The Contract is the first operations contract which the Ministry has signed since 1990 and follows the Panamanian government's announcement in 2005 of its first policy on hydrocarbons and alternate energy sources and its desire to promote hydrocarbons development in the country.
The Contract area covers 691,500 acres located wholly offshore in shallow water with a maximum depth of only 140 feet and an estimated average water depth of approximately 70 feet. The area covered by the Contract was previously held by the Company under a Technical Evaluation Agreement ('TEA') during which time extensive studies were conducted including the review and re-interpretation of all available geologic data.
The Contract area has been the site of previous activity by several oil companies since the 1920s. More recent exploration activity in the Garachine area has confirmed Miocene oil source potential and outlined the regional basin structure with a reconnaissance grid of seismic data.
The management of the Company believes that the Contract area has substantial exploration potential in an untested Mid Miocene carbonate play. The play is analogous to productive Miocene carbonates in Colombia as well as classic reef discoveries in Southeast Asia, including the 5.7 trillion of cubic feet ('TCF') of gas Ballena/Chuchupa field in Colombia and the 70 million barrels of oil equivalent ('mmboe') Jene field in Sumatra, Indonesia. Secondary objectives of the management would be Miocene and Oligocene clastics within anticlinal folds of the Las Perlas deformed belt.
The Company will own 100% of the Contract which has a duration of up to 35 years, divided into a 5 year initial exploration phase, a 25 year exploitation phase and a 5 year automatic extension phase on exploitation. The Company can elect to extend the exploration phase by 2 years and also terminate the Contract at any time during the exploitation phase by giving 120 days notice. Under the terms of the Contract the Company must carry out certain minimum work obligations during the exploration phase, estimated to cost approximately $10 million, which include the reprocessing and interpretation of existing seismic, aero-gravity and magnetic studies, the acquisition and interpretation of new seismic and the drilling of two exploration wells.
The Contract is subject to an initial royalty from any future hydrocarbon production of 20% payable to the Ministry until the earlier of the Company's recovery of 100% of its initial investments or five years from the date of initial production, whichever occurs first. Thereafter, the royalty increases to 50% on all hydrocarbons produced. Under the Contract the Company is exempt from Panamanian income tax for the first five years of the Contract after which time the enforced 25% income tax is absorbed by the maximum 50% royalty payable by the Company.
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