We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Register to chat with like-minded investors on our interactive forums.
| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Esperanza Resources Corp. | TSXV:EPZ | TSX Venture | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0 | - |
Hot Features
Premium
NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR DISSEMINATION IN THE UNITED STATES
WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the
Company") provides its results for the period ended June 30, 2010, key
highlights, and activities to date.
During the second quarter, the Company continued to drill the Kurdamir-1 well
sidetrack. At a depth of 3,214 metres the well encountered high-pressure sour
gas which resulted in well control difficulties. Subsequently, the drill string
parted and the Company initiated emergency response procedures. The well was
safely controlled with no injuries or atmospheric release of gas. Efforts to
recover the drill string continue. Kurdamir-1 is the Company's second
exploration well in the Kurdistan Region of Iraq.
Following drill string recovery operations, WesternZagros and its partners will
decide whether to conduct further drilling operations in order to test the
various potential hydrocarbon bearing zones that include the Shiranish, Kometan,
Upper Aaliji and Lower Oligocene formations. Another option is to re-drill the
Kurdamir structure, in a location designed to meet the dual objectives of
testing the down dip flank oil potential in the the Oligocene reservoir and the
oil potential of the deeper Cretaceous targets. A recently completed geochemical
study of drill cuttings from the Kurdamir-1 well supports the interpretation
that the Oligocene reservoir is oil bearing down dip on the flanks of the
Kurdamir structure.
The costs of the well control operations, sidetracking activities and a re-drill
of the Kurdamir-1 well (if necessary) are covered by an insurance policy and
coverage was confirmed by the insurers during the second quarter. WesternZagros
has submitted claims, and payments under the policy are being received as
expected.
While proceeding with operations at Kurdamir-1, WesternZagros continued to
assess the prospectivity of the Production Sharing Contract ("PSC") lands. This
work has identified additional attractive opportunities, including a new
prospect in the Upper Fars reservoir target named Mil Qasim, located close to
the Sarqala-1 well (the first exploration well drilled by WesternZagros). While
drilling through the Upper Fars interval at Sarqala-1, high quality light oil
shows (35 degree API gravity) were encountered, which had not been originally
anticipated by WesternZagros. This Upper Fars target at Mil Qasim is
considerably shallower than the original target formations in both Sarqala and
Kurdamir.
In order to maintain financial and operational flexibility while continuing with
Kurdamir-1 and evaluation of multiple future drilling options, WesternZagros is
involved in active discussions with its two partners, the Kurdistan Regional
Government ("KRG") and Talisman Block K44 B.V. ("Talisman"), around how to
structure and sequence the future activities of the joint venture.
Commenting on the results from the second quarter of 2010, WesternZagros Chief
Executive Officer Simon Hatfield said, "While we had anticipated completing the
Kurdamir-1 well by this time, we are nonetheless pleased to have brought the
well safely under control following the potentially dangerous drill string
failure experienced in May. Our current focus is on completing the drill string
recovery operations at the well so that we can test the promising oil-bearing
zones that we have encountered. We are also in constructive discussions with our
co-venturers, as we assess options that will enable us to move ahead on
evaluating and drilling the additional prospects identified on our exploration
block. In spite of the challenges we have encountered while drilling our first
two wells in this under-explored area, we remain highly confident about the
prospectivity of the region and optimistic about the potential to discover and
produce oil."
WesternZagros' highlights and activities for the second quarter of 2010 to
August 12, 2010 include the following:
Operations
- WesternZagros drilled a sidetrack at the Kurdamir-1 well during the second
quarter, exiting the 9 5/8" casing at approximately 2,600 metres through the
Upper Aaliji Formation into the Lower Aaliji Seal and reached a depth of 3,214
metres on April 25, 2010. At this depth, the well unexpectedly encountered a
high pressure, hydrogen sulfide (H2S) bearing, hydrocarbon zone. The well was
shut in while attempting to stabilize this zone.
- On May 15, 2010, the drill string parted and the Company activated its
Emergency Response Plan and began well control operations. As a precaution, the
Company moved non-essential personnel and local inhabitants who were within its
Emergency Planning Zone ("EPZ") to locations outside of the EPZ.
- The Company safely and successfully secured the well on May 31, 2010 and the
local residents who had been evacuated were able to return to their homes in
early June.
- A hydraulic workover rig, known as a snubbing unit, that enables well
intervention to be safely performed while the well is under pressure was
installed in June in order to recover the drill string from the well and
complete well kill operations. The upper 450 metre portion of the parted drill
string was recovered in early July 2010. A further 1655 metres was recovered in
early August 2010 with approximately 800 metres remaining in the well bore. The
Company is now removing the snubbing unit prior to resuming further well control
operations.
- The gross costs for Kurdamir-1 as of June 30, 2010 were approximately $92
million ($55 million net to WesternZagros). These gross costs include
approximately $35 million of incremental costs associated with well control and
sidetrack activities ($21 million net to WesternZagros). The Company is pursuing
reimbursement of a significant portion of these costs under an insurance claim.
WesternZagros, as operator, has notified the KRG of a force majeure event under
the terms of the PSC related to the well control and subsequent sidetracking
operations associated with Kurdamir-1. Under the terms of the PSC, when a force
majeure event occurs, the time resulting from any such delay and the time
necessary to repair any damage resulting from the delay will be added to the
first exploration sub-period.
Exploration
- WesternZagros completed a geochemical study of various drill cuttings from
Kurdamir-1 in the Aaliji seal to analyze whether this source rock interval is
likely to be generating oil or gas. Results from this study provide further
support for the potential of an oil flank in the Oligocene reservoir at
Kurdamir, as the source rock was found to be both oil prone and likely to be
generating oil present day.
- WesternZagros has completed an evaluation of the Upper Fars interval drilled
at Sarqala-1, where high quality light oil shows (35 degree API gravity) were
encountered while drilling, and has identified a nearby Upper Fars drilling
prospect named Mil Qasim. Mil Qasim is a seismically defined anticline, the
crest of which lies approximately three kilometres from the Sarqala-1 well. In
order to test this prospect, it would require a well to be drilled to a proposed
total depth of 2,400 metres.
- During the second quarter of 2010, WesternZagros completed the majority of the
work required to prepare the Qulijan-1 well site, including preparing the
drilling site and building roads. However, the Company has suspended further
work on Qulijan-1 while its operational efforts are focused on Kurdamir-1 and
while discussions are underway with its partners on the sequencing of future
drilling.
- WesternZagros continues to compile further seismic data and information from
wells on the exploration blocks surrounding its PSC lands. WesternZagros is
integrating this new information, along with the reprocessed seismic data from
its PSC lands, into its seismic interpretations to further define and update its
prospects and lead inventory.
Financial
- As at June 30, 2010, WesternZagros had $54.2 million in working capital.
- WesternZagros' share of capital expenditures for the six months ended June 30,
2010 associated with its PSC activities and other capitalized costs was $29.4
million, prior to insurance recoveries. Year-to-date expenditures for 2010
include $27.2 million of drilling-related costs; $0.4 million of geological and
geosciences related work; $1.3 million of supervision and local office costs;
and $0.5 million of corporate-related expenditures. Estimated insurance
recoveries of $19.7 million, net of deductibles, were recorded in the second
quarter of 2010 related to the year-to-date well recovery costs incurred at
Kurdamir-1.
Insurance
- WesternZagros initiated an insurance claim in the first quarter of 2010
related to well control operations at Kurdamir-1, commencing when Kurdamir-1 was
drilled into a high pressure formation in the Gulneri seal and continuing with
the well control operations related to subsequent additional high pressure zone
in the Aaliji seal The Company received confirmation of coverage for the claim
from the insurers in the second quarter of 2010.
- As at June 30, 2010, WesternZagros had received $5.4 million in insurance
proceeds and had accrued a further receivable of $14.3 million. Subsequent to
June 30, 2010, the Company has received an additional $4.0 million in insurance
proceeds. The Company continues to submit interim insurance claims as allowable
costs are incurred.
- The Company's maximum limit for the current insurance claim is $45 million,
which is expected to cover a substantial portion of the well recovery costs and
related sidetrack drilling costs and a portion of the re-drill costs should this
prove necessary.
Corporate
- On June 23, 2010, WesternZagros announced Mr. Ian McIntosh, Vice President,
Kurdistan Business Unit had assumed the position of acting Senior Vice
President, Engineering and Operations on an interim basis following the
departure of Mr. Robert Theriault.
- Given the difficulties encountered during drilling operations, in the second
quarter WesternZagros undertook a comprehensive review of its operations to
determine how to achieve better performance. The Company's Board of Directors
and an external expert led this review, and the resulting recommendations are
now being implemented. WesternZagros continues to work closely with Talisman in
order to take maximum advantage of its partner's expertise in operating complex
wildcat exploration wells.
Political
- A federal election was held in Iraq on March 7, 2010; however, the government
has yet to be formed.
Corporate Social Responsibility
- During the first six months of 2010, WesternZagros and its co-venturers
continued to focus on three key corporate social responsibility initiatives in
the Garmian region of Kurdistan - water supply, education and health care.
Activities during the first half of 2010 included: Extensive local procurement
of water tanker services;
- Road repairs and livestock water pit construction for several Garmian villages
- Implementation of the a biosand water filter project with the Kurdistan
Village Reconstruction Association; and
- Building of a sports recreation facility.
- When the emergency response plan was activated in May 2010, it required the
evacuation of a village near the Kurdamir-1 well. WesternZagros worked closely
with local residents to minimize the inconvenience they faced and to ensure
their needs were met.
Management's Discussion and Analysis
The following management's discussion and analysis ("MD&A") reviews
WesternZagros Resources Ltd.'s ("WesternZagros" or the "Company") financial
condition, activities and results of operations for the period ended June 30,
2010. It should be read in conjunction with the unaudited interim consolidated
financial statements for the period ended June 30, 2010, the audited
consolidated financial statements for the year ended December 31, 2009 and the
related notes. The effective date of this MD&A is August 12, 2010.
Forward-Looking Information
This discussion offers management's analysis of the financial and operating
results of WesternZagros and contains certain forward-looking statements
relating, but not limited, to operational information, future drilling plans and
testing programs and the timing associated therewith, estimated Production
Sharing Contract ("PSC") commitments, anticipated capital and operating budgets,
anticipated insurance recoveries, anticipated working capital and estimated
costs. Forward-looking information typically contains statements with words such
as "anticipate", "estimate", "expect", "potential", "could", or similar words
suggesting future outcomes. The Company cautions readers and prospective
investors in the Company's securities to not place undue reliance on
forward-looking information as, by its nature, it is based on current
expectations regarding future events that involve a number of assumptions,
inherent risks and uncertainties, which could cause actual results to differ
materially from those anticipated by WesternZagros.
Forward looking information is based on management's current expectations and
assumptions regarding, among other things, outcomes of well control operations
(including timing associated therewith), plans for and results of drilling
activity, future capital and other expenditures (including the amount, nature
and sources of funding thereof), insurance recoveries, future economic
conditions, future currency and exchange rates, continued political stability,
timely receipt of any necessary government or regulatory approvals, the
Company's continued ability to employ qualified staff and to obtain equipment in
a timely and cost efficient manner, the continued participation of the Company's
co-venture partners in exploration activities and the timely receipt of
insurance proceeds. In addition, budgets are based upon WesternZagros' current
plans and anticipated costs, both of which are subject to change based on, among
other things, the actual outcomes of well control operations and results of
drilling activity, unexpected delays and changes in market conditions. Although
the Company believes the expectations and assumptions reflected in such
forward-looking information are reasonable, they may prove to be incorrect.
Forward-looking information involves significant known and unknown risks and
uncertainties. A number of factors could cause actual results to differ
materially from those anticipated by WesternZagros including, but not limited
to, risks associated with the oil and gas industry (e.g. operational risks in
exploration; inherent uncertainties in interpreting geological data; changes in
plans with respect to exploration or capital expenditures; interruptions in
operations together with any associated insurance proceedings; denial of any
portion of the insurance claims; the uncertainty of estimates and projections in
relation to costs and expenses and health, safety and environmental risks), the
risk of commodity price and foreign exchange rate fluctuations, the uncertainty
associated with negotiating with foreign governments and risk associated with
international activity.
Readers are cautioned that the forgoing list of important factors is not
exhaustive. The forward-looking statements contained in this MD&A are made as of
the date of this MD&A and, except as required by law, WesternZagros does not
undertake any obligation to update publicly or to revise any of the included
forward-looking statements, whether as a result of new information, future
events or otherwise. The forward-looking statements contained in this MD&A are
expressly qualified by this cautionary statement. See the Risk Factors section
of this MD&A for a further description of these risks and uncertainties facing
WesternZagros. Additional information relating to WesternZagros is also
available on SEDAR at www.sedar.com.
Overview
WesternZagros is a publicly-traded, Calgary-based, international oil and gas
company engaged in acquiring properties and exploring for, developing and
producing crude oil and natural gas in Iraq. WesternZagros holds a PSC with the
Kurdistan Regional Government ("KRG") which covers a 2,120 square kilometre
exploration block (the "Kalar - Bawanoor Block" or "PSC lands") in the Kurdistan
Region of Iraq and it is on trend with, and adjacent to, a number of prolific
historic oil and gas discoveries. WesternZagros (operator) holds a 40 percent
working interest, the KRG holds a 20 percent working interest (carried by
WesternZagros) and a wholly-owned subsidiary of Talisman Energy Inc.
("Talisman") holds the remaining 40 percent working interest.
Basis of Presentation
Reporting and Functional Currency
The reporting and functional currency of the Company is the United States
("U.S.") dollar. All references herein to US$ or to $ are to United States
dollars and references herein to Cdn$ are to Canadian dollars.
Going Concern Uncertainty
The financial data presented below has been prepared in accordance with Canadian
generally accepted accounting principles ("GAAP") on the basis that the Company
will continue to operate as a going concern, which implies the realization of
assets and the settlement of liabilities and commitments in the normal course of
business for the foreseeable future. In assessing whether the going concern
assumption is appropriate, management takes into account all available
information about the future, which is at least, but is not limited to, twelve
months from June 30, 2010.
Since inception and typical with development stage companies, the Company has
incurred losses from operations and negative cash flows from operating
activities, and has an accumulated deficit at June 30, 2010. During the three
months ended June 30, 2010, the Company had expenditures of $1.2 million for
operating activities and $16 million for oil and gas property expenditures,
partially offset by an overall decrease in non-cash working capital of $0.5
million. During the six months ended June 30, 2010, the Company had expenditures
of $1.8 million for operating activities and $29.4 million for oil and gas
property expenditures, as well as an overall increase in non-cash working
capital of $7.1 million. The Company will require additional funding over time
to maintain ongoing exploration programs and property commitments, as well as
for administration expenses.
There are material uncertainties that could raise significant doubt about the
Company's ability to continue as a going concern, as further outlined below:
Kurdamir-1 Well Recovery Operations:
The Company is currently pursuing ongoing well recovery operations at Kurdamir-1
related to a parted drill string. A negative outcome from these operations,
which could potentially result in sidetracking the well or possibly re-drilling
the well entirely, would add additional cost and could significantly impact the
Company's ability to access any further financial resources required to meet its
Production Sharing Contract ("PSC") commitments.
Insurance Claim Related To Well Control Operations:
The Company has now received confirmation of coverage from its insurers, which
partially mitigates the uncertainty associated with the additional costs of the
well recovery operations at Kurdamir-1. However, any unforeseen delays in
payment from the insurers could impair the Company's ability to continue funding
ongoing activities under the PSC. In addition, the insurance claim will only
cover the Company's share of allowable costs up to a maximum of $45 million ($75
million gross). If the total costs of the current well recovery operations and
any associated sidetracking or re-drilling actitivities exceed the $45 million
limit, it could impair the Company's ability to continue funding ongoing
activities under the PSC.
Other Uncertainties
In general, the Company's ability to continue operations and exploration
activities as a going concern is dependent upon its ability to obtain additional
funding over time. The consolidated financial statements do not reflect
adjustments in the carrying values of assets and liabilities reported, revenue
or expenses, nor the balance sheet classification used that would be necessary
if the going concern assumption was not appropriate. Such adjustments could be
material.
Highlights
WesternZagros is currently exploring for crude oil and natural gas in the
Kurdistan Region of Iraq and the Company currently has no reserves or
production. WesternZagros' revenue is comprised entirely of interest earned on
cash and cash equivalent balances and short-term investments. WesternZagros'
highlights and activities to August 12, 2010 include the following.
Operations
- WesternZagros drilled a sidetrack at the Kurdamir-1 well during the second
quarter, exiting the 9 5/8" casing at approximately 2,600 metres through the
Upper Aaliji Formation into the Lower Aaliji Seal and reached a depth of 3,214
metres on April 25, 2010. At this depth, the well unexpectedly encountered a
high pressure, hydrogen sulfide (H2S) bearing, hydrocarbon zone. The well was
shut in while attempting to stabilize this zone.
- On May 15, 2010, the drill string parted and the Company activated its
Emergency Response Plan and began well control operations. As a precaution, the
Company moved non-essential personnel and local inhabitants who were within its
Emergency Planning Zone ("EPZ") to locations outside of the EPZ.
- The Company safely and successfully secured the well on May 31, 2010 and the
local residents who had been evacuated were able to return to their homes in
early June.
- A hydraulic workover rig, known as a snubbing unit, that enables well
intervention to be safely performed while the well is under pressure was
installed in June in order to recover the drill string from the well and
complete well kill operations. The upper 450 metre portion of the parted drill
string was recovered in early July 2010. A further 1655 metres was recovered in
early August 2010 with approximately 800 metres remaining in the well bore. The
Company is now removing the snubbing unit prior to resuming further well control
operations.
- The gross costs for Kurdamir-1 as of June 30, 2010 were approximately $92
million ($55 million net to WesternZagros). These gross costs include
approximately $35 million of incremental costs associated with well control and
sidetrack activities ($21 million net to WesternZagros). The Company is pursuing
reimbursement of a significant portion of these costs under an insurance claim.
WesternZagros, as operator, has notified the KRG of a force majeure event under
the terms of the PSC related to the well control and subsequent sidetracking
operations associated with Kurdamir-1. Under the terms of the PSC, when a force
majeure event occurs, the time resulting from any such delay and the time
necessary to repair any damage resulting from the delay will be added to the
first exploration sub-period.
Exploration
- WesternZagros completed a geochemical study of various drill cuttings from
Kurdamir-1 in the Aaliji seal to analyze whether this source rock interval is
likely to be generating oil or gas. Results from this study provide further
support for the potential of an oil flank in the Oligocene reservoir at
Kurdamir, as the source rock was found to be both oil prone and likely to be
generating oil present day.
- WesternZagros has completed an evaluation of the Upper Fars interval drilled
at Sarqala-1, where high quality light oil shows (35 degree API gravity) were
encountered while drilling, and has identified a nearby Upper Fars drilling
prospect named Mil Qasim. Mil Qasim is a seismically defined anticline, the
crest of which lies approximately three kilometres from the Sarqala-1 well. In
order to test this prospect, it would require a well to be drilled to a proposed
total depth of 2,400 metres.
- During the second quarter of 2010, WesternZagros completed the majority of the
work required to prepare the Qulijan-1 well site, including preparing the
drilling site and building roads. However, the Company has suspended further
work on Qulijan-1 while its operational efforts are focused on Kurdamir-1 and
while discussions are underway with its partners on the sequencing of future
drilling.
- WesternZagros continues to compile further seismic data and information from
wells on the exploration blocks surrounding its PSC lands. WesternZagros is
integrating this new information, along with the reprocessed seismic data from
its PSC lands, into its seismic interpretations to further define and update its
prospects and lead inventory.
Financial
- As at June 30, 2010, WesternZagros had $54.2 million in working capital.
- WesternZagros' share of capital expenditures for the six months ended June 30,
2010 associated with its PSC activities and other capitalized costs was $29.4
million, prior to insurance recoveries. Year-to-date expenditures for 2010
include $27.2 million of drilling-related costs; $0.4 million of geological and
geosciences related work; $1.3 million of supervision and local office costs;
and $0.5 million of corporate-related expenditures. Estimated insurance
recoveries of $19.7 million, net of deductibles, were recorded in the second
quarter of 2010 related to the year-to-date well recovery costs incurred at
Kurdamir-1.
Insurance
- WesternZagros initiated an insurance claim in the first quarter of 2010
related to well control operations at Kurdamir-1, commencing when Kurdamir-1 was
drilled into a high pressure formation in the Gulneri seal and continuing with
the well control operations related to subsequent additional high pressure zone
in the Aaliji seal The Company received confirmation of coverage for the claim
from the insurers in the second quarter of 2010.
- As at June 30, 2010, WesternZagros had received $5.4 million in insurance
proceeds and had accrued a further receivable of $14.3 million. Subsequent to
June 30, 2010, the Company has received an additional $4.0 million in insurance
proceeds. The Company continues to submit interim insurance claims as allowable
costs are incurred.
- The Company's maximum limit for the current insurance claim is $45 million,
which is expected to cover a substantial portion of the well recovery costs and
related sidetrack drilling costs and a portion of the re-drill costs should this
prove necessary.
Corporate
- On June 23, 2010, WesternZagros announced Mr. Ian McIntosh, Vice President,
Kurdistan Business Unit had assumed the position of acting Senior Vice
President, Engineering and Operations on an interim basis following the
departure of Mr. Robert Theriault.
- Given the difficulties encountered during drilling operations, in the second
quarter WesternZagros undertook a comprehensive review of its operations to
determine how to achieve better performance. The Company's Board of Directors
and an external expert led this review, and the resulting recommendations are
now being implemented. WesternZagros continues to work closely with Talisman in
order to take maximum advantage of its partner's expertise in operating complex
wildcat exploration wells.
Political
- A federal election was held in Iraq on March 7, 2010; however, the government
has yet to be formed.
Corporate Social Responsibility
- During the first six months of 2010, WesternZagros and its co-venturers
continued to focus on three key corporate social responsibility initiatives in
the Garmian region of Kurdistan - water supply, education and health care.
Activities during the first half of 2010 included: Extensive local procurement
of water tanker services;
- Road repairs and livestock water pit construction for several Garmian villages
- Implementation of the a biosand water filter project with the Kurdistan
Village Reconstruction Association; and
- Building of a sports recreation facility.
- When the emergency response plan was activated in May 2010, it required the
evacuation of a village near the Kurdamir-1 well, WesternZagros worked closely
with local residents to minimize the inconvenience they faced and to ensure
their needs were met.
General and Administrative Expenses
For the three and six month periods ended June 30, 2010 WesternZagros incurred
$1.6 million and $3.0 million in general and administrative expenses ("G&A"),
respectively, compared to $1.2 million and $2.5 for the comparable periods in
the prior year. G&A expenses were higher in the comparative periods of 2010 due
to the stronger Canadian dollar compared to 2009, which impacts a large portion
of the Company's G&A expenditures. As well, a lower proportion of G&A support
costs were allocated to capital projects in the second quarter of 2010 as
compared to 2009.
Depreciation, Depletion and Amortization (DD&A)
For the three and six month periods ended June 30, 2010, WesternZagros had $0.1
and $0.3 million, respectively, of depreciation related to certain
administrative assets (2008: $0.2 and $0.4 million). No depletion on oil and gas
related assets is recorded because WesternZagros has yet to determine whether
proved reserves are attributable to the PSC lands.
Stock-Based Compensation
The Company recognizes stock-based compensation expense for all stock options
granted, with a corresponding increase to contributed surplus. For the three
months ended June 30, 2010, WesternZagros had $0.4 million of stock-based
compensation expense included in G&A and $0.1 million in capitalized G&A, and
for the six months ended June 30, 2010, had $0.5 million of expense and $0.6
million in capitalized G&A. In comparison WesternZagros had $0.4 million of
stock-based compensation expense included in G&A and $0.2 million in capitalized
G&A for the three month period ended June 30, 2009, and had $0.8 million of
expense and $0.5 million in capitalized G&A for the six month period ending June
30, 2009.
Foreign Exchange
WesternZagros adopted the U.S. dollar as its measurement and reporting currency,
because the majority of its expenses are, or will be, directly or indirectly
denominated in U.S. dollars, and also to facilitate a more direct comparison to
other international crude oil and natural gas exploration and development
companies. WesternZagros holds over 95 percent of its cash and cash equivalents
and short-term investments in U.S. dollar accounts and U.S. dollar-priced
Government of Canada bonds; however, the Company has certain assets and
liabilities in currencies other than the U.S. dollar, mainly Canadian dollars.
These are converted to U.S. dollars at the end of each period resulting in
foreign exchange gains and losses. The Canadian dollar balances are held for the
purpose of funding WesternZagros' Canadian dollar expenditures, which are mainly
related to G&A costs for its head office and certain drilling-related services
and tangibles procured from Canadian suppliers. In the second quarter of 2010,
WesternZagros recorded a foreign exchange loss of $0.2 million compared to a
foreign exchange loss of $0.01 million in the second quarter of 2009 relating to
these conversions. In the six months ended June 30, 2010, WesternZagros recorded
a foreign exchange loss of $0.2 million compared to a foreign exchange gain of
$0.05 million for the six months ended June 30, 2009.
Income Taxes
For the three month period ended June 30, 2010, WesternZagros had an income tax
recovery of $0.1 million (2009: $0.06 million expense), comprised of $0.2
million of current income tax recovery and reduced by $0.1 million of future
income tax expense. For the six month period ended June 30, 2010, WesternZagros
had an income tax recovery of $0.8 million (2009: $0.9 million recovery), made
up of $0.9 million of current income tax recovery and reduced by $0.1 million of
future income tax expense. The current tax recovery relates to the expected
recovery of taxes incurred in 2008 on realized foreign exchange gains and losses
in WesternZagros' wholly-owned Canadian subsidiary. The tax recovery uses the
associated G&A costs incurred by and related tax pools available in the
subsidiaries. The future income tax expense results from the utilization of
share issuance costs in the current year to recover a portion of the current
income tax expense. WesternZagros anticipates recovering the majority of the
current income tax expense incurred in 2008 as it continues to incur G&A and
other expenditures related to its exploration and financing activities.
Revenue
WesternZagros' revenue is comprised entirely of interest earned on cash and cash
equivalents. Interest of $0.017 million was earned in the second quarter of 2010
compared to $0.035 million in the second quarter of 2009. For the six month
period ending June 30, 2010 WesternZagros earned $0.036 million of interest,
compared to $0.116 million in the six months ended June 30, 2009. The decrease
in interest income during 2010, versus the comparative periods in 2009, is
mainly due to the decreased balances of cash and cash equivalents.
Net Loss
For the three month period ended June 30, 2010, WesternZagros had a net loss of
$1.7 million compared to a net loss of $1.4 million in the second quarter of
2009. The increased net loss was mainly due to increased G&A costs associated
with the stronger Canadian dollar and a lower proportion of support costs
allocated to capital projects, as well as greater foreign exchange losses, but
was partially offet by increased tax recoveries during the second quarter of
2010 as compared to the same quarter of 2009. For the six month period ended
June 30, 2010, WesternZagros recorded a net loss of $2.7 million as compared to
a $1.7 million loss in the corresponding period of 2009. This was due to
increased G&A costs and foreign exchange losses as well as slightly lower tax
recoveries in the current year.
Capital Expenditures
For the three month period ended June 30, 2010, total capital expenditures on
the Kalar-Bawanoor Block were $25.3 million, including $23.5 million for
drilling and related operations, $0.4 million of geological and geosciences
related work (reprocessing and interpretation of seismic data), and $1.4 million
for supervision and local office costs in support of drilling operations.
Included in drilling and related operations during the second quarter of 2010
were $21.3 million for operations at Kurdamir-1 and $2.2 million for site
construction, planning costs and long lead items for Qulijan-1, (which was
formerly named the Sarhad prospect).
WesternZagros' share of capital expenditures for the three months ended June 30,
2010 associated with its PSC activities and other capitalized costs was $16.0
million, prior to any insurance recoveries. Expenditures during the second
quarter of 2010 include $14.8 million of drilling-related costs; $0.3 million of
geological and geosciences related work; $0.7 million of supervision and local
office costs; and $0.2 million of corporate-related expenditures. By comparison,
WesternZagros' share of capital expenditures in the second quarter of 2009 was
$14.8 million, which included $11.6 million of costs related to Kurdamir-1 and
$0.6 million of supervision and local office costs in support of drilling
operations, $1.5 million for Sarqala-1, and $1.1 million for long-lead items and
other tangibles for subsequent wells and consumables for testing operations.
For the six month period ended June 30, 2010, total capital expenditures on the
Kalar-Bawanoor Block were $46.8 million, prior to any insurance recoveries,
compared to $31.7 million for the comparable period in 2009. WesternZagros'
share of capital expenditures for the six months ended June 30, 2010 associated
with its PSC activities and other capitalized costs was $29.4 million, prior to
recovery of insurance proceeds. Year-to-date expenditures for 2010 include $27.2
million of drilling-related costs; $0.4 million of geological and geosciences
related work; $1.3 million of supervision and local office costs; and $0.5
million of corporate-related expenditures.
For the six month period ended June 30, 2010, the costs for Kurdamir-1 have been
credited by approximately $19.7 million, net to WesternZagros, for estimated
claimable costs under the current insurance claim. This amount is net of
deductibles.
WesternZagros capitalized $1.6 million in G&A expenses (2009: $1.4 million),
including $0.6 million of stock-based compensation costs (2009: $0.5 million),
directly related to exploration activities for the six months ended June 30,
2010.
Production Sharing Contract - Summary
Under the terms of its PSC, WesternZagros has a 40 percent working interest and
the KRG has a 20 percent interest in the PSC which is carried by WesternZagros.
The remaining 40 percent was allocated to Talisman in June 2008 by the KRG.
WesternZagros, the KRG and Talisman are collectively the "Contractor Group"
under the PSC. WesternZagros is the operator of the PSC lands until the end of
the first operating sub-period of the PSC, when a Joint Operating Company may be
established if so elected by the Contractor Group.
Production Sharing Contract - Commercial Terms
Under the PSC, the sharing of oil occurs as follows: of the total oil produced,
operations oil is available to WesternZagros for use in carrying out its
obligations under the PSC; the remaining oil is subject to a 10 percent royalty
payable to the KRG (the residual is considered to be "net available oil"). The
net available oil is determined on a development by development basis. Up to 45
percent of the net available oil is available for cost recovery, with the
remainder as "profit oil." Expenses eligible for cost recovery include all costs
and expenditures incurred by the Contractor Group for exploration, development,
production and decommissioning operations, as well as any other costs and
expenditures incurred directly or indirectly with these activities. The portion
of profit oil available to the Contractor Group is based on a sliding scale from
35 percent to 16 percent, depending on a calculated R-Factor. The R-Factor is
established by reference to the ratio of cumulative revenues over cumulative
costs. When the ratio is below one, the Contractor Group is entitled to 35
percent of the profit oil. The percentage is then reduced on a linear sliding
scale to a minimum of 16 percent at an R-Factor ratio of two or greater.
The production sharing terms for natural gas are the same as the oil production
sharing terms except that the net available gas available for cost recovery is
55 percent and the profit sharing component percentages and the R-Factor levels
are increased. For natural gas, the portion of profit natural gas available for
the Contractor Group is based on a sliding scale from 40 percent to 20 percent
depending on a calculated R-factor. The R-Factor is established by reference to
the ratio of the Contractor Group's cumulative revenue over cumulative costs.
When the R-Factor is below one, the Contractor Group is entitled to 40 percent
of the profit oil. The Contractor Group's percentage is then reduced on a linear
scale to a minimum of 20 percent at a ratio of 2.75 or greater.
Production
Pursuant to the terms of the PSC, WesternZagros maintains the right to market
its share of oil on the world market. There is an obligation under the PSC to
make oil production available to meet regional market demand. The price of such
oil is a market-based oil price based on a basket of crudes. The price for
natural gas is based on local commercial value and Iraq tariffs. Currently, no
markets exist for natural gas within Iraq and there is no infrastructure for
export.
Contract Obligations and Commitments
The PSC contemplates two exploration sub-periods of three years and two years,
respectively, with two possible one-year extensions. The first exploration
sub-period ends December 31, 2010. During the first sub-period, the Contractor
Group is required to complete a minimum of 1,150 kilometres of seismic surveying
(which has been completed), to drill three exploration wells, and to commit a
minimum of $75 million in the aggregate on these activities. At the end of the
first exploration sub-period, WesternZagros and the other parties to the PSC may
relinquish the entire contract area (other than any discovery or development
areas), continue further exploration operations by entering into the second
exploration sub-period, or request a one-year extension for further exploration
and appraisal activities prior to deciding to enter into the second exploration
sub-period.
The PSC also includes capacity-building support payments, which concluded in
April 2009, and annual funding for certain technological, logistical,
recruitment and training support during the exploration sub-periods. To meet its
remaining commitments for the first exploration sub-period, WesternZagros
estimates expenditures of approximately $25 million to $30 million, excluding
the costs associated with future activities at Kurdamir-1. Additional costs of
any testing, if required, would be in addition to these amounts. This represents
the Company's 60 percent funding requirement and includes the remaining costs
associated with drilling one additional exploration commitment well by the end
of the first exploration sub-period, and providing associated supervision and
local office support.
WesternZagros, on behalf of the Contractor Group, has applied to the KRG to
extend the first exploration sub-period for up to 12 months, i.e. to December
31, 2011, in order to allow sufficient time for drilling the flank of the
Kurdamir structure to determine whether the downdip Oligocene Reservoir is oil
bearing or gas-condensate bearing. The Company, on behalf of the Contractor
Group, has also notified the KRG of a force majeure event under the terms of the
PSC. See "Force Majeure" and "Outlook" sections in this MD&A for further
information.
To ensure that adequate time is available to complete operations at Kurdamir-1,
to make efficient use of limited capital, and to optimize the chances of success
on the next well, WesternZagros is in active discussions with its partners, the
KRG and Talisman. The three partners share the objectives of completing a well
and finding oil on the Kurdamir prospect, enabling further exploration on the
Kalar-Bawanoor block, and encouraging additional industry interest in Kurdistan.
WesternZagros management is therefore optimistic that it will be possible to
find a creative solution that will allow the Company's the amount of time
required to complete future exploration activities.
During the second exploration sub-period, the Contractor Group, or those parties
that have elected to participate in further exploration, are required to
complete a minimum of 575 kilometres of seismic surveying, drill at least two
exploration wells and commit a minimum of $35 million to these activities. At
the end of the second exploration sub-period, WesternZagros, and the other
parties to the PSC who have elected to participate in the second exploration
sub-period, may relinquish the entire contract area (other than any discovery or
development areas) or continue further exploration and appraisal operations into
the extension periods subject to the following relinquishment requirements. At
the end of the second exploration sub-period, and at the end of each subsequent
extension period, the PSC requires WesternZagros, and other parties who have
elected to participate, to relinquish 25 percent of the remaining undeveloped
area within the PSC lands or the entire contract area (other than any discovery
or development areas).
WesternZagros has entered into various exploration-related contracts, including
contracts for drilling equipment, services and tangibles. The following table
summarizes these contractual obligations as at June 30, 2010.
For the period ended December 31
($ 000's) 2010 2011 2012 2013 2014+ Total
----------------------------------------------------------------------------
Exploration 4,532 - - - - 4,532
Office 255 480 160 - - 895
----------------------------------------------------------------------------
Total 4,787 480 160 - - 5,427
----------------------------------------------------------------------------
The exploration commitments at June 30, 2010 have increased compared to prior
periods due to increased activity relating to the ongoing well recovery
operations. The Company expects to recover a substantial portion of these costs
under the insurance claim.
Third Party Obligations and Commitments
In 2003, WesternZagros entered into a consulting service agreement that provides
for a three percent right to indirectly participate in the future profits the
Company may earn in respect to the PSC, in exchange for consulting services
provided since that date. In the determination of profits under this agreement,
WesternZagros is entitled to deduct the consultant's proportional share of all
costs associated with acquiring the PSC and the exploration, appraisal,
development and production expenditures incurred by the Corporation ("eligible
costs"), together with interest on such percentage of eligible costs at LIBOR
plus three percent.
Further in 2004, WesternZagros entered into a consulting service agreement that
provides for a two percent right to indirectly participate in the future profits
the Corporation may earn in respect to the PSC, in exchange for the provision of
consulting services during the period 2004 to 2006. In the determination of
profits under this agreement, WesternZagros is entitled to deduct one percent of
all eligible costs, together with interest on such percentage of eligible costs
at LIBOR plus ten percent. The consultant is required to fund the additional one
percent of all eligible costs.
Off Balance Sheet Arrangement
The Company does not presently utilize any off-balance sheet arrangements to
enhance its liquidity and capital resource positions, or for any other purpose.
During the period ended June 30, 2010, WesternZagros did not enter into any
off-balance sheet transactions.
Related Party Transactions
Included in accounts receivable is a loan to a senior officer of $0.2 million,
the loan is non-interest bearing and was to mature on December 31, 2010. The
original transaction was recorded at the exchange amount, which is the amount of
consideration established and agreed to by the related party. This loan was
fully repaid subsequent to June 30, 2010.
Insurance Claim Update
WesternZagros has initiated an insurance claim related to the cost of well
control operations at Kurdamir-1, including those when Kurdamir-1 was drilled
into a high pressure formation in the Gulneri seal and the subsequent high
pressure zone encountered in the Lower Aaliji seal in the subsequent sidetrack.
The control of well insurance policy covering these claims has a net aggregate
limit to WesternZagros of $45 million with a $0.4 million deductible.
During the second quarter of 2010, WesternZagros received the Comprehensive
Report prepared by the insurance adjuster and which was been submitted to the
insurers. The Comprehensive Report included a request for the first interim
payment on account of $5.7 million net to WesternZagros, after consideration of
deductibles representing the costs incurred, paid and submitted to the adjuster
as of that date for well control operations and subsequent sidetracking. As at
June 30, 2010, WesternZagros had received $5.4 million related to the first
interim payment and has subsequently received the remaining $0.3 million.
Further claimable costs of $14.3 million, net to WesternZagros, have been
recorded as a receivable as at June 30, 2010. These costs, under the terms of
the insurance policy, are subject to review and approval by the adjuster
appointed by the insurers, and are submitted by WesternZagros as they are
incurred and paid. Subsequently, WesternZagros has submitted further claims
totalling $6.7 million and to date has received a further $3.7 million.
WesternZagros anticipates that the proceeds of this claim will cover a
significant portion of the well control and sidetrack drilling costs that have
been and will be incurred. WesternZagros continues to prepare the required
submissions to the adjuster for further interim payments on account as the costs
incurred are paid. The insurance policy covers re-drill of the well if required.
A separate well control insurance policy is in place for the third commitment
well.
Force Majeure
WesternZagros, on behalf of the Contractor Group, has notified the KRG of a
force majeure event under the terms of the PSC related to the well control and
subsequent sidetracking operations associated with Kurdamir-1. Under the terms
of the PSC, when a force majeure event occurs, the time resulting from any such
delay and the time necessary to repair any damage resulting from the delay will
be added to the first exploration sub-period. The period of force majeure
started on January 22, 2010 and continues to date.
Outlook
In spite of the challenges that WesternZagros has encountered while drilling its
first two wells in the Kurdistan Region of Iraq, management remains confident
about the prospectivity of the region and optimistic about the potential to
discover and produce oil. However, the delays encountered at the Kurdamir-1 well
have introduced an element of timing pressure to WesternZagros' forward plans.
The PSC requires the Company to drill its third exploration commitment well by
the end of 2010, although the force majeure event extends the time period
provided under the first exploration sub-period. The force majeure event
commenced on January 22, 2010 and continues to date.
To ensure that adequate time is available to complete operations at Kurdamir-1,
to make efficient use of limited capital, and to optimize the chances of success
on the next well, WesternZagros is in active discussions with its partners, the
KRG and Talisman. The three partners share the objectives of completing a well
and finding oil on the Kurdamir prospect, enabling further exploration on the
Kalar-Bawanoor block, and encouraging additional industry interest in Kurdistan.
WesternZagros management is therefore optimistic that it will be possible to
find a creative solution that will allow the Company's the amount of time
required to complete future exploration activities.
While proceeding with operations at Kurdamir-1, WesternZagros has also continued
to analyze the petroleum prospectivity of the other parts of the PSC lands. This
activity has identified an additional prospects, close to the first exploration
well drilled by WesternZagros at Sarqala-1. This prospect, named Mil Qasim, is
shallower and considerably less complex than other prospects.
With the objective of maximizing optionality and flexibility to increase the
likelihood of success, WesternZagros' priorities for the remainder of 2010 are
now as follows:
- Having successfully overcome the emergency situation at the Kurdamir-1 well
and minimized the risk to human safety, the focus is on recovering the remaining
drill string and achieving a successful test of the Aaliji and lower Oligocene
formations. The oil shows encountered in these formations while drilling are
encouraging, and a test is required to establish whether commercial quantities
of hydrocarbons are present.
- WesternZagros is currently in active discussions with the KRG and Talisman, in
order to seek a conclusion that gives the Company flexibility around the timing
of the third commitment well, to ensure efficient use of capital and an orderly
progression of drilling and other exploration activity.
- The decision on whether or not to drill forward at Kurdamir-1 to attempt to
reach the Shiranish and Kometan reservoir will depend on the condition of the
well-bore following the recovery of the remaining drill string and several other
factors. Other options include a new well on the same site (a re-drill is
covered by the insurance policy), or a well to test the flanks of the Kurdamir
structure.
Because the Kurdamir-1 operations have yet to be completed and decisions on the
next well still pending, the letter of intent that had been signed to secure a
drilling rig for the Qulijan-1 well has been cancelled. The decision on the next
well to be drilled will depend on the results at Kurdamir-1 and the outcome of
the discussions with the joint venture partners.
WesternZagros estimates its share of expenditures for the remainder of 2010 to
be between $17 million and $24 million after insurance proceeds. This range
includes $21 million of costs for the continued drilling operations at Kurdamir
1, of which $18 million is estimated to be recoverable from insurance, leaving a
net cost to the Company of $3 million. The remainder of the costs include
approximately $10 to $15 million for the next exploration well, with the balance
associated with various other support costs.
Liquidity and Capital Resources
WesternZagros is currently exploring for crude oil and natural gas in the
Kurdistan Region of Iraq and currently has no reserves, production or
operational cash flows. WesternZagros' revenue is comprised entirely of interest
earned on cash and cash equivalent balances. WesternZagros invests its cash and
cash equivalents with major Canadian financial institutions with investment
grade credit ratings and in Government of Canada instruments. This is in
accordance with an Investment Policy approved by the Board of Directors.
WesternZagros had no outstanding bank debt or other interest-bearing
indebtedness as at June 30, 2010.
At June 30, 2010, WesternZagros had $54.2 million in working capital. Management
currently expects to use this balance to fund future capital expenditures
described in the "Outlook" section. WesternZagros is considering the proper
timing to access further financial resources, including assessing the following
factors:
- The outcome of well control operations at Kurdamir-1, and ability to continue
drilling Kurdamir-1 to the Shiranish and Kometan formations;
- The opportunity to conduct cased hole testing operations at Kurdamir-1 in the
Shiranish, Kometan, Upper Aaliji and Lower Oligocene Formations, if well control
and subsequent drilling operations are successful;
- The conclusion of discussions with both the KRG and Talisman as it relates to
the PSC and associated timing of work commitments;
- Continued reimbursement of costs under the insurance claim;
- Continued participation of the Company's co-venturers in the PSC activities;
- Capital and operating budgets, including the budget for commencing drilling
activities on the third exploration commitment well;
- The completion of the recent federal election process in Iraq and naming of a
President, Prime Minister and federal cabinet;
- The status of the Federal Petroleum Law of Iraq and the ability to export oil
and natural gas from the Kurdistan Region of Iraq in accordance with the
economic terms under the PSC; and
- The current conditions in the financial markets, including the potential for
further market instability.
Given the well control operations, the potential for further market instability
and the continued delays in concluding the Federal Petroleum Law of Iraq,
WesternZagros will seek to maintain financial flexibility and will monitor and
assess its financing requirements and its ability to access additional financing
as its exploration activities progress. Any significant delay in collecting
amounts under its insurance claims, problems with the well control operations
that increase the costs of Kurdamir-1, or a decision to re-drill the Cretaceous
intervals at Kurdamir in a separate well, would require WesternZagros to secure
additional financial resources to complete its future activities, including
drilling the third exploration commitment well and any further testing program
in either Kurdamir-1, a re-drill or Kurdamir, or the third exploration
commitment well. WesternZagros will also require additional financial resources
over time to complete an appraisal program, and ultimately any development
program, that is warranted by discoveries at Kurdamir-1 or subsequent wells.
Future global economic events and conditions may result in further volatility in
the financial markets which, in turn, could negatively impact WesternZagros'
ability to access equity or debt markets over time. In addition, the results of
the Company's exploration activities or any prolonged delay in the export of oil
from the Kurdistan Region of Iraq in accordance with the economic terms under
the PSC could negatively impact the future ability to access equity or debt
markets. Any inability to access the equity or debt markets for sufficient
capital, at acceptable terms and within required timeframes, could have a
material adverse effect on WesternZagros' financial condition, results of
operations and prospects.
Outstanding Share Data
As at June 30, 2010, there were 207,464,320 shares issued and outstanding. The
number of common shares reserved for issuance pursuant to options granted will
not exceed 10 percent of the issued and outstanding common shares. For the six
month period ended June 30, 2010, 28,000 stock options were granted to employees
and 608,334 forfeited by employees bringing the total stock options outstanding
as of June 30, 2010 to 12,484,000.
Supplemental Quarterly Information
The following tables summarizes the key financial information on a quarterly
basis for the periods indicated.
($ thousands, unless June 30 March 31 Dec 31 Sept 30
otherwise indicated) 2010 2010 2009 2009
----------------------------------------------------------------------------
Revenue 17 19 32 36
Net Loss 1,720 1,006 1,035 2,712
Net Loss per Share (US$/share)
(Basic and Fully Diluted) 0.008 0.005 0.005 0.013
Capital Expenditures 16,041 13,334 11,250 11,456
Total Assets 236,006 235,977 241,077 241,600
Total Long-term Liabilities 207 178 175 171
Dividend (US$ per share) Nil Nil Nil Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ thousands, unless June 30 March 31 Dec 31 Sept 30
otherwise indicated) 2009 2009 2008 2008
----------------------------------------------------------------------------
Revenue 35 81 495 867
Net Loss 1,404 340 6,653 984
Net Loss per Share (US$/share)
(Basic and Fully Diluted) 0.006 0.002 0.030 0.005
Capital Expenditures 14,796 16,854 20,339 20,531
Total Assets 241,171 239,288 243,697 248,919
Total Long-term Liabilities 197 71 69 68
Dividend (US$ per Share) Nil Nil Nil Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Risk Factors
The risks factors that could influence actual results have not changed since the
2009 Annual Report and Annual Information Form including the risk that
WesternZagros' ability to access the equity or debt markets in the future may be
affected by further drilling challenges and related increases to exploration
well costs. The financial market instability seen in the first half of 2010 may
impact WesternZagros' ability, and that of other exploration and development
companies, to access equity or debt markets at all or with acceptable terms. For
future capital requirements beyond the Company's current financing capability,
which consists of its cash and cash equivalents balances at June 30, 2010, risks
associated with the global economic conditions have increased. The inability to
access the equity or debt markets for sufficient capital, at acceptable terms
and within required time frames, could have a material adverse effect on
WesternZagros' financial condition, results of operations and prospects.
An investment in WesternZagros should be considered highly speculative due to
the nature of its activities, the present stage of its development, the need for
continued participation of the Company's co-venturers in the PSC activities and
its need for additional financing in the future for any acquisition,
exploration, development and production of oil and gas reserves beyond current
funding levels. WesternZagros' risk factors include, but are not limited to, all
the risks normally incidental to the exploration, development and operation of
crude oil and natural gas properties and the drilling of crude oil and natural
gas wells, including geological risk, encountering unexpected formations or
pressures, potential environment damage, blow-outs, fires and spills, all of
which could result in personal injuries, loss of life and damage to property of
WesternZagros and others; premature declines of reservoirs; environment risks;
delay or changes in plans with respect to exploration or development projects or
capital expenditures; the ability to attract key personnel; the risk of
commodity price and foreign exchange rate fluctuations.
All of WesternZagros' assets are located in the Kurdistan Region of Iraq. As
such, WesternZagros is subject to political, economic, and other uncertainties,
including, but not limited to, the uncertainty of negotiating with foreign
governments, expropriation of property without fair compensation, adverse
determinations or rulings by governmental authorities, changes in energy
policies or the personnel administering them, nationalization, currency
fluctuations and devaluations, disputes between various levels of authorities,
arbitrating and enforcing claims against entities that may claim sovereignty,
authorities claiming jurisdiction, potential implementation of exchange
controls, royalty and government take increases and other risks arising out of
foreign governmental sovereignty over the areas in which WesternZagros'
operations are conducted, as well as risks of loss due to civil strife, acts of
war, guerrilla activities and insurrections. WesternZagros' operations may be
adversely affected by changes in government policies and legislation or social
instability and other factors which are not within the control of WesternZagros
including, among other things, adverse legislation in Iraq and/or the Kurdistan
Region, a change in crude oil or natural gas pricing policy, the risks of war,
terrorism, abduction, expropriation, nationalization, renegotiation or
nullification of existing concessions and contracts, taxation policies, economic
sanctions, the imposition of specific drilling obligations and the development
and abandonment of fields.
For a complete list of risk factors please refer to Company's Annual Information
Form, which is available at www.westernzagros.com or on SEDAR at www.sedar.com.
Future Accounting Pronouncements
International Financial Reporting Standards ("IFRS")
In February 2008, the Accounting Standards Board confirmed that all Canadian
publicly accountable enterprises will be required to adopt IFRS for interim and
annual reporting purposes for fiscal years beginning on or after January 1,
2011. WesternZagros has performed its preliminary review on the accounting
policy choices upon its conversion to IFRS for the fiscal year beginning on
January 1, 2011. The implementation of IFRS 6 "Exploration for and Evaluation of
Mineral Resources" ("IFRS 6") is expected to have the most significance to the
Company's results of operations, financial position and disclosures.
WesternZagros currently utilizes the full cost method for accounting for its
exploration activities in the Kurdistan Region of Iraq under Canadian GAAP.
Under the full cost method, all costs associated with the acquisition of,
exploration for and the development of crude oil and natural gas, including
asset retirement obligations, are capitalized and accumulated within cost
centres on a country-by-country basis. Such costs include land acquisition,
geological and geophysical activity, drilling and testing of productive and
non-productive wells, carrying costs directly related to unproved properties,
major development projects and administrative costs directly related to
exploration and development activities. As WesternZagros is only currently
operating in the Kurdistan Region of Iraq and has only one PSC in that region,
it has capitalized all costs associated with those exploration activities,
including certain costs incurred prior to entering into the PSC.
Under Canadian GAAP, amounts capitalized under the full cost method are reviewed
for impairment whenever events or conditions indicate that their net carrying
amount may not be recoverable from estimated future cash flows. If an impairment
is identified, the assets are written down to the estimated fair market value.
The calculation of these future cash flows is dependent on a number of
estimates, which include reserves, timing of production, crude oil price,
operating cost estimates and foreign exchange rates.
Upon conversion to IFRS, WesternZagros will be required to adopt IFRS 6, which
is the standard that deals with accounting for exploration and evaluation
("E&E") assets in the extractive industries. Typical costs included in the E&E
assets are acquisition of rights to explore, topographical, geological,
geochemical and geophysical studies, exploratory drilling, trenching, sampling,
and activities in relation to evaluating the technical feasibility and
commercial viability of extracting mineral resources. Under IFRS 6, costs
incurred prior to the legal rights to explore an area being obtained may no
longer be capitalized within E&E assets and requires that upon initial
recognition E&E assets should be measured at cost.
IFRS 6 allows either of two alternatives to be chosen as the accounting policy
for E&E assets after initial recognition. The first alternative is the "cost
model" whereby the item is carried at cost less impairment. The other
alternative is the "revaluation model." The revaluation model requires that,
after initial recognition, an asset whose fair value can be reliably measured
should be carried at a re-valued amount, being fair value at the date of
measurement, less any subsequent accumulated depreciation or accumulated
impairment losses. For the purpose of completing an impairment test under IFRS
6, the E&E assets must be allocated to specific cash-generating units (CGUs).
The level of grouping of CGUs for impairment testing purpose is based on how
management makes decisions about continuing/disposing of assets and operations
and the commercial terms associated with these assets and operations.
In July 2009, the International Accounting Standards Board ("IASB") approved
additional exemptions that will allow entities to allocate their oil and gas
asset balances as determined under full cost accounting to the IFRS categories
of exploration and evaluation assets and development and producing properties.
Under the exemption, exploration and evaluation assets are measured at the
amount determined under an entity's previous GAAP. This exemption will relieve
entities from significant adjustments resulting from retrospective adoption of
IFRS. The Company currently intends to utilize this exemption. The Company is
also evaluating other first-time adoption exemptions and elections available
upon initial transition that provide relief from retrospective application of
IFRS.
The Company continues to focus on analyzing and developing implementation
strategies and processes for the key IFRS transition issues identified. Where
applicable, key IFRS transition alternatives are being considered and evaluated.
The Company continues to perform preliminary accounting assessments on IFRS
transition issues and has commenced analysis of IFRS financial statement
presentation and disclosure requirements. These assessments will be further
analyzed and evaluated throughout the implementation phase of the Company's
project. At this time, the impact on the Company's financial position and
results of operations is not reliably determinable or estimable.
A detailed implementation plan and timeline has been developed, which also
includes the development of a training plan and the resources required to
complete the conversion. The project team is working on the design, planning and
implementation phases, which includes determining the specific qualitative and
quantitative impacts for each IFRS requirement that is relevant to the Company
and anticipates completion of this prior to the issuance of the Company's
December 31, 2010 consolidated financial statements.
INTERIM CONSOLIDATED BALANCE SHEETS
(United States dollars thousands)
(Unaudited)
June 30, December 31,
2010 2009
----------------------------------------------------------------------------
Assets
Current Assets
Cash and Cash Equivalents $ 43,769 $ 76,708
Accounts Receivable (note 14) 8,565 6,880
Insurance Recoveries Receivable (note 4) 14,307 -
Prepaid Expenses 395 183
Income Tax Recoverable 2,044 1,738
Future Income Taxes (note 7) 153 231
----------------------------------------------------------------------------
69,233 85,740
Long-term Assets
Property, Plant and Equipment (note 4) 166,353 154,911
Deposits held in trust (note 5) 420 420
Future Income Taxes (note 7) - 6
----------------------------------------------------------------------------
166,773 155,337
----------------------------------------------------------------------------
$ 236,006 $ 241,077
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current Liabilities
Accounts Payable and Accrued Liabilities $ 14,860 $ 18,297
----------------------------------------------------------------------------
14,860 18,297
Long-term Liabilities
Asset Retirement Obligation (note 6) 182 175
Future Income Taxes (note 7) 25 -
----------------------------------------------------------------------------
15,067 18,472
----------------------------------------------------------------------------
Shareholders' Equity
Share Capital (note 8) 253,583 253,583
Contributed Surplus (note 10) 9,809 8,749
Deficit (42,453) (39,727)
----------------------------------------------------------------------------
220,939 222,605
----------------------------------------------------------------------------
$ 236,006 $ 241,077
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Going Concern (note 1)
Commitments and Contingencies (note 15)
See Accompanying Notes to the Interim Consolidated Financial Statements
Approved by the Board of Directors
Fred J. Dyment Randall Oliphant
Director Director
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS,
COMPREHENSIVE LOSS AND DEFICIT
(United States dollars thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Revenues
Interest Income $ 17 $ 35 $ 36 $ 116
Expenses
General and Administrative 1,557 1,182 2,994 2,467
Depreciation 132 188 311 377
Accretion on Asset Retirement
Obligation 4 2 7 4
Foreign Exchange (Gain) Loss 193 8 245 (53)
----------------------------------------------------------------------------
1,886 1,380 3,557 2,795
----------------------------------------------------------------------------
Loss Before Income Taxes 1,869 1,345 3,521 2,679
Income Tax Expense (Recovery)
(note 7) (149) 59 (795) (935)
----------------------------------------------------------------------------
Net Loss and Other Comprehensive
Loss 1,720 1,404 2,726 1,744
Deficit, Beginning of Period 40,733 34,576 39,727 34,236
----------------------------------------------------------------------------
Deficit, End of Period $ 42,453 $ 35,980 $ 42,453 $ 35,980
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Loss Per Share
- Basic and Diluted (note 11) $ 0.008 $ 0.006 $ 0.013 $ 0.008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Going Concern (note 1)
See Accompanying Notes to the Interim Consolidated Financial Statements
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(United States dollars thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Cash Provided By (Used In)
Cash From Operating Activities
Net Loss $ (1,720) $ (1,404) $ (2,726) $ (1,744)
Non-cash Items
Depreciation 132 188 311 377
Accretion on Asset Retirement
Obligation (note 6) 4 2 7 4
Stock-based Compensation 367 363 495 792
Future Income Tax Recovery
(note 7) 58 196 109 465
----------------------------------------------------------------------------
(1,159) (655) (1,804) (106)
Decrease (Increase) in Non-Cash
Working Capital (note 13) 439 (1,697) (565) (7,723)
----------------------------------------------------------------------------
(720) (2,352) (2,369) (7,829)
----------------------------------------------------------------------------
Cash From Financing Activities
None - - - -
----------------------------------------------------------------------------
- - - -
----------------------------------------------------------------------------
Cash From Investing Activities
Short-term Investments - - - 39,967
Capital Expenditures (16,041) (14,796) (29,375) (31,650)
Insurance Recoveries (note 4) 5,380 - 5,380 -
Decrease (Increase) in Non-cash
Working Capital (note 13) 67 2,642 (6,575) 6,808
----------------------------------------------------------------------------
(10,594) (12,154) (30,570) 15,125
----------------------------------------------------------------------------
Increase (Decrease) in Cash and
Cash Equivalents (11,314) (14,506) (32,939) 7,296
Cash and Cash Equivalents at
Beginning of Period 55,083 111,818 76,708 90,016
----------------------------------------------------------------------------
Cash and Cash Equivalents at
End of Period $ 43,769 $ 97,312 $ 43,769 $ 97,312
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental cash flow
information:
Income Taxes Recovered (Paid) $ 598 $ (1,667) $ 598 $ (6,362)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Going Concern (note 1)
See Accompanying Notes to the Interim Consolidated Financial Statements
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Three and six months ended June 30, 2010 and 2009
(Tabular amounts in United States dollars thousands)
(Unaudited)
1. GOING CONCERN UNCERTAINTY AND BASIS OF PRESENTATION
These interim consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP") on the basis
that WesternZagros Resouces Ltd. (the "Corporation" or "WesternZagros") will
continue to operate as a going concern, which implies the realization of assets
and the settlement of liabilities and commitments in the normal course of
business for the foreseeable future.
Since inception and typical with development stage companies, the Corporation
has incurred losses from operations and negative cash flows from operating
activities, and has an accumulated deficit at June 30, 2010. During the three
months ended June 30, 2010, the Corporation had expenditures of $1.2 million for
operating activities and $16.0 million for oil and gas property expenditures,
partially offset by an overall decrease in non-cash working capital of $0.5
million. During the six months ended June 30, 2010, the Corporation had
expenditures of $1.8 million for operating activities, and $29.4 million for oil
and gas property expenditures, as well as an overall increase in non-cash
working capital of $7.1 million. The Corporation will require additional funding
over time to maintain ongoing exploration programs and property commitments, as
well as for administration expenses.
There are material uncertainties that could raise significant doubt about the
Corporation's ability to continue as a going concern, as further outlined below:
Kurdamir-1 Well Recovery Operations:
The Corporation is currently pursuing ongoing well recovery operations at
Kurdamir-1 related to a parted drill string. A negative outcome from these
operations, which could potentially result in sidetracking the well or possibly
re-drilling the well entirely, would add additional cost and could significantly
impact the Corporation's ability to access any further financial resources
required to meet its Production Sharing Contract ("PSC") commitments (see Note
15 for a further description of Commitments and Contingencies).
Insurance Claim Related To Well Control Operations:
The Corporation has now received confirmation of coverage from the insurers,
which partially mitigates the uncertainty associated with the additional costs
of the well recovery operations at Kurdimar-1. However, any unforeseen delays in
payment from the insurers could impair the Corporation's ability to continue
funding ongoing activities under the PSC. In addition, the insurance claim will
only cover the Corporation's share of allowable costs up to a maximum of $45
million ($75 million gross). If the total costs of the current well recovery
operations and any associated sidetracking or re-drilling activities exceed the
$45 million limit, it could impair the Corporation's ability to continue funding
ongoing activities under the PSC.
Other Uncertainties
In general, the Corporation's ability to continue operations and exploration
activities as a going concern is dependent upon its ability to obtain additional
funding over time. While the Corporation has been successful in obtaining its
required funding in the past, there is no assurance that sufficient funds will
be available to the Corporation in the future. The Corporation has no assurance
that such financing will be available or be available on favorable terms.
Factors that could affect the availability of financing include the continued
support of its shareholders; the results of its exploration activities; meeting
all commitments under the PSC; the resolution of remaining political disputes in
Iraq; progress on the Federal Petroleum Law and the ability to export oil and
natural gas from the Kurdistan Region of Iraq in accordance with the economic
terms under the PSC; the state of the capital markets and the ability of the
Corporation to obtain financing to develop reserves; the continued participation
of the Corporation's co-venturers in the PSC activities; and the timely receipt
of proceeds from the current insurance claim associated with the Kurdamir-1 well
control operations.
These consolidated financial statements do not reflect adjustments in the
carrying values of assets and liabilities reported, revenue or expenses, nor the
balance sheet classification used that would be necessary if the going concern
assumption was not appropriate. Such adjustments could be material.
2. NATURE OF OPERATIONS
WesternZagros Resources Ltd. (the "Corporation") was incorporated on August 22,
2007 under the laws of the Province of Alberta. The Corporation, an
international oil and gas company, is engaged in acquiring properties and
exploring for, developing and in due course producing crude oil and natural gas
in Iraq and is in the developmental stage. Through its subsidiaries, the
Corporation's operations are related to its interest in a Production Sharing
Contract with the Kurdistan Regional Government ("KRG") in respect of an
exploration project area in the Kurdistan Region of Iraq.
3. SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements are presented in accordance with
Canadian generally accepted accounting principles. The interim consolidated
financial statements have been prepared following the same accounting policies
and methods of computation as the audited consolidated financial statements for
the year ended December 31, 2009. These interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto in the Corporation's annual report for the year
ended December 31, 2009.
4. PROPERTY, PLANT AND EQUIPMENT
Accumulated
Depletion and
As at June 30, 2010 Cost Depreciation Net Book Value
----------------------------------------------------------------------------
Kurdistan Region
Exploration Project $ 165,849 $ - $ 165,849
Corporate 1,832 (1,328) 504
----------------------------------------------------------------------------
$ 167,681 $ (1,328) $ 166,353
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
Depletion and
As at December 31,2009 Cost Depreciation Net Book Value
----------------------------------------------------------------------------
Kurdistan Region
Exploration Project $ 154,244 $ - $ 154,244
Corporate 1,684 (1,017) 667
----------------------------------------------------------------------------
$ 155,928 $ (1,017) $ 154,911
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All costs included in the Kurdistan Region Exploration Project are excluded from
depletion as they represent costs incurred related to properties in cost centres
that are considered to be in the development stage. Currently, there are no
proved reserves. All costs, net of any associated revenues, have been
capitalized. The Corporation capitalized $1.6 million of general and
administrative costs (June 30, 2009 - $1.4 million) including $0.6 million of
stock-based compensation (June 30, 2009 - $0.5 million) directly related to
exploration activities for the six months ended June 30, 2010.
In the second quarter of 2010, the Corporation credited $18.2 million of net
insurance recoveries related to the well recovery operations at Kurdamir-1
against the Kurdistan Region Exploration Project. The Corporation's share of
allowable costs incurred to date was $20.1 million, which was reduced by a $0.4
million deductible and a $1.5 million loss load premium payable to the insurers
at the conclusion of the current insurance claim.
Proceeds from the first interim claim of $5.4 million were received from the
insurers during the second quarter. Further claimable costs of $14.3 million,
net to WesternZagros, have been recorded as a receivable as at June 30, 2010.
These costs, under the terms of the insurance policy, are subject to review and
approval by the adjuster appointed by the insurers and are submitted by
WesternZagros as they are incurred and paid. Subsequent to June 30, 2010, a
further $4.0 million in insurance proceeds was received.
5. DEPOSITS HELD IN TRUST
The Corporation had deposited in trust certain amounts to be utilized to fund
certain expenditures for drilling operations. The deposits bear interest at
prevailing market rates. As of June 30, 2010, the Corporation had a $0.4 million
deposit held in trust for a supplier.
6. ASSET RETIREMENT OBLIGATION
The Corporation records the fair value of legal obligations associated with the
retirement and reclamation of tangible long-lived assets when incurred. The
asset retirement cost, equal to the estimated fair value of the asset retirement
obligation, is capitalized as part of the cost of the related long-lived asset.
The estimation of this cost is based on engineering estimates using current
costs and technology and in accordance industry practice. The Corporation's
share of total undiscounted amount of estimated cash flow required to settle the
obligation is $1.2 million, which is assumed to be paid in the years 2033 and
2034 in the most likely cases. The Corporation used a credit risk adjusted
risk-free rate of 10 percent and an inflation factor of 4 percent to calculate
the net present value of the future retirement obligation.
The following table presents the reconciliation of the Corporation's asset
retirement obligation:
June 30, 2010 December 31, 2009
----------------------------------------------------------------------------
Balance, beginning of year $ 175 $ 69
Liabilities incurred - 95
Accretion expense 7 11
----------------------------------------------------------------------------
Balance at end of period $ 182 $ 175
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. INCOME TAXES
Six Month Period Ended June 30, 2010 June 30, 2009
----------------------------------------------------------------------------
Current Income Tax Recovery $ (904) $ (1,400)
Future Income Tax Expense 109 465
----------------------------------------------------------------------------
$ (795) $ (935)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Future Income Tax assets are comprised of:
As at June 30, 2010 December 31, 2009
----------------------------------------------------------------------------
Current Future Income Tax Asset:
Non-Capital Loss Carryforwards $ - $ 27
Share Issue Costs 153 204
----------------------------------------------------------------------------
$ 153 $ 231
As at June 30, 2010 December 31, 2009
----------------------------------------------------------------------------
Long-term Future Income Tax Asset
(Liability):
Share Issue Costs $ 336 $ 387
Book Values in Excess of Tax Values (178) (198)
Valuation Allowance (183) (183)
----------------------------------------------------------------------------
$ (25) $ 6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. SHARE CAPITAL
a. Authorized
The Corporation is authorized to issue an unlimited number of ordinary and
preferred shares. The common shares are without nominal or par value.
b. Common Shares Issued and Outstanding
Number of Shares Amount (000's)
----------------------------------------------------------------------------
Balance as at December 31, 2009
and June 30, 2010 207,464,320 $ 253,583
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. STOCK OPTIONS AND STOCK-BASED COMPENSATION
Pursuant to the stock option plan, the Board of Directors may grant options to
directors, officers, other employees and other service providers. The aggregate
number of shares that may be reserved for issuance pursuant to stock options may
not exceed 10 per cent of the issued and outstanding common shares on a
non-diluted basis of the Corporation at the time of granting. Stock options
expire not more than five years from the date of grant, or earlier if the
individual ceases to be associated with the Corporation, and vest at the
discretion of the Board of Directors.
The following table presents the reconciliation of stock options granted as of
June 30, 2010:
Weighted Average
Six Month Period Ended Number of Options exercise price ($CAD)
---------------------------------------------------------------------------
Outstanding, beginning of the year 13,007,334 $ 1.50
Granted 85,000 0.50
Exercised - -
Forfeited (608,334) 1.53
Expired - -
---------------------------------------------------------------------------
Outstanding, end of period 12,484,000 $ 1.49
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The fair value of all options granted have been estimated at the grant date
using the Black-Scholes option pricing model and are summarized in the following
table:
Six Month Period Ended June 30, 2010
----------------------------------------------------------------------------
Weighted average fair value of stock options granted $ 0.28
Risk Free Interest Rate 2.00%
Expected Life 3 years
Expected Volatility 88%
Dividend Per Share Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. CONTRIBUTED SURPLUS
The following table presents the reconciliation of Contributed Surplus:
Six Month Period Ended June 30, 2010
----------------------------------------------------------------------------
Balance, beginning of year $ 8,749
Stock-based Compensation 1,060
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, end of period $ 9,809
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. LOSS PER SHARE
The basic weighted average number of common shares outstanding calculated for
the three and six month period ended June 30, 2010 was 207,464,320 (June 30,
2009 - 207,464,320). In computing diluted per share amounts, the Corporation's
options totaling 12,484,000 (June 30, 2009 - 13,035,334) have been excluded as
anti-dilutive. Accordingly, no additional common shares were added to the basic
weighted average shares outstanding to account for dilution.
12. SHAREHOLDER RIGHTS PLAN
On October 18, 2007, the Corporation adopted a shareholder rights plan (the
"Plan"). Under the Plan, one right has been issued in respect of each currently
issued common share and one right will be issued with each additional common
share which is issued. The rights remain attached to the common shares and are
not exercisable or separable unless one or more of certain specified events
occur. If a person or group acting in concert acquires 20 per cent or more of
the common shares of the Corporation, the rights will entitle the holders
thereof (other than the acquiring person or group) to purchase common shares at
a substantial discount from the then market price. The rights are not triggered
by a "Permitted Bid" as defined in the Plan. The Plan will remain in effect
until termination of the annual meeting of shareholders in 2013, unless extended
by resolution of the shareholders at such meeting.
13. CHANGES IN NON-CASH WORKING CAPITAL
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Operating Activities
Accounts Receivable $ 51 $ 108 $ (47) $ 67
Prepaid Expenses 1 81 (212) 75
Income Tax Receivable 392 (1,900) (306) (3,179)
Accounts Payable and
Accrued Liabilities (5) 14 - (7)
Income Tax Payable - - - (4,679)
----------------------------------------------------------------------------
$ 439 $ (1,697) $ (565) $ (7,723)
----------------------------------------------------------------------------
Investing Activities
Accounts Receivable $ (1,230) $ 83 $ (3,137) $ 4,354
Accounts Payable and
Accrued Liabilities 1,297 2,559 (3,438) 2,454
----------------------------------------------------------------------------
$ 67 $ 2,642 $ (6,575) $ 6,808
----------------------------------------------------------------------------
----------------------------------------------------------------------------
14. RELATED PARTY TRANSACTIONS
At June 30, 2010 the accounts receivable included a loan to a senior officer of
$0.2 million. The loan was non-interest bearing and was to mature on December
31, 2010. The original transaction was recorded at the exchange amount, which is
the amount of consideration established and agreed to by the related party.
Subsequent to June 30, 2010, this loan was fully repaid.
15. COMMITMENTS AND CONTINGENCIES
Commitments
a) Production Sharing Contract
Under the terms of its PSC, the Corporation has a 40 percent working interest
and the KRG has a 20 percent interest in the PSC which is carried by the
Corporation. The remaining 40 percent was allocated to a wholly-owned subsidiary
of Talisman by the KRG as announced on June 23, 2008. The Corporation, the KRG
and Talisman are collectively the "Contractor Group" under the PSC.
WesternZagros is the operator of the PSC lands until the end of the first
operating sub-period of the PSC, when a Joint Operating Company may be
established if so elected by the Contractor Group.
The PSC contemplates two exploration sub-periods of three years and two years,
respectively, with two possible one-year extensions. The first exploration
sub-period ends December 31, 2010. During the first sub-period, the Contractor
Group is required to complete a minimum of 1,150 kilometres of seismic surveying
(which has been completed), to drill three exploration wells, and to commit a
minimum of $75 million in the aggregate on these activities. At the end of the
first exploration sub-period, the Corporation and the other parties to the PSC
may relinquish the entire contract area (other than any discovery or development
areas), continue further exploration operations by entering into the second
exploration sub-period, or request a one-year extension for further exploration
and appraisal activities prior to deciding to enter into the second exploration
sub-period.
The PSC also includes capacity building support, which concluded in April 2009,
and annual funding for certain technological, logistical, recruitment and
training support during the exploration sub-periods. To meet its remaining
commitments for the first exploration sub-period, the Corporation estimates
expenditures of approximately $25 million to $30 million, excluding the costs
associated with future activities at Kurdamir-1. Additional costs of any
testing, if required, would be in addition to these amounts. This represents the
Corporation's 60 percent funding requirement and includes the remaining costs
associated with drilling one additional exploration commitment well by the end
of the first exploration sub-period, and providing associated supervision and
local office support.
The Corporation, on behalf of the Contractor Group, has applied to the KRG to
extend the first exploration sub-period for a period of up to 12 months (i.e. to
December 31, 2011), in order to allow sufficient time for drilling the flank of
the Kurdamir structure to determine whether the downdip Oligocene Reservoir is
oil bearing or gas-condensate bearing. The Corporation, on behalf of the
Contractor Group, has also notified the KRG of a force majeure event under the
terms of the PSC. See "Force Majeure" below.
During the second exploration sub-period, the Contractor Group, or those parties
who have elected to participate in further exploration, is required to complete
a minimum of 575 kilometres of seismic surveying, drill at least two exploration
wells and commit a minimum of $35 million to these activities. At the end of the
second exploration sub-period, the Corporation and the other parties to the PSC
who have elected to participate in the second exploration sub-period, may
relinquish the entire contract area (other than any discovery or development
areas) or continue further exploration and appraisal operations into the
extension periods subject to the following relinquishment requirements. At the
end of the second exploration sub-period, and at the end of each subsequent
extension period, the PSC requires the Corporation, and other parties who have
elected to participate, to relinquish 25 percent of the remaining undeveloped
area within the PSC lands or the entire contract area (other than any discovery
or development areas).
Force Majeure
The Corporation, on behalf of the Contractor Group, has notified the KRG of a
force majeure event under the terms of the PSC related to the well control and
subsequent sidetracking operations associated with Kurdamir-1. Under the terms
of the PSC, when a force majeure event occurs, the time resulting from any such
delay and the time necessary to repair any damage resulting from the delay will
be added to the first exploration sub-period.
b) Consulting Service Agreements
In 2003 the Corporation entered into a consulting service agreement that
provides a three percent right to indirectly participate in the future profits
the Corporation may earn in respect to the PSC, in exchange for consulting
services provided since that date. In the determination of profits under this
agreement, the Corporation is entitled to deduct the consultant's proportional
share of all costs associated with acquiring the PSC and the exploration,
appraisal, development and production expenditures incurred by the Corporation
("eligible costs"), together with interest on such percentage of eligible costs
at LIBOR plus three percent.
Further, in 2004 the Corporation entered into a consulting service agreement
that provides a two percent right to indirectly participate in the future
profits the Corporation may earn in respect to the PSC, in exchange for the
provision of consulting services during the period 2004 to 2006. In
determination of profits under this agreement, the Corporation is entitled to
deduct one percent of all eligible costs, together with interest on such
percentage of eligible costs at LIBOR plus ten percent. The consultant is
required to fund the additional one percent of all eligible costs.
c) Other
The Corporation has entered into various exploration-related contracts,
including contracts for drilling equipment, services and tangibles. The
following table summarizes the commitments the Corporation has under these
exploration-related contracts and other contractual obligations at June 30,
2010:
For the Years Ending December 31,
2010 2011 2012 2013 2014+ Total
----------------------------------------------------------------------------
Exploration 4,532 - - - - 4,532
Office 255 480 160 - - 895
----------------------------------------------------------------------------
4,787 480 160 - - 5,427
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingencies
Litigation
From time to time the Corporation may become involved in legal or administrative
proceedings in the normal conduct of business. Amounts involved in such matters
are not reasonably estimable due to uncertainty as to the final outcome. The
Company's assessment of the likely outcome of these matters is based on its
judgement of a number of factors, including precedents and facts specific to the
matters. The Corporation does not believe these matters in aggregate will have a
material adverse effect on its consolidated financial position or results of
operations.
Regulatory
Oil and gas operations are subject to extensive controls and regulations imposed
by various levels of government that may be amended from time to time. The
Corporation's operations may require licenses and permits from various
governmental authorities in the countries in which it operates. Under the PSC,
the KRG is obligated to assist in obtaining all permits and licenses from any
government agencies in the Kurdistan Region and from any other government
administration in Iraq. There can be no assurance that the Corporation will be
able to obtain all necessary licenses and permits that may be required to carry
out exploration and development of its projects.
The political and security situation in Iraq is unsettled and volatile. The
Kurdistan Region is the only "Region" of Iraq that is constitutionally
established pursuant to the Iraq Constitution, which expressly recognizes the
Kurdistan Region. The political issues of federalism and the autonomy of the
Regions of Iraq are matters about which there are major differences between the
various political factions in Iraq. These differences could adversely impact the
Corporation's interest in the Kurdistan Region including the ability to export
any hydrocarbons as a result of our activities.
16. CHANGE IN FINANCIAL STATEMENT PRESENTATION
Certain comparative information has been changed in conformity to the current
year financial statement presentation.
For further details on WesternZagros Resources Ltd., please refer to the June
2010 corporate presentation available on the WesternZagros website:
http://www.westernzagros.com/documents/WZRCorporatePresentationJune2010.pdf
About WesternZagros Resources Ltd.
WesternZagros is an international natural resources company engaged in acquiring
properties and exploring for, developing and producing crude oil and natural gas
in Iraq. WesternZagros, through its wholly-owned subsidiaries, holds a
Production Sharing Contract with the Kurdistan Regional Government in the
Kurdistan Region of Iraq. WesternZagros' shares trade in Canada on the TSX
Venture Exchange under the symbol "WZR".
This news release may contain forward-looking information based on assumptions
that are subject to a wide range of business risks. WesternZagros' operations
are subject to all risks normally incident to the exploration, development and
operation of crude oil and natural gas properties and the drilling of crude oil
and natural gas wells, including geological risk, encountering unexpected
formations or pressures, premature declines of reservoirs, potential environment
damage, blow-outs, fires and spills, all of which could result in personal
injuries, loss of life and damage to property of WesternZagros and others;
environment risks; delay or changes in plans with respect to exploration or
development projects or capital expenditures; its joint venture partner's
continued participation in the exploration activities under the PSC, the ability
to attract key personnel; the risk of commodity price and foreign exchange rate
fluctuations.
All of WesternZagros' assets are located in the Kurdistan Region of Iraq. As
such, WesternZagros is subject to political, economic, and other uncertainties
of that region as well as risks of loss due to civil strife, acts of war,
guerrilla activities and insurrections. WesternZagros' operations may be
materially adversely affected by changes in government policies and legislation
or social instability and other factors which are not within its control. Risks
also include the uncertainty involved in the estimation of undiscovered
resources. For further information on WesternZagros and the risks associated
with its business, please see WesternZagros' Annual Information Form dated March
25, 2010 which is filed at www.sedar.com and on the Company's web site.
Forward-looking information typically contains statements with words such as
"anticipate", "estimate", "expect", "potential", "could", or similar words
suggesting future outcomes. We caution readers and prospective investors of the
Company's securities not to place undue reliance on forward-looking information
as by its nature, it is based on current expectations regarding future events
that involve a number of assumptions, inherent risks and uncertainties, which
could cause actual results to differ materially from those anticipated by
WesternZagros.
1 Year Esperanza Resources Corp. Chart |
1 Month Esperanza Resources Corp. Chart |
Support: +44 (0) 203 8794 460 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions
