ASC Topic 932 - Extractive Industries provides that an exploratory well shall be capitalized as part of the entity’s uncompleted wells pending the determination of whether the well has found proved reserves. Further, an exploration well that discovers oil and gas reserves, but those reserves cannot be classified as proved when drilling is completed, shall be capitalized if the well has found a sufficient quantity of reserves to justify its completion as a producing well and the entity is making sufficient progress assessing the reserves and the economic and operating viability of the project. If either condition is not met, the exploration well would be assumed to be impaired and its costs would be charged to expense.

In the second and third quarters of 2010, the Company drilled the Southeast Etame No. 1 well with two sidetracks in the Etame Marin block offshore Gabon. The well discovered five meters of oil-sand. Additional evaluation of the well and sidetrack information was conducted to facilitate options for developing the discovery. The Company and its joint venture partners evaluated the merits of two development options. One option involved a subsea well to develop the Southeast Etame discovery only, whereas the second option envisioned a platform development to access both the Southeast Etame area as well as the North Tchibala field, where a discovery was made on the block prior to VAALCO’s block participation. In the second quarter of 2012, the Company and its partners agreed to proceed with the development plan featuring a fixed leg platform for developing the Southeast Etame discovery area and the North Tchibala field and the final investment decision was approved in the fourth quarter of 2012 for the construction of the platform. The platform was completed and installed in the third quarter of 2014. A drilling rig has been contracted to drill a development well in the Southeast Etame field in the first half of 2015. Due to the recent fall in oil prices, the Company recognized an impairment loss in the Southeast Etame field in the fourth quarter of 2014. The impairment resulted in a $7.8 million write off related to the Southeast Etame No.1 well. Accordingly, the well has been removed from the above schedule for 2014.

In the third and fourth quarters of 2012, the Company drilled the N’Gongui No. 2 well with three sidetracks in the Mutamba Iroru block onshore Gabon. Evaluation of the well and sidetrack information was performed in the second quarter of 2013. A revised production sharing contract (“PSC”) including exploration rights is in the approval process.  The term sheet, which specifies financial and other obligations to be included in the PSC, was agreed to and signed by the Company, its joint venture partner, and the Government of Gabon on July 31, 2014. The form of the PSC has been completed and presented to the Company and its joint venture partner for execution.  The joint venture partner has withheld its approval of the new PSC pending resolution of certain legal aspects of the new agreement with the Government of Gabon.  In March 2015, the joint venture partner indicated to the Company that the legal aspects have not yet been resolved to their satisfaction.  The Company can provide no assurance as to the joint venture partner approving the PSC. The Company remains committed to this block and further meetings of the parties are expected to occur in the first half of 2015.  

After the PSC is approved, an application for a development area will be made by the Company.  After issuance of a development area, the next step is the submittal of the plan of development.  The Company can provide no assurances as to the either the approval of the PSC by the Government of Gabon, or the subsequent approval of a development area by the Government of Gabon. The Company has capitalized $8.9 million for the discovery well in accordance with the criteria contained in ASC Topic 932.