC Parties shall promptly notify the PAPI Parties if any
information is discovered or any event occurs with respect to any of the CAMAC
Parties, or any change occurs with respect to information provided by the CAMAC
Parties and included in the Proxy Statement, which information is required to be
described in an amendment of, or a supplement to, the Proxy Statement to avoid a
misstatement of a material fact or render the filed disclosures to be
misleading.
Section
6.11 Certain
PSC and Oyo Field Covenants.
Each
of the CAMAC Parties hereby agrees that: (a) it shall not engage in any conduct
or activity that could result in the revocation, suspension or termination of
any of the Oyo Related Agreements; and (b) it shall take all such actions as are
reasonably necessary and appropriate to (1) comply with applicable obligations
under the Oyo Related Agreements and (2) maintain the effectiveness and validity
of the Oyo Related Agreements during the terms thereof. In the event
that the PSC is terminated by any party after the Closing Date, Allied shall be
obligated to fulfill the obligations of NAE under the PSC and shall obtain such
instruments, assignments, certificates, notices, statements, consents,
agreements, deeds, papers and documents, as necessary to give PAPI Newco the
same rights and obligations with respect to the Oyo Field as previously afforded
under the Contract Rights.
ARTICLE
VII
Covenants
of the PAPI Parties
Section
7.1 Conduct
of Business.
PAPI
hereby covenant and agree that, until the earlier of the Closing or the
termination of this Agreement, unless consented to in writing by the CAMAC
Parties, it will (x) operate its business in the usual and ordinary course
consistent with past practices and (y) preserve substantially intact its
business organization, maintain its rights and franchises, retain the services
of its respective officers and key employees and consultants and maintain its
relationships and goodwill with its suppliers, customers, distributors,
licensors, licensees and other Persons doing business with
it. Without limiting the generality of the foregoing, except as
otherwise consented to in writing by the CAMAC Parties, from the date of this
Agreement until the earlier of the Closing or the termination of this Agreement,
the PAPI Parties will not, and will prevent their respective Subsidiaries from
doing any of the following:
(a) (i)
increase the compensation payable to or to become payable to or grant any
bonuses (except with respect to such annual compensation increases and bonuses
that are consistent with past practices) to any present or former director,
officer, employee or consultant of a PAPI Party of any of their respective
Subsidiaries; (ii) grant any severance or termination pay (unless required
pursuant to any existing agreement); (iii) enter into or amend any employment,
consulting, severance or termination agreement or other similar Contract with
any present or former partner, member, director, officer, employee or consultant
of a PAPI Party of any of their respective Subsidiaries; (iv) establish, adopt,
enter into or amend any employee benefit plan or arrangement in any material
respect; (v) amend, or take any other actions to increase the amount of, or
accelerate the payment or vesting of, any benefit or amount under any benefit
plan or any of the Contracts described in Section 7.1; or (vi) make any loan to
any present or former partner, member, director, officer, employee or consultant
of a PAPI Party of any of their respective Subsidiaries; except in each case (A)
as required by any Contract, Plan or other legal obligation of a PAPI Party of
any of their respective Subsidiaries existing on the date of this Agreement or
(B) as required by applicable Law;
(b) declare,
set aside or pay any dividend on, or make any other distributions in respect of,
any outstanding Equity Interests of a PAPI Party of any of their respective
Subsidiaries;
(c) (i)
directly or indirectly redeem, purchase or otherwise acquire, or offer to
redeem, purchase or otherwise acquire, any outstanding Equity Interests of a
PAPI Party of any of their respective Subsidiaries; (ii) effect any
reorganization or recapitalization; or (iii) split, combine or reclassify any of
the Equity Interests of a PAPI Party of any of their respective Subsidiaries or
issue or authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for, such Equity Interests, except, in each
case, as may be required by applicable Laws;
(d) other
than in connection with the Financing and the Excluded Transactions, offer,
issue, deliver, grant or sell, or authorize or propose the offering, issuance,
delivery, grant or sale (including the grant of any Liens or limitations in
voting rights) of, (i) any Equity Interests of a PAPI Party of any of their
respective Subsidiaries or (ii) any securities convertible into or exchangeable
for, or any rights, warrants or options to acquire any such Equity Interests,
except, in each case, as may be required by applicable Laws;
(e) (i)
merge, consolidate, combine or amalgamate with any Person or completely or
partially dissolve or liquidate; (ii) acquire or agree to acquire, by merging or
consolidating with, purchasing Equity Interests of, or purchasing all or a
portion of the assets of, or in any other manner, any business or any Person or
otherwise acquire or agree to acquire any assets of any other Person (other than
the purchase of assets from suppliers or vendors in the ordinary course of
business consistent with past practice); or (iii) make any loans, advances or
capital contributions to, or investments in, any Person except for loans,
advances and capital contributions (A) to any wholly owned Subsidiary of a PAPI
Party or (B) pursuant to and in accordance with the terms of any legal
obligation existing as of the date of this Agreement, except, in each case, as
may be required by applicable Laws;
(f) sell,
transfer, lease, exchange or otherwise dispose of, whether by merging,
consolidating or in any other manner, or grant any Lien with respect to any
properties or assets of a PAPI Party of any of their respective Subsidiaries,
except for sales of (i) inventories and assets in the ordinary course of
business consistent with past practice and (ii) worn out or obsolete property in
the ordinary course of business consistent with past practice, except, in each
case, as may be required by applicable Laws;
(g) (i)
transfer, assign, pledge, convey or grant any ownership interest or any
exclusive license or rights to any Intellectual Property; (ii) grant any
material nonexclusive licenses to any Intellectual Property except those in the
ordinary course of business consistent with past practice; (iii) take any Action
that would, or fail to take any Action the failure of which would, directly or
indirectly, cause any of the Intellectual Property to enter the public domain or
otherwise adversely affect the Intellectual Property, or its validity or
enforceability; (iv) license to any Person, or otherwise extend, amend or modify
any Person’s rights to, any of the Intellectual Property, other than in the
ordinary course of business consistent with past practice, except, in each case,
as may be required by applicable Laws;
(h) adopt
or propose any amendments to any PAPI Constituent Instrument;
(i) (i)
change any PAPI Party’s methods of accounting in effect at December 31, 2008,
except to the extent required to comply with GAAP; (ii) make or rescind any
election relating to Taxes; (iii) settle or compromise any claim, Action, suit,
litigation, proceeding, arbitration, investigation, audit or controversy
relating to Taxes; or (iv) change any of the PAPI Party’s methods of reporting
income or deductions for income tax purposes from those employed in the
preparation of the income tax returns for the taxable year ending December 31,
2008, except, in each case, as may be required by applicable Laws;
(j) incur,
create, assume, guarantee or otherwise become liable for any obligation for
borrowed money, purchase money indebtedness or any obligation of any other
Person, whether or not evidenced by a note, bond, debenture, guarantee,
indemnity or similar Contract, except for (i) trade payables incurred in the
ordinary course of business consistent with past practice; and (ii) indebtedness
with any wholly owned Subsidiary of any PAPI Party;
(k) make
or commit to make any capital expenditures, or capital additions or betterments
in excess of $100,000 in the aggregate, except for capital expenditures that
have been approved by the management of the PAPI Parties prior to the date
hereof and are set forth on
Schedule
7.1(k)
;
(l) pay,
discharge, settle or satisfy any claims prior to the same being due in excess of
$100,000 in the aggregate, other than pursuant to mandatory terms of any
Contract as in effect on the date hereof;
(m) (i)
enter into, renew, modify, amend or terminate any Material Contract, or waive,
delay the exercise of, release or assign any material rights or claims
thereunder except in the ordinary course of business consistent with past
practice or (ii) enter into or amend in any material manner any Contract with
any former or present director, officer, employee or consultant of a PAPI Party
of any of their respective Subsidiaries or with any affiliate of any of the
foregoing Persons;
(n) take
or cause to be taken any action (including inaction) that could reasonably be
expected to delay or adversely affect the consummation of the transactions
contemplated hereby or that could reasonably be expected to result in any of the
representations and warranties contained in
Article V
becoming
untrue or inaccurate in any material respect;
(o) enter
into any new line of business; or
(p) agree
in writing or otherwise to do any of the foregoing.
Section
7.2 Proxy
Statement Filing and Special Meeting.
PAPI
shall cause a meeting of its stockholders (the “
Stockholders’
Meeting
”) to be duly called and held as soon as reasonably practicable
for the purpose of voting on the adoption and approval of, among others, this
Agreement and the Transactions contemplated hereby and thereby. The
board of directors of PAPI shall recommend to its stockholders that they vote in
favor of the adoption of such matters thereto. In connection with the
Stockholders’ Meeting, this Agreement and the consummation of the Transactions
contemplated hereby, and in favor of the PAPI Parties (a) will use
commercially reasonable efforts to file with the SEC as promptly as practicable
the preliminary and definitive proxy statements pursuant to Section 14(a),
Regulation 14A, and Schedule 14A under the Exchange Act (the definitive proxy
statement is referred to herein as the “
Proxy
Statement
”) and all other proxy materials for such meeting, (b) upon
receipt of approval from the SEC, PAPI will mail to its stockholders the Proxy
Statement and other proxy materials, (c) will use commercially reasonable
efforts to obtain the necessary approvals by its stockholders of this Agreement
and the Transactions contemplated hereby, and (d) will otherwise comply
with all Legal Requirements applicable to the Stockholders’
Meeting. At the time the Proxy Statement is mailed to Shareholders,
the Proxy Statement will not contain any untrue statement of a material fact, or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they are made, not misleading (other than with respect to information
provided by the CAMAC Parties to PAPI specifically for inclusion in the Proxy
Statement). The PAPI Parties shall promptly notify the CAMAC Parties if any
information is discovered or any event occurs with respect to any of the PAPI
Parties, or any change occurs with respect to information included in the Proxy
Statement, other than information provided by the CAMAC Parties to PAPI
specifically for inclusion in the Proxy Statement, which information is required
to be described in an amendment of, or a supplement to, the Proxy Statement to
avoid a misstatement of a material fact or render the filed disclosures to be
misleading. THE CAMAC PARTIES SHALL HAVE NO LIABILITY TO ANY PAPI
PARTY OR ANY SHAREHOLDER OF PAPI UNDER THIS AGREEMENT, THE SECURITIES ACT OF
1933, THE SECURITIES EXCHANGE ACT OF 1934, OR ANY OTHER STATUTE OR LAW FOR ANY
MISSTATEMENTS OR OMISSIONS IN THE PROXY STATEMENT, EXCEPT WITH RESPECT TO
INFORMATION REGARDING THE CAMAC PARTIES’ BOARD REPRESENTATIVES (INCLUDING
BIOGRAPHICAL INFORMATION) PROVIDED BY THE CAMAC PARTIES TO PAPI FOR INCLUSION
THEREIN.
Section
7.3 SEC
Filings.
The PAPI
Parties will timely provide to the CAMAC Parties all correspondence received
from and to be sent to the SEC and will not file any amendment to the filings
with the SEC without providing the CAMAC Parties the opportunity to review and
comment on any responses to the SEC. In addition, the PAPI Parties
will use commercially reasonable efforts to cause the SEC to permit the CAMAC
Parties and/or their counsel to participate in the SEC conversations on issues
related to the PAPI Parties’ SEC filings together with the PAPI Parties
counsel.
Section
7.4 Notice
of PAPI Material Adverse Effect.
From the
date hereof through the Closing Date, the PAPI Parties shall give the CAMAC
Parties prompt written notice of any event or development that occurs that (a)
is of a nature that, individually or in the aggregate, would have or reasonably
be expected to have a PAPI Material Adverse Effect, or (b) would require
any amendment or supplement to the Proxy Statement.
Section
7.5 CAMAC
Consent Required.
Without
limiting the generality of the forgoing, during the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Closing Date, except as listed on
Schedule 7.5
of the
PAPI Disclosure Schedule or as otherwise expressly permitted by or provided for
in this Agreement, none of the PAPI Parties shall do, allow, cause or permit any
of the following actions to occur without the prior written consent of the CAMAC
Parties, which consent shall not be unreasonably delayed or
withheld:
(a)
Charter
Documents
. Except as set forth on
Schedule 7.5(a)
of
the PAPI Disclosure Schedule, none of the PAPI Parties nor any of its
Subsidiaries shall adopt or propose any change in any of their respective
Constituent Instruments except for such amendments required by any Legal
Requirement or the rules and regulations of the SEC or NYSE Amex LLC or as are
contemplated by this Agreement.
(b)
SEC
Reports
. The PAPI Parties shall not fail to timely file or
furnish to or with the SEC all SEC Reports, except those filings by affiliates
of the PAPI Parties required under Section 13(d) or 16(a) of the Exchange Act
which do not have a PAPI Material Adverse Effect.
(c)
Dividends; Changes in
Capital Stock
. The PAPI Parties shall not declare or pay any
dividends on or make any other distributions (whether in cash, stock or
property) in respect of any of its capital stock, or split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly, any
shares of its capital stock nor shall any of the PAPI Parties enter into any
agreement or arrangement to do any of the foregoing.
(d)
Taxes
. None
of the PAPI Parties nor any of its Subsidiaries shall make or change any
material election in respect of Taxes, adopt or change any accounting method in
respect of Taxes, file any Tax Return or any amendment to a Tax Return, enter
into any closing agreement, settle any claim or assessment in respect of Taxes,
or consent to any extension or waiver of the limitation period applicable to any
claim or assessment in respect of Taxes.
(e)
Litigation
.
Compromise or settle any material litigation or arbitration
proceedings.
(f)
Material
Contracts
. Enter into any new material contract imposing a
payment obligation of the PAPI Parties or any of their respective Subsidiaries
in excess of $100,000, other than (x) in the ordinary course of business
consistent with past practice or (y) upon prior consultation with, and prior
written consent of the CAMAC Parties.
Section
7.6 Fulfillment
of Conditions.
From
the date hereof to the Closing Date, the PAPI Parties shall use its commercially
reasonable efforts to fulfill the conditions specified in Article IX, to the
extent that the fulfillment of such conditions is within its control. The
foregoing obligation includes (a) the execution and delivery of documents
necessary or desirable to consummate the Transactions, (b) engaging in a road
show, at mutually agreed to times and places, in connection with the Financing
and to seek the approval of the Transactions, and (c) taking or refraining from
such actions as may be necessary to fulfill such conditions (including using its
commercially reasonable efforts to conduct the business of the PAPI Parties and
their respective Subsidiaries in such manner that on the Closing Date the
representations and warranties of the PAPI Parties contained herein shall be
accurate as though then made).
Section
7.7 Regulatory
and Other Authorizations; Notices and Consents.
The
PAPI Parties shall use its commercially reasonable efforts to obtain all
authorizations, consents, orders and approvals of all Governmental Authorities
and officials that may be or become necessary for their execution and delivery
of, and the performance of their obligations pursuant to, this Agreement and the
Transaction Documents to which they are a party. The PAPI Parties
shall cooperate and use commercially reasonable efforts to assist the CAMAC
Parties in giving such notices and obtaining such Consents set forth in Section
6.9 of this Agreement (and in such regard use commercially reasonable efforts to
cause the relevant Government Authorities to permit the CAMAC Parties and/or its
counsel to participate in the conversation and correspondence with such
Government Authorities together with the PAPI Parties’ counsel);
provided, however
, that the
PAPI Parties shall have no obligation to give any guarantee or other
consideration of any nature in connection with any such notice, consent or
estoppel certificate or to consent to any change in the terms of any agreement
or arrangement which could reasonably be expected to result in a PAPI Material
Adverse Effect.
Section
7.8
Exclusivity; No Other Negotiations.
(a)
The PAPI Parties shall not take (or authorize or permit any investment banker,
financial advisor, attorney, accountant or other Person retained by or acting
for or on behalf of the PAPI Parties to take) directly or indirectly, any action
to initiate, assist, solicit, negotiate, or encourage any offer, inquiry or
proposal from any Person: (i) relating to the acquisition by the PAPI
Parties of that Person (regardless of the structure of any such acquisitions) or
any affiliate of that Person, or (ii) take any other action that is inconsistent
with the Transactions and that has the effect of avoiding the Closing
contemplated hereby.
(b) The
PAPI Parties will immediately cease any and all existing activities, discussions
or negotiations with any parties conducted heretofore with respect to any of the
actions set forth in Section 7.8(a) above, if applicable. The
PAPI Parties will promptly (i) notify
A-35
the CAMAC
Parties if any of them receives any such proposal or inquiry or request for
information in connection with such proposal and (ii) notify the CAMAC
Parties of the significant terms and conditions of any such proposal including
the identity of the party making the proposal.
(c) Notwithstanding
the other provisions of this Section 7.8, from and after March 31, 2010, the
PAPI Parties may engage in the activities described in Section 7.8(a); provided,
that any definitive agreement entered into by a the PAPI Parties Party relating
to such activities must provide that the closing of any transaction of the type
described in Section 7.8(a) be conditioned on the prior termination of this
Agreement in accordance with its terms. The PAPI Parties will
promptly notify the CAMAC Parties of the entry into any such definitive
agreement and will promptly provide to the CAMAC Parties a true copy of such
agreement.
Section
7.9
Related Tax.
From the
date hereof through the Closing Date, the PAPI Parties, consistent with past
practice, shall (i) duly and timely file all Tax Returns and other documents
required to be filed by it with applicable Governmental Authorities, the failure
to file of which could have a PAPI Material Adverse Effect, subject to
extensions permitted by law and properly granted by the appropriate authority;
provided
, that the PAPI
Parties notify the CAMAC Parties that the PAPI Parties are availing themselves
of such extensions, and (ii) pay all Taxes shown as due on such Tax Returns
(subject to good faith disputes over such Taxes).
Section
7.10 Valid
Issuance of PAPI Shares.
At the
Closing, the Consideration Shares to be issued to CEHL or its designees)
hereunder will be duly authorized, validly issued, fully paid and nonassessable
and, when issued and delivered in accordance with the terms hereof for the
consideration provided for herein, will be validly issued and will constitute a
valid, binding and enforceable obligation of PAPI in accordance with their terms
and will have been issued in compliance with all applicable federal and state
securities laws.
Section
7.11 Oyo
Agreements.
The PAPI
Parties shall not engage in any conduct or activity that could result in the
revocation, suspension or termination of any of the Oyo Related
Agreements.
Section
7.12 PAPI
Newco.
PAPI
shall form a wholly-owned subsidiary under the laws of the Federal Republic of
Nigeria prior to the Closing. Such subsidiary, which shall be
entitled “CAMAC Energy Nigeria Limited” or a similar name, shall be the PAPI
entity to which the Contract Rights shall be novated pursuant to this Agreement
and is referred to herein as “
PAPI
Newco
”. Upon formation, PAPI Newco shall execute and deliver
to the CAMAC Parties a letter agreement, in form and content reasonably
satisfactory to the CAMAC Parties, whereby it will agree to the terms of this
Agreement as if it were an original signatory hereof and shall be deemed to be a
“PAPI Party,” as such term is defined herein. If this Agreement is
terminated pursuant to Article XI hereof, then unless otherwise agreed to by the
Parties, the PAPI Parties shall within thirty (30) days (i) dissolve, or cause
to be dissolved, PAPI Newco or (ii) change, or cause to be changed, the name of
PAPI Newco to remove any and all references to any of the CAMAC Parties from the
name of PAPI Newco. This Section 7.12 shall survive any termination
of this Agreement pursuant to Article XI hereof.
ARTICLE
VIII
Additional
Agreements and Covenants
Section
8.1 Disclosure
Schedules.
Each of
Parties shall, as of the Closing Date, have the obligation to supplement or
amend their respective Disclosure Schedules being delivered concurrently with
the execution of this Agreement and annexes and exhibits hereto with respect to
any matter hereafter arising or discovered which resulted in, or could
reasonably be expected to result in a PAPI Material Adverse Effect or CAMAC
Material Adverse Effect, as the case may be. The obligations of the
Parties to amend or supplement their respective Disclosure Schedules being
delivered herewith shall terminate on the Closing Date. Notwithstanding any such
amendment or supplementation, the representations and warranties of the Parties
shall be made with reference to the Disclosure Schedules as they exist at the
time of execution of this Agreement.
Section
8.2 Confidentiality.
Between
the date hereof and the Closing Date, each of the CAMAC Parties and the PAPI
Parties shall hold and shall cause their respective Representatives to hold in
strict confidence, unless compelled to disclose by judicial or administrative
process or by other requirements of law or by the rules and regulations of, or
pursuant to any agreement of a stock exchange or trading system, all documents
and
information concerning the other
Party furnished to it by such other Party or its Representatives in connection
with the Transactions, except to the extent that such information can be shown
to have been (a) publicly available without the receiving Party’s breach of any
obligation owed to the disclosing Party, (b) known to the receiving Party prior
to the disclosing Party’s disclosure of such information; (c) known to the
receiving Party from a source other than the disclosing Party other than by the
breach of an obligation of confidentiality owed to disclosing Party; or (d) is
independently developed by the receiving Party without reliance on the
disclosing Party’s information. Each Party shall be deemed to have satisfied its
obligations to hold confidential information concerning or supplied by the other
Party in connection with the Transactions, if it exercises the same care as it
takes to preserve confidentiality for its own similar
information. For the avoidance of doubt, any disclosure of
information required to be included by PAPI in its filings with the SEC as
required by the applicable laws will not be violation of this Section
8.2. Notwithstanding the foregoing, PAPI’s disclosure to financial
institutions and accredited investors in connection with the Financing, subject
to nondisclosure agreements among PAPI and such parties, shall not constitute a
violation of this Section 8.2.
Section
8.3 Public
Announcements.
From
the date of this Agreement until the Closing or termination of this Agreement,
the Parties shall cooperate in good faith to jointly prepare all press releases
and public announcements pertaining to this Agreement and the Transactions
governed by it, and none of the foregoing shall issue or otherwise make any
public announcement or communication pertaining to this Agreement or the
transaction without the prior consent of the PAPI Parties (in the case of the
CAMAC Parties) or the CAMAC Parties (in the case of the PAPI Parties), except as
required by Law or by the rules and regulations of, or pursuant to any agreement
of, a stock exchange or trading system. Each Party will not unreasonably
withhold approval from the others with respect to any press release or public
announcement. If any Party determines with the advice of counsel that it is
required to make this Agreement and the terms of the transaction public or
otherwise issue a press release or make public
disclosure
with respect thereto, it shall at a reasonable time before making any public
disclosure, consult with the other Parties regarding such disclosure, seek such
confidential treatment for such terms or portions of this Agreement or the
transaction as may be reasonably requested by the other Parties and disclose
only such information as is legally compelled to be disclosed. This provision
will not apply to communications by any Party to its counsel, accountants and
other professional advisors.
Section
8.4 Board
Composition.
For
a period commencing on the Closing Date and ending not sooner than the date that
is one (1) year following the Closing Date, the Board of PAPI will consist of
seven (7) persons. For a period commencing from the Closing Date
until the next annual or special meeting of the PAPI stockholders, or
until each director’s successor is elected and takes office, the Combined Board
shall consist of: (i) four (4) persons nominated by CEHL (at least two (2) of
which shall be an “
Independent
Director
” as such term is defined in §804 of the NYSE Amex Company Guide
(the “
CAMAC
Directors
”); and (ii) three (3) current PAPI directors (at least two (2)
of which shall be independent directors (the “
PAPI
Directors
”).
Section
8.5
Voting Agreement.
CEHL
agrees that for a period commencing on the Closing Date and ending not sooner
than the date that is one (1) year following the Closing Date
(the “
Voting
Period
”), it shall vote all the Consideration Shares then owned by it as
follows:
(a) At
any annual or special meeting called, or in connection with any other action
(including the execution of written consents) taken for the purpose of electing
directors to the board of directors of PAPI, CEHL agrees to vote all of the
Consideration Shares controlled by it (the “Voting Shares”) in favor of the
persons nominated by the PAPI Representative
.
Notwithstanding the foregoing,
any persons nominated by the PAPI Representatives to serve as the PAPI
Directors, other than persons identified in Section 8.4 hereof, must be
reasonably acceptable to a majority of the board of directors or a majority of
the members of the nominating and corporate governance committee, if such
committee exists.
(b) The
PAPI Representatives shall have the right to request the resignation or removal
of any PAPI Director. In such event, CEHL agrees to vote all of its
Voting Shares in a manner that would cause the removal of such PAPI Director,
whether at any annual or special meeting called, or, in connection with any
other action (including the execution of written consents) taken for the purpose
of removing such director. In the event of the resignation, death,
removal or disqualification of a PAPI Director, the PAPI Representatives shall
promptly nominate a new director and, after written notice of the nomination has
been given by PAPI Representatives, CEHL hereby agrees to vote all its Voting
Shares to elect such nominee to the board of directors.
(c) CEHL
shall appear in person (through a representative) or by proxy at any annual or
special meeting of PAPI’s shareholders for the purpose of obtaining a quorum and
shall vote all Voting Shares owned by CEHL, either in person or by proxy, at any
annual or special meeting of shareholders of PAPI called for the purpose of
voting on the election of directors or by written consent of shareholders with
respect to the election of directors, in favor of the election of the PAPI
Directors. In addition, CEHL shall appear in person or proxy at any
annual or special meeting of shareholders of PAPI for the purpose of obtaining a
quorum and shall vote, or shall execute and deliver a written consent with
respect to, all Voting Shares owned by CEHL entitled to vote upon any other
matter submitted to a vote of shareholders of PAPI in a manner so as to be
consistent and not in conflict with, and to implement, the terms of this
Agreement.
(d) CEHL
hereby agrees that all transfers of PAPI capital stock made by it shall be made
subject to the provisions of this Section 8.5, except as set forth below, and
any transferee will agree in writing to be bound by the terms and provisions of
this Section as a condition precedent to any such transfer. Each
certificate representing the Consideration Shares shall be endorsed with a
legend in substantially the following form:
THE
SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN VOTING
REQUIREMENTS AND OTHER RESTRICTIONS SET FORTH IN AN AGREEMENT BETWEEN THE HOLDER
OF THIS CERTIFICATE AND CERTAIN OTHER PARTIES. TRANSFER OF THE
SECURITIES IS SUBJECT TO THE RESTRICTIONS CONTAINED IN SUCH
AGREEMENT.
Notwithstanding
the foregoing, the provisions of this Section 8.5 shall not apply to any
transfers made in connection with an underwritten secondary offering of shares
owned by CEHL or a sale of shares made in the open market pursuant to Rule
144.
Section
8.6 ROFR
Agreement.
Each
of the CAMAC Parties agrees that, effective as of the Closing, until the fifth
(5
th
)
anniversary thereof, PAPI shall have a right of first refusal with
respect to any and all upstream oil and gas assets, licenses or rights currently
held or arising and inuring to any of the CAMAC Parties, which it offers for
sale, transfer, license or other disposition, other than such sales that occur
in the ordinary course of business (the “
ROFR
”),
pursuant to the terms and conditions set forth in the ROFR Agreement in form and
substance reasonably satisfactory to the Parties.
Except
as expressly provided in Article XI, in the event there is no Closing of the
Transactions contemplated by this Agreement, all fees and expenses incurred in
connection with this Agreement shall be paid by the Party incurring such fees or
expenses.
Section
8.8 Certain
Disclaimers.
EXCEPT
TO THE EXTENT EXPRESSLY SET FORTH IN THIS AGREEMENT, THE CAMAC PARTIES AND THE
PAPI PARTIES MAKE NO REPRESENTATIONS OR WARRANTIES WHATSOEVER AND DISCLAIM ALL
LIABILITY AND RESPONSIBILITY FOR ANY OTHER REPRESENTATION, WARRANTY, STATEMENT
OR INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO THE OTHER PARTIES
. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EXCEPT AS
EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER THE CAMAC PARTIES NOR THE PAPI
PARTIEES MAKE ANY REPRESENTATIONS OR WARRANTIES AS TO (I) THE AMOUNTS OF OR
VALUES WITH RESPECT TO ANY HYDROCARBON RESERVES ATTRIBUTABLE TO THE ASSETS OR
(II) THE ACCURACY OR CONTENT OF THE RECORDS AND DATA.
EXCEPT
AS CONTAINED IN ARTICLE IV OR ARTICLE V, THE CAMAC PARTIES AND PAPI PARTIES,
RESPECTIVELY, EXPRESSLY DISCLAIM ANY REPRESENTATION OR WARRANTY, EXPRESS,
STATUTORY OR IMPLIED, AS TO (I) THE ASSETS (II) THE CONTENTS, CHARACTER OR
NATURE OF ANY DESCRIPTIVE MEMORANDUM, OR ANY REPORT OF ANY PETROLEUM ENGINEERING
CONSULTANT, OR ANY GEOLOGICAL OR SEISMIC DATA OR INTERPRETATION, RELATING TO THE
COMPANIES, (III) THE QUANTITY, QUALITY OR RECOVERABILITY OF HYDROCARBONS IN OR
FROM THE ASSETS, (IV) ANY ESTIMATES OF THE VALUE OF THE ASSETS, RESERVES, OR
FUTURE REVENUES GENERATED BY THE ASSETS, (V) THE PRODUCTION OF HYDROCARBONS (VI)
THE MAINTENANCE, REPAIR, CONDITION, QUALITY, SUITABILITY, DESIGN OR
MARKETABILITY OF THE ASSETS, (VII) THE CONTENT, CHARACTER OR NATURE OF ANY
DESCRIPTIVE MEMORANDUM, REPORTS, BROCHURES, CHARTS OR STATEMENTS PREPARED BY
THIRD PARTIES, AND (VIII) ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN
MADE AVAILABLE OR COMMUNICATED TO THE PAPI PARTIES OR ITS AFFILIATES, OR ITS OR
THEIR EMPLOYEES, AGENTS, CONSULTANTS, REPRESENTATIVES OR ADVISORS IN CONNECTION
WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY DISCUSSION OR
PRESENTATION RELATING THERETO, AND FURTHER DISCLAIM ANY REPRESENTATION OR
WARRANTY, EXPRESS, STATUTORY OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, IT BEING
EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES THAT THE PAPI PARTIES SHALL BE
DEEMED TO BE OBTAINING THE ASSETS IN THEIR PRESENT STATUS, CONDITION AND STATE
OF REPAIR, “AS IS” AND “WHERE IS” WITH ALL FAULTS AND THAT THE PAPI PARTIES HAS
MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AND EVALUATIONS, AS THE PAPI PARTIES
DEEMS APPROPRIATE.
Section
8.9 Further
Assurances
. Subject
to the terms and conditions of this Agreement, at any time or from time to time
after the Closing, each of the Parties shall execute and deliver such other
documents and instruments, provide such materials and information and take such
other actions as may be commercially reasonable, to the extent permitted by law,
to fulfill its obligations under this Agreement and to effectuate and consummate
the Transactions.
ARTICLE
IX
Conditions
to Closing
Section
9.1 Joint
Conditions Precedent
The
obligations of the Parties to enter into and complete the Closing are subject to
the fulfillment on or prior to the Closing Date of the following conditions by
the Parties, any one or more of which may be waived by the Parties in
writing:
(a)
Novation
Agreement
. Execution and delivery of the Novation Agreement
(which shall include a waiver pursuant to which NAE waives the enforcement of
Section 8.11(e) of the Production Sharing Contract and agrees that,
notwithstanding anything to the contrary contained in the Production Sharing
Contract, the profit sharing allocation set forth in therein shall remain the
same after the Closing Date);
(b)
Financing
. PAPI
shall consummate the Financing prior to or concurrently with the Closing. The
proceeds of from the Financing shall be used to pay the Cash Consideration and
provide working capital for PAPI.
(c)
Deliveries
. The
deliveries required to be made by the PAPI Parties and the CAMAC Parties in
Article III shall have been made by them.
(d)
Approval by the PAPI
Stockholders
. The Transactions shall have been approved by the PAPI
majority holders (including any approvals required to change the name from
Pacific Asia Petroleum Inc. to CAMAC Energy Inc.), voting as a group, in
accordance with Section 253 of the Delaware General Corporation Law (the “DGCL”)
and other applicable laws, and this Agreement and the Transactions shall have
been approved by holders of a majority of the PAPI Newco shareholders in
accordance with the PAPI Newco constituent documents.
Section
9.2 CAMAC
Parties Conditions Precedent
The
obligations of the CAMAC Parties to enter into and complete the Closing are
subject, at the option of the CAMAC Parties, to the fulfillment on or prior to
the Closing Date of the following conditions by the PAPI Parties, any one or
more of which may be waived by the CAMAC Parties in writing.
(a)
Payment of
Consideration
. PAPI shall have paid the Cash Consideration and
issued the Consideration Shares.
(b)
Governmental and Third Party
Approvals
. Each of PAPI Parties shall have timely obtained
from each Governmental Authority all approvals, waivers and consents, if any,
necessary for consummation of or in connection with this Agreement and the
Transactions contemplated hereby, including such approvals, waivers and consents
as may be required from the Federal Republic of Nigeria (and any other Nigerian
governmental agency), NAE, the SEC, and any other foreign or domestic Persons
and governmental entities.
(c)
Representations and
Covenants
. The representations and warranties of the PAPI
Parties contained in this Agreement shall be true on and as of the Closing Date
except where the failure of such representations or warranties to be so true and
correct, individually or in the aggregate, has not had or would not reasonably
be expected to have a PAPI Material Adverse Effect and each of the PAPI Parties
shall have performed and complied in all material respects with all covenants
and agreements required by this Agreement to be performed or complied with by
each of them on or prior to the Closing Date, and the PAPI Parties shall have
delivered to the CAMAC Parties a certificate, dated the Closing Date, to the
foregoing effect.
(d)
Litigation
. There
is no effective injunction, writ or preliminary restraining order or any order
of any nature issued by a Governmental Authority prohibiting or making illegal
the consummation of the Transaction, and no action, suit or proceeding shall
have been threatened or instituted before any court or governmental or
regulatory body or instituted by any Governmental Authorities to restrain,
modify or prevent the carrying out of the Transactions, or to seek damages or a
discovery order in connection with such Transactions, which has or may have, in
the reasonable opinion of the CAMAC Parties, a PAPI Material Adverse
Effect.
(e)
No PAPI Material Adverse
Change
. There shall not have been any occurrence, event,
incident, action, failure to act, or transaction since September 30, 2009, which
has had or is reasonably likely to cause a PAPI Material Adverse
Effect.
(f)
Resignations
. Effective
as of the Closing, the directors of PAPI who are not continuing directors and
the officers of PAPI shall have resigned and the copies of such resignation
letters of such directors shall have been delivered to the CAMAC Parties, and
such resigning directors shall have no claim for employment compensation in any
form from PAPI except for any reimbursement of outstanding expenses existing as
of the date of such resignation.
(g)
SEC
Reports
. The PAPI Parties shall have filed all reports and
other documents required to be filed by the PAPI Parties under the U.S. federal
securities laws through the Closing Date.
(h)
NYSE Amex
Listing
. The PAPI Parties shall have maintained its status as
a Company whose Common Stock is quoted on the NYSE Amex and no reason shall
exist as to why such status shall not continue immediately following the
Closing.
(i)
Secretary’s
Certificate
. The CAMAC Parties shall have received a
certificate from the PAPI Parties, signed by its Secretary certifying that the
attached copies of the PAPI Constituent Instruments and resolutions of the PAPI
board of directors approving the Agreement and the Transactions are all true,
complete and correct and remain in full force and effect.
(j)
Opinions.
The
CAMAC Parties shall have received the opinions of PAPI’s legal counsel in
Delaware and PAPI Newco’s legal counsel in Nigeria, which such opinions shall be
in the form reasonably acceptable to the CAMAC Parties.
(k)
Certificate of Good
Standing
. The CAMAC Parties shall have received a certificate
of good standing under the applicable Law of each of the PAPI
Parties.
(l)
Injunctions or Restraints on
Conduct of Business
. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint provision limiting
or restricting any the PAPI Party’s conduct or operation of the business of the
PAPI Parties following the Closing Date shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
Governmental Authority, domestic or foreign, seeking the foregoing be
pending.
(m)
SEC
Actions
. No formal or informal SEC investigation or proceeding
shall have been initiated by the SEC against any of the PAPI Parties or any of
their officers or directors.
(n)
Registration Rights
Agreement
. Execution and delivery of the Registration Rights
Agreement, substantially in form and substance reasonably satisfactory to the
Parties.
Section
9.3 PAPI
Conditions Precedent.
The
obligations of PAPI to enter into and complete the Closing are subject, at the
option of PAPI, to the fulfillment on or prior to the Closing Date of the
following conditions by each of the CAMAC Parties, any one or more of which may
be waived by PAPI in writing:
(a)
Representations and
Covenants
. The representations and warranties of the CAMAC
Parties contained in this Agreement shall be true on and as of the Closing Date
except where the failure of such representations or warranties to be so true and
correct, individually or in the aggregate, has not had or would not reasonably
be expected to have a CAMAC Material Adverse Effect, and each of the CAMAC
Parties shall have performed and complied in all material respects with all
covenants and agreements required by this Agreement to be performed or complied
with by each of them on or prior to the Closing Date, and the CAMAC Parties
shall have delivered to PAPI a certificate, dated the Closing Date, to the
foregoing effect.
(b)
Litigation
. There
is no effective injunction, writ or preliminary restraining order or any order
of any nature issued by a Governmental Authority prohibiting or making illegal
the consummation of the Transactions, and no action, suit or proceeding shall
have been threatened or instituted before any court or governmental or
regulatory body or instituted by any Governmental Authorities to restrain,
modify or prevent the carrying out of the Transactions, or to seek damages or a
discovery order in connection with such Transactions, which has or may have, in
the reasonable opinion of the PAPI Parties, a CAMAC Material Adverse
Effect.
(c)
No CAMAC Material Adverse
Change
. There shall not have been any occurrence, event,
incident, action, failure to act, or transaction since September 30, 2009, which
has had or is reasonably likely to cause a CAMAC Material Adverse
Effect.
(d)
Opinions
. PAPI
shall have received the opinion of the CAMAC Parties’ legal counsel in Nigeria
and the Cayman Islands, and each such opinion shall be in the form reasonably
acceptable to the PAPI Parties.
(e)
Officer’s
Certificate
. PAPI shall have received a certificate from each
of CAMAC Parties signed by an authorized officer or representative of such
Party, respectively, certifying that the attached copies of each such Party’s
constituent instruments and resolutions or other authorizing documents approving
the Agreement and the Transactions are all true, complete and correct and remain
in full force and effect
(f)
Certificate of Good
Standing
. PAPI shall have received a certificate of good
standing or equivalent under the applicable Law of each of the CAMAC
Parties.
(g)
Injunctions or Restraints on
Conduct of Business
. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint provision limiting
or restricting any CAMAC Parties’ conduct or operation of the business of any of
the CAMAC Parties with respect to the Oyo Related Agreements and the Oyo Field
following the Closing Date shall be in effect, nor shall any proceeding brought
by an administrative agency or commission or other Governmental Authority,
domestic or foreign, seeking the foregoing be pending.
(h)
Transaction
Documents
. The Parties shall have executed and delivered all
of the Transaction Documents and all other agreements and instruments reasonably
necessary to consummate the Transactions.
(i)
OYO
Debt
. The CAMAC Parties shall delivered one or more debt/lien
release instruments with respect to all debt secured by the Contract Rights and
the Oyo Field in form and substance reasonably satisfactory to the
Parties.
(j)
Actions
. No formal or informal Government Authority
investigation or proceeding, including by the SEC, shall have been initiated or
sent by any Government Authority against any of the CAMAC Parties or any of
their officers or directors with respect to the Oyo Related Agreements and the
Oyo Field.
(k)
Technical Services
Agreement
. Execution and delivery of the Technical Services
Agreement, substantially in form and substance reasonably satisfactory to the
Parties.
(l)
ROFR
Agreement
. Execution and delivery of the ROFR Agreement in
form and substance reasonably satisfactory to the Parties.
(m)
Oyo Field Supplemental
Agreement
. Execution and delivery of the Oyo Field
Supplemental Agreement in form and substance reasonably satisfactory to the
Parties.
(n)
Formation of PAPI
Newco
. PAPI shall have formed PAPI Newco and PAPI Newco shall
have executed and delivered to the CAMAC Parties the letter agreement pursuant
to
Section 7.12 hereof.
ARTICLE
X
Indemnification
Section
10.1 Survival.
All
of the representations and warranties of the Parties contained in this Agreement
shall survive the Closing for a period of twelve (12) months and shall
thereafter be of no further force and effect;
provided, however
, that all
of the covenants and obligations of the Parties contained in this Agreement,
including the covenants and obligations with respect to the Oyo Related
Agreements and the Oyo Field, shall survive the Closing unless they expire
sooner in accordance with their terms. The term during which any
representation, warranty, or covenant survives hereunder is referred to as the
“
Survival
Period
.” Except as expressly provided in this paragraph, no claim for
indemnification hereunder may be made after the expiration of the Survival
Period.
Section
10.2 Indemnification
by the CAMAC Parties.
(a) The
CAMAC Parties shall, subject to the terms hereof, jointly and severally
indemnify, defend and hold harmless the PAPI Parties (which term, for the
purposes of this Article X shall include any of the PAPI Parties’ successors)
and permitted assigns (the “PAPI Indemnified Parties”) from and against any
liabilities, loss, claims, damages, fines, penalties, expenses (including costs
of investigation and defense and reasonable attorneys’ fees and court costs)
(collectively, “Damages”) arising from: (i) any debts, claims, liabilities, or
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obligations
of the CAMAC Parties not expressly assumed by PAPI Parties pursuant to this
Agreement (including the liabilities retained by the CAMAC Parties pursuant to
Section 1.4); (ii) any breach of any representation or warranty made by the
CAMAC Parties in Article IV hereof or in any certificate delivered by the CAMAC
Parties pursuant to this Agreement; (iii) any breach by any CAMAC Party of its
covenants or obligations in this Agreement to be performed or complied with by
such CAMAC Party at or prior to the Closing; or (iv) any breach by any CAMAC
Party of its representations or warranties, covenants or obligations in this
Agreement or in any certificate delivered by the CAMAC Parties pursuant to this
Agreement.
(b) Pursuant
to the provisions of this Article X, if any claim for indemnification is to be
brought against the CAMAC Parties on behalf of or by right of any PAPI Party,
such claim shall be determined and approved by a committee of directors
comprised of (i) all Independent Directors, and (ii) the directors nominated by
the PAPI Representatives, each as elected pursuant to Section 8.5(a) (the
“Independent Committee”). Any settlement of any claim described in
the immediately preceding sentence shall be determined and approved by the
Independent Committee. Any determination or approval of the
Independent Committee made pursuant to the provisions of this Article X shall be
by majority vote.
(c) The
amount of any and all indemnifiable Damages suffered by the PAPI Indemnified
Parties and agreed to be paid by the CAMAC Parties shall be paid in cash, or, at
the option of the PAPI Parties, may be paid in the return of a specified number
of Consideration Shares. If the PAPI Parties opt to receive shares in
lieu of receiving cash for any indemnifiable Damages, then the PAPI Parties
shall notify the CAMAC Parties in writing of their intent to exercise such
option. The number of shares to be returned to the PAPI Indemnified
Parties shall have a fair market value equal to the aggregate amount of the
indemnifiable Damages agreed to be paid by the CAMAC Parties. The
fair market value of such shares shall be determined by calculating the average
closing price of PAPI’s Common Stock over a period of 30 days, counting back
from the first business day immediately prior to the official determination of
Damages hereunder.
Section
10.3 Indemnification
by PAPI.
(a) Each
of the PAPI Parties shall, subject to the terms hereof, jointly and severally
indemnify, defend and hold harmless the CAMAC Parties and their respective
successors and permitted assigns (the “CAMAC Indemnified Parties”) from and
against any Damages arising from: (i) any breach of any representation or
warranty made by the PAPI Parties in Article V hereof or in any certificate
delivered by the PAPI Parties pursuant to this Agreement; or (ii) any breach by
any PAPI Party, of its covenants or obligations in this Agreement to be
performed or complied with by such PAPI Party at or prior to the
Closing.
(b) The
amount of any and all Damages suffered by the CAMAC Indemnified Parties shall be
paid in cash, or, at the option of the CAMAC Parties, may be paid in newly
issued shares of PAPI’s Common Stock. If the CAMAC Parties opt to
receive newly issued shares in lieu of receiving cash for any indemnifiable
Damages, the number of shares to be issued to the CAMAC Indemnified Parties
shall have a fair market value equal to the aggregate amount of the
indemnifiable Damages agreed to be paid by the PAPI Parties. The fair
market value of such shares shall be determined by calculating the average
closing price of PAPI’s
A-45
Common
Stock over a period of 30 days, counting back from the first business day
immediately prior to the official determination of Damages
hereunder.
Section
10.4 Limitations on
Indemnity.
(a) Notwithstanding
any other provision in this Agreement to the contrary, the PAPI Indemnified
Parties shall not be entitled to indemnification pursuant to Section 10.2,
unless and until the aggregate amount of Damages to the PAPI Indemnified Parties
with respect to such matters under Section 10.2 exceeds $5,000,000 (the
“Deductible”), and then only to the extent such Damages exceed the Deductible;
provided that the aggregate amount of Damages payable by the CAMAC Parties to
the PAPI Indemnified Parties hereunder shall not exceed $25,000,000 (the “Cap”)
unless the Damages arise from or otherwise relate to the breach of Sections 4.4
and 4.6 made by the CAMAC Parties.
(b) Notwithstanding
any other provision in this Agreement to the contrary, the CAMAC Parties shall
not be liable to, or indemnify the PAPI Indemnified Parties for any Damages or
indemnify the PAPI Indemnified Parties for any Damages “that are punitive
(except to the extent constituting third party punitive claims), special,
consequential, incidental, exemplary, lost profits or other wise not actual
damages.” The PAPI Indemnified Parties shall not use “multiple of
profits” or “multiple of cash flow” or any similar valuation methodology in
calculating the amount of any Damages. This Article X constitutes the
PAPI Parties’ sole and exclusive remedy for any and all Damages or other claims
relating to or arising from this Agreement and the transactions contemplated
hereby.
(c) Notwithstanding
any other provision in this Agreement to the contrary, no CAMAC Party shall be
entitled to indemnification pursuant to Section 10.3, unless and until the
aggregate amount of Damages with respect to such matters under Section 10.3
exceeds the Deductible, and then only to the extent such Damages exceed the
Deductible; provided that the aggregate amount of Damages payable by any PAPI
Party to the CAMAC Parties hereunder shall not exceed the Cap unless the Damages
arise from or otherwise relate to the breach of any of the Basic Representations
made by the PAPI Parties.
(d) Notwithstanding
any other provision in this Agreement to the contrary, PAPI shall not be liable
to, or indemnify any CAMAC Party for any Damages (i) resulting from any
non-fulfillment or breach of any such representations, warranties, covenants,
and obligations of which the CAMAC Parties had knowledge on or prior to the
Closing Date; (ii) that are punitive (except to the extent constituting third
party punitive claims), special, consequential, incidental, exemplary or
otherwise not actual damages or (iii) that are in the nature of lost profits or
any diminution in value of property or equity. The CAMAC Parties
shall not use “multiple of profits” or “multiple of cash flow” or any similar
valuation methodology in calculating the amount of any Damages. This
Article X constitutes the CAMAC Parties’ sole and exclusive remedy for any and
all Damages or other claims relating to or arising from this Agreement and the
transactions contemplated hereby.
Section
10.5 Defense of
Third Party Claims.
If
the Independent Committee determines to make a claim for indemnification on
behalf of the PAPI Parties under Section 10.2 or any CAMAC Party makes a claim
for indemnification under Section 10.3 (each as applicable an
“
Indemnitee
”),
the Independent Committee or such CAMAC Party as applicable shall notify the
indemnifying party (an “
Indemnitor
”)
of the claim in writing promptly after receiving notice of any action, lawsuit,
proceeding, investigation, demand or other claim against the Indemnitee (if by a
third party), describing the claim, the amount thereof (if known and
quantifiable) and the basis thereof in reasonable detail (such written notice,
an “
Indemnification
Notice
”);
provided
that the failure to
so notify an Indemnitor shall not relieve the Indemnitor of its obligations
hereunder except to the extent that (and only to the extent that) such failure
shall have caused the damages for which the Indemnitor is obligated to be
greater than such damages would have been had the Indemnitee given the
Indemnitor prompt notice hereunder. Any Indemnitor shall be entitled to
participate in the defense of such action, lawsuit, proceeding, investigation or
other claim giving rise to an Indemnitee’s claim for indemnification at such
Indemnitor’s expense, and at its option shall be entitled to assume the defense
thereof by appointing a reputable counsel reasonably acceptable to the
Indemnitee to be the lead counsel in connection with such defense;
provided
, that the Indemnitee
shall be entitled to participate in the defense of such claim and to employ
counsel of its choice for such purpose;
provided, however
, that the
fees and expenses of such separate counsel shall be borne by the Indemnitee and
shall not be recoverable from such Indemnitor under this Article
X. If the Indemnitor shall control the defense of any such claim, the
Indemnitor shall be entitled to settle such claims;
provided
, that the Indemnitor
shall obtain the prior written consent of the Indemnitee (which consent shall
not be unreasonably withheld, conditioned or delayed) before entering into any
settlement of a claim or ceasing to defend such claim if, pursuant to or as a
result of such settlement or cessation, injunctive or other equitable relief
will be imposed against the Indemnitee or if such settlement does not expressly
and unconditionally release the Indemnitee from all liabilities and obligations
with respect to such claim. If the Indemnitor assumes such defense,
the Indemnitor shall not be liable for any amount required to be paid by the
Indemnitee that exceeds, where the Indemnitee has unreasonably withheld or
delayed consent in connection with the proposed compromise or settlement of a
third party claim, the amount for which that third party claim could have been
settled pursuant to that proposed compromise or settlement. In all
cases, the Indemnitee shall provide its reasonable cooperation with the
Indemnitor in defense of claims or litigation, including by making employees,
information and documentation reasonably available. If the Indemnitor
shall not assume the defense of any such action, lawsuit, proceeding,
investigation or other claim, the Indemnitee may defend against such matter as
it deems appropriate;
provided
that the Indemnitee
may not settle any such matter without the written consent of the Indemnitor
(which consent shall not be unreasonably withheld, conditioned or delayed) if
the Indemnitee is seeking or will seek indemnification hereunder with respect to
such matter.
Section
10.6 Determining
Damages.
The
amount of Damages subject to indemnification under Section 10.2 or Section 10.3
shall be calculated net of (i) any Tax Benefit inuring to the Indemnitee on
account of such Damages, and (ii) any insurance proceeds or other amounts under
indemnification agreements received or receivable by the Indemnitee on account
of such Damages. If the Indemnitee receives a Tax Benefit on account
of such Damages after an indemnification payment is made to it, the Indemnitee
shall promptly pay to the Person or Persons that made such indemnification
payment the amount of such Tax Benefit at such time or times as and to the
extent that such Tax Benefit is realized by the Indemnitee. For
purposes hereof, “
Tax
Benefit
” shall mean any refund of Taxes to be paid or reduction in the
amount of Taxes which otherwise would be paid by the Indemnitee, in each case
computed at the highest marginal tax rates applicable to the recipient of such
benefit. To the extent Damages are
recoverable
by insurance, the Indemnitees shall take all commercially reasonable efforts to
obtain maximum recovery from such insurance. In the event that an
insurance or other recovery is made by any Indemnitee with respect to Damages
for which any such Person has been indemnified hereunder, then a refund equal to
the aggregate amount of the recovery shall be made promptly to the Person or
Persons that provided such indemnity payments to such Indemnitee. The
Indemnitors shall be subrogated to all rights of the Indemnitees in respect of
Damages indemnified by the Indemnitors. The Indemnitees shall take all
commercially reasonable efforts to mitigate all Damages upon and after becoming
aware of any event which could reasonably be expected to give rise to
Damages. For Tax purposes, the Parties agree to treat all payments
made under this Article X as adjustments to the consideration received for the
CAMAC Shares.
Section
10.7 Right of
Setoff.
To
the extent that any Party is obligated to indemnify any other Party after
Closing under the provisions of this Article X for Damages reduced to a monetary
amount, such Party after Closing shall have the right to decrease any amount due
and owing or to be due and owing under any agreement with the other Party,
whether under this Agreement or any other agreement between such Parties on the
one hand, and any of the other Party or any of their respective Affiliates,
Subsidiaries or controlled persons or entities on the other.
Section
10.8 Limitation
on Recourse; No Third Party Beneficiaries.
(a) No
claim shall be brought or maintained by any Party or its respective successors
or permitted assigns against any officer, director, partner, member, agent,
representative, Affiliate, equity holder, successor or permitted assign of any
Party which is not otherwise expressly identified as a Party, and no recourse
shall be brought or granted against any of them, by virtue of or based upon any
alleged misrepresentation or inaccuracy in or breach of any of the
representations, warranties, covenants or obligations of any Party set forth or
contained in this Agreement or any exhibit or schedule hereto or any certificate
delivered hereunder.
(b) Except
as set forth in Section 10.2(a) and 10.3(a), the provisions of this Article X
are for the sole benefit of the Parties and nothing in this Article X, express
or implied, is intended to or shall confer upon any other Person any legal or
equitable right, benefit or remedy of any nature whatsoever under or by reason
of this Article X.
ARTICLE
XI
Termination
Section
11.1 Methods of
Termination.
Unless
waived by the Parties hereto in writing, the Transactions may be terminated
and/or abandoned at any time but not later than the Closing:
(a) by
mutual written consent of the Parties;
(b) by
any Party, if the Closing has not occurred by the later of (i) March 31, 2010 or
(ii) such other date that has been agreed by the Parties;
(c) by
any CAMAC Party, if there has been a breach by the PAPI Parties of any
representation, warranty, covenant or agreement contained in this Agreement
which has prevented the satisfaction of the conditions to the obligations of the
CAMAC Parties at the Closing under Article IX and such violation or breach has
not been waived by the CAMAC Parties or cured by the PAPI Parties within ten
(10) business days after written notice thereof from the CAMAC
Parties;
(d) by
the PAPI Parties, if there has been a breach by the CAMAC Parties of any
representation, warranty, covenant or agreement contained in this Agreement
which has prevented the satisfaction of the conditions to the obligations of the
PAPI Parties at the Closing under Article IX and such violation or breach has
not been waived by the PAPI Parties or cured by the CAMAC Parties within ten
(10) business days after written notice thereof from the PAPI
Parties;
(e) by
any CAMAC Party, if the PAPI board of directors (or any committee thereof) shall
have failed to recommend or shall have withdrawn or modified in a manner adverse
to the CAMAC Parties its approval or recommendation of this Agreement and the
Transactions; or
(f) by
any PAPI Party, if (i) the CEHL board of directors (or any committee thereof)
shall have failed to approve or shall have withdrawn its approval of this
Agreement and the Transactions or (ii) the CEHL shareholders shall have failed
to approve of this Agreement and the Transactions; or
(g) by
either PAPI or the CAMAC Parties, if, at the Stockholders’ Meeting (including
any adjournments thereof), this Agreement and the Transactions shall fail to be
approved and adopted by holders of a majority of the PAPI voting securities in
accordance with Section 253 of the DGCL, and by the affirmative vote of holders
of a majority of the PAPI Newco outstanding shares in accordance with PAPI Newco
Constituent Instruments.
Section
11.2 Effect of
Termination.
(a) In
the event of termination and abandonment by either PAPI or the CAMAC Parties, or
both of them, pursuant to Section 11.1 hereof, written notice thereof shall
forthwith be given to the other Party (as applicable), and except as set forth
in this Section 11, all further obligations of the Parties shall terminate, no
Party shall have any right against the other Party hereto, and each Party shall
bear its own costs and expenses.
(b) If
the Transactions contemplated by this Agreement are terminated and/or abandoned
as provided herein:
(i) each
Party hereto will destroy all documents, work papers and other material (and all
copies thereof) of the other Party relating to the Transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the Party
furnishing the same;
(ii) all
confidential information received by either Party hereto with respect to the
business of the other Party hereto shall be treated in accordance with Section
9.2 hereof, which shall survive such termination or abandonment. The
provisions of Article X and Article XI shall survive termination of this
Agreement; and
(iii) The
PAPI Parties agree to comply with Section 7.12 of this Agreement following any
termination of this Agreement. The provisions of Section 7.12 shall survive
termination of this Agreement.
Section
11.3 Termination
Recovery and Fee.
(a) If
the Agreement is properly terminated pursuant to Sections 11.1(c) or 11.1(e),
then CAMAC will be entitled to damages in the amount of Five Hundred Thousand
Dollars ($500,000) immediately upon termination of this Agreement as liquidated
damages and not as a penalty amount, and in lieu of any other right or remedy
that the PAPI Parties may have against the CAMAC Parties for such termination or
breach.
(b) If
this Agreement is properly terminated pursuant to Sections 11.1(d) or 11.1(f),
then PAPI will be entitled to damages in the amount of Five Hundred Thousand
Dollars ($500,000) immediately upon termination of this Agreement as liquidated
damages and not as a penalty amount, and in lieu of any other right or remedy
that the PAPI Parties may have against the CAMAC Parties for such termination or
breach
(c) Except
for the rights specified in Section 11.2 and the right to liquidated damages
provided for in Section 11.3, no Person shall have any rights to any other
remedy or damages, whether at law or equity, in contract, in tort or otherwise
upon the termination of this Agreement. Each of PAPI and the CAMAC
Parties acknowledge that the covenants and agreements contained in this Article
XI are an integral part of this Agreement. If PAPI or the CAMAC
Parties fail to pay the liquidated damages amounts provided for in Section 11.3
when due, PAPI or the CAMAC Parties, as the case may be, will reimburse the
other party for all Expenses incurred by the other Party (including Expenses of
counsel) in connection with the collection under and enforcement of this Article
XI.
ARTICLE
XII
Miscellaneous
Section
12.1 Notices.
All
notices, requests, claims, demands and other communications under this Agreement
shall be in writing and shall be deemed given upon receipt by the Parties at the
addresses set forth on the signature pages hereto (or at such other address for
a Party as shall be specified in writing to all other Parties).
Section
12.2 Amendments;
Waivers; No Additional Consideration.
Except
as otherwise provided in this Agreement, no provision of this Agreement may be
waived or amended except in a written instrument signed by all of the Parties
hereto. No waiver of any Default with respect to any provision,
condition or requirement of this Agreement shall be deemed to be a continuing
waiver in the future or a waiver of any subsequent Default or a waiver of any
other provision, condition or requirement hereof, nor shall any delay or
omission of any Party to exercise any right hereunder in any manner impair the
exercise of any such right.
Section
12.3 Adjustments
to Payment of Purchase Price.
The
Consideration Shares shall be adjusted to reflect appropriately the effect of
any stock split, reverse stock split, stock dividend, extraordinary cash
dividends, reorganization, recapitalization, reclassification, combination,
exchange of shares or other like change with respect to PAPI’s securities,
occurring on or after the date hereof and prior to the Closing
Date.
Section
12.4 Interpretation.
When
a reference is made in this Agreement to a Section, such reference shall be to a
Section of this Agreement unless otherwise indicated. Whenever the
words “include,” “includes” or “including” are used in this Agreement, they
shall be deemed to be followed by the words “without limitation.”
Section
12.5 Severability.
If
any term or other provision of this Agreement is invalid, illegal or incapable
of being enforced by any rule or Law, or public policy, all other conditions and
provisions of this Agreement shall nevertheless remain in full force and effect
so long as the economic or legal substance of the Transactions is not affected
in any manner materially adverse to any Party (it being understood that if any
provision of Section 11.3 hereof is invalid, illegal or incapable of being
enforced by any Law or public policy, it will be deemed to be a change to the
economic and legal substance of the Transactions that is materially adverse to
the Parties and will entitle either the PAPI Parties or the CAMAC Parties to
terminate the Agreement without penalty and none of the Parties and their
respective shareholders and Affiliates will have recourse against any other
Parties). Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the Parties shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
Parties as closely as possible in an acceptable manner to the end that
Transactions are fulfilled to the extent possible.
Section
12.6 Counterparts;
Facsimile Execution.
This
Agreement may be executed in one or more counterparts, all of which shall be
considered one and the same agreement and shall become effective when one or
more counterparts have been signed by each of the Parties and delivered to the
other Parties. Facsimile execution and delivery of this Agreement is
legal, valid and binding for all purposes.
Section
12.7 Entire
Agreement; Third Party Beneficiaries.
This
Agreement, taken together with all Exhibits, Annexes and Schedules hereto (a)
constitute the entire agreement, and supersede all prior agreements and
understandings, both written and oral, among the Parties with respect to the
Transactions and (b) are not intended to confer upon any Person other than the
Parties any rights or remedies.
Section
12.8 Governing
Law.
This
Agreement shall be governed by, and construed in accordance with, the laws of
the State of New York regardless of the laws that might otherwise govern under
applicable principles of conflicts of laws thereof.
Section
12.9 Dispute
Resolution.
(a) All
disputes among the Parties arising out of or relating to this Agreement will be
resolved by mandatory, binding arbitration in accordance with this Section
12.10.
(b) Before
any arbitration is commenced pursuant to this Section 12.10, the Parties must
endeavor to reach an amicable settlement of the dispute through friendly
negotiations.
(c) If
no mutually acceptable settlement of the dispute is made within the sixty (60)
days from the commencement of the settlement negotiation or if any Party refuses
to engage in any settlement negotiation, any Party may submit the dispute for
arbitration.
(d) Any
arbitration commenced pursuant to this Section 12.10 will be conducted in New
York under the Arbitration Rules of the United Nations Commission on
International Trade Law by arbitrators appointed in accordance with such rules.
The arbitration and appointing authority will be the American Arbitration
Association (“AAA”). The arbitration will be conducted by a panel of three
arbitrators, one chosen by the PAPI Representatives, one chosen by the CAMAC
Parties and the third chosen by agreement of the two selected arbitrators;
failing agreement within thirty (30) days prior to commencement of the
arbitration proceeding, the AAA will appoint the third arbitrator. The
proceedings will be confidential and conducted in English. The arbitral tribunal
will have the authority to grant any equitable and legal remedies that would be
available in any judicial proceeding instituted to resolve a disputed matter,
and its award will be final and binding on the Parties. The arbitral tribunal
will determine how the Parties will bear the costs of the arbitration.
Notwithstanding the foregoing, each Party will have the right at any time to
immediately seek injunctive relief, an award of specific performance or any
other equitable relief against the other Party in any court or other tribunal of
competent jurisdiction. During the pendency of any arbitration or other
proceeding relating to a dispute between the Parties, the Parties will continue
to exercise their remaining respective rights and fulfill their remaining
respective obligations under this Agreement, except with regard to the matters
under dispute.
Section
12.10 Assignment.
Neither
this Agreement nor any of the rights, interests or obligations under this
Agreement shall be assigned, in whole or in part, by operation of law or
otherwise by any of the Parties without the prior written consent of the other
Parties. Any purported assignment without such consent shall be
void. Subject to the preceding sentences, this Agreement will be
binding upon, inure to the benefit of, and be enforceable by, the Parties and
their respective successors and assigns.
Section
12.11 Publicity.
The
terms of this Agreement shall be considered confidential information of the
Parties. The Parties agree that the specific provisions hereof shall
not be revealed or disclosed by it without the prior written consent of all the
Parties hereto, except to the Representatives or to the extent such disclosure
is required by applicable law or regulation.
Section
12.12 Governing
Language.
This
Agreement shall be governed and interpreted in accordance with the English
language.
[
Signature Page
Follows
]
IN
WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly
executed by their respective authorized signatories as of the date first
indicated above.
| PACIFIC ASIA PETROLEUM, INC. | |||
|
|
By:
|
/s/ Frank C. Ingriselli | |
| Frank C. Ingriselli | |||
| President and Chief Executive Officer | |||
| Address for Notice | |||
| 250 East Hartsdale Ave., Suite 47 | |||
| Hartsdale, New York 10530 | |||
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE
PAGES FOR CAMAC PARTIES FOLLOW]
Signature
Page to Purchase and Sale Agreement
IN
WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly
executed by their respective authorized signatories as of the date first
indicated above.
| CAMAC ENERGY HOLDINGS LIMITED | |||
|
|
By:
|
/s/Kamoru Lawal | |
| Name: Kamoru Lawal | |||
| Title: Director | |||
| Address for Notice | |||
| c/o CAMAC International Corporation | |||
| 1330 Post Oak Blvd. | |||
| Suite 2200 | |||
| Houston, Texas 77056 | |||
| CAMAC INTERNATIONAL (NIGERIA) LIMITED | |||
|
|
By:
|
/s/ Kase Lawal | |
| Name: Kase Lawal | |||
| Title: Director | |||
| Address for Notice | |||
| c/o CAMAC International Corporation | |||
| 1330 Post Oak Blvd. | |||
| Suite 2200 | |||
| Houston, Texas 77056 | |||
[SIGNATURES
FOR CAMAC PARTIES CONTINUE]
Signature Page
to Purchase and Sale Agreement
| ALLIED ENERGY PLC | |||
|
|
By:
|
/s/Kase Lawal | |
| Name: Kase Lawal | |||
| Title: Director | |||
| Address for Notice | |||
| c/o CAMAC International Corporation | |||
| 1330 Post Oak Blvd. | |||
| Suite 2200 | |||
| Houston, Texas 77056 | |||
Signature
Page to Purchase and Sale Agreement
ANNEX A
Definitions
“
Acquisition Proposal
”
has the meaning set forth in Section 6.7(a) of the Agreement.
“
Action
” has the
meaning set forth in Section 4.5 of the Agreement.
“
Affiliates
” shall
mean any Person that directly or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with the Person
specified. For purposes of this definition, control of a Person means the power,
direct or indirect, to direct or cause the direction of the management and
policies of such Person whether by Contract or otherwise and, in any event and
without limitation of the previous sentence, any Person owning fifty percent
(50%) or more of the voting securities of a second Person shall be deemed
to control that second Person. For the purposes of this definition, a Person
shall be deemed to control any of his or her immediate family
members.
“
Allied
” has the
meaning set forth in the preamble to the Agreement.
“
Allied Assignment
”
has the meaning set forth in the background to the Agreement.
“
Agreement
” has the
meaning set forth in the preamble to the Agreement.
“
CAA
” means the
federal Clean Air Act, as amended.
“
CAMAC Constituent
Instruments
” means the memorandum and articles of association of each of
the CAMAC Parties together with any of their statutory registers and such
constituent instruments of any of them as may exist, each as amended to the date
of the Agreement.
“
CAMAC Directors
” has
the meaning set forth in Section 8.4 of the Agreement.
“
CAMAC Indemnified
Parties
”
has
the meaning set forth in Section 10.3(a) of the Agreement.
“
CAMAC Material Adverse
Effect
” means any event, change or effect that is materially adverse to
the condition (financial or otherwise) of the Contract Rights, the Oyo Related
Agreements or the Oyo Field or would prevent or materially alter or delay any of
the Transactions. Notwithstanding the foregoing, the definition of
CAMAC Material Adverse Effect shall not include events caused by (A) changes in
Nigerian economic conditions, except to the extent that the same
disproportionately impact any of the Contract Rights, the Oyo Related Agreements
or the Oyo Field, as compared to similar assets of other similarly situated
companies; (B) changes to the economic conditions (including changes in
commodity prices) affecting the industries in which any of the Contract Rights
are exercised, the Oyo Related Agreements are performed or in which the Oyo
Field operates, except to the extent that the same disproportionately impact any
of the Contract Rights, the Oyo Related Agreements or the Oyo Field; (C) changes
related to or arising from the execution, announcement or performance of, or
compliance with, this Agreement or the consummation of the Transactions,
including the impact thereof on relationships, contractual or otherwise,
governmental authorities, customers, suppliers,
A-56
distributors
or employees; (D) changes in accounting requirements or principles or any change
in applicable laws or the interpretation thereof; (E) the failure to meet any
projections or budgets; or (F) matters listed in the Disclosure
Schedules.
“
CAMAC Party
” or
“
CAMAC Parties
”
has the meaning set forth in the preamble to the Agreement.
“
Cap
” has the meaning
set forth in Section 10.4(a) of the Agreement.
“
Cash Consideration
”
has the meaning set forth in Section 2.2 of the Agreement.
“
CEHL
” has the meaning
set forth in the preamble to the Agreement.
“
CERCLA
” shall mean
the Comprehensive Environmental Response, Compensation and Liability Act of 1980
as amended.
“
CINL
” has the meaning
set forth in the preamble to the Agreement.
“
Closing
” has the
meaning set forth in Section 3.1 of the Agreement.
“
Closing Date
” has the
meaning set forth in Section 3.1 of the Agreement.
“
Code
” means the
United States Internal Revenue Code of 1986, as amended.
“
Combined Board
” means
the board of directors of PAPI following the Closing.
“
Common Stock
” has the
meaning set forth in the background of the Agreement.
“
Consent
” has the
meaning set forth in Section 4.6 of the Agreement.
“
Consideration Shares
”
has the meaning set forth in Section 2.1 of the Agreement.
“
Contract
” means any
contract, agreement, option, right to acquire, preferential purchase right,
preemptive right, warrant, indenture, debenture, note, bond, loan, loan
agreement, collective bargaining agreement, lease, mortgage, franchise, license,
purchase order, commitment, letter of credit, guaranty, surety or any other
legally binding arrangement, whether oral or written.
“
Contract Rights
” has
the meaning set forth in the background to the Agreement.
“
Damages
” has the
meaning set forth in Section 10.2(a) of the Agreement.
“
Deductible
” has the
meaning set forth in Section 10.4(a) of the Agreement.
“
DGCL
” has the meaning
set forth Section 9.1(d).
“
Disclosure Materials
”
shall have the meaning set forth in Section 5.20 of the Agreement.
“
D
isclosure Schedules
”
means the CAMAC Disclosure Schedule and the PAPI Disclosure
Schedule.
“
Environment
” means
soil, land surface or subsurface strata, surface waters (including navigable
waters, ocean waters, streams, ponds, drainage basins, and wetlands),
groundwaters, drinking water supply, stream sediments, ambient air (including
indoor air), plant and animal life, and any other environmental medium or
natural resource.
“
Environmental
Authorization
” means any license, permit, certificate, order, approval,
consent, notice, registration, exemption, variance, filing or other form of
permission required under any Environmental Law.
“
Environmental Laws
”
means all Laws of any Governmental Authority currently in effect relating to
pollution or protection of human health, safety, natural resources or the
environment (including ambient air, surface water, ground water, land surface or
subsurface strata), including Laws relating to Releases or threatened Releases
of Hazardous Materials or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, transport or handling of Hazardous
Materials. Environmental Laws include CERCLA, RCRA, SARA, CAA, OSHA, FWPCA,
FIFRA, OPA and TSCA.
“
Environmental
Liabilities
” means any and all obligations to pay the amount of any
judgment or settlement, the cost of complying with any settlement, judgment or
order for injunctive or other equitable relief, the cost of compliance or
corrective action in response to any notice, demand, directive or request from a
Governmental Authority, the cost of performing any investigatory or remedial
action required under Environmental Laws in response to a Release of Hazardous
Materials (including any work performed under any voluntary cleanup program),
the amount of any administrative or civil penalty or criminal fine or
supplemental environmental project, and any court costs and reasonable amounts
for attorneys’ fees, fees for witnesses and experts, and costs of investigation
and preparation for defense of any Action or proceeding, regardless of whether
such Action or proceeding is threatened, pending or completed, that may be or
have been asserted against or imposed upon any owner or operator of the assets
or the business of the Party, to the extent any of the foregoing arise out
of:
(a) failure
of a Party or any of its respective Affiliates, any predecessor or the business
conducted by the Party to comply at any time before the Closing Date with all
Environmental Laws;
(b) presence
of any Hazardous Materials on, in, under, at or in any way affecting any
property used in the business conducted by the Party at any time before the
Closing Date;
(c) a
Release or threatened Release at any time before the Closing Date of any
Hazardous Materials on, in, at, under or in any way affecting the business
conducted by the Party or any property used therein or at, on, in, under or in
any way affecting any adjacent site or facility;
(d) a
Release or threatened Release of any Hazardous Materials on, in, at, under or
from any real property other than those described in (c), immediately above, and
to which any Party or any of its respective Affiliates or any Predecessor
transported or disposed, or arranged
A-58
for the
transportation or disposal of, Hazardous Materials generated at or arising from
operation of the business conducted by the Party at any time before the Closing
Date;
(e) identification
of any Party or any of its respective Affiliates or any Predecessor as a
potentially responsible party under CERCLA or under any Environmental Law
similar to CERCLA;
(f) presence
at any time before the Closing Date of any above-ground and/or underground
storage tanks, or any asbestos-containing material on, in, at or under any
property used in connection with the business conducted by the Party;
or
(g) any
and all Actions for injury or damage to persons or property arising out of
exposure to Hazardous Materials originating in connection with the business
conducted by the Party or any adjoining property, resulting from operation
thereof, or located at the location where such business is conducted, where such
exposure allegedly occurred prior to the Closing Date.
“
Equity Interests
”
means any and all shares, interests, participations or other equivalents
(however designated) of capital stock of a corporation, any and all ownership
interests in a limited liability company, partnership, association or other
business entity (other than a corporation), and any and all warrants, options or
other rights to purchase or acquire any of the foregoing.
“
Exchange Act
” means
the Securities Exchange Act of 1934, as amended.
“
Excluded
Transactions
” has the meaning set forth in Section 2.1 of the
Agreement.
“
Expenses
” shall mean
all reasonable out-of-pocket expenses (including all reasonable fees and
expenses of counsel, accountants, investment bankers, experts and consultants to
a party hereto and its Affiliates) incurred by a party on its behalf in
connection with or related to the authorization, preparation, diligence,
negotiation, execution, performance and enforcement of this Agreement and the
Transaction Documents.
“
FCPA
” has the meaning
set forth in Section 4.11 of the Agreement.
“
FIFRA
” means the
Federal Insecticide, Fungicide & Rodenticide Act, as amended.
“
Financial Statements
”
has the meaning set forth in Section 5.11(a) of the Agreement.
“
Financing
” has the
meaning set forth in the background to the Agreement.
“
FWPCA
” means the
Federal Water Pollution Control Act, as amended.
“
Governmental
Authority
” means any national, federal, state, provincial, local or
foreign government, governmental, regulatory or administrative authority, agency
or commission or any court, tribunal or judicial or arbitral body of competent
jurisdiction, or other governmental authority or instrumentality, domestic or
foreign.
“
Hazardous Materials
”
means any chemical, product, material, waste or substance that, whether by its
nature or its use, is regulated or as to which liability might arise under any
Environmental Law, including:
(a) solid
or hazardous wastes, as defined in RCRA or in any other Environmental
Law;
(b) hazardous
substances, as defined in CERCLA or in any other Environmental Law;
(c) toxic
substances, as defined in TSCA or in any other Environmental Law;
(d) pollutants
or contaminants, as defined in the CAA or the FWPCA, or in any other
Environmental Law;
(e) insecticides,
fungicides or rodenticides, as defined in FIFRA or in any other Environmental
Law;
(f) petroleum
hydrocarbons including, without limitation, natural gas, crude oil or any
components, fractions or derivatives thereof; and
(g) gasoline
or any other petroleum product or byproduct, polychlorinated biphenyls,
asbestos, urea formaldehyde, naturally occurring radioactive materials, other
radioactive materials or radon.
“
Indemnitee
” has the
meaning set forth in Section 10.5 of the Agreement.
“
Indemnitor
” has the
meaning set forth in Section 10.5 of the Agreement.
“
Indemnification
Notice
” has the meaning set forth in Section 10.5 of the
Agreement.
“
Independent
Committee
” has the meaning set forth in Section 10.2(b) of the
Agreement.
“
Independent
Director(s)
” has the meaning set forth in Section 8.4 of the
Agreement.
“
Intellectual
Property
” means all United States and foreign (a) patents, patent
applications, utility models or statutory invention registrations (whether or
not filed), and invention disclosures; (b) trademarks, service marks, logos,
designs, trade names, trade dress, domain names and corporate names and
registrations and applications for registration thereof (whether or not filed)
and the goodwill associated therewith; (c) copyrights, whether registered or
unregistered, and registrations and applications for registration thereof
(whether or not filed) and other works of authorship, whether or not published;
and (d) trade secrets, proprietary information, confidential information,
know-how, inventions, customer lists and information, supplier lists,
manufacturer lists, manufacturing and production processes and techniques,
blueprints, drawings, schematics, manuals, software, firmware and
databases.
“
Interim Financial
Statements
” is defined in Section 5.11(a).
“
Judgment
” means any
judgment, order or decree.
“
Knowledge
”, (i) with
respect to the CAMAC Parties shall mean the actual knowledge of Abiola Lawal,
Gary Hirstein, Carolyn Anandu, and Segun Omidele, and (ii) with respect to the
PAPI Parties shall mean the actual knowledge of Frank Ingriselli, Stephen F.
Groth, Richard Grigg and the members of its Board of Directors.
“
Latest Balance Sheet
”
is defined in Section 5.11(a).
“
Law
” means any law,
statute, code, ordinance, order, rule, rule of common law, regulation, judgment,
decree, injunction, franchise, permit, certificate, license, authorization or
other directional requirement of any Governmental Authority.
“
Legal Requirement
”
means any federal, state, local, municipal, provincial, foreign or other law,
statute, constitution, principle of common law, resolution, ordinance, code,
edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted,
promulgated, implemented or otherwise put into effect by or under the authority
of any Governmental Authorities (or under the authority of any national
securities exchange upon which PAPI Securities then listed or
traded)
“
Liens
” means any
liens, security interests, pledges, equities and claims of any kind, voting
trusts, shareholder agreements and other encumbrances.
“
Material Contract
”
has the meaning set forth in Section 5.5 of the Agreement.
“
Material Permits
” has
the meaning set forth in Section 4.7 of the Agreement.
“
Money Laundering
Laws
” has the meaning set forth in Section 4.12 of the
Agreement.
“
NAE
” has the meaning
set forth in the background to the Agreement.
“
NAE Assignment
” has
the meaning set forth in the background to the Agreement.
“
Novation Agreement
”
has the meaning set forth in background of the Agreement.
“
Novation Date
” has
the meaning set forth in Section 1.1 of the Agreement.
“
OFAC
” has the meaning
set forth in Section 4.13 of the Agreement.
“
OMLs
” has the meaning
set forth in the background to the Agreement.
“
OML 120
” has the
meaning set forth in the background to the Agreement.
“
OPA
” means the Oil
Pollution Act of 1990, as amended.
“
OPL 210
” has the
meaning set forth in the background to the Agreement.
”
Oyo Field
” has the
meaning set forth in Section 1.1 of the Agreement.
“
Oyo Field Supplemental
Agreement
” has the meaning set forth in the background to the
Agreement.
“
Oyo Related
Agreements
” has the meaning set forth in Section 4.4(b) of the
Agreement.
“
PAPI
” has the meaning
set forth in the preamble to the Agreement.
“
PAPI Constituent
Instruments
” means the articles of incorporation and bylaws of PAPI,
together with any memorandum and articles of association, statutory registers
and such constituent instruments of any of its Subsidiaries as may exist, each
as amended as of the date of the Agreement.
“
PAPI Directors
” has
the meaning set forth in Section 8.4 of the Agreement.
“
PAPI Disclosure
Schedule
” has the meaning set forth in Article V of the
Agreement.
“
PAPI Indemnified
Parties
” has the meaning set forth in Section 10.2(a) of the
Agreement.
“
PAPI Material Adverse
Effect
” means any event, change or effect that is materially adverse to
the condition (financial or otherwise), properties, assets, liabilities,
business, operations or results of operations of PAPI and its subsidiaries,
taken as a whole. Notwithstanding the foregoing, the definition of PAPI Material
Adverse Effect shall not include events caused by (A) changes in the PRC
economic conditions (including changes in commodity prices), except to the
extent that the same disproportionately impact the PAPI Parties as compared to
other similarly situated companies; (B) changes to the economic conditions
affecting the industries in which the PAPI Parties operate, except to the extent
that the same disproportionately impact the PAPI Parties as compared to other
companies in the industries in which the PAPI Parties operate; (C) changes
related to or arising from the execution, announcement or performance of, or
compliance with, this Agreement or the consummation of the Transactions,
including the impact thereof on relationships, contractual or otherwise,
governmental authorities, customers, suppliers, distributors or employees; (D)
changes in accounting requirements or principles or any change in applicable
laws or the interpretation thereof; (E) the failure to meet any projections or
budgets; or (F) matters listed in the Disclosure Schedules.
“
PAPI Newco
” has the
meaning set forth in the preamble to the Agreement.
“
PAPI Parties
” has the
meaning set forth in the preamble to the Agreement.
“
PAPI Representatives
”
means each of Frank Ingriselli, and Stephen F. Groth.
“
Party
” or “
Parties
” has the
meaning set forth in the preamble to the Agreement.
“
Permits
” mean all
governmental franchises, licenses, permits, authorizations and approvals
necessary to enable a Person to own, lease or otherwise hold its properties and
assets and to conduct its businesses as presently conducted.
“
Permitted Lien
” shall
mean (a) any restriction on transfer arising under applicable securities law;
(b) any Liens for Taxes not yet due or delinquent or being contested in good
faith by appropriate proceedings for which adequate reserves have been
established in accordance
A-62
with U.S.
GAAP; (c) any statutory Liens arising in the ordinary course of business by
operation of Law with respect to a liability that is not yet due and delinquent
and which are not, individually or in the aggregate, significant; (d) zoning,
entitlement, building and other land use regulations imposed by governmental
agencies having jurisdiction over the Oyo Field or Contract Rights which are not
violated by the current use and operation of the Contract Rights; (e) covenants,
conditions, restrictions, easements and other similar matters of record
affecting title to the Oyo Field or Contract Rights which do not materially
impair the occupancy or use of the Oyo Field or Contract Rights for the purposes
for which it is currently used or proposed to be used in connection with the
such relevant Person’s business; (f) Liens identified on title policies, title
opinions or preliminary title reports or other documents or writings included in
the public records; (g) Liens arising under worker’s compensation, unemployment
insurance, social security, retirement and similar legislation; (h) Liens of
lessors and licensors arising under lease agreements or license arrangements;
and (i) those Liens set forth in the CAMAC Disclosure
Schedule.
“
Person
” shall mean an
individual, partnership, corporation, joint venture, unincorporated
organization, cooperative or a governmental entity or agency
thereof.
“
Proxy Statement
” has
the meaning set forth in Section 7.2 of the Agreement.
“
PSC
” has the meaning
set forth in the background to the Agreement.
“
RCRA
” shall mean the
Resource Conservation and Recovery Act, as amended.
“
Registration Rights
Agreement
” has the meaning set forth in the background to the
Agreement.
“
Release
” shall mean
any depositing, spilling, leaking, pumping, pouring, placing, emitting,
discarding, abandoning, emptying, discharging, migrating, injecting, escaping,
leaching, dumping or disposing into the indoor or outdoor
environment.
“
Representatives
” of
either Party shall mean such Party’s employees, accountants, auditors,
actuaries, counsel, financial advisors, bankers, investment bankers and
consultants and any other person acting on behalf of such Party.
“
ROFR
” has the meaning
set forth in Section 8.6 of the Agreement.
“
ROFR Agreement
” has
the meaning set forth in the background to the Agreement.
“
SARA
” shall mean the
Superfund Amendments and Reauthorization Act of 1986, as amended.
“
SEC
” means the U.S.
Securities and Exchange Commission.
“
SEC Reports
” shall
have the meaning set forth in Section 5.20 of the Agreement.
“
Securities Act
” means
the Securities Act of 1933, as amended.
“
Stockholders’
Meeting
” has the meaning set forth in Section 7.2 of the
Agreement.
“
Subsidiary
” an entity
shall be deemed to be a “Subsidiary” of another Person if such Person directly
or indirectly owns, beneficially or of record, (a) an amount of voting
securities of other interests in such entity that is sufficient to enable such
Person to elect at least a majority of the members of such entity’s board of
directors or other governing body, or (b) at least 50% of the outstanding equity
or financial interests of such entity.
“
Survival Period
”
means the applicable period of time that a representation, warranty, covenant or
obligation survives the Closing pursuant to Section 10.1 of this
Agreement.
“
Tax
” or “
Taxes
” includes all
forms of taxation, whenever created or imposed, and whether of the United States
or elsewhere, and whether imposed by a local, municipal, governmental, state,
foreign, federal or other Governmental Authority, or in connection with any
agreement with respect to Taxes, including all interest, penalties and additions
imposed with respect to such amounts.
“
Tax Benefit
” has the
meaning set forth in Section 10.6 of the Agreement.
“
Tax Return
” means all
federal, state, local, provincial and foreign Tax returns, declarations,
statements, reports, schedules, forms and information returns and any amended
Tax return relating to Taxes.
“
Technical Services
Agreement
” has the meaning set forth in the background to the
Agreement.
“
Transactions
” has the
meaning set forth in the background to the Agreement.
“
Transaction
Documents
” shall have the meaning set forth in the background to the
Agreement.
“
TSCA
” means the Toxic
Substances Control Act, as amended.
“
U.S. GAAP
” means
generally accepted accounting principles of the United States
.
“
Voting Period
” has
the meaning set forth in Section 8.5 of the Agreement.
“
Voting Shares
” has
the meaning set forth in Section 8.5(a) of the Agreement.
“Year-End Financial
Statements
” is defined in Section 5.11(a).
SCHEDULE
B
CAMAC
DISCLOSURE SCHEDULE
Dated
as of November 18, 2009
This is
the CAMAC Disclosure Schedule referred to in Article IV of that certain Purchase
and Sale Agreement, dated as of November 18, 2009 (the “
Purchase
Agreement
”), by and among Pacific Asia Petroleum, Inc., a corporation
incorporated in the State of Delaware, USA (“
PAPI
” and
together with the new entity to be formed by PAPI pursuant to Section 7.12
hereof (“
PAPI
Newco
”, the “
PAPI
Parties
”); CAMAC Energy Holdings Limited, a Cayman Islands company
(“
CEHL
”);
CAMAC International (Nigeria) Limited, a company incorporated in the Federal
Republic of Nigeria (“
CINL
”) and
a wholly-owned subsidiary of CEHL; and Allied Energy Plc (formerly, Allied
Energy Resources Nigeria Limited), a company incorporated in the Federal
Republic of Nigeria and a wholly-owned subsidiary of CEHL (“
Allied
,”
and together with CEHL, and CINL, the
“CAMAC
Parties
”).
This
CAMAC Disclosure Schedule is qualified by reference to the specific provisions
of the Purchase Agreement and is not intended to constitute, and shall not be
deemed to constitute, representations or warranties of the CAMAC Parties, except
as and to the extent set forth in the Purchase Agreement. The
disclosure of any matter herein is not intended to indicate and does not
constitute an indication that such matter is required to be disclosed pursuant
to the Purchase Agreement, and such disclosure does not constitute an admission
that such information is material to the CAMAC Parties or any other party to the
Purchase Agreement except to the extent required pursuant to the Purchase
Agreement.
The
numbering and headings of this CAMAC Disclosure Schedule refer to the section or
subsection of the Purchase Agreement and are for convenience of reference
only. Copies of all agreements listed below have been made
available to the PAPI Parties and their counsel.
Section
4.3
:
Under the
PSC, NAE waives its rights to its entitlement of Profit Oil as the First Party
in favour of Allied (the “NAE Waiver”). Absent the waiver referred to
in Section 9.1(a) of the Purchase Agreement, if Allied sells, assigns or
otherwise transfers all or part of its legal or beneficial interests and or
obligations under the PSC to any third party (other than its Affiliates, subject
to Article 17.1of the PSC) or if the owner of Allied disposes of control of
Allied to any third party or parties, the NAE Waiver shall not inure or be
extended to such third party or parties and NAE shall be entitled prospectively
to its forty percent (40%) share of the Profit Oil as First Party, unless such
transfer of legal and beneficial interests is made in favor of
NNPC.
Section
4.4(a)
:
NAE has,
from time to time, failed to deliver to the CAMAC Parties documents and
information when required under the PSC. NAE has not provided
adequate documentation to support costs that NAE claims they have incurred in
relation to, or pursuant to, the PSC and activities thereunder. CAMAC
believes that such matters constitute a breach of the PSC.
Section
4.4(b
):
In
addition to the Oyo Related Agreements, one or more of the CAMAC
Parties is a party to the following Contracts relating to or affecting the Oyo
Field or Contract Rights:
| 1. | Cooperation Agreement by and between NAE and Allied, dated January 15, 2006 |
|
2.
|
Escrow
Agreement by and among NAE, Allied and BNP Paribas S.A., dated August 4,
2005
|
| 3. | Secondment Agreement by and between NAE and Allied, dated January 15, 2006 |
|
4.
|
Service
Agreement for the Provision of Project Management Services by and between
NAE and Allied, dated January 26, 2009 (effective September 1,
2008)
|
In
addition, Oceanic Consultants Nigeria Limited (“OCNL”), a Nigerian company, and
Oceanic Consultants Inc. (“OCI”), a Texas corporation, both of which are
companies affiliated with the CAMAC Parties, provide engineering consulting
services as a contractor to Allied, as well as to third parties, in connection
with the planning, procurement and operation functions that NAE has assigned to
Allied with respect to seismic and other studies, drilling,
geological/geophysical, operational and general services. In relation
to these functions, the following agreements have been entered into for the
provision of services for compensation to be mutually agreed on a particular
work order on a fixed sum or rate basis:
| 1. | Between OCNL and OCI, dated January 16, 2008 |
| 2. | Between OCNL and Allied, dated January 16, 2008 |
| 3. | Between OCI and Allied, dated January 16, 2008 |
| 4. | Additionally, OCNL and OCI are parties to the following agreements: |
|
5.
|
Agreement
for Engineering Services (Package 1) between OCI and William Jacob
Management: this is an evergreen contract but currently there
is no work being performed pursuant thereto.
|
|
6.
|
Agreement
for Engineering Services (Packages 2 and 3) between OCI and Intec
Engineering Partnership: this is an evergreen contract but
currently there is no work being performed pursuant
thereto.
|
|
7.
|
Agreement
for Engineering and Drafting Services between OCI and Fairwinds
International Inc.: this is an evergreen contract but currently
there is no work being performed pursuant thereto.
|
|
8.
|
Agreement
for Inspection Services (Packages 2 and 3) between OCI and Global
SCS: this is an evergreen contract but currently there is no
work being performed pursuant thereto.
|
|
9.
|
Agreement
for Inspection Services (Packages 2 and 3) between OCI and
MAC: this is an evergreen contract but currently there is no
work being performed pursuant thereto.
|
|
10.
|
Agreements
for the services of the following individuals working as
contractors to OCI:
|
| A. | Swift Technical (for the services of Natalia Milovankina | |
| B. | Peter Cutt | |
| C. | Nigel Buchan | |
| D. | Loy Liang Zai |
|
11.
|
Allied
has entered into General Service Agreements with both OCNL and
OCI. In addition to these General Service Agreements, OCNL and
OCI are parties to the following agreements that relate
to
|
Section
4.14
:
The
Environmental Impact Assessment (“EIA”) of the Oyo development may not have been
filed in a timely manner, but the Department of Petroleum Resources has granted
provisional approval for this EIA.
Section
6.4(a)
:
The CAMAC
Parties have been and continue to be in discussions with various third parties
concerning the possible sale to such third parties of the crude oil to which the
CAMAC Parties are entitled to lift under the PSC. The CAMAC Parties
expect to finalize such crude sale agreement prior to the Closing.
SCHEDULE
C
PAPI
DISCLOSURE SCHEDULE
Dated
as of November 18, 2009
This is
the PAPI Disclosure Schedule referred to in Article V of that certain Purchase
and Sale Agreement, dated as of November 18, 2009 (the “
Purchase
Agreement
”), by and among Pacific Asia Petroleum, Inc., a corporation
incorporated in the State of Delaware, USA (“
PAPI
” and
together with the new entity to be formed by PAPI pursuant to Section 7.12 of
the Purchase Agreement (“
PAPI
Newco
”), the “
PAPI
Parties
”); CAMAC Energy Holdings Limited (“
CEHL
”);
CAMAC International (Nigeria) Limited, a company incorporated in the Federal
Republic of Nigeria (“
CINL
”) and
a wholly-owned subsidiary of CEHL; and Allied Energy Plc (formerly, Allied
Energy Resources Nigeria Limited), a company incorporated in the Federal
Republic of Nigeria and a wholly-owned subsidiary of CEHL (“
Allied
,”
and together with CEHL, and CINL, the
“CAMAC
Parties
”).
This PAPI
Disclosure Schedule is qualified by reference to the specific provisions of the
Purchase Agreement and is not intended to constitute, and shall not be deemed to
constitute, representations or warranties of the PAPI Parties, except as and to
the extent set forth in the Purchase Agreement. The disclosure of any
matter herein is not intended to indicate and does not constitute an indication
that such matter is required to be disclosed pursuant to the Purchase Agreement,
and such disclosure does not constitute an admission that such information is
material to the PAPI Parties or any other party to the Purchase Agreement except
to the extent required pursuant to the Purchase Agreement.
The
numbering and headings of this PAPI Disclosure Schedule refer to the section or
subsection of the Purchase Agreement and are for convenience of reference
only. Copies of all agreements listed below have been made available
to the CAMAC Parties and their counsel.
Section
5.5
Material
Contracts
.
|
(1)
|
Work
Program entered pursuant to Production Sharing Contract for Exploitation
of Coalbed Methane Resources in Zinjinshan Area, Shanix Province, The
People’s Republic of China, dated October 26, 2007, by and between PAPL
and China United Coalbed Methane Corp
Ltd.
|
|
(2)
|
Advisor
Agreement, dated August 4, 2008, as amended effective July 30, 2009, by
and between PAPI and Somerley
Limited.
|
|
(3)
|
Engagement
Letter, dated August 30, 2009, by and between Worldwide Capital Group and
PAPI (the “
WCG
Engagement Letter
”).
|
|
(4)
|
Letter
of Understanding, dated May 13, 2009, by and among Mr. Li Xiangdong
(“
LXD
”),
PAPI, Pacific Asia Petroleum Energy Limited (“
PAPE
”),
and Mr. Ho Chi Kong (“
HCK
”),
as amended June 25, 2009 (the “
EORP
LOU
”).
|
|
(5)
|
Consulting
Engagement Agreement, dated June 7, 2009, by and among LXD, PAPL and Inner
Mongolia Production Company (HK) Limited (“
IMPCO
HK
”).
|
|
(6)
|
Assignment
Agreement of Application Right For Patent, by and between LXD and PAPL,
dated June 7, 2009.
|
|
(7)
|
Interest
Assignment Agreement, dated June 7, 2009, by and between IMPCO HK, PAPL
and LXD.
|
|
(8)
|
Offer
Letter, dated November 13, 2009, by and between Clark Moore and
PAPI.
|
Section
5.6
Capitalization
.
|
(1)
|
Pacific Asia
Petroleum, Inc. (“
PAPI
”)
:
|
|
|
a.
|
Common
Stock
|
PAPI is
authorized to issue up to 300,000,000 shares of Common Stock, par value $0.001
per share. As of November 18, 2009, 43,866,267 shares of Common Stock are
currently issued and outstanding. PAPI has authorized and reserved 4,000,000
shares of Common Stock for issuance under the PAPI 2007 Stock Plan, and
6,000,000 shares of Common Stock for issuance under the PAPI 2009 Equity
Incentive Plan. As of November 18, 2009, an aggregate of 1,347,000
shares of Common Stock were issuable upon exercise of outstanding stock options
under the 2007 Stock Plan, an aggregate of 30,000 shares of Common Stock were
issuable upon exercise of outstanding stock options under the 2009 Equity
Incentive Plan, and an aggregate of 755,200 shares of Common Stock were issuable
upon exercise of outstanding stock options issued outside of a PAPI incentive
stock plan.
|
|
b.
|
Preferred
Stock
|
PAPI
is authorized to issue up to 50,000,000 shares of Preferred Stock in one or more
classes or series within a class as may be determined by the PAPI board of
directors, of which 30,000,000 shares have been designated “Series A Convertible
Preferred Stock.” No shares of Preferred Stock are currently
outstanding.
|
|
c.
|
Warrants
|
As of
November 18, 2009, PAPI had warrants outstanding to purchase (i) an aggregate of
1,060,888 shares of Common Stock at a price per share of $1.25; (ii) an
aggregate of 200,000 shares of Common Stock at a price per share of $1.375; and
(iii) an aggregate of 200,000 shares of Common Stock at a price per share of
$1.50.
Pursuant
to the WCG Engagement Letter, WCG shall be entitled to receive warrants
exercisable for Common Stock of PAPI upon consummation of certain debt and
equity fundraisings of PAPI. See WCG Engagement Letter.
|
|
d.
|
EORP-Related
Obligations
|
Pursuant
to the EORP LOU, upon acknowledgement from the Chinese Government that the CJVC
(as defined in the EORP LOU) is the registered owner of the LXD patents, PAPI
shall issue to HCK up to 100,000 shares of Common Stock of PAPI and options to
purchase up to 400,000 additional shares of Common Stock of PAPI at an exercise
price coinciding with PAPI’s
A-70
share
price on the day of the issue of the options. PAPI has agreed to issue 300,000
more shares to HCK upon the signing of certain contracts by the CJVC with
respect to the Fulaerjiqu Oilfield (as set forth in the EORP
LOU). The options will not vest immediately, and vesting will
be contingent upon the achievement of certain milestones related to the entry by
the CJVC into certain EORP-related development contracts pertaining to oilfield
projects in the Fulaerjiqu Oilfield.
PAPI has
agreed to loan up to $5 million to PAPE, which may then invest up to RMB
30,000,000 (approximately $ 4.4 million) with portion of this being a
requirement to invest RMB 22,650,000 as PAPE’s share of the registered capital
of the CJVC when and to the extent required under applicable law, to be used by
the CJVC to carry out work projects, fund operations, and to make aggregate
payments of up to $1.5 million in cash to LXD and HCK. See EORP
LOU.
|
|
(2)
|
Inner Mongolia
Production Company (HK) Ltd. (“
IMPCO
HK”
)
:
|
IMPCO HK
is a wholly-owned subsidiary of PAPI.
|
|
(3)
|
Inner Mongolia Sunrise
Petroleum JV Company (
“IMPCO
Sunrise
”)
:
|
In March
2006, PAPI formed IMPCO Sunrise, a Chinese joint venture company which is owned
97% by IMPCO HK and 3% by Beijing Jinrun Hongda Technology Co., Ltd. (“BJHTC”),
an unaffiliated Chinese corporation. PAPI formed IMPCO Sunrise as an
indirect subsidiary to engage in Chinese energy ventures. Under
Chinese law, a foreign-controlled Chinese joint venture company must have a
Chinese partner. BJHTC is IMPCO HK’s Chinese partner in IMPCO Sunrise. IMPCO
Sunrise is governed and managed by a Board of Directors comprised of three
members, two of whom are appointed by IMPCO HK and one by BJHTC.
IMPCO HK
has advanced a total of $407,507 to BJHTC, which then invested that amount in
IMPCO Sunrise and issued notes to IMPCO HK for that amount. BJHTC is
obligated to apply any remittances received from IMPCO Sunrise directly to IMPCO
HK. IMPCO Sunrise is authorized to pay these remittances directly to IMPCO HK on
BJHTC’s behalf, until the debt is satisfied.
|
|
(4)
|
Pacific Asia Petroleum
Ltd. (“
PAPL
”)
:
|
PAPL is a
wholly-owned subsidiary of PAPI.
|
|
(5)
|
Pacific Asia Petroleum
(HK) Ltd. (“
PAPL
HK
”)
:
|
PAPL HK
is a wholly-owned subsidiary of PAPL.
|
|
(6)
|
Pacific Asia Petroleum
Energy Ltd. (“
PAPE
”)
:
|
PAPE is
70% owned by PAPI and 30% beneficially owned by HCK.
PAPI has
agreed to loan up to $5 million to PAPE, which may then invest up to RMB
30,000,000 (approximately $ 4.4 million) with portion of this being a
requirement to invest RMB 22,650,000 as PAPE’s share of the registered capital
of the CJVC when and to the extent required under applicable law, to be used by
the CJVC to carry out work projects, fund operations, and to make aggregate
payments of up to $1.5 million in cash to LXD and
HCK. See EORP LOU.
|
|
(7)
|
Beijing Dong Fang Ya
Zhou Petroleum Technology Services Company Limited (“
CJCV
”)
:
|
CJVC is a
Chinese joint venture company formed on September 24, 2009, 75.5% owned by PAPE
and 24.5% owned by LXD.
Pursuant
to the EORP LOU, LXD has a “Share Sale Right” for a period of 24 months from the
date of incorporation of the CJVC to require PAPE to purchase 50% of the shares
owned by LXD in the CJVC. See EORP LOU.
Section
5.9
Consents and
Approvals
.
The
Transactions must be approved by (i) the PAPI Board of Directors, and (ii) the
PAPI majority holders, voting as a group, in accordance with Section 253 of the
Delaware General Corporation Law (the “DGCL”) and other applicable
laws.
The
Agreement and the Transactions must be approved by (i) the PAPI Newco Board of
Directors, and (ii) the holders of a majority of the PAPI Newco shareholders in
accordance with the PAPI Newco constituent documents.
Section
5.12
Absence of Certain Changes
or Events
.
See
agreements disclosed under Section 5.5 above that were entered into since
December 31, 2008.
ANNEX
B
AMENDMENT
NO. 1 TO
PURCHASE
AND SALE AGREEMENT
THIS
AMENDMENT NO. 1 TO PURCHASE AND SALE AGREEMENT, dated as of March 4, 2010 (this
“
Amendment
”),
by and among PACIFIC ASIA PETROLEUM, INC., a corporation incorporated in the
State of Delaware, USA (“
PAPI
”);
CAMAC PETROLEUM LIMITED, a company incorporated in the Federal Republic of
Nigeria, and a wholly owned subsidiary of PAPI (“
Newco
,”
and together with PAPI, the “
PAPI
Parties
”); CAMAC ENERGY HOLDINGS LIMITED, a Cayman Islands company
(“
CEHL
”);
CAMAC INTERNATIONAL (NIGERIA) LIMITED, a company incorporated in the Federal
Republic of Nigeria (“
CINL
”) and
a wholly-owned subsidiary of CEHL; and ALLIED ENERGY PLC (formerly, Allied
Energy Resources Nigeria Limited, a company incorporated in the Federal Republic
of Nigeria and a wholly-owned subsidiary of CEHL (“
Allied
,”
and together with CEHL, and CINL, the “
CAMAC
Parties
”), amends that certain Purchase and Sale Agreement, dated
November 18, 2009, entered into by and among the Parties (the “
Purchase
Agreement
”). Capitalized terms used herein that are not
otherwise defined herein shall have the meanings ascribed to them in the
Purchase Agreement.
WITNESSETH
A. On
November 18, 2009, the Parties entered into the Purchase Agreement, which
agreement set forth the terms and conditions pursuant to which PAPI will acquire
from Allied and CINL, through Newco, all of the CAMAC Parties’ interest in the
PSC with respect to that certain oilfield asset known as the Oyo Field for stock
consideration consisting of shares of PAPI’s Common Stock representing 62.74% of
the issued and outstanding Common Stock of PAPI, and cash in the amount of USD
$38.84 million (the “
Cash
Consideration
”), subject to certain conditions to closing set forth in
the Purchase Agreement.
B. On
December 28, 2009, Newco was formed in the Federal Republic of Nigeria as a
wholly-owned subsidiary of PAPI, and pursuant to Sections 7.12 and 9.3(n) of the
Purchase Agreement, Newco is required to execute and deliver to the CAMAC
Parties an agreement whereby it will agree to the terms of the Purchase
Agreement as if it were an original signatory thereto and shall be deemed a
“PAPI Party” as such term is defined therein, and Newco, PAPI and the CAMAC
Parties desire to enter into this Amendment in satisfaction of such requirement
under Sections 7.12 and 9.3(n) of the Purchase Agreement.
C. The
PAPI Parties and the CAMAC Parties also desire to enter into this Amendment to
confirm the Parties’ mutual agreement that the condition to Closing set forth
under the Purchase Agreement requiring PAPI to consummate the Financing prior to
or concurrently with the Closing is removed.
D. The
PAPI Parties and the CAMAC Parties also desire to enter into this Amendment to
confirm the Parties’ mutual agreement that the amount of Cash Consideration due
and payable by PAPI to CEHL at Closing shall be $32,000,000, with the balance
$6,840,000 (“
Post-Closing Cash
Consideration
”) to be due and payable to CEHL (without interest) from
initial cash received by Newco as payment for its allocation of Cost Oil and
Profit Oil (each as
defined
in the PSC) post-Closing with respect to any Petroleum Operations (as defined in
the PSC) conducted on the Oyo Field (“
Initial
Post-Closing Newco Receipts
”), 100% of which Initial Post-Closing Newco
Receipts shall be paid to CEHL until the full Post-Closing Cash Consideration is
paid to CEHL, provided that if Post-Closing Consideration paid by PAPI to CEHL
from Initial Post-Closing Newco Receipts, if any, does not equal the full
Post-Closing Cash Consideration due and payable to CEHL by the date that is six
months following the Closing Date, PAPI shall pay the balance due of the
Post-Closing Cash Consideration to CEHL on such date.
F. The
PAPI Parties and the CAMAC Parties also desire to enter into this Amendment to
confirm that any and all cash received by any of the CAMAC Parties as payment
for its allocation of Cost Oil and Profit Oil prior to the Closing of the
Purchase Agreement with respect to any Petroleum Operations conducted on the Oyo
Field (“
Pre-Closing CAMAC
Receipts
”) shall cause an equal reduction of the Post-Closing Cash
Consideration due and payable by Newco to CEHL post-Closing from Initial
Post-Closing Newco Receipts.
G. The
PAPI Parties and the CAMAC Parties also desire to enter into this Amendment to
confirm the Parties’ mutual understanding and agreement that the Closing shall
occur on or before April 7, 2010, subject to satisfaction of the conditions to
Closing under the Purchase Agreement, and that Sections 6.7(c), 7.8(c), and
11.1(b) of the Purchase Agreement shall be revised accordingly.
H. The
PAPI Parties and the CAMAC Parties also desire to enter into this Amendment to
confirm the Parties’ mutual understanding and agreement that Royalty Oil and Tax
Oil (each as defined in the PSC) shall, at all times be allocated to Allied in
accordance with the terms and conditions of Sections 8.1(a), 8.1(c) and 8.3 of
the PSC, which shall remain unaffected by the Purchase Agreement, including this
Amendment, and Allied Energy shall retain its rights and obligations under such
Articles.
I. The
PAPI Parties and the CAMAC Parties also desire to enter into this Amendment to
confirm the Parties’ mutual understanding and agreement that Cost Oil that is
allocated to Allied as payment for outstanding invoices to NAE, acting as the
Operating Contractor under the PSC, for services performed (including
reimbursable expenses relating thereto), training expenses, and other support
provided by Allied, including work subcontracted to Oceanic Consultants Nigeria
Limited and Oceanic Consultants Inc. (all such invoices to be hereinafter
referred to as the “
Allied
Invoices
”) shall, at all times be allocated to Allied.
J. The
PAPI Parties and the CAMAC Parties also desire to enter into this Amendment to
confirm the Parties’ mutual understanding and agreement that the TSA Accruals
(as defined in that certain Technical Services Agreement, to be entered into by
and between Newco and Allied on or about Closing (the “
TSA
”))
shall be paid by Newco to Allied from Initial Post-Closing Newco Receipts
following
payment in full of the Post-Closing Cash Consideration due and payable
therefrom, provided that if TSA Accruals paid by Newco to Allied from Initial
Post-Closing Newco Receipts, if any, do not equal the full TSA Accruals due and
payable to Allied by the date that is six months following the Closing Date,
Newco shall pay the balance due of the TSA Accruals to Allied on such
date.
NOW,
THEREFORE, in consideration of the premises, and the mutual covenants and
agreements set forth herein, the Parties agree as follows:
Section
1.
Newco Signatory to Purchase
Agreement
. Newco agrees to the terms of the Purchase
Agreement, as amended hereby and from time to time, as if it were an original
signatory thereto and agrees to be deemed a “PAPI Party” as such term is defined
therein, and PAPI and the CAMAC Parties agree to the addition of Newco as a
party to the Purchase Agreement as an original signatory thereto as a “PAPI
Party” thereunder, in satisfaction of the requirements set forth under Sections
7.12 and 9.3(n) of the Purchase Agreement.
Section
2.
Removal of Financing Closing
Condition
. The PAPI Parties and the CAMAC Parties agree and
acknowledge that the condition to Closing set forth under the Purchase Agreement
requiring PAPI to consummate the Financing prior to or concurrently with the
Closing is hereby removed.
Section
3.
Cash
Consideration
.
(a) The
Parties hereby acknowledge and agree that the amount of Cash Consideration due
and payable by PAPI to CEHL at Closing shall be $32,000,000, with the
Post-Closing Cash Consideration balance of $6,840,000 to be due and payable to
CEHL (without interest) from Initial Post-Closing Newco Receipts, 100% of which
Initial Post-Closing Newco Receipts shall be paid to CEHL until the full
Post-Closing Cash Consideration is paid, provided that if Post-Closing
Consideration paid by PAPI to CEHL from Initial Post-Closing Newco Receipts, if
any, does not equal the full Post-Closing Cash Consideration due and payable to
CEHL by the date that is six months following the Closing Date, PAPI shall pay
the balance due of the Post-Closing Cash Consideration to CEHL on such
date.
(b) The
Parties hereby acknowledge and agree that any and all Pre-Closing CAMAC Receipts
received by any of the CAMAC Parties shall cause an equal reduction of the
Post-Closing Cash Consideration due and payable by Newco to CEHL post-Closing
from Initial Post-Closing Newco Receipts.
Section
4.
Royalty Oil and Tax
Oil
. The Parties hereby acknowledge and agree that Royalty Oil
and Tax Oil (each as defined in the PSC) shall, at all times be allocated to
Allied in accordance with the terms and conditions of Sections 8.1(a), 8.1(c)
and 8.3 of the PSC, which shall remain unaffected by the Purchase Agreement,
including this Amendment, and Allied Energy shall retain its rights and
obligations under such Sections.
Section
5.
Cost Oil for Allied
Services
. The Parties hereby acknowledge and agree that Cost
Oil that is allocated to Allied as payment for the Allied Invoices shall, at all
times, be allocated and distributed to Allied, and the PAPI Parties shall have
no right with respect to, or interest in (pecuniary or otherwise), such Cost
Oil.
Section
6.
Closing
Date
. The Parties hereby acknowledge and agree that the
Closing shall occur on or before April 7, 2010, subject to satisfaction of the
conditions to Closing under the Purchase Agreement, and that the references to
“March 31, 2010” in each of Section 6.7(c), Section 7.8(c), and Section 11.1(b)
of the Purchase Agreement shall be replaced with “April 7, 2010.”
Section 7
TSA
Accruals
. The Parties hereby acknowledge and agree that the TSA
Accruals shall be paid by Newco to Allied from Initial Post-Closing Newco
Receipts
following
payment in full of the Post-Closing Cash Consideration due and payable
therefrom, provided that if TSA Accruals paid by Newco to Allied from Initial
Post-Closing Newco Receipts, if any, do not equal the full TSA Accruals due and
payable to Allied by the date that is six months following the Closing Date,
Newco shall pay the balance due of the TSA Accruals to Allied on such
date.
Section
8.
Entire Agreement; Continued
Validity
. Except as expressly set forth in this Amendment, all
other provisions of the Purchase Agreement shall remain in full force and
effect.
[Signature
Pages Follow]
IN
WITNESS WHEREOF, the Parties hereto have caused this Amendment to be duly
executed by their respective authorized signatories as of the date first
indicated above.
PACIFIC
ASIA PETROLEUM, INC.
By:
/c/ Frank C.
Ingriselli
Frank C.
Ingriselli
President
and Chief Executive Officer
CAMAC
PETROLEUM LIMITED
By:
/c/ Frank C.
Ingriselli
Frank C.
Ingriselli
Authorized
Signatory
CAMAC
ENERGY HOLDINGS LIMITED
By:
/c/ Kamoru
Lawal
Name: Kamoru
Lawal
Title: Director
CAMAC
INTERNATIONAL (NIGERIA) LIMITED
By:
/c/ Mickey
Lawal
Name:
Mickey Lawal
Title: Director
ALLIED
ENERGY PLC
By:
/c/ Mickey
Lawal
Name: Mickey
Lawal
Title: Director
ANNEX
C
REPORT
OF SOMERLEY LIMITED
| STRICTLY PRIVATE AND CONFIDENTIAL |
| VALUATION REPORT |
|
|
THE
OIL MINING LEASE
120,
OFFSHORE NIGERIA
|
|
| 17 JUL 2009 |
STRICTLY
CONFIDENTIAL
DISCLAIMER
This
valuation report (“Report”) is prepared by Somerley Limited (“Somerley”) for
Pacific Asia Petroleum Inc. (“PAPI”) with the understanding that it is solely
for the internal purposes of PAPI in relation to its potential acquisition of a
57.5% participating interest in the Oil Mining Lease 120 (the “OML 120”) from
Allied Energy Plc (“Allied”), formerly known as Allied Energy Resources Nigeria
Limited. Allied is wholly owned by CAMAC International Limited
(“CAMAC”).
Save
as disclosed in this Report, Somerley has relied on information that is publicly
available and/or information provided by PAPI and CAMAC in preparing this
Report. This information has not been independently verified by Somerley. In
addition, Somerley is not, and does not hold itself to be, adviser as to
accounting, taxation, legal or regulatory matters in any jurisdiction; PAPI
shall be responsible for obtaining all such advice as it thinks appropriate or
necessary on such matters. Somerley and its affiliates, directors, officers,
employees, agents and consultants make no representation or warranty (whether
express or implied) as to the accuracy or completeness of the contents of this
Report, and take no responsibility for any loss or damage suffered as a result
of any omission, inadequacy, or inaccuracy therein. The reproduction or
distribution of the contents herein in whole or in part is prohibited without
the prior approval of Somerley in writing.
PAPI
and each recipient should conduct their own independent investigation and
assessment of the contents of this Report and make such additional enquiries, as
they deem necessary or appropriate.
Statements
or assumptions in this Report as to future matters are subject to uncertainty
and may prove to be incorrect. Somerley and its directors and employees make no
representation or warranty as to the accuracy of such statements or assumptions.
Recipients acknowledge that circumstances may change and the contents of this
Report may become outdated as a result. This Report is not to be construed as an
offer or a solicitation of an offer to buy or sell any securities.
STRICTLY
CONFIDENTIAL
STRICTLY
CONFIDENTIAL
|
TABLE OF
CONTENTS
|
|||
|
1
|
INTRODUCTION
|
B-6
|
|
|
2
|
ASSET
OVERVIEW
|
B-7
|
|
|
2.1
|
B
ACKGROUND
|
B-7
|
|
|
2.2
|
P
ROJECT
S
TATUS
|
B-7
|
|
|
2.3
|
K
EY
T
ERMS OF THE
PSC
|
B-9
|
|
|
2.4
|
NSAI
R
EPORT
|
B-10
|
|
|
3
|
DISCOUNTED
CASH FLOW
|
B-12
|
|
|
3.1
|
A
SSUMPTIONS
|
B-12
|
|
|
3.2
|
B
ASE
C
ASE
P
ROJECTIONS
|
B-14
|
|
|
3.3
|
B
ASE
C
ASE
DCF V
ALUATION
|
B-14
|
|
|
3.4
|
S
ENSITIVITY
A
NALYSIS
|
B-15
|
|
|
4
|
TRADING COMPARABLES
|
B-16
|
|
|
5
|
TRANSACTION
COMPARABLES
|
B-17
|
|
|
6
|
CONCLUSION
|
B-18
|
|
|
APPENDIX I: BRENT OIL
PRICE FORECAST
|
B-18
|
||
STRICTLY
CONFIDENTIAL
TABLE OF
TABLES
| TABLE 1: |
SUMMARY OF NSAI’S ESTIMATED GROSS OIL RESERVES AND PRODUCTION SCHEDULE OF
THE OML 120 (PROJECT LEVEL)
|
B-11
|
| TABLE 2: |
CAPEX AND OPEX ASSUMPTIONS
IN THE NSAI REPORT
|
B-11
|
| TABLE 3: |
NET OIL RESERVES TO
ALLIED PROJECTED BY NSAI
|
B-11
|
| TABLE 4: |
MAJOR ASSUMPTIONS IN OUR
DCF MODEL
|
B-12
|
| TABLE 5: |
UPDATED CAPEX AND
OPEX ASSUMPTIONS PROJECTED BY NAE
|
B-13
|
| TABLE 6: |
PROJECTED NET OIL
RESERVES TO
ALLIED (BASE CASE)
|
B-13
|
| TABLE 7: |
CASH FLOWS OF THE OML 120
FOR THE PERIOD 2009 TO 2018 (PROJECT LEVEL)
|
B-15
|
| TABLE 8: |
CASH FLOWS TO ALLIED FOR
THE PERIOD 2009 TO 2018
|
B-15
|
| TABLE 9: |
TRADING COMPARABLES
|
B-16
|
| TABLE 10: |
RECENT SELECTED
PRECEDENT TRANSACTIONS
|
B-17
|
| TABLE 11: |
ENTERPRISE VALUE OF ALLIED’S
57.5% PARTICIPATING INTEREST IN THE OML 120
|
B-18
|
TABLE OF
FIGURES
| F IGURE 1: | T HE CURRENT PARTICIPATING INTEREST IN THE OML 120 | B-7 |
| F IGURE 2: | L OCATION OF THE OML 120 | B-8 |
| F IGURE 3: | O IL PROCEEDS ALLOCATION FLOWCHART | B-10 |
| F IGURE 4: | NSAI’ S ESTIMATED GROSS 2P PRODUCTION AND PROJECTED NET OIL TO A LLIED (B ASE C ASE ) | B-14 |
STRICTLY
CONFIDENTIAL
1 INTRODUCTION
Somerley
is engaged by PAPI to conduct an independent valuation of Allied’s 57.5%
participating interest in the Oil Mining Lease 120 (the “OML 120”). Based on the
OML 120 that was granted by the Nigerian Ministry of Petroleum Resources in
2001, Allied, CAMAC International ("Nigeria") Limited ("CAMAC Nigeria") and
Nigerian Agip Exploration Limited (“NAE”) are entitled to the exclusive right to
conduct petroleum operations in the Oyo oilfield that is located in the Gulf of
Guinea, offshore Nigeria (the "Oyo Field").
Somerley
understands this Report will be used by PAPI exclusively for its internal
process. In preparing this Report, we have primarily relied upon the integrity
of the information supplied by PAPI and CAMAC without verification by us as to
its validity or accuracy. We have not conducted any site visit, nor interviewed
with the management of CAMAC and Allied. In addition, we have not discussed with
Netherland, Sewell & Associates, Inc. (“NSAI”) in relation to its reserve
report of the OML 120 dated May 20, 2008 (“NSAI Report”).
In preparing
this Report, the following valuation methodologies are
employed:-
|
●
|
Discounted cash
flow;
|
|
●
|
Trading comparables;
and
|
|
●
|
Transaction comparables.
|
STRICTLY
CONFIDENTIAL
2 ASSET OVERVIEW
2.1 Background
Headquartered
in Houston since 1986, CAMAC is a global energy services corporation. Its wholly
owned subsidiary, Allied Energy Plc, is a company focuses on the upstream oil
and gas exploration and production activities in Nigeria.
Allied
was awarded a deep offshore Oil Prospecting Licence 210 (the “OPL 210”) on June
3, 1992 by the Ministry of Petroleum Resources of Nigeria and assigned on
September 30, 1992 an undivided 2.5% participating interest in the OPL 210 to
CAMAC International (Nigeria) Limited, a subsidiary of CAMAC.
After
commercial quantities of oil were identified in the OPL 210, Allied had
successfully converted the OPL 210 into two Oil Mining Leases (“OML”), i.e. the
OML 120 and the OML 121 for a term of 20 years, commencing from February 27,
2001.
On
July 22, 2005, a Production Sharing Contract (“PSC”) was signed among Allied,
CAMAC Nigeria and Nigerian Agip Exploration Limited, a subsidiary of Eni S.p.A..
Pursuant to the PSC, NAE assumed the rights and obligations as the Operating
Contractor to the petroleum operations in the Oyo Field and was assigned an
undivided 40% participating interest in the OML 120.
Figure
1: The current participating interest in the
OML 120
Source: PSC dated July 27, 2005 and Information
provided by CAMAC.
2.2 Project Status
The lease area of
the OML 120 is located in the Gulf of Guinea, 60km offshore Nigeria with water
depth ranging from 100 m to 800 m, covering an area of approximately 910
km
2
. The Oyo Field
within the OML 120 has an average water depth of approximately 300 m. Four
exploratory wells were drilled and all encountered oil and/or
gas.
Based
on the NSAI Report to Allied Energy Corporation, the Oyo Field within the OML
120 was estimated to have gross proved and probable reserves (“2P Reserves”) of
50.2 mmbbls based on 100% interest of the OML 120.
STRICTLY
CONFIDENTIAL
Based
on the production forecast of NSAI, the current development plan of the Oyo
Field is for 10 years and consists of four wells: two producer wells, one gas
injection well and one water injection well to maintain pressure. A Floating
Production Storage and Offloading vessel (“FPSO”) constructed by Bumi Armada
Berhad will be used at the field.
The
original working schedule provided by CAMAC
is summarised below:
|
●
|
Oil
drilling rig commenced operation: Jan 27,
2009
|
|
●
|
Subsea installation
vessel mobilisation: July
10, 2009
|
|
●
|
FPSO
sail-away: Sept 11, 2009
|
|
●
|
First oil: Jan
24, 2010
|
However, based on
our understanding, the actual work program has been two to three months ahead of
the above schedule. CAMAC targets to deploy the FPSO by mid of July
2009
1
. The production
of the Oyo Filed is now scheduled to be commenced on November 1,
2009.
Figure
2: Location of the OML 120
Some
of the nearby oilfields to the Oyo Field
include (as shown in
the above map):
|
●
|
OPL
316 (“Abo Oilfield”, Allied has 15% interest) and OPL 211 operated by Eni
S.p.A.;
|
|
●
|
OPL
118 (“Bonga Oilfield”) operated by
Shell; and
|
|
●
|
OPL
209 (“Erha Oilfield”) operated
by Exxon.
|
_____________________________
1
Source: Business Day –
The Voice of Business on July 14, 2009.
STRICTLY
CONFIDENTIAL
2.3 Key
Terms of the PSC
|
Date
of signing:
|
July 22, 2005
|
|
Signing
Parties:
|
Allied, NAE
and CAMAC Nigeria
|
|
Lease Term:
|
Twenty years, commencing on February 27, 2001 (starting from the
date the OML 120 was granted).
|
|
Operating Contractor:
|
NAE, who is responsible for daily
operation
|
|
Contractors:
|
Allied and NAE
|
|
(Note: CAMAC Nigeria is not a “Contractor” as per the PSC. Based on
the PSC, the Contractors are obligated to invest Capex and Opex
during both exploration and production
periods.)
|
|
|
First Party:
|
Parties that are entitled to the allocation of Profit Oil based on
participating interest in the PSC,
i.e. CAMAC Nigeria, Allied and
NAE.
|
|
According to Article 8.1(e) of the PSC,
“NAE waives its right to receive
Profit Oil as First Party. However, if Allied sells, assigns or otherwise
transfers all or part of its legal or beneficial interests and/or obligations
to any third party or if Allied disposes of control of Allied to any third
party, the waiver shall not inure or be extended to such third party and
NAE shall be entitled to its
40% share of the Profit Oil as First
Party.”
|
|
|
Currently, the allocation of Profit Oil to the First Party is Allied 97.5%
and CAMAC Nigeria 2.5%. According to PAPI, Allied will seek a waiver
from NAE in order to maintain the current profit sharing allocation
percentage should PAPI takeover Allied’s participating interest in the
OML 120. Our valuation analysis is based on the assumption that
this waiver will be obtained and thus the profit sharing ratio remains
unchanged.
|
|
|
|
|
|
Oil
Allocation:
|
Proceeds from available crude oil should be first used to pay royalty
(“Royalty Oil”), recover Opex and Capex (“Cost Oil”) and pay tax
(“Tax Oil”). The rest of the proceeds will be distributed as profit oil
(“Profit Oil”) to Contractors and First Party (refer
to Figure 3).
|
|
|
|
|
Cost Recovery:
|
Each party can share Cost Oil based on the share of Opex and Capex
actually incurred by such party in proportion to the sum of Opex and
Capex.
|
|
|
|
|
Allied may elect to contribute up to 30% of the Opex.
NAE has also agreed to pay, on
behalf of Allied, 30% of the
Opex up to the amount of
US$10 million as a “free-carry”
to Allied. Cost
Oil cannot exceed 80% of the available oil proceeds net of
Royalty Oil.
|
STRICTLY
CONFIDENTIAL
The allocation of oil proceeds from the OML 120 is
governed by the PSC as demonstrated in the flowchart below
.
Figure 3: Oil proceeds allocation
flowchart
*Petroleum
profit tax of 50% plus education tax of 2%, chargeable on the total remainder
oil after deduction of amortization and investment allowance.
** Y-Factor:
NAE and Allied will share the Profit
Oil to Contractor based on their contribution
on Capex and Opex.
Source: The PSC
dated July 22, 2005
2.4 NSAI
Report
This
section summarises the reserves and cost estimates of the OML 120 prepared by
NSAI in May 2008.
STRICTLY
CONFIDENTIAL
Table
1: Summary of NSAI’s estimated gross oil reserves and production schedule of the
OML 120 (Project Level)
|
(mmbbl)
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
Total
|
|
Proved reserves
(“1P
Reserves”)
|
2.44
|
7.2
|
5.87
|
4.24
|
3.04
|
2.49
|
0.28
|
-
|
-
|
-
|
-
|
25.56
|
|
|
||||||||||||
|
Proved and
probable reserves
(“2P
Reserves”)
|
3.17
|
10.81
|
8.37
|
6.95
|
5.87
|
4.96
|
4.19
|
3.01
|
2.10
|
0.77
|
-
|
50.20
|
|
|
||||||||||||
|
Proved,
probable
and possible
reserves (“3P
Reserves”)
|
4.67
|
18.42
|
25.82
|
24.91
|
19.56
|
15.19
|
11.31
|
9.11
|
6.81
|
3.64
|
1.14
|
140.58
|
Source: the
NSAI Report dated May 20, 2008.
In
the NSAI Report, it estimates that the 1P Reserves and the 2P Reserves net to
Allied are 9.37 mmbbls and 19.81 mmbbls respectively based on the following cost
assumptions:
Table
2: Capex and Opex assumptions in the NSAI
Report
|
(US$
m)
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
Total
|
|
1P
Reserves
|
||||||||||||
|
Capex
|
43.24
|
87.30
|
-
|
-
|
-
|
-
|
-
|
8.73
|
-
|
-
|
-
|
139.27
|
|
Opex
|
2.20
|
13.45
|
19.34
|
19.14
|
18.89
|
18.69
|
18.61
|
4.95
|
-
|
-
|
-
|
115.27
|
|
2P
Reserves
|
||||||||||||
|
Capex
|
49.15
|
100.20
|
6.00
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
10.47
|
165.82
|
|
Opex
|
2.43
|
14.08
|
20.15
|
19.53
|
19.31
|
19.14
|
18.99
|
18.87
|
18.15
|
18.01
|
9.07
|
177.73
|
Source: the
NSAI Report dated May 20, 2008.
The Table below
summarizes NSAI’s projected net oil reserves to
Allied.
Table
3: Net oil reserves to Allied projected
by NSAI
|
(mmbbl)
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
Total
|
|
1P
Reserves
|
0.73
|
2.26
|
2.29
|
1.77
|
1.23
|
0.99
|
0.09
|
-
|
-
|
-
|
9.37
|
|
2P
Reserves
|
0.95
|
3.59
|
3.62
|
2.98
|
2.50
|
2.09
|
1.75
|
1.22
|
0.82
|
0.28
|
19.81
|
Source: the
NSAI Report dated May 20, 2008.
STRICTLY
CONFIDENTIAL
3
DISCOUNTED
CASH FLOW
3.1 Assumptions
We
have prepared 10-year financial projections in our discounted cash flow (“DCF”)
model based on the following assumptions.
Table
4: Major assumptions in our
DCF model
|
Parameter
|
Assumption
|
|||
|
Oil price
|
In terms of
oil price assumption from 2010 to 2012, we use the
mean of selected
market analysts’ forecast as per Appendix I.
Our oil price assumptions are
summarized below:
|
|||
|
|
||||
|
•
2009:
US$60/bbl (referencing Brent oil spot price as
of July 9, 2009)
|
||||
|
•
|
2010:
US$70/bbl
|
|||
|
•
|
2011:
US$80/bbl
|
|||
|
•
|
2012:
US$85/bbl
|
|||
|
After
2012, we assume oil price will be flat at
US$85/bbl.
|
||||
| Capex | Past cost of US$77 m | |||
|
Tangible
capital cost of US$315 m
from Jul 2005 to 2008.
|
||||
|
Tangible
capital cost of US$406 m in 2009.
|
||||
| Opex | Opex is composed of leasing expense on FPSO and NAE allocated cost. | |||
|
Amortization
|
Capex is amortized based on straight-line method over five years for tax purpose. | |||
|
|
||||
|
Fiscal Terms
(Note
1)
|
Royalty
|
12%
|
||
|
Petroleum profit
tax
|
50%
|
|||
|
Education
tax
|
2%
|
|||
|
Investment
tax allowance
|
50%
|
|||
|
Maximum capital allowance
|
85%
|
|||
|
Discount
Rate
|
Base
Case
|
12%
|
||
|
Assumed
transaction
|
Assumed PAPI’s
completion date of acquisition from Allied
|
30-Sept-09
|
||
|
completion date
|
||||
Note
1: Information provided by PAPI and
CAMAC, and the PSC dated
July 22, 2005
Discount
rate assumption
In
determining the discount rate, we refer to Dutton Associates’ research report on
PAPI issued in February 2009, in which a 10% discount rate is applied in
evaluating PAPI’s projects. For conservative purposes, we have included an extra
2% in our Base Case discount rate to reflect Nigeria’s country risk. Therefore,
we adopt a discount rate of 12% in our Base Case.
Capex and Opex
assumptions
Capital
expenditure (“Capex”) and operating expenditure (“Opex”) estimations have been
updated after the release of the NSAI Report. Based on the information provided
by CAMAC,
below
are the most updated Capex and Opex forecast estimated by NAE, the Operating
Contractor of the OML 120.
STRICTLY
CONFIDENTIAL
Table
5: Updated Capex and Opex assumptions projected by NAE
|
(US$
m)
|
Past
|
Pre-first
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
Total
|
|
cost
|
oil
|
||||||||||||
|
1P
Reserves
|
|||||||||||||
|
Capex
|
77.00
|
315.08
|
406.28
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
798.36
|
|
Opex
|
-
|
-
|
56.70
|
89.84
|
90.57
|
91.32
|
92.09
|
92.88
|
12.00
|
-
|
-
|
-
|
525.38
|
|
2P
Reserves
|
|||||||||||||
|
Capex
|
77.00
|
315.08
|
406.28
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
798.36
|
|
Opex
|
-
|
-
|
56.70
|
89.84
|
90.57
|
91.32
|
92.09
|
92.88
|
93.67
|
75.88
|
76.51
|
43.50
|
802.94
|
Opex
mainly consists of FPSO’s leasing fees and NAE’s allocated cost. We assume that
the Operating Contractor, NAE, contributes all the Opex in the DCF model, though
Allied may elect to contribute up to 30% of Opex according to the
PSC.
Capex
includes past cost and tangible capital cost. For the past cost of US$77
million, US$27 million was incurred by Allied and the rest was contributed by
NAE. The tangible capital cost mainly consists of cost of exploration surveys,
drilling cost of exploration and production wells, and construction cost. NAE is
responsible for all of the tangible capital cost and Allied enjoys a
‘free-carry’ of US$10 million from NAE.
As
noted above, the costs estimated by NAE are significantly higher than the base
figures used in the NSAI Report (refer to Table 2).
Production
schedule and reserves assumptions
Based
on the information provided by CAMAC, the current scope of work program prepared
by NAE is in line with what has been previous assumed in the NSAI Report. The
core work program consists of two producer wells, one gas injection well and one
water injection well. Therefore, the estimated gross reserves by NSAI (as show
in Section 2.4, Table 1) are still applicable. In our DCF analysis, we forecast
the net oil to Allied based on the NSAI’s gross production
schedule.
Based
on the assumptions as set out in Table 4, we have computed the net oil to
Allied, CAMAC Nigeria and NAE as follows in accordance with the oil allocation
mechanism in the PSC.
Table
6: Projected net oil
reserves to Allied (Base Case)
|
(mmbbl)
|
Allied
2
|
CAMAC Nigeria
|
NAE
|
Royalty
Oil
|
Total
|
|
1P Reserves
|
2.16
|
0.04
|
20.29
|
3.07
|
25.56
|
|
2P Reserves
|
7.61
|
0.18
|
36.38
|
6.03
|
50.20
|
|
Source: Somerley
|
2
Consistent with
the approach used in the NSAI Report, Allied’s 1P Reserves and 2P Reserves are
the
share of reserves
attributable to Allied, comprised of Cost Oil and Profit Oil, after Royalty Oil.
1P Reserves and 2P Reserves have not been reduced for the effect of the tax,
namely, profit tax and education tax.
STRICTLY
CONFIDENTIAL
3.2 Base Case Projections
The
following figures depict the NSAI’s estimated gross 2P production profile,
annual oil production, net oil to Allied and cash flows to Allied under Base
Case.
Figure
4: NSAI’s estimated gross 2P production and
projected net oil to Allied (Base Case)
Figure
5: Cash flows to Allied under Base Case
3.3 Base Case DCF
Valuation
The
tables below summarize the cash flows of the OML 120 (Project Level) from 2009
to 2018 and cash flows to Allied after commencement of operation under the Base
Case.
STRICTLY
CONFIDENTIAL
Table
7: Cash flows of the OML 120 for the period
2009 to 2018 (Project Level)
|
Pre-first
|
|||||||||||||||||||||||||||||||||
|
(US$ m)
|
oil
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
||||||||||||||||||||||
|
Gross Oil
production (mmbbl)
|
3.2 | 10.8 | 8.4 | 7.0 | 5.9 | 5.0 | 4.2 | 3.0 | 2.1 | 0.8 | |||||||||||||||||||||||
|
Oil
price (US$/bbl)
|
60.0 | 70.0 | 80.0 | 85.0 | 85.0 | 85.0 | 85.0 | 85.0 | 85.0 | 85.0 | |||||||||||||||||||||||
|
Total
oil proceeds
|
190.3 | 756.4 | 669.6 | 590.8 | 498.8 | 421.5 | 356.4 | 255.8 | 178.7 | 65.3 | |||||||||||||||||||||||
|
Less:
|
|||||||||||||||||||||||||||||||||
|
Royalty
|
(22.8 | ) | (90.8 | ) | (80.4 | ) | (70.9 | ) | (59.9 | ) | (50.6 | ) | (42.8 | ) | (30.7 | ) | (21.4 | ) | (7.8 | ) | |||||||||||||
|
Capex
|
(392.1 | ) | (406.3 | ) | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||
|
Opex
|
(56.7 | ) | (89.8 | ) | (90.6 | ) | (91.3 | ) | (92.1 | ) | (92.9 | ) | (93.7 | ) | (75.9 | ) | (76.5 | ) | (43.5 | ) | |||||||||||||
|
Tax
|
(8.6 | ) | (44.9 | ) | (106.1 | ) | (139.9 | ) | (97.3 | ) | (144.6 | ) | (114.4 | ) | (77.6 | ) | (42.0 | ) | (7.2 | ) | |||||||||||||
| Total | (392.1 | ) | (494.5 | ) | (225.5 | ) | (277.0 | ) | (302.1 | ) | (249.3 | ) | ( 288.0 | ) | (250.8 | ) | (184.2 | ) | (139.9 | ) | (58.6 | ) | |||||||||||
|
Net
cash available
|
(392.1 | ) | (304.1 | ) | 530.8 | 392.6 | 288.8 | 249.5 | 133.4 | 105.6 | 71.6 | 38.7 | 6.7 |
Table
8: Cash flows to Allied for the period 2009
to 2018
|
(US$
m)
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
Total
|
|||||||||||
|
Cost
Oil
|
12.6
|
11.2
|
6.9
|
4.9
|
1.3
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
|
Profit
Oil - Contractor
|
0.2
|
2.3
|
1.7
|
0.9
|
0.6
|
0.8
|
0.6
|
0.4
|
0.2
|
0.0
|
||||||||||||
|
Profit
Oil - First Party
|
7.3
|
84.5
|
68.1
|
37.8
|
26.3
|
39.0
|
30.9
|
21.0
|
11.3
|
2.0
|
||||||||||||
|
Net
cash available to Allied
|
20.1
|
98.0
|
76.7
|
43.6
|
28.2
|
39.8
|
31.4
|
21.3
|
11.5
|
2.0
|
||||||||||||
|
Add
back: Tax Oil allocated to Allied
|
2.6
|
13.4
|
31.7
|
41.8
|
29.1
|
43.3
|
34.2
|
23.2
|
12.6
|
2.2
|
||||||||||||
|
Total
oil proceeds allocated to Allied
|
22.7
|
111.4
|
108.4
|
85.4
|
57.3
|
83.0
|
65.7
|
44.5
|
24.1
|
4.2
|
||||||||||||
|
Divided
by: Oil price (US$/bbl)
|
60.0
|
70.0
|
80.0
|
85.0
|
85.0
|
85.0
|
85.0
|
85.0
|
85.0
|
85.0
|
||||||||||||
|
Net
oil to Allied (mmbbl)
|
0.38
|
1.59
|
1.36
|
1.00
|
0.67
|
0.98
|
0.77
|
0.52
|
0.28
|
0.05
|
7.61
|
Based
on the above assumptions in our DCF model, Allied’s 57.5% participating interest
in the OML 120 is valued at around US$251 million to US$278 million as of
September 30, 2009.
|
(US$
m)
|
Base Case
|
|||||
|
Discount
rate
|
10%
|
12%
|
14%
|
|||
|
Implied valuation
|
277.5
|
263.6
|
251.0
|
|||
3.4 Sensitivity Analysis
We
have conducted the following sensitivity analyses in our DCF model based on
discount rate of 12%.
|
Implied Valuation
|
||||
|
(US$
m)
|
||||
|
Base
Case
|
263.6
|
|||
|
1
|
Oil price
/ production increases by 10%
|
298.7
|
||
|
2
|
Oil price
/ production
decreases by 10%
|
228.8
|
||
4 TRADING
COMPARABLES
We
have selected six companies which we believe are comparable listed companies
based on their business nature and geographic focus. They are among the major
oil field operators in Africa.
|
Comparable
|
Listing
Location
|
Operating
Countries
|
||
|
Tullow
Oil plc
|
London Stock Exchange
|
Ghana,
Uganda, Equatorial Guinea, Gabon,
|
||
|
Democratic
Republic of Congo, Cote d’lvoire
|
||||
|
Mauritania, Bangladesh, UK, etc.
|
||||
|
Addax Petroleum Corp
|
Toronto Stock Exchange
|
Nigeria, Cameroon,
Gabon, Iraq, etc.
|
||
|
Heritage
Oil Limited
|
London Stock Exchange
|
Iraq,
Mali, Tanzania, Uganda, Pakistan,
|
||
|
Russia,
Malta, etc.
|
||||
|
Maurel
et Prom
|
Paris Stock
Exchange
|
Gabon,
Congo, Tanzania, Colombia, etc.
|
||
|
Afren
plc
|
London Stock Exchange
|
Nigeria,
Gabon, Congo, Ghan, Cote d’lvoire
|
||
|
Vaalco
Energy, Inc.
|
New York Stock
Exchange
|
Gabon,
Angola, Texas, Gulf Coast
|
Table
9: Trading comparables
|
Mkt
Cap @ 30- EV @ 30-day
|
Total
Cash
|
Total
Debt
|
2 | P |
EV/2P
|
||||||||||||||||||||
|
Company
Name
|
day
VWAP
|
VWAP
|
(2008) | (2008 | ) |
Reserves
|
Reserves
|
Note
|
|||||||||||||||||
|
(US$
m)
|
(US$ m)
|
(US$
m)
|
(US$ m)
|
(mmboe)
|
(US$/boe)
|
||||||||||||||||||||
|
Tullow
Oil plc
|
12,324 | 12,953 | 505 | 1,134 | 314 | 41.25 |
<1>
|
||||||||||||||||||
|
Addax
Petroleum Corp
|
6,236 | 7,615 | 76 | 1,455 | 537 | 14.19 |
<2>
|
||||||||||||||||||
|
Heritage
Oil Limited
|
2,540 | 2,605 | 91 | 156 | 305 | 8.54 |
<3>
|
||||||||||||||||||
|
Maurel
et Prom
|
2,091 | 2,376 | 269 | 553 | 119 | 19.96 |
<4>
|
||||||||||||||||||
|
Afren
plc
|
593 | 881 | 118 | 405 | 80 | 11.02 |
<5>
|
||||||||||||||||||
|
Vaalco
Energy, Inc.
|
246 | 126 | 125 | 5 | 7 | 17.88 |
<5>
|
||||||||||||||||||
|
Mean
|
18.81 | ||||||||||||||||||||||||
|
Median
|
16.03 | ||||||||||||||||||||||||
|
High
|
41.25 | ||||||||||||||||||||||||
|
Low
|
8.54 | ||||||||||||||||||||||||
|
(1)
|
Reserves source: Tullow's presentation dated
March 11, 2009.
|
|
(2)
|
Reserves source: Addax’s 2008 annual
report.
|
|
(3)
|
Reserves source: Heritage
Oil's presentation dated June
2009.
|
|
(4)
|
Reserves source:
Maurel et Prom's 2008 annual
report.
|
|
(5)
|
Reserves
source: Crude Valuations - Low cost oil and M&A in Africa issued by
Renaissance Capital on November 17,
2008.
|
|
(6)
|
Market capitalization is based
on 30-day VWAP as
of July 7, 2009. Source: Bloomberg.
|
|
(7)
|
Exchange
rates are as
of July 7, 2009.
|
|
Valuation based on trading comparables
|
||||||
| Trading |
Allied’s 2P
Reserves
|
EV/2P Reserves
|
Implied Valuation
|
|||
|
Comparables
|
(mmbbl)
|
(US$/bbl)
|
(US$
m)
|
|||
|
Mean
|
7.61
|
16 to 19
|
121.8
to 144.6
|
|||
Based on the trading comparables approach, Allied’s
57.5% participating interest in the OML 120 is valued at a range of US$122
million to US$145 million
.
STRICTLY
CONFIDENTIAL
5 TRANSACTION
COMPARABLES
We
have also valued Allied’s 57.5% participating interest in the OML 120 based on
the following selected merger and acquisitions transactions in the oil sector
with certain transactions/assets in Africa.
Table
10: Recent selected precedent
transactions
|
2P
|
||||||||||||||
|
Announced
|
EV
|
Reserves
|
EV/2P
|
|||||||||||
|
Date
|
Buyer
|
Seller
|
Asset
Location
|
(US$
m)
|
(mmboe)
|
(US$/boe)
|
Note
|
|||||||
|
24-Jun-09
|
Sinopec
International Petroleum
|
Addax
Petroleum
|
Nigeria,
Cameroon,
|
8,523
|
537
|
15.87
|
<1>
|
|||||||
|
Exploration
and Production
|
Gabon,
Iraq
|
|||||||||||||
|
Corporation
|
||||||||||||||
|
8-Sep-08
|
Eni
SpA
|
First
Calgary Petroleums Ltd.
|
Algeria
|
863
|
190
|
4.54
|
<2>
|
|||||||
|
6-Mar-08
|
Beach
Petroleum Ltd.
|
Egypt
Kuwait Holding
|
Egypt
|
110
|
8
|
13.75
|
<3>
|
|||||||
|
8-Apr-08
|
GE
Petrol
|
Devon
Energy Corporation
|
Equatorial
Guinea
|
2,200
|
208
|
10.56
|
<3>
|
|||||||
|
30-May-08
|
Afren
plc
|
Devon
Energy Corporation
|
Cote
d'lvoire
|
164
|
28
|
5.80
|
<4>
|
|||||||
|
31-Jan-08
|
Korea
National Oil Corporation
|
Tullow
Oil plc
|
Congo
|
435
|
31
|
14.17
|
<3>
|
|||||||
|
13-Nov-07
|
Oranje-Nassau
Groep BV
|
Devon
Energy Corporation
|
Gabon
|
206
|
10
|
20.15
|
<3>
|
|||||||
|
27-Sep-07
|
Petroliam
Nasional Berhad
|
Woodside
Petroleum Ltd.
|
Mauritania
|
418
|
24
|
17.42
|
<3>
|
|||||||
|
5-Sep-07
|
TransGlobe
Energy Corporation
|
Tanganyika
Oil Company Ltd.
|
Egypt
|
59
|
6
|
9.37
|
<3>
|
|||||||
|
2-Aug-07
|
Logria
Corp; National Petroleum
|
Rally
Energy Corporation
|
Egypt
|
808
|
105
|
7.68
|
||||||||
|
Company
SAE; and Citadel Capital
|
||||||||||||||
|
Company
|
<3>
|
|||||||||||||
|
18-Apr-07
|
Dana
Petroleum plc
|
Devon
Energy Corporation
|
Egypt
|
375
|
30
|
12.50
|
<5>
|
|||||||
|
19-Mar-07
|
Burren
Energy Plc
|
Eni
SpA
|
Congo
|
154
|
14
|
10.77
|
<3>
|
|||||||
|
22-Feb-07
|
Eni
SpA
|
Etablissements
Maurel el Prom
|
Congo
|
1,434
|
126
|
11.38
|
<3>
|
|||||||
|
Mean
|
11.84
|
|||||||||||||
|
Median
|
11.38
|
|||||||||||||
|
High
|
20.15
|
|||||||||||||
|
Low
|
4.54
|
|
(1)
|
Source: Addax's
announcement on June
24, 2009.
|
|
(2)
|
Source: Eni's announcement on September 08, 2008.
|
|
(3)
|
Source:
Crude Valuations - Low Cost Oil and M&A in Africa issued by
Renaissance Capital on November 17,
2008.
|
|
(4)
|
Source: Afren's
announcement on
March 6, 2008.
|
|
(5)
|
Source: Dana Petroleum’s press
release on April
18, 2007.
|
|
Valuation based on transaction comparables
|
|||||||
| Transaction |
Allied’s 2P
Reserves
|
EV/2P Reserves
|
Implied Valuation
|
||||
|
Comparables
|
(mmbbl)
|
(US$/bbl)
|
(US$
m)
|
||||
|
Mean
|
7.61
|
12 to 15
|
91.3
to 114.1
|
||||
Based
on the above transaction comparables approach, Allied’s 57.5% participating
interest in the OML 120 is valued at a range of US$91 million to US$114
million.
6
CONCLUSION
Based
on the three valuation approaches we outlined in this Report, the implied
enterprise value of Allied’s 57.5% participating interest in the OML 120 is
summarized as follows:
Table
11: Enterprise value of Allied’s
57.5% participating interest in the
OML 120
|
Valuation Approach
|
Valuation Range
|
||
|
(US$ m)
|
|||
|
DCF
|
251
to 278
|
||
|
Trading Comparables
|
122
to 145
|
||
|
Transaction
Comparables
|
91 to 114
|
||
Prior
to drawing our conclusion on the valuation on the OML 120, we would like to
highlight our concern in relation to the risk inherent with oil development in
Nigeria.
In
June 2008, Shell’s Bonga Oilfield, which is quite near to the OML 120 (please
refer to Section 2.2, Figure 2), was attacked by Nigerian militants, causing
Shell to shut down the operation of the field. In June 2009, another Nigerian
offshore oilfield of Shell, the Ofirma Field, and a flow station of Chevron were
attacked by Nigerian Militants. Subsequently, Shell was forced to shut down some
of its oil production in the region.
We
will not be able to reflect such development risk in our valuation analysis.
However, we would like to draw your attention to this kind of development risk
and PAPI should seek to understand the legal implications of such potential
force majeure events.
Based
on the analysis outlined in this Report, it is our opinion that the enterprise
value of Allied’s 57.5% participating interest in the OML 120 is in the range of
US$114 million to US$251 million, representing an EV/2P Reserves of US$15/bbl to
US$33/bbl.
|
STRICTLY
CONFIDENTIAL
|
|||||||||||
|
APPENDIX
I: BRENT OIL PRICE FORECAST
|
|||||||||||
|
Brokers'
forecast on Brent oil price
|
Date of
report
|
2010
|
2011
|
2012
|
2013
|
||||||
|
ING
Wholesale Banking
|
05-May-09
|
60.00
|
65.00
|
70.00
|
75.00
|
||||||
|
National Australia
Bank Ltd
|
05-May-09
|
59.19
|
-
|
-
|
-
|
||||||
|
Fortis
Bank
|
19-May-09
|
78.00
|
-
|
-
|
-
|
||||||
|
JPMorgan
Chase & Co
|
20-May-09
|
65.50
|
-
|
-
|
-
|
||||||
|
Nomura
International Hong Kong Ltd
|
08-Jun-09
|
60.00
|
-
|
-
|
105.00
|
||||||
|
Commerzbank
AG
|
08-Jun-09
|
74.00
|
-
|
-
|
|||||||
|
UniCredit Markets
& Investment Banking
|
08-Jun-09
|
75.00
|
-
|
-
|
90.00
|
||||||
|
Landesbank Baden-Wuerttemberg
|
09-Jun-09
|
69.00
|
-
|
-
|
-
|
||||||
|
BNP Paribas
|
11-Jun-09
|
75.00
|
-
|
-
|
-
|
||||||
|
Standard Chartered Bank
|
24-Jun-09
|
77.00
|
-
|
-
|
-
|
||||||
|
Societe
Generale
|
29-Jun-09
|
81.75
|
100.30
|
102.50
|
-
|
||||||
|
Barclays
PLC
|
02-Jul-09
|
84.00
|
85.00
|
92.00
|
-
|
||||||
|
Deutsche
Bank AG
|
06-Jul-09
|
55.00
|
80.00
|
85.00
|
-
|
||||||
|
National Australia
Bank Ltd
|
07-Jul-09
|
67.75
|
-
|
-
|
-
|
||||||
|
Mean
|
70.09
|
82.58
|
87.38
|
90.00
|
|||||||
|
Median
|
71.50
|
82.50
|
88.50
|
90.00
|
|||||||
|
Maximum
|
84.00
|
100.30
|
102.50
|
105.00
|
|||||||
|
Minimum
|
55.00
|
65.00
|
70.00
|
75.00
|
|||||||
|
Source: Bloomberg, July 7, 2009
|
|||||||||||
ANNEX
D
UPDATE OF SOMERLEY REPORT
AND UPDATED PRO FORMA CASH FLOW PROJECTIONS
MARCH 1,
2010
Pacific
Asia Petroleum, Inc (the “Company”) has updated the Somerley Valuation report
dated July 17, 2009 in order to reflect some corrected information and also
reflect updated oil price assumptions, actual current production, possible
additional drilling and current market data. We have updated the values for
Company assuming oil prices based on using the latest projections made by the US
Energy Information Administration (“EIA”) in their report dated February 2010
and by Goldman Sachs in their report dated December 2009. The Company has also
updated the values for the companies used in the Company Comparables section for
valuation, including the addition of several other companies that the Company
believes reflect similar operations. The results are noted below.
Discounted
Cash Flow (DCF) Analysis
When
conducting an updated Cash Flow Analysis of Camac & Allied’s (the “Camac
Group”) interest in the Oyo field which the Company is acquiring, we used
updated pricing based on the recent reports from EIA and Goldman Sachs
referenced above. Also, we assumed that only two producing wells would be in
production in 2010 (which 2 wells have produced in the range between 12,000 and
20,000 barrels of oil per day (“BOPD”); and only added one additional production
well that would begin production in 2011. With that additional third production
well, the Company assumed that the total gross production from the 3 wells would
be approximately 24,000 BOPD in 2011. Likewise, it was assumed that a total of
approximately 50 million barrels of oil would be produced over the next 10 years
with the addition of a 4
th
well. There is no assurance that this amount of oil will be produced or that any
additional wells (including the 3
rd
production well) will be drilled, but it is the Company’s belief that such wells
are economically justified. We have also looked at a range of values that would
assume that 20% less gross barrels of oil are produced. Based on these new
assumptions, cash flow analysis shows that discounting cash flows at 10% yields
an NPV of between $326 million and $250 million.
Downside
Cases
We
have added several downside cases where we have made the following additional
assumptions:
|
●
|
Increased
Tax Rate: The tax rate increases from approximately 50% and escalates up
to 85% (some advisors have indicated that the Company may face a higher
tax rate). We have also included a drop in overall gross oil produced by
20%.
|
|
o
|
Under
this downside case, cash flow analysis shows that discounting cash flows
at 10% yields an NPV of $228
million.
|
|
●
|
No
additional production wells are drilled and the current 2 production wells
decline through the end of the production period. We have also included a
drop in overall gross oil produced by
20%.
|
|
o
|
Under
this downside case, cash flow analysis shows that discounting cash flows
at 10% yields an NPV of $244
million.
|
Company
Comparables
We
have expanded the list of comparable oil and gas companies used by Somerley to
include companies based in the United States that the Company believes are good
comparables.
Descriptions
Trading
Comparables
Updating
and expanding the trading comparables used by Somerley, the Camac Group’s
interest in the OML 120 is valued at a range of $193 MM to $217 MM USD when
evaluated off of the EV/2P Reserves Median and Mean, respectively.
Projections:
The
following is a summary of the latest pro-forma consolidated projections for
Pacific Asia Petroleum, Inc. over the next 5 years that consolidates the
projections for the Oyo oilfield and the Company’s Zijinshan coal bed methane
project and the Company’s Enhanced Oil Recovery Production asset. For the Oyo
projections, we use the base case discussed above with an average production
rate of 15,000 BOPD in 2010 and based on the assumption that we drill a third
well with production commencing from 3 wells in 2011 at 24,000 BOPD and that a
total of 50 million barrels of oil are produced over the next 10 years with an
additional 4
th
well drilled.
There
is no assurance that in making the below projections that a third well, or any
additional wells will be drilled in the Oyo Field; that the total oil produced
during the next 10 years from the Oyo Field will reach 50 million barrels; that
the production rates assumed in the Oyo Field will be achievable; that the EORP
business will secure the necessary contracts to carry out its business plan and
the production rates assumed will be achievable; or that the Zijinshan asset
will discover a sufficient amount of gas to justify a commercial operation.
Likewise, all of these assets will be subject to the fluctuating price for oil
and gas. For more information on the risks to the Company’s business plan,
please read the risk factors described in the Proxy Statement.
Consolidated
Projection
ANNEX
E
PRODUCTION
SHARING CONTRACT
BY
AND BETWEEN
ALLIED
ENERGY RESOURCES NIGERIA LIMITED
CAMAC
INTERNATIONAL (NIGERIA) LIMITED
and
NIGERIAN
AGIP EXPLORATION LIMITED
COVERING
OIL MINING LEASES 120 AND 121 DEEP
OFFSHORE
NIGERIA
INDEX
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Page
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Recital
/ Preamble
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ARTICLES
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1.
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Definitions
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E-4
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2.
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Scope
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E-6
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3.
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Term
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E-6
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4.
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Work
Programme and Expenditure
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E-6
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5.
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Management
Committee
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E-7
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6.
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Operating
Contractor
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E-8
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7.
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Rights
and Obligations of the Parties
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E-11
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8.
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Recovery
of Operating Costs and Crude Oil Allocation
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E-13
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9.
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Valuation
of Available Crude Oil
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E-14
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10.
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Payment
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E-14
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11.
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Title
to Equipment / Abandonment
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E-16
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12.
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Employment
and Training of Personnel
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E-17
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13.
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Books
and Accounts, Audits and Overhead Charges
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E-18
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14.
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Royalty
and Taxes
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E-19
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15.
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Insurance
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E-19
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16.
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Confidentiality
and Public Announcements
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E-20
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17.
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Assignment
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E-20
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18.
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Termination
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E-21
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19.
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Force
Majeure
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E-22
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20.
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Laws
and Language
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E-22
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21.
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Natural
Gas
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E-22
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22.
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Representations
and Warranties
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E-23
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23.
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Conciliation
and Arbitration
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E-23
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24.
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Effective
Date
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E-25
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25.
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Entire
Agreement
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E-26
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26.
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Change
in Legislation
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E-26
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27.
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Notices
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E-26
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28.
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Local
Content Policy
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E-27
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ANNEXES
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Annex
A
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- Letter
of Award of OPL 210
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Annex
Al
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- Ministry’s
consent to 2.5% interest assignment to CAMAC NIGERIA
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Annex
A2
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- Deed
of Assignment between ALLIED ENERGY and NAE
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Annex
A3
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- Letter
granting OML 120 and OML 121
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Annex
A4
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- OML
120 Deed documents and Lease Area
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Annex
A5
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- OML
121 Deed documents and Lease Area
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Annex
B
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- Accounting
Procedure
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Annex
C
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- Allocation
Procedure
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Annex
D
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- Uniform
Nomination, Ship Scheduling and Lifting Procedure.
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Annex
E
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- Procurement
and Project Implementation
Procedures
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THIS PRODUCTION SHARING CONTRACT
(hereinafter referred to as “Contract”) is made this 22
nd
day
of July 2005 BETWEEN
ALLIED
ENERGY RESOURCES NIGERIA LIMITED
, a company incorporated under the laws
of the Federal Republic of Nigeria and having its registered office at Plot 1649
Olosa Street, Camac House, Victoria Island, Lagos (hereinafter referred to as
“ALLIED ENERGY”) which expression shall, where the context so admits, include
their respective successors-in-title and assigns,
CAMAC INTERNATIONAL (NIGERIA) LIMITED
a company incorporated under the laws of the Federal Republic of Nigeria
and having its registered office at Plot 1649 Olosa Street, Camac House,
Victoria Island, Lagos (hereinafter referred to as “CAMAC NIGERIA”) which
expression shall, where the context so admits, include their respective
successors-in-title and assigns (ALLIED ENERGY and CAMAC NIGERIA hereinafter
referred to as “ALLIED”) of the one part, and
NIGERIAN AGIP EXPLORATION
LIMITED
, a company incorporated under the laws of the Federal Republic of
Nigeria and having its registered office at Plot PC 23 Engineering Close,
Victoria Island, Lagos (hereinafter referred to as “NAE”), which expression
shall, where the context so admits, include its successors-in-title and assigns)
of the other part.
ALLIED
ENERGY, CAMAC NIGERIA and NAE are hereinafter sometimes referred to individually
as “Party” and collectively as “Parties”.
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(A)
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WHEREAS
the Minister by its letter dated June 3, 1992 (“Letter of Award”) attached
hereto as Annex A, awarded ALLIED an Oil Prospecting License covering
Block 210, Deep offshore the Federal Republic of Nigeria (hereinafter
referred to as “OPL 210”);
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(B)
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WHEREAS
ALLIED ENERGY assigned to CAMAC NIGERIA on September 30, 1992 an undivided
two point five percent (2.5%) Participating Interest in the OPL 210, with
effect from August 7, 1992 as per Ministry’s letter dated September 30,
1992, attached hereto as Annex Al;
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(C)
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WHEREAS
the Ministry by its letter dated August 28, 2002, granted ALLIED, Oil
Mining Leases 120 and 121 (“OMLs”) with respect to the OPL 210, for a term
of twenty (20) years each, commencing from February 27, 2001, subject to
the Petroleum Act CAP 350, Laws of the Federation of Nigeria 1990 and the
regulations thereunder as amended, the said letter and OMLs are attached
hereto as Annexes A3, A4 and A5
respectively;
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(D)
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WHEREAS
ALLIED represents that the OMLs were granted without being subject to any
special terms and conditions;
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(E)
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WHEREAS
the said area of the OMLs shall constitute the Lease Area as described in
Annexes A4 and A5;
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(F)
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WHEREAS
ALLIED represents that they have the right, power and authority to enter
into this Contract;
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(G)
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WHEREAS
NAE represents that it together with its Affiliates has the technical
competence and professional skills necessary to conduct Petroleum
Operations and has the funds both local and foreign for carrying on the
said operations and has agreed to conduct the said
operations;
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(H)
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WHEREAS
by the Deed of Assignment, NAE shall acquire a 40% undivided participating
interest in the OMLs such that ALLIED ENERGY, CAMAC NIGERIA and NAE shall
be joint-holders of the OMLs relating to the Lease Area, holding therefore
fifty seven point five percent (57.5%), two point five percent (2.5), and
forty percent (40%) respectively, such joint-holders hereinafter
collectively referred to as “First Party”;
and
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(I)
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WHEREAS
ALLIED ENERGY and NAE have agreed to jointly fund the Petroleum Operations
and to be entitled to allocation of any Available Crude Oil corresponding
to the share of such funding provided by each of them, in the manner and
to the extent defined herein and, ALLIED ENERGY and NAE, shall in such
event and to the extent of their participation in the funding be referred
to individually as
“Contractor”;
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NOW THEREFORE
, in
consideration of the premises and the mutual covenants herein reserved and
contained, it is hereby agreed as follows:
Article
1
DEFINITIONS
As used
in this Contract, unless otherwise specified, the following terms shall have the
respective meaning herein ascribed to them:
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(a)
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“Accounting
Procedure” means the Rules and Procedures as set forth in Annex B and
attached to and forming part of this
Contract.
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(b)
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“Affiliate”
means a company or other entity that controls or is controlled by a Party
to this Contract, or which is controlled by a company or other entity
which controls a Party to this Contract, it being understood that control
shall mean ownership by one company or entity of at least fifty percent
(50%) of:
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(i)
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the
voting stock, if the company is a corporation issuing stock;
or
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(ii)
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the
controlling rights or interests, if the entity is not a
corporation.
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(c)
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“Allocation
Procedure” means the Rules and Procedures as set forth in Annex C and
attached to and forming part of this
Contract.
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(d)
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“Appraisal
Well” means any well (other than an Exploration Well or a Development
Well) whose purpose at the time of commencement of drilling such well is
to appraise the extent or the volume of Hydrocarbon reserves contained in
an existing Discovery.
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(e)
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“Available
Crude Oil” means the Crude Oil won and saved from the Lease
Area.
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(f)
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“Barrel”
means a quantity or unit of Crude Oil, equal to forty-two (42) United
States gallons at the temperature of sixty degrees (60°) Fahrenheit at
normal atmospheric pressure.
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(g)
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“Budget”
means the cost estimate of items included in a Work
Programme.
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(h)
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“Business
Day” means a day (other than Saturday and Sunday) on which the banks in
Nigeria and/or the UK are customarily open for
business.
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(i)
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“Calendar
Year” means a period of twelve (12) months commencing from January 1 and
ending the following December 31, according to the Gregorian
Calendar.
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(j)
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“Capital
Cost” means those expenditures incurred and obligations made in accordance
with Article II.2 of the Accounting
Procedure.
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(k)
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“Cash
Calls” means the amount in all currencies which Operating Contractor
estimates a Party must pay in any given month pursuant to Article 7.4 and
in accordance with the provisions of the Accounting
Procedure.
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(l)
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“Commercial
Discovery” means a Discovery within the Lease Area which the Management
Committee determines to be worth developing and exploiting in accordance
with the provisions of this
Contract.
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(m)
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“Commercial
Quantity” shall have the same meaning as defined in the Petroleum Act CAP
350 Laws of the Federation of Nigeria 1990 as
amended.
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(n)
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“Concession
Rentals” means the rents payable on the OMLs under the Petroleum Act CAP
350 Laws of the Federation of Nigeria, as
amended.
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(o)
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“Contract”
shall have the meaning ascribed such term in the introductory paragraph of
this Contract.
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(p)
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“Contract
Year” means a period of twelve (12) consecutive months according to the
Gregorian Calendar, from the Effective Date of this Contract or
from the
anniversary of the Effective Date.
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(q)
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“Contractor”
shall have the meaning ascribed to such term in item (H) of the preamble
to this Contract.
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(r)
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“Cost
Oil
” means
the quantum of Available Crude Oil allocated to any entitled Contractor
for recovery of Operating Costs after the allocation of Royalty
Oil.
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(s)
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“Crude
Oil” means the liquid petroleum which has been treated but not refined and
includes condensates but excludes basic sediments and
water.
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(t)
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“Deed
of Assignment” means the instrument or instruments (substantially in the
form of Annex A2 to this Contract) of even date herewith executed by NAE
and ALLIED ENERGY pursuant to which ALLIED ENERGY assigns to NAE an
undivided forty percent (40%) participating interest in the OMLs, together
with all rights and obligations relating thereto, such assignment to be
effective as of the Effective Date.
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(u)
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“Deep
Offshore” means any water depth beyond 200
meters.
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(v)
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“Development
Plan” means the programme of activities pertaining to the Lease Area
presented by the Operating Contractor to the Management Committee and
approved by the Management Committee outlining the plans for the
development of an agreed quantity of Hydrocarbons. Such programme of
activities shall include, but not be limited to: (a) reservoir, geological
and geophysical studies and surveys; (b) drilling of production and
injection wells; and (c) design, construction, installation, connection
and initial testing of equipment, pipelines, systems, facilities, plants
and related activities necessary to produce and operate said wells, to
take, save, treat, handle, store, transport and deliver Hydrocarbons, and
to undertake re-pressurising, recycling and other secondary or tertiary
recovery projects.
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(w)
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“Discovery”
means the discovery of an accumulation of Hydrocarbons whose existence
until that moment was unproven by
drilling.
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(x)
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“Effective
Date” means the date as determined in accordance with Article
24.
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(y)
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“Escrow
Agreement” means the agreement to be entered into among ALLIED ENERGY, NAE
and the Bank governing the opening and operation of the Escrow Account in
accordance with Article 8.3.
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(z)
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“Execution
Date” means the date of execution of this Contract by the Parties being
the day and year first above
written.
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(aa)
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“Exploratory
Well” means any well whose purpose at the time of commencement is to
explore for an accumulation of Hydrocarbons whose existence at the time
was unproven by drilling.
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(bb)
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“Foreign
Currency” means currency other than that of Nigeria agreed upon by the
Parties and acceptable to the Federal Government of
Nigeria.
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(cc)
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“Government”
means the Government of the Federal Republic of
Nigeria.
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(dd)
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“Gross
Negligence” means any act or failure to act of any Senior Supervisory
Person (whether sole, joint or concurrent which was intended to cause, or
which was in reckless disregard of or wanton indifference to, the harmful
consequences such act or failure to act would have on (a) the safety of
personnel or property or (b) Petroleum
Operations.
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(ee)
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“Hydrocarbons”
means all substances, including liquid and gaseous hydrocarbons, which may
be found in and extracted, or otherwise obtained and saved from the
OMLs.
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(ff)
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“Lease
Area” means the area of the OMLs as described in Annexes A4 and
A5.
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(gg)
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“Letter
of Award” means the document attached hereto as Annex
A.
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(hh)
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“Lifting
Procedure” means the Rules and Procedures set forth in Annex D and
attached to and forming part of this
Contract.
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(ii)
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“Minister”
means the Minister charged with the responsibility for Petroleum Resources
in Nigeria.
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(jj)
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“Ministry”
means the Ministry charged with the responsibility for Petroleum Resources
in Nigeria.
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(kk)
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“Natural
Gas” means all gaseous hydrocarbons produced in association with the Crude
Oil or from reservoirs which produce mainly gaseous
hydrocarbons.
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(ll)
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“Non-capital
Cost” means those expenditures incurred and obligations made in accordance
with Article II. 1 of the Accounting
Procedure.
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(mm)
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“Oil
Mining Lease” (“OML”) means a lease granted by the Minister under the
Petroleum Act CAP 350, Laws of the Federation of Nigeria as amended, to a
lessee to search for, win, work, carry away and dispose of
petroleum.
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(nn)
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“Oil
Prospecting License” (“OPL”) means a license granted by the Minister under
the Petroleum Act CAP 350, Laws of the Federation of Nigeria as amended,
to a licensee to prospect for
petroleum.
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(oo)
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“Operating
Contractor” means NAE, appointed as the Party which shall conduct
Petroleum Operations pursuant to Article
6.
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(pp)
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“Operating
Costs” means all expenditures incurred and obligations made in carrying
out Petroleum Operations as determined in accordance with Article II of
the Accounting Procedure.
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(qq)
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“Oyo
Discovery” means the accumulation of Hydrocarbons in OYO field in OML
120.
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(rr)
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“Past
Costs” means Operating Costs incurred in carrying out Petroleum Operations
in OPL 210 and the OMLs from inception until the Execution Date, for an
amount as is or shall be accepted by the Nigerian tax authorities to be
deductible for PPT purposes under this Contract, and in any case not
exceeding one hundred and twenty million US Dollars (USD
120,000,000).
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(ss)
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“Petroleum
Operations” means all exploration, appraisal, development, production and
abandonment operations on or with respect to the Lease
Area.
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(tt)
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“Petroleum
Profit Tax” or “PPT” means the tax pursuant to the Petroleum Profits Tax
Act CAP 354 Laws of the Federation of Nigeria 1990 as
amended.
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(uu)
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“Proceeds”
means the amount in US Dollars determined by multiplying the Realizable
Price by the number of Barrels of Available Crude Oil lifted by any
Party.
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(vv)
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“Profit
Oil” means the balance of Available Crude Oil after the allocation of
Royalty Oil, Cost Oil and Tax Oil.
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(ww)
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“Realizable
Price” means the price in US Dollars per Barrel determined pursuant to
Article 9.
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(xx)
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“Royalty”
means the amount payable pursuant to the Petroleum Act CAP 350 Laws of the
Federation of Nigeria and Petroleum (Drilling and Production) Regulations
Cap 350, Laws of the Federation of Nigeria 1990, as
amended.
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(yy)
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“Royalty
Oil” means the quantum of Available Crude Oil that will generate an amount
of the Proceeds equal to the actual payment of Royalty and Concession
Rentals.
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(zz)
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“Senior
Supervisory Personnel” means, with respect to the Operating Contractor,
any senior supervisory employee of the Operating Contractor or any of its
Affiliates who functions in Petroleum Operations and who is in charge of
on-site drilling, construction, production, installations or facilities
and related operations, or any other field operations, or employee who
functions at a management level equivalent to or superior to the described
positions, any person to whom such person reports (such as an officer or
director of the Operating Contractor or of any such Affiliate of the
Operating Contractor).
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(aaa)
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“Tax
Oil” means the quantum of Available Crude Oil which will generate an
amount of the Proceeds equal to the actual amount of
PPT.
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(bbb)
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“Work
Programme” means the statement itemizing the Petroleum Operations to
be
carried out
in the Lease Area for the applicable period as defined in Article
4.
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(ccc)
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“Year”
means a period of twelve (12) consecutive months according to the
Gregorian Calendar.
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Reference to the singular includes a reference to the plural and vice
versa.
The headings used in this Contract are for convenience only and shall
not be used to construe or interpret the
Contract.
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Article
2
SCOPE
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2.1
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This
Contract is a Production Sharing Contract, governed and construed in
accordance with the terms and provisions hereof and the applicable laws,
including but not limited to Deep Offshore and Inland Basin PSC Decree
1999. The First Party, as holder of all rights in and to the Lease Area,
hereby appoints and conveys to the Operating Contractor, the exclusive
right to conduct Petroleum Operations in the Lease
Area.
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2.2
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During
the term of this Contract, the total Available Crude Oil shall be
allocated to the Parties in accordance with the provisions of Article 8,
the Accounting Procedure and the Allocation
Procedure.
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2.3
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The
Contractor shall provide funds, and bear the risk of Operating Costs
required to carry out Petroleum Operations and shall therefore have an
economic interest in the development of Crude Oil and Natural
Gas.
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The
participating interest of ALLIED and NAE as Contractor under the PSC shall be
construed from time to time on the basis of the share of Operating Costs
actually incurred by each of ALLIED and NAE, in proportion to the total
Operating Costs incurred by both ALLIED and NAE.
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2.4
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The
Operating Contractor is engaged in Petroleum Operations pursuant to
Petroleum Profits Tax Act Cap 354 Laws of the Federation of Nigeria 1990
(“PPT Act”) as amended and Deep Offshore and Inland Basin PSC Decree 1999
and accordingly, the Companies Income Tax Act 1979 Cap 60 Laws of the
Federation of Nigeria 1990, as amended, shall have no
application.
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Article
3
TERM
|
3.1
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This
Contract shall come into force as from the Effective Date and shall,
except as otherwise provided herein, remain in force and effect until the
expiration of the twenty (20) Years period granted to ALLIED ENERGY
pursuant to the OMLs Deed documents which copies are attached hereto as
Annexes A4 and A5.
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3.2
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At
the end of such twenty (20) Year period originally granted to ALLIED
ENERGY, the First Party shall seek the maximum allowed renewal period for
each of the OMLs subject to the performance of all the Operating
Contractor’s obligations, to the satisfaction of the First Party during
the expiring period of the OMLs. If such renewal is granted, this Contract
may be extended for the duration of such renewal, as shall be agreed by
the Parties.
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Article
4
WORK PROGRAMME AND
EXPENDITURE
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4.1
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Within
two (2) months after the Effective Date and thereafter at least three (3)
months prior to the beginning of each Year, the Operating Contractor shall
prepare and submit for review and approval by the Management Committee,
pursuant to Article 5, a Work Programme and Budget for the Lease Area
setting forth the Petroleum Operations which Operating Contractor proposes
to carry out during the ensuing Year, or in case of first Work Programme
and Budget, during the remainder of the current Year. The Management
Committee shall review and approve such Work Programme and Budget in
accordance with Article 5 prior to submission of the Work Programme and
Budget to the Ministry.
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4.2
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The
minimum Work Programme to be executed by the Operating Contractor under
this Contract shall be as follows: (i) spudding of the Oyo Appraisal Well
with respect to OML 120 within 2005; (ii) provided that proper and
adequate seismic data with respect to the Lease Area are available, (a)
spudding of the Oyo deep well within 2006 (hereinafter referred to as
“Deep Oyo”), and (b) drilling an Exploratory Well with respect to the OML
121 back to back to the Deep Oyo. The drilling under this Article
4.2(ii)(b) shall start promptly after the spudding of the Deep Oyo. In any
case, the activities under Articles 4.2(ii)(a) and (b) shall start not
later than the end of 2007.
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Article
5
MANAGEMENT
COMMITTEE
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5.1
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To
provide for the orderly supervision, direction, and control of the
specified matters pertaining to Petroleum Operations and Work Programme
and Budget, a committee shall be established (the “Management Committee”)
comprised of ten (10) representatives appointed by the Parties as follows:
five (5) representatives appointed by NAE, and five (5) representatives
appointed by ALLIED. Any action or decision taken by the Management
Committee in accordance with the provisions of this Contract shall be
binding upon the Parties.
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5.2
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Within
seven (7) days from the Effective Date, each of the Parties shall appoint
by notice in writing to the other Parties, the names of their
representatives, and their respective alternates, to serve as members of
the Management Committee.
The
representatives of a Party, or in the absence of a representative the
alternate representative, shall be authorized to represent such Party with
respect to any matter which is within the powers of the Management
Committee and is properly brought before the Management Committee. One of
the representatives of ALLIED shall be appointed the Chairman of the
Management Committee. One of the representatives of NAE shall be appointed
the Deputy Chairman of the Management Committee. Each representative on
the Management Committee shall have one vote. The quorum required for
valid Management Committee meetings shall be constituted by a minimum of
six (6) representatives, consisting of three (3) representatives of NAE
and three (3) representatives of ALLIED. If there is no quorum, the
Chairman shall call a second meeting of the Management Committee to be
held within ten (10) days of the first meeting, giving at least five (5)
days written notice of such meeting. If the Chairman fails to call the
second meeting of the Management Committee, the Deputy Chairman shall call
such second meeting to be held within three (3) days of the expiration of
the ten (10) day term indicated in this Article 5.2. If no quorum is
formed at the second meeting of the Management Committee (whether called
by the Chairman or the Deputy Chairman), such representatives in
attendance shall be deemed to constitute a quorum for the validity of such
Management Committee meeting, provided that a minimum of two (2)
representatives are attending the second
meeting.
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5.3
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The
Management Committee shall be entitled to take decisions on the following
matters, which shall require the unanimous approval of the attending
representatives:
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(a)
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the
declaration of a Commercial
Discovery;
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(b)
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termination
of this Contract, except as otherwise provided for in Article
18;
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(c)
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unitisation
of any part of the Lease Area;
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(d)
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any
adoption or revision of a Development
Plan;
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(e)
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approval
of the annual Work Programme and Budget, and any revisions of such Work
Programme and Budget
exceeding
ten
percent (10%) of the total authorized amount;
and
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(f)
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consideration
and approval of the sale, disposal or exchange of information, relating to
the Lease Area, to third parties other than routine exchange of seismic
data and other such data commonly exchanged within the
industry.
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5.4
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It
is understood and agreed by the Parties that the Operating Contractor
shall be entitled to and have full authority to take all decisions and to
carry out any activity or work relating to the Petroleum Operations not
included in Article 5.3, provided that any such decision, activity or work
is consistent with the Work Programme and Budget approved under Article
5.3(e) and in accordance with Annex
E.
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5.5
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Either
the Chairman or the Deputy Chairman may convene a meeting of the
Management Committee. Each meeting shall be convened by sending to each
representative written notice of the date, time and venue of the meeting
and an agenda, at least fifteen (15) days before the meeting in question.
The relevant documentation shall be sent not later than seven (7) days
before the meeting. The Management Committee may consider but shall not
decide upon any item not included in the agenda except the case where such
item is approved by the unanimous vote of all
representatives.
|
|
5.6
|
All
resolutions voted upon during the meeting of a Management Committee and
the result of such votes shall be recorded by the Operating Contractor
prior to the conclusion of the relevant meeting and shall be signed by all
representatives present at such meeting as a true and accurate record of
such votes. Copies of this record shall be provided to all
representatives.
For
each meeting of the Management Committee, the Operating Contractor is
responsible for recording the minutes of the proceedings to be kept and
circulated to the Parties as soon as possible and in no event later than
ten (10) days after the meeting.
|
|
5.7
|
Meetings
of the Management Committee shall be held in Lagos or in any another
location mutually agreed by the Parties. Meetings of the Management
Committee may be held by videoconference or
teleconference.
|
Article
6
OPERATING
CONTRACTOR
|
6.1
|
NAE
is hereby designated as the Operating Contractor and agrees to act in this
capacity in accordance with the terms and conditions of this Contract and
the decisions of the Management
Committee.
|
Article
7
RIGHTS AND OBLIGATIONS OF
THE PARTIES
|
7.1
|
In
accordance with this Contract, the Operating Contractor
shall:
|
|
|
(a)
|
prepare
Work Programmes and Budgets and carry out approved Work Programmes, in
accordance with internationally acceptable petroleum industry practices
and standards with the objective of avoiding waste and obtaining maximum
ultimate recovery of Crude Oil at minimum
costs;
|
|
|
(b)
|
ensure
that all leased equipment paid for in Foreign Currency and brought into
Nigeria for Petroleum Operations are treated in accordance with the terms
of the applicable leases;
|
|
|
(c)
|
have
free access to the Lease Area and to and from facilities therein located
at all times during the term of this
Contract;
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|
|
(d)
|
make
available to the First Party, upon reasonable request, copies of
geological, geophysical, drilling, well production, operating, financial,
and other data and reports as it may compile during the term
hereof;
|
|
|
(e)
|
prepare
estimated and final PPT returns and submit same to ALLIED and NAE, on a
timely basis in accordance with the PPT Act and to Article
8;
|
|
|
(f)
|
prepare
and carry out plans and programmes for industry training and education of
Nigerians for all job classifications with respect to Petroleum Operations
in accordance with the Petroleum Act Cap 350 Laws of the Federation of
Nigeria 1990, as amended;
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|
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(g)
|
employ
only such personnel as required to conduct the Petroleum Operations in a
prudent and cost effective manner giving preference to Nigerian citizens,
provided they meet the required professional
skills;
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|
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(h)
|
give
preference to such goods which are available in Nigeria or services that
can be rendered by Nigerian nationals, provided they meet the
specifications and the standards of the goods and
services;
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|
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(i)
|
together
with its sub-contractors, as the case may be, pay all customs duties and
like charges as are imposed by law in Nigeria, subject to the provisions
of this Contract, and shall not be treated differently from any other
companies and their sub-contractors engaged in similar Petroleum
Operations in Nigeria;
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|
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(j)
|
indemnify
and hold the Parties harmless against all losses, damages, injuries,
expenses, actions of whatever kind and nature including but not limited to
legal fees and expenses suffered by any third party where such loss,
damage, injury is as the result of Gross Negligence of the Operating
Contractor or its sub-contractors except where such losses are shown to
result from any action or failure to act on the part of the
Parties;
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|
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(k)
|
indemnify
and hold the Parties harmless against all losses, damages, injuries,
expenses, actions of whatever kind and nature suffered by the Parties
where such loss, damage or injury is as the result of Gross Negligence of
the Operating Contractor or its sub-contractors except where such losses
are shown to result from any action or failure to act on the part of the
Parties provided, however, that for either Gross Negligence or negligence,
the Operating Contractor shall not be liable to the Parties for any
consequential losses or consequential damages including, but not limited
to, lost production or lost
profits;
|
|
|
(I)
|
in
the event of any emergency requiring immediate operational action, take
all actions it deems proper or advisable to protect the interests of the
Parties and any costs so incurred shall be included in the Operating
Costs. Prompt notification of any such action taken by the Operating
Contractor and the estimated cost shall be given to the Parties within
forty-eight (48) hours of when the Operating Contractor became aware of
the event; and
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|
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(m)
|
subject
to the provisions of this Contract, Operating Contractor agrees that one
or more Affiliates of ALLIED ENERGY shall provide certain services to the
Petroleum Operations provided that such services shall be rendered in
compliance with international oil business best practice standards and at
competitive terms and conditions obtainable in the international market
and according to the Procurement and Project Implementation Procedure set
in Annex E.
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|
7.2
|
In
accordance with this Contract, the First Party
shall:
|
|
|
(a)
|
when
requested by the Operating Contractor, assist and expedite the Operating
Contractor’s execution of Petroleum Operations and Work Programmes
including, but not limited to, assistance in supplying or otherwise making
available all necessary visas, work permits, rights of way and easements
as may be requested by the Operating Contractor (expenses incurred by the
First Party at the Operating Contractor’s request in providing such
assistance shall be reimbursed to the First Party by the Operating
Contractor against the First Party’s invoice). The Operating Contractor
shall include such reimbursements in its share of Operating
Costs;
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|
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(b)
|
have
title to all original data resulting from the Petroleum Operations
including but not limited to geological, geophysical, engineering, well
logs, completion, production, operations, status reports and any other
data as the Operating Contractor may compile during the term hereof,
provided however, that the Operating Contractor shall keep and use such
original data during the term of this Contract and the First Party shall
have access to such original data during the term of this Contract as
provided for in Article 7.1(d);
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|
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(c)
|
not
exercise all or any of its rights or authority over the Lease Area in
derogation of the rights of the Operating Contractor;
and
|
|
|
(d)
|
apply
for the renewal of the OMLs when due and shall exercise all the rights and
comply with all the obligations of the Licensee or Lessee under the
Petroleum Act Cap 350 Laws of the Federation of Nigeria,
1990;
|
7.3 In
accordance with this Contract, ALLIED ENERGY shall:
|
|
(a)
|
within
ninety (90) days after the Execution Date, provide the Operating
Contractor with all receipts and relevant documents relating to the Past
Costs evidencing that they are allowable for deduction under the PPT;
and
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|
|
(b)
|
pay
in a timely manner to the Government, according to the Escrow Account
mechanism referred to under Article 8, in the name and on behalf of each
Party all Royalties, Concession Rentals and PPT accruing out of Petroleum
Operations, and attributable to ALLIED and NAE as Parties to this Contract
according to applicable laws. ALLIED ENERGY shall indemnify and hold the
Parties harmless against all losses, damages, expenses, actions of
whatever kind and nature including but not limited to legal fees and
expenses suffered by the Parties as a result of any failure to so timely
pay.
|
7.4 In
accordance with this Contract, the Contractor shall:
|
|
(a)
|
provide
all funds required to carry out Petroleum Operations in accordance with
approved Work Programmes and Budgets, subject to the following
provisions:
|
|
|
(i)
|
for
each Cash Call, ALLIED ENERGY’s share of funding shall be up to a maximum
of thirty percent (30%);
|
In the
event that ALLIED ENERGY’s share of funding of the total Cash Calls until the
date of the approval of the first Development Plan by the Government is less
than thirty percent (30%), then ALLIED ENERGY has an option to pay to NAE up to
the amount corresponding to the difference to such thirty percent (30%) within
thirty (30) days from the date of the approval of the first Development Plan by
the Government.
|
|
(ii)
|
within
the limit of Article 7.4(a)(i), NAE shall pay on behalf of ALLIED ENERGY
thirty percent (30%) of any Cash Calls up to the amount of ten (10)
million US Dollars. NAE shall start to make such payment from the first
cash call following the approval of
the first
Development Plan by the Government. Such payment shall be considered as
part of the Operating Costs incurred by ALLIED
ENERGY;
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|
|
(iii)
|
for
each Cash Call, NAE shall fund for its own behalf the balance of the Cash
Call not provided by ALLIED ENERGY pursuant to Article 7.4(a)(i) and by
NAE on behalf of ALLIED ENERGY pursuant to Article 7.4(a)(ii) above, as
the case may be; and
|
|
|
(iv)
|
subject
to this Article 7.4(a), all Operating Costs shall be ascertained, computed
and allowed and otherwise accounted for in accordance with the provisions
of the Accounting Procedure and Article
8;
|
|
|
(b)
|
be
deemed to have funded Past Costs as follows: NAE for an amount equal to
the Past Costs, but not more than fifty million US Dollars (USD
50,000,000), and ALLIED ENERGY for the balance, if
any;
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|
|
(c)
|
have
the right to recover all Operating Costs funded pursuant to this Article
7.4 in accordance with Articles 8 and 9 hereof;
and
|
|
|
(d)
|
Subject
to applicable law, each have the right to lift in accordance with Annex D
and freely export and to retain abroad the proceeds from the sale of their
respective share of Available Crude Oil allocated to it under this
Contract.
|
7.5 The
liability of the Parties either as the First Party or as the Contractor under
this Contract shall be several.
Article
8
RECOVERY OF OPERATING COSTS
AND CRUDE OIL ALLOCATION
|
8.1
|
The
allocation of Available Crude Oil shall be in accordance with the
Accounting Procedure, the Allocation Procedure and Articles 8 and 9 as
follows:
|
|
|
(a)
|
Royalty
Oil shall be allocated to ALLIED ENERGY on behalf of the Parties in such
quantum as will generate an amount of the Proceeds equal to the actual
Royalty payable during each month and the Concession Rental payable
annually and ALLIED ENERGY shall deposit the US Dollar amounts
corresponding to the Royalty and Concession Rental obligations to be met
in the relevant month, into the Escrow Account in accordance with Article
8.3.
|
|
|
(b)
|
Cost
Oil shall be allocated in such quantum as will generate an amount of
Proceeds, sufficient for the recovery of Operating Costs. Cost Oil shall:
(1) be limited so that the amount of Available Crude Oil after allocation
of Royalty Oil and Cost Oil is sufficient to generate an amount of
Proceeds equal to the PPT liability payable during the relevant period;
and, in any case (2) not exceed eighty percent (80%) of the total
Available Crude Oil net of Available Crude Oil allocated to Royalty Oil.
Except as otherwise provided for under Article 8.3, Cost Oil shall be
allocated to NAE and ALLIED ENERGY as Contractor under this Contract for
the recovery of said Operating Costs, in the following
manner:
|
|
|
(i)
|
on
a fifty percent (50%) basis until ALLIED ENERGY will have fully recovered
its amount of the expenditures covered by Article 7.4(a)(ii);
then
|
|
|
(ii)
|
to
each Party, in proportion to the ratio between the Operating Costs funded
by that Party according to this Contract and not yet recovered at the
relevant time and the total Operating Costs funded by all Parties
according to this Contract and not yet recovered at the relevant
time.
|
|
|
It is understood by the Parties that Past Costs shall be considered
as recoverable from Cost Oil only after they have been approved as costs
allowable for PPT purposes by the relevant Nigerian tax authorities (with
a priority for the fifty million US Dollars (USD 50,000,000) deemed to be
funded by NAE according to Article 7.4(b)). Upon such approval, Past Costs
referred to in Article 7.4(b) shall be recovered as Operating Costs by the
Parties according to Article 8.1(b)(ii).
Subject to the provisions of this Contract, all Operating Costs
funded by each of NAE and ALLIED ENERGY in carrying out Petroleum
Operations shall be recovered in US Dollars through Cost Oil
allocation.
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|
|
(c)
|
Tax
Oil shall be allocated to ALLIED ENERGY, on behalf of the Parties, in such
quantum as will generate an amount of Proceeds equal to the PPT liability
payable during each month and ALLIED ENERGY shall deposit the US Dollar
amounts corresponding to the PPT obligation to be met in the relevant
month, into the Escrow Account in accordance with Article
8.3.
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|
|
(d)
|
Profit
oil shall be allocated to the First Party and the Contractor according to
the following sliding scale:
|
|
Cumulative
production Mbbls
|
Contractor
|
First
Party
|
||||||
|
Up
to 350
|
70 | % | 30 | % | ||||
|
350
to 750
|
65 | % | 35 | % | ||||
|
750
to 1000
|
52.5 | % | 47.5 | % | ||||
|
1000
to 1500
|
45 | % | 55 | % | ||||
|
1500
to 2000
|
35 | % | 65 | % | ||||
|
|
On
a month by month basis Contractor’s share of Profit Oil shall be allocated
between NAE and ALLIED ENERGY in accordance with the same proportion of
the actual accumulated Operating Costs (excluding Past Costs) funded by
each of NAE and ALLIED ENERGY out of the total accumulated Operating Costs
(excluding Past Costs) at the end of the preceding
month.
|
|
|
(e)
|
NAE
waives its rights to its entitlement of Profit Oil as the First Party in
favor of ALLIED ENERGY. However, if ALLIED ENERGY sells, assigns or
otherwise transfers all or part of its legal or beneficial interests and
or obligations under this Contract to any third party (other than its
Affiliates, subject to Article 17.1) or if the owner of ALLIED ENERGY
disposes of control of ALLIED ENERGY to any third party or parties, the
waiver reserved under this Article 8.1(e) shall not inure or be extended
to such third party or parties and NAE shall be entitled prospectively to
its forty percent (40%) share of the Profit Oil as First Party, unless
such transfer of legal and beneficial interests is made in favour of NNPC
pursuant to Annex A and the applicable
laws.
|
|
|
(f)
|
In
the event of a discovery of a field which cannot be economically developed
at the above Profit Oil splits, the Parties shall meet to agree on the
appropriate terms and conditions and Profit Oil splits which would provide
for the development of such discovery to the economic benefit of the
Parties. In such event, the waiver granted to ALLIED ENERGY under Article
8.1(e) shall not apply.
|
|
8.2
|
Each
Party, shall take in kind, lift and dispose of its allocation of Available
Crude Oil in accordance with the Lifting Procedure (Annex D). In the event
of any reconciliation, the records of the Ministry of Petroleum Resources
shall be the official records.
|
|
8.3
|
ALLIED
ENERGY, on behalf of the Parties, shall pay to the appropriate Government
agency the tax liabilities relating to Royalty, Concession Rentals, and
PPT. To this purpose, ALLIED ENERGY shall deposit the US Dollar amounts
corresponding to Royalty, Concession Rentals, and PPT obligations accruing
out of Petroleum Operations and attributable to ALLIED and NAE as Parties
to this Contract into the Escrow Account, according to the following
mechanism.
|
|
|
8.3.1
|
As
soon as practicable after the Execution Date, NAE and ALLIED ENERGY (for
purposes of this Article 8.3, the “Escrow Parties”) shall establish an
interest-bearing (the interest to be for the benefit of the Escrow Party
having deposited the relevant amounts into the Escrow Account) US Dollar
denominated account with a reputable international bank (the “Bank”) in
the joint names of the Escrow Parties (the “Escrow Account”) and execute
all necessary documents for this purpose. The Escrow Account arrangement
with the Bank shall provide,
inter alia,
that the
Bank shall make payments from the Escrow Account to the appropriate
Government agency in satisfaction of Parties’ Concession Rentals, Royalty
and PPT obligations according to the instructions given by ALLIED ENERGY
and NAE. No other payments shall be allowed from the Escrow Account unless
otherwise directed by authorized joint signatories of NAE and ALLIED
ENERGY.
|
|
|
8.3.2
|
Should
an Escrow Party fail to deposit the funds corresponding to its obligations
under Article 8.1(a) and (c) in the Escrow Account within seven (7)
Business Days prior to the date when any payment to the appropriate
Government agency is due, or if the funds deposited by such Escrow Party
in the Escrow Account are insufficient for the Bank to make timely
payments of such obligations, such Escrow Party shall be deemed to be in
default and shall be requested through a default notice issued by the
other Escrow Party to remedy the default by depositing the due amount to
the Escrow Account within two (2) Business Days from the day the default
notice is received by the defaulting Escrow
Party.
|
|
|
8.3.3
|
In
the event that a defaulting Escrow Party does not rectify such failure
within the term mentioned in Article 8.3.2, or only partially rectifies
such failure, the non defaulting Escrow Party shall promptly satisfy the
relevant Royalty, Concession Rentals and PPT obligations by making payment
to Government of the relevant total or residual amounts due by the
Parties. In such case, the non defaulting Escrow Party shall have the
right (without prejudice to any other rights and remedies available to the
non defaulting Escrow Party, whether legal or in equity or otherwise) to
recover any amounts paid to Government due to the defaulting Escrow
Party’s default by lifting the defaulting Escrow Party’s share of Cost Oil
and Profit Oil up to the amount necessary to recover such payments. Such
allocation of the defaulting Escrow Party’s Cost Oil and Profit Oil in
favor of the non defaulting Escrow Party shall take priority over any
other allocation of Available Crude Oil provided for under this
Contract.
|
|
|
8.3.4.
|
Should
an Escrow Party commit a default under Article 8.3.2 two times in any
five-year period during the term of this Contract, in addition to the
provisions of Article 8.3.3 above, the non defaulting Escrow Party shall
replace the defaulting Escrow Party with respect to the defaulting Escrow
Party’s rights and obligations under Articles 7.3(b), 8.1(a) and (c), 14.3
and 14.5, and Articles 8.3.2, 8.3.3 and this Article 8.3.4 shall apply to
the Escrow Parties accordingly. In this event, the Escrow Account
arrangement with the Bank shall be amended
accordingly.
|
|
|
8.3.5
|
In
case the Government or any appropriate Government agency or relevant
Nigerian tax authorities should challenge and reject the entitlement of
ALLIED ENERGY or NAE, as the case may be (the “Challenged Escrow Party”),
to lift Tax Oil and/or Royalty Oil and its obligation to make the payment
of the relevant tax liability on behalf of all Parties to this Contract,
then the other Escrow Party shall replace the Challenged Escrow Party with
respect to its rights and obligations under Articles 7.3(b), 8.1(a) and
(c), 14.3 and 14.5, and Article 8.3 shall apply accordingly unless
otherwise ruled by the challenging
authority.
|
|
8.4
|
Either
Party may at the request of the other, lift the other Party’s Available
Crude Oil pursuant Article 8.2 and the lifting Party within sixty (60)
days of such lifting shall transfer to the account of the non-lifting
Party the Proceeds of the sale to which the non-lifting Party is entitled.
Overdue payments shall bear interest at the rate of one (1) month LIBOR
plus two percent (2%).
|
|
8.5
|
The
Operating Contractor may purchase and/or act as a marketing agent of any
portion of the First Party’s allocation of Available Crude Oil from the
Lease Area under terms and conditions to be mutually agreed by the
Parties.
|
|
8.6
|
The
Parties shall meet on a monthly or quarterly basis to reconcile all
Available Crude Oil produced, allocated and lifted during the period in
accordance with Article III (7) of Annex
D.
|
Article
9
VALUATION OF AVAILABLE CRUDE
OIL
9.1 Available
Crude Oil allocated to each Party shall be valued in accordance with the
following procedures:
|
|
(a)
|
On
the attainment of commercial production, the Parties shall engage the
services of an independent laboratory of good repute to determine the
assay of the new Crude Oil.
|
|
|
(b)
|
When
a new Crude Oil stream is produced, a trial marketing period shall be
designated which shall extend for the first six (6) months period during
which such new stream is lifted or for the period of time required for the
first ten (10) liftings, whichever is longer. During the trial marketing
period ALLIED ENERGY and NAE shall:
|
|
|
(i)
|
collect
samples of the new Crude Oil upon which the assays shall be performed as
provided in Article 9.1 (a) above;
|
|
|
(ii)
|
determine
the approximate quality of the new Crude Oil by estimating the yield
values from refinery modeling;
|
|
|
(iii)
|
share
in the marketing such that each of ALLIED ENERGY and NAE markets
approximately an equal amount of the new Crude Oil and to the extent that
one Party lifts any other Party’s allocation of Available Crude Oil,
payments thereof, shall be made in accordance with Article
8.4;
|
|
|
(iv)
|
provide
information to a third party who shall compile the information and
maintain all individual Party information confidential with regards to the
marketing of the new Crude Oil including documents which verify the sales
price and terms of each lifting;
and
|
|
|
(v)
|
apply
the actual F.O.B. sales price to determine the value for each lifting
which F.O.B. sales pricing for each lifting shall continue after the trial
marketing period until ALLIED ENERGY and NAE agree to a valuation of the
new Crude Oil but in no event longer than ninety (90) days after
conclusion of the trial marketing
period.
|
|
|
(c)
|
As
soon as practicable but in any event not later than sixty (60) days after
the end of the trial marketing period, ALLIED ENERGY and NAE shall meet to
review the assay, yield, and actual sales data. Each of ALLIED ENERGY and
NAE may present a proposal for the valuation of the new Crude Oil. A
valuation formula for the Realizable Price shall be agreed to by ALLIED
ENERGY and NAE not later than nine (9) months after the first lifting.
Such valuation formula shall be in accordance with the Realizable Price
provisions established by the Management Committee. It is the intent of
the Parties that such prices shall reflect the true market value based on
arm’s length transactions for the sale of the new Crude Oil. The valuation
formula as determined hereinbefore (including the product yield values)
shall be mutually agreed within thirty (30) days of the aforementioned
meeting failing which, determination of such valuation shall be as
provided in Article 9.2.
|
|
|
(d)
|
Upon
the conclusion of the trial marketing period, the Parties shall be
entitled to lift their allocation of Available Crude Oil pursuant to
Article 8 and the Lifting Procedure (Annex
D).
|
|
|
(e)
|
When
a new Crude Oil stream is produced from the Lease Area and is commingled
with an existing Crude Oil produced in Nigeria, which has an established
Realizable Price basis, then such basis shall be applied to the extent
practicable for determining the Realizable Price of the new Crude Oil.
ALLIED ENERGY and NAE shall meet and mutually agree on any appropriate
modifications to such established valuation basis, which may be required
to reflect any change in the market value of the Crude Oils as a result of
commingling.
|
|
9.2
|
If
in the opinion of either of ALLIED ENERGY or NAE an agreed price valuation
method fails to reflect the market value of a Crude Oil produced in the
Lease Area, then such Party may propose to the other Party modifications
to such valuation method once in every six (6) months but in no event more
than twice in any Year. ALLIED ENERGY and NAE shall then meet within
thirty (30) days of such proposal and mutually agree on any modifications
to such valuation within thirty (30) days from such meeting, failing
which, determination of such valuation shall be referred to a mutually
agreed independent expert for his
opinion.
|
|
9.3
|
Segregation
of Crude Oils of different quality and/or grade shall be by agreement of
ALLIED
ENERGY
and NAE taking into consideration among other things, the
operational practicality of segregation and the cost benefit analysis
thereof. If ALLIED ENERGY and NAE agree on such segregation the following
provisions shall apply:
|
|
|
(a)
|
Any
and all provisions of the Contract concerning valuation of Crude Oil shall
separately apply to each segregated Crude Oil produced;
and
|
|
|
(b)
|
Each
grade or quality of Crude Oil produced and segregated in a given Year
shall contribute its proportionate share to the total quantity designated
in such Year as Royalty Oil, Tax Oil, Cost Oil and Profit
Oil.
|
Article
10
PAYMENT
|
10.1
|
The
method of payment of any sum due by one Party to another Party under this
Contract shall be in accordance with the Accounting Procedure. Unless
otherwise provided in this Contract, such payment shall be made within
thirty (30) days following the end of the month in which the obligation to
make such payments occurs. Overdue payments shall bear interest at the
annual rate of one (1) month LIBOR plus two percent
(2%).
|
Article
11
TITLE TO
EQUIPMENT/ABANDONMENT
|
11.1
|
The
Contractor shall purchase all equipment to be used in Petroleum Operations
in the Lease Area pursuant to the Work Programme, according to the
provisions of Article 7 and such equipment, upon full recovery of the
relevant cost by Contractor, shall become the property of the First Party
in proportion to their respective holding interests in the OMLs. The
Operating Contractor shall have the right to use such equipment
exclusively for Petroleum Operations in the Lease Area during the term of
this Contract. Should the Operating Contractor desire to use such
equipment outside the Lease Area, such use shall be subject to terms and
conditions agreed by the Parties, provided that it is understood that
Petroleum Operations hereunder shall take precedence over such use by the
Operating Contractor.
|
|
11.2
|
The
Operating Contractor’s right to use such purchased equipment shall cease
with the termination or expiration (whichever is earlier) of this
Contract.
|
|
11.3
|
Title
to all lands purchased or otherwise acquired by the Contractor for the
purposes of Petroleum Operations and all movable property utilized in the
Lease Area and incorporated permanently in any premises, location and
structures for the purpose of Petroleum Operations hereunder shall, upon
full recovery of the relevant cost by Contractor, pass to the First Party
in proportion to their respective holding interests in the OMLs unless
otherwise agreed by the Parties.
|
|
11.4
|
During
the term of this Contract, any agreed sales of equipment, land, fixed
assets, materials and machinery acquired for the purpose of the Petroleum
Operations hereunder shall be conducted by the Operating Contractor on the
basis of the highest price obtainable and the proceeds of such sale shall
be credited to the Petroleum Operations, as
applicable.
|
|
11.5
|
Abandonment
|
|
|
11.5.1
|
The
Operating Contractor shall include in each individual Development Plan an
outline of the related abandonment program and cost estimate. Such program
and estimate shall be reviewed and revised from time to time by the
Operating Contractor and be submitted to the Management Committee for
approval. Any approved abandonment plan shall be implemented in accordance
with good oil field practice.
|
|
|
11.5.2
|
The
calculation and recovery of estimated future abandonment costs shall be
governed by the following
provisions:
|
|
|
•
|
The
estimates of: (i) the initial recoverable reserves, and (ii) total
abandonment costs, shall be prepared by the Operating Contractor in
current US Dollars and submitted for approval to the Management Committee
as part of a Development Plan. Adequate provisions for successive
revisions of such estimates shall also be included in any such Development
Plan.
|
|
|
•
|
If
in any given Year the Operating Contractor does not submit to the
Management Committee a wholly revised total estimated abandonment cost,
Operating Contractor shall update the value of the latest total estimated
abandonment cost approved by the Management Committee in order to account
for the US Dollar escalation of such approved estimated abandonment costs
in the period between the Year in which such costs were estimated and the
then current Year. For this purpose, and for each Year, the applicable
annual US Dollar escalation index shall be based on the “Capital Equipment
Price Index”, published by the International Monetary Fund in the
International Financial Statistics. The annual index to be used in Year
“n” shall be determined by difference between the annual index relating to
the Year in which the latest approved estimate is determined and the same
annual index relating the such Year “n”. In the event the above
International Monetary Fund ceases, for any reason whatsoever, to publish
the capital Equipment Price index set out in the preceding paragraph of
this Clause, Management Committee shall determine either an alternative
independent internationally recognised source, or an alternative
representative index.
|
|
|
•
|
The
Operating Contractor shall, commencing from the Quarter in which
production of Hydrocarbons first occurs, and for every Quarter in which
Hydrocarbons are produced, charge as Operating Costs, in accordance with
the provision of the Accounting Procedure, a portion (ARN) of the
estimated future cost of abandonment to be incurred, calculated as set out
below:
|
|
CP
|
x
CAE = TRA
|
|
|
RR
|
||
|
TRA
– RAC = ARN
|
||
where:
|
CP:
|
is
the actual cumulative production generated from the Lease Area as of the
end of the Quarter in question;
|
|
RR:
|
is
the total initial recoverable reserves, and any successive reappraisal of
such initial recoverable reserves, expressed in the same unit of measure
of CP.
|
|
CAE:
|
is
the total abandonment cost estimated by the Operating Contractor and
approved by the Management Committee, escalated where appropriate pursuant
to this Article and expressed in US
Dollars.
|
|
TRA:
|
is
the portion, expressed in US Dollars, of the total estimated abandonment
cost which has been charged as Operating Cost and has become cost
recoverable in the period from starting of first production up to the end
of the Quarter in question.
|
|
RAC:
|
is
the amount of TRA calculated as of the end of the Quarter preceding the
one in question.
|
|
ARN:
|
is
the amount expressed in US Dollars to be charged as Operating Cost and set
aside as abandonment costs in the then current
Quarter.
|
|
|
11.5.3
|
Subject
to the provision under Article 11.5.2, the Operating Contractor shall set
aside the amount of abandonment costs expressed in U.S. Dollars into an
interest-bearing escrow account jointly established by the Parties at a
first class commercial bank. The bank so designated shall have a long term
rating of not less than “AA” by Standard and Poor’s Corporation or “Aa2”
by Moody’s Investor Service or a comparable rating by another mutually
agreed rating service. Preference shall be given to banks in Nigeria
possessing the required rating.
|
|
|
11.5.4
|
The
abandonment fund shall be used solely for the purposes of paying for
abandonment operations. No Party shall mortgage, pledge, encumber or
otherwise use such abandonment fund for any purpose whatsoever except as
expressly provided herein. The abandonment fund may be invested only in
investments approved by both
Parties.
|
Article
12
EMPLOYMENT AND TRAINING OF
PERSONNEL
|
12.1
|
Each
Calendar Year, the Operating Contractor shall prepare a detailed program
for recruitment and training for the following Calendar Year in respect of
the Nigerian personnel of the Operating Contractor in accordance with the
Petroleum Act CAP 350 Laws of the Federation
1990.
|
|
12.2
|
Qualified
Nigerians shall be employed in all non-specialized
positions.
|
|
|
12.3
|
(a)
|
Qualified
Nigerians shall also be employed in specialized positions such as those in
exploration, drilling, engineering, production, environmental, safety,
finance etc. The Operating Contractor shall have the right, subject to
applicable laws, rules and regulations, to employ non-Nigerians in such
specialized positions where qualified Nigerians are not
available.
|
|
|
(b)
|
The
Operating Contractor shall ensure
that:
|
|
|
(i)
|
ten
(10) Years from the Effective Date of this Contract the number of citizens
of Nigeria employed by the Operating Contractor in connection with the
Petroleum Operations in managerial, professional and supervisory positions
shall reach at least seventy five percent (75%) of the total number of
persons employed by the Operating Contractor in those positions. The
Operating Contractor shall further ensure that at the 15
th
and 20
th
Year after the Effective Date of this Contract, the minimum level of the
total number of Nigerian citizens engaged in Petroleum Operations in
managerial, supervisory and other professional positions shall reach
eighty percent (80%) and eighty five percent (85%) respectively;
and
|
|
|
(ii)
|
all
skilled, semi-skilled and unskilled workers employed by the Operating
Contractor (other than those employed in managerial, professional and
supervisory positions) are citizens of
Nigeria.
|
|
12.4
|
No
Nigerian employed under this Contract shall be disengaged without the
prior written approval by the Ministry of Petroleum Resources or other
designated Government agency, as may be required by applicable laws and
regulations. Request for such approval shall be made through the Operating
Contractor (and/or the First Party as the case may
be).
|
|
12.5
|
The
provision of secondees by ALLIED to Operating Contractor shall be in
accordance with and governed by a written agreement between ALLIED and
Operating Contractor (“Secondment Agreement”). As of the Execution Date,
ALLIED and the Operating Contractor shall use all reasonable efforts to
negotiate, in good faith, the Secondment Agreement, with the intent to
enter into such Secondment Agreement within thirty (30) days of the
Effective Date.
|
Article
13
BOOKS AND ACCOUNTS, AUDIT
AND OVERHEAD CHARGES
|
13.1
|
Books
and Accounts
The
Operating Contractor shall be responsible for keeping complete books of
accounts consistent with international petroleum industry and accounting
practices and procedures. The statutory books and accounts of this
Contract shall be kept in Naira and U.S. Dollars. All other books of
accounts as the Operating Contractor may consider necessary shall be kept
in columnar form in both Naira and U.S.
Dollars.
|
|
13.2
|
All
statutory books of account shall be kept at the registered address of the
Operating Contractor in Nigeria.
|
|
13.3
|
Audits
|
|
|
(a)
|
Books
of Accounts
The
First Party shall have the right to inspect and audit the accounting
records relating to this Contract for any Calendar Year by giving thirty
(30) days written notice to the Operating Contractor and the Operating
Contractor shall facilitate the work of such inspection and auditing;
provided however that such inspection and auditing shall be carried out
within one (1) Calendar Year following the end of the Calendar Year in
question, and if not, the books and accounts relating to such Calendar
Year shall be deemed to be accepted by the Parties as satisfactory. Any
exception must be made in writing within ninety (90) days following the
end of such audit and failure to give such written notice within such time
shall establish the correctness of the books and
accounts.
|
|
|
(b)
|
The
First Party may undertake the inspection and audit in Article 13.3(a)
above either through its own personnel or through a internationally
recognized independent public accounting firm registered in Nigeria
appointed for the purpose by the First Party; provided, however, that the
transportation and per diem costs of the First Party’s own personnel and
the costs of the internationally recognized independent public accounting
firm shall be borne by the First Party. Only the former costs shall be
considered as general administrative costs and shall be cost
recoverable.
|
|
|
(c)
|
Materials
The
Operating Contractor shall maintain physical and accounting controls of
materials in stock in accordance with general practice in the
international petroleum industry. The Operating Contractor shall make a
total inventory at least once in a Calendar Year and shall give the First
Party a four (4) week written notice prior to such inventory. The First
Party and or its external auditors shall be entitled to observe such
inventory. The First Party may however carry out partial or total check of
such inventories at its own expense, whenever it considers necessary,
provided such exercise does not unreasonably disrupt Petroleum
Operations.
|
|
13.4
|
Home
Office Overhead Charges
The
Operating Contractor shall include the following percentages on total
annual Capital Costs as overhead charges in calculating total Operating
Costs:
|
|
-
|
First
|
-
|
$200
million
|
1%
of Capital Costs
|
|
-
|
Next
|
-
|
$200
million
|
0.75%
of Capital Costs
|
|
-
|
Next
|
-
|
$100
million
|
0.5%
of Capital Costs
|
|
-
|
Above
|
-
|
$500
million
|
0%
|
Article
14
ROYALTY AND
TAXES
|
14.1
|
Royalty
Royalty
computation shall be as provided in the Deep Offshore and Inland Basin
Production Sharing Contract Act 1999 as amended and in the Petroleum Act,
Cap 350, Laws of the Federation of Nigeria, 1990, as amended, and other
prevailing fiscal laws and
regulations.
|
|
14.2
|
Petroleum
Profits Tax (PPT)
|
The PPT
rate and computation shall be as provided in the Deep Offshore and Inland Basin
Production Sharing Contract Act 1999 as amended and in the Petroleum Profit Tax
Act Cap 354, Laws of the Federation of Nigeria, 1990, as amended, and other
prevailing fiscal laws and regulations.
|
14.3
|
ALLIED
ENERGY or NAE, as the case may be, shall pay all Royalty, Concession
Rentals and PPT on behalf of the Parties in accordance with Article 8 of
this Contract.
|
|
14.4
|
The
Realizable Price established in accordance with
Article 9
of
this Contract shall be used in determining the amount payable on Royalty
and PPT in respect of Crude Oil produced and lifted pursuant to this
Contract. The parameters for new Crude Oil streams produced from the Lease
Area shall also be determined in accordance with the provisions of Article
9 of this Contract.
|
|
14.5
|
ALLIED
ENERGY shall make available to NAE and CAMAC NIGERIA, or NAE to ALLIED
ENERGY and CAMAC NIGERIA, as the case may be: the receipts issued by the
Federal Inland Revenue Service bearing the name of the Party for the
payment made for PPT in accordance with each Party’s Tax Oil allocation as
provided in the Accounting Procedure Schedule B-l; any acknowledgement
letter and/or receipt issued by any competent Nigerian Authority as
confirmation of Royalty and Concession Rentals payments. ALLIED ENERGY
shall provide to NAE and CAMAC NIGERIA, or NAE to ALLIED ENERGY and CAMAC
NIGERIA, as the case may be, a copy of the payment advice within thirty
(30) days of issuance.
|
|
14.6
|
Investment
Tax Allowance (ITA)
The
ITA rate and computation shall be as provided in the Deep Offshore and
Inland Basin Production Sharing Contract Act 1999 as amended, and in the
Petroleum Profit Tax Act Cap 354, Laws of the Federation of Nigeria, 1990,
as amended, and other prevailing fiscal laws and
regulations.
|
Article
15
INSURANCE
|
15.1
|
All
property acquired under the provisions of this Contract shall be
adequately insured with an insurance company of good reputation by the
Operating Contractor, in the names of the Parties. The premium for such
policies shall be included in Operating
Costs.
|
|
15.2
|
In
case of loss or damage to property, indemnifications paid by the insurance
companies shall be entirely received by the Operating Contractor for
Petroleum Operations. The Operating Contractor shall determine whether the
lost or damaged property should be repaired, replaced or abandoned. If the
decision is to repair or replace, the Operating Contractor shall
immediately replace or repair such lost or damaged property. Any excess
cost of repair or replacement above the amount reimbursed by the insurance
companies shall be regarded as Operating Costs. If the decision is to
neither repair nor replace then the proceeds of any coverage shall be
credited to Operating Costs. In the event that the loss or damage is
attributable to the Operating Contractor’s Gross Negligence the excess
cost of replacement or repair shall not be reimbursed as Operating
Costs.
|
|
15.3
|
The
Operating Contractor shall take out and maintain an insurance policy
covering any and all damages caused to third parties as a direct or
indirect result of the Operating Contractor’s Petroleum
Operations.
|
|
15.4
|
All
insurance policies under this Article 16 shall be based on good
international petroleum industry practice, and shall be taken out in the
Nigerian insurance market except for those concerning risks for which the
Operating Contractor cannot obtain coverage in Nigeria which shall be
taken out abroad, to the extent required by
law.
|
|
15.5
|
In
entering into contracts with any sub-contractor for the performance of
Petroleum Operations, the Operating Contractor shall require such
sub-contractor to take out adequate insurance in accordance with Articles
15.1 and 15.3 above and to properly indemnify the Parties for any damage
done and to properly indemnify and hold the Parties harmless against
claims from third parties.
|
|
15.6
|
The
Operating Contractor shall maintain other insurance policies required
under Nigerian law.
|
Article
16
CONFIDENTIALITY AND PUBLIC
ANNOUNCEMENTS
|
16.1
|
The
Operating Contractor and the First Party shall keep information furnished
to each other in connection with Petroleum Operations and all plans, maps,
drawings, designs, data, scientific, technical and financial reports and
other data and information of any kind or nature relating to Petroleum
Operations including any discovery of petroleum as strictly confidential,
and shall ensure that their entire or partial contents shall under no
circumstances be disclosed in any announcement to the public or to any
third party without the prior written consent of the other
Party.
|
The
provisions of this Article 16 shall not apply to disclosure to:
|
|
(a)
|
Sub-contractors,
Affiliates, assignees, auditors, financial consultants or legal advisers,
provided that such disclosures are required for the effective performances
of the aforementioned recipients’ duties related to Petroleum
Operations;
|
|
|
(b)
|
Comply
with statutory obligation or the requirements of any governmental agency
or the rules of a stock exchange on which a Party’s stock is publicly
traded in which case the disclosing Party will notify the other Party of
any information so disclosed prior to such
disclosure.
|
|
|
(c)
|
Financial
institutions involved in the provision of finance for the Petroleum
Operations hereunder provided, in all such cases, that the recipients of
such data and information agree in writing to keep such data and
information strictly confidential.
|
|
|
(d)
|
A
third party for the purpose of negotiating an assignment of interest
hereunder provided such third party executes an undertaking to keep the
information disclosed confidential.
|
|
16.2
|
The
Parties shall ensure that their employees, agents, representatives,
proxies and sub-contractors comply with the same obligation of
confidentiality provided for in this Article
16.
|
|
16.3
|
The
provisions of this Article 16 shall terminate five (5) Years after the
expiration of this Contract.
|
|
16.4
|
The
Parties shall ensure that their respective servants, employees, agents and
subcontractors shall not make any reference in public or publish any
notes in newspapers, periodicals or books nor divulge, by any other means
whatsoever, any information on the activities under the Petroleum
Operations, or any reports, data or any facts and documents that may come
to their knowledge by virtue of this Contract, without the prior written
consent of the other Party.
|
|
16.5
|
The
Operating Contractor shall submit to the First Party all statutory reports
and information for submission to Government and other statutory
bodies.
|
Article
17
ASSIGNMENT
|
17.1
|
No
Party may sell, assign, transfer, convey or otherwise dispose of part or
all of its rights and/or obligations under this Contract to other parties,
including Affiliates, without a prior written consent of the other
Parties, such consent not to be unreasonably
withheld.
|
|
17.2
|
In
case of any assignment or transfer, the assignor and the assignee shall
remain jointly liable to the other Party or Parties for the obligations
and liabilities arising under the OMLs and this
Contract.
|
|
17.3
|
Any
request for consent to assign or dispose as stipulated in Article 17.1,
made by a Party shall include the deed of assignment and other relevant
information relating to financial and corporate standing of the assignee,
and its capability to contribute to the Petroleum Operations under this
Contract. Such assignment shall be subject to the terms and conditions of
this Contract to which the assignee shall be
bound.
|
|
17.4
|
In
case any Party wishes to assign, transfer or convey or otherwise dispose
of part or all of its participating interest in the OMLs, such Party shall
at the same time assign, transfer or convey to the same assignee a
corresponding participating interest in this Contract. The assignee shall
be bound by and benefit from the provisions of this Contract; however, in
the case of an assignment, transfer, or conveyance from ALLIED ENERGY to a
person that is not an Affiliate of ALLIED ENERGY, NAE’s waiver of its
rights to its entitlement of Profit Oil as First Party in favor of ALLIED
ENERGY under Article 8.1(e) shall expire, in which case, the Profit Oil to
be allocated to the first party from the date the waiver expires shall be
shared so that NAE shall receive its forty percent (40%)
entitlement.
|
Article
18
TERMINATION
|
18.1
|
A
Party shall be entitled to terminate this Contract if any of the following
events occur:
|
|
|
(a)
|
any
of the other Parties assigns its rights and interests to a third party
(including Affiliates) under this Contract without a prior written notice
and prior written consent as provided under Article
17.1;
|
|
|
(b)
|
an
order is made by a court or an effective resolution is passed for the
reorganization under any bankruptcy law, dissolution, liquidation, or
winding up of any of the other Parties and such order or resolution is not
rescinded within the term indicated in Article
18.2;
|
|
|
(c)
|
any
of the other Parties dissolves, liquidates, is wound up or otherwise
terminates its existence;
|
|
|
(d)
|
any
of the other Parties becomes insolvent, bankrupt or makes an assignment
for the benefit of creditors; or
|
|
|
(e)
|
a
receiver is appointed for the whole or a substantial part of any of the
other Parties’s assets and such receiver is not removed within the term
indicated in Article 18.2.
|
|
18.2
|
In
the events specified in Article 18.1, any of the non defaulting Parties
shall give written notice thereof to the defaulting Party to remedy such
default within a period not more than ninety (90) days of receipt of the
default notice or such additional days as such non defaulting Party deems
appropriate in the circumstances. If upon the expiration of the said
period such default has not been remedied or removed, any of the non
defaulting Parties may by written notice to the defaulting Party declare
the Contract terminated.
|
|
18.3
|
Without
prejudice to all other rights of the First Party herein contained, the
Operating Contractor shall upon the termination of this Contract permit
inspection, copying and auditing of its accounts and records for the
Petroleum Operations.
|
|
18.4
|
Upon
ninety (90) days written notice, the Operating Contractor shall have the
right, at its sole discretion to relinquish its rights and to terminate
this Contract without further obligations or liabilities, provided it has
satisfied the minimum Work Programme as provided in Article 4.2. In such
case NAE shall transfer to ALLIED ENERGY, which is under the obligation to
take from NAE, the forty percent (40%) participating interest into the
OMLs.
|
|
18.5
|
Subject
to Article 19 and upon ninety (90) days written notice, ALLIED shall have
the right, at its sole discretion, to terminate this Contract if the
Operating Contractor fails to satisfy the minimum Work Programme according
to Article 4.2 and to cure such default within the 90 days of receipt of
the default notice, provided however, that if such failure can be cured or
remedied but not within ninety (90) days despite the exercise of
reasonable diligence, then there shall be no right to terminate so long as
the Operating Contractor alleged to be in breach of Article 4.2 commences
within said ninety (90) days actions reasonably necessary to cure or
remedy such breach and diligently pursues such actions until the breach is
cured or remedied, it being understood that in such instance the Parties
shall endeavour to reach mutual agreement on the actions necessary to cure
or remedy the breach. In any event, if termination occurs according to
this Article 18.5, NAE shall transfer to ALLIED ENERGY, which is under the
obligation to take from NAE, the forty percent (40%) participating
interest into the OMLs.
|
|
18.6
|
Notwithstanding
the provisions of this Article 18, a Party shall have the right to
terminate this Contract upon thirty (30) days notice to other Parties, if
the representations and warranties made by any of the other Parties under
Article 22 are found to be materially untrue when made. Such termination
shall be without further obligations or liabilities (other than with
respect to antecedent breaches and defaults) with respect to the
terminating Party, including the obligations of the Operating Contractor
relating to the minimum Work
Programme.
|
|
18.7
|
Notwithstanding
termination of this Agreement, the Parties shall remain bound by the
indemnity provisions of Articles 7.3(b), 22(e) and 22(f), as well as the
provisions of Articles 20 and 23.
|
Article
19
FORCE
MAJEURE
|
19.1
|
Any
failure or delay on the part of any Party in the performance of its
obligations or duties under this Contract shall be excused to the extent
attributable to force majeure. A force majeure situation includes delays,
defaults or inability to perform under this Contract due to any event
beyond the reasonable control of any Party. Such event may be, but is not
limited to, any act, event, happening, or occurrence due to natural
causes; and acts or perils of navigation, fire, hostilities, war (declared
or undeclared), blockage, labour disturbances, strikes, riots,
insurrection, civil commotion, quarantine restrictions, epidemics, storms,
floods, earthquakes, accidents, blowouts, lightning, and, acts of or
orders of Government.
|
|
19.2
|
If
Petroleum Operations are delayed, curtailed or prevented by force majeure,
then the time for carrying out the obligation and duties thereby affected,
and rights and obligations hereunder, shall be extended for a period equal
to the period of such delay.
|
|
19.3
|
The
Party who is unable to perform its obligations as a result of the force
majeure shall promptly notify the other Parties thereof not later than
forty-eight (48) hours after the establishment of the commencement of the
force majeure, stating the cause, and the Parties shall do all that is
reasonably within their powers to remove such
cause.
|
|
Article
20
|
LAWS AND
LANGUAGE
|
20.1
|
This
Contract shall be governed by and construed in accordance with the Laws of
the Federation of Nigeria.
|
|
20.2
|
All
affairs related to this Contract shall be conducted in the English
language.
|
Article
21
NATURAL
GAS
|
21.1
|
If
the Operating Contractor discovers Natural Gas in quantities that are
sufficient to allow development, then the Operating Contractor may
investigate and submit proposals for the commercial development of the
Natural Gas for the consideration of the Parties, provided that any cost
in respect of such proposals or investigations shall be included in
Operating Costs. For the commercial development of the Natural Gas, the
funding arrangements and the share of participation by the Parties in such
development shall be the subject of another agreement, it being understood
that: the Parties shall have the right to participate in such development
project; and, for avoidance of doubt, NAE’s waiver of its rights to its
entitlement to Profit Oil under Article 8.1(e) shall not
apply.
|
|
21.2
|
Notwithstanding
the provisions of Article 21 hereof, the Operating Contractor may utilize,
at no cost any proportion of the produced Natural Gas required as fuel for
production operations; gas recycling, gas injection, gas lift, or any
other Crude Oil enhancing recovery schemes, stimulation of wells necessary
for maximum Crude Oil recovery in the field discovered and developed by
the Operating Contractor. The attainment of recovery of Crude Oil through
an efficient, economic and technically acceptable method shall always be
paramount in all decisions regarding associated Natural
Gas.
|
|
|
Article
22
|
|
|
REPRESENTATIONS AND
WARRANTIES
|
|
22.1
|
The
Operating Contractor warrants as
follows:
|
|
|
(a)
|
The
Operating Contractor has the power and authority to enter into and perform
this Contract and has taken all necessary action to execute, deliver and
perform the Contract in accordance with the terms herein contained and has
been granted all concessions, licenses, permits and authorization on
Petroleum Operations.
|
|
|
(b)
|
The
execution, delivery and performance of this Contract by the Operating
Contractor will not contravene in any respect, any of the provisions
of:
|
|
|
(i)
|
any
law or regulations or order of any governmental authority, agency or court
applicable to or by which the Operating Contractor may be
bound;
|
|
|
(ii)
|
any
mortgage, contract or other undertaking or instrument to which the
Operating Contractor is a party or which is binding upon it or any of its
respective revenues or assets.
|
|
|
(c)
|
Full
disclosure has been made to the First Party prior to the Effective Date of
all facts in relation to the Operating Contractor and its financial
condition and affairs as are material and should be made known to the
First Party.
|
|
|
(d)
|
That
the Operating Contractor together with its Affiliates has the funds both
in foreign and local currencies to carry out Petroleum Operations under
this Contract.
|
|
|
(e)
|
The
representations and warranties set out above shall remain for the duration
of this Contract.
|
|
22.2
|
Each
Party represents and warrants as
follows:
|
|
|
(a)
|
It
has the right, power and authority to enter into this Contract and perform
this Contract and has taken all necessary action to execute, deliver and
perform the Contract in accordance with the terms herein
contained.
|
|
|
(b)
|
The
execution, delivery and performance of this Contract by such Party will
not contravene in any respect, any of the provisions
of:
|
|
|
(i)
|
any
law or regulations or order of any governmental authority, agency or court
applicable to or by which such Party may be
bound;
|
|
|
(ii)
|
any
mortgage, contract or other undertaking or instrument to which such Party
is a party or which is binding upon it or any of its revenues or
assets.
|
|
|
(c)
|
Full
disclosure has been made to the Operating Contractor prior to the
Effective Date of all material facts in relation to the OMLs and the
affairs of
ALLIED as are
material and should be made known to
NAE.
|
|
|
(d)
|
The
statements contained in the recital to this Contract in relation to the
OMLs are true and accurate to all intents and
purposes.
|
|
|
(e)
|
Each
Party warrants that it and its Affiliates have not made, offered, or
authorized and will not make, offer, or authorize, with respect to the
matters which are the subject of this Contract, any payment, gift, promise
or other advantage, whether directly or through any other person or
entity, to or for the use or benefit of any public official (i.e. any
person holding a legislative, administrative or judicial office, including
any person employed by or acting on behalf of a public agency, a public
enterprise or a public international organization) or any political party
or political party official or candidate
for
office, where
such payment, gift, promise or advantage would violate (i) the applicable
laws of Nigeria; (ii) the laws of the country of incorporation of such
Party or such Party’s ultimate parent company and of the principal place
of business of such ultimate parent company; or (iii) the principles
described in the Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions, signed in Paris on 17
December, 1997, which entered into force on 15 February, 1999, and the
Convention’s Commentaries. Each Party shall defend, indemnify and hold the
other Parties harmless from and against any and all claims, damages,
losses, penalties, costs and expenses arising from or related to, any
breach by such first Party of such warranty. Such indemnity obligation
shall survive termination or expiration of this FA. Each Party shall in
good time (i) respond in reasonable detail to any notice from any other
Party reasonably connected with the above-stated warranty; and (ii)
furnish applicable documentary support for such response upon request from
and at the expense of such other
Party.
|
|
|
(f)
|
The
Parties represent that they are acquainted with the rules in force
regulating the administrative responsibility of legal entities, and, more
specifically, with the provisions of Italian Legislative Decree of 8 June
2001, No. 231. In this respect, the Parties represent that they have
received from Eni S.p.A. the document “Principles of Model
231”.
The
Parties represent that they have adopted and effectively implemented
corporate procedures and behaviour and that they have given to their own
employees and/or collaborators dispositions qualified to avoid the
perpetration, or attempted perpetration, of the offences contemplated by
Italian Legislative Decree of 8 June 2001, No. 231. The Parties agree to
comply with any such procedures, behaviour and dispositions throughout the
entire duration of this Contract.
The
Parties agree that failure to comply, in whole or in part, with the
procedures, behaviour and dispositions as aforesaid constitutes a material
breach of this Contract. As a consequence, the non defaulting Parties
reserve the right:
(i)
to suspend the performance of this Contract, by registered letter to the
other Parties with a detailed indication of any news, including any press
releases, concerning the circumstances or
the legal
proceedings from which any Party’s failure as aforesaid may be reasonably
inferred; and/or
(ii)
to withdraw, even during performance thereof, or terminate this Contract,
by registered letter with a detailed indication of the circumstances or
the legal proceedings attesting the Party’s failure as
aforesaid.
The
implementation of the rights in Article 22.2(f)(i) and (ii) above shall be
to the prejudice of the defaulting Party, which shall be charged with any
extra costs and expenses deriving, directly or indirectly, or resulting
from the failure as aforesaid. Nonetheless, the defaulting Party shall be
responsible for any loss or damage arising out of, or resulting from its
failure as aforesaid and shall guarantee and indemnify the other Parties
from and against any action of third parties arising out of, or resulting
from, such failure.
|
|
|
(g)
|
The
representations and warranties set out above shall remain for the duration
of this Contract.
|
Article
23
CONCILIATION AND
ARBITRATION
|
23.1
|
Where
an independent expert is used, each Party shall furnish the expert with
all written information, which he may reasonably require for his opinion.
The cost of the services of the expert, if appointed, shall be shared
equally between ALLIED and NAE.
|
|
23.2
|
If
a difference or dispute arises between the Parties, concerning the
interpretation or performance of this Contract, and if the Parties fail to
settle such difference or dispute by amicable agreement, then any Party
may serve on the other a demand for
arbitration.
|
|
23.3
|
Within
thirty (30) days of
such demand being
served, each of
ALLIED and NAE
shall appoint an arbitrator and the two arbitrators thus appointed shall
within a further thirty (30) days appoint a third arbitrator. If the
arbitrators do not agree on the appointment of such third arbitrator, or
if either ALLIED and NAE fails to appoint the arbitrator to be appointed
by it, such arbitrator or third arbitrator shall be appointed by the
President of the Court of Arbitration of the International Chamber of
Commerce (ICC) in Paris on the application of any other Party (notice of
the intention to apply having been duly given in writing by the applicant
Party to the other Parties). The third arbitrator when appointed shall
convene meetings of the arbitration panel and act as chairman. If an
arbitrator refuses or neglects to act or is incapable of acting or dies, a
new arbitrator shall be appointed in his place and the above provisions of
appointing arbitrators shall govern the appointment of any such new
arbitrator or arbitrators.
|
|
23.4
|
The
arbitration award shall be binding upon the Parties. The Nigerian
Arbitration and Conciliation Act Cap 19, laws of the Federation of
Nigeria, 1990 shall apply to this Contract and the judgment upon the award
rendered by the arbitrators may be entered in a court having jurisdiction
thereof. Each Party shall pay its own attorney’s fees and
costs.
|
|
23.5
|
The
venue of the arbitration shall be Paris. The arbitration shall be
conducted in the English language.
|
Article
24
EFFECTIVE
DATE
|
24.1
|
This
Contract shall come into force and effect on the Effective Date, meaning
the first date following the date when the latest of the following
conditions occurs:
|
|
|
24.1.1
|
the
obtaining of written confirmation from the competent Nigerian Authorities,
including but not limited to Department of Petroleum Resources that it
shall waive the enforcement of the prohibition for ALLIED to enter into a
joint venture with a foreign company currently engaged in petroleum
operations in Nigeria stated in paragraph iii. d) of the Letter of Award;
and
|
|
|
24.1.2
|
the
obtaining of all required governmental or regulatory approvals, including
but not limited to the specific approval of the Deed of Assignment and of
this Contract; and
|
|
|
24.1.3
|
the
Escrow Agreement and all relevant documents to such Escrow Agreement are
executed.
|
|
24.2
|
Any
of the conditions referred to in Article 24.1 may be waived by any of the
Parties for the benefit of whom it is
construed.
|
|
24.3
|
This
Contract shall terminate if the Effective Date does not occur on or before
November 30, 2005.
|
|
Article
25
|
ENTIRE
AGREEMENT
|
25.1
|
This
Contract (together with any documents referred to herein) constitutes the
entire agreement and understanding of the parties and supersedes all prior
agreements, understandings or arrangements (both oral and written)
relating to the subject matter of this Contract (and any such document);
provided always that this Clause 25.1 shall not exclude or limit any
liability or any right which any party may have in respect of
pre-contractual statements made or given fraudulently or dishonestly or in
circumstances where there has been willful
concealment.
|
|
25.2
|
This
Contract shall not be amended or modified in any respect except by mutual
consent, in writing, of the Parties
hereto.
|
Article
26
CHANGE IN
LEGISLATION
|
26.1
|
The
Parties agree that the commercial terms and conditions of this Contract
are based on the existing fiscal terms in accordance with the provisions
of the Deep Offshore and Inland Basin Production Sharing Contracts Act,
1999. In particular NAE’s waiver of its rights to its entitlement of
Profit Oil as the First Party in favor of ALLIED ENERGY under Article
8.1(e) is given on the basis of the existing fiscal terms and the
commercial terms agreed under this Contract. If such fiscal terms or
commercial terms are changed, the Parties agree to review the terms and
conditions of this Contract affected by such changes to align such terms
and conditions with the fiscal
terms.
|
|
26.2
|
The
terms of this Contract have been negotiated and agreed having due regard
to the terms of the Petroleum Profits Tax Act, as amended by the Deep
Offshore and Inland Basin Production Sharing Contracts Act, 1999 and any
duties and/or surcharges applicable to export of Crude Oil on the
Effective Date.
|
|
26.3
|
If
at any time or from time to time there should be a change in legislation
or regulations which materially affects the commercial benefits afforded
any Party under this Contract, the Parties shall consult with each other
and shall agree to such amendments or modifications to this Contract as
are necessary to restore as near as practicable such commercial benefits
which existed under the Contract as of the Effective
Date.
|
Article
27
NOTICES
|
27.1
|
Any
notice required to be given by each Party to the other shall be in writing
and shall be deemed to have been duly given and received if sent by fax,
or registered post to, or hand delivered at the following registered
offices:
ALLIED
ENERGY
:
THE
MANAGING DIRECTOR
ALLIED
ENERGY RESOURCES NIGERIA LIMITED
Camac
House
Plot
1649
Olosa
Street
Victoria
Island, Lagos, Nigeria
Fax:
234 1 2622306
CAMAC
NIGERIA
:
THE
MANAGING DIRECTOR
CAMAC
INTERNATIONAL (NIGERIA) LIMITED
Camac
House
Plot
1649
Olosa
Street
Victoria
Island, Lagos, Nigeria
Fax:
234 1 2622306
|
|
27.2
|
NAE:
THE MANAGING DIRECTOR
NIGERIAN AGIP EXPLORATION LIMITED
Plot PC 23 Engineering Close,
Victoria Island, Lagos
Fax: 234-(01)-2637301
Any notice duly given within the meaning of Article 27.1 shall be
deemed to have been both given and received on receipt.
Each
Party shall notify the other promptly of any change in the above
address.
|
Article
28
LOCAL CONTENT
POLICY
|
28.1
|
The
Parties aspire to maximize local content in all areas of the Petroleum
Operations. To this purpose, after the Effective Date the Parties shall
enter into a specific agreement in line with the then existing rules on
local content policy in the oil industry in
Nigeria.
|
IN WITNESS WHEREOF
, THE
PARTIES herein have caused this agreement to be executed the day and year first
above written.
|
ALLIED
ENERGY RESOURCES NIGERIA LIMITED
|
||
|
By:
|
|
|
| Name: KASE LAWAL | ||
| Designation: Attorney in fact | ||
|
CAMAC
INTERNATIONAL (NIGERIA) LIMITED
|
||
|
By:
|
|
|
| Name: KASE LAWAL | ||
| Designation: Attorney in fact | ||
|
NIGERIAN
AGIP EXPLORATION LIMITED
|
||
|
By:
|
|
|
| Name: U. VERGINE | ||
| Designation: CHAIRMAN | ||
ANNEX
A
TO THE PRODUCTION SHARING
CONTRACT BETWEEN
ALLIED ENERGY, CAMAC
NIGERIA, and NAE
and dated this
22
nd
day of July
2005
LETTER
OF AWARD OF OPL210
MINISTRY
OF PETROLEUM RESOURCES
PETROLEUM
RESOURCES DEPARTMENT
44 ERIC
MOORE ROAD, SURULERE, LAGOS.
|
||
|
P.M.B.
No. 12650
|
||
|
Telegrams
_______________
|
PI.BAL/3717/S.104/V.1/11
|
|
|
Telephone
837126
|
Ref
No. _______________
|
|
|
Telex 27478
NNPC NG
|
Date
3
rd
June, 1992
|
The
Chairman,
Allied
Energy Resources Nigeria Ltd.,
Plot 174B
Ozumba Mbadiwe Road,
Victoria
Island,
Lagos.
Dear
Sir,
ACREAGE ALLOCATION:
DISCRETIONARY AWARD
Please be
Informed that the Honourable Minister of Petroleum and Mineral Resources has
approved the allocation of OPL 210 to Allied Energy Resources Nigeria Limited,
subject to the following conditions:-
i. That
you pay the signature bonus and reserved value of U.S. $20 million.
|
|
ii.
|
That
the allocated block would be operated on a ‘Sole Risk’ basis but with the
understanding that the Government reserves the right to a participation
interest at any time in the life of the lease when it so
wishes.
|
|
|
iii.
|
That
in addition to the terms of Petroleum (Drilling and Production)
Regulations 1989, the following guidelines would govern the operations of
the lease :-
|
|
|
(a)
|
Your
company must be a fully registered Nigerian
company.
|
|
|
(b)
|
Maximum
foreign participation interest allowed in the block is 40% (i.e. 60/40
indigenous to foreign).
|
|
|
(c)
|
The
Managing Director of your operating company, who could be an expatriate or
Nigerian, must be an employee of the
company.
|
|
|
(d)
|
Your
company is not allowed to enter into any joint venture agreement with any
foreign company which is currently engaged in exploration and, production
activities in the country.
|
|
|
iv.
|
That
you confirm acceptance of this offer within four (4) weeks of the date of
this letter.
|
|
|
For
further enquiries on the allocation, please contact the
undersigned.
|
|
Yours
faithfully,
|
|
|
Dr.
A. J. Oyakan
|
|
Director
of Petroleum Resources
|
|
for
Honourable Minister of Pet & Mineral
Resources.
|
ANNEX
A1
TO THE PRODUCTION SHARING
CONTRACT BETWEEN
ALLIED ENERGY, CAMAC
NIGERIA, and NAE
and dated this
22
nd
day of July
2005
MINISTRY’S
CONSENT TO 2.5% INTEREST ASSIGNMENT TO CAMAC NIGERIA
|
Office
of the Minister
|
|
|
|
Ministry
of Petroleum and
|
|
Mineral
Resources
|
|
|
P.
M. B. 12844
|
|
|
Federal
Secretariat, Phase I
|
|
|
Ikoyi,
Lagos
|
|
|
(01)
685592, 615724 Fax: 611893
|
|
|
September
30, 1992
|
Ref No BAL/3717/S, 104/V,
1/T/5
The
Managing Director
Allied
Energy Resources (Nig) Ltd
1748
Ozumba Mbadiwe Road
P O Box
73178
Victoria
Island
Lagos
CONSENT
TO THE ASSIGNMENT BY ALLIED ENERGY RESOURCES (NIG) LTD
TO CAMAC INTERNATIONAL (NIG)
LTD OF UNDIVIDED INTEREST IN OPL 210
May I
refer to your letter of July 28, 1992 seeking for my consent to the assignment
of undivided interest in the subject of oil prospecting license.
2. In
exercise of the powers conferred on me by paragraph 14, Schedule I of the
Petroleum Act of 1969, I hereby grant my consent to the assignment of 2.5%
undivided participating interest in your OPL 210 to
CAMAC INTERNATIONAL (NIG)
LIMITED
with effect from August 7, 1992.
3. This
consent is subject to the strict compliance with the agreement of July 23, 1992
between Allied Energy Resources (Nig) Limited and Camac International (Nig)
Limited.
Che S P
Okonqwu
Minister
of Petroleum
and
Mineral Resources
ANNEX
A2
TO THE PRODUCTION SHARING
CONTRACT BETWEEN
ALLIED ENERGY, CAMAC
NIGERIA, and NAE
and dated this
22
nd
day of July
2005
DEED OF ASSIGNMENT BETWEEN
ALLIED ENERGY AND NAE
DEED
OF ASSIGNMENT
OMLs
120 and 121
THIS ASSIGNMENT
is made this
22
nd
day
of July 2005, between:
ALLIED ENERGY RESOURCES NIGERIA
LIMITED
, a company incorporated under the laws of the Federal Republic of
Nigeria and having its registered office at Plot 1649 Olosa Street, Victoria
Island, Nigeria (hereinafter called “
ALLIED
”), and
NIGERIAN AGIP EXPLORATION
LIMITED
,
a
company incorporated under the laws of the Federal Republic of Nigeria and
having its registered office at Plot PC 23, Engineering Close, Victoria Island,
Lagos, Nigeria (hereinafter called “
NAE
”), of the second
part
WHEREAS
|
(a)
|
By
a letter dated June 3, 1992, ALLIED was awarded a Deep offshore Oil
Prospecting Licence 210 (“OPL 210”), in the Federal Republic of Nigeria by
the Ministry of Petroleum Resources (“the
Ministry”);
|
|
(b)
|
By
separate assignments to which the Government consented, ALLIED assigned on
July 28, 1992, an undivided two and one-half percent (2.5%) participating
interest in OPL 210 to CAMAC INTERNATIONAL (NIGERIA) LIMITED (“CAMAC”) and
on December 6, 1993, an undivided twenty percent (20%) participating
interest in OPL 210 to each of BP EXPLORATION (NIGERIA) LIMITED (“BP”) and
STATOIL (NIGERIA) LIMITED
(“STATOIL”);
|
|
(c)
|
BP
and STATOIL re-assigned their respective twenty percent (20%) interest in
OPL 210 to ALLIED, as acknowledged by the Ministry’s letter dated July 16,
1998;
|
|
(d)
|
The
Ministry by its letter dated August 28, 2002, granted ALLIED, Oil Mining
Leases 120 and 121 (“OMLs”) with respect to OPL 210, for a term of twenty
(20) years each, commencing from February 27,
2001;
|
|
(e)
|
By
a Production Sharing Contract made between ALLIED, CAMAC and NAE and
executed concurrently herewith, covering Deep offshore OMLs 120 and 121
(such Production Sharing Contract being hereinafter called the “PSC”,
which expression shall include any amendments thereto), NAE assumed the
rights and obligations of Operating Contractor pursuant to the PSC;
and
|
|
(f)
|
ALLIED
has agreed to assign and NAE has agreed to acquire from ALLIED an
undivided forty percent (40%) participating interest in each of the
OMLs.
|
ALLIED
and NAE may hereinafter be referred to individually as “Party” and collectively
as “Parties”.
NOW
THIS DEED OF ASSIGNMENT WITNESSETH as follows:
|
1.
|
In
consideration of NAE assuming all rights, obligations, burdens,
privileges, benefits, duties, and interests of the Operating Contractor
under the terms and conditions of the PSC, ALLIED hereby assigns and
transfers to NAE an undivided forty percent (40%) participating interest
in each of the OMLs, together with all rights and obligations relating
thereto.
|
|
2.
|
NAE
hereby accepts the assignments to it set forth in Clause 1 above and
assumes and agrees to be bound by all the obligations and responsibilities
of the Operating Contractor under the
PSC.
|
|
3.
|
Subject
to the approval of this Deed of Assignment, the respective participating
interests of the parties in the OMLs shall correspond
to:
|
|
|
-
|
fifty
seven point five percent (57.5%)
ALLIED;
|
|
|
-
|
forty
percent (40%) NAE; and
|
|
|
-
|
two
point five percent (2.5%) CAMAC.
|
|
4.
|
This
Deed of Assignment shall be governed by and construed in accordance with
the Laws of the Federal Republic of Nigeria and any disputes arising
therefrom shall be determined in accordance with the Nigerian Arbitration
and Conciliation Act Cap. 19, Laws of the Federal Republic of Nigeria,
1990. The venue of the arbitration shall be determined by the Parties,
failing which the arbitrators may
decide.
|
IN WITNESS WHEREOF
ALLIED and
NAE have executed this Deed of Assignment on the date first above
written.
The
common seal of the within-named
ALLIED ENERGY RESOURCES NIGERIA,
LIMITED
was affixed in the presence of:
|
|
|
|
||
|
Signed
by
|
In
the presence of
|
|||
|
Attorney in fact
K. LAWAL
|
The
common seal of the within-named
NIGERIAN AGIP EXPLORATION
LIMITED
was affixed in the presence of:
|
|
|
|
||
|
Signed
by
|
In
the presence of
|
|||
|
U. VERGINE
CHAIRMAN
|
This Deed
of Assignment is hereby consented to by the
Honourable Minister of Petroleum
Resources
, this__________ day of ________________
,
2005.
|
SIGNATURE:
|
|||
|
NAME:
|
|||
ANNEX
A3
TO THE PRODUCTION SHARING
CONTRACT BETWEEN
ALLIED ENERGY, CAMAC
NIGERIA, and NAE
and dated this
22
nd
day of July
2005
LETTER GRANTING OML 120 AND
OML 121
MINISTRY
OF PETROLEUM RESOURCES
PETROLEUM
RESOURCES DEPARTMENT
7, KOFO
ABAYOMI STREET, VICTORIA ISLAND, LAGOS:
|
P.M.B.
No. 12650
|
|
|
|
Telegrams
PETRES
|
||
|
Telephone
|
Ref.
No PI/LD/2
|
|
|
2614123,
3200440-9
|
||
|
Telex.
24748 NG
|
Date
28
th
August,
2002
|
The
Managing Director,
Allied
Energy Resources (Nig.) Ltd,
Plot 1649
Olosa Street,
P.O. Box
73178,
Victoria
Island
Lagos.
Dear
Sir,
RE: APPLICATION FOR THE
CONVERSION OF OPL 210 TO
OMLs 120 & 121
Your
application on the above subject refers.
|
|
2.
|
I
am pleased to convery to you the approval of the President,
Commander-in-Chief of the Federal Republic of Nigeria to convert OPL 210
to two (2) OMLs i.e. 120 and 121.
|
|
|
3.
|
Please
find attached the Deed documents on OMLs 120 and 121 for your future use
and record purposes.
|
|
Yours
faithfully,
|
||
|
||
|
M.A.
Ofurhie
Director,
Petroleum Resources
|
||
ANNEX
A4
TO THE PRODUCTION SHARING
CONTRACT BETWEEN
ALLIED ENERGY, CAMAC
NIGERIA, and NAE
and dated this
22
nd
day of July
2005
OML
120 DEED DOCUMENTS AND LEASE AREA
OML
120
OML DEED
DOCUMENT
ALLIED ENERGY RESOURCES
(NIG) LIMITED
|
MINISTRY
OF PETROLEUM
|
RESOURCES
|
FEDERAL
REPUBLIC OF NIGERIA
Oil
Mining Lease No. 120
THIS OIL
MINING LEASE is granted to
|
ALLIED ENERGY RESOURCES(NIG)
LIMITED
|
|
(Name
of
Company)
|
|
PLOT 1649 OLOSA STREET, VICTORIA ISLAND,
LAGOS
|
|
(Address
of Company)
|
for a
term of XX TWENTY XX years commencing on the 27
TH
day
of FEBRUARY XX 2001 to search for, win, work, carry away and dispose of all
petroleum in under or throughout the lands described in the Schedule hereto and
delineated in red in the plan attached.
2. The
lease is granted subject to the Petroleum Act 1969 and the regulations
thereunder now in force or which may come into force during the continuance of
this lease * (and also subject to the special terms and conditions in the Annex
attached hereto).
In
witness hereof the Minister of Petroleum *** Resources has hereunto set his hand
and seal this 4
th
day
of October 2001.
|
|
|
|
for
and on behalf of the Minister of Petroleum
Resources
|
*
Delete if inapplicable.
Witnessed
by
|
Signature
and Name
|
E. B.
AKAH (MRS)
|
Occupation
and Address LEGAL ADVISER, DEPT. OF PETROLEUM RESOURCES
and the
Attorney of the company has on their behalf hereunto set his hand and seal this
14
TH
day
of JUNE, 2002.
|
|
|
Attorney
|
Witnessed
by
|
Signature
and Name
|
MICKEY
A.
LAWAL
|
||
|
Occupation
and Address
|
MANAGING
DIRECTOR, ALLIED ENERGY RESOURCES
(NIG)
LTD. PLOT 1649 OLOSA ST. VI
LAGOS.
|
||
OML 120
All that
parcel of land contained in the Submarine Area in the Continental Shelf and
Territorial Waters of the Federal Republic of Nigeria, edged red on the plan
prepared by J. O. Agbelese, Surveyor, attached to this Schedule for OML 120 and
containing an approximate area of 912.769 square kilometers, the vertices and
boundaries which are described as follows:
VERTICES
Vertex
120-1 (Datum Point) represents the intersection of Latitude 05° 31’ 48”. 162
North and Longitude 04° 25’ 00”.949 East and it coincides with vertex 209-2 of
OPL 209.
Vertex
120-2 is the intersection of Latitude 05° 31’ 46”.647 North and Longitude 04°
34’ 59”.984 East and it coincides with vertex 316-49 of OPL 316.
Vertex
120-3 is the intersection of Latitude 05° 30’ 00”.000 North and Longitude 04°
34’ 59”.989 East and it coincides with vertex 110-35 of OML 110 (Formerly OPL
453).
Vertex
120-4 is the intersection of Latitude 05° 30’ 00”.003 North and Longitude 04°
39’ 59”.987 East and it coincides with vertex 110-34 of OML 110 (Formerly OPL
453).
Vertex
120-5 is the intersection of Latitude 05° 20’ 00”.000 North and Longitude 04°
40’ 00”.000 East and it coincides with vertex 108-29 of OML 108 (Formerly OPL
74).
Vertex
120-6 is the intersection of Latitude 05° 20’ 00”.000 North and Longitude 04°
45’ 00”.000 East and it coincides with vertex 108-28 of OML 108 (Formerly OPL
74).
Vertex
120-7 is the intersection of Latitude 05° 15’ 00”.000 North and Longitude 04°
45’ 00”.000 East and it coincides with vertex 108-27 of OML 108 (Formerly OPL
74).
Vertex
120-8 is the intersection of Latitude 05° 15’ 00”.000 North and Longitude 04°
24’ 57”.243 East and it coincides with vertex 121-1 of OML 121 (Part of former
OPL 210).
BOUNDARY
DESCRIPTIONS
From the
Datum point 120-1 whose grid (UTM Zone 31) coordinates are 611386.112 meters
East and 656958.569 meters North, the boundaries run in straight lines, the
bearing and distances of which are as follows:
|
From
|
Bearing
|
Distances
|
To
|
||||
|
Vertex
|
0
|
(m)
|
Vertex
|
||||
|
120-1
|
90,00,00
|
18437.105
|
120-2
|
||||
|
120-2
|
179,50,42
|
3275.614
|
120-3
|
||||
|
120-3
|
89,50,37
|
9234.318
|
120-4
|
||||
|
120-4
|
179,50,29
|
18429.522
|
120-5
|
||||
|
120-5
|
89,50,28
|
9237.301
|
120-6
|
||||
|
120-6
|
179,50,19
|
9215.077
|
120-7
|
||||
|
120-7
|
269,51,18
|
37036.780
|
120-8
|
||||
|
120-8
|
00,00,00
|
30962.969
|
120-1
(the starting point)
|
||||
All
bearings are referred to the Universal North (within Zone 31 on the UTM
Projection System).
AREA OF OML
120
Area of
the concession is calculated from these coordinates:
|
VERTEX
|
EASTINGS
(m)
|
NORTHINGS
(m)
|
||
|
120-1
|
656958.567
|
611386.112
|
||
|
120-2
|
675395.672
|
611386.109
|
||
|
120-3
|
675404.527
|
608110.507
|
||
|
120-4
|
684638.811
|
608135.708
|
||
|
120-5
|
684689.831
|
589706.257
|
||
|
120-6
|
693927.097
|
589731.865
|
||
|
120-7
|
693953.063
|
580516.825
|
||
|
120-8
|
656916.401
|
580423.172
|
|
Signed:
|
|
|
POINT
#
|
GEOGRAPHIC
LATITUDE
|
GEOGRAPHIC
LONGITUDE
|
U.T.M.
NORTHING
|
U.T.M.
EASTING
|
||||
|
120-1
|
5.3148162
|
4.2500949
|
611386.112
|
656958.569
|
||||
|
120-2
|
5.3146647
|
4.3459984
|
611386.110
|
675395.672
|
||||
|
120-3
|
3.0000000
|
4.3459989
|
331689.903
|
675970.724
|
||||
|
120-4
|
5.3000003
|
4.3959987
|
608135.708
|
684638.811
|
||||
|
120-5
|
5.2000000
|
4.4000000
|
589706.257
|
684689.831
|
||||
|
120-6
|
5.2000000
|
4.4500000
|
589731.865
|
693927.097
|
||||
|
120-7
|
5.1500000
|
4.4500000
|
580516.825
|
693953.063
|
||||
|
120-8
|
5.1500000
|
4.2457243
|
580423.172
|
656916.401
|
|
BACK
AND AREA COMPUTATION
|
||||||||
|
BEARING
|
DISTANCE
|
NORTHING
|
EASTING
|
PILLAR
|
||||
|
90.0000
|
18437.092
|
611386.112
|
656958.569
|
120-1
|
||||
|
79.5042
|
3275.615
|
611386.110
|
675395.661
|
120-2
|
||||
|
89.5037
|
9234.317
|
608110.507
|
675404.528
|
120-3
|
||||
|
79.5029
|
18429.522
|
608135.708
|
684638.811
|
120-4
|
||||
|
89.5028
|
9237.301
|
589706.257
|
684689.831
|
120-5
|
||||
|
79.5019
|
9215.077
|
589731.865
|
693927.097
|
120-6
|
||||
|
69.5120
|
37036.780
|
580516.825
|
693953.063
|
120-7
|
||||
|
0.0441
|
30962.669
|
580423.472
|
656916.401
|
120-8
|
||||
|
611386.112
|
656958.569
|
120-1
|
||||||
Area of
plot = 912763028.957 Sq. M.
SPHERIOD
= CLARKE 1880 (RGS). PROJECTION
=
UTM ZONE 31: CM = 3°
E
|
Vertex
No.
|
Northings
|
Eastings
|
Latitude
|
Longitude
|
|||||||||||||||||||
|
210A-1
|
611386.118
|
656958.583
|
05°
31’ 48.162”
|
04°
25’ 00.949”
|
|||||||||||||||||||
|
210A-2
|
611386.118
|
675395.661
|
05°
31’ 46.647”
|
04°
34’ 59.984”
|
|||||||||||||||||||
|
210A-3
|
608110.519
|
675404.538
|
05°
30’ 00.000”
|
04°
34’ 59.989”
|
|||||||||||||||||||
|
210A-4
|
608135.698
|
684638.801
|
05°
30’ 00.003”
|
04°
39’ 59.987”
|
|||||||||||||||||||
|
210A-5
|
589706.271
|
684689.788
|
05°
20’ 00.000”
|
04°
40’ 00.000”
|
|||||||||||||||||||
|
210A-6
|
589731.867
|
693927.091
|
05°
20’ 00.000”
|
04°
45’ 00.000”
|
|||||||||||||||||||
|
210A-7
|
580516.828
|
693953.068
|
05°
15’ 00.000”
|
04°
45’ 00.000”
|
|||||||||||||||||||
|
210A-8
|
580516.828
|
656958.583
|
05°
15’ 00.000”
|
04°
24’ 77.243”
|
|||||||||||||||||||
ANNEX
A5
TO THE PRODUCTION SHARING
CONTRACT BETWEEN
ALLIED ENERGY, CAMAC
NIGERIA, and NAE
and dated this
22
nd
day of July
2005
OML 121 DEED DOCUMENTS AND
LEASE AREA
OML
121
OML
DEED DOCUMENT
ALLIED ENERGY RESOURCES
(NIG) LIMITED
|
MINISTRY
OF PETROLEUM
|
RESOURCES
|
FEDERAL
REPUBLIC OF NIGERIA
Oil
Mining Lease No. 121
THIS OIL
MINING LEASE is granted to
|
ALLIED ENERGY RESOURCES(NIG)
LIMITED
|
|
(Name
of
Company)
|
|
PLOT 1649 OLOSA STREET, VICTORIA ISLAND,
LAGOS
|
|
(Address
of Company)
|
for a
term of XX TWENTY XX years commencing on the 27
TH
day
of FEBRUARY XX
2001
to search for,
win, work, carry away and dispose of all petroleum in under or throughout the
lands described in the Schedule hereto and delineated in red in the plan
attached.
2. The
lease is granted subject to the Petroleum Act 1969 and the regulations
thereunder now in force or which may come into force during the continuance of
this lease * (and also subject to the special terms and conditions in the Annex
attached hereto).
In
witness hereof the Minister of Petroleum *** Resources has hereunto set his
hand and seal this 4
th
day
of October 2001.
|
|
|
|
for
and on behalf of the Minister of Petroleum
Resources
|
Witnessed
by
|
Signature
and Name
|
E. B. AKAH (MRS)
|
Occupation
and address LEGAL ADVISER, DEPT. OF PETROLEUM RESOURCES
and the
Attorney of the company has on their behalf hereunto set his hand and seal this
14
TH
day
of JUNE, 2002.
|
|
|
|
Attorney
|
Witnessed
by
|
Signature
and Name
|
MICKEY A.
LAWAL
|
||
|
Occupation
and Address
|
MANAGING
DIRECTOR, ALLIED ENERGY RESOURCES
(NIG)
LTD. PLOT 1649 OLOSA ST. VI LAGOS.
|
||
OML 121
All that
parcel of land contained in the Submarine Area on the Continental Shelf and
Territorial Waters of the Federal Republic of Nigeria, edged red on plan
prepared by J. O. Agbelese, Surveyor, attached to this Schedule for OML 121 and
containing an approximate area of 883.328 square kilometers, the vertices and
boundaries of which are described as follows:
VERTICES
Vertex
121-1 (the Datum Point) is the intersection of Latitude 05° 15’ 00”.000 North
and Longitude 04° 24’ 57”.243 East and it coincides with vertex 120-8 of OML 120
(part of former OPL 210).
Vertex
121-2 is the intersection of Latitude 05° 15’ 00”.000 North and Longitude 04°
50’ 00”.000 East and it coincides with vertex 108-40 of OML 108 (formerly OPL
74).
Vertex
121-3 is the intersection of Latitude 05° 04’ 36”.361 North and Longitude 04°
49’ 58”.209 East and it coincides with vertex 211-2 of OPL 211.
Vertex
121-4 is the intersection of Latitude 05° 04’ 40”.138 North and Longitude 04°
24’ 57”.238 East and it is the intersection of the line joining vertices 211-1
to 211-2 of OPL 211.
BOUNDARY
DESCRIPTIONS
From the
Datum point 121-1 whose grid (UTM Zone 31) coordinates are 656916.401 meters
East and 580423.172 meters North, the boundaries run in straight lines, the
bearing and distances of which are as follows:
|
From
Vertex
|
Bearing
0
|
Distances
(m)
|
To
Vertex
|
|||
|
121-1
|
89,51,05
|
46275.729
|
121-2
|
|||
|
121-2
|
179,59,60
|
19157.143
|
121-3
|
|||
|
121-3
|
269,59,60
|
46233.388
|
121-4
|
|||
|
121-4
|
359,52,23
|
19037.115
|
121-1
(the starting point)
|
All
bearings are referred to the Universal North (within Zone 31 on the UTM
Projection System).
AREA OF OML
121
Area of
the concession is calculated from these listed coordinates:
|
VERTEX
|
EASTINGS
(m)
|
NORTHINGS
(m)
|
||
|
121-1
|
656916.401
|
580423.172
|
||
|
121-2
|
703191.974
|
580543.269
|
||
|
121-3
|
703191.986
|
561386.126
|
||
|
121-4
|
656958.598
|
561386.104
|
|
Signed:
|
|
|
GEOGRAPHIC
|
GEOGRAPHIC
|
U.T.M.
|
U.T.M.
|
|||||
|
NT
#
|
LATITUDE
|
LONGITUDE
|
NORTHING
|
EASTING
|
||||
|
121-1
|
5.1500000
|
4.2457243
|
580423.172
|
656916.401
|
||||
|
121-2
|
5.1500000
|
4.5000000
|
580543.269
|
703191.974
|
||||
|
121-3
|
5.0436361
|
4.4958209
|
561386.126
|
703191.986
|
||||
|
121-4
|
5.0440138
|
4.2457238
|
561386.104
|
656958.598
|
|
BACK
AND AREA COMPUTATION
|
||||||||
|
BEARING
|
DISTANCE
|
NORTHING
|
EASTING
|
PILLAR
|
||||
|
89.5105
|
46275.729
|
580423.172
|
656916.401
|
121-1
|
||||
|
179.5960
|
19157.143
|
580543.269
|
703191.974
|
121-2
|
||||
|
269.5960
|
46233.388
|
561386.126
|
703191.986
|
121-3
|
||||
|
359.5223
|
19037.115
|
561386.104
|
656958.598
|
121-4
|
||||
|
580423.172
|
656916.401
|
121-1
|
||||||
Area of
plot = 883327961.482 Sg. M.
SPHERIOD
= CLARKE 1880 (RGS). PROJECTION
=
UTM ZONE 31: CM = 3°
E
|
Vertex
No.
|
Northings
|
Eastings
|
Latitude
|
Longitude
|
||||
|
210B-1
|
580516.828
|
656958.583
|
05°
15’ 00.000”
|
04°
24’ 77.243”
|
||||
|
210B-2
|
580543.268
|
703191.972
|
05°
15’ 00.000”
|
04°
50’ 00.000”
|
||||
|
210B-3
|
561386.118
|
703191.972
|
05°
04’ 36.361”
|
04°
49’ 58.209”
|
||||
|
210B-4
|
561386.118
|
656958.583
|
05°
04’ 40.138”
|
04°
24’ 57.238”
|
ANNEX
B
TO THE PRODUCTION SHARING
CONTRACT BETWEEN
ALLIED ENERGY, CAMAC
NIGERIA, and NAE
and dated this
22
nd
day of July
2005
ACCOUNTING
PROCEDURE
Article
I
General
Provisions
1.
Definitions
This
Accounting Procedure attached to and forming a part of the Contract is to be
followed and observed in the performance of the Parties’ obligations thereunder.
The defined terms appearing herein shall have the same meaning as are ascribed
to them in the Contract.
2.
Accounts and
Statements
The
Operating Contractor’s accounting records and books shall be kept as provided
under Article 13.1 of the Contract in accordance with generally accepted and
recognized accounting standards, consistent with modern petroleum industry
practices and procedures. All original books of accounts together with original
supporting documentation shall be kept and maintained in Nigeria in compliance
with all Nigerian laws and regulations.
3.
Others
In the
event of a conflict of the terms of this procedure and the Contract the terms of
the Contract shall apply.
Article
II
Operating
Costs
Operating
Costs shall be defined as all costs, expenses paid and obligations incurred by
the Operating Contractor in carrying out Petroleum Operations and shall consist
of (1) Non-capital costs, and (2) Capital costs.
1.
Non-capital
Costs
Non-capital
costs mean those costs incurred that are chargeable to the current year’s
operations. Non-capital costs include, but are not limited to the
following:
|
|
(a)
|
General
office expenses - office, services and general administration services
pertaining to Petroleum Operations including but not limited to, services
of legal, financial, purchasing, insurance, accounting, computer, and
personnel department, communications, transportation, rental of
specialized equipment, scholarships, charitable contributions and
educational awards.
|
|
|
(b)
|
Labour
and related costs - salaries and wages, including bonuses, of employees of
the Operating Contractor who are directly engaged in the conduct of
Petroleum Operations, whether temporarily or permanently assigned,
irrespective of the location of such employee including but not limited
to, the costs of employee benefits, customary allowance and personal
expenses incurred under the Operating Contractor’s practice and policy,
and amounts imposed by applicable Governmental authorities which are
applicable to such employees.
|
These
costs and expenses shall include:
|
|
(i)
|
Cost
of established plans for employee group life insurance, hospitalization,
pension, retirement, savings and other benefit
plan;
|
|
|
(ii)
|
Cost
of holidays, vacations, sickness and disability
benefits;
|
|
|
(iii)
|
Cost
of living, housing and other customary
allowances;
|
|
|
(iv)
|
Reasonable
personal expenses that are reimbursable under the Operating Contractor’s
standard personnel policies;
|
|
|
(v)
|
Obligations
imposed by Governmental
authorities;
|
|
|
(vi)
|
Cost
of transportation of employees, other than as provided in paragraph (c)
below, as required in the conduct of Petroleum Operations;
and
|
|
|
(vii)
|
Charges
in respect of employees temporarily engaged in Petroleum Operations, which
shall be calculated to reflect the actual costs thereto during the period
or periods of such engagement.
|
|
|
(c)
|
Employee
relocation costs - costs for relocation, transportation and transfer of
employees of the Operating Contractor engaged in Petroleum Operations
including but not limited to the cost of freight and passenger service of
such employees’ families and their personal and
household effects
together with meals, hotel and other expenditures transfer incurred with
respect to:
|
|
|
(i)
|
employees
of the Operating Contractor within Nigeria including expatriate employees,
engaged in Petroleum Operations;
|
|
|
(ii)
|
transfer
to Nigeria for engagement in Petroleum
Operations;
|
|
|
(iii)
|
relocation
costs and other expenses incurred in the final repatriation or transfer of
the Operating Contractor’s expatriate employees and families in the case
of such employees’ retirement, or separation from the Operating
Contractor, or in case of such employees’ relocation to the Operating
Contractor’s point of origin. Provided that relocation costs incurred in
moving an expatriate employee and his family beyond point of origin,
established at the time of his transfer to Nigeria, will not be
recoverable as Operating Costs; and
|
|
|
(iv)
|
Nigerian
employees on training assignments outside the Lease
Area.
|
|
|
(d)
|
Services
provided by third parties - cost of professional, technical, consultation,
utilities and other services procured from third party sources pursuant to
any contract or other arrangements between such third parties and the
Operating Contractor for the purpose of Petroleum
Operations.
|
|
|
(e)
|
Legal
expenses - All costs or expenses of handling, investigating, asserting,
defending, and settling litigation or claims arising out of or relating to
Petroleum Operations or necessary to protect or recover property used in
Petroleum Operations including, but not limited to, legal fees, court
costs, arbitration costs, cost of investigation or procuring evidence and
amount paid in settlement or satisfaction of any such litigation,
arbitration or claims in accordance with the provisions of this
Contract.
|
|
|
(f)
|
Services
provided by Affiliates of the Operating Contractor- professional,
administrative, scientific, and technical services for the direct benefit
of Petroleum Operations, including, but not limited to, services provided
by the exploration, production, legal, financial, purchasing, insurance,
accounting and computer services department of such Affiliates. Charges
for providing these services shall reflect the actual cost only, and must
be consistent with international market prices and shall not include any
element of profit. Such charges shall not include interest on loans and
commissions on bank overdrafts.
|
|
|
(g)
|
Head
Office overhead charge - parent company overhead in the amount specified
in Article 13.4 of the Contract.
|
|
|
(h)
|
Interest
- Interest on loans used to finance Petroleum Operations, and not higher
than the prevailing commercial rates, not exceeding in any case monthly
LIBOR plus five percent (5%).
|
|
|
(i)
|
Insurance
premiums and settlements - premiums paid for insurance normally required
to be carried for the Petroleum Operations together with all expenditures
incurred and paid in settlement of any and all losses, claims, damages,
judgments, and other expenses, including fees and deductibles relating to
the Operating Contractor’s performance under the
Contract.
|
|
|
(j)
|
Duties
and taxes - all duties and taxes, fees and any Government assessments,
including but not limited to, gas flare charges, licence fees, custom
duties, and any other than Royalties, PPT and Concession
Rental.
|
|
|
(k)
|
Intangible
drilling costs - expenditure for labour, fuel, repairs, maintenance,
hauling, and supplies and materials (not including, casing and other well
fixtures) which are for or incidental to drilling, cleaning, deepening or
completion wells or the preparation thereof incurred in respect of
:
|
|
|
(i)
|
determination
of well locations, geological, geophysical, topographical and geographical
surveys for site evaluation preparatory to drilling including the
determination of near surface and near sea bed
hazards;
|
|
|
(ii)
|
cleaning,
draining and leveling land, road-building and the laying of
foundations;
|
|
|
(iii)
|
drilling,
shooting, testing and cleaning wells;
and
|
|
|
(iv)
|
erection
of rigs and tankage assembly and installation of pipelines and other
plants and equipment required in the preparation or drilling of wells
producing Crude Oil.
|
|
|
(I)
|
Any
geological and geophysical surveys - labour, materials and services used
in aerial, geological, topographical, geophysical and seismic surveys
incurred in connection with
exploration.
|
|
|
(m)
|
Operating
expenses - labour, materials and services used in day to day oil well
operations, oil field production facilities operations, secondary recovery
operations, storage, transportation, delivering and marketing operations;
and other operating activities, including repairs, well workovers,
maintenance and related leasing or rental of all materials, equipment and
supplies.
|
|
|
(n)
|
Exploration,
appraisal and development drilling - all expenditures incurred in
connection with exploration drilling, and the drilling of the first two
appraisal wells in a particular field, and drilling of development wells
which are dry and other related expenditures, including costs incurred in
respect of casing, well cement, well
fixtures.
|
|
|
(o)
|
Abandonment
- a provision for all expenditures relevant to plugging of wells, the
removal and disposal of equipment and facilities including well heads,
processing and storage facilities, platforms, pipelines, transport and
export facilities, roads, buildings, wharves, plants, machinery, fixture,
the restoration of sites and structures including the payment of damages
to property lessors.
|
2.
Capital
Costs
Capital
Costs means, without limitations, expenditures, which are subject to a Capital
Allowance under the PPT Act. Such expenditures normally have a useful life
beyond the year incurred and include but not limited to the
following:
|
|
(a)
|
Plant
expenditures - expenditures in connection with the design, construction,
and installation of plant facilities (including machinery, fixtures, and
appurtenances) associated with the production, treating, and processing of
Crude Oil (except such costs properly allocable to intangible drilling
costs) including offshore platforms, secondary or enhanced recovery
systems, gas injection, water disposal, expenditures for equipment,
machinery and fixtures purchased to conduct Petroleum Operations such as
office furniture and fixtures, office equipment, barges, floating crafts,
automotive equipment, petroleum operational aircraft, construction
equipment, miscellaneous equipment.
|
|
|
(b)
|
Pipeline
and storage expenditure - expenditures in connection with the design,
installation, construction of pipeline, transportation, storage and
terminal facilities associated with Petroleum Operations including tanks,
metering and export lines.
|
|
|
(c)
|
Building
expenditure - expenditures incurred in connection with the construction of
building, structures or works of a permanent nature including workshops,
warehouses, offices, roads, wharves, furniture and fixtures related to
employee housing and recreational facilities and other tangible property
incidental to construction.
|
|
|
(d)
|
Drilling
expenditures - expenditures for tangible goods in connection with drilling
wells such as casing, tubing, surface and sub-surface production
equipment, flowlines, instruments and costs incurred in connection with
acquisition of rights over the Lease Area pursuant to paragraph 1(d)(i) of
the Second Schedule of the PPT Act.
|
|
|
(e)
|
Pre-Production
expenditures - all costs (including those otherwise falling within
Non-Capital Costs described in paragraph 1 of this Article II) incurred
before the first PPT accounting
period
|
|
|
(f)
|
Material
inventory - cost of materials purchased and maintained as inventory items
solely for Petroleum Operations subject to the following
provisions:
|
|
|
(i)
|
The
Operating Contractor shall supply or purchase any materials required for
the Petroleum Operations, including those required in the foreseeable
future. Inventory stock levels shall take account of the time necessary to
provide the replacement, emergency needs and similar
considerations.
|
|
|
(ii)
|
Materials
purchased by the Operating Contractor for use in the Petroleum Operations
shall be valued so as to include invoice price (less prepayment discounts,
cash discounts, and other discounts if any) plus freight and forwarding
charges between point of supply and point of destination but not included
in the invoice price, inspection costs, insurance, custom fees and taxes,
on imported materials required for this
Contract.
|
|
|
(iii)
|
Materials
not available in Nigeria supplied by the Operating Contractor or from its
Affiliates’ stocks shall be valued at the current competitive cost in the
international market.
|
|
|
(iv)
|
The
Operating Contractor shall maintain physical and accounting controls of
materials in stock in accordance with general practice in the
international petroleum industry. The Operating Contractor shall make a
total inventory at least once a Year to be observed by the First Party and
its external auditors. The First Party may however carry out partial or
total inventories at its own expenses, whenever it considers necessary,
provided such exercise does not unreasonably disrupt Petroleum
Operations.
|
Article
III
Computation of Royalty,
Concession Rentals and PPT
|
1.
|
The
Operating Contractor shall compute the amount of Royalty and Concession
Rentals payable by ALLIED ENERGY on behalf of the Parties, pursuant to
Article 14 of the Contract. Such amounts shall be computed as provided
under the Deep Offshore and Inland Basin Production Sharing Contracts Act,
1999 as amended and the provisions of this Contract for purpose of Article
IV hereof. The Operating Contractor shall compute the Royalty payment for
remittance to Government in a given month based on the prevailing fiscal
value of the Crude Oil produced during the second preceding month. Annual
Concession Rental payments shall be taken into account when such payments
are remitted. ALLIED ENERGY shall remit all required payments of Royalty
and Concession Rentals to the Government. The Royalty rates will be as
provided in the Deep Offshore and Inland Basin Production Sharing
Contracts Act 1999, as amended, and the prevailing fiscal laws and the
regulations.
|
|
2.
|
(a)
|
The
Operating Contractor shall compute the PPT payable by ALLIED ENERGY or NAE
as the case may be pursuant to Article 7.3(b) of the Contract in
accordance with the provisions of the PPT Act Cap 354 Laws of the
Federation of Nigeria 1990, as amended, as well as any prevailing
Government fiscal incentives including, but not limited to, any credit
which offsets PPT liability.
|
|
|
(b)
|
The
PPT shall be in accordance with the PPT Act Cap 354 Laws of the Federation
of Nigeria 1990, as amended.
|
|
|
(c)
|
Subject
to Article 8.3 of the Contract, ALLIED ENERGY or NAE as the case may be
shall make all required PPT payments to Federal Inland Revenue Service.
The Operating Contractor shall prepare all returns required under the PPT
Act and timely submit them to ALLIED or NAE as the case may be for onward
filing with the Federal Inland Revenue Service. The monthly PPT payable
shall be determined from such PPT returns. The U.S. Dollar shall be used
as the currency for calculating cost recovery and
taxes.
|
Article
IV
Accounting
Analyses
|
1.
|
A
monthly accounting analysis in the form of Schedule B-l attached to this
Accounting Procedure shall be prepared by the Operating Contractor in US
Dollar and furnished to the Parties within sixty (60) days of the end of
the period covered by such analysis, for consideration and
approval.
|
|
2.
|
The
Realizable Price and the quantities actually lifted by the Parties shall
be used to compute the Proceeds as reflected in Section A of each Schedule
B-l and the allocation of such Proceeds in the categories described under
Article 8.1 of the Contract shall be reflected in Section B
thereof.
|
|
3.
|
The
allocation of the quantity of Available Crude Oil to each Party pursuant
to Article 8 of the Contract shall be according to and governed by
provisions of the Allocation
Procedure.
|
|
4.
|
The
priority of allocation of the total Proceeds for each period shall be as
follows:
(a) Royalty
Oil,
(b) Cost
Oil,
(c) Tax
Oil,
(d) Profit
Oil.
|
|
5.
|
The
amount chargeable to and recoverable from Royalty Oil, Tax Oil and Cost
Oil to be entered in Section B of the Schedule B-l shall be determined as
follows:
|
|
|
(a)
|
Royalty
Oil - The sum of royalties payable during such month, and, where
applicable, the annual amount of Concession Rentals as provided under
Article III.l of this Annex B for purposes of Royalty
Oil.
|
|
|
(b)
|
Cost
Oil - The Operating Costs applicable to such month for purposes of Cost
Oil as follows:
|
|
|
(i)
|
Non-Capital
Costs shall be the amount recorded in the books and accounts of the
Operating Contractor for such month in accordance with this Accounting
Procedure;
|
|
|
(ii)
|
Capital
Costs recorded in the books and accounts of the Operating Contractor shall
be recoverable in full and chargeable in equal installments over five (5)
Year period or the remaining life of the Contract, whichever is less.
Amortization of such costs shall be in accordance with the method
prescribed under the Schedule of the PPT Act, or over the remaining life
of the Contract, which ever is
less;
|
|
|
(iii)
|
Qualifying
Pre-Production Costs for the Lease Area shall be in accordance with the
PPT Act as amended.
|
|
|
(c)
|
Tax
Oil - The sum of the PPT payable for such month as provided under Article
III.2 of this Annex B for the purposes of Tax
Oil.
|
|
|
(d)
|
Any
carryover from previous months as provided under paragraph 6 of this
Article IV.
|
|
6.
|
Any
amounts chargeable and recoverable in excess of the allocation of Proceeds
for the month to Royalty Oil, Tax Oil and Cost Oil shall be carried
forward to subsequent months. Carryovers shall be determined as
follows:
|
|
|
(a)
|
A
Royalty Oil value carryover results when the Proceeds for such month are
insufficient for recovery of the Royalty Oil due for the
month.
|
|
|
(b)
|
A
Cost Oil value carryover results when the Proceeds remaining after
allocating a portion of the Proceeds to Royalty Oil is insufficient for
recovery of Cost Oil due for the month, including the costs described in
Article 8.1(b) of the Contract.
|
|
|
(c)
|
A
Tax Oil value carryover results when the Proceeds remaining after
allocating a portion of the Proceeds to Royalty Oil and Cost Oil are
insufficient for recovery of the Tax Oil due for the
month.
|
|
7.
|
Profit
Oil results where Proceeds remain after allocations to Royalty Oil, Cost
Oil and Tax Oil pursuant to paragraph 5 of this Article IV. Profit Oil
shall be allocated to the Parties according to the following
percentages:
|
In the
event of a discovery of a field which cannot be economically developed at the
above Profits Oil splits, the Parties shall meet to agree on the appropriate
terms and conditions and Profit Oil splits which would provide for the
development of such discovery to the economic benefit of the
Parties.
A
computation of Profit Oil shares in the form of Schedule B-2 attached to this
Accounting Procedure shall be submitted monthly in conjunction with Schedule
B-1.
Article
V
Cash Calls, Payments and
Billing
|
1.
|
To
finance Petroleum Operations pursuant to the Work Programmes and Budgets,
and consistent with the progress of Petroleum Operations, according to the
provision of Article 7.4 of the Contract, the Operating Contractor shall
issue, when it deems appropriate, but in any case not more than once per
calendar month, Cash Call notices to the Parties at least fifteen (15)
days prior to the date on which the Parties have to make available to the
Operating Contractor the required funds (“Due Date”). Cash Call notices
may be delivered to the Parties by the Operating Contractor through
registered mail or courier services or hand
delivery.
|
|
2.
|
The
Due Date shall be set by the Operating Contractor and indicated in the
Cash Call notice. Such date shall be no sooner than the first day of the
calendar month for which funds are requested. Cash Calls shall reflect the
total cash requirements of the Operating Contractor for the conduct of
Petroleum Operations for the applicable calendar month, and the Parties
shall pay their respective share of same in US Dollars, or, to the extent
determined by the Operating Contractor, in Naira to meet liabilities
incurred in Naira. Cash Calls shall be made and paid net of any bank
charge, cost or commission.
|
|
3.
|
Cash
Call notices shall be detailed according to the main cost headings in the
approved Work Programmes and Budgets. Cash Call notices shall indicate the
cash estimate for the two (2) calendar months following the month for
which funds are being called.
|
|
4.
|
Payment
of Cash Call shall be made in full by the Parties on or before the Due
Date to the bank account indicated by the Operating Contractor on the Cash
Call notices.
|
|
5.
|
In
the event that payment of any Cash Call is not paid by ALLIED ENERGY on or
before the Due Date according to Article 7.4(a)(i), then ALLIED ENERGY is
deemed to have waived its right to contribute to funding for such Cash
Call and other rights attached to such funding (including but not limited
to the right to Cost Oil and Profit
Oil).
|
|
6.
|
The
Operating Contractor shall submit monthly billing statements to all
Parties within thirty (30) days from the end of each calendar month, in
accordance with the Contract, for costs and expenditure incurred during
the previous month. Such billing statements shall be expressed in US
Dollars.
|
|
7.
|
Statements
and billings submitted by the Operating contractor shall be so detailed as
to permit cross-reference to the approved Work Programmes and Budgets. The
monthly billings shall indicate, for each of the
Parties:
|
|
|
(A)
|
the
accumulated Cash Call advances received by the Operating Contractor from
the beginning of the Calendar Year and from inception to date, including
the advances received in the reporting calendar
month;
|
|
|
(B)
|
its
share of the costs accumulated from the beginning of the Calendar Year,
and from inception to date, accounted for on Accrual Basis; however, for
purposes of settlement between the Operating Contractor and the Parties,
the billings shall be on a Cash Basis after adjusting for accrual and
other unpaid liabilities;
|
|
|
(C)
|
its
share of the variation from the beginning of the Calendar Year and from
inception to date, of fixed assets and material acquired and held as
Contract property and of abandonment costs charged under Article 11.
Acquisition of Contract property and fixed assets shall be charged to the
Petroleum Operations on the basis of the actual cost of either purchase or
construction at the place of use, net of rebates and discounts received,
if any;
|
|
|
(D)
|
its
share of the variation from the beginning of the Calendar Year, and from
inception to date, of the payable and receivable accounts within the
account and records relating to this Contract;
and
|
|
|
(E)
|
the
surplus or shortage of the advances contributed by such Party to the
Petroleum Operations from inception to
date.
|
|
8.
|
The
Operating Contractor may not commingle with its own funds the monies which
it receives from or on behalf of ALLIED ENERGY to finance Petroleum
Operations. Unless otherwise required in connection with the obtaining of
financing for Petroleum Operations, all such monies received from ALLIED
ENERGY shall be deposited in a dedicated bank
account.
|
Article
VI
Other
Provisions
|
1.
|
The
Operating Contractor shall open and keep bank accounts in Nigeria in Naira
and US Dollars where all funds remitted from abroad shall be deposited for
the purpose of meeting local expenditures. For purposes of keeping the
books of accounts, any Foreign Currency remitted by the Operating
Contractor into Nigeria shall be converted into Naira at the monthly
exchange rates advised by the Central Bank of
Nigeria.
|
|
2.
|
The
Operating Contractor shall prepare financial accounting and budget
statements in accordance with the Operating Contractor’s prescribed
reporting format.
The
Operating Contractor shall report on the cumulative production in the
Lease Area in the Form on Schedule B-3
Attached.
|
Schedule B -
1
Monthly Accounting
Analysis
Month
of_______, _______
Section
A - Lifting Summary
|
Proceeds
Received By:
|
||||||||||||
|
Lifting
Date
|
Crude
Type
|
RP
US $ Bbl
|
Volume
Bbl
|
Proceeds
US $
|
Contractor
|
First
Party
|
||||||
|
Totals
|
||||||||||||
Section
B - Allocation of Proceeds - Expressed in U.S. Dollars
|
CATEGORY
|
||||||||||||
|
Royalty
Oil
|
||||||||||||
|
Cost
Oil
|
||||||||||||
|
Tax
Oil
|
||||||||||||
|
Contractor
Profit Oil
|
||||||||||||
|
First
Party Profit Oil
|
||||||||||||
|
Totals
|
Schedule
B - 2
Profit
Oil Shares
Month
of_______, _______
Section
A - Total Production for the month
|
Production
Field
|
Total
Net Barrels
|
|
Section
B - Total Profit Oil for the month
|
Category
|
U.S.
Dollar
|
|
|
Proceeds
|
||
|
Royalty
Oil
|
||
|
Cost
Oil
|
||
|
Tax
Oil
|
||
|
Profit
Oil
|
Section
C - Calculation of Profit Oil Share
|
RANGE
FOR CUMM. PROD. IN MMB FROM
|
PROFIT
OIL SHARING RATIO
|
CUMULATIVE
PRODUCTION
ACHIEVED
|
APPLICABLE
PROFIT
RATIO
|
AVAILABLE
|
FIRST
PARTY SHARE
|
CONTR.
SHARE
|
||||||||||
|
FIRST
|
FIRST
|
|||||||||||||||
|
LEASE
AREA
|
PARTY
|
CONTR.
|
PARTY
|
CONTR.
|
PROFIT
OIL
|
U.S.
Dollar
|
U.S.
Dollar
|
|||||||||
|
0 -
350
|
||||||||||||||||
|
351
- 750
|
||||||||||||||||
|
751
- 1000
|
||||||||||||||||
|
1000
- 1500
|
||||||||||||||||
|
1500
- 2000
|
||||||||||||||||
Schedule
B - 3
Cumulative
Production Analysis
Section
A - Monthly Production
|
Crude
Type
|
Planned
Production
for
Month Bbls
|
Planned
Cumulative
For
Quarter Bbls
|
Actual
Production
for
Month Bbls
|
Actual
Cumulative
for
Quarter Bbls
|
||||
|
Totals
|
Section
B - Cumulative Production
|
Crude
Type
|
Cumulative
Production
for
Quarter Bbls
|
Previous
Quarter Cumulative Production B/F Bbls
|
Cumulative
Production
To
Date Bbls
|
||||
|
Totals
|
Section
C - Cumulative Production/Liftings/Storages
|
Crude
Type
|
Cumulative
Production
|
Cumulative
Liftings
|
In
Storage
|
||||
|
Totals
|
ANNEX C
TO THE PRODUCTION SHARING
CONTRACT BETWEEN
ALLIED ENERGY, CAMAC
NIGERIA, and NAE
and dated this
22
nd
day of July
2005
ALLOCATION
PROCEDURE
Article
I
Application
|
1.
|
This
Allocation Procedure (Procedure) sets out the methods for the allocation
of Available Crude Oil from the Lease Area and the Parties shall allocate
all lifting of Available Crude Oil in accordance with this Procedure and
the Contract.
|
|
2.
|
In
the event that the production of Available Crude Oil is segregated into
two or more types or grades, the provisions of this Procedure shall apply
separately to each such type or grade. To the extent that distribution on
such a basis is impracticable, a separate method for the allocation of
such Available Crude Oil shall be agreed upon by the
Parties.
|
|
3.
|
In
the event of a conflict between the terms of this Procedure and the
Contract, the terms of the Contract shall
prevail.
|
|
4.
|
The
procedures set forth herein may be amended from time to time by mutual
agreement of the Parties.
|
Article
II
Definitions
|
1.
|
The
words and expressions defined in the Contract when used herein, shall have
the meaning ascribed to them in the Contract. In addition, the following
words shall have the meaning set forth
below:
|
|
|
(a)
|
“
Current
Quarter
”
means the calendar quarter within which the relevant schedules are
prepared and submitted;
|
|
|
(b)
|
“
Forecast
Quarter
”
means the first calendar quarter succeeding the Current
Quarter;
|
|
|
(c)
|
“
Lifting
Allocation
”
means the quantity of Available Crude Oil, which each Party has the right
to take in kind, lift and dispose of in accordance with Article 8 of the
Contract;
|
|
|
(d)
|
“
Primary
Nominations
”
means written
statement issued by each Party to the other at least thirty (30) days
prior to the commencement of each quarter declaring the volume by grade of
its estimated Lifting Allocation which the Party desires to lift during
the Forecast Quarter;
|
|
|
(e)
|
“
Proceeds
”
means the amount in US
Dollars determined by multiplying the Realizable Price by the number of
Barrels of Available Crude Oil lifted by any Party;
and
|
|
|
(f)
|
“
Proceeds
Imbalance
”
means the difference between each Party’s Proceeds to which it is entitled
and the Proceeds which each Party has received, as reflected in each
quarter’s Schedule C-2 of this
Procedure.
|
Article
III
Lifting
Allocation
|
1.
|
On
or before September 30 of every Calendar Year, the Operating Contractor
shall advise the Parties of its forecast of the Available Crude Oil to be
produced by grades during each month of the first six (6) months of the
next ensuing Calendar Year.
|
|
2.
|
On
or before March 31 of every Calendar Year, the Operating Contractor shall
advise the Parties of its forecast of Available Crude Oil to be produced
by grades during each month of the six (6) months commencing July 1 of the
Calendar Year.
|
|
3.
|
Thirty-five
(35) days before commencement of production from the Lease Area and
thereafter thirty-five (35) days prior to the beginning of the Forecast
Quarter, the Operating Contractor shall notify the Parties of the
estimated Lifting Allocation which can be produced and made available for
disposal during the Forecast Quarter. Such estimated Lifting Allocation
shall take into account any Proceeds Imbalance for the quarter first
preceding the Current Quarter and any estimated Proceeds Imbalance for the
Current Quarter computed in accordance with paragraph 3 of Article IV of
this Annex C. Such notice shall be in the form of schedule C-l attached
hereto indicating the estimated quantities of Royalty Oil, Tax Oil, Cost
Oil and Profit Oil, each Party’s estimated Lifting Allocation and the
estimated Realizable Price used to prepare such estimated Lifting
Allocations.
|
|
4.
|
Thirty
(30) days before the commencement of production from the Lease Area and
thereafter not later than thirty (30) days before the beginning of the
Forecast Quarter, each Party shall notify the Operating Contractor and
each other of its Primary Nomination of Available Crude Oil which it
intends to lift during the Forecast Quarter which shall not exceed its
estimated Lifting Allocation. Such notice shall include the information
described in Article V. 1 of Annex D - Uniform Nomination, Ship Scheduling
and Lifting Procedure.
|
|
5.
|
The
estimated Realizable Price to be used by the Operating Contractor to
prepare Schedule C-l (Estimated Quarterly Lifting Allocation) shall be the
Realizable Price of the first month of the Current
Quarter.
|
|
6.
|
Each
Party shall be obliged to lift its own Lifting Allocation in accordance
with Uniform Nomination, Ship Scheduling and Lifting Procedures (Annex D).
In the event that one Party lifts any other Parties’s Lifting Allocation,
pursuant to Article 8.4 of the Contract, the lifting Party shall pay to
the non-lifting Parties the applicable Proceeds pursuant to Article 8.4 of
the Contract. In such case, the non-lifting Parties shall be treated for
all other purposes under this Contract as though it had made such lifting
itself.
|
Article
IV
Adjustments of Lifting
Allocations
|
1.
|
On
or before thirty-five (35) days prior to the last day of the Current
Quarter, the Lifting Allocation for the first preceding quarter thereto
shall be computed and the Proceeds Imbalance determined and agreed to by
all Parties in the Schedule C-2 attached hereto indicating liftings made
by the Parties and the Proceeds therefrom. Section A of such Schedule C-2
shall be based on the actual Section B of such Schedule C-2 that shall be
prepared from the Schedule B-l (of the Accounting Procedure) for the
months in the quarter.
|
|
2.
|
On
or before thirty-five (35) days prior to the last day of the Current
Quarter, the Proceeds Imbalance for the Current Quarter shall be
estimated, taking into account the actual Proceeds Imbalance computed for
the first preceding quarter under paragraph 1 of this Article
IV.
|
|
3.
|
The
Proceeds Imbalance for the first preceding quarter computed under
paragraph 1 above and the estimated Proceeds Imbalance for the Current
Quarter computed under paragraph 2 above shall be taken into account by
the Parties by debiting or crediting such Proceeds Imbalances to each
Party’s share of the estimated Lifting Allocation reflected in Schedule
C-l for the Forecast Quarter filed by dividing the respective Proceeds
Imbalance by the Realizable Price applicable for the period in
question.
|
|
4.
|
Notwithstanding
the reports required to be kept by the Operating Contractor pursuant to
Article IV in Annex D, the Operating Contractor shall keep complete
records of all liftings. At the end of each quarter, the Parties will meet
to reconcile the Lifting Allocations and the actual liftings with a view
to making adjustments as appropriate. If any disagreement arises with
respect to such reconciliation, the area of disagreement shall be mutually
resolved by the Parties, in accordance with the official records of the
Ministry.
|
|
5.
|
All
Lifting Allocations and actual liftings shall be audited at the end of
each Calendar Year by a mutually acceptable independent
auditor.
|
Schedule
C - I
Estimated
Quarterly Lifting Allocation,
_________
Quarter (____-__________), ______________
Section
A - Estimated Total Proceeds
|
Crude
Type
|
Estimated
Lifting Volume Bbls
|
Estimated
RP U.S. Dollar/Bbls
|
Estimated
Proceeds U.S. Dollar
|
||||
|
Totals
|
Section
B - Allocation of Estimated Proceeds - Expressed in U.S. Dollars
|
Prior
Month
|
Estimated
Quarter
|
Recoverable
|
Allocation
of Estimated Proceeds To:
|
|||||||
|
Category
|
Carry
Over
|
Charges
|
This
Quarter
|
FIRST
PARTY
|
CONTR.
|
|||||
|
Royalty
Oil
|
||||||||||
|
Cost
Oil
|
||||||||||
|
Tax
Oil
|
||||||||||
|
Contractor
Profit Oil
|
||||||||||
|
First
Party Profit Oil
|
||||||||||
|
Totals
|
||||||||||
Prior
Quarter’s Proceeds Imbalance
Current
Quarters Estimated Proceeds Imbalance (Over)/Under
Estimated
Proceeds Allocation For Quarter
Section
C - Estimated lifting Allocation
|
Contractor
Allocation
|
First
party Allocation
|
||||||||
|
Crude
Type
|
Proceeds
|
Bbls
|
Proceeds
|
Bbls
|
|||||
Schedule
C - 2
Actual
Quarterly Lifting Allocation
_________Quarter
(_________-______ ), __________
Section
A - Lifting Summary
|
Proceeds
Received By
|
||||||||||
|
Crude
Type
|
Volume
Bbls
|
Proceeds
US $
|
RP
US $/Bbl
|
Contractor
|
First
Party
|
|||||
|
Totals
|
||||||||||
Section
B - Allocation of Proceeds - Expressed in U.S. Dollar
|
Contractor
|
First
Party
|
|||||||||
|
Category
|
Sum
of Monthly Proceeds
|
Allocation
of Proceeds
|
Lifting
Proceeds Received
|
Allocation
of Proceeds
|
Lifting
Proceeds Received
|
|||||
|
Royalty
Oil
|
||||||||||
|
Cost
Oil
|
||||||||||
|
Tax
Oil
|
||||||||||
|
Contractor
Profit Oil
|
||||||||||
|
First
Party Profit Oil
|
||||||||||
|
Totals
|
||||||||||
|
Proceeds
Imbalance
|
Quarter
(Over)/Under
|
|
Prior
Quarter (Over)/Under
|
|
|
Total
(Over)/Under
|
ANNEX D
TO THE PRODUCTION SHARING
CONTRACT BETWEEN
ALLIED ENERGY, CAMAC
NIGERIA, and NAE
and dated this
22
nd
day of July
2005
UNIFORM NOMINATION, SHIP
SCHEDULING AND LIFTING
PROCEDURE
Article
I
Application
|
1.
|
This
Annex D sets out the procedure for the nomination, ship scheduling and
lifting of Available Crude Oil from the Lease
Area.
|
|
2.
|
Pursuant
to Article 8.2 of the Contract the Parties have the right to nominate,
lift and separately dispose of their agreed allocation of Available Crude
Oil produced and saved from the Lease
Area.
|
|
3.
|
The
procedure set out herein may be amended from time to time by the mutual
agreement of the Parties.
|
In the
event of a conflict between the terms of this Annex D and the Contract, the
terms of the Contract shall apply.
Article
II
Definition and
Terminology
|
1.
|
Words
and expressions in this Annex shall have the meanings ascribed to them in
the Contract. In addition, the following words shall have the following
meanings:
|
|
|
(a)
|
“
Available
Production
” means the quantity of Crude Oil which can be
efficiently and economically produced and saved from the producing wells
subject to any limitations imposed by any government authority or other
technical limitation resulting from
operations.
|
|
|
(b)
|
“
Technical Allowable
Production
” means the quantity of Crude Oil from time to time
determined by the Ministry as being the quantity that may be produced from
the Lease Area on a well by well basis for a particular
period.
|
|
|
(c)
|
“
Commercial Production
Quota
” means the quantity of Crude Oil from time to time fixed or
advised by the appropriate government authority as the permissible
quantity that may be produced from the Lease Area on a crude stream basis
for a particular month/quarter.
|
|
|
(d)
|
“
Actual
Production
” means the quantity of Crude Oil which is produced from
the Lease Area on a monthly/quarterly
basis.
|
|
|
(e)
|
“
Available Monthly
Scheduling Quantities
” means each Party’s allocation of the
Available Production for the calendar month plus Opening
Stock.
|
|
|
(f)
|
“
Combined Lifting
Schedule
” means the lifting programmes of the Parties for a given
calendar month/quarter as prepared by the Operating Contractor and agreed
to by the Parties.
|
|
|
(g)
|
“
Opening Stock
”
means the quantity of Crude Oil that each Party may carry forward to the
succeeding month, recognizing the difficulty in lifting precisely the
Available Monthly Scheduling Quantity. This quantity, which excludes
unpumpable dead-stock, should not be such as to cause a production shut-in
through reaching maximum stock levels in which event, the provisions of
Article V will apply. The quantity also includes credits/debits accruing
after reconciliation with Available Crude
Oil.
|
Article
III
Production/Notice of
Availability
|
1.
|
The
Operating Contractor shall endeavour to produce the aggregate volume of
Crude Oil nominated by the Parties as provided in this
Contract.
|
|
2.
|
In
the event that Available Crude Oil is segregated into two or more grades
the provisions of this Annex D shall apply separately to each such grade.
To the extent that distributions on such a basis is impracticable,
separate arrangement for sharing of such Available Crude Oil shall be
agreed upon by the Parties.
|
|
3.
|
On
or before September 30 of every Calendar Year, the Operating Contractor
shall advise the Parties of its forecast of the Available Production to be
produced by grades during each month of the first six (6) months of the
next ensuing Calendar Year.
|
|
4.
|
On
or before March 31 of every Calendar Year, the Operating Contractor shall
advise the Parties of its forecast of the Available Production to be
produced by grades during each month of six months commencing July 1 of
the Calendar Year.
|
|
5.
|
Where
for operational reasons the Operating Contractor cannot exactly produce at
the anticipated Commercial Production Quota, the Operating Contractor
shall notify the Parties promptly of any required changes exceeding two
(2%) percent of the quantities originally notified. In any event, when
Actual Production for the month/quarter is known each Party’s allocation
will be re-calculated and the differences between Actual Production and
Commercial Production Quota will be credited/debited to each Party, and
shall form the Party’s entitlement for the following month or quarter
except in the case of production shut-ins where the provisions of Article
VI of this Annex D will apply.
|
|
6.
|
Thirty
(30) days before the commencement of production from the Lease Area and
thereafter not later than thirty (30) days before the beginning of each
month, each Party shall notify the other of its primary nomination of
Available Crude Oil which it intends to lift during the ensuing month,
which shall not exceed its monthly allocation of Commercial Production
Quota plus Opening Stock.
|
|
7.
|
At
the end of each month or quarter, as may be agreed, the Parties will meet
to reconcile Available Monthly Scheduling Quantities with actual Available
Crude Oil lifted and adjustments made where necessary. All entitlements
shall be audited at the end of each Calendar Year by a mutually acceptable
independent auditor.
|
|
8.
|
The
Operating Contractor shall keep complete records of all liftings and
provide same to the Parties in accordance with Articles III & IV of
this Annex D.
|
Article
IV
The Operating Contractor’s
Reports
|
1.
|
The
Operating Contractor shall, not more than fifteen (15) calendar days after
the end of each calendar month and quarter, prepare and furnish to the
Parties, a written statement showing in respect of the month and quarter
respectively:
|
|
|
(a)
|
Production
Quota stating each Party’s allocation of Commercial Production
Quota;
|
|
|
(b)
|
Lifting
against Available Crude Oil;
|
|
|
(c)
|
Each
Party’s allocation of Available Crude
Oil;
|
|
|
(d)
|
Quantity
of Crude Oil in stock for each Party at the end of the said calendar month
or quarter;
|
|
|
(e)
|
Any
production losses attributable to Crude Oil used in Petroleum Operations;
and
|
|
|
(f)
|
Cumulative
Production.
|
|
2.
|
In
the event that the Parties disagrees with any of the Operating
Contractor’s reports, the area of the disagreement shall be mutually
resolved by the Parties to the satisfaction of the Ministry. The Operating
Contractor shall thereafter prepare a revised report to reflect the
changes agreed.
|
|
3.
|
The
Operating Contractor shall endeavour to send consistent statistical data
to the different reporting bodies and should adhere to agreed formats of
reporting.
|
|
Article
V
|
Scheduling
Details
|
1.
|
Scheduling
Notification
- At least thirty (30) days prior to the beginning of
a calendar month, each Party shall notify the Operating Contractor of its
proposed tanker schedule for that calendar month specifying the
following:
|
|
|
(a)
|
A
loading date range of ten (10) days for each tanker
lifting;
|
|
|
(b)
|
The
desired parcel size for each lifting in Barrels, subject always to change
within a range of plus or minus five percent (5%) by the Party so
nominating;
|
|
|
(c)
|
The
tanker’s name or To Be Named (TBN) for each tanker lifting. Tanker
nomination made as TBN shall be replaced at least seven (7) working days
prior to the accepted date range, unless a shorter time is acceptable to
the Operating Contractor; and
|
|
|
(d)
|
Documentation
instructions shall be given for each lifting not later than seven (7)
working days prior to the first day of the accepted date range for the
tanker in question.
|
|
2.
|
Tanker Substitution
- Any Party may substitute another tanker to lift its nominated
volume of Crude Oil, provided such substituted tanker has the same arrival
date range as the originally scheduled tanker and all other provisions of
Annex C and D are complied with, and revised documentation instruction
reflecting the name of the substitute tanker is given to the Operating
Contractor no less than three (3) working days prior to arrival, unless
otherwise agreed by the Operating
Contractor.
|
|
3.
|
Overlapping Date
Ranges
- In the event the Combined Lifting Schedule contains
overlapping accepted date ranges, the tanker which gives its Notice of
Readiness (NOR) and has provided all documentation and obtained clearances
first within such accepted date ranges shall be loaded first, unless
urgent operational requirements dictate otherwise in which case, demurrage
shall be borne by Petroleum Operations and charged to Operating
Costs.
|
|
4.
|
Confirmation of
Lifting Schedules
- On or before the 10
th
of every month, the Operating Contractor shall either confirm the
feasibility of the proposed monthly lifting schedules or, alternatively,
advise necessary modifications to such schedules. Such confirmation which
shall be in the form of Combined Lifting Schedule, should include a
loading date range of two (2) days for each lifting, the first day being
the earliest date of arrival and the second day being the latest date of
arrival.
|
Accounting
Analyses
|
5.
|
Operational
Delays
- The Parties recognize that occasionally environmental and
technical problems in the Lease Area may cause delays and/or disruptions
in the Combined Lifting Schedule. The affected Party shall promptly notify
the Operating Contractor of such delays and/or disruptions; and the
projected termination of each of such delays and/or disruptions and advise
the Operating Contractor of the revised Combined Lifting Schedule. In the
event that such notification does not allow for a revised Combined Lifting
Schedule on the part of the Operating Contractor, then any resultant costs
will be charged to Operating Costs.
|
|
6.
|
Estimated Delayed
Arrival of a Tanker
|
|
|
a.
|
Whenever
it becomes apparent that a tanker will not be available as scheduled or
will be delayed, the Party utilizing such tanker shall notify the
Operating Contractor of the circumstances and expected duration of the
delays. Upon assessing the impact that the delay will have upon the
Combined Lifting Schedule and Production during the current and/or next
month, the Operating Contractor shall make appropriate revision(s) to the
Combined Lifting Schedule to avoid disruption in production and the
Party(ies) affected by the revision shall be absolved of any liability
including but not limited to the impending demurrage claims resulting from
such revision(s) to the Combined Lifting
Schedule.
|
|
|
b.
|
In
the event that any Party fails to lift its Nominated Share of Production
in any month/quarter, that Party shall have the right during the following
month/quarter to lift the unlifted quantities, provided such inability to
lift does not result in tank top situation or curtailment of production.
In the event that production is curtailed as a result of the defaulting
party’s inability to lift its Nominated Share of Production, the
defaulting party shall be advised in writing of the estimated quantity of
curtailed production and it shall be deducted from the defaulting party’s
entitlement in the following
month/quarter.
|
|
7.
|
Tanker
Standards
– All tankers nominated for lifting by any Party shall
conform to international regulations and standards concerning size,
equipment, safety, maintenance and the like adopted by the Operating
Contractor for the terminal in question and by the appropriate government
authority. Failure of a tanker to meet such standards shall not excuse the
nominating Party from the applicable consequences provided in the
Contract. The Operating Contractor shall keep the Parties advised as to
the current regulations and standards in use at the terminals operated by
the Operating Contractor.
|
|
8.
|
Destination of Crude
Oil
- The Operating Contractor shall at all times disclose the
destination of the Crude Oil lifted under this Contract as described in
the documentation instructions.
|
Article
VI
Production
Decreases/Increases Subsequent to Nomination
|
1.
|
Production
decreases occurring after lifting nominations have been scheduled and not
resulting from the fault of any Party shall be shared by the Parties in
proportion to their respective
nominations.
|
|
2.
|
Production
increases occurring after lifting nominations have been confirmed by the
Operating Contractor shall be shared by the respective Parties, in
proportion to their respective agreed
allocation.
|
|
3.
|
To
the extent that field operations permit, a Party shall have the right to
request the Operating Contractor to adjust its nomination during a month
following confirmation of the Combined Lifting Schedule provided that the
nominations, entitlements and lifting of the other Parties are not
affected thereby without their express written consent. Adjusted
nominations shall always be within the limits of the Party’s allocated
portion of the Commercial Production Quota, plus Opening
Stock.
|
|
4.
|
Any
production decrease caused by or resulting directly from the actions of
one Party shall not affect the availability or entitlement of the other
Parties. The Operating Contractor will, to the greatest extent possible,
endeavour not to affect the lifting of the other
Parties.
|
|
5.
|
For
the avoidance of doubt, each Party’s agreed allocations shall be based on
Actual Production.
|
Article
VII
Delivery Terms and
Conditions
|
1.
|
Tanker
Notification
: The Parties shall report, or cause the tankers
nominated for lifting pursuant to this Annex D to report, by radio/telex
to the Operating Contractor, each tanker’s scheduled arrival date and hour
as follows:
|
|
|
(a)
|
Seven
(7) days before estimated arrival, or upon clearing at last port if there
is less than seven (7) days steaming time before estimated
arrival;
|
|
|
(b)
|
Seventy-two
(72) hours before estimated
arrival;
|
|
|
(c)
|
Forty-eight
(48) hours before estimated
arrival;
|
|
|
(d)
|
Twenty-four
(24) hours before estimated arrival;
and
|
|
|
(e)
|
When
the estimated arrival time made pursuant to (b), (c), or (d) above is
revised by more than twelve (12) hours from that most recently notified
or, thereafter, if revised by more than one-half (1/2)
hour.
|
|
Parties
shall also cause such tanker so nominated, or their agent, to report by
radio/telex to the Nigerian Government Port Head Official at the Port at
least seventy-two (72) hours before each tanker’s scheduled arrival date
giving the tanker’s name, call sign, ETA at the port(s), cargo tonnage to
be loaded, number of crew, health status, whether or not a doctor is on
board and request for “Free
Pratique”.
|
|
2.
|
Notice of
Readiness
: Upon arrival at the designated safe anchorage at the
port or upon the time of boarding of the mooring master, whichever is
earlier, the master of the tanker shall give the Operating Contractor a
Notice of Readiness (NOR) by radio or by letter, as appropriate,
confirming that the tanker is ready to load cargo, berth or no berth.
Laytime, as herein provided, shall commence upon the expiration of six (6)
running hours after receipt by the loading terminal of such notice, or
upon the tanker’s completion of mooring at the sea loading terminal,
whichever first occurs. However, where delay is caused to the tanker
getting into berth after giving NOR for any reason over which neither the
Party nor the loading terminal has control, such delay shall not count as
used laytime. In addition time used by tanker while proceeding to berth or
awaiting entry and “Free Pratique” by Customs after the expiration of six
(6) running hours free time, shall not count as used
laytime.
|
|
3.
|
Early Tanker
Arrival
: Notwithstanding the provisions Article VII.2 above, if the
tanker arrives and tenders NOR to load prior to its agreed date range, the
Operating Contractor shall endeavour to load the tanker on arrival or as
soon thereafter as possible and laytime shall only commence when loading
commences. If, however, the Operating Contractor is unable to accept a
tanker for loading prior to the agreed date range, laytime shall commence
at 0600 hours local time on the first day of the agreed date range or when
the loading commences, whichever comes
first.
|
|
4.
|
Late Tanker
Arrival
: If a tanker arrives and tenders NOR to load after its
accepted date range and other tankers (having arrived during their
accepted date range), are either loading or waiting to load, the loading
tanker shall be governed by the earliest availability of crude and loading
slot, and laytime shall commence only when loading
commences.
|
|
5.
|
Laytime
: The
Operating Contractor shall be allowed laytime in running hours equal to
one-half of the voyage laytime permitted under worldscale, or such other
freight scale that is issued in replacement thereof, for loading a full
cargo and pro rata thereof for a part cargo, with minimum of eighteen (18)
hours. Sundays and holidays included, any delay due to the fault of the
tanker or its facilities to load cargo within the time allowed shall not
count as used laytime. If rules of the owner of the vessel or regulations
of Government or appropriate Government agencies prohibit loading of the
cargo at any time, the time so lost shall not count as used laytime. Time
consumed loading or discharging ballast or discharging slops shall not
count as used laytime. Laytime shall continue until hoses have
disconnected.
Laytime
allowed for loading a full cargo is “36 running hours” with a provision
for pro-rating the laytime in the case of vessels loading part cargo. When
a vessel is loading one parcel only and operations commence ahead of the
acceptance date, there is no demurrage involved unless the vessel
completes cargo after the permissible laytime, commencing 0001 hours of
the first day of the acceptance date range. When more than one parcel and
more than one acceptance date is awarded, the demurrage will not count
unless the total loading is completed after the expiry of the permissible
laytime for the last parcel, counting 0001 hours of the first day on the
last acceptance date.
|
|
6.
|
Demurrage
: If
the Operating Contractor is unable to load within the time allowed, the
Operating Contractor shall apply demurrage per running hour (pro rata for
a part thereof) for laytime exceeding the allowed laytime as specified
herein. The rate of demurrage will be calculated by multiplying the time
by the Average Freight Rate Assessment (AFRA) as determined by the London
Tanker Brokers Panel. In the event that such determination is no longer
available, a freight rate-assessment shall be mutually agreed by the
Parties, which rate shall be appropriate in relation to the size of the
tanker and in demurrage rate according to tanker size as specified in the
Worldwide Tanker Normal Freight Scale or such other foreign scale that is
issued in replacement thereof. If however, demurrage is incurred by reason
of fire, storm, explosion, or by strike, picketing, lockout, stoppage or
restraint or labour difficulties, or disturbances or by breakdown of
machinery or equipment in or about the loading terminal, the rate of
demurrage as calculated in accordance with the above shall be governed by
force majeure and shall not attract any demurrage. Demurrage claims must
be notified in writing together with supporting documents within ninety
(90) days from Bill of Lading date.
|
|
7.
|
Changes
of Berth
: The Operating Contractor shall have the right
to shift any vessel from one berth to another. Charges of running lines on
arrival at and leaving and berth, wharfage and dockage charges at that
berth, and any other extra port charges or port expenses incurred by
reason of such shifting at the Operating Contractor’s request shall be
borne by the Operating Contractor and shall count as used laytime. If,
however, it is necessary to shift the vessel from the berth because of the
breakdown of machinery or other deficiency of the vessel or its crew, the
resulting expenses shall be borne by the Party whose Crude Oil is being
lifted. The time consumed in such circumstances, shall not count as used
laytime. However, the vessel shall lose its regular turn in berth. When
the vessel is ready to recommence loading, it shall so advise the
Operating Contractor and wait its turn for reberthing and such time after
notice is given shall not count as used
laytime.
|
|
8.
|
Tanker
Departure
: The tanker shall vacate the berth as soon as loading is
complete. The Party that scheduled such tanker shall indemnify the
Operating Contractor for any direct loss or damage incurred as a result of
the tanker’s failure to vacate the berth promptly including such loss or
damage as may be incurred due to resulting delay in the docking of the
tanker awaiting the next turn to load at such
berth.
|
|
9.
|
Loading Hoses
:
Hoses for loading shall be furnished by the Operating Contractor and shall
be connected and disconnected by the tanker’s crew under the supervision
of a suitable qualified ship’s officer acting on the advice of the
Operating Contractor’s mooring
master.
|
|
10.
|
Partial Cargo
:
Should the Operating Contractor supply less than full cargo, for any
reasons the tanker shall not be required to proceed to sea until all of
her tanks are filled with a combination of cargo and ballast as will place
her in a seaworthy condition.
|
Article
VIII
Crude Oil Quantity And
Measurement
|
1.
|
Certification
:
The quantity and origin of each shipment of Crude Oil shall be determined
by the appropriate Government authority at the loading terminal and set
forth in standard certificates of quantity, quality and origin. Each Party
shall have the right to designate a representative at its own expense, who
shall have the right to witness the determination of quantity, quality and
origin. All reasonable facilities shall be supplied by the Operating
Contractor, as necessary, to such Party’s representatives at the port to
enable such representatives to witness the measurements taken at the
loading terminal and the taking of the sample to be used by and supplied
to the representative of the Party.
|
|
2.
|
Acceptance of
Certificate
: If the Party in question does not appoint a
representative, or if such representative appointed as aforesaid agrees
with the Certificate of Quantity, Quality and Origin of a shipment of
Crude Oil (in which event he shall so indicate by signing the Certificates
of Quantity, Quality and Origin), such determinations shall be final and
binding on the Parties.
|
|
3.
|
Refusal of
Certificate
: If the determination of Quantity, Quality and Origin
by the appropriate Government authority has not been approved by such a
representative in accordance with Article VIII.2 above and dispute arises
concerning the Quality, Quantity and Origin of Crude Oil, recourse shall
be made to mutually agreed independent expert to resolve the dispute on
the basis of his expertise. Claims about Quality, Quantity of Crude Oil
delivered, shall be notified in writing with all supporting documents,
within forty-five (45) days from Bill of Lading date, otherwise the claim
shall be considered closed. The expert shall be selected on the basis of
his special knowledge of the subject matter in this regard and shall be
appointed by mutual agreement of the Parties. Such expert shall file his
conclusions within thirty (30) days after his date of appointment. Any
conclusions of such expert shall be binding on the Parties. Pending the
determination of the dispute, the tanker may sail, unless the Parties
agree otherwise.
|
|
4.
|
Quantity
Determination
: The quantity of Crude Oil lifted shall be determined
at the time of loading on the basis of gauging the terminal tanks before
and after the lifting of such Crude Oil, or otherwise by meter reading
installed on the loading line from the tanks, as approved by appropriate
Government authority. The quantity in barrels of Crude Oil determined
pursuant to the foregoing procedure should be corrected to a temperature
of sixty-degrees Fahrenheit (60°F) in accordance with the most currently
published ASTM-IP Petroleum Measurement Tables. A copy of the conversion
calculation, if any shall be submitted to the lifting Party through it’s
representative. In addition, the bottom, sediment and water (“BS&W”)
content, determined in accordance with Article VIII.5 hereof, shall be
deducted from the quantity loaded, for purposes of preparing the Bill of
Lading for such shipment and for purposes of substantiating claims about
Quantity and Quality. Any substantiated loss of Crude Oil occurring in
transit between the point of such determination and delivery shall be
borne by the lifting Party provided such losses do not result due to
differences in method of determining BS&W between the loading and
discharge terminals. For differences occurring where same method of
determination at both points are used, provisions of Article VIII.3 above
shall apply. The retained sample(s) shall be used in determining such loss
claims.
|
|
5.
|
Quality
Determination
: The determination of API Gravity and BS&W
content shall be made of each shipment of Crude Oil. BS&W content and
API Gravity shall be determined according to standard international
practices acceptable to the relevant Government
authorities.
|
|
6.
|
Samples
: A
sample of each shipment of Crude Oil shall be taken. The sample shall be
sealed and retained by the Operating Contractor for a minimum of ninety
(90) days. The lifting Party or its representative shall have the right to
receive one (1) gallon sealed sample of the Crude Oil loaded which shall
be placed on board the tanker, if so
requested.
|
ANNEX
E
TO THE PRODUCTION SHARING
CONTRACT BETWEEN
ALLIED ENERGY, CAMAC
NIGERIA, and NAE
and dated this
22
nd
day of July
2005
PROCUREMENT AND PROJECT
IMPLEMENTATION
PROCEDURES
Article
I
Application
|
1.1
|
These
Procurement and Project Implementation Procedures (“Procedures”) shall be
followed and observed in the performance of any Party’s obligations under
the Contract. Words and expressions defined under the Contract, when used
herein, shall have the meanings ascribed to them in the Contract. In the
event of a conflict between the terms of these Procedures and the
Contract, the terms of the Contract shall
prevail.
|
|
1.2
|
These
Procedures shall be applicable to all contracts and purchase orders whose
values exceed the respective limits set forth in Article 1.3 below and
which, pursuant thereto, require the prior concurrence of the Parties.
These Procedures may be amended from time to time by the
Parties.
|
|
1.3
|
The
Operating Contractor shall have the authority, subject to any limitations
or restrictions established by the Management Committee, to enter into any
contract or place any purchase order in its own name for the performance
of services or the procurement of facilities, equipment, materials or
supplies, provided that:
|
|
|
(a)
|
Prior
approval of the Parties shall be obtained for all contracts or purchase
orders where the cost exceeds two million US Dollars (USD 2,000,000) or
its equivalent in Naira;
|
|
|
(b)
|
The
amount set forth in Article 1.3(a) above will be reviewed by the
Management Committee whenever it becomes apparent to any Party that such
limits create unreasonable constraints on the Petroleum Operations. In the
event of a significant change in the exchange rate of Naira to US Dollar
compared to that, which existed on the Effective Date, the Management
Committee shall review the limits set forth in Article 1.3(a)
above;
|
|
|
(c)
|
Such
contracts shall be entered into, and such purchase orders shall be placed
with third parties, which in the Operating Contractor’s opinion are
technically and financially able to properly perform their
obligations;
|
|
|
(d)
|
Procedures
customary in the oil industry for securing competitive prices shall
prevail; and
|
|
|
(e)
|
The
Operating Contractor shall give preferences to contractors that are
companies organized under the laws of Nigeria to the maximum extent
possible provided they meet the required
standards;
|
|
|
(f)
|
The
Operating Contractor shall give preferences to such goods which are
manufactured or produced in Nigeria or services rendered by Nigerians
provided they meet specifications and
standards.
|
Article
II
Project Implementation
Procedure
|
2.1
|
The
Operating Contractor realizing the need for a project or contract to which
these Procedures apply pursuant to Article 1.3 above, shall introduce it
as part of the proposed Work Programme and Budgets to be developed and
submitted by the Operating Contractor to the Management Committee pursuant
to Article 5 of the Contract.
|
|
|
(a)
|
The
Operating Contractor shall provide adequate information with respect to
the project including, without limitation, the following:
(i) A
clear definition of the necessity and objectives of the
project;
(ii) Scope
of the project; and
(iii) Cost
estimate thereof.
|
|
|
(b)
|
The
Operating Contractor shall transmit the project proposal along with all
related documentation to the Parties for
consideration.
|
|
|
(c)
|
The
Parties may make recommendations in writing to the Operating Contractor
regarding the selection, scope and timing of the project. The Management
Committee shall consider the proposal and the recommendations of the
Parties and shall determine the matter in accordance with Article 5 of the
Contract. If the Parties do not submit any recommendations in writing to
the Operating Contractor within thirty (30) working days of the submittal
of the project, the project as proposed by the Operating Contractor shall
be so noted in the minutes of the next
meeting.
|
|
2.2
|
The
project as approved pursuant to Article 2.1 above shall form part of the
Work Programme and Budget of the Petroleum Operations. Such approval shall
also constitute authorizations by the Management Committee to the
Operating Contractor to initiate contracts and purchase orders relevant to
the project proposal, subject to the provisions of Article 1.3
above.
|
|
2.3
|
The
resources for the project design, supervision, and management shall first
be drawn from the Operating Contractor’s available in-house expertise. If
the Management Committee approves, such may be performed by the Operating
Contractor’s Affiliate under the approved budget for the project.
Competent Nigerian Engineering/Design companies shall be given priority
over others by the Management Committee for such
projects.
|
|
2.4
|
After
approval of the project/budget, the Operating Contractor shall prepare and
transmit to the Parties complete details of the project including, without
limitation, the following:
|
|
|
(a)
|
Project
definition;
|
|
|
(b)
|
Project
Specification;
|
|
|
(c)
|
Flow
diagrams;
|
|
|
(d)
|
Projects
implementation schedule showing all phases of the project including,
without limitation, engineering design, material/equipment procurement,
inspection, transportation, fabrication/ construction, installation,
testing and commissioning;
|
|
|
(e)
|
Major
equipment specifications;
|
|
|
(f)
|
Cost
estimate of the project; and
|
|
|
(g)
|
An
activity status report.
|
Article
III
Contract Tender
Procedure
|
3.1
|
The
following tender procedure shall apply to work/services/supply not
directly undertaken by the Operating Contractor or by the Operating
Contractor’s Affiliates:
|
|
|
(a)
|
The
Operating Contractor shall maintain a list of approved contractors for the
purpose of contracts for the Petroleum Operations, (the “Approved
Contractors’ List”).
|
|
|
(b)
|
Contractors
included in the Approved Contractors’ List shall be both local and/or
overseas contractors or entities. Where regulations require, they shall be
registered with the Petroleum Resources Department of the Ministry of
Petroleum and Mineral Resources.
|
|
|
(c)
|
When
a contract is to be bid, the Operating Contractor shall present a list of
proposed bidders to the Parties for concurrence not less than fifteen (15)
working days before the issuance of invitations to bid to prospective
contractors. The Parties may propose additional names to be included in
the list of proposed bidders or the deletion of any one thereof. Contract
specifications shall be in English and in a recognized format used in the
international petroleum industry.
|
|
|
(d)
|
If
the Parties have not responded within thirty (30) working days from the
date of the official receipt following the-presentation of the list of
proposed bidders as aforesaid, the list shall be deemed to have been
approved.
|
|
3.2
|
The
Operating Contractor shall within its limits in Article 1.3(a) above
establish a Tender Committee who shall be responsible for pre-qualifying
bidders, sending out bid invitations, receiving and evaluating bids and
determining successful bidders to whom contracts shall be
awarded.
|
|
3.3
|
Analysis
and recommendations of bids received and opened by, the Tender Committee
shall be sent by the Operating Contractor to the Management Committee for
approval before a contract is signed within thirty (30) working days from
the date of the official receipt. Approval of the Operating Contractor’s
recommendations shall be deemed to have been given if the Parties have not
responded within the said period.
|
|
3.4
|
In
all cases in which an offshore contractor or its Nigerian Affiliate is
invited to bid, the Operating Contractor shall make full disclosure to the
Parties of its relationship, if any, with such
contractors.
|
|
3.5
|
These
Procedures may be waived and the Operating Contractor may negotiate
directly with the contractor and promptly inform the Parties of the
outcome of such negotiations in the following
cases:
|
|
|
(a)
|
emergency
situations; and
|
|
|
(b)
|
in
work requiring specialized skills, or when special circumstances warrant,
upon the approval of the Parties.
|
Article
IV
General Conditions of
Contracts
|
4.1
|
The
payment terms shall provide, without limitation,
that:
|
|
|
(a)
|
A
minimum of ten percent (10%) of contract price shall be held as a
retention fee until after the end of a guarantee period agreed with the
contractor which shall vary between six (6) months and twelve (12) months,
depending on the project, with the exception of drilling and seismic data
acquisition, well surveys and other such services provided that, a
contractor may be given the option to provide other guarantee equivalent
to the ten percent (10%) retention such as letter of credit or performance
bond; and
|
|
|
(b)
|
Provision
shall be made for appropriate withholding tax as may be
applicable.
|
|
4.2
|
The
language of all contracts shall be
English.
|
4.3
(a)
The governing law of all agreements signed with
subcontractors shall be, to the extent feasible, Nigerian law for work to be
conducted in Nigeria, and for work outside Nigeria.
|
|
(b)
|
Nigerian
law shall apply to contractors performing in Nigeria and, as far as
practicable, they shall use Nigerian resources both human and
material.
|
|
4.4
|
Each
contract shall provide for early termination where necessary and the
Operating Contractor shall use all reasonable endeavours to obtain a
termination provision with minimal
penalty.
|
|
4.5
|
Operating
Contractor shall provide, in the case of a foreign contractor, that the
local part of the work, in all cases, shall be performed by contractor’s
local subsidiary.
|
Article
V
Materials and Equipment
Procurement
|
5.1
|
The
Operating Contractor may, through own in-house or parent company procure
materials and equipment subject to conditions set forth in this Article
5.
|
|
5.2
|
The
provisions of this Article 5 shall not apply to lump sum or turnkey
contracts/projects.
|
|
5.3
|
In
ordering the equipment/materials, the Operating Contractor shall obtain
from vendors/manufactures such rebates/discounts and such
warranties/guarantees that such discounts, guarantees and all other grants
and responsibilities shall be for the benefit of the Petroleum
Operations.
|
|
5.4
|
The
Operating Contractor shall:
|
|
|
(a)
|
By
means of established policies and procedure ensure that its procurement
efforts provide the best total value, with proper consideration of
quality, services, price delivery and Operating Costs to the benefit of
the Petroleum Operations;
|
|
|
(b)
|
Maintain
appropriate records, which shall be kept up to date, clearly documenting
procurement activities;
|
|
|
(c)
|
Provide
quarterly and annual inventory of materials in
stock;
|
|
|
(d)
|
Provide
a quarterly listing of excess materials in its stock list to the Parties;
and
|
|
|
(e)
|
Check
the excess materials listings from other companies, to identify materials
available in the country prior to initiating any foreign purchase
order.
|
|
5.5
|
The
Operating Contractor shall initiate and maintain policies and practices,
which provide a competitive environment/climate amongst local and/or
overseas suppliers. Competitive quotation processes shall be employed for
all local procurement where the estimated value exceeds the equivalent of
fifty thousand US Dollars (USD
50,000).
|
|
|
(a)
|
Fabrication,
wherever practicable shall be done locally. To this effect, the Petroleum
Operations recognize and shall accommodate local offers at a premium not
exceeding ten percent (10%).
|
|
|
(b)
|
Subject
to Article 3.1(a), the Operating Contractor shall give preferences to
Nigerian indigenous contractors in the award of contracts. Contracts
within the agreed financial limit of the Operating Contractor shall be
awarded to only competent Nigerian indigenous contractors possessing the
required skill/capability for the execution of such contracts, the
Operating Contractor shall notify the Parties
accordingly.
|
|
5.6
|
Analysis
and recommendation of competitive quotation of a value exceeding the
limits established in Article 1.3 above shall be transmitted to the
Management Committee for approval before a purchase order is issued to the
selected vendor/manufacturer. Approval shall be deemed to have been given
if a response has not been received from the Parties within thirty (30)
working days of receipt by the Parties of the said analysis and
recommendations.
|
|
5.7
|
Pre-inspection
of rig, equipment/stock materials of reasonable value shall be jointly
carried out at the factory site and quay before shipment at the request of
any Party.
|
Article
VI
|
|
Project
Monitoring
|
|
6.1
|
The
Operating Contractor shall provide a project report to the
Parties.
|
|
6.2
|
For
major projects exceeding five million US Dollars (USD 5,000,000) or
equivalent, the Operating Contractor shall provide to the Parties a
detailed quarterly report which shall
include:
|
|
|
(a)
|
Approved
budget total for each project;
|
|
|
(b)
|
Expenditure
on each project;
|
|
|
(c)
|
Variance
and explanations;
|
|
|
(d)
|
Bar
chart of schedule showing work progress and work already completed and
schedule of mile-stones and significant events;
and
|
|
|
(e)
|
Summary
of progress during the reporting period, summary of existing problems, if
any, and proposed remedial action, anticipated problems, and percentage of
completion.
|
|
Provided
that the Parties shall have the right to send its own representatives to
assess the project based on the
report.
|
|
6.3
|
In
the case of an increase in cost in excess of ten percent (10%) on the
project, the Operating Contractor shall promptly notify the Parties and,
unless already approved pursuant to Article 5.3(e) of the Contract, obtain
necessary budget approval.
|
|
6.4
|
Not
later than six (6) months following the physical completion of any major
project whose cost exceeds five million US Dollars (USD 5,000,000) or
equivalent, the Operating Contractor shall prepare and deliver to the
Parties a project completion report which shall include the
following:
|
|
|
(a)
|
Cost
performance of the project in accordance with the work breakdown at the
commencement of the project;
|
|
|
(b)
|
Significant
variation in any item or sub-item;
|
|
|
(c)
|
Summary
of problems and expected events encountered during the project;
and
|
|
|
(d)
|
List
of excess materials.
|
ANNEX
F
AUDITED
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2009
The
following index lists the financial statements and supplementary data of Pacific
Asia Petroleum, Inc. that are included in this report.
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F1
|
|
Financial
Statements:
|
|
|
Consolidated
Balance Sheets
December
31, 2009 and 2008
|
F-2 |
|
|
|
|
Consolidated
Statements of Operations
For
the years ended December 31, 2009, 2008 and 2007, and for the period from
inception
(August 25, 2005) through December 31, 2009 |
F-3
|
|
Consolidated
Statements of Comprehensive Income
For
the years ended December 31, 2009, 2008 and 2007, and for the period from
inception
(August 25, 2005) through December 31, 2009 |
F-4
|
|
Consolidated
Statement of Stockholders’ Equity (Deficiency)
For
the period from inception (August 25, 2005) through December 31,
2009
|
F-5 |
|
|
|
|
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2009, 2008 and 2007, and for the
period from inception
(August 25, 2005) through December 31, 2009 |
F-6 |
|
Notes
to Consolidated Financial Statements
|
F-7 -- F-23
|
Schedules
not disclosed above or elsewhere in this report have been omitted since they are
either not required, are not applicable or the required information is shown in
the financial statements or the related notes.
Board of
Directors
Pacific
Asia Petroleum, Inc.
Hartsdale,
NY
We
have audited the accompanying consolidated balance sheets of Pacific Asia
Petroleum, Inc. and its subsidiaries (the “Company”) (a development stage
company) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, comprehensive income, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2009 and the
period August 25, 2005 (date of inception) through December 31, 2009. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based upon
our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Pacific Asia Petroleum, Inc.
and its subsidiaries (a development stage company) as of December 31, 2009 and
2008 and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2009 and the period August 25, 2005 (date
of inception) through December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2009, based on the criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated expressed
an unqualified opinion on the Company’s internal control over financial
reporting.
/s/
RBSM LLP
New York,
New York
March 2,
2010
|
AUDITED
FINANCIAL STATEMENTS
|
Pacific
Asia Petroleum, Inc. and Subsidiaries
|
||||||||
|
(A
Development Stage Company)
|
|||||||||
|
Consolidated
Statements of Operations
|
|||||||||
|
For
the years ended December 31, 2009, 2008, and 2007 and for the
period
|
|||||||||
|
from
inception (August 25, 2005) through December 31, 2009
|
|||||||||
|
For
the period
|
||||||||||||||||
|
from
inception
|
||||||||||||||||
|
(August
25, 2005)
|
||||||||||||||||
|
through
|
||||||||||||||||
|
2009
|
2008
|
2007
|
December
31, 2009
|
|||||||||||||
|
Revenues
|
||||||||||||||||
|
Sales
and services
|
$ | 66,802 | $ | - | $ | - | $ | 66,802 | ||||||||
|
Costs and Operating
Expenses
|
||||||||||||||||
|
Depreciation
|
132,052 | 66,769 | 18,850 | 219,411 | ||||||||||||
|
All
other
|
11,523,729 | 5,717,051 | 2,963,397 | 21,440,794 | ||||||||||||
|
Total
costs and operating expenses
|
11,655,781 | 5,783,820 | 2,982,247 | 21,660,205 | ||||||||||||
|
Operating
Loss
|
(11,588,979 | ) | (5,783,820 | ) | (2,982,247 | ) | (21,593,403 | ) | ||||||||
|
Other Income (Expense)
|
||||||||||||||||
|
Interest
Income
|
37,885 | 323,762 | 618,089 | 1,079,142 | ||||||||||||
|
Interest
Expense
|
(939 | ) | - | - | (939 | ) | ||||||||||
|
Other
Income
|
217 | 14,695 | 12,937 | 27,849 | ||||||||||||
|
Other
Expense
|
(11 | ) | (172 | ) | (714 | ) | (897 | ) | ||||||||
|
Total
Other Income
|
37,152 | 338,285 | 630,312 | 1,105,155 | ||||||||||||
|
Net
loss before income taxes and
|
||||||||||||||||
|
noncontrolling
interests
|
(11,551,827 | ) | (5,445,535 | ) | (2,351,935 | ) | (20,488,248 | ) | ||||||||
|
Income
tax expense
|
(39,575 | ) | (13,082 | ) | (38,826 | ) | (91,483 | ) | ||||||||
|
Net
loss
|
(11,591,402 | ) | (5,458,617 | ) | (2,390,761 | ) | (20,579,731 | ) | ||||||||
|
Less:
Net loss - noncontrolling interests
|
102,024 | 11,968 | 7,077 | 122,289 | ||||||||||||
|
Net
Loss - Pacific Asia Petroleum, Inc. and
Subsidiaries
|
$ | (11,489,378 | ) | $ | (5,446,649 | ) | $ | (2,383,684 | ) | $ | (20,457,442 | ) | ||||
|
Net
loss per common share - Pacific Asia
|
||||||||||||||||
|
Petroleum
Inc. common shareholders -
|
||||||||||||||||
|
basic
and diluted
|
$ | (0.28 | ) | $ | (0.14 | ) | $ | (0.08 | ) | |||||||
|
Weighted
average number of common
|
||||||||||||||||
|
shares
outstanding, basic and diluted
|
41,647,002 | 39,992,512 | 31,564,121 | |||||||||||||
The
accompanying notes to the consolidated financial statements are an integral part
of this statement.
| AUDITED FINANCIAL STATEMENTS |
Pacific
Asia Petroleum, Inc. and Subsidiaries
(A
Development Stage Company)
|
|
Consolidated
Statements of Comprehensive Income
|
|
|
For the years ended December
31, 2009, 2008 and 2007, and for
the period from inception (August 25,
2005) through December 31, 2009
|
|
For
the period
|
||||||||||||||||
|
from
inception
|
||||||||||||||||
|
(August
25, 2005)
|
||||||||||||||||
|
through
|
||||||||||||||||
|
2009
|
2008
|
2007
|
12/31/2009
|
|||||||||||||
|
Net
loss
|
$ | (11,591,402 | ) | $ | (5,458,617 | ) | $ | (2,390,761 | ) | $ | (20,579,731 | ) | ||||
|
Other
comprehensive income (loss) -
|
||||||||||||||||
|
pre-tax
and net of tax:
|
||||||||||||||||
|
Currency
translation adjustment
|
(63,643 | ) | 101,799 | 108,833 | 166,217 | |||||||||||
|
Unrealized
gain (loss) on
|
||||||||||||||||
|
investments
in securities
|
(74,645 | ) | - | - | (74,645 | ) | ||||||||||
|
Total
other comprehensive income (loss)
|
(138,288 | ) | 101,799 | 108,833 | 91,572 | |||||||||||
|
Comprehensive
income (loss)
|
(11,729,690 | ) | (5,356,818 | ) | (2,281,928 | ) | (20,488,159 | ) | ||||||||
|
Less:
Comprehensive (income) loss -
|
||||||||||||||||
|
Noncontrolling
interests' share:
|
||||||||||||||||
|
Net
loss plus pre-tax and net of
|
||||||||||||||||
|
tax
other comprehensive income/loss
|
102,175 | 8,679 | 3,116 | 115,190 | ||||||||||||
|
Comprehensive
income (loss) -
|
||||||||||||||||
|
Pacific
Asia Petroleum, Inc. and
|
||||||||||||||||
|
Subsidiaries
|
$ | (11,627,515 | ) | $ | (5,348,139 | ) | $ | (2,278,812 | ) | $ | (20,372,969 | ) | ||||
|
The
accompanying notes to the consolidated financial statements are an
integral part of this statement.
|
||||||||||||||||
|
AUDITED
FINANCIAL STATEMENTS
|
Pacific
Asia Petroleum, Inc. and Subsidiaries
|
|
(A
Development Stage Company)
|
|
|
Consolidated
Statement of Stockholders' Equity (Deficiency)
|
For
the period from inception (August 25, 2005) through December 31,
2009
|
|
Pacific
Asia Petroleum, Inc. Stockholders
|
||||||||||||||||||||||||||||||||||||||||
|
No.
of
Common
|
Common
Stock
|
Subscriptions
Receivable
|
No.
of
Preferred
|
Preferred
Stock
|
Paid-in
Capital
|
Deficit
Accumulated
|
Other
Comprehensive
|
Noncontrolling
Interests
|
Total
Equity
|
|||||||||||||||||||||||||||||||
|
Balance
- August 25, 2005
|
- | $ | - | $ | - | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||
|
Issued
for cash
|
1,852,320 | 1,852 | - | - | - | 10,148 | - | - | - | 12,000 | ||||||||||||||||||||||||||||||
|
Subscriptions
|
3,451,680 | 3,452 | (28,000 | ) | - | - | 24,548 | - | - | - | - | |||||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | (51,344 | ) | - | - | (51,344 | ) | ||||||||||||||||||||||||||||
|
Balance
- December 31, 2005
|
5,304,000 | 5,304 | (28,000 | ) | - | - | 34,696 | (51,344 | ) | - | - | (39,344 | ) | |||||||||||||||||||||||||||
|
Subscriptions
paid
|
- | - | 28,000 | - | - | - | - | - | - | 28,000 | ||||||||||||||||||||||||||||||
|
Issued
for fees and services
|
- | - | - | 1,829,421 | 1,829 | 195,776 | - | - | - | 197,605 | ||||||||||||||||||||||||||||||
|
Issued
for cash
|
- | - | - | 8,161,802 | 8,162 | 4,215,262 | - | - | - | 4,223,424 | ||||||||||||||||||||||||||||||
|
Subsidiary
paid-in capital additions
|
- | - | - | - | - | - | - | - | 359,410 | 359,410 | ||||||||||||||||||||||||||||||
|
Amortization
of options fair value
|
- | - | - | - | - | 29,065 | - | - | - | 29,065 | ||||||||||||||||||||||||||||||
|
Currency
translation
|
- | - | - | - | - | - | - | 19,228 | - | 19,228 | ||||||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | (1,086,387 | ) | - | (1,220 | ) | (1,087,607 | ) | |||||||||||||||||||||||||||
|
Balance
- December 31, 2006
|
5,304,000 | 5,304 | - | 9,991,223 | 9,991 | 4,474,799 | (1,137,731 | ) | 19,228 | 358,190 | 3,729,781 | |||||||||||||||||||||||||||||
|
Issued
for services - pre-merger
|
600,032 | 600 | - | 117,729 | 118 | 334,594 | - | - | - | 335,312 | ||||||||||||||||||||||||||||||
|
Shares
retained by Pacific Asia Petroleum original
stockholders in
merger - 5/7/07
|
468,125 | 468 | - | - | - | 83,323 | - | - | - | 83,791 | ||||||||||||||||||||||||||||||
|
Shares
issued to ADS members in merger - 5/7/07
|
9,850,000 | 9,850 | - | 13,600,000 | 13,600 | 15,453,957 | - | - | - | 15,477,407 | ||||||||||||||||||||||||||||||
|
Post-merger
acquisition costs and adjustments
|
- | - | - | - | - | (291,093 | ) | - | - | - | (291,093 | ) | ||||||||||||||||||||||||||||
|
Automatic
conversion of Preferred Shares - 6/5/07
|
23,708,952 | 23,709 | - | (23,708,952 | ) | (23,709 | ) | - | - | - | - | - | ||||||||||||||||||||||||||||
|
Issued
for services, compensation cost of stock options
|
||||||||||||||||||||||||||||||||||||||||
|
and
restricted stock
|
- | - | - | - | - | 195,442 | - | - | - | 195,442 | ||||||||||||||||||||||||||||||
|
Subsidiary
paid-in capital additions
|
- | - | - | - | - | - | - | - | 40,020 | 40,020 | ||||||||||||||||||||||||||||||
|
Currency
translation
|
- | - | - | - | - | - | - | 108,833 | 3,961 | 112,794 | ||||||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | (2,383,684 | ) | - | (7,077 | ) | (2,390,761 | ) | |||||||||||||||||||||||||||
|
Balance
- December 31, 2007
|
39,931,109 | 39,931 | - | - | - | 20,251,022 | (3,521,415 | ) | 128,061 | 395,094 | 17,292,693 | |||||||||||||||||||||||||||||
|
Issued
on exercise of warrants
|
79,671 | 80 | - | - | - | (83 | ) | - | - | - | (3 | ) | ||||||||||||||||||||||||||||
|
Vesting
of restricted stock
|
76,400 | 76 | - | - | - | (76 | ) | - | - | - | - | |||||||||||||||||||||||||||||
|
Cancellation
of restricted stock
|
(10,400 | ) | (10 | ) | 10 | - | - | - | ||||||||||||||||||||||||||||||||
|
Compensation
cost of stock options and restricted stock
|
- | - | - | - | - | 1,355,590 | - | - | - | 1,355,590 | ||||||||||||||||||||||||||||||
|
Issued
for services
|
15,000 | 15 | - | - | - | 137,985 | - | - | - | 138,000 | ||||||||||||||||||||||||||||||
|
Issued
for acquisition of Navitas Corporation
|
450,005 | 450 | - | - | - | 8,176,141 | - | - | - | 8,176,591 | ||||||||||||||||||||||||||||||
|
Acquired
on acquisition of Navitas Corporation
|
(480,000 | ) | (480 | ) | - | - | - | (8,178,624 | ) | - | - | - | (8,179,104 | ) | ||||||||||||||||||||||||||
|
Currency
translation
|
- | - | - | - | - | - | - | 101,799 | 3,289 | 105,088 | ||||||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | (5,446,649 | ) | - | (11,968 | ) | (5,458,617 | ) | |||||||||||||||||||||||||||
|
Balance
- December 31, 2008
|
40,061,785 | 40,062 | - | - | - | 21,741,965 | (8,968,064 | ) | 229,860 | 386,415 | 13,430,238 | |||||||||||||||||||||||||||||
|
Issued
on exercise of warrants and options
|
238,811 | 239 | - | - | - | 13,705 | - | - | - | 13,944 | ||||||||||||||||||||||||||||||
|
Exchanged
for stock of Sino Gas & Energy Holdings Limited
|
970,000 | 970 | - | - | - | 551,930 | - | - | - | 552,900 | ||||||||||||||||||||||||||||||
|
Vesting
of restricted stock
|
738,000 | 738 | - | - | - | (738 | ) | - | - | - | - | |||||||||||||||||||||||||||||
|
Compensation
cost of stock options and restricted stock
|
- | - | - | - | - | 2,432,006 | - | - | - | 2,432,006 | ||||||||||||||||||||||||||||||
|
Issued
for services
|
1,029,000 | 1,029 | - | - | - | 1,052,071 | - | - | - | 1,053,100 | ||||||||||||||||||||||||||||||
|
Adjustments
to noncontrolling interests in subsidiary equity
|
- | - | - | - | - | 243,932 | - | (21 | ) | (597,751 | ) | (353,840 | ) | |||||||||||||||||||||||||||
|
Currency
translation
|
- | - | - | - | - | - | - | (63,622 | ) | (151 | ) | (63,773 | ) | |||||||||||||||||||||||||||
|
Unrealized
gain (loss) on investments in securities
|
- | - | - | - | - | - | - | (74,645 | ) | - | (74,645 | ) | ||||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | (11,489,378 | ) | - | (102,024 | ) | (11,591,402 | ) | |||||||||||||||||||||||||||
|
Balance
- December 31, 2009
|
43,037,596 | $ | 43,038 | $ | - | - | $ | - | $ | 26,034,871 | $ | (20,457,442 | ) | $ | 91,572 | $ | (313,511 | ) | $ | 5,398,528 | ||||||||||||||||||||
The
accompanying notes to the consolidated financial statements are an integral part
of this statement.
|
AUDITED
FINANCIAL STATEMENTS
|
Pacific
Asia Petroleum, Inc. and Subsidiaries
|
|||||
|
(A
Development Stage Company)
|
||||||
|
Consolidated
Statement of Cash Flows
|
For
the years ended December 31, 2009, 2008 and 2007,
|
|||||
|
and
for the period from inception (August 25, 2005) through December 31,
2009
|
||||||
|
For
the period
|
||||||||||||||||
|
from
inception
|
||||||||||||||||
|
(August
25, 2005)
|
||||||||||||||||
|
through
|
||||||||||||||||
|
2009
|
2008
|
2007
|
December
31, 2009
|
|||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||
|
Net
loss - Pacific Asia Petroleum, Inc. and subsidiaries
|
$ | (11,489,378 | ) | $ | (5,446,649 | ) | $ | (2,383,684 | ) | $ | (20,457,442 | ) | ||||
|
Adjustments
to reconcile net loss to cash
|
||||||||||||||||
|
used
in operating activities:
|
||||||||||||||||
|
Interest
income on long-term advances
|
- | (88,440 | ) | (90,602 | ) | (188,987 | ) | |||||||||
|
Currency
transaction (gain) loss
|
(56,476 | ) | 41,047 | 43,444 | 28,015 | |||||||||||
|
Stock
and options compensation expense
|
3,456,971 | 1,493,590 | 530,754 | 5,707,985 | ||||||||||||
|
Noncontrolling
interest in net loss
|
(102,024 | ) | (11,969 | ) | (7,077 | ) | (122,290 | ) | ||||||||
|
Depreciation
expense
|
132,052 | 66,769 | 18,850 | 219,411 | ||||||||||||
|
Impairment
of assets adjustment
|
219,388 | 273,618 | - | 493,006 | ||||||||||||
|
Changes
in current assets and current
|
||||||||||||||||
|
liabilities:
|
||||||||||||||||
|
(Increase)
decrease in income tax refunds receivable
|
8,500 | (8,500 | ) | - | - | |||||||||||
|
(Increase)
in accounts and other receivables
|
(68,771 | ) | - | - | (68,771 | ) | ||||||||||
|
(Increase)
in inventory
|
(73,394 | ) | - | - | (73,394 | ) | ||||||||||
|
(Increase)
decrease in advances
|
(4,738 | ) | 2,375 | (2,758 | ) | (5,121 | ) | |||||||||
|
(Increase)
decrease in deposits
|
2,294 | (14,602 | ) | (11,456 | ) | (35,262 | ) | |||||||||
|
(Increase)
decrease in prepaid expenses
|
23,033 | (44,410 | ) | (14,761 | ) | (67,624 | ) | |||||||||
|
Increase
(decrease) in accounts payable
|
146,694 | 22,707 | (55,638 | ) | 156,989 | |||||||||||
|
Increase
(decrease) in income tax and accrued liabilities
|
694,847 | 506,447 | (87,959 | ) | 1,209,484 | |||||||||||
|
Net
cash used in operating activities
|
(7,111,002 | ) | (3,208,017 | ) | (2,060,887 | ) | (13,204,001 | ) | ||||||||
|
Cash
flows from investing activities
|
||||||||||||||||
|
Net
sales (purchases) of available for sale securities
|
(475,397 | ) | 9,940,000 | (9,800,000 | ) | (1,735,397 | ) | |||||||||
|
Purchase
of long-term certificate of deposit
|
(25,000 | ) | - | - | (25,000 | ) | ||||||||||
|
Refunds/(deposits)
on prospective property acquisitions
|
1,150,000 | 1,900,000 | (3,050,000 | ) | - | |||||||||||
|
(Increase)
decrease in long-term advances and deferred charges
|
(225,515 | ) | 5,824 | (106,058 | ) | (325,749 | ) | |||||||||
|
Additions
to property, plant and equipment
|
(232,535 | ) | (334,319 | ) | (84,118 | ) | (850,839 | ) | ||||||||
|
Net
cash provided by (used in) investing activities
|
191,553 | 11,511,505 | (13,040,176 | ) | (2,936,985 | ) | ||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||
|
Payment
and proceeds of notes payable
|
- | - | (5,000 | ) | (5,000 | ) | ||||||||||
|
Increase
in noncontrolling interest investment in subsidiary
|
- | - | 40,020 | 399,430 | ||||||||||||
|
Increase
in long-term advances to noncontrolling interest
stockholder
|
- | - | - | (400,507 | ) | |||||||||||
|
Proceeds
from exercise of stock options and warrants
|
13,944 | - | - | 13,944 | ||||||||||||
|
Decrease
in subscriptions receivable
|
- | - | - | 28,000 | ||||||||||||
|
Issuance
of common stock net of issuance costs
|
- | (2,513 | ) | 15,385,982 | 19,671,092 | |||||||||||
|
Net
cash provided by (used in) financing activities
|
13,944 | (2,513 | ) | 15,421,002 | 19,706,959 | |||||||||||
|
Effect
of exchange rate changes on cash
|
(8,041 | ) | 5,713 | 21,656 | 36,138 | |||||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(6,913,546 | ) | 8,306,688 | 341,595 | 3,602,111 | |||||||||||
|
Cash
and cash equivalents at beginning of period
|
10,515,657 | 2,208,969 | 1,867,374 | - | ||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 3,602,111 | $ | 10,515,657 | $ | 2,208,969 | $ | 3,602,111 | ||||||||
|
Supplemental
disclosures of cash flow information
|
||||||||||||||||
|
Interest
paid
|
$ | 939 | $ | - | $ | - | $ | 939 | ||||||||
|
Income
taxes paid
|
$ | 24,723 | $ | 48,832 | $ | 35 | $ | 73,590 | ||||||||
|
Supplemental
schedule of non-cash investing and
|
||||||||||||||||
|
financing
activities
|
||||||||||||||||
|
Common
and preferred stock issued for services and fees
|
$ | 1,053,100 | $ | 138,000 | $ | 335,312 | $ | 1,724,017 | ||||||||
|
Common
stock issued for stock of nonsubsidiary
|
$ | 552,900 | $ | - | $ | - | $ | 552,900 | ||||||||
|
Issuance
costs paid as warrants issued
|
$ | - | $ | - | $ | 868,238 | $ | 929,477 | ||||||||
|
Increase
in fixed assets accrued in liabilities
|
$ | - | $ | - | $ | 4,537 | $ | - | ||||||||
|
Warrants
exercised for common stock
|
$ | - | $ | (3 | ) | $ | - | $ | (3 | ) | ||||||
|
Decrease
to long-term advances to noncontrolling interest
shareholder
|
$ | 353,840 | $ | - | $ | - | $ | 353,840 | ||||||||
|
Disposition
of partial interest in a subsidiary
|
$ | 243,911 | $ | - | $ | - | $ | 243,911 | ||||||||
|
Decrease
in noncontrolling interest investment in subsidiary
|
$ | (597,751 | ) | $ | - | $ | - | $ | (597,751 | ) | ||||||
The
accompanying notes to consolidated financial statements are an integral part of
this statement.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. --- DESCRIPTION OF BUSINESS
Pacific
Asia Petroleum, Inc. (the “Company”) is the successor company from a reverse
merger involving the former Pacific East Advisors, Inc. and other entities on
May 7, 2007. The Company’s activities commenced in 2005 through Inner
Mongolia Production Company, LLC (“IMPCO”), a limited liability company formed
under New York State law on August 25, 2005.
Coalbed
Methane
In
October 2007 Pacific Asia Petroleum, Limited (“PAPL”), a wholly-owned subsidiary
of the Company, entered into a production sharing contract (“PSC”) with China
United Coalbed Methane Co. (“CUCBM”) with respect to coalbed methane (“CBM”)
production covering an area in the Shanxi Province of China referred to as the
Zijinshan Block. During the development and production period, CUCBM
will have the right to acquire a 40% participating interest and work jointly to
develop and produce CBM under the PSC. The PSC has a term of 30 years
and was approved by the Ministry of Commerce of China in 2008. In
2009 the Company completed seismic data acquisition,
performed
seismic shooting, and drilled its first well in the Zijinshan
Block. Core samples have undergone laboratory testing, including
tests for gas content, gas saturation and coal characteristics. Based
on the results of these tests, at the latest Zijinshan PSC Joint Management
Committee (JMC) meeting, the Company agreed to a 2010 work program which
includes undertaking further technical studies related to the CUCBM Contract
Area and drilling at least two additional wells there.
Chifeng
Joint Development Contract
In 2006 a
subsidiary of the Company entered into a joint development contract with Chifeng
Zhongtong Oil and Natural Gas Co., Ltd., (“Chifeng”), a company incorporated in
Inner Mongolia, China. Pursuant to the Chifeng Agreement, drilling
operations commenced in October 2006. The first well drilled by
Chifeng discovered oil and was completed as a producing well, but production
operations were suspended in 2007 pending receipt of a production license from
the Chinese government. The Company is pursuing a combination of strategies to
have such production license awarded, including a possible renegotiation of the
Chifeng Agreement and/or possible negotiations toward acquiring the existing
production from the 22 sq. km. Kerqing Oilfield and extending its production
license to the Chifeng area. As of year-end 2009, new activity toward
accomplishing this result had not commenced. If this Production
License is not issued, the opportunities to drill additional long-term
production wells under the contract, including future production from this first
well, will be at risk. No revenue has been recognized to date due to
uncertainty of realization of the revenue until a permanent production license
is obtained. See Note 7. - Property, Plant and Equipment regarding
the impairment adjustment recorded on Chifeng capitalized costs in
2009.
Natural
Gas Distribution
In July
2009 the Company entered into a revised Letter of Intent to possibly acquire a
49% ownership interest in the Handan Chang Yuan Natural Gas Co., Ltd.
(“HGC”) from the Handan Yua Ying Company Limited (“Handan”). HGC owns
and operates gas distribution assets in and around Handan City, China. HGC was
founded in May 2001, and is the primary gas distributer in Handan City, which is
located 250 miles south of Beijing, in the Hebei Province of the People’s
Republic of China. HGC has over 300,000 customers and owns 35 miles of a main
gas pipeline, and more than 450 miles of delivery gas pipelines, with a delivery
capacity of 300 million cubic meters per day. HGC also owns an 80,000
sq. ft. field distribution facility. Gas is being supplied by Sinopec and
PetroChina from two separate sources. The Company will continue its final legal
and financial due diligence with an objective of entering into a mutually agreed
final sale and purchase agreement in 2010.
Enhanced Oil Recovery and Production
(“EORP”)
In May
and June 2009, Pacific Asia Petroleum Energy Limited (“PAPE”), a subsidiary of
the Company, entered into a Letter of Understanding and associated agreements
with two persons pursuant to which a China joint venture company, Beijing Dong
Fang Ya Zhou Petroleum Technology Service Company Limited (“Dong Fang”), was
formed in September 2009 to engage in EORP operations using the patent rights
contributed by a noncontrolling owner of Dong Fang. Dong Fang is
owned 75.5% by PAPE and 24.5% by a joint venture partner, LXD. In
conjunction with these agreements, a 30% ownership interest in PAPE was issued
to one of the joint venture partners, BSG. Operations have commenced in various
oil fields in the Liaoning, Shandong, and Xinjiang Provinces in
China. Initial revenues were recorded in 2009. The Company intends to
negotiate additional agreements for EORP operations in 2010.
Oyo
Field Production Sharing Contract Interest
In
November 2009, the Company entered into a Purchase and Sale Agreement with CAMAC
Energy Holdings Limited and certain of its affiliates (“CAMAC”)
involving the acquisition of a 60% interest in production sharing contract
rights in the Oyo Field in Nigeria in return for $38.84 million in cash (subject
to possible reduction in cash payment by a portion of CAMAC’s net cash flows
from the Oyo Field through the closing date) and a 62.74% ownership in the
Company’s Common Stock after giving effect to this transaction and related
financing transaction (the “Transaction”). If the Transaction is
completed, CAMAC will own a majority interest in the Company and designate four
of the seven members of the Company’s Board of Directors, and therefore a change
of control of the Company will occur. The Transaction is expected to
close during the first quarter of 2010.
NOTE
2. --- BASIS OF PRESENTATION
The
Company’s financial statements are prepared on a consolidated
basis. All significant intercompany transactions and balances have
been eliminated in consolidation. The financial statements include Pacific Asia
Petroleum, Inc. (successor company to IMPCO) and its majority-owned direct and
indirect subsidiaries in the respective periods. Net income for 2007 excludes
the results of Pacific East Advisors, Inc. (PEA) and Advanced
Drilling Services, LLC (ADS) prior to May 7, 2007, the date of the
Mergers.
The
Company’s financial statements are prepared under U.S. Generally Accepted
Accounting Principles as a development stage company. Refer to Note 5 regarding
adoption in 2009 of revised presentation of noncontrolling interests
in the balance sheet and income statement which have been applied
retrospectively to prior years as required under ASC 810-10. Certain
reclassifications have been made to the prior year financial statements to
conform to current year presentation.
NOTE 3. --- LIQUIDITY AND
CAPITAL RESOURCES
During
the period from its inception (August 25, 2005) to December 31, 2006, the
Company was able to fund its expenses through member equity contributions and
member loans. In 2006 the Company sold equity units in the private
market in exchange for consideration totaling $4,561,000, and received $28,000
from collection of subscriptions on equity units subscribed for in
2005. Proceeds from the equity offering were used to repay $240,000
of notes payable ($100,000 with an officer) outstanding from loans incurred in
late 2005 and the first quarter of 2006.
In May
2007, immediately prior to the merger, ADS issued equity units for cash of
$17,000,000, of which net proceeds were $15,497,773 after offering costs. The
proceeds were invested in temporary investments and were available for
operations of the Company after the merger date.
To date
the Company has incurred expenses and sustained losses and has generated minimal
revenue from operations. Consequently, its operations are subject to all risks
inherent in the establishment of a new business enterprise. The Company will
require significant financing in excess of its December 31, 2009 available cash,
cash equivalents, and short-term and long-term cash investments in order to
achieve its business plan. It is not certain that this amount of financing will
be successfully obtained.
Refer to
Note 20. – Subsequent Event regarding the registered direct offering of Common
Stock sold in February 2010.
NOTE
4. --- SIGNIFICANT ACCOUNTING POLICIES
In July
2009, The Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (the “Codification”)(“ASC”) which became the source of
authoritative accounting principles effective with financial statements of
interim and annual periods ending after September 15, 2009. Sources
of accounting principles referred to in this report refer to Topics, Subtopics
and Sections of the Codification.
Use of
Estimates – Management uses estimates and assumptions in preparing these
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, disclosures of contingencies, and reported
revenues and expenses. Actual results could vary from those
estimates.
Cash and
Cash Equivalents – Cash and cash equivalents include cash on hand, demand
deposits and short-term investments with initial maturities of three months or
less.
Short-term
Investments – The Company applies the provisions of
Accounting Standards
Codification (ASC) Topic 320 (Investments in Debt and Equity Securities). The
Company classifies debt and equity securities into one of three categories:
held-to-maturity, available-for-sale or trading. These security classifications
may be modified after acquisition only under certain specified conditions.
Securities may be classified as held-to-maturity only if the Company has the
positive intent and ability to hold them to maturity. Trading securities are
defined as those bought and held principally for the purpose of selling them in
the near term. All other securities must be classified as available-for-sale.
Declines in the fair value of held-to-maturity and available-for-sale securities
below their cost that are deemed to be other than temporary are reflected in
earnings as realized losses.
Inventories
– The Company’s inventories of chemicals are carried at lower of cost or market,
with cost determined using average cost. The Company had no other
inventories as of the balance sheet dates.
Property,
Plant and Equipment – For oil and gas properties, the successful efforts method
of accounting is used. Costs of drilling successful wells are
capitalized. Costs of drilling exploratory wells not placed into
production are charged to expense. Geological and geophysical costs are charged
to expense as incurred. For depreciable tangible property, the
minimum capitalization threshold is $1,000.
Leaseholds—The
Company initially capitalizes the costs of acquiring leaseholds on productive
and prospective oil and gas properties. Capitalized leasehold costs
for productive properties are amortized as part of the cost of oil and gas
produced. Capitalized leasehold costs on both proven and unproven
properties are periodically assessed for impairment and an impairment loss is
recorded when necessary.
Depreciation,
Depletion and Amortization - Depreciation, depletion and amortization for oil
and gas related property is recorded on a unit-of-production
basis. For other depreciable property, depreciation is recorded on a
straight line basis based on depreciable lives of five years for office
furniture and three years for computer related equipment. Repairs and
maintenance costs are charged to expense as incurred.
Reserves
for Uncollectible Advances and Loans – The Company reviews its advances and
loans receivable for possible impairment and records reserves for possible
losses on amounts believed to be uncollectible. This includes the
recording of impairment on debt securities classified as held-to-maturity under
ASC Topic 320 (Investments in Debt and Equity Securities), when impairment is
deemed to be other than temporary.
Impairment
of Long-Lived Assets – The Company reviews its long-lived assets in property,
plant and equipment for impairment in accordance with ASC Topic 360 (Property,
Plant and Equipment). Review for impairment of long-lived assets occurs whenever
changes in circumstances indicate that the carrying amount of assets in
property, plant and equipment may not be fully recoverable. An
impairment loss is recognized for assets to be held and used when the estimated
undiscounted future cash flows expected to result from the asset including
ultimate disposition are less than its carrying
amount. Impairment is measured by the excess of carrying amount
over the fair value of the assets.
Asset
Retirement Obligations – The Company accounts for asset retirement obligations
in accordance with ASC Topic 410 (Asset Retirement and Environmental
Obligations). The Company at December 31, 2009 and 2008 had no long-lived assets
subject to significant asset retirement obligations. The nature or
amount of any asset retirement obligations which the Company may become subject
to from its future operations is not determinable at this time and will be
assessed as significant operations and development efforts begin.
Revenues
– Revenues are recognized only when the earnings process is complete and an
exchange transaction has taken place. An exchange transaction may be a physical
sale, the providing of services, or an exchange of rights and
privileges. The recognition criteria are satisfied when there exists
a signed contract with defined pricing, delivery and acceptance (as defined in
the contract) of the product or service have occurred, there is no significant
uncertainty of collectibility, and the amount is not subject to
refund
Income
Taxes – Commencing May 7, 2007, the Company became subject to taxation as a
corporation but at December 31, 2009 was in an operating loss position for U.S.
income tax purposes. Therefore, the Company does not accrue U.S. current income
taxes. Deferred income taxes are provided using the asset and liability method
for financial reporting purposes in accordance with the provisions of ASC Topic
740 (Income Taxes). Under this method, deferred tax assets and liabilities are
recognized for temporary differences between the tax bases of assets and
liabilities and their carrying values for financial reporting purposes and for
operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
removed or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statement of operations in the period
that includes the enactment date. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that the related tax benefits
will not be realized. For dates prior to May 7, 2007, the Company was an LLC
pass-through entity treated similar to a partnership for income tax purposes in
the United States, and therefore did not accrue or pay income
taxes.
Foreign
Currency Translation – The functional currency of the U.S. parent company is the
U.S. dollar. The functional currency of China subsidiaries is
the local currency (RMB). For Hong Kong subsidiaries, the functional currency is
the U.S. dollar or RMB, depending on the primary activity of the subsidiary.
Balance sheet translation effects from translating functional currency into U.S.
dollars (the reporting currency) are recorded directly to other comprehensive
income in accordance with ASC Topic 200 (Comprehensive Income).
Stock
Based Compensation – The Company accounts for stock based compensation in
accordance with ASC Topics 718 (Compensation) and 505 (Equity) which specify the
revised accounting alternative requirements for pre-2006 stock based
compensation grants existing at January 1, 2006 and the required accounting for
new grants starting January 1, 2006. The Company made no stock based
compensation grants before 2006. Accordingly, the ASC provisions pertaining to
pre-2006 grants do not apply. The Company values its stock
options awarded on or after January 1, 2006 at the fair value at grant date
using the Black-Scholes option pricing model. Compensation expense for stock
options is recorded over the vesting period on a straight line basis.
Compensation paid in vested stock is valued at the fair value at the applicable
measurement date and charged to expense at that date. Compensation
paid in restricted stock is valued at fair value at the award date and is
charged to expense over the vesting period.
Net
Income (Loss) Per Common Share –The Company computes earnings per share under
ASC Topic 260 (Earnings Per Share). Net loss per common share is computed by
dividing net loss by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding during the year. Dilutive
common stock equivalents consist of shares issuable upon the exercise of the
Company's stock options, unvested restricted stock, and warrants (calculated
using the treasury stock method).
New
Accounting Pronouncements – As of the balance sheet date, there were no new
accounting pronouncements not yet adopted that are expected to materially affect
the Company other than possibly those below.
Accounting
Standards Update (ASU) No. 2009-17 – Consolidations (Topic 810) – “Improvements
to Financial Reporting by Enterprises with Variable Interest
Entities.” This standard amends Topic 810 by requiring consolidation
of certain special purpose entities that were previously exempted from
consolidation. The revised criteria will define a controlling
financial interest for requiring consolidation as: the power to
direct the activities that most significantly affect the entity’s performance,
and (1) the obligation to absorb losses of the entity or (2) the right to
receive benefits from the entity. This standard is effective for
fiscal years beginning after November 15, 2009.
NOTE
5. ADOPTION OF UPDATES TO THE FASB ACCOUNTING STANDARDS
CODIFICATION
ASC
820-10
Effective
January 1, 2009 the Company adopted the portion of ASC Topic 820 (Fair Value
Measurements and Disclosures) that relates to assets measured at fair value on a
nonrecurring basis. The Company had previously adopted the remainder
of ASC Topic 820 effective January 1, 2008. Neither adoption had a
material effect on the Company’s measurement practices for determining fair
value.
ASC
825-10
Commencing
with the interim period ending June 30, 2009, the Company adopted new
requirements for quarterly disclosures related to fair values of financial
instruments whether or not currently reflected on the balance sheet at fair
value. Previously, qualitative and quantitative information about
fair value estimates for financial instruments not measured on the balance sheet
at fair value were disclosed only annually. Quarterly
disclosures were required under an update to ASC Topic 825 (Financial
Instruments) effective for interim periods ending after June 15,
2009. The adoption of this update did not have a material
impact on the Company’s results of operations or financial
condition.
ASC
810-10
Effective
January 1, 2009 the Company adopted an update to ASC Topic 810 (Consolidation)
that changes the accounting and reporting for noncontrolling interests (formerly
known as minority interests) in subsidiaries and for the deconsolidation of a
subsidiary. The presentation of noncontrolling interests in the
balance sheet and income statement has been revised to report noncontrolling
interests as a separate component of total consolidated equity and total
consolidated net income, rather than as reduction adjustments. In
addition, if a subsidiary is deconsolidated, the parent company will now
recognize a gain or loss to net income based upon the fair value of the
noncontrolling equity at that date.
The
update is applied prospectively except for the provisions involving financial
statements line detail presentation. All of the Company’s financial
statements contain changes as a result of the update. Under the
update, the amount formerly titled “Net Loss” in the income statement is now
referred to as “Net Loss - Pacific Asia Petroleum, Inc. and Subsidiaries,” to
designate the portion of total net loss attributable to the controlling
shareholder interest of the parent company. Financial statements for
years prior to 2009 have been revised retrospectively in this report to reflect
the revised presentation basis.
ASC
855-10
Effective
with the six months ended June 30, 2009, the Company adopted an update to ASC
Topic 855 (Subsequent Events). Subsequent events are events or
transactions about which information becomes available after the balance sheet
date but before the financial statements are issued or are available to be
issued. In the case of the Company as a public entity, the applicable
cutoff date is the date the financial statements are issued, whereas previously
the cutoff date could be the date the financial statements were available for
issuance.
The
update requires that certain subsequent events (“recognized subsequent events”)
be recorded in the financial statements of the latest preceding period currently
being issued. These items provide evidence about conditions that
existed at the date of that balance sheet, including estimates inherent in
preparing the financial statements for that period. Other
subsequent events (“nonrecognized subsequent events”) are not recorded in
balance sheet for the latest preceding period currently being issued. Those
items relate to conditions that arose only after the balance sheet
date. Disclosure is required for nonrecognized subsequent
events if necessary to prevent those financial statements from being
misleading.
NOTE 6. --- FINANCIAL
INSTRUMENTS
Fair Value of Financial
Instruments
The
carrying amounts of the Company’s financial instruments for cash equivalents,
short-term and long-term cash investments, accounts receivable, deposits,
advances, accounts payable, accrued expenses, and notes payable,
approximate fair value at December 31, 2009, and 2008. The carrying amount for
the investment in nonsubsidiary is fair value from a market price. The recorded
amounts for fair values of securities were as follows at December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Available
for sale:
|
||||||||
|
Short-term
investments
|
$ | 1,735,397 | $ | 1,260,000 | ||||
|
Investment
in nonsubsidiary
|
478,255 | - | ||||||
|
Held
to maturity:
|
||||||||
|
Long-term
certificate of deposit
|
$ | 25,141 | $ | - | ||||
|
Long-term
advances
|
33,015 | 386,415 | ||||||
Long-Term
Advances
At
December 31, 2008, and December 31, 2007, 100% of the Company’s long-term
advances ($33,015 in 2009, $386,415 in 2008) were comprised of a note receivable
from a single borrower. In 2006, IMPCO HK advanced $400,507 to Beijing Jinrun
Hongda Technology Co., Ltd. (“BJHTC”), which then invested that amount in IMPCO
Sunrise. The notes are repayable in RMB. As of December 31, 2008 no
repayments had been made. The balance of $386,415 at December 31,
2008 reflects an impairment loss recorded in 2008, as described further
below. As of December 31, 2007 IMPCO HK had accrued $100,547 in
interest and $33,476 in currency gains on the notes, for a total balance of
$534,530. BJHTC is obligated to apply any remittances received
from IMPCO Sunrise directly to IMPCO HK. IMPCO Sunrise is authorized to pay
these remittances directly to IMPCO HK on BJHTC’s behalf, until the debt is
satisfied. The note matures November 14, 2014. BJHTC is
only responsible to make payments under the note for the share of profits it
receives from IMPCO Sunrise. On December 31, 2009 the total recorded capital of
IMPCO Sunrise was reduced by agreement among IMPCO Sunrise and its owners, and
the reduction (including the BJHTC share) was reclassified to an intercompany
loan from IMPCO HK to IMPCO Sunrise. The recorded amount for the
outside note receivable of IMPCO HK from BJHTC was reduced to $33,015 as a
result.
Under the
provisions of ASC Topic 320 (Investments - Debt and Equity Securities), the
BJHTC note has been accounted for as “held-to-maturity” based on an intent and
ability to hold to maturity. ASC Topic 320 also provides that such securities
are to be assessed for declines in value that are other than
temporary. In addition, we considered the guidance in ASC Topic 820
(Fair Value Measurements and Disclosures). Based upon the delay in
achieving net income in IMPCO Sunrise, the impact of the significant decline in
the price of oil in the second half of 2008, the amount of uncollected interest
on the note, and the required date for repayment, it was determined in the
fourth quarter of 2008 that the note was impaired. Additionally the
recording of interest income on the note was discontinued effective October 1,
2008. An impairment loss of $273,618 was recorded in 2008 operating
expenses to reduce the carrying amount of the note to the recorded amount of the
BJHTC-related minority interest liability in the consolidated balance sheet as
of December 31, 2008. As IMPCO Sunrise had no positive cash flows from
operations, projections of future potential positive cash flows at several rates
of return were utilized to determine that the revised carrying amount was
realistic based upon the rate of return inherent in that amount. The difference
between the impairment adjustment and the net change in carrying amount from
December 31, 2007 represents interest income and currency transaction
adjustments recorded during 2008 prior to recording the
impairment. In accordance with ASC Topic 820, the calculation of
impairment was based upon a “level 3” unobservable input because there are no
direct or indirect observable inputs of fair value available for this
note given that it is not publicly traded and is not comparable to publicly
traded securities. It is not comparable to publicly traded securities
because by its terms the note is repayable only from cash distributions to the
noncontrolling interest owned by the debtor in which the debtor has no at risk
cash investment and no active involvement in the management of the
entity. After reduction in the note balance at December 31, 2009 as
previously described above, it was concluded that no additional impairment
adjustment was required for 2009.
Concentration
of Credit Risk
The
Company is exposed to concentration of credit risk with respect to cash, cash
equivalents, short-term investments, long-term investments, and long-term
advances. At December 31, 2009, 65% ($1,291,455) of the Company’s
total cash was on deposit at HSBC in China and Hong Kong. Also at
that date, 64% ($1,028,762) of the Company’s total cash equivalents was invested
in a single money market fund in the U.S. At December 31, 2008, 78%
($975,681) of the Company’s total cash was on deposit in China at the Bank of
China. Also at that date, 48.7% ($4,514,167) of the Company’s total
cash equivalents was invested in a single money market fund in the
U.S.
NOTE
7. --- PROPERTY, PLANT AND EQUIPMENT
|
Gross
|
Accumulated
Depreciation
|
Net
|
||||||||||
|
December
31, 2009
|
||||||||||||
|
Oil
and gas leases
|
$ | 150,000 | $ | - | $ | 150,000 | ||||||
|
Office
and computer equipment
|
358,320 | 161,078 | 197,242 | |||||||||
|
Enhanced
oil recovery equipment
|
34,202 | 2,028 | 32,174 | |||||||||
|
Leasehold
improvements
|
89,946 | 18,659 | 71,287 | |||||||||
|
Total
|
$ | 632,468 | $ | 181,765 | $ | 450,703 | ||||||
|
December
31, 2008
|
||||||||||||
|
Oil
and gas wells
|
$ | 221,805 | $ | - | $ | 221,805 | ||||||
|
Oil
and gas leases
|
150,000 | - | 150,000 | |||||||||
|
Office
and computer equipment
|
244,595 | 59,894 | 184,701 | |||||||||
|
Leasehold
improvements
|
41,480 | 28,683 | 12,797 | |||||||||
|
Total
|
$ | 657,880 | $ | 88,577 | $ | 569,303 | ||||||
Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was $132,052,
$66,769, and $18,850, respectively.
No
interest expense has been capitalized through December 31, 2009.
Impairment of Chifeng Oil
Well Costs
In 2009,
the Company conducted an impairment review of its Chifeng contract capitalized
oil well cost for recoverability as an asset to be held and
used. This review was prompted based on the continuing lack of
production license that would enable recovery of these costs through production
revenues and that three years have passed with no progress in this regard.
Without a production license, the opportunities to drill additional production
wells under the contract and future production from this initial well are
significantly at risk. The Company has alternate strategies it intends to pursue
toward possibly obtaining a production license through modification of the
existing agreement and/or inclusion of this area in a production license for a
neighboring area should the Company be able to obtain a production license for
that other area. However, as of December 31, 2009, activity toward
accomplishing this result by specific negotiations and agreements had not
commenced, and the likelihood of possible success and when it might occur could
not be reasonably estimated. Therefore, the Company concluded that an
estimate of future cash flows from this asset no longer could be
made. Absent the likely ability to obtain a production license, the
fair value of the asset is zero under Level 3 unobservable inputs for estimation
of fair value under ASC Topic 820. Those conditions required the recording of an
impairment charge to expense and retirement of capitalized costs of
$219,388. The impairment is included in “all other” within costs and
operating expenses in the income statement.
NOTE
8. – FAIR VALUE MEASUREMENTS
The
Company calculates fair values for assets and liabilities utilizing a three
level hierarchy as follows:
| Level 1: | Quoted market prices in active markets for identical items. |
| Level 2: | Observable inputs not included in Level 1, such as quoted prices for similar assets or liabilities, broker quotations, or other observable inputs for a similar contract term. |
| Level 3: | Unobservable inputs where Level 1 or Level 2 inputs are not available. Level 3 inputs may involve internal models of risk-adjusted expected cash flows using present value techniques. |
The
tables below exclude current assets and current liabilities other than assets
for short-term investments, as fair value and cost are deemed to be identical
for the excluded items.
Assets
Measured at Fair Value on a Recurring Basis – as of December 31
|
2009
|
Level
1
Measurements
|
2008
|
Level
1
Measurements
|
|||||||||||||
|
Short-term
investments
|
$ | 1,735,397 | $ | 1,735,397 | $ | 1,260,000 | $ | 1,260,000 | ||||||||
|
Investment
in nonsubsidiary
|
478,255 | 478,255 | - | - | ||||||||||||
|
Total
|
$ | 2,313,652 | $ | 2,313,652 | $ | 1,260,000 | $ | 1,260,000 | ||||||||
Assets
Measured at Fair Value on a Nonrecurring Basis – as of December 31
|
2009
|
Level
3
Measurements
|
Loss
Recorded for Year
|
||||||||||
|
Property,
plant and equipment
to
be held and used
|
$ | 450,703 | $ | 450,703 | $ | (219,388 | ) | |||||
|
Long-term
advances
|
33,015 | 33,015 | - | |||||||||
Refer to
Note 7. – Property, Plant and Equipment regarding determination of the
impairment loss recorded to net
loss in
2009.
NOTE
9. – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Following
is a detail of activity by category for accumulated other comprehensive income
(loss).
|
Currency
translation adjustment
|
Gain
(loss) on investments in securities
|
Total
|
||||||||||
|
Balance
– December 31, 2006
|
$ | 19,228 | $ | - | $ | 19,228 | ||||||
|
Change
during 2007
|
108,833 | - | 108,833 | |||||||||
|
Balance
– December 31, 2007
|
128,061 | - | 128,061 | |||||||||
|
Change
during 2008
|
101,799 | - | 101,799 | |||||||||
|
Balance
– December 31, 2008
|
229,860 | - | 229,860 | |||||||||
|
Change
during 2009
|
( 63,643 | ) | ( 74,645 | ) | (138,288 | ) | ||||||
|
Balance
– December 31, 2009
|
$ | 166,217 | $ | ( 74,645 | ) | $ | 91,572 | |||||
NOTE 10.
--- INCOME TAXES
Income
tax expense was as follows for the respective periods:
|
2009
|
2008
|
2007
|
||||||||||
|
Current:
|
||||||||||||
|
U.S.
Federal
|
$ | - | $ | (19,044 | ) | $ | 19,085 | |||||
|
State
and other
|
39,575 | 32,126 | 19,741 | |||||||||
|
Total income
tax expense
|
$ | 39,575 | $ | 13,082 | $ | 38,826 | ||||||
The
Company’s subsidiaries outside the United States did not have any undistributed
net earnings at December 31, 2009, due to accumulated net losses.
Following
is a reconciliation of the expected statutory U.S. Federal income tax provision
to the actual income tax expense for the respective periods:
|
2009
|
2008
|
2007
|
||||||||||
|
Net
(loss) before income tax expense
|
$ | (11,449,802 | ) | $ | (5,433,567 | ) | $ | (2,344,858 | ) | |||
|
Expected
income tax provision at statutory rate of 35%, assuming U.S. Federal
filing as a corporation
|
$ | (4,007,431 | ) | $ | (1,901,748 | ) | $ | (820,700 | ) | |||
|
Increase (decrease) due to:
|
||||||||||||
|
Foreign-incorporated
subsidiaries
|
1,585,060 | 433,577 | 40,011 | |||||||||
|
U.S.
Federal filing as a partnership during LLC
periods
|
- | - | 315,254 | |||||||||
|
State and
other income tax
|
39,575 | 32,126 | 19,741 | |||||||||
|
Net
losses not realizable currently for U.S. tax
purposes
|
2,422,371 | 1,468,171 | 465,435 | |||||||||
|
Penalties
and miscellaneous
|
- | (19,044 | ) | 19,085 | ||||||||
|
Total
income tax expense
|
$ | 39,575 | $ | 13,082 | $ | 38,826 | ||||||
The Company records interest and penalties related to income taxes as income tax expense.
The
Company records zero net deferred income tax assets and liabilities on the
balance sheet on the basis that its overall net deferred income tax asset
position is offset by a valuation allowance due to its net losses since
inception for both book basis and tax basis.
Deferred
income tax assets by category are as follows as of December 31:
|
2009
|
2008
|
2007
|
||||||||||
|
Tax
basis operating loss carryovers
|
$ | 5,171,772 | $ | 1,746,203 | $ | 444,756 | ||||||
|
Stock
compensation
|
386,465 | 402,323 | 24,156 | |||||||||
|
Depreciation
|
- | 3,712 | - | |||||||||
| 5,558,237 | 2,152,238 | 468,912 | ||||||||||
|
Valuation
allowance
|
(5,558,237 | ) | (2,152,238 | ) | (468,912 | ) | ||||||
|
Net
deferred income tax assets
|
$ | - | $ | - | $ | - | ||||||
The
Company’s total tax basis loss carryovers at December 31, 2009 were
$15,594,950. Of this amount, $448,457 has no expiration
date. The remainder expires from 2011 to 2029.
NOTE
11. --- RELATED PARTY TRANSACTIONS
Consulting
Agreements and Employment Contracts
Effective
December 15, 2005 the Company entered into two-year consulting agreements with
three key personnel who were also IMPCO members (shareholders of the Company
following the Mergers). The agreements provided for the performance of specified
services by the personnel in return for a fixed rate per month. The agreements
were subject to termination by either party on 90 days notice. If an agreement
is terminated by the Company, the consultant was entitled to receive the balance
of payments that would have been payable through the original term. The
Company’s commitments under these contracts were $33,350 per month, which
increased to $34,350 per month in July 2006. In September 2006, new executive
employment agreements were entered into between the Company and two IMPCO
members to replace two of the three existing consulting
agreements. The agreements have no expiration date, and either party
may terminate at will. The minimum commitment under these contracts is a total
of $618,000 per year. In the event of termination by the
Company other than for cause or disability, multi-year severance payments are
required. However, the operable effective date for the compensation rates under
these agreements was delayed subject to the Company achieving certain financial
benchmarks. Therefore, payments
continued
at the rates set forth under the consulting agreements through March 31,
2007. The new agreements became fully effective at the contracted
rates on April 1, 2007. These agreements are with Frank C.
Ingriselli, President and Chief Executive Officer, and Stephen F. Groth, Vice
President and Chief Financial Officer.
On August
1, 2008, the Company entered into an Employment Agreement with Richard Grigg,
the Company’s Senior Vice President and Managing Director (the “Grigg
Agreement”). The Grigg Agreement, which superseded the prior
employment agreement the Company entered into with Mr. Grigg in March 2008, had
a three year term, and provided for a base salary of 1,650,000 RMB
(approximately $241,000) per year and an annual performance-based bonus award
targeted at between 30% and 40% of his then-current annual base salary awardable
in the discretion of the Company’s Board of Directors. Mr. Grigg was
also entitled to reimbursement of certain accommodation expenses in Beijing,
China, medical insurance, annual leave expenses, and certain other
transportation fees and expenses. In addition, in the event the
Company terminated Mr. Grigg’s employment without Cause (as defined in the Grigg
Agreement), the Company would have been required to pay to Mr. Grigg a lump sum
amount equal to 50% of Mr. Grigg’s then-current annual base
salary. However, on January 27, 2009, the Company revised the terms
of its employment relationship with Richard Grigg by entering into an Amended
and Restated Employment Agreement with Mr. Grigg (the “Amended Employment
Agreement”) and a Contract of Engagement (“Contract of Engagement”) with KKSH
Holdings Ltd., a company registered in the British Virgin Islands (“KKSH”). Mr.
Grigg is a minority shareholder and member of the board of directors of
KKSH. The Amended Employment Agreement superseded the Grigg Agreement
and now governs the employment of Mr. Grigg in the capacity of Managing Director
of the Company for a period of three years. The Amended Employment
Agreement provides for a base salary of 990,000 RMB (approximately $144,000) per
year and the reimbursement of certain accommodation expenses in Beijing, China,
annual leave expenses, and certain other transportation and expenses of Mr.
Grigg. In addition, in the event the Company terminates Mr. Grigg’s
employment without Cause (as defined in the Amended Employment Agreement), the
Company must pay to Mr. Grigg a lump sum amount equal to 50% of Mr. Grigg’s
then-current annual base salary. The Contract of Engagement governs
the engagement of KKSH for a period of three years to provide the services of
Mr. Grigg through KKSH as Senior Vice President of the Company strictly with
respect to the development and management of business opportunities for the
Company outside of the People’s Republic of China. The basic fee for
the services provided under the Contract of Engagement is 919,000 (approximately
$134,000) RMB per year, to be prorated and paid monthly and subject to annual
review and increase upon mutual agreement by the Company and
KKSH. Pursuant to the Contract of Engagement, the Company shall also
provide Mr. Grigg with medical benefits and life insurance coverage, and an
annual performance-based bonus award targeted at between 54% and 72% of the
basic fee, awardable in the discretion of the Company’s Board of
Directors. In addition, in the event the Company terminates the
Contract of Engagement without Cause (as defined in the Contract of Engagement),
the Company must pay to KKSH a lump sum amount equal to 215% of the then-current
annual basic fee.
The
Company was a party to a consulting agreement, dated November 8, 2005, with
Jamie Tseng, the Company’s former Executive Vice President (“Tseng Consulting
Agreement”), which was assigned on September 1, 2006 by Mr. Tseng to Golden Ring
International Consultants Limited, a British Virgin Islands registered company
wholly-owned and controlled by Mr. Tseng, and which was later superseded in its
entirety effective January 1, 2009 by that certain Employment Agreement, dated
April 22, 2009 and effective January 1, 2009, entered into by and between the
Company and Mr. Tseng. Mr. Tseng served in the role of Executive Vice
President to the Company from November 2005 to January 15, 2010, on which date
Mr. Tseng retired as an executive officer and employee of the
Company.
Management
Service Contracts
In
connection with the merger on May 7, 2007, the Company assumed an Advisory
Agreement, dated December 1, 2006, by and between ADS and Cagan McAfee Capital
Partners, LLC (“CMCP”), pursuant to which CMCP agreed to provide certain
financial advisory and management consulting services to the Company. Pursuant
to the Advisory Agreement, CMCP was entitled to receive a monthly advisory fee
of $9,500 for management work commencing on December 11, 2006 and continuing
until December 11, 2009. The Company received services from CMCP
under this agreement since the Mergers. Laird Q. Cagan, the
Managing Director and 50% owner of CMCP, served as a member of the Company’s
Board of Directors until his resignation in May 2009. During 2008,
the Company paid $123,500 in fees under this contract, including an amount due
for 2007. During 2009, the Company paid $85,500 in fees under this contract,
including amounts paid for early termination of this contract in June
2009.
Merger-Related
Transactions
In
connection with the Mergers on May 7, 2007, the Company assumed the obligation
of ADS to pay Chadbourn Securities, Inc., a NASD licensed broker-dealer for
which Mr. Laird Cagan (at that time a director and significant shareholder
of the Company) served as a registered representative and Managing Director,
$1,195,430 in placement fees and expense reimbursements relative to the previous
securities offering of ADS. This amount has been paid in full.
Immediately
prior to the Mergers, ADS issued to its placement agents 1,860,001 warrants to
purchase Class B membership units of ADS. Included were (i) warrants
to purchase 3,825 Class B membership units of ADS issued to Michael
McTeigue, an executive officer of ADS, (ii) warrants to purchase 83,354
Class B membership units of ADS issued to Chadbourn Securities, Inc., a
NASD licensed broker-dealer for which Laird Q. Cagan served as a registered
representative and Managing Director, and (iii) warrants to purchase
696,094 Class B membership units of ADS issued to Laird Q. Cagan, a former
member of the Company’s Board of Directors and the then-beneficial
owner of 7.7% of the Company’s Common Stock. These warrants were
exchanged in the Mergers for warrants exercisable for 1,860,001 shares of Common
Stock of the Company. The Company has accounted for this as an offering cost
applicable to paid-in capital and therefore will not record any compensation
expense on these warrants. At December 31, 2009, 1,460,888 warrants remained
unexercised, at a weighted average exercise price of $1.30 per share of Common
Stock, and expire May 7, 2012.
Acquisition
of SGE Common Stock
In March,
2009, the Company issued 970,000 shares of Company Common Stock, to Mr. Richard
Grigg, the Company’s Senior Vice President and Managing Director, in exchange
for 3,825,000 Ordinary Fully Paid Shares of Sino Gas & Energy Holdings
Limited (SG&E) owned by Mr. Grigg. This represented approximately 3.26% of
the outstanding shares of SG&E as of March 9, 2009. The acquired shares were
originally accounted for by the Company as a non-current investment carried at
cost. Commencing with the interim period ending September 30, 2009,
the carrying amount is recorded at fair value. Mr. Grigg is a former executive
of SG&E who joined the Company in October 2007. The SG&E
shares were acquired in order to eliminate possible conflicts of interest
involving Mr. Grigg regarding possible future transactions that may occur
between the Company and SG&E, as both companies’ business plans involve
developing operations in China.
Chemical
Sales Agent Arrangement
During
the third quarter of 2009, the Company conducted its initial business involving
EORP chemicals through an arrangement with Tongsheng, a subsidiary of the
family-owned business of Mr. Li Xiangdong (LXD). A new China
Joint Venture Company (CJVC) was established for this purpose in September 2009,
known as Beijing Dong Fang Ya Zhou Petroleum Technology Services Company Ltd.
(Dong Fang). LXD is a 24.5% owner of Dong Fang as a result of
contributing patent rights and related technology for specialty chemicals and
processes to Dong Fang. Prior to formation of Dong Fang, the Company was not
licensed in China to purchase or blend chemicals for resale or to sell
chemicals. Under the arrangement with Tongsheng, Tongsheng manufactured
specialty blends of chemicals using technology developed by LXD and sold
finished product to customers of the Company. Tongsheng collects the
revenues from customers in advance on these sales, bills the Company for the
cost of sales, and is obligated to remit the revenues to the
Company.
NOTE
12. --- OTHER COMMITMENTS
Lease
Commitments
At
December 31, 2009, the Company had non-cancelable lease commitments for two
operating leases on office facilities. Future minimum lease rentals by year are
as follows:
2010 - $
210,748
2011 -
$ 86,358
Rental
expense for the years ended December 31, 2009, 2008 and 2007 was $233,042,
$110,013, and $78,183, respectively.
NOTE
13. --- CAPITALIZATION
Capital
Stock Authorized and Issued
The
authorized capital stock of the Company consists of 300,000,000 shares of Common
Stock, $0.001 par value per share, and 50,000,000 shares of Preferred Stock,
$0.001 par value per share, of which 30,000,000 shares have been designated as
“Series A Convertible Preferred Stock.” 6,291,048 shares of
Series A Convertible Preferred Stock remain unissued following the automatic
conversion of 23,708,952 shares of the Company’s Series A Convertible
Preferred Stock into Common Stock of the Company on June 5, 2007.
The
Company’s capitalization at December 31, 2009 was 43,037,596 shares of Common
Stock issued and outstanding, and 23,708,952 shares of Series A Convertible
Preferred Stock issued but none outstanding. The Company’s capitalization at
December 31, 2008 was 40,061,785 shares of Common Stock issued and outstanding,
and 23,708,952 shares of Series A Convertible Preferred Stock issued but none
outstanding .
Common
Stock Issued as Compensation for Consultant Services
In 2009,
the Company issued 1,029,000 shares of Common Stock for consultant compensation
valued at $1,053,100, as follows: 879,000 shares at $.85 per share
($747,150); 90,000 shares at $1.92 per
share ($172,800); 10,000 shares at $.65 per
share ($6,500); 15,000 shares at $1.90 per share
($28,500); 15,000 shares at $2.09 per share ($31,350); and
20,000 shares at $3.34 per share ($66,800).
In 2008,
the Company issued 15,000 shares of Common Stock for consultant compensation
valued at $138,000, as follows: 5,000 shares at $22.90 per share
($114,500); and 10,000 shares at $2.35 per share ($23,500).
Other
Equity-Based Compensation
Refer to
Note 15. – Stock-Based Compensation Plans regarding activity for stock options
and stock compensation not immediately vested at award date.
NOTE 14. --- NAVITAS ACQUISITION
On July
1, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with (i) Navitas Corporation, a Nevada corporation (“Navitas”),
whose primary assets at the time of merger were comprised of 480,000 shares of
Common Stock of the Company and certain deferred tax assets, and (ii) Navitas
LLC, a Nevada limited liability company affiliated with Navitas and whose
members consisted of Navitas shareholders. The shareholders of Navitas received
a total of 450,005 shares of Company Common Stock in return for 100% of the
shares of Navitas. The merger was effective July 2,
2008. At that date, Navitas was merged into the Company, and Navitas
ceased to exist as a separate corporation. The transaction resulted
in a net decrease of 29,995 shares of the Company’s outstanding Common
Stock.
A
majority of interest of Navitas’ and Navitas LLC’s shareholders and members,
respectively, were shareholders of the Company prior to the
merger. In addition, Adam McAfee, the President of Navitas and
Managing Director of Navitas, LLC, is the brother of Eric A.
McAfee. At the time of the merger, Eric McAfee was a beneficial owner
of approximately 5.6% of the Company’s Common Stock and 50% owner of Cagan
McAfee Capital Partners, LLC, a fund owned 50% by Mr. Laird Q.
Cagan. At the time of the merger, Mr. Cagan was a member of the
Company’s Board of Directors and beneficial owner of approximately 7.2% of the
Company’s Common Stock.
The
acquisition was accounted for as a merger involving treasury stock and
immaterial net working capital. No value was assigned to deferred tax
assets acquired. The purchase price paid of 450,005 shares of Common
Stock of the Company was valued at $18.17 per share based on a seven-day
weighted average related to the measurement date. No gain was
recognized on the net reduction of 29,995 shares outstanding of the Company’s
capital stock. The total absolute dollar amounts recorded for shares
issued and shares acquired were the same except for certain transaction costs
recorded as additional cost of shares acquired. No cash consideration
was paid by the Company in the merger.
NOTE
15. --- STOCK-BASED COMPENSATION PLANS
Stock
Options
Under the
Company’s 2009 Equity Incentive Plan, the Company may issue stock, options or
units to result in issuance of a maximum aggregate of 6,000,000 shares of Common
Stock. Options awarded expire 10 years from date of grant or shorter term as
fixed by the Board of Directors. In 2009, the Company issued a total
of 460,070 stock options with vesting periods from 6 months to 25 months. The
approximate percentages of the 2009 awards vesting by year is as follows: 2010 -
53%; 2011 – 23%; 2012 – 24%.
The
following is a table of options activity:
|
Number
of Shares Underlying Options
|
Weighted
Average
Exercise
Price per
Share
|
Weighted
Average Remaining Contractual Term(Years)
|
||||||||||
|
Outstanding
at December 31, 2008
|
2,137,200 | $ | 1.04 | 9.07 | ||||||||
|
Granted
in 2009
|
460,070 | $ | 3.96 | 5.25 | ||||||||
|
Exercised
in 2009
|
(30,000 | ) | $ | .59 | ||||||||
|
Forfeited
in 2009
|
(25,000 | ) | $ | .64 | ||||||||
|
Outstanding
at December 31, 2009
|
2,542,270 | $ | 1.57 | 8.16 | ||||||||
|
Expected
to vest
|
2,474,610 | $ | 1.56 | 8.17 | ||||||||
|
Exercisable
at December 31, 2009
|
1,291,488 | $ | 1.06 | 8.85 | ||||||||
The total
intrinsic values of options at December 31, 2009 were $7,090,724 for options
outstanding and expected to vest and $4,811,400 for options that were
exercisable at that date. The total intrinsic values realized by
recipients on options exercised were $117,824 in 2009 and none in
2008 and 2007.
The
Company recorded compensation expense relative to stock options in 2009, 2008
and 2007 of $583,547, $378,025, and $167,325 respectively.
The fair
values of stock options used in recording compensation expense are computed
using the Black-Scholes option pricing model. The table below shows
the weighted average amounts for the assumptions used in the model for options
awarded in each year.
| 2009 |
2008
|
2007
|
||||||||||
|
Expected
price volatility (basket of comparable public companies)
|
77.54 | % | 65.60 | % | 55.80 | % | ||||||
|
Risk-free
interest rate (U.S. Treasury bonds)
|
1.42 | % | 2.04 | % | 4.09 | % | ||||||
|
Expected
annual dividend rate
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
|
Expected
option term – weighted average
|
3.17
yrs.
|
5.95
yrs.
|
5.98yrs.
|
|||||||||
|
Grant
date fair value per common share-weighted average
|
$ | 2.05 | $ | .39 | 3.38 | |||||||
|
Restricted
Stock
|
Number
Of Grants
|
Weighted
Average Grant Date Fair Value
|
||||||
|
Outstanding
at December 31, 2008
|
834,000 | $ | 1.78 | |||||
|
Granted
in 2009
|
924,055 | $ | 2.42 | |||||
|
Vested
in 2009
|
(738,000 | ) | $ | 1.87 | ||||
|
Outstanding
at December 31, 2009
|
1,020,055 | $ | 2.29 | |||||
The Company recorded compensation expense relative to restricted stock in years 2009, 2008 and 2007 of $1,848,459, $977,565 and $28,117 respectively.
Unamortized
Compensation
At
December 31, 2009, the remaining future compensation expense to be recorded on
unvested stock options and restricted stock was $2,530,180, to be recognized
over a weighted average period of 1.66 years, assuming that no forfeitures
occur.
Fair
Value Data
The total
grant date fair value of shares vested during 2009, 2008, and 2007 were
$1,383,370, $763,510, and $173,441 respectively.
The total
grant date fair values of stock options and restricted shares issued during the
years 2009, 2008, and 2007 were $3,185,240, $1,478,080, and $1,660,800
respectively.
NOTE 16. --- POTENTIALLY DILUTIVE SECURITIES
Warrants,
options and restricted stock described in the immediately preceding notes are
potentially dilutive in future periods if the Company has net income. They have
been anti-dilutive for all periods to date because the Company has been in a
loss position.
NOTE
17. --- PENSION AND POSTRETIREMENT PLANS
In 2007
the Company adopted a defined contribution 401(k) plan for its
employees. The plan provides for Company matching of 200% on up
to the first 3% of salary contributed by employees. The plan includes the option
for employee contributions to be made from either pre-tax or after-tax basis
income as elected by the employee. Company contributions are immediately vested
to the employee. In 2009, the Company contributions were $75,322
under this plan including third party administration fees.
NOTE
18. --- PATENT APPLICATION RIGHTS
On
November 27, 2009, the State Intellectual Property Office of the PRC in
China recognized Dong Fang as the official owner of the six LXD
Patent Application Rights (the “Rights”), covering enhanced oil recovery
technologies developed by LXD (the “EORP Technologies”). LXD contributed the
Rights in satisfaction of his 24.5% share of Dong Fang’s registered capital of
RMB 30,000,000. The fair value of the Rights was verified by a certified Chinese
valuation firm.
Thus far,
Dong Fang has used the Rights to utilize the EORP Technologies in both service
and sale scenarios. Dong Fang intends to pursue various short-
and long-term strategies to expand its EORP operations in order to
add value to the Company.
Under
interpretation SAB No. 48 issued by the Staff of the U.S. Securities and
Exchange Commission, the Company in this case is not permitted to
record a capitalized asset value on the Rights for U.S. reporting. This ruling
in no way lessens the fair value of the Rights to the Company.
NOTE
19. --- LITIGATION AND CONTINGENCIES
The
Company at December 31, 2009 had no litigation, actual or potential, of which it
was aware and which could have a material effect on its financial
position.
NOTE
20. --- SUBSEQUENT EVENT
On
February 16, 2010, the Company consummated the offer and sale of 5,000,000
shares (the "Shares") of its common stock, par value $0.001 per share ("Common
Stock"), for an aggregate purchase price of $20 million, or $4.00 per share (the
"Purchase Price"), pursuant to a Securities Purchase Agreement, dated February
10, 2010, among the Company and certain purchasers signatory thereto (the
“Purchasers”). In addition, the Company issued to the Purchasers (1)
warrants to purchase up to an additional 2,000,000 shares of Common Stock of the
Company, in the aggregate, at an exercise price of $4.50 (subject to
customary adjustments), exercisable commencing six months following the closing
for a period of 36 months after such commencement date (the “Series A
Warrants”); and (2) warrants to purchase up to an additional
2,000,000 shares of Common Stock of the Company, in the aggregate, at an
exercise price $4.00 per share (subject to customary adjustments), exercisable
immediately at the closing until November 1, 2010 (the “Series B Warrants” and
together with the Series A Warrants, the “Warrants”). If all the
Warrants are exercised, the Company would receive additional gross proceeds of
$17 million. The Shares and the Warrant Shares are to be sold pursuant to a
shelf registration statement on Form S-3 declared effective by the SEC on
February 3, 2010 (File No. 333-163869), as amended by the prospectus supplement
filed with the SEC on February 12, 2010 and delivered to the
Purchasers.
Rodman
& Renshaw, LLC (“Rodman”) served as the Company’s exclusive placement agent
in connection with the offering. As consideration for its services as
placement agent, Rodman received a cash fee equal to 6.0%
of the gross proceeds of the offering ($1,200,000), as well as a 5-year warrant
to purchase shares of Common Stock of the Company equal to 3.0% of the aggregate
number of shares sold in the offering (150,000 shares of Common Stock), plus any
shares underlying the Warrants. Rodman’s warrant has the same terms as the
Warrants issued to the Purchasers in the offering except that the warrant is not
exercisable until the 6-month anniversary of the closing and the exercise price
is 125% of the per share purchase price of the shares issued in the offering
($5.00 per share). In addition, subject to compliance with Financial
Industry Regulatory Authority ("FINRA") Rule 5110(f)(2)(D), the Company
reimbursed Rodman’s out-of-pocket accountable expenses actually incurred in the
amount of $25,000.
Net
proceeds from the offering are planned to be used by the Company for working
capital purposes, and also may be used by the Company to fund the
Company’s acquisition from CAMAC of the Contract Rights with respect
to the Oyo Field, which began production in December
2009.
Quarterly
Information (unaudited)
The table
below presents unaudited quarterly data for the years ended December 31, 2009
and December 31, 2008:
|
1
st
Quarter
|
2
nd
Quarter
|
3
rd
Quarter
|
4
th
Quarter
|
|||||||||||||
|
2009
|
||||||||||||||||
|
Revenues
– sales and services
|
$ | - | $ | - | $ | 55,409 | $ | 11,393 | ||||||||
|
Operating
Loss
|
$ | (2,939,025 | ) | $ | (2,149,474 | ) | $ | (2,696,731 | ) | $ | (3,803,749 | ) | ||||
|
Net
Loss
|
$ | (2,922,351 | ) | $ | (2,158,650 | ) | $ | (2,644,162 | ) | $ | (3,764,215 | ) | ||||
|
Basic
and diluted net loss per common share
|
$ | (.07 | ) | $ | (.05 | ) | $ | (.06 | ) | $ | (.09 | ) | ||||
|
2008
|
||||||||||||||||
|
Operating
Loss
|
$ | (1,085,980 | ) | $ | (1,265,498 | ) | $ | (1,250,923 | ) | $ | (2,181,419 | ) | ||||
|
Net
Loss
|
$ | (950,008 | ) | $ | (1,201,002 | ) | $ | (1,157,980 | ) | $ | (2,137,659 | ) | ||||
|
Basic
and diluted net loss per common share
|
$ | (.02 | ) | $ | (.03 | ) | $ | (.03 | ) | $ | (.05 | ) | ||||
Fourth
quarter 2009 versus fourth quarter 2008
The 2009
fourth quarter operating loss exceeded the 2008 fourth quarter operating loss by
$1,622,329. The increase was principally due to increased consulting
expense of $905,905 of which $630,519 was for amounts paid as equity and
$275,386 was for amounts paid as cash. The increased consulting
expense was largely due to milestone payments under agreements related to
start-up of EORP operations. In addition, stock compensation expense
for restricted stock and stock options increased $358,528 due to greater value
of awards subject to amortization. Legal fees expense decreased
$82,309 principally due to lower expense related to China. All other
expenses reflected a net increase, including 2009 write-offs of deferred charges
of $85,000 on asset acquisition and financing transactions under negotiation
that were terminated.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s reports under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to management, including its Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), as appropriate, to allow timely decisions
regarding required disclosure.
Management
of the Company, with the participation of its CEO and CFO, evaluated the
effectiveness of the Company’s disclosure controls and procedures. Based on
their evaluation, as of the end of the period covered by this Form 10-K, the
Company’s CEO and CFO have concluded that the Company’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) were effective.
Management’s
Report On Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act
as a process designed by, or under the supervision of, our principal executive
and principal financial officers and is effected by the Company’s board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles (“GAAP”) and includes those policies and procedures
that:
|
•
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect our transactions and dispositions of our
assets,
|
|
•
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with GAAP, and that
our receipts and expenditures are being made only in accordance with
authorizations of management and directors of the Company,
and
|
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal controls over financial reporting may vary over time. Our system
contains self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2009 based on the criteria described in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”).
Based on
this assessment, management, including the Company’s CEO and CFO, concluded that
our internal control over financial reporting was effective as of December 31,
2009.
RBSM LLP,
the independent registered public accounting firm that has audited the financial
statements included in this Report, has issued an attestation report on the
Company’s internal control over financial reporting as of December 31, 2009
which is given below.
RBSM
LLP
CERTIFIED
PUBLIC ACCOUNTANTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
Pacific
Asia Petroleum, Inc.
Hartsdale,
NY
We have
audited Pacific Asia Petroleum, Inc. and its subsidiaries (the "Company")
(a development stage company) internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on assessed
risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Pacific Asia Petroleum, Inc. and its subsidiaries maintained, in all
material respects, effective internal control over financial reporting as
of December 31, 2009, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Pacific Asia
Petroleum, Inc. and its subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations, comprehensive income,
stockholders’ equity and cash flows for each of the three years in the period
ended December 31, 2009 and for the period August 25, 2005 (date of inception)
through December 31, 2009, and our report dated
March
2, 2010
expressed an unqualified opinion.
| /s/ RBSM LLP | ||
|
New
York, New York
March
2, 2010
|