PetroLatina has entered into a farm-out agreement with Shell E&P Colombia, effective July 12, 2011. Under the terms of the agreement, Shell E&P Colombia will acquire an 85% participating interest in the Company's VMM-28 Exploration and Production contract, subject to the approval of the ANH. The VMM-28 block is currently wholly owned and operated by Petroleos del Norte (PDN), PetroLatina's Colombian operating subsidiary.
PDN and the ANH signed the formal E&P Contract in March 2011, for the exploration, development and production of hydrocarbons in the area known as the VMM-28 block. The block covers an area of 54,552 hectares (approximately 136,390 acres) and lies to the west of, and immediately adjacent to, the Company's existing La Paloma block containing the Company's producing Colon field. Preliminary analysis of the available historic 2D seismic data suggests that the type of structure which has proven to be oil productive on the La Paloma block may also potentially hold commercial oil reserves on the VMM-28 block. The current carrying value of the Company's interest in the VMM-28 block is approximately US $4.64 million.
In accordance with the terms of the farm-out agreement, which remains subject to regulatory approval from the ANH, Shell E&P Colombia has agreed to pay a fee of US $15 million in cash to PetroLatina, of which US $3 million is payable on execution of the agreement and the balance of US $12 million is payable on receipt of the requisite ANH approval. Shell E&P Colombia will be appointed as operator of the contract and will take responsibility for the work program. In the event that ANH approval is not forthcoming by 30 September 2011, Shell E&P Colombia has the right to terminate the agreement and require any payments made by it to PetroLatina to be repaid.
The VMM-28 E&P Contract comprises two 3 year exploration periods ("Phase 1" and "Phase 2") followed by a 24 year production phase. In accordance with the E&P Contract in place with the ANH, work obligations for the VMM-28 block include the acquisition of 2D seismic and one exploratory well during Phase 1 (the first 3 year exploration phase), and either two wells without relinquishment of any acreage or one well with 50% relinquishment during Phase 2 (the second 3 year exploration phase). Under the terms of the farm-out agreement, PetroLatina has granted Shell E&P Colombia a six year period of operational exclusivity. During this Exclusivity Period, Shell E&P Colombia will pay for 100% of the costs, expenses and liabilities associated with the work program and shall be entitled to all rights in relation to the block.
Shell E&P Colombia will make available to PetroLatina all data acquired by it in relation to the contract area and ensure that the license area remains in good standing and will comply with all applicable laws, regulations and orders of Colombia.
Under the agreement, Shell E&P Colombia will obtain an 85% participating interest in the block. PDN will retain a 15% legal interest with an option to participate in the block upon expiration of the Exclusivity Period. Under the terms of the farm-out agreement, PetroLatina shall pay its share of the costs, expenses and liabilities associated with the block and shall pay Shell E&P Colombia for its share of Shell E&P Colombia's total sunk costs incurred to such date, out of PetroLatina's share of production within the block. Operations on the VMM-28 block would thereafter be governed by a joint operating agreement.
In the event that Shell E&P Colombia decides to withdraw from the farm-out agreement, the Company has the option to request that Shell E&P Colombia transfers its prevailing interest in the block back to PetroLatina.
Following the receipt of ANH approval, the Company intends to use the proceeds from the farm-out agreement to assist with the part funding of its planned ongoing drilling program and development commitments in respect of the remainder of its Colombian asset portfolio and for general working capital purposes.
Luc Gerard, Executive Chairman of PetroLatina, commented, "I am extremely pleased to welcome Shell E&P Colombia as our partner in respect of the VMM-28 contract, who's deep and complex drilling capability and experience in conventional and non-conventional reservoirs will be invaluable. The farm-out agreement provides us with exposure to exploration activity on the VMM-28 block, including the technology and expertise of Shell, whilst enabling us to focus our resources on the development of the other promising assets in our Colombian portfolio, including the Putumayo-4 E&P block.
The funds received, following the receipt of ANH approval, will assist with the financing of our ongoing Colombian work program whilst we maintain the flexibility of exercising an option to participate in the promising VMM-28 block in the future. This agreement serves to demonstrate the level of industry interest in VMM-28 and more generally in Colombia. We continue to believe in the potential of both our asset portfolio and Colombia and look forward to demonstrating and realizing such potential as our work program progresses."
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