12. LEASES

Under the leasing standard that became effective January 1, 2019, there are two types of leases: finance and operating. Regardless of the type of lease, the initial measurement of the lease results in recording a ROU asset and a lease liability at the present value of the future lease payments.

Practical Expedients

The Company elected to use all the practical expedients, effectively carrying over its previous identification and classification of leases that existed as of January 1, 2019. Additionally, a lessee may elect not to recognize ROU assets and liabilities arising from short-term leases provided there is no purchase option the entity is likely to exercise. The Company has elected this short-term lease exemption.

Operating leases

The Company is currently a party to several operating lease agreements for the corporate office, rental of marine vessels and equipment and the FPSO. The duration for these agreements ranges from 9 to 30 months. In some cases, the lease contracts require the Company to make payments both for the use of the asset itself and for operations and maintenance services. Only the payments for the use of the asset related to the lease component are included in the calculation of ROU assets and lease liabilities. Payments for the operations and maintenance services are considered non-lease components and are not included in calculating the ROU assets and lease liabilities. For leases on ROU assets used in joint operations, generally the operator reflects the full amount of the lease component, including the amount that will be funded by the non-operators. As operator for the Etame Marin block, the ROU asset recorded for marine vessels, and certain equipment used in the joint operations includes the gross amount of the lease components.

During the third quarter of 2019, the Company notified the lessor of the FPSO of its intent to extend the lease term by the first option that extends the FPSO lease to September 2021. Similarly, during the third quarter of 2020, the Company gave notification to extend the FPSO lease to September 2022.

On September 9, 2022, the Company entered into an addendum to the FPSO contract which extends the contract from  September 2022 through October 4, 2022 and sets forth both the Company’s and lessor's rights and obligations with respect to demobilization and decommissioning. Under ASC 842, the Company was required to reassess the lease for lease classification at the time the Company entered into the amendment. Accordingly, the Company assessed the lease as a short-term lease.

The marine vessels and certain equipment leases include provisions for variable lease payments, under which the Company is required to make additional payments based on the level of production or the number of days or hours the asset is deployed, or the number of persons onboard the vessel. Because the Company does not know the extent that the Company will be required to make such payments, they are excluded from the calculation of ROU assets and lease liabilities.

Financing leases

The Company is currently a party to several financing lease agreements for the FSO and generators used in the operations of the Etame Marin block. On February 15, 2022, the Company signed a contract for a finance lease of generators and related parts. The related ROU asset and lease liability was recorded on the lease commencement date of February 15, 2022.  The remaining minimum duration for this lease is 59 months as of September 30, 2022.  

In August 2021, the Company signed the FSO agreements to lease a FSO to replace the current FPSO whose term ended in October 2022. Under the terms of the FSO agreements, a third party is expected to modify the leased vessel in order to meet the Company’s crude-oil production requirements. The vessel arrived on location in the Etame Marin block in August 2022. On  October 19, 2022, the Company signed the final acceptance certificate at which time control of the vessel transferred to the Company.

All leases

For all leases that contain an option to extend the initial lease term, the Company has evaluated whether it will extend the lease beyond the initial lease term. When the Company believes it will utilize these leased assets beyond the initial lease term, those payments have been included in the calculation of the ROU assets and liabilities. The discount rate used to calculate ROU assets and lease liabilities represents the Company’s incremental borrowing rate. The Company determined this by considering the term and economic environment of each lease, and estimating the resulting interest rate the Company would incur to borrow the lease payments.

For the three and nine months ended September 30, 2022 and 2021, the components of the lease costs and the supplemental information were as follows:

The table below describes the presentation of the total lease cost on the Company’s condensed consolidated statement of operations. As discussed above, the Company’s joint venture owners are required to reimburse the Company for their share of certain expenses, including certain lease costs.

The following table describes the future maturities of the Company’s lease liabilities at September 30, 2022:

Under the joint operating agreements, other joint venture owners are obligated to fund $1.4 million of the $3.5 million in future lease liabilities.