7. CRUDE OIL, NATURAL GAS and NGLs PROPERTIES AND EQUIPMENT

The Company’s crude oil, natural gas and NGLs properties and equipment is comprised of the following: 

Etame Marin Block PSC

On September 25, 2018, VAALCO, together with the other joint venture owners in the Etame Marin block (the “Etame Consortium”), received a Presidential Decree for an extension (“PSC Extension”) to the Etame Consortium to operate in the Etame Marin block. The Company’s subsidiary, VAALCO Gabon S.A., currently has a 63.575% participating interest (working interest including the working interest attributable to the carried interest owner) in the Etame Marin block.

The PSC Extension extends the term to operate until September 17, 2028. The PSC Extension also grants the Etame Consortium the right for two additional extension periods of five years each. 

In accordance with the Etame Marin block PSC, the Etame Consortium maintains a “Cost Account,” which accumulates capital costs and operating expenses that are deductible against revenues, net of royalties, in determining taxable profits. Under the PSC Extension, the Cost Recovery Percentage increased to 80% for the ten-year period from September 17, 2018 through September 16, 2028. After September 16, 2028, the Cost Recovery Percentage returns to 70%. The government of Gabon will acquire from the Etame Consortium an additional 2.5% gross working interest carried by the Etame Consortium effective June 20, 2026. VAALCO’s share of this interest to be transferred to the government of Gabon is 1.6%.

Egypt PSCs

On January 20, 2022, the Company announced a fully executed Merged Concession Agreement with EGPC that merged the three existing Eastern Desert concessions with a 15-year primary term and improved economics. In connection with the Merged Concession Agreement, the Company is required to make further annual $10.0 million modernization payments from February 2023 through February 2026. In accordance with the Merged Concession, the Company agreed to substitute the February 2023 payment and issue a $10.0 million credit against receivables owed to it from EGPC. 

The Merged Concession Agreement contains minimum financial work commitments of $50.0 million per each five-year period of the primary development term, commencing on February 1, 2020 (the "Merged Concession Effective Date").

The Egyptian PSCs provide for the government to receive a percentage gross royalty on the gross production. The remaining oil production, after deducting the gross royalty, if any, is split between cost sharing oil and production sharing oil. Cost sharing oil is up to a maximum percentage as defined in the specific PSC. Cost oil is assigned to recover approved operating and capital costs spent on the specific project. Unutilized cost sharing oil or excess cost oil (maximum cost recovery less actual cost recovery) is shared between the government and the contractor as defined in the specific PSCs. Each PSC is treated individually in respect of cost recovery and production sharing purposes. The remaining production sharing oil (total production less cost oil) is shared between the government and the contractor as defined in the specific PSC. The Egyptian PSCs do not contain minimum production or sales requirements, and there are no restrictions with respect to pricing of the contractor's sales volumes. Except as otherwise disclosed, all crude oil sales are priced at current market rates at the time of sale.

The following table summarizes the Company's Egyptian PSC terms for the first tranche(s) of production for each block. The contracts have different terms for production levels above the first tranche, which are unique to each contract. The government's share of production increases and the contractor's share of production decreases as the production volumes go to the next production tranche. The Company is the contractor in all of the Company's PSCs.

(1) - Represents the year acquired by TransGlobe, prior to the Arrangement.

Equatorial Guinea PSC

With the approval of the plan of development in September, 2022, the Block P production sharing contract provides for a development and production period of 25 years for the area associated with the Venus development, to September, 2047. The Block P acreage is 23,144 hectares, with 8,476 hectares being the area associated with the Venus development. The Royalty of the PSC is 10% for the first 10,000 bopd, and 11% for the 10,000 bopd to 25,000 bopd tranche. The State’s share of profit oil is 10% to a cumulative production of 25 million bbl. For recovery of between 25 million bbl to 50 million bbl, the State’s share of profit oil increases to 20%. The Contractor is allowed access to cost oil to pay for development and operating costs, with a cost oil maximum of 70%. The PSC is subject to 25% income tax in Equatorial Guinea, with tangible development costs being straight line depreciated for tax purposes over 120 months. 

Proved Properties

The Company reviews the crude oil, natural gas and NGLs producing properties for impairment quarterly or whenever events or changes in circumstances indicate that the carrying amount of such properties may not be recoverable. When a crude oil, natural gas and NGLs property’s undiscounted estimated future net cash flows are not sufficient to recover its carrying amount, an impairment charge is recorded to reduce the carrying amount of the asset to its fair value. The fair value of the asset is measured using a discounted cash flow model relying primarily on Level 3 inputs into the undiscounted future net cash flows. The undiscounted estimated future net cash flows used in the impairment evaluations at each quarter end are based upon the most recently prepared independent reserve engineers’ report adjusted to use forecasted prices from the forward strip price curves near each quarter end and adjusted as necessary for drilling and production results.

There was no triggering event in the three months ended March 31, 2023 that would cause the Company to believe the value of crude oil, natural gas and NGLs producing properties should be impaired. Factors considered included higher forward prices from December 31, 2022 and capital expenditures in the period related to its reserves in Gabon, Egypt and Canada. 

Undeveloped Leasehold Costs 

Equatorial Guinea

VAALCO acquired a 31% working interest in an undeveloped portion of a block (“Block P”) offshore Equatorial Guinea in 2012. The Ministry of Mines and Hydrocarbons (“EG MMH”) approved the Company's appointment as the operator of Block P on November 12, 2019. The Company acquired an additional working interest of 12% from Atlas Petroleum, thereby increasing its working interest to 43% in 2020, in exchange for a potential future payment of $3.1 million to Compania Nacional de Petroleos de Guinea Ecuatorial, (“GEPetrol”) in the event that there is commercial production from Block P. On August 27, 2020, the amendment to the production sharing contract to ratify the Company’s increased working interest and appointment as operator was approved by the EG MMH. In April 2021, Crown Energy, who held a 5% working interest elected to default on its obligations of Block P. On April 12, 2021, the non-defaulting parties assigned the defaulting party’s interest to the non-defaulting parties as required by the Joint Operating Agreement. As a result, VAALCO’s working interest increased to 45.9% when the EG MMH approved the fourth amendment to the production sharing contract. In February of 2023, the Company acquired an additional 14.1% participating interest, increasing VAALCO’s participating interest in the Block to 60.0%. This increase of 14.1% participating interest increases the Company's future payment to GEPetrol to $6.8 million at first commercial production of the Block.

The Company has completed a feasibility study of the development concept of the Venus discovery on Block P. On September 16, 2022, the EG MMH approved the submitted plan of development. Final documents to affect the plan of development are subject to EG MMH approval. The 2023 budget for the plan was delivered on October 12, 2022 to the MMH and was approved effective November 16, 2022. In March 2023, Atlas voted to participate in the Venus Development. Amendment 5 of the PSC was approved by all parties in March 2023 with updated participating interest. Execution of the Venus development plan has been initiated. The Block P production sharing contract provides for a development and production period of 25 years from the date of approval of a development and production plan for the area associated with the Venus development. As of March 31, 2023, the Company had $10.0 million recorded for the book value of the undeveloped leasehold costs associated with the Block P license. 

Gabon

As a result of the PSC extension discussed above, the exploitation area for the Etame Marin block was expanded to include previously undeveloped acreage. The Company allocated $6.7 million of the share of the signing bonus and $7.1 million of the $18.6 million resulting from the deferred tax impact for the difference between book basis and tax basis to unproved leasehold costs using the acreage attributable to the previous exploitation areas and the additional acreage in the expanded exploitation areas. Exploitation of this additional area is permitted throughout the term of the Etame Marin block PSC. As a result of discovering reserves in connection with drilling the South East Etame 4H development well in March 2020, $2.3 million of costs were transferred to proved leasehold costs leaving a remaining $11.5 million in unproved leasehold costs. In connection with the Sasol Acquisition discussed under Note 3, $2.2 million of reserves were attributed to undeveloped properties. The balance of undeveloped leasehold costs related to the Etame Marin block at March 31, 2023 was $13.7 million.

Egypt and Canada

In connection with the TransGlobe acquisition discussed under Note 3, the Company added $13.6 million and $16.7 million of undeveloped leasehold costs for Egypt and Canada, respectively. The undeveloped leasehold costs were associated to the probable category of reserves. At March 31, 2023, the undeveloped leasehold costs for Egypt was $13.6 million and Canada was $16.7 million.

Capitalized Equipment Inventory

Capitalized equipment inventory is reviewed regularly for obsolescence. Adjustments for inventory obsolescence are recorded in the “Other operating expense, net” line item of the unaudited condensed consolidated statements of operations and comprehensive income but were not material for the three months ended March 31, 2023 and 2022.