10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ý | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015
or
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission file number 001-34018
GRAN TIERRA ENERGY INC.
(Exact name of registrant as specified in its charter)
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Nevada | | 98-0479924 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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200, 150 13 Avenue S.W. Calgary, Alberta, Canada T2R 0V2 |
(Address of principal executive offices, including zip code) |
(403) 265-3221
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | | NYSE MKT |
| | Toronto Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o (do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $0.8 billion.
On February 23, 2016, the following numbers of shares of the registrant’s capital stock were outstanding: 287,129,518 shares of the registrant’s Common Stock, $0.001 par value; one share of Special A Voting Stock, $0.001 par value, representing 3,638,889 shares of Gran Tierra Goldstrike Inc., which are exchangeable on a 1-for-1 basis into the registrant’s Common Stock; and one share of Special B Voting Stock, $0.001 par value, representing 4,903,177 shares of Gran Tierra Exchangeco Inc., which are exchangeable on a 1-for-1 basis into the registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the registrant’s definitive proxy statement relating to the 2016 annual meeting of stockholders, which definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after December 31, 2015.
Gran Tierra Energy Inc.
Annual Report on Form 10-K
Year Ended December 31, 2015
Table of Contents
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PART I | | |
Items 1 and 2. | Business and Properties | |
Item 1A. | Risk Factors | |
Item 1B. | Unresolved Staff Comments | |
Item 3. | Legal Proceedings | |
Item 4. | Mine Safety Disclosures | |
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PART II | | |
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
Item 6. | Selected Financial Data | |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 8. | Financial Statements and Supplementary Data | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
Item 9A. | Controls and Procedures | |
Item 9B. | Other Information | |
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PART III | | |
Item 10. | Directors, Executive Officers and Corporate Governance | |
Item 11. | Executive Compensation | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
Item 14. | Principal Accounting Fees and Services | |
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PART IV | | |
Item 15. | Exhibits, Financial Statement Schedules | |
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SIGNATURES | |
EXHIBIT INDEX | |
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical facts included in this Annual Report on Form 10-K regarding our financial position, estimated quantities and net present values of reserves, business strategy, plans and objectives of our management for future operations, covenant compliance, capital spending plans and those statements preceded by, followed by or that otherwise include the words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “project”, “target”, “goal”, “plan”, “objective”, “should”, or similar expressions or variations on these expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct or that, even if correct, intervening circumstances will not occur to cause actual results to be different than expected. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, those set out in Part I, Item 1A “Risk Factors” in this Annual Report on Form 10-K. The information included herein is given as of the filing date of this Form 10-K with the Securities and Exchange Commission (“SEC”) and, except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Annual Report on Form 10-K to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based.
GLOSSARY OF OIL AND GAS TERMS
In this document, the abbreviations set forth below have the following meanings:
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bbl | barrel | Mcf | thousand cubic feet |
Mbbl | thousand barrels | MMcf | million cubic feet |
MMbbl | million barrels | Bcf | billion cubic feet |
BOE | barrels of oil equivalent | bopd | barrels of oil per day |
MMBOE | million barrels of oil equivalent | NGL | natural gas liquids |
BOEPD | barrels of oil equivalent per day | NAR | net after royalty |
Sales volumes represent production NAR adjusted for inventory changes and losses. Our oil and gas reserves are reported NAR. Our production is also reported NAR, except as otherwise specifically noted as "working interest production before royalties." NGL volumes are converted to BOE on a one-to-one basis with oil. Gas volumes are converted to BOE at the rate of 6 Mcf of gas per bbl of oil, based upon the approximate relative energy content of gas and oil. The rate is not necessarily indicative of the relationship between oil and gas prices. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Below are explanations of some commonly used terms in the oil and gas business and in this report.
Developed acres. The number of acres that are allocated or assignable to producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole. Exploratory or development well that does not produce oil or gas in commercial quantities.
Exploitation activities. The process of the recovery of fluids from reservoirs and drilling and development of oil and gas reserves.
Exploration well. An exploration well is a well drilled to find a new field or new reservoir in a field previously found to be productive of oil or gas in another reservoir. Generally, an exploratory well is any well that is not a development well, an extension well, a service well or a stratigraphic test well.
Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells in which we own a working interest.
Net acres or net wells. The sum of the fractional working interests we own in gross acres or gross wells expressed as whole numbers and fractions of whole numbers.
Possible reserves. Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. The SEC provides a complete definition of possible reserves in Rule 4-10(a)(17) of Regulation S-X.
Probable reserves. Probable reserves are those additional reserves that are less certain to be recovered than proved reserves but that, together with proved reserves, are as likely as not to be recovered. The SEC provides a complete definition of probable reserves in Rule 4-10(a)(18) of Regulation S-X.
Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.
Proved developed reserves. In general, reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. The SEC provides a complete definition of developed oil and gas reserves in Rule 4-10(a)(6) of Regulation S-X.
Proved reserves. Those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
(i) The area of the reservoir considered as proved includes:
(A) The area identified by drilling and limited by fluid contacts, if any, and
(B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.
(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.
(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when:
(A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and
(B) The project has been approved for development by all necessary parties and entities, including governmental entities.
(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
Proved undeveloped reserves. In general, reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. The SEC provides a complete definition of undeveloped oil and gas reserves in Rule 4-10(a)(31) of Regulation S-X.
Reserves. Reserves are estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.
Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of economic quantities of oil and gas regardless of whether such acreage contains proved reserves.
Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production and requires the owner to pay a share of the costs of drilling and production operations.
PART I
Items 1 and 2. Business and Properties
General
Gran Tierra Energy Inc. together with its subsidiaries (“Gran Tierra”, "us", "our", or “we”) is an independent international energy company engaged in oil and gas acquisition, exploration, development and production. We are strategically focused on onshore oil and gas properties in Colombia and also own the rights to oil and gas properties in Brazil and Peru. Our Colombian properties represented 87% of our proved reserves NAR at December 31, 2015. The remainder of our proved reserves were attributable to our Brazilian properties.
Our company was incorporated under the laws of the State of Nevada on June 6, 2003, originally under the name Goldstrike Inc. We have acquired oil and gas producing and non-producing assets in Colombia, Peru, and Brazil, with our largest acquisitions being the acquisitions of Argosy Energy International L.P. in 2006, Solana Resources Limited in 2008 and Petrolifera Petroleum Limited in 2011.
All dollar ($) amounts referred to in this Annual Report on Form 10-K are United States (U.S.) dollars, unless otherwise indicated.
2015 Overview
During early 2015, largely as a result of the low commodity price environment and drilling results in Peru, we ceased all development expenditures in the Bretaña Field on Block 95 in Peru other than what is necessary to maintain tangible asset integrity and security. As a result, all probable and possible reserves associated with the field were reclassified as contingent resources.
On May 7, 2015, we entered into an agreement (the “Agreement”) with West Face SPV (Cayman) I L.P. (“West Face”) pursuant to which we settled a proxy contest. Pursuant to the terms of the Agreement, Gary Guidry was appointed as our President and Chief Executive Officer. Mr. Guidry replaced Duncan Nightingale in that role, who was serving as interim Chief Executive Officer since February 2015 and, with the appointment of Mr. Guidry as Chief Executive Officer, was designated as Executive Vice President. Additionally, effective May 11, 2015, Ryan Ellson was appointed as Chief Financial Officer. In connection with our entry into the Agreement, the size of our Board of Directors was expanded, new directors were appointed to fill the newly created vacancies and certain existing directors agreed not to stand for re-election at the 2015 annual meeting of stockholders. In June 2015, our Board of Directors approved a new capital program focusing on development activities in Colombia.
On January 13, 2016, we acquired all of the issued and outstanding shares of Petroamerica Oil Corp ("Petroamerica") for cash consideration of $70.6 million and the issuance of 13,656,719 shares of Gran Tierra common stock. The net purchase price of Petroamerica was $70.4 million, after giving consideration to estimated net working capital of $26.0 million. On January 25, 2016, we acquired all of the issued and outstanding shares of PetroGranada Colombia Limited ("PGC"). The net purchase price of PGC was $19.0 million, after giving consideration to estimated net working capital of $18.7 million. In addition, we agreed to pay an additional $4.0 million if cumulative production from the Putumayo-7 Block plus gross proved plus probable reserves under the Putumayo-7 Block meet or exceed 8 MMbbl in any year prior to January 2021. Combined proved NAR oil and gas reserves of Petroamerica and PGC as at December 31, 2015, were 3.9 MMBOE calculated in compliance with the SEC rules.
2015 Operational Highlights
In the year ended December 31, 2015, we incurred capital expenditures of $159.2 million, including $87.7 million in Colombia, $20.0 million in Brazil, $50.4 million in Peru and $1.1 million in Corporate. In the second half of 2015, after the change in management and substantial change of the board of directors, the majority of capital expenditures (86%) were incurred in Colombia.
The significant elements of our 2015 capital program in Colombia were:
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• | On the Chaza Block (100% working interest ("WI"), operated), we drilled and completed the Costayaco-25D and Costayaco-26D development wells in the Costayaco Field, and the Moqueta-17 and Moqueta-21D development wells in the Moqueta Field, as oil producers. The Moqueta-19i well was completed as a water injector as planned. We commenced drilling the Costayaco-24D and Costayaco-27i development well and started pre-drilling activities for the |
Moqueta-20, 22 and 23 development wells. We also drilled the Moqueta-18i development well and encountered mechanical difficulties. This well is currently suspended.
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• | On the Garibay Block (50% WI, non-operated) and Tiple Block (owned by two other parties), the unitization of the Jilguero Field was completed and we became a 38.5% WI owner in the newly unitized field. Together with our partners, we drilled and completed three development wells, Jilguero Sur-2, Jilguero-3 and Jilguero-4 as oil producing wells. |
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• | We completed the acquisition of 2-D seismic on the Cauca-7 (100% WI, operated), Sinu-1 (60% WI, operated) and Sinu-3 (51% WI, operated) Blocks and continued activities in preparation for the acquisition of 2-D seismic on the Putumayo-10 Block (100% WI, operated). We also commenced environmental impact assessments ("EIA"s) for future drilling on the Sinu-3 Block. |
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• | We also continued facilities work at the Costayaco and Moqueta Fields on the Chaza Block, and on the Jilguero unitized Field within the Garibay Block. |
In Brazil:
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• | On Blocks REC-T-86, Block REC-T-117 and Block REC-T-118 (100% WI, operated)), we completed the acquisition, processing and interpretation of 3-D seismic. |
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• | On Block REC-T-155 (100% WI, operated), we initiated construction of an infield gas pipeline between the Tiê facilities and 3-GTE-03-BA. |
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• | On Block 95 (100% WI, operated), we completed drilling operations on the Bretaña Sur 95-3-4-1X appraisal well on the L4 lobe in the Bretaña Field, which satisfied our work obligation for the fifth exploration period. We encountered approximately six feet of oil pay above the oil-water contact in the Vivian Sandstone Reservoir. This oil column was less than what we had estimated prior to drilling. As previously discussed, in February 2015, we ceased all further development expenditures in the Bretaña Field on Block 95 other than what is necessary to maintain tangible asset integrity and security. |
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• | On Blocks 107 and 133 (100% WI, operated), we continued the environmental permitting process. On Block 107, we completed the acquisition, interpretation and processing of 2-D seismic and commenced planning activities for the Osheki-1 exploration well and the refurbishment of the base camp and well location. Both of these planning activities were suspended at the end of February 2015. |
2016 Outlook
In January 2016, we announced our 2016 capital budget. Our base 2016 capital program of $107 million consists of: $76 million for Colombia; $8 million for Brazil; $6 million for Peru; and $17 million for other.
In Colombia, our base 2016 capital program includes two water injector wells in the Costayaco Field and three development wells in the Moqueta Field, both on the Chaza Block (100% WI, operated), two exploration wells and a development well in the Putumayo-7 Block (subject to regulatory approval, 100% WI, operated) and an exploration well on the Llanos-10 Block (50% WI, non-operated) with the costs being carried by a third party. Facilities work is also planned for the Chaza Block.
In Peru, the 2016 capital program includes only those activities required for retention of lands and security of assets. In Brazil, the capital program includes only minimal activity to implement water injection for reservoir pressure maintenance and to preserve current production levels. In both Peru and Brazil, operations have been scaled back significantly, with the aim of allowing time to explore and execute on options to maximize shareholder value.
In addition to our base 2016 capital budget, we have a discretionary capital budget of $61 million that we may utilize during 2016 in the event of an increase in commodity prices. If deployed, we expect that our discretionary capital budget would target six exploration wells, five development wells and seismic activities in Colombia.
We expect to finance our 2016 capital program through cash flows from operations and cash on hand, while retaining financial flexibility to undertake further development opportunities and opportunistically pursue acquisitions.
Business Strategy
The Company’s strategy is to efficiently grow and diversify its portfolio of exploration, development and production opportunities in Colombia. We are taking steps to maintain cash flows from existing assets, and seeking opportunities to leverage our financial strength to expand our Colombian operations and asset base.
Oil and Gas Properties
Colombia
On January 13, 2016, and January 25, 2016, respectively, we completed the acquisitions of all of the issued and outstanding shares of Petroamerica and PGC.
Excluding blocks subject to relinquishment, we have interests in 29 blocks in Colombia and are the operator on 16 of these blocks, including 14 blocks acquired through the acquisitions of Petroamerica and PGC (three operated). These blocks include interests in the Putumayo-7 Block for which assignment of WI is subject to approval, or final approval, by the Agencia Nacional de Hidrocarburos (National Hydrocarbons Agency) (“ANH”). Relinquishments of our interests in four blocks in Colombia are subject to receipt of final documentation from the ANH. During 2015, unitization of the Jilguero Field on the Garibay and Tiple Block was completed and we became a 38.5% WI owner in the newly unitized field, we executed an Exploration and Production Contract for the Putumayo-4 Block farm-in, received final documentation from the ANH for relinquishment of our interest in the Magangué Block, and our contract on the Santana Block expired.
The following table provides a summary of selected data for our blocks in Colombia as at December 31, 2015, as well as a summary of selected combined data for Petroamerica and PGC as at December 31, 2015:
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Block and Field(s) | Basin | WI | Estimated Proved Reserves, NAR | 2015 Average Production NAR, BOEPD | Number of Productive Wells at December 31, 2015, Net | End of Production Phase | Acres, Net(1) |
Chaza - Costayaco and Moqueta Fields | Putumayo | 100% operated | 29,375 | 16,601 | 28.0 | 2033 for Costayaco and 2037 for Moqueta | 46,676 |
Guayuyaco - Guayuyaco and Juanambu Fields | Putumayo | 70% operated | 1,890 | 727 | 3.8 | 2030 | 36,656 |
Garibay (50% WI) - Jilguero Field (38.5% WI) | Llanos | 50% non-operated | 753 | 739 | 1.9 | 2037 | 19,460 |
Llanos-22 - Ramiriqui Field | Llanos | 45% non-operated | 1,672 | 810 | 0.9 | 2038 | 19,075 |
11 Other Blocks | Putumayo, Cauca, Catatumbo or Sinu | See below | — | 95 | — | — | 2,652,763 |
Gran Tierra as at December 31, 2015(1) | | 33,690 | 18,972 | 34.6 | | 2,774,630 |
Combined Petroamerica and PGC(2) | 3,947 | 3,360 | 7.6 | | 940,708 |
Pro forma Gran Tierra as at December 31, 2015(3) | | 37,637 | 22,332 | 42.2 | | 3,715,338 |
(1) Excludes our interest in three blocks with a total of 0.8 million gross and net acres for which government approval of relinquishments was pending at December 31, 2015.
(2) We acquired Petroamerica and PGC subsequent to December 31, 2015. Estimated proved NAR reserves are based on independent reserves reports prepared by McDaniel with an effective date of December 31, 2015 for Petroamerica and PGC.
(3) Gives pro forma effect to the acquisitions of Petroamerica and PGC as if they had occurred on December 31, 2015.
Status of Exploration Phases
During 2015, the ANH introduced a number of programs which are intended to assist oil and gas companies operating in Colombia during the current low commodity price environment. One program provides an option for companies to apply for a nine month extension to fulfill different commitments and exercise rights during the exploration period (exploration, evaluation, among others). Another program provides an option for companies to apply requesting approval to transfer certain work obligations between blocks. We requested and were granted nine month extensions of the exploration phase on some of our blocks and are considering applying to request approval to transfer certain of our work obligations to other blocks.
Chaza Block (100% WI, operated)
The second additional exploration program ended on January 30, 2016. This exploration phase required one exploration well to be drilled, which was satisfied by the Eslabón Sur Deep-1 exploration well. The exploration period in the Chaza Block has ended and we retain the Moqueta and Costayaco Fields.
Guayuyaco Block (70% WI, operated)
We have completed all of our obligations in relation to this contract. Ecopetrol has the option to back-in to a 30% participation interest in any other new discoveries in the block.
Garibay Block (50% WI, non-operated)
We are in the second additional exploration program. We applied for and were granted an extension of this phase to July 24, 2016. We have an obligation to drill one exploration well in this exploration phase.
Llanos-22 Block (45% WI, non-operated)
We are in a unified first and second additional exploration program which will end on February 3, 2017, but our partner has requested a suspension of this exploration program. This exploration phase requires one exploration well to be drilled and the acquisition of 125 square kilometers of 3-D seismic.
Putumayo Piedemonte Norte Block (70% WI, operated)
We are in the first of six exploration phases, which is currently under suspension. This exploration phase requires the acquisition, processing and interpretation of 70 kilometers of 2-D seismic. We have already acquired 18 kilometers of 2-D seismic on this block.
Putumayo Piedemonte Sur Block (100% WI, operated)
We are in a unified phase two and three of six exploration phases. We applied for and were granted an extension of this phase for nine months to December 5, 2016. This unified phase requires the acquisition of 55 kilometers of 2-D seismic and one exploration well to be drilled. We have satisfied the 2-D seismic work obligation for this phase.
Cauca-6 Block (100% WI, operated)
We are in the exploration phase of this contract, which is currently under suspension. This phase requires the acquisition of 200 kilometers of 2-D seismic and the drilling of one stratigraphic well. We will have 815 days from the date the suspension is lifted to complete the work obligation.
Cauca-7 Block (100% WI, operated)
We are in the exploration phase of this contract. We applied for and were granted an extension of this phase to November 28, 2016. This phase requires the acquisition of 252 kilometers of 2-D seismic and the drilling of one stratigraphic well. We have satisfied the seismic work obligation.
Putumayo-10 Block (100% WI, operated)
We are in the first of two exploration phases. We requested and were granted a suspension of the exploration phase due to community and permitting issues. This phase requires the acquisition of 73 kilometers of 2-D seismic and two exploration wells to be drilled. We will have 20 months from the date the suspension is lifted to complete the work obligation.
Putumayo-1 Block (55% WI, operated)
We are in the first of two exploration phases. We requested and were granted a suspension of the exploration period due to community issues. This phase requires the acquisition of 159 square kilometers of 3-D seismic and one exploration well to be drilled. We have satisfied the seismic work obligation.
Catguas Block (100% WI, operated)
We are in a unified phase two and three of five exploration phases. The contract is under suspension due to community issues. This phase requires three exploratory wells to be drilled, or two exploratory wells and re-entry of an existing well, the acquisition of 80 kilometers of 2-D seismic and the relinquishment of 15% of the block. We have satisfied the seismic work obligation.
Sinu-1 Block (60% WI, operated)
The contract comprises one exploration phase which requires the completion of regional studies, the acquisition of 478 kilometers of 2-D seismic and one stratigraphic well to be drilled by August 13, 2017. We completed the regional studies and
the acquisition 478 kilometers of 2-D seismic, but are required to acquire an additional 80 kilometers of 2-D seismic to satisfy the minimum required investment.
Sinu-3 Block (51% WI, operated)
We are in the first exploration phase. We requested and were granted an extension of this exploration phase to June 11, 2017. This phase requires the completion of regional studies, the acquisition of 488 kilometers of 2-D seismic and one exploration well to be drilled. We completed the regional studies and the acquisition 334 kilometers of 2-D seismic.
Putumayo-31 Block (100% WI, operated)
We are in phase zero, the community consultation phase. We requested and were granted an extension of this phase to March 2, 2016. We have requested an additional extension of this phase. Subsequent to year-end, we acquired the remaining 35% WI in this block in the Petroamerica acquisition.
Putumayo-4 Block (70% WI, operated)
We are in the first exploration phase. We requested and were granted an extension of this phase to August 17, 2016. This phase requires the acquisition, processing and interpretation of 143 kilometers of 2-D seismic, and one exploration well to be drilled.
Azar, Magdalena and Sierra Nevada Blocks
We have applied to the ANH to relinquish our interest in these blocks. These relinquishments are subject to receipt of final documentation from ANH.
Blocks acquired in the Petroamerica and PGC Acquisitions
We acquired interests in the following blocks through the acquisitions of Petroamerica and PGC on January 13, 2016, and January 25, 2016, respectively.
Putumayo-7 Block (subject to regulatory approval, 100% WI, operator)
Petroamerica and PGC have each entered into agreements to acquire 50% WI in this block, for a total combined WI of 100%. These WI assignments are subject to regulatory approval. This block is in phase one of two exploration phases, which will end on July 31, 2016. This phase requires the acquisition of 167 square kilometers of 3-D seismic and two explorations well to be drilled.
Putumayo-2 Block (100% WI, operator)
We are in the second exploration phase, which is currently suspended. This phase requires two exploration wells to be drilled and the acquisition of 10 square kilometers of 3-D seismic. The seismic work obligation was satisfied prior to our acquisition of Petroamerica.
Llanos-10 (50% WI, non-operated)
We are in the first of two exploration phases. This phase will end on June 18, 2016, and requires the acquisition of 127 square kilometers of 3-D seismic and one exploration well to be drilled. The seismic work obligation was satisfied prior to our acquisition of Petroamerica.
Llanos-19 (50% WI, non-operated)
We are in the second exploration phase. This phase will end on June 12, 2016, and requires two exploration wells to be drilled. One exploration well was drilled in this exploration phase prior to our acquisition of Petroamerica, which resulted in an oil discovery.
Los Ocarros (50% WI, non-operated)
We are in the second additional exploration program which will end on November 12, 2017. The second additional exploration program required one exploration well to be drilled. This work obligation was satisfied prior to our acquisition of Petroamerica.
CPO-7 (20% WI, non-operated)
We are in the second exploration phase. This phase will end on April 13, 2017, and requires the acquisition of 100 kilometers of 2-D seismic and two explorations well to be drilled. The seismic work obligation was satisfied and one of the two work obligation wells was drilled prior to our acquisition of Petroamerica. We are also in an evaluation program which will end January 1, 2017, and requires the recompletion of a well.
CPO-13 (20% WI, non-operated)
We are in the second exploration phase. This phase will end on July 13, 2017, and requires three exploration wells to be drilled. All of the work obligations in this phase were satisfied prior to our acquisition of Petroamerica. We are also in an evaluation program which will end on September 27, 2016, and requires the interpretation of 106 square kilometers of 3-D seismic inversion processing and a long-term test on a well that was drilled prior to the Petroamerica acquisition.
El Porton (25% WI, non-operated)
Prior to our acquisition of Petroamerica, Petroamerica's two other partners on this block withdrew from the exploration phase of the contract and decided not to continue into the fifth exploration phase. As a result, Petroamerica retains 100% WI of the exploration phase of this block. The fifth exploration phase of the contract ended on January 2, 2016, however, we have applied for an extension of this phase. This phase requires one exploration well to be drilled.
Tinigua (50% WI, operator)
We are in the second of six exploration phases which will end on October 20, 2016. This phase requires one exploration well to be drilled.
Alea 1848-A (50% WI, non-operated)
We are in the unified three and four of five exploration phases, which is currently suspended. This phase requires the reprocessing of 52 kilometers of 2-D seismic, the acquisition of 70 kilometers of 2-D seismic, the acquisition of 52 square kilometers of 3-D seismic and one exploration well to be drilled. The work obligation for the reprocessing of 2-D seismic was satisfied prior to our acquisition of Petroamerica.
Alea 1947-C (49.5% WI, non-operated)
We are in phase two of five exploration phases, which is currently suspended. This phase requires one exploration well to be drilled.
El Eden Block (40% WI, non-operated)
The exploration period in the El Eden Block has ended. We retain the La Casona Evaluation Area. The evaluation period for this area will end on April 17, 2016. All work obligations in relation to this contract were completed prior to our acquisition of Petroamerica.
Suroriente Block (15.8% WI, non-operated)
All work obligations in relation to this contract were completed prior to our acquisition of Petroamerica. This is a “Crude Incremental Production Contract” with Ecopetrol. Under the terms of the contract, the working interests are subject to an “R” factor which can reduce the net WI depending on future investment and cash flow ratios. Although the contract is described as an incremental production contract, in this particular case, the working interest parties share in the entire amount of the crude production with Ecopetrol, due to the base production level being set at zero over the life of the contract, which expires in 2023.
Arjona Block (50% WI, non-operated)
This is a contract for the operation of Ecopetrol undeveloped discovered fields. The evaluation period in the Arjona Block has ended. All work obligations in relation to such evaluation period were completed prior to our acquisition of Petroamerica. We entered into an agreement to transfer our working interest in this block to a third party, but this assignment is subject to Ecopetrol approval.
El Balay
Prior to our acquisition of Petroamerica, Petroamerica applied to the ANH to relinquish its interest in this block. This relinquishment is subject to receipt of final documentation from ANH.
Royalties
Colombian royalties are regulated under laws 756 of 2002 and 1530 of 2012. All discoveries made subsequent to the enactment of law 756 of 2002 have the sliding scale royalty described below. Discoveries made before the enactment of this law have a royalty of 20%. The ANH contracts to which we are a party all have royalties that are based on a sliding scale described in law 756. This royalty works on an individual oil field basis starting with a base royalty rate of 8% for gross production of less than 5,000 bopd. The royalty increases in a linear fashion from 8% to 20% for gross production between 5,000 and 125,000 bopd and is stable at 20% for gross production between 125,000 and 400,000 bopd. For gross production between 400,000 and 600,000 bopd the rate increases in a linear fashion from 20% to 25%. For gross production in excess of 600,000 bopd the royalty rate is fixed at 25%. In addition to the sliding scale royalty, the following blocks have additional x-factor royalties: Llanos-22 and Putumayo-7: 1%; Sinu-1 and Llanos-10: 3%; Putumayo-31: 12%; Sinu-3:17%; CPO-13: 32% and CPO-7: 47%.
For gas fields, the royalty is on an individual gas field basis starting with a base royalty rate of 6.4% for gross production of less than 28.5 MMcf of gas per day. The royalty increases in a linear fashion from 6.4% to 20% for gross production between 28.5 MMcf of gas per day and 3.42 Bcf of gas per day and is stable at 16% for gross production between 712.5 to 2,280 MMcf of gas per day. For gross production between 2.28 to 3.42 Bcf of gas per day the rate increases in a linear fashion from 16% to 20%. For gross production in excess of 3.42 Bcf of gas per day the royalty rate is fixed at 20%.
Pursuant to the Chaza Block exploration and production contract (the "Chaza Contract") between the ANH and Gran Tierra, our production from the Costayaco Exploitation Area is also subject to an additional royalty (the "HPR royalty") that applies when cumulative gross production from an Exploitation Area is greater than five MMbbl. The HPR royalty is calculated on the difference between a trigger price defined in the Chaza Contract and the sales price. Pursuant to the Chaza Contract, any new Exploitation Area on the Chaza Block will also be subject to the HPR royalty once the production on such Exploitation Area exceeds five MMbbl of cumulative production. The Jilguero Exploitation Area in the Garibay Block will be subject to the HPR royalty once production from such Exploitation Area has reached five MMbbl.
There is a dispute with the ANH as to whether the HPR royalty must be paid with respect to all production from the Moqueta Exploitation Area or only after production from the Moqueta Exploitation Area has reached five MMbbl (see Item 3. “Legal Proceedings” and Item 8. "Financial Statements and Supplementary Data", below). On April 30, 2015, total cumulative production from the Moqueta Exploitation Area reached 5.0 MMbbl and Gran Tierra commenced paying the HPR royalty payable on production over that threshold. The estimated compensation which would be payable on cumulative production if the ANH's claims are accepted in the arbitration is $66.3 million plus related interest of $26.5 million. We also disagree with the interest rate that the ANH has used in calculating the interest cost. We assert that since the HPR royalty is denominated in the U.S. dollar, the contract requires the interest rate to be three-month LIBOR plus 4%, whereas the ANH has applied the highest legally authorized interest rate on Colombian peso liabilities, which during the period of production to date has averaged approximately 29% per annum. At December 31, 2015, based on an interest rate of three-month LIBOR plus 4% related interest would be $6.4 million.
For exploration and production contracts awarded in the 2010, 2012 and 2014 Colombia Bid Rounds, the HPR royalty will apply once the production from the area governed by the contract, rather than any particular Exploitation Area designated under the contract, exceeds five MMbbl of cumulative production. We expect that this criterion for the HPR royalty will apply for subsequent bid rounds.
The Guayuyaco Block has the sliding scale royalty but does not have the additional royalty.
In addition to these government royalties, our original interests in the Santana, Guayuyaco, Chaza and Azar Blocks acquired on our entry into Colombia in 2006 are subject to a third party royalty. The additional interests in Guayuyaco and Chaza that we
acquired on the acquisition of Solana in 2008 are not subject to this third party royalty. On June 20, 2006, we entered into a participation agreement that would effectively compensate Crosby Capital, LLC ("Crosby") for its share in certain Colombian properties. The compensation is in the form of overriding royalty rights that apply to our original interests in production from the Santana, Guayuyaco, Chaza and Azar Blocks. The overriding royalty rights start with a 2% rate on working interest production less government royalties. For new commercial fields discovered within 10 years of the agreement date and after a prescribed threshold is reached, Crosby reserves the right to convert the overriding royalty rights to a net profit interest ("NPI"). This NPI ranges from 7.5% to 10% of working interest production less sliding scale government royalties, as described above, and operating and overhead costs. No adjustment is made for the HPR royalty. On certain pre-existing fields, Crosby does not have the right to convert its overriding royalty rights to an NPI. In addition, there are conditional overriding royalty rights that apply only to the pre-existing fields. Currently, we are subject to a 10% NPI on 50% of our working interest production from the Costayaco and Moqueta Fields in the Chaza Block and 35% of our working interest production from the Juanambu Field in the Guayuyaco Block, and overriding royalties on our working interest production from the Santana Block and the Guayuyaco Field in the Guayuyaco Block.
The Putumayo-7 Block is also subject to a third party royalty in addition to the government royalties. Pursuant to the terms of the agreement by which the interests in the Putumayo-7 Block were acquired, a 10% royalty on production from the Putumayo-7 Block is payable to Petro Caribbean Resources Ltd. ("PCR"). The terms of the royalty allow for transportation costs, marketing and handling fees, government royalties (including royalties payable to the ANH pursuant to Section 39 of the contract for the Putumayo-7 Block - the "Rights Due to High Prices") and taxes (other than taxes measured by the income of any party, and other than VAT or any equivalent) to be paid in cash or kind to the Government of Colombia (or any federal, state, regional or local government agency) and ANH, and the 1% ’X’ factor payment to be deducted from production revenue prior to the royalty being paid to PCR.
Oil and Gas Properties - Brazil
We have interests in seven blocks in Brazil and are the operator in all of these blocks. Our Brazilian properties are located in the Recôncavo Basin in Eastern Brazil in the State of Bahia.
All of our blocks in Brazil are subject to an 11% royalty, which consists of a 10% crown royalty and a 1% landowner royalty.
Blocks REC-T-129, REC-T-142, REC-T-155 and REC-T-224 (100% WI, operated)
Blocks REC-T-129, REC-T-142, REC-T-155 and REC-T-224 are located approximately 70 kilometers northeast of Salvador, Brazil in the Recôncavo Basin and cover 27,076 gross acres. The Tiê Field on Block 155 includes two productive wells.
In December 2014, the Agência Nacional de Petróleo, Gás Natural e Biocombustíveis ("ANP") issued an injunction specifically related to properties in the Recôncavo Basin covered by Bid Round 12. This injunction placed a moratorium on unconventional activities on the Bid Round 12 blocks, all of which were unconventional exploration targets, until such a time as policies governing unconventional activities are finalized. Blocks REC-T-129, REC-T-142, REC-T-155 and REC-T-224 were granted in Bid Round 9, for which there has not been a similar injunction; however, we expect that the ANP’s injunction may limit our ability to receive permits in the short-term for our blocks with unconventional exploration targets.
The First Appraisal Plan ("PAD") phase for Blocks REC-T-129, REC-T-142 and REC-T-155 ended on May 24, 2015, however we requested and were granted a suspension of the PAD phase until regulatory policies governing unconventional activities are finalized.
The exploration phase of the concession agreement on Block REC-T-224 was due to expire on December 11, 2013; however, we requested and were granted a suspension of the exploration phase of this block. The exploration phase on Block REC-T-224 will end one year after the date an environmental permit is granted. This phase requires one exploration well to be drilled.
Blocks REC-T-86, REC-T-117 and REC-T-118 (100% WI, operated)
Blocks REC-T-86, REC-T-117 and REC-T-118 are located north of our other blocks in the Recôncavo Basin and cover 20,658 gross acres. All three blocks are in the first exploration phase which will end in August 2016. This phase requires the acquisition of a total of 120 square kilometers of 3-D seismic on the three blocks and two exploration wells to be drilled on Block REC-T-117 and three exploration wells on Block REC-T-118. We have satisfied the work obligation for the acquisition, processing and interpretation of 3-D seismic on Block 86. We have requested a rephasing of the work obligations for the exploration commitments on Blocks 117 and 118 that would move the obligations to 2017.
Oil and Gas Properties - Peru
We have a 100% WI in five blocks in Peru and we are the operator in each of the blocks. The following table provides summary information for our blocks in Peru:
|
| |
Block | Acres, Gross and Net |
Block 95 | 853,210 |
Block 123 | 2,323,831 |
Block 129 | 1,167,409 |
Block 107 | 623,504 |
Block 133 | 764,320 |
| 5,732,274 |
All blocks in Peru are subject to a license agreement with PeruPetro. There is a 5-20% sliding scale royalty rate on the lands, dependent on production levels. Production less than 5,000 bopd is assessed a royalty of 5%. For production between 5,000 and 100,000 bopd there is a linear sliding scale between 5% and 20%. Production over 100,000 bopd has a flat royalty of 20%. This royalty structure applies to all blocks in Peru in which we have an interest. Block 133 has an additional royalty 'X' factor of 15%.
Status of Exploration Phases
Block 95 (100% WI, operated)
As previously discussed, in February 2015, we ceased all further development expenditures in the Bretaña Field on Block 95 other than what is necessary to maintain tangible asset integrity and security. We applied for and were granted a three year retention period from December 28, 2015, to ring-fence the Bretaña Structure. The obligation during this retention period is to evaluate the economics of the project in order to decide whether to declare commerciality by December 27, 2018. Additionally, we were granted an extension of the exploration period to December 27, 2017. This additional exploration period requires the completion of 176 units of work to move to the next phase or forfeiture with no penalty or commitment.
Block 123 and Block 129 (100% WI, operated)
Both blocks are in the third exploration period of five and are under force majeure. On Block 123, the current exploration period required one exploration well to be drilled or the completion of 300 units of work. This work obligation was satisfied by the acquisition of 318 kilometers of 2-D seismic prior to assuming operatorship. On Block 129, the current exploration period required one exploration well to be drilled or the completion of 204 units of work. This work obligation was satisfied by the acquisition of 252 kilometers of 2-D seismic by our former partners on this block.
Block 107 (100% WI, operated)
We are in the fifth and final exploration period, which is suspended due to delays in the permitting process. A 3-year extension of the fifth exploration phase was granted in April 30th, 2015. This period requires two exploration wells to be drilled. During 2015, we completed the acquisition of 311 kilometers of 2-D seismic as part of the obligation for the fourth exploration period.
Block 133 (100% WI, operated)
We are in the third exploration period of four, which is in force majeure pending the approval of 2-D seismic and drilling EIAs. This period requires one exploration well to be drilled or the completion of 200 units of work.
Administrative Facilities
Our principal executive offices are located in Calgary, Alberta, Canada. The Calgary office lease will expire on December 30, 2018. We also have office space in Colombia, Peru and Brazil.
Estimated Reserves
Our 2015 reserves were independently prepared by McDaniel International Inc. ("McDaniel"), a wholly owned subsidiary of McDaniel & Associates. McDaniel & Associates was established in 1955 as an independent Canadian consulting firm and has been providing oil and gas reserves evaluation services to the world's petroleum industry for the past 60 years. They have internationally recognized expertise in reserves evaluations, resource assessments, geological studies, and acquisition and disposition advisory services. McDaniel’s has offices in Calgary, Canada and Guildford, United Kingdom, The technical person primarily responsible for the preparation of our reserves estimates at McDaniel meets the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers.
The primary internal technical person in charge of overseeing the preparation of our reserve estimates is the Vice President, Asset Management. He has a B. Eng (Hons) degree in mechanical engineering and is a professional engineer and member of the Association of Professional Engineers, Geologists and Geophysicists of Alberta. He is responsible for our engineering activities including reserves reporting, asset evaluation, reservoir management and field development. He has over 20 years of experience working internationally in the oil and gas industry.
We have developed internal controls for estimating and evaluating reserves. Our internal controls over reserve estimates include: 100% of our reserves are evaluated by an independent reservoir engineering firm, at least annually; and review controls are followed, including an independent internal review of assumptions used in the reserve estimates and presentation of the results of this internal review to our reserves committee. Calculations and data are reviewed at several levels of the organization to ensure consistent and appropriate standards and procedures. Our policies are applied by all staff involved in generating and reporting reserve estimates including geological, engineering and finance personnel.
The process of estimating oil and gas reserves is complex and requires significant judgment, as discussed in Item 1A. “Risk Factors”. The reserve estimation process requires us to use significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each property. Therefore, the accuracy of the reserve estimate is dependent on the quality of the data, the accuracy of the assumptions based on the data and the interpretations and judgment related to the data.
Proved reserves are reserves which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward from known reservoirs under existing economic conditions, operating methods and government regulations prior to the time at which contracts providing the right to operate expires, unless evidence indicates that renewal is reasonably certain. The term “reasonable certainty” implies a high degree of confidence that the quantities of oil or natural gas actually recovered will equal or exceed the estimate. To achieve reasonable certainty, we and the independent reserve engineers employed technologies that have been demonstrated to yield results with consistency and repeatability. Estimates of proved reserves are generated through the integration of relevant geological, engineering, and production data, utilizing technologies that have been demonstrated in the field to yield repeatable and consistent results as defined in the SEC regulations. Data used in these integrated assessments included information obtained directly from the subsurface through wellbores, such as well logs, reservoir core samples, fluid samples, static and dynamic pressure information, production test data, and surveillance and performance information. The data utilized also included subsurface information obtained through indirect measurements such as seismic data. The tools used to interpret the data included proprietary and commercially available seismic processing software and commercially available reservoir modeling and simulation software. Reservoir parameters from analogous reservoirs were used to increase the quality of and confidence in the reserves estimates when available. The method or combination of methods used to estimate the reserves of each reservoir was based on the unique circumstances of each reservoir and the dataset available at the time of the estimate. Probable reserves are reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely as not to be recovered. Estimates of probable reserves which may potentially be recoverable through additional drilling or recovery techniques are by nature more uncertain than estimates of proved reserves and accordingly are subject to substantially greater risk of not actually being realized by us.
Possible reserves are reserves that are less certain to be recovered than probable reserves. Estimates of possible reserves are also inherently imprecise. Estimates of probable and possible reserves are also continually subject to revisions based on production history, results of additional exploration and development, price changes and other factors.
The following table sets forth our estimated reserves NAR as of December 31, 2015.
|
| | | | | | | | | |
| | Oil | | Natural Gas | | Oil and Natural Gas |
Reserves Category | | (Mbbl) | | (MMcf) | | (MBOE) |
Proved | | | | | | |
Developed | | | | | | |
Colombia | | 28,513 |
| | 1,346 |
| | 28,737 |
|
Brazil | | 2,303 |
| | 1,368 |
| | 2,531 |
|
Total proved developed reserves | | 30,816 |
| | 2,714 |
| | 31,268 |
|
Undeveloped | | | | | | |
Colombia | | 4,873 |
| | 477 |
| | 4,953 |
|
Brazil | | 2,420 |
| | 1,437 |
| | 2,659 |
|
Total proved undeveloped reserves | | 7,293 |
| | 1,914 |
| | 7,612 |
|
Total proved reserves | | 38,109 |
| | 4,628 |
| | 38,880 |
|
| | | | | | |
Probable | | | | | | |
Developed | | | | | | |
Colombia | | 7,354 |
| | 514 |
| | 7,440 |
|
Brazil | | 651 |
| | 386 |
| | 715 |
|
Total probable developed reserves | | 8,005 |
| | 900 |
| | 8,155 |
|
Undeveloped | | | | | | |
Colombia | | 5,319 |
| | 557 |
| | 5,412 |
|
Brazil | | 1,952 |
| | 1,159 |
| | 2,145 |
|
Total probable undeveloped reserves | | 7,271 |
| | 1,716 |
| | 7,557 |
|
Total probable reserves | | 15,276 |
| | 2,616 |
| | 15,712 |
|
| | | | | | |
Possible | | | | | | |
Developed | | | | | | |
Colombia | | 6,044 |
| | 530 |
| | 6,132 |
|
Brazil | | 563 |
| | 334 |
| | 619 |
|
Total possible developed reserves | | 6,607 |
| | 864 |
| | 6,751 |
|
Undeveloped | | | | | | |
Colombia | | 3,860 |
| | 508 |
| | 3,945 |
|
Brazil | | 1,688 |
| | 1,002 |
| | 1,855 |
|
Total possible undeveloped reserves | | 5,548 |
| | 1,510 |
| | 5,800 |
|
Total possible reserves | | 12,155 |
| | 2,374 |
| | 12,551 |
|
Product Prices Used In Reserves Estimates
The product prices that were used to determine the future gross revenue for each property reflect adjustments to the benchmark prices for gravity, quality, local conditions and/or distance from market. The average realized prices for reserves in the report are:
|
| | | | |
Oil and NGLs (USD/bbl) - Colombia | | $ | 43.96 |
|
Natural Gas (USD/Mcf) - Colombia | | $ | 3.55 |
|
Light/Medium Oil (USD/bbl) - Brazil | | $ | 40.57 |
|
Natural Gas (USD/Mcf) - Brazil | | $ | 1.47 |
|
Proved Undeveloped Reserves
At December 31, 2015, we had total proved undeveloped reserves NAR of 7.6 MMBOE (December 31, 2014 - 7.7 MMBOE), including 5.0 MMBOE in Colombia (December 31, 2014 – 6.2 MMBOE) and 2.6 MMBOE in Brazil (December 31, 2014 –
1.5 MMBOE). Approximately 53%, 7% and 5% of proved undeveloped reserves, respectively, are located in our Moqueta, Costayaco and Ramiriqui Fields in Colombia and 35% are in the Tiê Field in Brazil. None of our proved undeveloped reserves at December 31, 2015, have remained undeveloped for five years or more since initial disclosure as proved reserves and we have adopted a development plan which indicates that the proved undeveloped reserves are scheduled to be drilled within five years of initial disclosure as proved reserves.
Material changes in proved undeveloped reserves are summarized in the table below:
|
| | | |
| Oil Equivalent (MMBOE) |
Balance, December 31, 2014 | $ | 7.7 |
|
Converted to proved producing | (1.3 | ) |
Discoveries and extensions | 0.6 |
|
Technical revisions | 0.6 |
|
Balance, December 31, 2015 | $ | 7.6 |
|
In 2015, we converted 1.3 MMBOE, or 17% of year-end 2014 proved undeveloped reserves, to developed status. In 2015, we made investments, consisting solely of capital expenditures, of $34.6 million in Colombia and $0.1 million in Brazil, associated with the development of proved undeveloped reserves.
All of the proved undeveloped reserves conversions occurred in the Costayaco, Moqueta and Jilguero Fields in Colombia. In Colombia, the majority of proved undeveloped conversions occurred as a result of ongoing development activities in the Moqueta and Costayaco Fields, including infill drilling and a pressure maintenance projects in both of these fields.
Discoveries and extensions include proved undeveloped reserves additions in Brazil as a result of the signing of a gas contract and proved undeveloped reserves additions in Colombia at one location in the Ramiriqui Field. Technical revisions include positive revisions resulting from better than expected production performance in the Costayaco and Moqueta Fields. In Brazil, no new wells were drilled, however, our current development plan includes a water injection project and the updated reservoir modeling resulted in a large technical revision to the proved ultimate recovery volumes of the existing wells.
Production, Revenue and Price History
Certain information concerning production, prices, revenues and operating expenses for the three years ended December 31, 2015, is set forth in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the Unaudited Supplementary Data provided following our Financial Statements in Item 8, which information is incorporated by reference here.
The following table presents oil and NGL production NAR from our Costayaco and Moqueta Fields for the three years ended December 31, 2015:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| | Costayaco | Moqueta | | Costayaco | Moqueta | | Costayaco | Moqueta |
Oil and NGL's, bbl | | 4,053,977 |
| 2,005,444 |
| | 4,194,933 |
| 1,690,335 |
| | 4,692,610 |
| 1,283,369 |
|
Average sales price of oil and NGL's per bbl | | $ | 42.57 |
| $ | 42.10 |
| | $ | 83.05 |
| $ | 82.84 |
| | $ | 90.13 |
| $ | 97.22 |
|
Operating expenses of oil and NGL's per bbl | | $ | 14.87 |
| $ | 15.93 |
| | $ | 15.50 |
| $ | 12.06 |
| | $ | 11.29 |
| $ | 16.58 |
|
We prepared the estimate of standardized measure of proved reserves in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 932, “Extractive Activities – Oil and Gas”.
Drilling Activities
The following table summarizes the results of our exploration and development drilling activity for the past three years. Wells labeled as “In Progress” for a year were in progress as of December 31, 2015, 2014 or 2013. This information should not be considered indicative of future performance, nor should it be assumed that there was any correlation between the number of productive wells drilled and the oil and gas reserves generated thereby or the costs to Gran Tierra of productive wells compared to the costs of dry holes.
|
| | | | | | | | | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| | Gross | | Net | | Gross | | Net | | Gross | | Net |
Colombia | | | | | | | | | | | | |
Exploration | | | | | | | | | | | | |
Productive | | — |
| | — |
| | — |
| | — |
| | 3.00 |
| | 1.60 |
|
Dry | | 1.00 |
| | 1.00 |
| | 2.00 |
| | 2.00 |
| | 1.00 |
| | 0.50 |
|
In Progress | | — |
| | — |
| | 1.00 |
| | 1.00 |
| | 2.00 |
| | 2.00 |
|
Development | | | | | | | | | | | | |
Productive | | 7.00 |
| | 5.16 |
| | 6.00 |
| | 6.00 |
| | 5.00 |
| | 5.00 |
|
Dry | | — |
| |
| | — |
| | — |
| | — |
| | — |
|
In Progress | | 6.00 |
| | 6.00 |
| | 3.00 |
| | 3.00 |
| | — |
| | — |
|
Total Colombia | | 14.00 |
| | 12.16 |
| | 12.00 |
| | 12.00 |
| | 11.00 |
| | 9.10 |
|
| | | | | | | | | | | | |
Brazil | | | | | | | | | | | | |
Exploration | | | | | | | | | | | | |
Productive | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Dry | | — |
| | — |
| | 2.00 |
| | 2.00 |
| | 2.00 |
| | 2.00 |
|
In Progress | | — |
| | — |
| | — |
| | — |
| | 2.00 |
| | 2.00 |
|
Development | | | | | | | | | | | | |
Productive | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Dry | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
In Progress | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Brazil | | — |
|
| — |
| | 2.00 |
| | 2.00 |
|
| 4.00 |
|
| 4.00 |
|
| | | | | | | | | | | | |
Peru | | | | | | | | | | | | |
Exploration | | | | | | | | | | | | |
Productive | | — |
| | — |
| | — |
| | — |
| | 1.00 |
| | 1.00 |
|
Dry | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
In Progress | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Development | | | | | | | | | | | | |
Productive | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Service | | 1.00 |
| | 1.00 |
| | — |
| | — |
| | — |
| | — |
|
Dry | | 1.00 |
| | 1.00 |
| | — |
| | — |
| | — |
| | — |
|
In Progress | | — |
| | — |
| | 1.00 |
| | 1.00 |
| | — |
| | — |
|
Total Peru | | 2.00 |
|
| 2.00 |
| | 1.00 |
| | 1.00 |
|
| 1.00 |
|
| 1.00 |
|
| | | | | | | | | | | | |
Argentina(1) | | | | | | | | | | | | |
Exploration | | | | | | | | | | | | |
Productive | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Dry | | — |
| | — |
| | — |
| | — |
| | 3.00 |
| | 1.70 |
|
In Progress | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Development | | | | | | | | | | | | |
Productive | | — |
| | — |
| | 1.00 |
| | 0.85 |
| | 4.00 |
| | 3.35 |
|
Dry | | — |
| | — |
| | — |
| | — |
| | 1.00 |
| | 0.35 |
|
In Progress | | — |
| | — |
| | 1.00 |
| | 1.00 |
| | 1.00 |
| | 1.00 |
|
Total Argentina | | — |
| | — |
| | 2.00 |
| | 1.85 |
| | 9.00 |
| | 6.40 |
|
Total | | 16.00 |
| | 14.16 |
| | 17.00 |
| | 16.85 |
| | 25.00 |
| | 20.50 |
|
(1) On June 25, 2014, we sold our Argentina business unit to Madalena Energy Inc. ("Madalena").
Of the four wells in progress in Colombia as at December 31, 2014, two continued to be in progress (suspended), one was producing and one was dry at December 31, 2015. We had one well in progress in Peru as at December 31, 2014, which was dry at December 31, 2015.
In 2015, we also continued pressure maintenance projects in the Costayaco and Moqueta Fields in Colombia.
Well Statistics
The following table sets forth our productive wells as of December 31, 2015:
|
| | | | | | | | | | | | | | | | | |
| Oil Wells | | Gas Wells | | Total Wells |
| Gross | | Net | | Gross | | Net | | Gross | | Net |
Colombia(1) | 40.0 |
| | 34.6 |
| | — |
| | — |
| | 40.0 |
| | 34.6 |
|
Brazil(2) | 2.0 |
| | 2.0 |
| | — |
| | — |
| | 2.0 |
| | 2.0 |
|
Peru | 1.0 |
| | 1.0 |
| | — |
| | — |
| | 1.0 |
| | 1.0 |
|
| 43.0 |
| | 37.6 |
|
| — |
|
| — |
|
| 43.0 |
|
| 37.6 |
|
(1) Includes 9.0 gross and 8.4 net water injector wells and 43.0 gross and 39.5 net wells with multiple completions.
(2) Includes 2.0 gross and net wells with multiple completions.
Developed and Undeveloped Acreage
The following table sets forth our developed and undeveloped oil and gas lease and mineral acreage as of December 31, 2015:
|
| | | | | | | | | | | | | | | | | |
| Developed | | Undeveloped | | Total |
| Gross | | Net | | Gross | | Net | | Gross | | Net |
Colombia(1) | 180,349 |
| | 121,867 |
| | 3,216,195 |
| | 2,652,763 |
| | 3,396,544 |
| | 2,774,630 |
|
Brazil | 1,511 |
| | 1,511 |
| | 46,223 |
| | 46,223 |
| | 47,734 |
| | 47,734 |
|
Peru | — |
| | — |
| | 5,732,274 |
| | 5,732,274 |
| | 5,732,274 |
| | 5,732,274 |
|
Gran Tierra as at December 31, 2015(1) | 181,860 |
| | 123,378 |
|
| 8,994,692 |
|
| 8,431,260 |
|
| 9,176,552 |
|
| 8,554,638 |
|
Combined Petroamerica and PGC(2) | 1,514,477 |
| | 386,108 |
| | 794,545 |
| | 554,600 |
| | 2,309,022 |
| | 940,708 |
|
Pro forma as at December 31, 2015(3) | 1,696,337 |
| | 509,486 |
| | 9,789,237 |
| | 8,985,860 |
| | 11,485,574 |
| | 9,495,346 |
|
(1) Excluded from acres are three blocks for which government approval of relinquishments was pending as of December 31, 2015. These blocks total 820,189 gross and net acres in Colombia.
(2) We acquired Petroamerica and PGC subsequent to December 31, 2015.
(3) Gives pro forma effect to the acquisitions of Petroamerica and PGC as if they had occurred on December 31, 2015.
At December 31, 2015, our gross undeveloped acreage was located 64% in Peru (39% Blocks 123 and 129) and 36% in Colombia.
Research and Development
We utilize existing technology, industry best practices and continual process improvement to execute our business plan. We have not expended any resources on pursuing research and development initiatives.
Marketing and Major Customers
Colombia
Our oil in Colombia is light oil, with 93% of 2015 production coming from the Putumayo Basin with an average API of approximately 29°.
We have entered into agreements to sell to Ecopetrol the volume of crude oil production produced in the Chaza and Guayuyaco Blocks (the “Putumayo production”). The volume of crude oil does not include the volume of oil corresponding to royalties taken in kind, but does include volumes relating to HPR royalties. These agreements are subject to renegotiation annually and generally contain mutual termination provisions with 30 days notice. These agreements will expire November 30, 2016. We may, but are not obligated to, sell up to 100% of our Putumayo production to Ecopetrol. We deliver our oil to Ecopetrol through our transportation facilities which include pipelines, gathering systems and trucking and through the transportation and logistics assets of Ecopetrol and CENIT Transporte y Logistica de Hidrocarburos S.A.S ("CENIT"), a wholly-owned subsidiary of Ecopetrol.
The point of sale of our Putumayo production to Ecopetrol is the Port of Tumaco on the Pacific coast of Colombia.
We have entered into transportation agreements (the “Transportation Agreements”) with CENIT. These agreements will expire November 30, 2016. Pursuant to the Transportation Agreements we pay a transportation tariff and transportation tax for the transportation of the Putumayo production from the Putumayo Basin to the Port of Tumaco. Pursuant to the Transportation Agreements, each of Gran Tierra Energy Colombia Ltd. and Petrolifera Petroleum (Colombia) Limited have the right to transport up to 10,000 bopd, subject to availability of capacity, of crude oil production from the Chaza and Guayuyaco Blocks in Colombia: (1) from Santana Station to CENIT’s facility at Orito through CENIT’s Mansoya – Orito Pipeline, and (2) from CENIT’s facility at Orito to the Port of Tumaco through CENIT’s Orito – Tumaco Pipeline. We can request that CENIT transport additional crude oil in excess of 20,000 bopd through the pipelines on the same terms, which CENIT may do at its sole discretion.
Generally, under these agreements, CENIT is liable (subject to specified limitations) for pollution clean up costs resulting from incidents during transportation. The cost of oil lost during transportation is shared by the parties that ship oil on the pipeline, in proportion to their share of total volumes shipped.
Currently we have Firm Capacity Transportation Agreements for 6,000 bopd, of which 3,000 bopd are under ship or pay agreements and 3,000 bopd are under ship and pay agreements. These agreements will expire October 31, 2020. The remainder of our Putumayo production is transported through the Transportation Agreements.
In the event that we do not sell all of our production to Ecopetrol, we sell to numerous alternative purchasers. We are under no obligation to sell any oil to our alternative purchasers until we specify for a particular day the amount of oil we wish to sell to them. Oil can be delivered and sold at the Costayaco battery where oil is loaded into trucks, delivered to facilities at Babillas Station and the sales point is the Port of Coveñas upon oil export, or delivered via pipeline to the Port of Esmeraldas, Ecuador and the sales point is when oil is loaded into an export tanker.
The majority of the oil produced is transported by pipeline. Varying amounts of oil are trucked: (1) from Santana Station to Ecopetrol’s storage terminal at Orito, a distance of approximately 46 kilometers; (2) from the Costayaco Field to Ecopetrol’s storage terminal at Neiva (Dina Station), approximately 350 kilometers north of the Chaza Block; (3) from the Costayaco Field to Hocol´s unloading facilities at Neiva (Babillas Station), approximately 350 kilometers north of the Chaza Block; (4) from the Costayaco Field to the Atlántico Oil Terminal in Barranquilla, a distance of approximately 1,500 kilometers; (5) from the Garibay Jilguero Field to facilities at Cusiana Station, a distance of approximately 75 kilometers; and; (6) from the Llanos 22 Ramiriqui Field to facilities at Cusiana Station, a distance of approximately 35 kilometers.
We receive revenues for our Colombian oil sales in U.S. dollars. Oil prices for sales of our crude oil are defined by agreements with the purchasers of the oil and are based generally on an average price for crude oil, such as West Texas Intermediate ("WTI") or Brent, with adjustments such as for quality, specified fees, transportation fees and transportation tax.
Brazil
Petróleo Brasileiro S.A (“Petrobras”) is the main purchaser of our oil production from Block 155 in Brazil. Oil is trucked 26 miles to the Petrobras Carmo Oil Treatment Station. Oil prices for sales to Petrobras are based on the monthly average Dated Brent price less a refining and quality discount.
Competition
The oil and gas industry is highly competitive. We face competition from both local and international companies in acquiring properties, contracting for drilling and other oil field equipment and securing trained personnel. Many of these competitors, such as Ecopetrol, have financial and technical resources that exceed ours. Others are smaller and we believe our technical and financial capabilities give us a competitive advantage over these companies. Our ability to acquire additional properties and to discover reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. In addition, there is substantial competition for prospects and resources in the oil and gas industry.
Geographic Information
Information regarding our geographic segments, including information on revenues, assets, expenses and net income, can be found in Note 4 to the Consolidated Financial Statements, Segment and Geographic Reporting, in Item 8 “Financial Statements and Supplementary Data”, which information is incorporated by reference here. Long lived assets are Property, Plant and Equipment, which includes all oil and gas assets, furniture and fixtures, automobiles and computer equipment. No long lived assets are held in our country of domicile, which is the United States of America. "All Other" assets include assets held by our corporate head office in Calgary, Alberta, Canada. Because all of our exploration and development operations are in South America, we face many risks associated with these operations. See Item 1A “Risk Factors” for risks associated with our foreign operations.
Regulation
The oil and gas industry in Colombia, Peru and Brazil is heavily regulated. Rights and obligations with regard to exploration, development and production activities are explicit for each project; economics are governed by a royalty/tax regime. Various government approvals are required for property acquisitions and transfers, including, but not limited to, meeting financial and technical qualification criteria in order to be certified as an oil and gas company in the country. Oil and gas concessions are typically granted for fixed terms with opportunity for extension.
Colombia
In Colombia, prior to 2004, Ecopetrol was the administrator of all hydrocarbons and therefore executed contracts with oil companies under different contractual types such as Association Contracts and Shared Risk Contracts. Under an Association Contract, the oil company (“Associate”) assumed all risk during the exploration phase and Ecopetrol had the obligation to reimburse the Associate, if the commerciality was accepted by Ecopetrol, the direct exploration costs which the Associate incurred in proportion to Ecopetrol's working interest. If Ecopetrol did not accept the initial commerciality of a field, the Associate could continue the activities at its sole risk and Ecopetrol would retain the right to back-in later, after Ecopetrol reimbursed the Associate for the initial exploitation work and exploration costs plus certain penalties, depending upon at what stage Ecopetrol later declared commerciality of the field.
Effective June 2003, the regulatory regime in Colombia underwent a significant change with the formation of the ANH. The ANH is now the administrator of the hydrocarbons in the country and therefore is responsible for regulating the Colombian oil and gas industry, including managing all exploration lands. Ecopetrol became a public company owned in majority by the state with the main purpose of exploring and producing hydrocarbons similar to any other oil company. However, Ecopetrol continues to have rights under the existing contracts executed with oil companies before the ANH was created. Ecopetrol continues to be the major purchaser and marketer of oil in Colombia and operates the majority of the oil transportation infrastructure in the country.
In conjunction with this change, the ANH developed a new exploration risk contract that took effect as of June 2004. This Exploration and Production Contract has significantly changed the way the industry views Colombia. In place of the earlier association contracts, the new agreement provides full risk/reward benefits for the contractor. Under the terms of the contract the successful operator retains the rights to all reserves, production and income from any new exploration block, subject to existing royalty and tax regulations. Each contract contains an exploration phase and a production phase. The exploration phase will contain a number of exploration periods and each period will have an associated work commitment. The production phase will last a number of years (usually 24) from the declaration of a commercial hydrocarbon discovery.
We operate in Colombia through the following branches - Gran Tierra Energy Colombia Ltd., Petrolifera Petroleum (Colombia) Limited, Petroamerica International Colombia Corp. Sucursal, Petroamerica Energy Colombia Sucursal,
Petroamerica P&G Corp Colombia, Southeast Investment Corporation, Petroamerica Colombia, and PetroGranada Colombia Limited Sucursal Colombia. The home offices of Gran Tierra Energy Colombia Ltd., Petrolifera Petroleum (Colombia) Limited, Petroamerica Colombia and Petroamerica Energy Colombia Sucursal are qualified as operators of oil and gas properties by the ANH.
When operating under a contract, the contractor is the owner of the hydrocarbons extracted from the contract area during the performance of operations, except for royalty volumes which are collected by the ANH (or its designee), depending on the type of contract. The contractor can market the hydrocarbons in any manner whatsoever, subject to a limitation in the case of natural emergencies where the law specifies the manner of sale.
Peru
Peru’s hydrocarbon legislation, which includes the Organic Hydrocarbon Law No. 26221 enacted in 1993 and the regulations thereunder (the “Organic Hydrocarbon Law”), governs our operations in Peru. This legislation covers the entire range of petroleum operations, defines the roles of Peruvian government agencies which regulate and interact with the oil and gas industry, provides that private investors (either national or foreign) may also make investments in the petroleum sector and provides for the promotion of the development of hydrocarbon activities based on free competition and free access to all economic activities. This law provides that pipeline transportation and natural gas distribution must be handled via concession contracts with the appropriate governmental authorities. All other petroleum activities are to be freely operated subject to complying with applicable regulation, including local safety and environment standards.
Under the Peruvian legal system, Peru is the owner of the hydrocarbons located below the surface in its national territory. However, Peru has given the ownership right to extracted hydrocarbons to PeruPetro S.A. ("PeruPetro"), a state company responsible for promoting and overseeing the investment of hydrocarbon exploration and exploitation activities in Peru. PeruPetro is empowered to enter into contracts for either the exploration and exploitation or just the exploitation of petroleum and natural gas on behalf of Peru, the nature of which are described further below. The Peruvian government also plays an active role in petroleum operations through various entities and agencies, including through the involvement of the Ministry of Energy and Mines(the specialized government department in charge of establishing energy, mining and environmental protection policies, enacting the rules applicable to all these sectors and supervising compliance with such policies and rules),OSINERGMIN (an agency in charge of checking compliance with hydrocarbon regulations) and OEFA (the entity of supervising environmental compliance). We are subject to the laws and regulations of all of these entities and agencies.
The Peruvian Constitution and the Organic Hydrocarbon Law states that a license contract does not provide for a transfer or lease of property over the area of the exploration or exploitation. In accordance with a license contract, a third party acquires the right to explore for or exploit hydrocarbons in a specified area and PeruPetro (the entity that holds the Peruvian state interest) transfers the property right in the extracted hydrocarbons to the third party, who must pay a royalty to the state.
PeruPetro enters into either license contracts or service contracts for hydrocarbon exploration and exploitation. Peruvian law also allows for other contract models, but the investor must propose contract terms compatible with Peru’s interests. We only operate under license contracts and do not foresee operating under any service contracts. License and service contracts are approved by supreme decree issued by the Peruvian Ministry of Economy and Finance and the Peruvian Ministry of Energy and Mining, and can only be modified by written agreement signed by the parties. A company must be qualified by PeruPetro to enter into negotiations for hydrocarbon exploration and exploitation contracts in Peru. In order to qualify, the company must meet the standards under the Regulations Governing the Qualifications of Oil Companies. These qualifications generally require the company to have the technical, legal, economic and financial capacity to comply with all obligations it will assume under the contract based on the characteristics of the area requested, the possible investments and the environmental protection rules governing the performance of its operations. When a contractor is a foreign investor, it is required to incorporate a subsidiary company or registered branch in accordance with Peruvian corporate law and appoint Peruvian representatives in accordance with the Organic Hydrocarbon Law who will interact with PeruPetro.
We operate in Peru through Gran Tierra Energy Peru S.R.L. and Petrolifera Petroleum del Peru S.R.L. Gran Tierra Energy Peru S.R.L. has been qualified by PeruPetro with respect to its contracts for Blocks 95, 123 and 129 and Petrolifera has been qualified by PeruPetro with respect to its contracts for Blocks 107 and 133.
When operating under a license contract, the licensee is the owner of the hydrocarbons extracted from the contract area during the performance of operations and pays royalties which are collected by PeruPetro. The licensee can market or export the hydrocarbons in any manner whatsoever, subject to a limitation in the case of national emergency where the law stipulates such manner.
Brazil
In Brazil, Law No. 2004 enacted in 1953 created the state monopoly of the petroleum industry and Petrobras, a state-owned legal entity, which was the sole company conducting exploration and production activities in Brazil. The Brazilian Federal Constitution enacted on October 5, 1988, continued this state monopoly of the petroleum industry.
Amendment No. 9 to the Brazilian Constitution, enacted on November 9, 1995, relaxed the state monopoly and authorized the Brazilian government to contract with state and private companies, with head offices and management located in Brazil, for the exploration and production of oil and natural gas, as well as to grant authorizations for the refining, transportation, import and export of oil, natural gas and its by-products.
The regulatory model is governed by Law No. 9478 of August 6, 1997 (the “Petroleum Law”), as amended, which controls the granting of concessions for carrying out exploration and production activities to Brazilian companies. The Petroleum Law, as amended, also established a legal framework for pre-salt layer areas and strategic areas to be defined by the Brazilian government and which will be subject to the Production Sharing Regime.
In accordance with the Petroleum Law, the acquisition of oil and natural gas property and oil and gas operations by state and private companies is subject to legal, technical and economic standards and regulations issued by the Agência Nacional de Petróleo, Gás Natural e Biocombustíveis ("ANP"), the agency created by the Petroleum Law and vested with regulatory and inspection authority to ensure adequate operational procedures with respect to industry activities and the supply of fuels throughout the national territory.
The ANP has authority for the implementation of the national oil and natural gas policy in accordance with the National Council of Energy Policy. The ANP conducts bid rounds to award exploration, development and production contracts, as well as to authorize the construction and operation of refineries and gas processing units, transportation facilities (including port terminals), import and export of oil and natural gas, as well as supervision of the activities which integrate the petroleum industry and the general enforcement of the Petroleum Law.
During a public bid procedure, any company evidencing technical, financial and legal standards under the applicable bidding requirements may qualify and apply for particular blocks made available for concession contracts. Qualified companies may compete alone or in association with other companies, including through the formation of “consortia” (unincorporated joint-ventures), provided they agree to comply with all the applicable requirements of Brazilian Corporate Law. Blocks awarded and the duration of the exploration and production periods are defined in the contracts which, besides the usual covenants that can be found in oil concessions, such as exploration and development programs, relinquishment of areas, and unitization, include reversion to the state of certain assets at the end of the concession. Contracts may be assigned or transferred to other Brazilian companies that comply with the technical, financial and legal requirements established by the ANP.
Oil and natural gas resources in Brazil, whether onshore or offshore, belong to the Brazilian government. However, under the Concession Regime, after the discovery of oil and gas reserves, ownership is assigned to the concessionaire. Under the principles of the Federal Constitution, the national territory comprises all land and the continental shelf. Brazil is a signatory of the conventions regulating the economic use of the sea and its subsoil. Brazil is thus entitled to the enjoyment of the resources over the territorial sea and marine platform up to the limits indicated in the pertinent treaties.
Concessionaires are required under Law No. 9,478/97 to pay the government dues and fees, in addition to the charges for sale of pre-bid data and information. The ANP has the power to determine the criteria under which the Government Take will be assessed within the limits established by Federal Decree No. 2,705/98. Government Take comprises (i) signature bonus, (ii) royalties, (iii) special participation and (iv) area rentals. Part of the Government Take is passed on to States and Municipalities and other government branches according to law.
We operate in Brazil through Gran Tierra Energy Brasil Ltda. (“Gran Tierra Brazil”). Gran Tierra Brazil received approval from the ANP as a Class B operator permitting Grant Tierra Brazil to act as an operator both onshore and in the shallow water offshore Brazil.
Environmental Compliance
Our activities are subject to existing laws and regulations governing environmental quality and pollution control in the countries where we maintain operations. Our activities with respect to exploration, drilling, production and facilities, including the operation and construction of pipelines, plants and other facilities for transporting, processing, treating or storing oil and other products, are subject to stringent environmental regulation by local, provincial, state and federal authorities in Colombia,
Peru and Brazil. Such regulations relate to environmental impact studies, the discharge of pollutants into air and water, management of hazardous waste, including its transportation, storage, and disposal, permitting for the construction of facilities, recycling requirements and reclamation standards, and the protection of certain plants and animal species, among others. Risks are inherent in oil and gas exploration, development and production operations, such as blowouts, fires, or spills, and significant costs and liabilities may be incurred in connection with environmental compliance issues. Licenses and permits required for our exploration and production activities may not be obtainable on reasonable terms or on a timely basis, which could result in delays and have an adverse effect on our operations. Spills and releases into the environment of petroleum products can result in investigatory and remedial liabilities. Moreover, violations of environmental laws and regulations can result in the issuance of administrative, civil, or criminal fines and penalties, as well as orders or injunctions prohibiting some or all of our operations in affected areas. In addition, indigenous groups or other local organizations could oppose our operations in their communities, potentially resulting in delays which could adversely affect our operations.
We do not expect that the cost of compliance with local, provincial, state and federal provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment will be material to us.
We have implemented a company wide web-based reporting system which allows us to better track incidents and respective corrective actions and associated costs. We have a Corporate Health, Safety, and Environmental Management System and follow environmental best practices. We have also implemented an environmental risk management program in place as well as waste management procedures. Air and water testing occur regularly and environmental contingency plans have been prepared for all sites and ground transportation of oil. We have a regular quarterly comprehensive reporting system with a schedule of internal audits and routine checking of practices and procedures. Emergency response exercises were conducted in Colombia, Peru and Brazil. However, despite these measures, we cannot guarantee that our operations will always be able to maintain compliance with applicable environmental laws and regulations in the countries in which we operate.
Employees
At December 31, 2015, we had 301 full-time employees (December 31, 2014 - 473): 58 located in the Calgary corporate office, 193 in Colombia (101 staff in Bogota and 92 field personnel), 28 in Peru (19 office staff in Lima and 9 field staff) and 22 in Brazil (9 office staff in Rio de Janeiro and Salvador and 13 field staff). None of our employees are represented by labor unions and we consider our employee relations to be good.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and current reports on Form 8-K, as well as any amendments to such reports and all other filings pursuant to Section 13(a) or 15(d) of the Exchange Act which we make available as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC, are available free of charge to the public on our website www.grantierra.com. Our website address is provided solely for informational purposes. We do not intend, by this reference, that our website should be deemed to be part of this Annual Report.
In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding us. Any materials we have filed with the SEC may be read or copied at the SEC’s Public Reference Room at 100 F Street N.E. Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Item 1A. Risk Factors
Risks Related to Our Business
Guerrilla Activity in Colombia Has Disrupted and Delayed, and Could Continue to Disrupt or Delay, Our Operations and We May Be Unable to Safeguard Our Operations and Personnel in Colombia.
During 2012 and 2013, guerrilla activity in Colombia increased significantly, and the activity level remained high in 2014 and 2015. This increased activity creates a greater risk for our operations and our employees.
For over 40 years, the Colombian government has been engaged in a conflict with two main Marxist guerrilla groups: the Revolutionary Armed Forces of Colombia ("FARC") and the National Liberation Army ("ELN"). Both of these groups have been designated as terrorist organizations by the United States and the European Union. Another threat comes from criminal gangs
formed from the former members of the United Self-Defense Forces of Colombia militia, a paramilitary group that originally sprouted up to combat FARC and ELN, which the Colombian government successfully dissolved.
Negotiations between the government and FARC may lead to a peaceful resolution and may not generate the intended outcome for either party. The impact of these negotiations, or any potential resolution, is not determinable on our operations.
We operate principally in the Putumayo Basin in Colombia, and have properties in other basins, including the Catatumbo, Cauca, Llanos, Sinu-San Jacinto, Middle Magdalena and Lower Magdalena Basins. Pipelines have been primary targets of guerrilla activity, because such pipelines cannot be adequately secured due to the sheer length of such pipelines and the remoteness of the areas in which the pipelines are laid. The CENIT S.A ("CENIT")-operated Trans-Andean oil pipeline (the "OTA pipeline”), which transports oil from the Putumayo region to the Port of Tumaco and which is one of our export routes, has been targeted by FARC. Starting in 2008, the OTA pipeline experienced outages of various lengths. Since 2012, the OTA pipeline has been shut down for 784 days (including 166 days as a result of landslides and maintenance works). Such disruptions may continue indefinitely and could harm our business.
Continuing attempts by the Colombian government to reduce or prevent guerrilla activity may not be successful and dissident guerrilla activity may continue to disrupt our operations in the future. Our efforts to increase security measures may not be successful and there can also be no assurance that we can maintain the safety of our or our contractors' field personnel and Bogota head office personnel or operations in Colombia or that this violence will not continue to adversely affect our operations in the future and cause significant loss.
We Are Vulnerable to Risks Associated with Geographically Concentrated Operations.
Our producing properties are geographically concentrated in Colombia, and as at December 31, 2015, 87% of our proved reserves were located in Colombia. As a result of this concentration, we may be disproportionately exposed to the impact of, among other things, regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental regulation or guerilla activities, transportation constraints or market limitations.
If We do Not Have the Resources to Execute on Our Business Plan, We May Be Required to Curtail Our Operations.
Our base capital program for 2016 is $107 million to fund our exploration and development, which we intend to fund through cash flows from operations and cash on hand. Funding this program relies in part on oil prices remaining close to current levels or higher and other factors to generate sufficient cash flow. In addition to our base 2016 capital program we have a discretionary capital program of $61 million that we may utilize during 2016 if oil prices strengthen during the year. Oil prices were very volatile in 2014 and 2015 and have remained at low levels in the first part of 2016. Low oil prices affect our debt capacity and the amount of money we can borrow using our oil reserves as collateral, as well as the amount of cash we are able to generate from operations. If cash flows from operations are not sufficient to fund our capital program, we may not be able to execute our business plan which would cause us to further decrease our exploration and development, which could harm our business outlook, investor confidence and our share price.
We May Encounter Difficulties Storing and Transporting Our Production, Which Could Cause a Decrease in Our Production or an Increase in Our Expenses.
To sell the oil and natural gas that we are able to produce, we have to make arrangements for storage and distribution to the market. We rely on local infrastructure and the availability of transportation for storage and shipment of our products, but infrastructure development and storage and transportation facilities may be insufficient for our needs at commercially acceptable terms in the localities in which we operate. This could be particularly problematic to the extent that our operations are conducted in remote areas that are difficult to access, such as areas that are distant from shipping and/or pipeline facilities. In certain areas, we may be required to rely on only one gathering system, trucking company or pipeline, and, if so, our ability to market our production would be subject to their reliability and operations. These factors may affect our ability to explore and develop properties and to store and transport our oil and gas production, and may increase our expenses. Furthermore, future instability in one or more of the countries in which we operate, weather conditions or natural disasters, actions by companies doing business in those countries, labor disputes or actions taken by the international community may impair the distribution of oil and/or natural gas and in turn diminish our financial condition or ability to maintain our operations.
The majority of our oil in Colombia is shipped through the OTA pipeline owned by CENIT and operated by Ecopetrol. Sales of oil have been and could continue to be disrupted by damage to this pipeline or displaced by Ecopetrol’s use of the pipeline itself. In addition, CENIT has a monopoly over pipeline transportation from the area and Ecopetrol over the operation of the port of Tumaco, which limits our ability to negotiate proposed pipeline and port tariff increases and our costs may increase as a
result. Under our transportation contract with CENIT, the delivery point for our oil is at the end of this pipeline. This creates a risk of loss of oil due to sabotage by guerrillas or theft from the pipeline which may result in reduced revenues and increased clean-up or third party costs. CENIT and Ecopetrol maintain responsibility for clean-up of any spilled oil and for pipeline repair.
If these pipelines remain down for extended periods of time, our storage facilities may become full, which may cause us to limit producing activities. In addition, there is competition for space in these pipelines, and additional discoveries in our area of operations by other companies could decrease the pipeline capacity available to us. Trucking is an alternative to transportation by pipeline; however, it is generally more expensive and carries higher safety risks for us, our employees and the public.
Significant percentages of our 2014 and 2015 production were transported by alternative means. These alternatives are more expensive and reduce our average realized prices. In addition, these alternative means of transportation may not be sustainable long term. When disruptions are of a long enough duration, our sales volumes may be lower than normal, which will cause our cash flow to be lower than normal, and if our storage facilities become full, we can be forced to reduce production.
We May Be Unable to Obtain Additional Capital That We Will Require to Implement Our Business Plan, Which Could Restrict Our Ability to Grow.
In the event that our cash flow from existing operations and cash on hand is not sufficient, we may require additional capital to fund our currently planned activities or to expand our exploration and development programs to additional properties. We may be unable to obtain additional capital on favorable terms or at all.
If we require additional capital, we may pursue sources of capital through various financing transactions or arrangements, including joint venturing of projects, debt financing, equity financing or other means. We may not be able to access capital on favorable terms or at all. If we do succeed in raising additional capital, future financings may be dilutive to our shareholders, as we could issue additional shares of Common Stock or other equity to investors. In addition, debt and other mezzanine financing may involve a pledge of assets and may be senior to interests of equity holders. We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertibles and warrants, which will adversely impact our financial results.
Our ability to obtain needed financing may be impaired by factors such as the capital markets (both generally and for the oil and gas industry in particular), the location of our oil and natural gas properties in South America, prices of oil and natural gas on the commodities markets (which will impact the amount of asset-based financing available to us), and the loss of key management. Further, if oil and/or natural gas prices on the commodities markets decrease, then our revenues will likely decrease, and such decreased revenues may increase our requirements for capital. The price of oil and natural gas also effects the value of our oil and natural gas reserves, which dictates our capacity to borrow using those reserves as collateral. Some of the contractual arrangements governing our exploration activity may require us to commit to certain capital expenditures, and we may lose our contract rights if we do not have the required capital to fulfill these commitments. If the amount of capital we are able to raise from financing activities, together with our cash flow from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our activities), we may be required to curtail our operations.
The Borrowing Base Under Our Revolving Credit Facility May Be Reduced in Light of Recent Commodity Price Declines, Which Could Hinder or Prevent us From Meeting Our Future Capital Needs.
The borrowing base under our revolving credit facility is currently $200 million, and lender commitments under our revolving credit facility are $500 million. Our borrowing base is redetermined by the lenders twice per year, and the next scheduled borrowing base redetermination is in May 2016. Our borrowing base may decrease as a result of current oil and natural gas price levels, a further decline in oil or natural gas prices, operating difficulties, declines in reserves, lending requirements or regulations, the issuance of new indebtedness or for any other reason. We cannot be certain that funding will be available if needed, and to the extent required, on acceptable terms. In the event of a decrease in our borrowing base due to current or further declines in commodity prices or otherwise, we may be unable to meet our obligations as they come due and could be required to repay any indebtedness in excess of the redetermined borrowing base. In addition, we may be unable to access the equity or debt capital market to meet our obligations. As a result, we may be unable to implement our drilling and development plan, make acquisitions or otherwise carry out our business plan, which would have a material adverse effect on our financial condition and results of operations and impair our ability to service our indebtedness.
Our Business is Subject to Local Legal, Political and Economic Factors Which Are Beyond Our Control, Which Could Impair Our Ability to Expand Our Operations or Operate Profitably.
We operate our business in Colombia, Peru, and Brazil, and may eventually expand to other countries. Exploration and production operations in foreign countries are subject to legal, political and economic uncertainties, including terrorism, military repression, social unrest, strikes by local or national labor groups, interference with private contract rights (such as nationalization), extreme fluctuations in currency exchange rates, high rates of inflation, exchange controls, changes in tax rates, changes in laws or policies affecting environmental issues (including land use and water use), workplace safety, foreign investment, foreign trade, investment or taxation, as well as restrictions imposed on the oil and natural gas industry, such as restrictions on production, price controls and export controls. Our production in Brazil was shut in for three weeks in October 2013 as a result of a strike by employees of Petrobras which affected the crude oil receiving terminal we use in the Recôncavo Basin, and we experienced minor delays in trucking operations due to demonstrations and strikes in our operating area during the year ended December 31, 2014 and 2015. We do not know how long any such labor action will last, and if it lasts a significant amount of time, it may affect our ability to meet our production targets.
South America has a history of political and economic instability. This instability could result in new governments or the adoption of new policies, laws or regulations that might assume a substantially more hostile attitude toward foreign investment, including the imposition of additional taxes. In an extreme case, such a change could result in termination of contract rights and expropriation of foreign-owned assets. Any changes in oil and gas or investment regulations and policies or a shift in political attitudes in Colombia, Peru or Brazil or other countries in which we intend to operate are beyond our control and may significantly hamper our ability to expand our operations or operate our business at a profit.
Changes in laws in the jurisdiction in which we operate or expand into with the effect of favoring local enterprises, and changes in political views regarding the exploitation and protection of natural resources and economic pressures, may make it more difficult for us to negotiate agreements on favorable terms, obtain required licenses, comply with regulations or effectively adapt to adverse economic changes, such as increased taxes, higher costs, inflationary pressure and currency fluctuations. In certain jurisdictions the commitment of local business people, government officials and agencies and the judicial system to abide by legal requirements and negotiated agreements may be more uncertain, creating particular concerns with respect to licenses and agreements for business. These licenses and agreements may be susceptible to revision or cancellation and legal redress may be uncertain or delayed.
Recently, in the Department of Putumayo in Colombia where we operate, despite a company’s compliance with legislative requirements for prior consultation of communities and minority ethnic groups and the receipt of the necessary permits to drill and operate, new ethnic groups have been threatening, and in some cases using, the Judicial Branch of the Government, Superior Court of the Judicial District of Mocoa (the “Local Court”) to require that they be consulted, and thereby obtain benefits from companies operating in the Department of Putumayo as a result of those consultations. The Local Court has the ultimate jurisdiction to determine, upon a writ for protection or tutela, by an ethnic group (i) whether there has been a violation of a fundamental right to prior consultation by act or omission of a public authority or individual and (ii) whether the ethnic group is legitimate. If the Local Court determines that there has been a violation and the ethnic group is legitimate despite receipt by the company of its proper governmental permits, the Local Court has the power to invalidate a company’s permits and force the company to cease operations immediately until such time as the company can successfully appeal to the Supreme Court to overturn the Local Court’s decision or prior consultations are completed and the permits effective once again.
Property right transfers, joint ventures, licenses, license applications or other legal arrangements pursuant to which we operate may be adversely affected by the actions of government and judicial authorities and the effectiveness of and enforcement of our rights under such arrangements in these jurisdictions may be impaired and, if we are faced with a tutela, our operations in the area(s) governed by a Local Court’s order may be shut down for a period of time thereby causing significant harm to our business in Colombia.
Recently in Brazil, environmental regulations related to fracture stimulation drilling have been under review by national agencies. In December 2014, the Agência Nacional de Petróleo Gás Natural e Biocombustíveis ("ANP") issued an injunction specifically related to properties in the Recôncavo Basin covered by Bid Round 12. This injunction placed a moratorium on unconventional activities on the Bid Round 12 blocks, all of which were unconventional exploration targets, until such a time as policies governing unconventional activities are finalized. Blocks REC-T-129, REC-T-142, REC-T-155 and REC-T-224 were granted in Bid Round 9, for which there has not been a similar injunction; however, we expect that the ANP’s injunction may limit our ability to receive permits in the short-term for our blocks with unconventional exploration targets. We acquired Blocks REC-T-86, REC-T-117 and REC-T-118 in Bid Round 11 and these blocks may be affected by the same or a similar injunction as the one placed on blocks acquired in Bid Round 12. Until this situation is resolved, the expansion of our drilling operations in Brazil may be limited which would harm our business in Brazil.
Pending regulations related to emissions and the impact of any changes in climate could adversely impact our business.
Governments around the world have become increasingly focused on regulating greenhouse gas ("GHG") emissions and addressing the impacts of climate change in some manner. Brazil, Peru and Colombia all have enacted legislation related to GHG emissions. For example, in July 2015, Colombia announced that it will seek to reduce the national emission of greenhouse gases by at least 20% over the next 15 years. Colombia has also passed legislation requiring the country to generate 77% of its energy from renewable resources and reduce deforestation in the Amazon to zero by 2020. Peru and Brazil have passed similar climate change-related measures.
GHG emissions legislation is emerging and is subject to change. For example, on an international level, almost 200 nations agreed on December 12, 2015, to an international climate change agreement in Paris, France, that calls for countries to set their own GHG emission targets and be transparent about the measures each country will use to achieve its GHG emission targets. Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations that limit emissions of GHGs could adversely affect demand for the oil and natural gas that we produce.
Current GHG emissions legislation has not resulted in material compliance costs, however, it is not possible at this time to predict whether proposed legislation or regulations will be adopted, and any such future laws and regulations could result in additional compliance costs or additional operating restrictions. If we are unable to recover a significant level of our costs related to complying with climate change regulatory requirements imposed on us, it could have a material adverse impact on our business, financial condition and results of operations. Further, to the extent financial markets view climate change and GHG emissions as a financial risk, this could negatively impact our cost of or access to capital.
Almost All of Our Cash and Cash Equivalents is Held Outside of Canada and the United States, and if We Determine to, or Are Required to, Repatriate These Funds, We Could Be Subject to Taxes.
At December 31, 2015, 92% of our cash and cash equivalents was held by subsidiaries and partnerships outside of Canada and the United States. This cash is generally not available to fund domestic or head office operations unless funds are repatriated. At this time, we do not intend to repatriate funds, but if we did, we might have to accrue and pay taxes in certain jurisdictions on the distribution of accumulated earnings.
Strategic and Business Relationships Upon Which We May Rely Are Subject to Change, Which May Diminish Our Ability to Conduct Our Operations.
Our ability to successfully bid on and acquire additional properties, to discover reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements will depend on developing and maintaining effective working relationships with industry participants and on our ability to select and evaluate suitable partners and to consummate transactions in a highly competitive environment. These relationships are subject to change and may impair our ability to grow.
To develop our business, we enter into strategic and business relationships, which may take the form of joint ventures with other parties or with local government bodies, or contractual arrangements with other oil and gas companies, including those that supply equipment and other resources that we will use in our business. We also have an active business development program to develop those relationships and foster new relationships. We may not be able to establish these business relationships, or if established, we may choose the wrong partner or we may not be able to maintain them. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to take to fulfill our obligations to these partners or maintain our relationships. If we fail to make the cash calls required by our joint venture partners in the joint ventures we do not operate, we may be required to forfeit our interests in these joint ventures. If our strategic relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.
In cases where we are the operator, our partners may not be able to fulfill their obligations, which would require us to either take on their obligations in addition to our own, or possibly forfeit our rights to the area involved in the joint venture. In addition, despite our partner’s failure to fulfill its obligations, if we elect to terminate such relationship, we may be involved in litigation with such partners or may be required to pay amounts in settlement to avoid litigation despite such partner’s failure to perform. Alternatively, our partners may be able to fulfill their obligations, but will not agree with our proposals as operator of the property. In this case there could be disagreements between joint venture partners that could be costly in terms of dollars, time, deterioration of the partner relationship, and/or our reputation as a reputable operator. These joint venture partners may not comply with their responsibilities or may engage in conduct that could result in liability to us.
In cases where we are not the operator of the joint venture, the success of the projects held under these joint ventures is substantially dependent on our joint venture partners. The operator is responsible for day-to-day operations, safety, environmental compliance and relationships with government and vendors.
We have various work obligations on our blocks that must be fulfilled or we could face penalties, or lose our rights to those blocks if we do not fulfill our work obligations. Failure to fulfill obligations in one block can also have implications on the ability to operate other blocks in the country ranging from delays in government process and procedure to loss of rights in other blocks or in the country as a whole. Failure to meet obligations in one particular country may also have an impact on our ability to operate in others.
Disputes or Uncertainties May Arise in Relation to Our Royalty Obligations
Our production is subject to royalty obligations which may be prescribed by government regulation or by contract. These royalty obligations may be subject to changes in interpretation as business circumstances change.
As discussed in Note 11 to the Consolidated Financial Statements in Part II, Item 8 below, our production from the Costayaco Exploitation Area is subject to the HPR royalty, which applies when cumulative gross production from an Exploitation Area is greater than five MMbbl. The HPR royalty is calculated on the difference between a trigger price defined in the Chaza Contract and the sales price. The ANH has interpreted the Chaza Contract as requiring that the HPR royalty must be paid with respect to all production from the Moqueta Exploitation Area and initiated a noncompliance procedure under the Chaza Contract, which we contested because the Moqueta Exploitation Area and the Costayaco Exploitation Area are separate Exploitation Areas. ANH did not proceed with that noncompliance procedure. We also believe that the evidence shows that the Costayaco and Moqueta Fields are two clearly separate and independent hydrocarbon accumulations. Therefore, it is our view that, pursuant to the terms of the Chaza Contract, the HPR royalty is only to be paid with respect to production from the Moqueta Exploitation Area when the accumulated oil production from that Exploitation Area exceeds five MMbbl. Discussions with the ANH have not resolved this issue and we have initiated the dispute resolution process under the Chaza Contract by filing on January 14, 2013, an arbitration claim before the Center for Arbitration and Conciliation of the Chamber of Commerce of Bogotá, Colombia, seeking a decision that the HPR royalty is not payable until production from the Moqueta Exploitation Area exceeds five MMbbl. We supplemented our claim on May 30, 2013. The ANH has filed a response to the claim seeking a declaration that its interpretation is correct and a counterclaim seeking, amongst other remedies, declarations that we breached the Chaza Contract by not paying the disputed HPR royalty, that the amount of the alleged HPR royalty that is payable, and that the Chaza Contract be terminated. We filed a response to the ANH's counterclaim and filed our comments on the ANH defense to our claim. The ANH filed an amended counterclaim and we filed a response to the ANH's amended counterclaim. In April 2015, total cumulative production from the Moqueta Exploitation Area exceeded 5.0 MMbbl and we commenced paying the HPR royalty. The estimated compensation which would be payable on cumulative production prior to that date if the ANH is successful in the arbitration is $66.3 million plus related interest of $26.5 million. We also disagree with the interest rate that the ANH has used in calculating the interest cost. We assert that since the HPR royalty is denominated in the U.S. dollar, the contract requires the interest rate to be three-month LIBOR plus 4%, whereas the ANH has applied the highest legally authorized interest rate on Colombian peso liabilities, which during the period of production to date has averaged approximately 29% per annum. At December 31, 2015, based on an interest rate of three-month LIBOR plus 4% related interest would be $6.4 million. At this time no amount has been accrued in the financial statements nor deducted from our reserves for the disputed HPR royalty as we do not consider it probable that a loss will be incurred.
Additionally, the ANH and Gran Tierra are engaged in discussions regarding the interpretation of whether certain transportation and related costs are eligible to be deducted in the calculation of the HPR royalty. Discussions with the ANH are ongoing. Based on our understanding of the ANH's position, the estimated compensation which would be payable if the ANH’s interpretation is correct could be up to $44.8 million as at December 31, 2015. At this time no amount has been accrued in the financial statements as we do not consider it probable that a loss will be incurred.
Maintaining Good Community Relationships and Being a Good Corporate Citizen May Be Costly and Difficult to Manage.
Our operations have a significant effect on the areas in which we operate. Maintaining good community relationships is an essential aspect of operating in the oil and gas industry. Communities have demonstrated an ability and willingness to halt operations or delay approvals.
To enjoy the support and trust of local populations and governments, we must demonstrate a commitment to: providing local employment, training and business opportunities; a high level of environmental performance; open and transparent communication; a willingness to discuss and address community issues including community development investments that are carefully selected, not unduly costly and bring lasting social and economic benefits to the community and the area. Improper
management of these relationships could lead to a delay in operations, loss of license or major impact to our reputation in these communities, which could adversely affect our business.
Competition in Obtaining Rights to Explore and Develop Oil and Gas Reserves and to Market Our Production May Impair Our Business.
The oil and gas industry is highly competitive. Other oil and gas companies will compete with us by bidding for exploration and production licenses and other properties and services we will need to operate our business in the countries in which we expect to operate. Additionally, other companies engaged in our line of business may compete with us from time to time in obtaining capital from investors. Competitors include larger companies, which, in particular, may have access to greater resources than us, may be more successful in the recruitment and retention of qualified employees and may conduct their own refining and petroleum marketing operations, which may give them a competitive advantage. In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. In the event that we do not succeed in negotiating additional property acquisitions, our future prospects will likely be substantially limited, and our financial condition and results of operations may deteriorate.
Our Business May Suffer if We do Not Attract and Retain Talented Personnel.
Our success will depend in large measure on the abilities, expertise, judgment, discretion, integrity and good faith of our executive team and other personnel in conducting our business. The loss of any of these individuals or our inability to attract suitably qualified individuals to replace any of them could materially adversely impact our business.
Our success depends on the ability of our management and employees to interpret market and geological data successfully and to interpret and respond to economic, market and other business conditions to locate and adopt appropriate investment opportunities, monitor such investments and ultimately, if required, successfully divest such investments. Further, our key personnel may not continue their association or employment with us and we may not be able to find replacement personnel with comparable skills. If we are unable to attract and retain key personnel, our business may be adversely affected.
The Acquisitions of Petroamerica and PGC May Not Generate the Results Expected and Could be Difficult to Integrate.
In January 2016, we acquired all of the issued and outstanding shares of Petroamerica and PGC. There can be no assurance that these acquisitions will generate the expected returns and other projected results we anticipate. For example, we may not be able to achieve the anticipated synergies of the acquisitions, including expected increases in revenue and cost savings. If we fail to effectively integrate Petroamerica and PGC, our business and financial results may be adversely affected.
Foreign Currency Exchange Rate Volatility May Affect Our Financial Results.
We expect to sell our oil and natural gas production under agreements that will be denominated in U.S. dollars. Many of the operational and other expenses we incur will be paid in the local currency of the country where we perform our operations. Our income taxes in Colombia are paid in Colombian pesos. As a result, we are exposed to translation risk when local currency financial statements are translated to U.S. dollars, our functional currency. We are also exposed to transaction risk on settlement of payables and receivables denominated in foreign currency. Between January 1, 2014 and February 23, 2016, exchange rates between the Colombian peso and U.S. dollar have varied between 1,844 pesos to one U.S. dollar to 3,440 pesos to one U.S. dollar, a fluctuation of approximately 87%. Production in Brazil is invoiced and paid in Brazilian Reals. Between January 1, 2014 and February 23, 2016, the exchange rate of the Brazilian Real has varied between 2.19 Reals to one U.S. dollar to 4.18 Reals to the U.S. dollar, a variance of 91%. Current and deferred tax liabilities in Colombia are denominated in Colombian pesos and the Colombian peso weakened by 32% against the U.S. dollar in the year ended December 31, 2015, resulting in a foreign exchange gain.
Our Operations Involve Substantial Costs and Are Subject to Certain Risks Because the Oil and Gas Industries in the Countries in Which We Operate Are Less Developed.
The oil and gas industry in South America is not as efficient or developed as the oil and gas industry in North America. As a result, our exploration and development activities may take longer to complete and may be more expensive than similar operations in North America. The availability of technical expertise, specific equipment and supplies may be more limited than in North America. We expect that such factors will subject our international operations to economic and operating risks that may not be experienced in North American operations.
Further, we operate in remote areas and may rely on helicopter, boats or other transportation methods. Some of these transport methods may result in increased levels of risk and could lead to operational delays which could effect our ability to add to our reserve base and/or produce oil, serious injury or loss of life and could have a significant impact on our reputation or cash flow. Additionally, some of this equipment is specialized and may be difficult to obtain in our areas of operations, which could hamper or delay operations, and could increase the cost of those operations.
Exchange Controls and New Taxes Could Materially Affect Our Ability to Fund Our Operations and Realize Profits from Our Foreign Operations.
Foreign operations may require funding if their cash requirements exceed operating cash flow. To the extent that funding is required, there may be exchange controls limiting such funding or adverse tax consequences associated with such funding. In addition, taxes and exchange controls may affect the dividends that we receive from foreign subsidiaries.
The government in Brazil requires us to register funds that enter and exit the country with the central bank. In Brazil and Colombia, all transactions must be carried out in the local currency of the country. Exchange controls may prevent us from transferring funds abroad.
In Colombia, we participate in a special exchange regime, which allows us to receive revenue in U. S. dollars offshore. This regime gives us flexibility to determine the currency in which we receive our revenues, rather than to be restricted to Colombian pesos if received in Colombia, but also limits the ways in which we are able to fund our operations in Colombia. As such, this could cause us to employ funding strategies for our Colombian operations that are not as tax efficient as might otherwise be possible if we did not participate in the special exchange regime.
Tax law changes can impact the after tax profits available for expatriation. For example, in the fourth quarter of 2014 the Colombian government approved tax legislation increasing the rate of tax applicable to ordinary income from 34% in 2014 to 39% for 2015, 40% for 2016, 42% for 2017 and 43% for 2018. In the same legislation, the Colombian government also instituted a new “wealth tax” payable on the net equity of our Colombia business units at a rate of 1.15% for 2015, 1% for 2016 and 0.4% for 2017.
Negative Political Developments in Peru May Negatively Affect our Proposed Operations.
Peru held a national election in June 2011 after which a new political regime was elected on a left-populist platform. The government has said that the past decade prioritized the strengthening of democracy with economic growth, while the current government will enhance social inclusion to benefit the neediest. This political regime may adopt new policies, laws and regulations that are more hostile toward foreign investment which may result in the imposition of additional taxes, the adoption of regulations that limit price increases, termination of contract rights, or the expropriation of foreign-owned assets. Such actions by the elected political regime could limit the amount of our future revenue in that country and affect our results of operations. The next general elections in Peru will be held on April 10, 2016 and the current incumbent President, Ollanta Humala, will not seek to run again for presidency in this election.
Guerrilla Activity in Peru Could Disrupt or Delay Our Operations and We Are Concerned About Safeguarding Our Operations and Personnel in Peru.
The Shining Path Guerilla group has been active in Peru since the early 1980’s and, at one point, was active throughout the country. Recently, the group’s activity has been confined to small areas of Peru and operations have been hampered by the capture of many high profile leaders and membership has fallen dramatically. During April 2012, 30 people working on the Camisea natural gas project in central Peru were kidnapped. Most of the workers were released after a short period of time, and the remainder were freed within a few days. The kidnapping was attributed to the Shining Path Guerilla group. Camisea is a very large, high profile project in an area where the group continues to be active. Our operations in Peru are in a different region, with no known activity by the group. Other groups may be active in other areas of the country and possibly our operational areas. Recently there have been security incidents and incidents of social unrest in and around our operating areas, including Block 107, and activities in the areas surrounding the block are to be considered with caution due to the eradication of illegal farms by the government.
We May Not Be Able to Effectively Manage Our Growth, Which May Harm Our Profitability.
Our strategy envisions continually expanding our business, both organically and through acquisition of other properties and companies. If we fail to effectively manage our growth or integrate successfully our acquisitions, our financial results could be adversely affected. Growth may place a strain on our management systems and resources. Integration efforts place a significant
burden on our management and internal resources. The diversion of management attention and any difficulties encountered in the integration process could harm our business, financial condition and results of operations. In addition, we must continue to refine and expand our business development capabilities, our systems and processes and our access to financing sources. As we grow, we must continue to hire, train, supervise and manage new or acquired employees. We may not be able to:
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• | expand our systems effectively or efficiently or in a timely manner; |
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• | allocate our human resources optimally; |
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• | identify and hire qualified employees or retain valued employees; or |
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• | incorporate effectively the components of any business that we may acquire in our effort to achieve growth. If we are unable to manage our growth and our operations our financial results could be adversely affected by inefficiencies, which could diminish our profitability. |
The United States Government May Impose Economic or Trade Sanctions on Colombia That Could Result In a Significant Loss to Us.
Colombia is among several nations whose eligibility to receive foreign aid from the United States is dependent on its progress in stemming the production and transit of illegal drugs, which is subject to an annual review by the President of the United States. Although Colombia is currently eligible for such aid, Colombia may not remain eligible in the future. A finding by the President that Colombia has failed demonstrably to meet its obligations under international counternarcotics agreements may result in any of the following:
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• | all bilateral aid, except anti-narcotics and humanitarian aid, would be suspended; |
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• | the Export-Import Bank of the United States and the Overseas Private Investment Corporation would not approve financing for new projects in Colombia; |
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• | United States representatives at multilateral lending institutions would be required to vote against all loan requests from Colombia, although such votes would not constitute vetoes; and |
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• | the President of the United States and Congress would retain the right to apply future trade sanctions. |
Each of these consequences could result in adverse economic consequences in Colombia and could further heighten the political and economic risks associated with our operations there. Any changes in the holders of significant government offices could have adverse consequences on our relationship with ANH and Ecopetrol and the Colombian government’s ability to control guerrilla activities and could exacerbate the factors relating to our foreign operations. Any sanctions imposed on Colombia by the United States government could threaten our ability to obtain necessary financing to develop the Colombian properties or cause Colombia to retaliate against us, including by nationalizing our Colombian assets.
Accordingly, the imposition of the foregoing economic and trade sanctions on Colombia would likely result in a substantial loss and a decrease in the price of shares of our Common Stock. The United States may impose sanctions on Colombia in the future, and we cannot predict the effect in Colombia that these sanctions might cause.
We Are Subject to the U.S. Foreign Corrupt Practices Act, a Violation of Which Could Adversely Affect Our Business.
The U.S. Foreign Corrupt Practices Act ("FCPA") and similar anti-bribery laws in other jurisdictions prohibit corporations and individuals, including us, our subsidiaries and affiliates, partners, and our employees, contractors, and agents working on behalf, from making improper payments to government officials and certain other individuals and organizations for the purpose of obtaining or retaining business or engaging in certain accounting practices. We do business and may do future business in countries in which we may face, directly or indirectly, corrupt demands by officials, tribal or insurgent organizations, international organizations, or private entities. As a result, we face the risk of unauthorized payments or offers of payments by employees, contractors agents, and partners of ours or our subsidiaries or affiliates, even though these parties are not always subject to our control or direction. It is our policy to implement compliance procedures to prohibit these practices. However, our existing safeguards and any future improvements may prove to be less than effective or may not be followed, and our employees, contractors, agents, and partners may engage in illegal conduct for which we might be held responsible. Also, the FCPA contains certain accounting standards which obligate us to maintain accurate and complete books and records and a system of effective internal controls. These accounting provisions are very broad and a violation can occur even if there is no
evidence of a bribe or unauthorized payment. The U.S. government is actively investigating and enforcing the FCPA and similar laws against companies and individuals. A violation of any of these laws, even if prohibited by our policies, may result in criminal or civil sanctions or other penalties (including profit disgorgement), could disrupt our business and could have a material adverse effect on our business. Actual or alleged violations could damage our reputation, be expensive to investigate and defend, and impair our ability to do business. A number of countries, including Canada and Brazil, have strengthened their anti-corruption legislation and enforcement. These laws prohibit both domestic and international bribery. There is a risk that an act of corruption can result in a violation of not only the FCPA, but also the laws of several other countries, and expose us to investigation and enforcement outside of the U.S.
Our Business Could Be Negatively Impacted by Security Threats, Including Cybersecurity Threats as Well as Other Disasters, and Related Disruptions.
Our business processes depend on the availability, capacity, reliability and security of our information technology infrastructure and our ability to expand and continually update this infrastructure in response to our changing needs. It is critical to our business that our facilities and infrastructure remain secure. We cannot guarantee that measures taken to defend against cybersecurity threats will be sufficient for this purpose. The ability of the information technology function to support our business in the event of a security breach or a disaster such as fire or flood and our ability to recover key systems and information from unexpected interruptions cannot be fully tested and there is a risk that, if such an event actually occurs, we may not be able to address immediately the repercussions of the breach or disaster. In that event, key information and systems may be unavailable for a number of days or weeks, leading to our inability to conduct business or perform some business processes in a timely manner. We have implemented strategies to mitigate impacts from these types of events.
Our employees have been and will continue to be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate information or to introduce viruses or other malware through “trojan horse” programs to our computers. These emails appear to be legitimate emails sent by us but direct recipients to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information through email or download malware. Despite our efforts to mitigate “spoof” and “phishing” emails through education, “spoof” and “phishing” activities remain a serious problem that may damage our information technology infrastructure.
Risks Related to Our Industry
Unless We Are Able to Replace Our Reserves, and Develop and Manage Oil and Gas Reserves and Production on an Economically Viable Basis, Our Reserves, Production and Cash Flows May Decline as a Result.
Our future success depends on our ability to find, develop and acquire additional oil and gas reserves that are economically recoverable. Without successful exploration, development or acquisition activities, our reserves and production will decline. We may not be able to find, develop or acquire additional reserves at acceptable costs.
To the extent that we succeed in discovering oil and/or natural gas, reserves may not be capable of production levels we project or in sufficient quantities to be commercially viable. On a long-term basis, our viability depends on our ability to find or acquire, develop and commercially produce additional oil and gas reserves. Without the addition of reserves through exploration, acquisition or development activities, our reserves and production will decline over time as reserves are produced. Our future reserves will depend not only on our ability to develop and effectively manage then-existing properties, but also on our ability to identify and acquire additional suitable producing properties or prospects, to find markets for the oil and natural gas we develop and to effectively distribute our production into our markets. Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-downs of connected wells resulting from extreme weather conditions, problems in storage and distribution and adverse geological and technical conditions. While we will endeavor to effectively manage these conditions, we may not be able to do so optimally, and we will not be able to eliminate them completely in any case. Therefore, these conditions could diminish our revenue and cash flow levels and result in the impairment of our oil and natural gas interests.
Estimates of probable and possible reserves are inherently imprecise. When producing an estimate of the amount of oil that is recoverable from a particular reservoir, probable reserves are those additional reserves that are less certain to be recovered than
proved reserves but which, together with proved reserves, are as likely as not to be recovered. Possible reserves are even less certain and generally require only a 10% or greater probability of being recovered. All categories of reserves are continually subject to revisions based on production history, results of additional exploration and development, price changes and other factors. Estimates of probable and possible reserves are by their nature much more speculative than estimates of proved reserves and are subject to greater uncertainties, and accordingly the likelihood of recovering those reserves is subject to substantially greater risk.
In addition, the quantity and value of our reserves directly effects our ability to access certain kinds of external financing that uses our reserves as collateral. Low oil prices diminish the value of our oil reserves, thus diminishing not only current cash flow, but debt capacity and access to other forms of capital as well. This could impair our ability to carry out the exploration and development activity required to replace our reserves.
Prices and Markets for Oil and Natural Gas Are Unpredictable and Tend to Fluctuate Significantly, Which Could Reduce Our Profitability, Growth and Value.
Oil and natural gas are commodities whose prices are determined based on world demand, supply and other factors, all of which are beyond our control. World prices for oil and natural gas have fluctuated widely in recent years. Spot prices for West Texas Intermediate ("WTI") declined from approximately $106 per bbl in June 2014 to less than $30 per bbl in January 2016. The spot price for Brent oil declined from approximately $115 per bbl in June 2014 to less than $30 per bbl in January 2016.
Given the current economic environment and unstable conditions in the Middle East, North Africa, China, and Eastern Europe and the current supply of oil in world markets, the oil price environment is unpredictable and unstable. We expect that prices will fluctuate in the future. Price fluctuations will have a significant impact upon our revenue, the return from our oil and gas reserves and on our financial condition generally. Price fluctuations for oil and natural gas commodities may also impact the investment market for companies engaged in the oil and gas industry. Furthermore, prices which we receive for our oil sales, while based on international oil prices, are established by contract with purchasers with prescribed deductions for transportation and quality differentials. These differentials can change over time and have a detrimental impact on realized prices. Future decreases in the prices of oil and natural gas may have a material adverse effect on our financial condition, the future results of our operations, financing available to us, and quantities of reserves recoverable on an economic basis.
Oil prices in Colombia are related to international market prices, but adjustments that are defined by contracts with offtakers may cause realized prices to be lower or higher than those received in North America. Oil prices in Brazil are defined by contract with the refinery and may be lower or higher than those received in North America.
Our Exploration for Oil and Natural Gas Is Risky and May Not Be Commercially Successful, Impairing Our Ability to Generate Revenues from Our Operations.
Oil and natural gas exploration involves a high degree of risk. These risks are more acute in the early stages of exploration. Our exploration expenditures may not result in new discoveries of oil or natural gas in commercially viable quantities or at a commercially viable cost. It is difficult to project the costs of implementing an exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various drilling conditions, such as over pressured zones and tools lost in the hole, and changes in drilling plans and locations as a result of prior exploratory wells or additional seismic data and interpretations thereof. The target location may be drilled again in the future with a revised drilling plan. If exploration costs exceed our estimates, or if our exploration efforts do not produce results which meet our expectations, our exploration efforts may not be commercially successful, which could adversely impact our ability to generate revenues from our operations. In addition, changes in the price of oil can affect the commercial success of our exploration activity. If the oil price declines drastically, such as it did at the end of 2014 and beginning of 2015, some projects that were previously considered commercially successful may not be at low oil price levels and may be deferred, which means that our short to medium term production and cash flow may be lower than previously anticipated.
If Oil and Natural Gas Prices Decrease, or Our Operating Results are Different Than We Expect, We May Be Required to Take Write-Downs of the Carrying Value of Our Oil and Natural Gas Properties.
We follow the full cost method of accounting for our oil and gas properties. A separate cost center is maintained for expenditures applicable to each country in which we conduct exploration and/or production activities. Under this method, the net book value of properties on a country-by-country basis, less related deferred income taxes, may not exceed a calculated “ceiling”. The ceiling is the estimated after tax future net revenues from proved oil and gas properties, discounted at 10% per year. In calculating discounted future net revenues, oil and natural gas prices are determined using the average price during the 12 months period prior to the ending date of the period covered by the balance sheet, calculated as an unweighted arithmetic average of the first-day-of-the month price for each month within such period for that oil and natural gas. That average price is
then held constant, except for changes which are fixed and determinable by existing contracts. The net book value is compared with the ceiling on a quarterly basis. The excess, if any, of the net book value above the ceiling is required to be written off as an expense. Under full cost accounting rules, any write-off recorded may not be reversed even if higher oil and natural gas prices increase the ceiling applicable to future periods. Future price decreases could result in reductions in the carrying value of such assets and an equivalent charge to earnings. In countries where we do not have proved reserves, dry wells drilled in a period would directly result in an impairment for that period.
We Are Required to Obtain Licenses and Permits to Conduct Our Business and Failure to Obtain These Licenses Could Cause Significant Delays and Expenses That Could Materially Impact Our Business.
We are subject to licensing and permitting requirements relating to exploring and drilling for and development of oil and natural gas, including seismic, environmental and many other operating permits. We may not be able to obtain, sustain or renew such licenses and permits on a timely basis or at all. In addition, environmental and social evaluation demands have increased in Colombia, causing permit processing to take longer than previously experienced in the areas where we operate and, in some areas where we operate, such as the Department of Putumayo, despite the receipt of the proper permits, there are new procedures being utilized by new ethnic communities to make further economic demands on operators to continue to operate in the region, such as the use of the Local Court to obtain a tutela, or writ of protection. These delays and demands are also significantly impacting other industry participants. Regulations and policies relating to these licenses and permits may change, be implemented in a way that we do not currently anticipate or take significantly greater time to obtain. These licenses and permits are subject to numerous requirements, including compliance with the environmental regulations of the local governments. As we are not the operator of all the joint ventures we are currently involved in, we may rely on the operator to obtain all necessary permits and licenses. If we fail to comply with these requirements, we could be prevented from drilling for oil and natural gas, and we could be subject to civil or criminal liability or fines. Revocation or suspension of our environmental and operating permits could have a material adverse effect on our business, financial condition and results of operations.
Estimates of Oil and Natural Gas Reserves That We Make May Be Inaccurate and Our Actual Revenues May Be Lower and Our Operating Expenses May Be Higher Than Our Financial Projections.
We make estimates of oil and natural gas reserves, upon which we will base our financial projections. We make these reserve estimates using various assumptions, including assumptions as to oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Some of these assumptions are inherently subjective, and the accuracy of our reserve estimates relies in part on the ability of our management team, engineers and other advisors to make accurate assumptions. Wells that are drilled may not achieve the results expected from interpretation of geological data. Economic factors beyond our control, such as world oil prices, interest rates and exchange rates, will also impact the value of our reserves. The process of estimating oil and gas reserves is complex, and will require us to use significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each property. As a result, our reserve estimates will be inherently imprecise. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves may vary substantially from those we estimate. If actual production results vary substantially from our reserve estimates, this could materially reduce our revenues and result in the impairment of our oil and natural gas interests.
Exploration, development, production (including transportation and workover costs), marketing (including distribution costs) and regulatory compliance costs (including taxes) will substantially impact the net revenues we derive from the oil and gas that we produce. These costs are subject to fluctuations and variation in different locales in which we operate, and we may not be able to predict or control these costs. If these costs exceed our expectations, this may adversely affect our results of operations. In addition, we may not be able to earn net revenue at our predicted levels, which may impact our ability to satisfy our obligations.
Our Inability to Obtain Necessary Facilities and/or Equipment Could Hamper Our Operations.
Oil and natural gas exploration and development activities are dependent on the availability of drilling and related equipment, transportation, power and technical support in the particular areas where these activities will be conducted, and our access to these facilities may be limited. To the extent that we conduct our activities in remote areas, needed facilities or equipment may not be proximate to our operations, which will increase our expenses. For example, our development and exploration projects in Peru are in remote areas that require barge and helicopter transportation which adds dramatically to the cost of these operations. Demand for such limited equipment and other facilities or access restrictions may affect the availability of such equipment to us and may delay exploration and development activities. The quality and reliability of necessary facilities or equipment may also be unpredictable and we may be required to make efforts to standardize our facilities, which may entail
unanticipated costs and delays. Shortages and/or the unavailability of necessary equipment, transportation or other facilities will impair our activities, either by delaying our activities, increasing our costs or otherwise.
Decommissioning Costs Are Unknown and May Be Substantial; Unplanned Costs Could Divert Resources from Other Projects.
We are responsible for costs associated with abandoning and reclaiming some of the wells, facilities and pipelines which we use for production of oil and gas reserves. Abandonment and reclamation of these facilities and the costs associated therewith is often referred to as “decommissioning.” We have determined that we require a reserve account for these potential costs in respect of our current properties and facilities at this time, and have booked such reserve on our financial statements. If decommissioning is required before economic depletion of our properties or if our estimates of the costs of decommissioning exceed the value of the reserves remaining at any particular time to cover such decommissioning costs, we may have to draw on funds from other sources to satisfy such costs. The use of other funds to satisfy decommissioning costs could impair our ability to focus capital investment in other areas of our business.
Environmental Risks May Adversely Affect Our Business.
All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of international conventions and federal, provincial and municipal laws and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances used or produced in association with oil and gas operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner likely to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to foreign governments and third parties and may require us to incur costs to remedy such discharge. The application of environmental laws to our business may force us to curtail our production as a result of restrictions imposed by government regulators, or increase the costs of our production, development or exploration activities because of increased compliance costs.
Penalties We May Incur Could Impair Our Business.
Our exploration, development, production and marketing operations are regulated extensively under foreign, federal, state and local laws and regulations. Under these laws and regulations, we could be held liable for personal injuries, property damage, site clean-up and restoration obligations or costs and other damages and liabilities. We may also be required to take corrective actions, such as installing additional safety or environmental equipment, which could require us to make significant capital expenditures. Failure to comply with these laws and regulations may also result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties, including the assessment of natural resource damages. We could be required to indemnify our employees in connection with any expenses or liabilities that they may incur individually in connection with regulatory action against them. As a result of these laws and regulations, our future business prospects could deteriorate and our profitability could be impaired by costs of compliance, remedy or indemnification of our employees, reducing our profitability.
Policies, Procedures and Systems to Safeguard Employee Health, Safety and Security May Not Be Adequate.
Oil and natural gas exploration and production is dangerous. Detailed and specialized policies, procedures and systems are required to safeguard employee health, safety and security. We have undertaken to implement what we believe to be best practices for employee health, safety and security; however, if these policies, procedures and systems are not adequate, or employees do not receive adequate training, the consequences can be severe including serious injury or loss of life, which could impair our operations and cause us to incur significant legal liability.
Our Insurance May Be Inadequate to Cover Liabilities We May Incur.
Our involvement in the exploration for and development of oil and natural gas properties may result in our becoming subject to liability for pollution, blowouts, property damage, personal injury or other hazards. Our insurance has limitations on liability that may not be sufficient to cover the full extent of such liabilities. In addition, such risks may not in all circumstances be insurable or, in certain circumstances, we may choose not to obtain insurance to protect against specific risks due to the high premiums associated with such insurance or for other reasons. The payment of such uninsured liabilities would reduce the funds available to us. If we suffer a significant event or occurrence that is not fully insured, or if the insurer of such event is not
solvent, we could be required to divert funds from capital investment or other uses towards covering our liability for such events.
Challenges to Our Properties May Impact Our Financial Condition.
Title to oil and natural gas interests is often not capable of conclusive determination without incurring substantial expense. While we intend to make appropriate inquiries into the title of properties and other development rights we acquire, title defects may exist. In addition, we may be unable to obtain adequate insurance for title defects, on a commercially reasonable basis or at all. If title defects do exist, it is possible that we may lose all or a portion of our right, title and interest in and to the properties to which the title defects relate.
Furthermore, applicable governments may revoke or unfavorably alter the conditions of exploration and development authorizations that we procure, or third parties may challenge any exploration and development authorizations we procure. Such rights or additional rights we apply for may not be granted or renewed on terms satisfactory to us.
If our property rights are reduced, whether by governmental action or third party challenges, our ability to conduct our exploration, development and production may be impaired. See the risk factor "Disputes or Uncertainties May Arise in Relation to Our Royalty Obligations" for a description of our dispute with the ANH regarding royalties payable on our Chaza Block and the resulting challenge to our contract for that block.
We Will Rely on Technology to Conduct Our Business and Our Technology Could Become Ineffective or Obsolete.
We rely on technology, including geographic and seismic analysis techniques and economic models, to develop our reserve estimates and to guide our exploration and development and production activities. We will be required to continually enhance and update our technology to maintain its efficacy and to avoid obsolescence. The costs of doing so may be substantial, and may be higher than the costs that we anticipate for technology maintenance and development. If we are unable to maintain the efficacy of our technology, our ability to manage our business and to compete may be impaired. Further, even if we are able to maintain technical effectiveness, our technology may not be the most efficient means of reaching our objectives, in which case we may incur higher operating costs than we would were our technology more efficient.
Risks Related to Our Common Stock
The Market Price of Our Common Stock May Be Highly Volatile and Subject to Wide Fluctuations.
The market price of shares of our Common Stock may be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including but not limited to:
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• | dilution caused by our issuance of additional shares of Common Stock and other forms of equity securities, which we expect to make in connection with acquisitions of other companies or assets; |
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• | announcements of new acquisitions, reserve discoveries or other business initiatives by our competitors; |
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• | fluctuations in revenue from our oil and natural gas business; |
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• | changes in the market and/or WTI or Brent price for oil and natural gas commodities and/or in the capital markets generally, or under our credit agreement; |
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• | changes in the demand for oil and natural gas, including changes resulting from the introduction or expansion of alternative fuels; |
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• | changes in the social, political and/or legal climate in the regions in which we will operate; |
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• | changes in the valuation of similarly situated companies, both in our industry and in other industries; |
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• | changes in analysts’ estimates affecting us, our competitors and/or our industry; |
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• | changes in the accounting methods used in or otherwise affecting our industry; |
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• | changes in independent reserve estimates related to our oil and gas properties; |
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• | announcements of technological innovations or new products available to the oil and natural gas industry; |
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• | announcements by relevant governments pertaining to incentives for alternative energy development programs; |
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• | fluctuations in interest rates, exchange rates and the availability of capital in the capital markets; and |
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• | significant sales of shares of our Common Stock, including sales by future investors in future offerings we expect to make to raise additional capital. |
In addition, the market price of shares of our Common Stock could be subject to wide fluctuations in response to various factors, which could include the following, among others:
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• | quarterly variations in our revenues and operating expenses; and |
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• | additions and departures of key personnel. |
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• | updated reserve estimates by independent parties. |
These and other factors are largely beyond our control, and the impact of these risks, singularly or in the aggregate, may result in material adverse changes to the market price of shares of our Common Stock and/or our results of operations and financial condition.
We do Not Expect to Pay Dividends in the Foreseeable Future.
We do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their shares of Common Stock, and shareholders may be unable to sell their shares on favorable terms or at all. Investors cannot be assured of a positive return on investment or that they will not lose the entire amount of their investment in shares of our Common Stock.
Item 1B. Unresolved Staff Comments
None.
Item 3. Legal Proceedings
As discussed above (see “Royalties”, above, in Item 1), Gran Tierra’s production from the Costayaco Exploitation Area is subject to the HPR royalty, which applies when cumulative gross production from an Exploitation Area is greater than five MMbbl. The HPR royalty is calculated on the difference between a trigger price defined in the Chaza Contract and the sales price. The ANH has interpreted the Chaza Contract as requiring that the HPR royalty must be paid with respect to all production from the Moqueta Exploitation Area and initiated a noncompliance procedure under the Chaza Contract, which was contested by Gran Tierra because the Moqueta Exploitation Area and the Costayaco Exploitation Area are separate Exploitation Areas. ANH did not proceed with that noncompliance procedure. Gran Tierra also believes that the evidence shows that the Costayaco and Moqueta Fields are two clearly separate and independent hydrocarbon accumulations. Therefore, it is Gran Tierra’s view that, pursuant to the terms of the Chaza Contract, the HPR royalty is only to be paid with respect to production from the Moqueta Exploitation Area when the accumulated oil production from that Exploitation Area exceeds five MMbbl. Discussions with the ANH have not resolved this issue and Gran Tierra has initiated the dispute resolution process under the Chaza Contract by filing on January 14, 2013, an arbitration claim before the Center for Arbitration and Conciliation of the Chamber of Commerce of Bogotá, Colombia, seeking a decision that the HPR royalty is not payable until production from the Moqueta Exploitation Area exceeds five MMbbl. Gran Tierra supplemented its claim on May 30, 2013. The ANH has filed a response to the claim seeking a declaration that its interpretation is correct and a counterclaim seeking, amongst other remedies, declarations that Gran Tierra breached the Chaza Contract by not paying the disputed HPR royalty, that the amount of the alleged HPR royalty that is payable, and that the Chaza Contract be terminated. Gran Tierra filed a response to the ANH's counterclaim and filed its comments on the ANH defense to Gran Tierra's claim. The ANH filed an amended counterclaim and Gran Tierra filed a response to the ANH's amended counterclaim. On April 30, 2015, total cumulative production from the Moqueta Exploitation Area reached 5.0 MMbbl and Gran Tierra commenced paying the HPR royalty payable on production over that threshold. The estimated compensation which would be payable on cumulative production if the ANH's claims are accepted in the arbitration is $66.3 million plus related interest of $26.5 million. We also disagree with the interest rate that the ANH has used in calculating the interest cost. We assert that since the HPR royalty is denominated in the U.S. dollar, the
contract requires the interest rate to be three-month LIBOR plus 4%, whereas the ANH has applied the highest legally authorized interest rate on Colombian peso liabilities, which during the period of production to date has averaged approximately 29% per annum. At December 31, 2015, based on an interest rate of three-month LIBOR plus 4% related interest would be $6.4 million. At this time, no amount has been accrued in the financial statements nor deducted from our reserves for the disputed HPR royalty as Gran Tierra does not consider it probable that a loss will be incurred.
Additionally, the ANH and Gran Tierra are engaged in discussions regarding the interpretation of whether certain transportation and related costs are eligible to be deducted in the calculation of the HPR royalty. Discussions with the ANH are ongoing. Based on our understanding of the ANH's position, the estimated compensation which would be payable if the ANH’s interpretation is correct could be up to $44.8 million as at December 31, 2015. At this time no amount has been accrued in the financial statements as Gran Tierra does not consider it probable that a loss will be incurred.
We have several other lawsuits and claims pending. Although the outcome of these lawsuits and disputes cannot be predicted with certainty, we believe the resolution of these matters would not have a material adverse effect on our consolidated financial position, results of operations or cash flows. We record costs as they are incurred or become probable and determinable.
Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of the Registrant
Set forth below is information regarding our executive officers as of February 23, 2016.
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Name | | Age | | Position |
Gary S. Guidry | | 60 | | President and Chief Executive Officer, Director |
Ryan Ellson | | 40 | | Chief Financial Officer |
Adrian Coral | | 42 | | President, Gran Tierra Energy Colombia |
James Evans | | 50 | | Vice President, Corporate Services |
David Hardy | | 61 | | Vice-President, Legal, Secretary and General Counsel |
Alan Johnson | | 44 | | Vice President, Asset Management |
Lawrence West | | 59 | | Vice President, Exploration |
Gary Guidry, Chief Executive Officer and President. Mr. Guidry has been Gran Tierra's Chief Executive Officer and President since May 7, 2015. Mr. Guidry was the Chief Executive Officer of Onza Energy Inc. from January 2014, until May 2015. From July 2011 to July 2014, Mr. Guidry served as President and Chief Executive Officer of Caracal Energy Inc. Mr. Guidry also served as President and CEO of Orion Oil & Gas Corp. from October 2009 to July 2011, Tanganyika Oil Corp. from May 2005 to January 2009, and Calpine Natural Gas Trust from October 2003 to February 2005. As chief executive officer of these companies, Mr. Guidry was responsible for overseeing all aspects of the respective company’s business. Mr. Guidry currently sits on the boards of Africa Oil Corp. (since April 2008) and Shamaran Petroleum Corp. (since February 2007), where he also serves as a member of each company’s Audit Committee. From September 2010 to October 2011, Mr. Guidry also served on the Board of Zodiac Exploration Corp., and from October 2009 to March 2014, he served on the board of TransGlobe Energy Corp. Prior to these positions, Mr. Guidry served as Senior Vice President and subsequently President of Alberta Energy Company International, and President and General Manager of Canadian Occidental Petroleum’s Nigerian operations. Mr. Guidry has directed exploration and production operations in Yemen, Syria and Egypt and has worked for oil and gas companies around the world in the U.S., Colombia, Ecuador, Venezuela, Argentina and Oman. Mr. Guidry is an Alberta-registered professional engineer (P. Eng.) and holds a B.Sc. in petroleum engineering from Texas A&M University.
Ryan Ellson, Chief Financial Officer. Mr. Ellson has been Gran Tierra's Chief Financial Officer since May 2015. Mr. Ellson has 15 years of experience in a broad range of international corporate finance and accounting roles. Mr. Ellson was CFO of Onza Energy Inc. from January 2015 to May 2015. From July 2014 until December 2014 Mr. Ellson was Head of Finance for Glencore E&P (Canada) and prior thereto Vice President, Finance at Caracal Energy, a London Stock Exchange listed company with operations in Chad, Africa from August 2011 until July 2014. Prior to Caracal, Mr. Ellson was Vice President of Finance at Sea Dragon Energy from April 2010 until August 2011. In these positions, Mr. Ellson oversaw financial and accounting functions, implemented and oversaw internal financial controls, secured a reserve based lending facility and was involved in multiple capital raises. Mr. Ellson has held management and executive positions with companies operating in Chad, Egypt, India and Canada. Mr. Ellson is a Chartered Accountant and holds a Bachelor of Commerce and a Master of Professional Accounting from the University of Saskatchewan.
Adrian Coral, President, Gran Tierra Energy Colombia. Mr. Coral joined Gran Tierra in August 2006 as an operations engineer in Gran Tierra Energy Colombia, Ltd., and served in that capacity until February 2007. Mr. Coral rejoined Gran Tierra in August 2008 as Operations Director of Gran Tierra Energy Colombia, Ltd. He served in that capacity until September 2011, when he was promoted to Production Manager of Gran Tierra Energy Colombia, Ltd. Mr. Coral was promoted to Senior Operations Manager of Gran Tierra Energy Colombia, Ltd. in April 2013. On August 1, 2014, Mr. Coral was promoted to President, Gran Tierra Energy Colombia. Mr. Coral has a total of 18 years of experience as an engineer or manager in the oil and gas industry. Mr. Coral graduated from the Universidad de América – Bogotá D.C. with a degree as a Petroleum Engineer and from the School of Business Management – Bogotá D.C with degree in Project Management.
James Evans, Vice President, Corporate Services. Mr. Evans has been Gran Tierra's Vice President, Corporate Services, since May 2015. Mr. Evans has over 20 years of experience including working the last 10 years in the international oil and gas industry. Most recently, Mr. Evans was the Head of Compliance & Corporate Services for Glencore E&P (Canada) from July 2014 to December 2014, and prior thereto Vice President of Compliance & Corporate Services at Caracal Energy from July
2011 to June 2014, in each case where he oversaw the execution of corporate strategy and goals, developed and implemented a robust corporate compliance program, and managed all aspects of IT, document control, security and administration. Mr. Evans also managed the recruitment, training and retention of staff in both Calgary and Chad. He oversaw the growth of Caracal Energy from seven employees to in excess of 400 as Caracal Energy exceeded 20,000 barrels of oil per day at the time of sale to Glencore. Prior to Caracal, Mr. Evans held senior management and executive positions at Orion Oil and Gas and Tanganyika Oil, with operating experience in Egypt, Syria and Canada. Mr. Evans is a Certified General Accountant and holds a Bachelor of Commerce degree from the University of Calgary.
David Hardy, Vice President, Legal, and Secretary and General Counsel. Mr. Hardy joined Gran Tierra as General Counsel, Vice President Legal and Secretary on March 1, 2010. He has more than 25 years’ experience in the legal profession. Before joining Gran Tierra, he worked for Encana Corporation and for Encana Corporation’s predecessor, Pan Canadian, from 2000 through 2009 where he held various positions, including: Vice President Divisional Legal Services, Integrated Oil and Canadian Plains Divisions; Vice President Regulatory Services, Corporate Relations Division; and Associate General Counsel, Offshore and International Division. For four of his eight years in the Offshore and International Division of Encana, Mr. Hardy led the Legal and Commercial Negotiations Group, where he was responsible for providing strategic legal, commercial and negotiation advice and support to the offshore and international business units. This included dealing with new venture activities and operational, joint venture and host government issues relating to projects in various countries, including Australia, Brazil, Chad, Libya, Oman, Qatar and Yemen. Prior to joining Encana, Mr. Hardy spent over 10 years in private practice and was a partner in a law firm in Calgary, Alberta. He holds a Juris Doctor Degree from the University of Calgary (converted from an LL.B Degree in 2011) and is a member of the Law Society of Alberta and the Association of International Petroleum Negotiators.
Alan Johnson, Vice President, Asset Management. Mr. Johnson has been Gran Tierra's Vice President, Asset Management, since May 2015. Mr. Johnson is a professional engineer with more than 20 years experience working internationally in the oil and gas industry. His experience includes varied technical, managerial and executive roles in drilling, production, reservoir, reserves, corporate planning and asset management. Most recently Mr. Johnson was Head of Asset Management for Glencore E&P (Canada) from April 2014 to April 2015, where he was responsible for all development activities in Chad and prior thereto Director of Asset Management at Caracal Energy from August 2011 to March 2014, where he was responsible for development activities in the Doba basin in Chad, Africa. Mr. Johnson was instrumental in developing oil and gas assets in remote areas of southern Chad, achieving first production in less than 18 months. Mr. Johnson started his E&P career with Shell International in the Dutch North Sea. He then held positions of increasing responsibility with Shell Canada, APF Energy, Rockyview Energy, Delphi Energy and BG Australia. Mr. Johnson graduated with a 1st Class B. Eng (Hons) from Heriot Watt University in Scotland. Mr. Johnson is a Chartered Engineer in the UK and a Professional Engineer in Alberta.
Lawrence West. Vice President, Exploration. Mr. West has been Gran Tierra's Vice President, Exploration, since May 2015. Mr. West has thirty-five years of experience as an executive, explorationist, and geologist. Most recently, Mr. West was Vice President, Exploration at Caracal Energy from July 2011 to June 2014. Mr. West built a multi-disciplinary team to assess resources and grow reserves in the interior rift basins within Chad and led a successful exploration program. During his tenure he successfully executed two large 2D/3D seismic shoots in remote frontier basins, on time and on budget. Prior to Caracal he has been involved in starting and growing several public and private companies, including Reserve Royalty Corp., Chariot Energy, Auriga Energy and Orion Oil and Gas. Lawrence worked at Alberta Energy Company (AEC), where he was on the team that merged with Conwest. He built and led the AEC East team to the Rocky Mountain USA basins. His career began with Imperial Oil working on prospect and reservoir characterization, in multi-disciplinary teams, and as a technical mentor to exploration teams. Lawrence has an Honours Bachelor of Science in Geology from McMaster University and an MBA, specializing in economics, from the University of Calgary.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Shares of our Common Stock trade on the NYSE MKT and on the Toronto Stock Exchange ("TSX") under the symbol “GTE”. In addition, the exchangeable shares in one of our subsidiaries, Gran Tierra Exchangeco, are listed on the TSX and are trading under the symbol “GTX”.
As of February 23, 2016, there were approximately: 35 holders of record of shares of our Common Stock and 287,129,518 shares outstanding with $0.001 par value; and one share of Special A Voting Stock, $0.001 par value representing approximately four holders of record of 3,638,889 exchangeable shares which may be exchanged on a 1-for-1 basis into shares of our Common Stock; and one share of Special B Voting Stock, $0.001 par value, representing sixteen holders of record of 4,903,177 shares of Gran Tierra Exchangeco Inc., which are exchangeable on a 1-for-1 basis into shares of our Common Stock.
For the quarters indicated from January 1, 2014, through the end of the fourth quarter of 2015, the following table shows the high and low closing sale prices per share of our Common Stock as reported on the NYSE MKT.
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| | | | | | | | |
| | High | | Low |
Fourth Quarter 2015 | | $ | 2.91 |
| | $ | 2.01 |
|
Third Quarter 2015 | | $ | 2.92 |
| | $ | 1.91 |
|
Second Quarter 2015 | | $ | 3.87 |
| | $ | 2.72 |
|
First Quarter 2015 | | $ | 3.93 |
| | $ | 2.10 |
|
Fourth Quarter 2014 | | $ | 5.43 |
| | $ | 3.11 |
|
Third Quarter 2014 | | $ | 8.04 |
| | $ | 5.54 |
|
Second Quarter 2014 | | $ | 8.12 |
| | $ | 6.97 |
|
First Quarter 2014 | | $ | 7.74 |
| | $ | 6.82 |
|
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
|
| | | | | | | | |
| (a) Total Number of Shares Purchased(1) | (b) Average Price Paid per Share (2) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs(3) |
July 1-31, 2015 | — |
| — |
| — |
| 13,831,866 |
|
August 1-31, 2015 | 2,575,996 |
| 2.18 |
| 2,575,996 |
| 11,255,870 |
|
September 1-30, 2015 | 424,800 |
| 2.30 |
| 424,800 |
| 10,831,070 |
|
October 1-31, 2015 | 485,100 |
| 2.24 |
| 485,100 |
| 10,345,970 |
|
November 1-30, 2015 | — |
| — |
| — |
| 10,345,970 |
|
December 1-31, 2015 | 1,081,240 |
| 2.12 |
| 1,081,240 |
| 9,264,730 |
|
Total | 4,567,136 |
| 2.19 |
| 4,567,136 |
| 9,264,730 |
|
(1) Based on settlement date.
(2) Exclusive of commissions paid to the broker to repurchase the common shares.
(3) On July 22, 2015, we announced that we intended to implement a share repurchase program or normal course issuer bid (the “2015 Program”) through the facilities of the Toronto Stock Exchange ("TSX"), the NYSE MKT and eligible alternative trading platforms in Canada and the United States. We received regulatory approval from the TSX to commence the 2015 Program on July 27, 2015. We are able to purchase at prevailing market prices up to 13,831,866 shares of Common Stock, representing 4.98% of our issued and outstanding shares of Common Stock as of July 21, 2015. The average daily trading volume of shares of Common Stock over the six calendar month period prior to July 28, 2015, was 946,386 meaning that we are entitled to purchase, on any trading day, up to 236,596 shares of Common Stock. Shares of Common Stock purchased pursuant to the 2015 Program will be canceled. The 2015 Program will expire on July 29, 2016, or earlier if the 4.98% share maximum is reached. The 2015 Program may be terminated by us at any time, subject to compliance with regulatory requirements. As such, there can be no assurance regarding the total number of shares that may be repurchased under the 2015 Program. Shareholders may obtain a copy of the Notice of Intention to Make A Normal Course Issuer Bid filed with the TSX detailing the 2015 Program free of charge by writing or telephoning us at the address or phone number on the cover page of this Annual Report.
Dividend Policy
We have never declared or paid dividends on the shares of Common Stock and we intend to retain future earnings, if any, to support the development of the business and therefore do not anticipate paying cash dividends for the foreseeable future. Payment of future dividends, if any, would be at the discretion of our Board of Directors after taking into account various factors, including current financial condition, the tax impact of repatriating cash, operating results and current and anticipated cash needs. Under the terms of the credit facility, the Company cannot pay any dividends to its shareholders if it is in default under the facility and, if the Company is not in default, it is required to obtain bank approval for dividend payments to shareholders outside of the credit facility group.
Performance Graph
The information in this Form 10-K appearing under the heading "Performance Graph" is being "furnished" pursuant to Item 2.01 (e) of Regulation S-K under the Securities Act and shall not be deemed to be "soliciting material" or "filed" with the SEC or subject to Regulation 14A or 14C, other than as provided in Item 2.01 (e) of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act and shall not be deemed incorporated by reference into any filing under the Securities Act of the Exchange Act except to the extent that we specifically request that it be treated as such.
Item 6. Selected Financial Data
(Thousands of U.S. Dollars, Except Share and Per Share Amounts)
|
| | | | | | | | | | | | | | | | | | | |
Statement of Operations Data | | | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
Oil and natural gas sales | $ | 276,011 |
| | $ | 559,398 |
| | 646,955 |
| | $ | 503,467 |
| | $ | 548,175 |
|
| | | | | | | | | |
Operating expenses | 75,565 |
| | 89,753 |
| | 91,223 |
| | 65,562 |
| | 51,690 |
|
Transportation | 40,204 |
| | 24,196 |
| | 18,949 |
| | 26,645 |
| | 7,731 |
|
Depletion, depreciation and accretion | 176,386 |
| | 185,877 |
| | 200,851 |
| | 130,370 |
| | 143,696 |
|
Asset impairment | 323,918 |
| | 265,126 |
| | 2,000 |
| | 20,200 |
| | 42,000 |
|
G&A expenses | 32,353 |
| | 51,249 |
| | 41,115 |
| | 46,659 |
| | 52,344 |
|
Severance expenses | 8,990 |
| | — |
| | — |
| | — |
| | — |
|
Equity tax | 3,769 |
| | — |
| | — |
| | — |
| | 8,271 |
|
Foreign exchange (gain) loss | (17,242 | ) | | (39,535 | ) | | (18,693 | ) | | 28,727 |
| | (255 | ) |
Financial instruments loss (gain) | 2,027 |
| | 4,722 |
| | — |
| | — |
| | (1,354 | ) |
Other loss | — |
| | — |
| | 4,400 |
| | — |
| | — |
|
Other gain | (502 | ) | | (2,000 | ) | | — |
| | (9,336 | ) | | — |
|
Gain on acquisition | — |
| | — |
| | — |
| | — |
| | (21,699 | ) |
| 645,468 |
| | 579,388 |
|
| 339,845 |
|
| 308,827 |
|
| 282,424 |
|
| | | | | | | | | |
Interest income | 1,369 |
| | 2,856 |
| | 2,174 |
| | 1,709 |
| | 1,124 |
|
| | | | | | | | | |
(Loss) income from continuing operations before income taxes | (368,088 | ) |
| (17,134 | ) |
| 309,284 |
| | 196,349 |
| | 266,875 |
|
| | | | | | | | | |
Current income tax (expense) recovery | (15,383 | ) | | (92,865 | ) | | (157,126 | ) | | (69,453 | ) | | (134,018 | ) |
Deferred income tax recovery (expense) | 115,442 |
| | (34,350 | ) | | 28,865 |
| | (26,814 | ) | | 18,728 |
|
| 100,059 |
| | (127,215 | ) | | (128,261 | ) | | (96,267 | ) | | (115,290 | ) |
| | | | | | | | | |
(Loss) income from continuing operations | (268,029 | ) | | (144,349 | ) | | 181,023 |
| | 100,082 |
| | 151,585 |
|
Loss from discontinued operations, net of income taxes | — |
| | (26,990 | ) | | (54,735 | ) | | (423 | ) | | (24,668 | ) |
Net income (loss) | $ | (268,029 | ) |
| $ | (171,339 | ) |
| 126,288 |
| | $ | 99,659 |
| | $ | 126,917 |
|
| | | | | | | | | |
INCOME (LOSS) PER SHARE | | | | | | | | | |
BASIC | | | | | | | | | |
(LOSS) INCOME FROM CONTINUING OPERATIONS | $ | (0.94 | ) | | $ | (0.51 | ) | | $ | 0.64 |
| | $ | 0.35 |
| | $ | 0.55 |
|
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | — |
| | (0.09 | ) | | (0.19 | ) | | — |
| | (0.09 | ) |
NET INCOME (LOSS) | $ | (0.94 | ) | | $ | (0.60 | ) | | $ | 0.45 |
| | $ | 0.35 |
| | $ | 0.46 |
|
DILUTED | | | | | | | | | |
(LOSS) INCOME FROM CONTINUING OPERATIONS | $ | (0.94 | ) | | $ | (0.51 | ) | | $ | 0.63 |
| | $ | 0.35 |
| | $ | 0.54 |
|
|
| | | | | | | | | | | | | | | | | | | |
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | — |
| | (0.09 | ) | | (0.19 | ) | | — |
| | (0.09 | ) |
NET INCOME (LOSS) | $ | (0.94 | ) | | $ | (0.60 | ) | | $ | 0.44 |
| | $ | 0.35 |
| | $ | 0.45 |
|
Balance Sheet Data | | | | | | | | | |
| As at December 31, |
| 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
Cash and cash equivalents | $ | 145,342 |
| | $ | 331,848 |
| | $ | 428,800 |
| | $ | 212,624 |
| | $ | 351,685 |
|
Working capital (including cash)(1) | 160,449 |
| | 239,312 |
| | 244,764 |
| | 220,288 |
| | 210,071 |
|
Oil and gas properties | 780,360 |
| | 1,117,931 |
| | 1,250,070 |
| | 1,196,661 |
| | 1,036,850 |
|
Deferred tax asset - long-term(1) | 3,241 |
| | 2,153 |
| | 3,663 |
| | 3,918 |
| | 7,776 |
|
Total assets | 1,146,118 |
| | 1,714,050 |
| | 1,904,550 |
| | 1,732,875 |
| | 1,626,780 |
|
Deferred tax liability - long-term(1) | 34,592 |
| | 176,364 |
| | 178,275 |
| | 225,532 |
| | 186,799 |
|
Total long-term liabilities | 70,485 |
| | 213,039 |
| | 209,270 |
| | 250,396 |
| | 207,633 |
|
Shareholders’ equity | 1,001,642 |
| | 1,276,685 |
| | 1,429,908 |
| | 1,291,431 |
| | 1,174,318 |
|
(1) In accordance with generally accepted accounting principles in the United States of America ("GAAP") and as discussed further in Note 2, "Significant Accounting Policies" of our consolidated financial statements for the three years ended December 31, 2015, we retrospectively reclassified deferred tax assets and liabilities as long-term assets and liabilities in our consolidated financial statements.
On June 25, 2014, we sold our Argentina business unit to Madalena Energy Inc. ("Madalena") for aggregate consideration of $69.3 million, comprising $55.4 million in cash and $13.9 million in Madalena shares. In accordance with GAAP, we met the criteria to classify our Argentina business unit as discontinued operations in the second quarter of 2014. As such, the results of operations for our Argentina business unit are reflected as loss from discontinued operations, net of income taxes and discussed further in Note 3, "Discontinued Operations," of our consolidated financial statements for the three years ended December 31, 2015. Amounts for 2012 and 2011 have been reclassified to conform to this presentation. The reclassifications had no effect on net income or loss.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report, and in particular this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Please see the cautionary language at the very beginning of this Annual Report on Form 10-K regarding the identification of and risks relating to forward-looking statements, as well as Part I, Item 1A “Risk Factors” in this Annual Report on Form 10-K.
The following discussion of our financial condition and results of operations should be read in conjunction with the "Financial Statements and Supplementary Data" as set out in Part II, Item 8 of this Annual Report on Form 10-K.
Overview
We are an independent international energy company incorporated in the United States and engaged in oil and natural gas acquisition, exploration, development and production. Our principal business activity is in Colombia and we also have business activities in Peru and Brazil. For the year ended December 31, 2015, 97% (year ended December 31, 2014 - 95%; year ended December 31, 2013 - 96%) of our revenue and other income was generated in Colombia. We are headquartered in Calgary, Alberta, Canada.
During early 2015, largely as a result of the low commodity price environment and drilling results in Peru, we ceased all development expenditures in the Bretaña Field on Block 95 in Peru other than what was necessary to maintain tangible asset integrity and security. As a result, all probable and possible reserves associated with the field were reclassified as contingent resources.
On May 7, 2015, we entered into an agreement (the “Agreement”) with West Face SPV (Cayman) I L.P. (“West Face”) pursuant to which we settled a proxy contest. Pursuant to the terms of the Agreement, Gary Guidry was appointed as our
President and Chief Executive Officer. Mr. Guidry replaced Duncan Nightingale in that role, who was serving as interim Chief Executive Officer since February 2015 and, with the appointment of Mr. Guidry as Chief Executive Officer, was designated as Executive Vice President until February 19, 2016, when he ceased performing this role. Additionally, effective May 11, 2015, Ryan Ellson was appointed as Chief Financial Officer. In connection with our entry into the Agreement, the size of our Board of Directors was expanded, new directors were appointed to fill the newly created vacancies and certain existing directors agreed not to stand for re-election at the 2015 annual meeting of stockholders. In June 2015, our Board of Directors approved a new capital program focusing on development activities in Colombia.
As of December 31, 2015, we had estimated proved reserves NAR of 38.9 MMBOE, approximately 98% oil, of which 80% were proved developed reserves. Our primary source of liquidity is cash generated from our operations and cash on hand.
On January 13, 2016, we acquired all of the issued and outstanding shares of Petroamerica Oil Corp ("Petroamerica") for cash consideration of $70.6 million and the issuance of 13,656,719 shares of Gran Tierra common stock with a value of $25.8 million. On January 25, 2016, we acquired all of the issued and outstanding shares of PetroGranada Colombia Limited ("PGC") for a net purchase price of $19.0 million, after giving consideration to estimated net working capital of $18.7 million. In addition, we agreed to pay contingent consideration of $4.0 million if cumulative production from the Putumayo-7 Block plus gross proved plus probable reserves under the Putumayo-7 Block meet or exceed 8 MMbbl. Combined proved NAR oil and gas reserves of Petroamerica and PGC as at December 31, 2015, were 3.9 MMBOE.
Oil prices are volatile and unpredictable and influenced by concerns over world supply and demand imbalance and many other market factors outside of our control. Oil prices started falling in July 2014 and fell dramatically during the period December 2014 to March 2015. Prices have remained low and volatile. During 2015, the average price realized for our oil was $41.56 per bbl (2014 - $83.22; 2013 - $92.31). Average Brent oil price for the year ended December 31, 2015, was $52.35 per bbl compared with $99.02 per bbl in 2014 and $108.64 in 2013. Average West Texas Intermediate ("WTI") oil price for the year ended December 31, 2015, was $48.78 per bbl compared with $93.00 per bbl in 2014 and $97.97 in 2013.
Highlights
|
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | % Change | | 2014 | | % Change | | 2013 |
Estimated Proved Oil and Gas Reserves, NAR, at December 31 (MMBOE) | | 38.9 |
| | 5 |
| | 37.0 |
| | (12 | ) | | 42.1 |
|
| | | | | | | | | | |
Estimated Probable Oil and Gas Reserves, NAR, at December 31 (MMBOE) | | 15.7 |
| | 16 |
| | 13.5 |
| | (81 | ) | | 69.8 |
|
| | | | | | | | | | |
Estimated Possible Oil and Gas Reserves, NAR, at December 31 (MMBOE) | | 12.6 |
| | (18 | ) | | 15.4 |
| | (79 | ) | | 72.0 |
|
| | | | | | | | | | |
Volumes (BOE) | | | | | | | | | | |
Working Interest Production Before Royalties | | 8,541,393 |
| | (7 | ) | | 9,191,467 |
| | (2 | ) | | 9,357,967 |
|
Royalties | | (1,428,088 | ) | | (34 | ) | | (2,153,013 | ) | | (10 | ) | | (2,397,037 | ) |
Production NAR | | 7,113,305 |
| | 1 |
| | 7,038,454 |
| | 1 |
| | 6,960,930 |
|
Change in Inventory | | (448,562 | ) | | 62 |
| | (277,485 | ) | | (553 | ) | | 61,217 |
|
Sales(1) | | 6,664,743 |
| | (1 | ) | | 6,760,969 |
| | (4 | ) | | 7,022,147 |
|
| | | | | | | | | | |
Average Daily Volumes (BOEPD) | | | | | | | | | | |
Working Interest Production Before Royalties | | 23,401 |
| | (7 | ) | | 25,182 |
| | (2 | ) | | 25,638 |
|
Royalties | | (3,912 | ) | | (34 | ) | | (5,899 | ) | | |