PGS Says Petrojarl Varg Strike Becomes Effective

Varg Field, North Sea
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Petroleum Geo-Services reports that, as previously disclosed on September 17, effective October 8, 2004, the Norwegian Oil Workers Union ("OFS") will order its members on PGS floating, production, storage and offloading vessel Petrojarl Varg to join other OFS members in the offshore strike on the Norwegian Continental Shelf (NCS) which commenced in July 2004.

Since a resolution of the strike is not likely to be reached by midnight on October 8, 2004, preparations for the shut down of production on the Petrojarl Varg have commenced. However, the OFS has given Petrojarl Varg an exemption from the conflict until the next oil cargo is unloaded from the vessel around October 12. Shortly thereafter, oil production is expected to be shut down.

Petrojarl Varg is producing the Varg field on Production License (PL), 038 located on the NCS, which is 70% owned by Pertra, a wholly-owned subsidiary of PGS. PGS has previously announced that oil production on the Varg field is expected to exceed 25,000 barrels per day in the second half of 2004.

As also previously reported, when the OFS strike commences on Petrojarl Varg, PGS oil production associated with Pertra's share of the Varg field, expected to be above 17,500 barrels per day, will stop until the strike is resolved. However, the effect on net income of the reduced revenue will be mitigated by reduced taxes at the NCS tax rate of 78%. The Petrojarl Varg vessel will receive compensation based on a force majeure rate of approximately USD 176,000 per day, but Pertra will not be compensated for their stopped production.

To minimize any cash effects of the strike, PGS will reevaluate its investment and drilling program for the field.

PGS believes that this is a very unfortunate escalation of the conflict. What the industry and employees need is a rapid resolution of this conflict and a return to business as usual.

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