9. COMMITMENTS AND CONTINGENCIES

Litigation

Butcher settlement

On October 3, 2016, the Court approved a Stipulation and Order of Dismissal entered into by the parties in a stockholder class action lawsuit against the Company and all of its directors alleging that a previously terminated shareholder rights agreement, no longer in effect, and certain provisions of the former Chief Executive Officer’s and former Chief Financial Officer’s employment agreements securing change-in-control severance benefits were invalid under Delaware law, case number C.A. No. 12277-VCL, filed on April 29, 2016, in the Court. After the Company and its directors moved to dismiss the lawsuit, the Plaintiff Daniel Butcher agreed to dismiss the lawsuit as moot, and the Company agreed to settle Plaintiff’s application for an award of attorneys’ fees, all of which were covered by our directors and officers insurance as a covered claim.

McDonough litigation

On December 7, 2016, a lawsuit was filed against the Company alleging that a former worker on the Company’s oil and gas platforms off the coast of Gabon was terminated because of his age in violation of the Age Discrimination in Employment Act and the Texas Commission on Human Rights Act. The Plaintiff seeks damages for lost wages and benefits as well as attorneys’ fees. The case is pending in the U.S. District Court for the Southern District of Texas and is styled as McDonough v. VAALCO Energy, Inc., No. 4:17-cv-00361. In a February 2017 demand letter, the plaintiff made a demand for $361,000 to settle this claim. We intend to defend the claim vigorously, and we do not expect that this claim will have a material effect on our financial condition, results of operations or liquidity.

FPSO charter 

In connection with the charter of the FPSO, we, as operator of the Etame Marin block, guaranteed the full charter payments through contract term, which goes until September 2020. At our election, the charter may be extended for two one-year periods beyond September 2020. We obtained guarantees from each of our partners for their shares of the charter payment. Our net share of the charter payment is 31.1%. Although, we believe the need for performance under the charter guarantee is remote, we have recorded a liability of $0.7 million and $1.0 million at December 31, 2016 and 2015, respectively, representing the guarantee’s fair value.

Estimated future minimum obligations through the end of the FPSO charter are as follows:

The charter payment includes a $0.93 per barrel charter fee for production up to 20,000 barrels of oil per day and a $2.50 per barrel charter fee for those barrels produced in excess of 20,000 barrels of oil per day. VAALCO’s net share of payments was $11.2 million, $10.9 million and $11.8 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Other lease obligations

In addition to the FPSO, we have operating lease obligations, as follows: 

We incurred rent expense of $4.5 million, $4.3 million and $3.9 million under operating leases for 2016, 2015 and 2014.

Rig commitment

Not included in the lease obligations for 2017 above are the remaining costs for the Constellation II drilling rig that was under a long-term contract for the multi-well development drilling campaign offshore Gabon. The campaign included the drilling of several development wells and workovers of existing wells in the Etame Marin block. As of December 31, 2015, the remaining rig commitment was $32.2 million ($9.8 million net to VAALCO). We began demobilization in January 2016 and released the drilling rig in February 2016, prior to the original July 2016 contract termination date, because we no longer intended to drill any wells in 2016 on our Etame Marin block offshore Gabon. In June 2016, we reached an agreement with the drilling contractor to pay $5.1 million net to VAALCO’s interest for unused rig days under the contract. We are paying this amount, plus the demobilization charges, in seven equal monthly installments which began in July 2016. As of December  31, 2016, the remaining amount to pay was $1.0 million net to VAALCO’s interest. The full expense is reported in the “Other operating expense” line of our consolidated statements of operations in the year ended December 31, 2016.

Gabon domestic market obligation and other investment obligations

Under the terms of the Etame PSC, effective in April 2016, the consortium is required to provide to the local government refinery a volume of crude at a 15% discount to market price (the “Gabon DMO”). Prior to April 2016, the discount was 25%.  The volume required to be furnished is the amount of the Etame Marin block production divided by total Gabon production times the volume of oil refined by the refinery per year. In 2016, we paid $1.7 million for our share of the 2015 obligation. In 2015, we paid $2.3 million for our share of the 2014 obligation. In 2014, we paid $3.3 million for our share of the 2013 obligation. We accrue an amount for the Gabon DMO based on management’s best estimate of the volume of crude required, because the refinery does not publish throughput figures. The amount accrued at December 31, 2016, for our share of the 2016 obligation was $1.1 million. The amount accrued at December 31, 2015, for our share of the 2015 obligation was $1.8 million. These costs are cost recoverable under the terms of the Etame PSC. Also, beginning in April 2016, the consortium is required to pay an additional 1% of revenues for provisions for diversified investments (“PID”) and for investments in hydrocarbons (“PIH”). The amount accrued at December 31, 2016, for our share of the 2016 obligation was $0.4 million. 75% of PID and PIH costs are cost recoverable under the terms of the Etame PSC.

Abandonment funding

As part of securing the first of two five-year extensions to the Etame field production license to which we are entitled from the government of Gabon, we agreed to a cash funding arrangement for the eventual abandonment of all offshore wells, platforms and facilities on the Etame Marin block. The agreement was finalized in the first quarter of 2014 (effective 2011) providing for annual funding over a period of ten years at 12.14% of the total abandonment estimate for the first seven years and 5.0% per year for the last three years of the production license. The amounts paid will be reimbursed through the cost account and are non-refundable. The abandonment estimate used for this purpose is approximately $61.1 million ($19.0 million net to VAALCO) on an undiscounted basis. Through December 31, 2016,  $27.4 million ($8.5 million net to VAALCO) on an undiscounted basis has been funded. This cash funding is reflected under “Other noncurrent assets” as “Abandonment funding” on our consolidated balance sheet. Future changes to the anticipated abandonment cost estimate could change our asset retirement obligation and the amount of future abandonment funding payments.

Audits 

We are subject to periodic routine audits by various government agencies in Gabon, including audits of our petroleum cost account, customs, taxes and other operational matters, as well as audits by other members of the contractor group under our joint operating agreements.

As of December 31, 2016, we had accrued $1.0 million net to VAALCO in “Accrued liabilities and other” on our consolidated balance sheet for certain payroll taxes in Gabon which were not paid pertaining to labor provided to us over a number of years by a third-party contractor. While the payroll taxes were for individuals who were not our employees, we could be deemed liable for these expenses as the end user of the services provided. These liabilities were substantially resolved at the accrued amount by January 2017.

In 2016, the government of Gabon conducted an audit of our operations in Gabon, covering the years 2013 through 2014. We received the findings from this audit and responded to the audit findings in January 2017. We do not anticipate that the ultimate outcome of this audit will have a material effect on our financial condition, results of operations or liquidity.

 

Employment agreements

Our Chief Executive Officer and certain other officers have employment agreements which provide for payments of annual salary, incentive compensation and certain other benefits if their employment is terminated without cause. We have also entered into change of control agreements with certain officers providing for additional payments in the event that their employment is terminated without cause just for a specified period after a change of control of the Company.