7.	COMMITMENTS AND CONTINGENCIES

 

FPSO Charter

 

In October 2007, the Company entered into an amendment with the owner of the FPSO chartered for the Etame field to extend the contract until September 2015. In connection with the charter of the FPSO, the Company, as operator of the Etame field, guaranteed the charter payments through the same period. The charter continues for two years beyond that period unless one year's prior notice is given to the owner of the FPSO. The Company obtained several guarantees from its partners for their share of the charter payment. The Company's share of the charter payment is 28.1%. The Company believes the need for performance under the charter guarantee is remote. The estimated obligations for the annual charter payment and the Company's share of the charter payments through the end of the charter are as follows: (in thousands)

Year		Full Charter Payment				Company Share
2012		$	16,879			$	4,739
2013			16,833				4,726
2014			16,833				4,726
2015			11,621				3,263
Total		$	62,166			$	17,454

The Company has recorded a liability of $0.4 million at December 31, 2011 representing the guarantee's fair value.

The Company's share of charter expense, including a $0.25 per bbl charter fee for production up to 20,000 BOPD and a $2.50 per bbl charter fee for those bbls produced in excess of 20,000 BOPD, was $7.3 million, $7.8 million and $7.4 million for the years ending December 31, 2011, 2010 and 2009, respectively.

 

Other Lease Obligations

 

In addition to the FPSO, the Company has operating lease obligations for rentals as follows: (In thousands)

Year		Gross Obligation				Company Share
2012		$	10,579			$	3,369
2013			4,166				1,500
2014			695				532
2015			433				433
2016			434				434
Thereafter			651				651
Total		$	16,958			$	6,919

The 2012 and 2013 lease obligation amounts are significantly higher than amounts for years beyond 2013 due to short term contracts for helicopter and marine vessels supporting the offshore Gabon operations.

The Company incurred rent expense of $3.6 million, $6.0 million and $5.3 million under operating leases for the years December 31, 2011, 2010 and 2009, respectively.

 

Gabon Obligation

 

Under the terms of the Etame Production Sharing Contract, the consortium is required to provide to the local government refinery a volume of crude at a 25% discount to market price (the "Gabon Obligation"). The volume required to be furnished is the amount of the Etame Marin block production divided by the total Gabon production times the volume of oil refined by the refinery per year. In 2011, the Company paid $2.8 million for its share of the 2010 obligation. In 2010, the Company paid $1.3 million for its share of the 2009 obligation. In 2009, the Company paid $2.8 million for its share of the 2008 obligation. The Company accrues an amount for the Gabon Obligation based on management's best estimate of the volume of crude required, because the refinery does not publish its throughput figures. The amount accrued at December 31, 2011, for the Company's share of the 2011 obligation is $4.0 million.

 

Offshore Gabon

 

In addition to the contractual obligations described above, the Company entered into a sixth exploration period extension during 2009 and is required to spend $5.3 million for its share of two exploration wells and to acquire and process 150 square kilometers of 3-D seismic on the Etame Marin block by July 2014. One of the two exploration commitment wells was drilled in 2010 on the Omangou prospect at a cost of $8.6 million ($2.6 million net to the Company). The seismic obligation was met with the acquisition of 223 square kilometers of 3-D seismic in 2011. The remaining obligation is the drilling of one exploration well.

As part of securing the second ten year production license with the government of Gabon, the Company agreed in principle to a cash funding arrangement for the eventual abandonment of the offshore wells, platforms and facilities. The agreement is not yet signed, but calls for annual funding for the next seven years at 12.14% of the total abandonment estimate per year 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 to the Company. The funding is expected to begin in 2012 after the agreement is finalized. The abandonment estimate for this purpose is estimated to be approximately $14.0 million net to the Company on an undiscounted basis. 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.

 

Onshore Gabon

 

In November 2005, the Company signed a production sharing contract for the Mutamba Iroru block onshore Gabon. The five year contract awarded the Company exploration rights to approximately 270,000 acres along the central coast of Gabon. The Mutamba Iroru block was previously held by Shell Gabon. The Company acquired aeromagnetic gravity data in 2008, and together with seismic data acquired from previous operators over the block in 2006 and 2007, drilled two exploration wells in 2009. Both wells encountered water bearing sands and were abandoned.

In 2010, in conjunction with executing a farm-out agreement with Total Gabon, the exploration period was extended until May 2012. This extension requires the Company to reprocess 400 kilometers of 2-D seismic data and drill one exploration well. In return for Total Gabon funding an agreed portion of the new work commitment, Total Gabon will receive a 50% interest on the permit. The seismic reprocessing began in the first quarter of 2011 and was largely completed by the end of 2011. The Company expects to request an extension period in the first quarter of 2012 as the rig to drill the exploration well is not expected to be available until the third quarter of 2012. However, the Company can provide no assurances that such a request will be granted.

 

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 awards 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. During the first four years of the contract the Company was required to acquire and process 1,000 square kilometers of 3-D seismic, drill two exploration wells and expend a minimum of $29.5 million ($14.8 million net to the Company). The Company fulfilled its seismic obligation when it acquired 1,175 square kilometers of 3-D seismic data at a cost of $7.5 million ($3.75 million net to the Company) in January 2007 and 524 square kilometers of 3-D seismic data during the fourth quarter of 2008 at a cost of $6.0 million ($3.0 million net to the Company).

The government-assigned working interest partner was delinquent paying their share of the costs several times in 2009 and consequently was placed in a default position. By a governmental decree dated December 1, 2010, the former partner was removed from the production sharing contract, and a one year time extension was granted for drilling the two exploration commitment wells. Following the decree, the Company and the government of Angola have been working together to obtain a replacement partner. Options to amend the two-well commitment are also being discussed with the Angolan government. Because of the uncertainty surrounding the outcome of the discussions with the Angolan government, the Company recorded a full allowance of $4.4 million against the accounts receivable from partners for the amounts owed to the Company above its 40% working interest plus the 10% carried interest. In early 2012, the Angolan government granted a further one year extension for drilling the two exploration commitment wells in accordance with the production sharing contract.

Due to the timing uncertainty of obtaining a replacement partner and the outcome of discussions regarding modifying the drilling well commitments required by the production sharing contract, a time extension may be necessary beyond the current expiration date of November 30, 2012. If the government of Angola were to deny a request for a further time extension, the Company may be required to impair its leasehold costs and other investments totaling $11.0 million as of December 31, 2011. The Company may also be required to pay the Angolan government $10.0 million in lieu of drilling the two exploration commitment wells.

 

United States

 

In September 2011, the Company acquired a 65% working interest in approximately 22,000 gross acres (14,300 net acres) covering the Middle Bakken and deeper formations in the East Poplar unit and the Northwest Poplar field in Roosevelt County, Montana. Pursuant to the terms of the acquisition, the Company is required to drill three wells at its sole cost, one of which must be drilled by June 1, 2012 and the remaining two wells must be drilled by the end of 2012. A vertical exploration well, which met the time requirement for drilling the first well, was spudded in December 2011 to evaluate the formations. The Company expects to drill two additional wells on this property in 2012 in accordance with the terms of the agreement.