4.       COMMITMENTS AND CONTINGENCIES

Offshore Gabon

As part of securing the second ten year production license with the government of Gabon for the Etame Marin block, the Company agreed to a cash funding arrangement for the eventual abandonment of the offshore wells, platforms and facilities. The agreement is pending final approval and will provide for annual funding over the remaining life of the production license. The amounts paid will be reimbursed through the cost account and are non-refundable to the Company. The funding is expected to begin in the first half of 2014.   As in prior periods, the obligation for abandonment of the Gabon offshore facilities is included in the asset retirement obligation shown on the Company’s balance sheet.

Angola

In November 2006, the Company signed a production sharing contract for Block 5 offshore Angola. The four year primary term with an optional three year extension awarded the Company exploration rights to 1.4 million acres offshore central Angola. The Company’s working interest is 40%. Additionally, the Company is required to carry the Angolan national oil company, Sonangol P&P, for 10% of the work program. The Company’s seismic obligation was met in 2008 and the requirement to drill two exploratory wells remains as an obligation.   Additional time extensions have been granted for drilling the two exploration commitment wells with a current expiration date of November 30, 2014. In April 2014, the Company received a letter and contractual amendment proposal from Sonangol E. P. which is expected to be approved in the near term by the government of Angola.  The contractual amendment provides for a three year time extension for the exploration permit until November 30, 2017 and outlines the timing for the drilling of the two exploration wells, an obligation under the terms of the original agreement.  The amendment provides for spudding one exploration well prior to the expiration of the current November 30, 2014 time extension, and the second well by early 2016. Each well is subject to a $5.0 million penalty ($10.0 million in aggregate for both wells) if not drilled by the expiration date. The $10.0 million obligation is currently recorded as short term restricted cash and is held at a financial institution located in the United States.   

The government-assigned working interest partner was removed from the production sharing contract for cause by governmental decree dated December 1, 2010.  In the first quarter of 2014, this working interest was assigned to Sonangol P&P, by Sonangol E.P., the concessionaire.  Both Sonangol entities and the Company have been working together to determine the work program for the block including the timing for drilling the two exploration obligation wells. Subject to final approval of the contract amendment provided by Sonangol E.P., the agreed work plan will include the drilling of one exploration well in 2014 and the second exploration well by early 2016. As discussed above, the expiration date of the primary term of the production sharing contract is expected to be extended to November 30, 2017.  Additionally, the Company in the first quarter of 2014 has already proceeded with the purchase and processing of 3D seismic in the outboard segment of the block, which may have a bearing on the location for drilling the second exploration well.

Asset Retirement Obligation

The Company is carrying $11.6 million of asset retirement obligation as of March 31, 2014, representing the present value of our future obligations for the future abandonment costs of tangible assets such as platforms, well, pipelines and other facilities.