FPSO Charter

In October 2012, the Company entered into an amendment with the owner of the FPSO chartered for the Etame field to extend the contract until September 2020. 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)

The Company has recorded a liability of $1.0 million and $1.1 million at December 31, 2014 and 2013, respectively, representing the guarantee’s fair value.

The Company’s share of charter expense, including a $0.93 per Bbl ($0.25 per Bbls in 2013) 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 $11.8 million, $10.4 million and $9.7 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Other Lease Obligations

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

The Company contracted with two drilling rigs in the year ended December 31, 2014. In the third quarter of 2014, the Company contracted with a drilling rig to begin a multi- well development drilling campaign offshore Gabon. The campaign includes drilling of      wells from the Etame platform and      wells from the South East Etame and North Tchibala platform. The drilling rig commenced in October 2014 and provides a commitment until July 2016, at a day rate of approximately $168,000. The total commitment related to this rig is $25.8 million. The second drilling rig contract was signed in July 2014 for a semi-submersible rig to drill the exploration well on the Kindele prospect, a post-salt objective. The well began drilling in the first quarter of 2015. The drilling rig provides a forty-five day commitment at a day rate of approximately $338,000. The total commitment related to this rig is $15.2 million Such rates are subject to standard reimbursement and escalation contractual provisions.

The 2015 lease obligation amounts are higher than amounts for years beyond 2015 due to short term contracts for helicopter and marine vessels supporting the offshore Gabon operations.

The Company incurred rent expense of $4.0 million, $4.1 million and $4.4 million under operating leases for the years ended December 31, 2014, 2013 and 2012, 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 2014, the Company paid $3.3 million for its share of the 2013 obligation. In 2013, the Company paid $3.0 million for its share of the 2012 obligation. In 2012, the Company paid $3.7 million for its share of the 2011 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, 2014, for the Company’s share of the 2014 obligation is $2.7 million. These costs are deemed cost recoverable under the terms of the production sharing contract.

Offshore Gabon

As part of securing the first of two-five year extensions to the Etame field production license to which the Company is entitled from the government of Gabon, the Company 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 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 initial funding took place in October 2014 for calendar years 2012 and 2013 totaling $8.4 million ($2.3 million net to the Company). The funding for calendar year 2014 was paid in the first quarter of 2015 in the amount of $4.2 million ($1.2 million net to the Company). The abandonment estimate for this purpose is estimated to be approximately $10.1 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. The cash funding is reflected under other long term assets as “Abandonment Funding”.  

Additionally, in October 2014, the Company received a provisional audit report related to the Etame Marin block operations from the Gabon Taxation Department as part of a special industry-wide audit of business practices and financial transactions in the Republic of Gabon.  The Company currently cannot reasonably estimate a range of potential loss, if any, as a result of the audits.  While the ultimate outcome of the claim and impact on VAALCO cannot be predicted, management believes that the claims are unfounded.  In November 2014, we responded to the Gabon Taxation Department requesting joint meetings to advance the resolution of this matter and provided a formal reply to the provisional audit report in February 2015.

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 data, 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. Additional extensions were subsequently granted by the Angolan government until November 30, 2014 to drill the two exploration commitment wells.

In the fourth quarter of 2013, the Company received written confirmation from The Ministry of Petroleum of Angola that the available 40% working interest in Block 5, offshore Angola, was assigned to Sonangol E.P., the National Concessionaire.  The Ministry of Petroleum also confirmed that Sonangol E.P. would assign the aforementioned participating interest to its exploration and production affiliate, Sonangol P&P.   

In April 2014, the Company received a letter and contractual amendment proposal from Sonangol E.P., related to the extension of the two well drilling commitment, prior to the expiration of the extension on November 30, 2014, by the government of Angola.  Due to the uncertainty that the primary term of the exploration license would be extended by the Republic of Angola before the November 30, 2014 expiration date, in October 2014, the Company entered into the Subsequent Exploration Phase (“SEP”), together with its working interest partner, Sonangol P&P. The Subsequent Exploration Phase (“SEP”) provided for in the Production Sharing Agreement signed in 2006 with the Republic of Angola. The SEP extends the exploration period for an additional three year period such that the new expiry date for exploration activities is November 30, 2017. Entering the SEP requires the Company and its partner to acquire 3D seismic covering six hundred square kilometers and to drill two additional exploration wells.

Late in 2013, the Company proceeded to obtain additional seismic data covering the deeper segment of the block.  The seismic data was reprocessed during 2014 and will continue to be reprocessed in 2015. With the purchase of the additional seismic data, the Company has already satisfied the seismic obligation of the SEP.

By entering into the SEP, the Company is required to drill a total of four exploration wells during the exploration extension period.  The four well obligations include the two well commitments under the primary exploration period that carries over to the SEP period. A $10.0 million dollar assessment ($5.0 million dollars net to VAALCO) applies to each of the four commitment exploration wells, if any, that remain undrilled at the end of the exploration period in November 2017. Restricted cash of $10.0 million for the two new commitment wells was recorded in the fourth quarter of 2014. At December 31, 2014 the Company had $20.0 million in restricted cash related to the offshore Angola exploration agreement.

A drilling rig contract was signed in July 2014 for a semi-submersible rig to drill the exploration well on the Kindele prospect, a post-salt objective. The well is expected to begin drilling in the first quarter of 2015. Drilling this well will satisfy one of the four exploration well obligations and release $5.0 million of the $20.0 million recorded as restricted cash at December 31, 2014 by the Company.