-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B1GnFR/ws3NdhL40/CSXhHOVLR1OVPbeGz1OBSbJIXlsyUMPAdgEUfdcrubMxLrF UsPu4cynaPqdFrCE1luWGg== 0000930661-02-000958.txt : 20020415 0000930661-02-000958.hdr.sgml : 20020415 ACCESSION NUMBER: 0000930661-02-000958 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVIVA PETROLEUM INC /TX/ CENTRAL INDEX KEY: 0000910659 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 751432205 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-13440 FILM NUMBER: 02593300 BUSINESS ADDRESS: STREET 1: 8235 DOUGLAS AVE STREET 2: STE 400 CITY: DALLAS STATE: TX ZIP: 75225 BUSINESS PHONE: 2146913464 MAIL ADDRESS: STREET 1: 8235 DOUGLAS AVE STREET 2: STE 400 CITY: DALLAS STATE: TX ZIP: 75225 10-K405 1 d10k405.txt FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2001 --------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ___________ Commission File Number 0-22258 AVIVA PETROLEUM INC. (Exact name of registrant as specified in its charter) Texas 75-1432205 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8235 Douglas Avenue, 75225 Suite 400, Dallas, Texas (Zip Code) (Address of principal executive offices) (214) 691-3464 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Names of each exchange ---------------------- Title of each class on which registered ------------------- ------------------- Common Stock, without par value None -- Common Stock quoted on OTC Bulletin Board Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___. --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x . --- The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant on February 28, 2002 was approximately $2,139,872. As of such date, the last sale price of a share of the Registrant's common stock, without par value ("Common Stock"), was U.S. $0.05, as quoted on the OTC Bulletin Board. As of February 28, 2002, the Registrant had 46,900,132 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None. TABLE OF CONTENTS TO FORM 10-K Page ------- Part I Item 1. Business General.......... ...................................... 1 Garnet Merger........................................... 1 Debt Restructuring...................................... 1 Current Operations...................................... 1 Risks Associated with the Company's Business............ 2 Products, Markets and Methods of Distribution........... 3 Regulation.............................................. 4 Competition............................................. 6 Employees............................................... 7 Item 2. Properties Productive Wells and Drilling Activity.................. 7 Undeveloped Acreage..................................... 7 Title to Properties..................................... 8 Reserves and Future Net Cash Flows...................... 8 Production, Sales Prices and Costs...................... 8 Significant Properties Colombia............................................. 9 United States........................................ 11 Papua New Guinea..................................... 12 Item 3. Legal Proceedings.......................................... 12 Item 4. Submission of Matters to a Vote of Security Holders........ 13 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Price Range of Depositary Shares and Common Stock....... 13 Dividend History and Restrictions....................... 14 Item 6. Selected Financial Data.................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies............................ 15 Results of Operations................................... 15 New Accounting Pronouncements........................... 17 Liquidity and Capital Resources......................... 17 Item 7A. Quantitative and Qualitative Disclosure about Market Risk.. 18 Item 8. Financial Statements and Supplementary Data................ 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................ 18 Part III Item 10. Directors and Executive Officers of the Registrant Directors of the Company................................ 19 Executive Officers of the Company....................... 19 Meetings and Committees of the Board of Directors....... 19 Compliance with Section 16(a) of the Securities Exchange Act of 1934............................................. 20 Item 11. Executive Compensation Summary Compensation Table.............................. 20 Directors' Fees......................................... 20 Option Grants During 2001............................... 20 Option Exercises During 2001 and Year End Option Values. 20 (i) TABLE OF CONTENTS TO FORM 10-K (Continued) Page ------- Compensation Committee Interlocks and Insider Participation in Compensation Decisions.............. 21 Employment Contracts.................................... 21 Compensation Committee Report on Executive Compensation. 21 Performance Graph....................................... 22 Item 12. Security Ownership of Certain Beneficial Owners and Management Security Ownership of Certain Beneficial Owners ........ 23 Security Ownership of Management........................ 24 Item 13. Certain Relationships and Related Transactions............. 24 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................................ 25 Signatures .......................................................... 28 (ii) PART I ITEM 1. BUSINESS General Aviva Petroleum Inc. (referred to collectively with its consolidated subsidiaries as the "Company"), a Texas corporation, through its subsidiaries, is engaged in the exploration for and production and development of oil and gas in Colombia, offshore in the United States, and in Papua New Guinea. The Company was incorporated in 1973 and the common stock, without par value ("Common Stock"), of the Company trades on the OTC Bulletin Board under the symbol "AVVP". The Company's principal executive offices are located in Dallas, Texas. Garnet Merger On October 28, 1998, the Company acquired Garnet Resources Corporation ("Garnet") in exchange for the issuance, in the aggregate, of approximately 14 million shares of the Company's Common Stock. Pursuant to the Agreement and Plan of Merger dated as of June 24, 1998, an indirect, wholly owned subsidiary of the Company was merged with and into Garnet. Garnet's $15 million of 9 1/2% Convertible Subordinated Debentures were acquired and canceled, and the outstanding bank debt of Garnet and the Company was refinanced under a $15 million credit facility which was fully retired in 2000. See "--Debt Restructuring". As a result of the merger, the Company was able to effect cost savings, particularly in Colombia where each company had an interest in the same properties. Debt Restructuring On June 8, 2000, the Company entered into agreements with the Company's senior secured lender, Crosby Capital L.L.C. ("Crosby"), in order to restructure the Company's senior debt which, including unpaid interest, aggregated $16,103,064 as of May 31, 2000. Pursuant to the agreements, Crosby canceled $13,353,064 of such debt and transferred to the Company warrants on 1,500,000 shares of the Company's common stock in exchange for the general partner rights and an initial 77.5% partnership interest in Argosy Energy International ("Argosy"), a Utah limited partnership which holds the Company's Colombian properties. Following the transaction, Aviva Overseas, Inc. ("Aviva Overseas"), a wholly owned subsidiary of the Company, owned a 22.1196% limited partnership interest in Argosy. An additional 7.5% limited partnership interest was transferred from Crosby to Aviva Overseas effective August 14, 2001, when Crosby received in distributions from Argosy an amount equal to $3,500,000 plus interest at the prime rate plus 1%. The Company's interest in Argosy is 29.6196% after the transfer. The Company's remaining debt of $2,750,000 was reacquired from Crosby on December 21, 2000, in exchange for a 15% net profits interest in any new production at Breton Sound Block 31 field. This transaction substantially completed the restructuring of the Company and the reorganization of the Company's wholly owned subsidiary, Aviva America, Inc. ("AAI"). AAI had filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code on July 21, 2000. The filing, in the Northern District of Texas, was initiated in order to achieve a comprehensive restructuring of AAI's debts. Following approval by the court and creditors, the voluntary petition for reorganization became effective on November 17, 2000. As a result of the aforementioned transactions, all of the Company's outstanding senior secured debt has been eliminated. Current Operations Colombia. The Company is the owner of interests in, and is engaged in -------- exploration for, and development and production of oil from, three contracts granted by Empresa Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"). The Company's Colombian activities are carried out by Argosy which operates the Colombian properties. Argosy is currently party to three contracts with Ecopetrol called Santana, Rio Magdalena and Aporte Putumayo. Argosy 1 expects to sign a fourth contract, the Guayuyaco contract, in April 2002. All contract areas are located in the Putumayo Basin of southwestern Colombia, except for Rio Magdalena which is located in the Upper Magdalena Basin in central Colombia. The Company's production activities are currently limited to the Santana contract area. Twenty-one wells have been drilled on the Santana contract area. Of 13 exploratory wells, seven have been productive and six were dry holes. Of eight development wells, seven have been productive. Four fields have been discovered and have been declared commercial by Ecopetrol. Gross production from the Santana block has totaled approximately 17.4 million barrels during the period from April 1992, when production commenced, through December 2001. The Aporte Putumayo block produced from 1976 until March 1995, when declining production caused the block to be unprofitable under the terms of the contract. The block has been relinquished, however Argosy remains obligated for abandonment and restoration operations on the old wells in the block. Each concession is governed by a separate contract with Ecopetrol. Generally, the contracts cover a specific period and require certain exploration expenditures in the early years of the contract and, in the later years of the contract, permit exploitation of reserves that have been found. The Santana contract provides that Ecopetrol shall receive, on behalf of the Colombian Ministry of Mines, royalty payments in the amount of 20% of the gross proceeds of the oil produced pursuant to the respective contract, less certain costs of transporting the oil to the point of sale. The Rio Magdalena contract (and the proposed Guayuyaco contract, see "Item 2. Properties -- Significant Properties") provides for similar royalty payments, however, the amount of royalty is calculated on a sliding scale that ranges from 5% (for production up to 5,000 barrels per day) up to a maximum of 25%. Under each of the contracts, application must be made to Ecopetrol for a declaration of commerciality for each discovery. If Ecopetrol declares the discovery commercial, it has the right to a reversionary interest in the field equal to its specified interest and is required to pay its share of all future costs. If, alternatively, Ecopetrol declines to declare the discovery commercial, Argosy has the right to proceed with development and production at its own expense until such time as it has recovered 200% of the costs incurred, at which time Ecopetrol is entitled to back in for a working interest in the field equal to its specified interest without payment or reimbursement of any historical costs. Exploration costs (as defined in the contracts) incurred by Argosy prior to the declaration of commerciality are recovered by means of retention by Argosy of a portion of the non-royalty proceeds of production from each well until costs relating to that well are recovered. United States. In the United States the Company, through its wholly owned ------------- subsidiary, AAI, has been engaged in the production of oil and gas attributable to its working interests in various wells located in the Gulf of Mexico offshore Louisiana, at Main Pass 41 and Breton Sound 31 fields. Effective November 7, 2000, the Company assigned all of its interest in the Main Pass 41 field to the field operator. AAI continues to produce from, and is the operator of, the Breton Sound 31 field. The Company acquired its interests in these fields through the acquisition of Charterhall Oil North America PLC in 1990. Papua New Guinea. In Papua New Guinea the Company, through its wholly ---------------- owned subsidiary, Garnet PNG Corporation ("Garnet PNG"), is engaged in the exploration for oil and gas attributable to its 2% carried working interest in Petroleum Prospecting License No. 206 ("PPL-206"). The Company acquired Garnet PNG as part of the merger with Garnet. See "-- Garnet Merger." Risks Associated with the Company's Business General. The Company's operations are subject to oil field operating ------- hazards such as fires, explosions, blowouts, cratering and oil spills, any of which can cause loss of hydrocarbons, personal injury and loss of life, and can severely damage or destroy equipment, suspend drilling operations and cause substantial damage to subsurface structures, surrounding areas or property of others. As protection against operating hazards, the Company maintains broad insurance coverage, including indemnity insurance covering well control, redrilling and cleanup and containment expenses, Outer Continental Shelf Lands Act coverage, physical damage on certain risks, employers' liability, comprehensive general liability, appropriate auto and marine liability and workers' compensation insurance. The Company believes that such insurance coverage is customary for companies engaged in similar operations, but the Company may not be fully insured against various of the foregoing risks, because such risks are either not fully insurable or the cost of insurance is prohibitive. The Company does not carry business interruption or terrorism insurance because of the prohibitively high cost. The occurrence of an uninsured hazardous event could have a material adverse effect on the financial condition of the Company. 2 Colombia. The Company has expended significant amounts of capital for the -------- acquisition, exploration and development of its Colombian properties and may expend additional capital for further exploration and development of such properties. Even if the results of such activities are favorable, further drilling at significant cost may be required to determine the extent of and to produce the recoverable reserves. Failure to fund certain capital expenditures could result in a decrease in the Company's ownership interest in Argosy or, possibly, a forfeiture of all or part of the Company's interests in the applicable property. For additional information on the Company's concession obligations, see "-- Current Operations," and regarding its cash requirements, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company is subject to the other risks inherent in the ownership and development of foreign properties including, without limitation, cancellation or renegotiation of contracts, royalty and tax increases, retroactive tax claims, expropriation, adverse changes in currency values, foreign exchange controls, import and export regulations, environmental controls and other laws, regulations or international developments that may adversely affect the Company's properties. The Company does not maintain political risk insurance. Exploration and development of the Company's Colombian properties are dependent upon obtaining appropriate governmental approvals and permits. See "-- Regulation." The Company's Colombian operations are also subject to price risk. See "-- Products, Markets and Methods of Distribution." There are logistical problems, costs and risks in conducting oil and gas activities in remote, rugged and primitive regions in Colombia. The Company's operations are also exposed to potentially detrimental activities by the leftist guerrillas who have operated within Colombia for many years. The guerrillas in the Putumayo area, where the Company's property is located, have as recently as August 3, 1998, significantly damaged the Company's assets. Since that time the Company has been subject to lessor attacks on its pipelines and equipment resulting in only minor interruptions of oil sales. The Colombian army guards the Company's operations, however, there can be no assurance that the Company's operations will not be the target of significant guerrilla attacks in the future. The damages resulting from the above-referenced attacks were covered by insurance. During 2001 the cost of such insurance became prohibitively high and, accordingly, Argosy has elected to no longer maintain terrorism insurance. United States. The Company's activities in the United States are subject ------------- to a variety of risks. The U.S. properties could, in certain circumstances, require expenditure of significant amounts of capital. Failure to fund its share of such costs could result in a diminution of value of, or under applicable operating agreements forfeiture of, the Company's interest. The Company's ability to fund such expenditures is also dependent upon the ability of the other working interest owners to fund their share of the costs. If such working interest owners fail to do so, the Company could be required to pay its proportionate share or forego further development of such properties. The Company's activities in the United States are subject to various environmental regulations and to price risk. See "-- Regulation" and "-- Products, Markets and Methods of Distribution." Information concerning the amounts of revenue, operating loss and identifiable assets attributable to each of the Company's geographic areas is set forth in Note 10 of the Notes to Consolidated Financial Statements contained elsewhere herein. Products, Markets and Methods of Distribution Colombia. The Company's oil is sold pursuant to a sales contract with -------- Ecopetrol. The contract provides for cancellation by either party with notice. In the event of cancellation by Ecopetrol, the Company may export its oil production. Ecopetrol has historically purchased the Company's production, but there can be no assurance that it will continue to do so, nor can there be any assurance of ready markets for the Colombian production if Ecopetrol does not elect to purchase the production. The Company currently produces no natural gas in Colombia. See "Item 2. Properties." During each of the three years ended December 31, 2001, the Company received the majority of its revenue from Ecopetrol. Sales to Ecopetrol accounted for $1,253,000 or 59% of oil and gas revenue for 2001, $4,267,000, or 74% of oil and gas revenue for 2000, and $5,683,000, or 84% of oil and gas revenue for 1999. The foregoing amounts represent the Company's entire Colombian oil revenue. If Ecopetrol were to elect not to purchase the Company's Colombian oil production, the Company believes that other purchasers could be found for such production. 3 United States. The Company does not refine or otherwise process domestic ------------- crude oil and condensate production. The domestic oil and condensate it produces are sold to oil transmission companies at posted field prices in the area where production occurs. The Company does not have long term contracts with purchasers of its domestic oil and condensate production. The Company's domestic gas production at Breton Sound 31 is used for field operations and is recorded at spot prices. The Company has not historically hedged any of its domestic production. During 2001 and 2000, the Company received more than 10% of its revenue from one domestic purchaser. Such revenue accounted for $782,000, or 37% of oil and gas revenue for 2001 and $968,000, or 16.7% of oil and gas revenue for 2000. During 1999, the Company did not receive more than 10% of its revenue from any one domestic purchaser. General. Oil and gas are the Company's only products. There is substantial ------- uncertainty as to the prices that the Company may receive for production from its existing oil and gas reserves or from oil and gas reserves, if any, which the Company may discover or purchase. It is possible that under market conditions prevailing in the future, the production and sale of oil or gas, if any, from the Company's properties in Papua New Guinea may not be commercially feasible. The availability of a ready market and the prices received for oil and gas produced depend upon numerous factors beyond the control of the Company including, without limitation, adequate transportation facilities (such as pipelines), marketing of competitive fuels, fluctuating market demand, governmental regulation and world political and economic developments. World oil and gas markets are highly volatile and shortage or surplus conditions substantially affect prices. As a result, there have been dramatic swings in both oil and gas prices in recent years. From time to time there may exist a surplus of oil or natural gas supplies, the effect of which may be to reduce the amount or price of hydrocarbons that the Company may produce and sell while such surplus exists. Regulation Environmental Regulation. The Company's operations are subject to foreign, ------------------------ federal, state, and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit by operators before drilling commences; restrict the types, quantities, and concentration of various substances that can be released into the environment in connection with drilling and production activities; limit or prohibit drilling activities on certain lands lying within wilderness areas, wetlands, and other protected areas; require remedial measures to mitigate pollution from former operations, such as plugging and abandoning wells; and impose substantial liabilities for pollution resulting from the Company's operations. The regulatory burden on the oil and gas industry increases the cost of doing business and consequently affects its profitability. Changes in environmental laws and regulations occur frequently, and any revision or reinterpretation of existing laws and regulations or adoption of new laws and regulations that result in more stringent and costly waste handling, disposal, remedial, drilling, permitting, or operational requirements could have a material adverse impact on the operating costs of the Company, as well as significantly impair the Company's ability to compete with larger, more highly capitalized companies. Management believes that the Company is in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on the Company's operations, capital expenditures, and earnings. Management further believes, however, that risks of substantial costs and liabilities are inherent in oil and gas operations, and there can be no assurance that significant costs and liabilities, including administrative, civil and criminal penalties for violations of environmental laws and regulations and cleanup costs for remediation of contaminated properties, will not be incurred. For more information, please read "Item 3. Legal Proceedings." Colombia. Any significant exploration or development of the Company's -------- Colombian properties in which it now holds a non-operating interest, such as conducting a seismic program, the drilling of an exploratory or developmental well or the construction of a pipeline, requires environmental review and the issuance of environmental permits by the Ministry of the Environment. In recent years while it was operator of these Colombian properties, the Company received environmental permits without substantial delay. There can be, however, no assurance that the current operator of these Colombian properties will not experience future delays in obtaining necessary environmental licenses. See also "Item 2. Properties -- Significant Properties -- Colombia." United States. The Company believes that its domestic operations are ------------- currently in substantial compliance with U.S. federal, state, and local environmental laws and regulations. In the past, the Company has incurred significant costs to make capital improvements, including the drilling and completion of a salt water 4 injection well at Breton Sound 31 field, in order to maintain compliance with these U.S. environmental laws or regulations. There can be no assurance that the Company will not expend additional significant amounts in the future to maintain such compliance. The Oil Pollution Act of 1990, as amended ("OPA '90"), and regulations thereunder impose a variety of requirements on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. A "responsible party" includes the owner or operator of a vessel, pipeline, or onshore facility, or the lessee or permittee of the area in which an offshore facility is located. OPA '90 assigns liability to each responsible party for oil spill removal costs and a variety of public and private damages from oil spills. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill is caused by gross negligence or willful misconduct, the spill resulted from violation of a federal safety, construction, or operating regulation, or a party fails to report a spill or to cooperate fully in the cleanup. Few defenses exist to the liability imposed under OPA '90 for oil spills. The failure to comply with these requirements or inadequate cooperation in a spill event may subject a responsible party to civil or criminal enforcement actions. Management of the Company is currently unaware of any oil spills for which the Company has been designated as a responsible party under OPA '90 and that will have a material adverse impact on the Company or its operations. OPA '90 also imposes ongoing requirements on facility operators, such as the preparation of an oil spill contingency plan. The Company has such plans in place. The Company's U.S. property at Breton Sound Block 31 field, on state leases offshore Louisiana, is subject to OPA '90. Under OPA '90 and a final rule adopted by the U.S. Minerals Management Service ("MMS") in August 1998, owners and operators of covered offshore facilities that have a worst case oil spill of more than 1,000 barrels must demonstrate financial responsibility in amounts ranging from $10 million in specified state waters to $35 million in federal outer continental shelf ("OCS") waters, with higher amounts of up to $150 million in certain limited circumstances where the MMS believes such a level is justified by the risks posed by operations at such covered offshore facilities or if the worst case oil-spill discharge volumes possible at such facilities may exceed the applicable threshold volumes specified under the MMS final rule. The Company believes that it currently has established adequate proof of financial responsibility for its covered offshore facilities in Louisiana State waters. However, the Company cannot predict whether these financial responsibility requirements under the OPA '90 amendments or the MMS final rule will result in the imposition of significant additional annual costs to the Company in the future or otherwise have a material adverse effect on the Company. The impact of financial responsibility requirements is not expected to be any more burdensome to the Company than it will be to other similarly or less capitalized owners or operators in the Gulf of Mexico. The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, and analogous state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered responsible for the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury, property damage and recovery of response costs allegedly caused by the hazardous substances released into the environment. The Company has not received any notification nor does it otherwise know of circumstances indicating that it may be potentially responsible for cleanup costs under CERCLA. The federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes regulate the storage, treatment and disposal of wastes, including hazardous wastes. The EPA and various state agencies have limited the approved methods of disposal for certain hazardous and nonhazardous wastes, thereby making such disposal more costly. Furthermore, certain wastes generated by the Company's oil and natural gas operations that are currently exempt from treatment as hazardous wastes may in the future be designated as hazardous wastes and therefore be subject to more rigorous and costly operating and disposal requirements. Other Regulation - Colombia. The Company's Colombian operations, in which --------------------------- it now holds a non-operating interest, are regulated by Ecopetrol, the Ministry of Mines and Energy, and the Ministry of the Environment, among others. Current environmental laws, regulations and the administration and enforcement thereof, or the passage of new environmental laws or regulations in Colombia, could result in substantial costs and liabilities in the future or in delays in obtaining the necessary permits to conduct these Colombian operations. These operations may also be 5 affected from time to time in varying degrees by political developments in Colombia. Such political developments could result in cancellation or significant modification of the Company's contract rights with respect to such properties, or could result in tax increases and/or retroactive tax claims being assessed against the Company. Other Regulation - United States. Domestic exploration for and production -------------------------------- and sale of oil and gas are extensively regulated at both the national and local levels. Legislation affecting the oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue, and have issued, rules and regulations applicable to the oil and gas industry that are often difficult and costly to comply with and that may carry substantial penalties for failure to comply. The regulations also generally specify, among other things, the extent to which acreage may be acquired or relinquished, permits necessary for drilling of wells, spacing of wells, measures required for preventing waste of oil and gas resources and, in some cases, rates of production. The heavy and increasing regulatory burdens on the oil and gas industry increase the costs of doing business and, consequently, affect profitability. Sales of crude oil, condensate and gas liquids by the Company are not currently regulated and are made at market prices. In a number of instances, however, the ability to transport and sell such products is dependent on pipelines whose rates, terms and conditions of service are subject to the Federal Energy Regulatory commission ("FERC") jurisdiction under the Interstate Commerce Act and, possibly, the Energy Policy Act of 1992. Certain regulations implemented by the FERC in recent years could result in an increase in the cost of transportation service on certain pipelines. However, the Company does not believe that these regulations affect it any differently than others. The Company cannot accurately predict the effect that any of the aforementioned orders or the challenges to the orders will have on the Company's operations. Additional proposals and proceedings that might affect the oil industry are pending before Congress, the FERC and the courts. The Company cannot accurately predict when or whether any such proposals or proceedings may become effective. State Regulation. Production of any domestic oil and gas by the Company is ---------------- affected by state regulations. Many states in which the Company has operated have statutory provisions regulating the production and sale of oil and gas, including provisions regarding deliverability. Such statutes, and the regulations promulgated in connection therewith, are generally intended to prevent waste of oil and gas and to protect correlative rights to produce oil and gas between owners of a common reservoir. Such regulations include requiring permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells, and the disposal of fluids used in connection with operations. The Company's operations are also subject to various conservation laws and regulations including the regulation of the size of drilling and spacing units or proration units, the density of wells that may be drilled, and the unitization or pooling of oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas, and impose certain requirements regarding the ratability of production. The effect of these regulations may limit the amount of oil and natural gas that the Company can produce from its wells and may limit the number of wells or the locations at which the Company can drill. Inasmuch as such laws and regulations are periodically expanded, amended and reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations; however, the Company does not believe it will be affected by these laws and regulations materially differently than the other oil and natural gas producers with which it competes. Other Regulations - Papua New Guinea. The Company's Papua New Guinea ------------------------------------ operations, in which it holds a non-operating interest, are currently governed by the Department of Petroleum and Energy, which has jurisdiction over all petroleum exploration in that country. In the event the Company develops and operates a petroleum business in Papua New Guinea, the Company will be subject to regulation by the Investment Promotion Authority, which regulates almost all business operations with significant foreign equity or with foreign management control. Competition The Company encounters strong competition from other independent operators and from major oil companies in acquiring properties suitable for exploration, in contracting for drilling equipment and in securing trained personnel. 6 Many of these competitors have financial and other resources substantially greater than those available to the Company. The Company's ability to discover reserves in the future depends on its ability to select, generate and acquire suitable prospects for future exploration. The Company does not currently generate its own prospects and depends exclusively upon external sources for the generation of oil and gas prospects. Employees As of December 31, 2001, Aviva had 7 full-time employees. ITEM 2. PROPERTIES Productive Wells and Drilling Activity The following table summarizes the Company's developed acreage and productive wells at December 31, 2001. "Gross" refers to the total acres or wells in which the Company has a working interest, and "net" refers to gross acres or wells multiplied by the percentage working interest owned by the Company. Developed Acreage (1) Gross Net -------- ------- United States 1,387 1,003 Colombia (2) 3,706 384 -------- ------- 5,093 1,387 ======== ======= Productive Wells (3) Oil Gas --------------------- --------------------- Gross Net Gross Net ------- ------ ------- ------ United States 7 4.93 3 2.30 Colombia 14 1.45 - - ------- ------ ------- ------ 21 6.38 3 2.30 ======= ====== ======= ====== (1) Developed acreage is acreage assignable to productive wells. (2) Excludes Aporte Putumayo acreage pending abandonment operations. (3) Productive wells represent producing wells and wells capable of producing. During the period from January 1, 1999 through December 31, 2001, the Company did not drill nor participate in the drilling of any development or exploratory wells. Undeveloped Acreage The Company's undeveloped acreage in Colombia is held pursuant to the Santana and Rio Magdalena contracts with the Colombian government. No further relinquishments are required for the Santana contract until the expiration of the contract in 2015. The Rio Magdalena contract may, by operation of its terms, require the relinquishment of certain portions of the undeveloped acreage in 2007, 2009 and 2011. See "-- Significant Properties." The Company's undeveloped acreage in Papua New Guinea is held pursuant to PPL-206. See "-- Significant Properties." The Company does not have an undeveloped acreage position in the United States because of the costs of maintaining such a position. Oil and gas leases in the United States generally can be acquired by the Company for specific prospects on reasonable terms either directly or through farmout arrangements. 7 The following table shows the undeveloped acreage held by the Company at December 31, 2001. Undeveloped acreage is acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether such acreage contains proved reserves. Undeveloped Acres ------------------------ Gross Net --------- ------ Colombia Santana 48,636 14,406 Rio Magdalena 144,609 14,991 Papua New Guinea 1,228,187 24,564 --------- ------ 1,421,432 53,961 ========= ====== Title to Properties The Company has not performed a title examination for offshore U.S. leases in federal waters because title emanates from the United States government. Title examinations also are not performed in Colombia, where mineral title emanates from the national government. The Company believes that it generally has satisfactory title to all of its oil and gas properties. The Company's working interests are subject to customary royalty and overriding royalty interests generally created in connection with their acquisition, liens incident to operating agreements, liens for current taxes and other burdens and minor liens, encumbrances, easements and restrictions. The Company believes that none of such burdens materially detracts from the value of such properties or its interest therein or will materially interfere with the use of the properties in the operation of the Company's business. Reserves and Future Net Cash Flows See Supplementary Information Related to Oil and Gas Producing Activities in "Item 8. Financial Statements and Supplementary Data" for information with respect to the Company's reserves and future net cash flows. The Company will file with the Department of Energy (the "DOE") a statement with respect to the Company's estimate of proved oil and gas reserves as of December 31, 2001, that is not the same as that included in the estimate of proved oil and gas reserves as of December 31, 2001, as set forth in "Item 8. Financial Statements and Supplementary Data" elsewhere herein. The information filed with the DOE includes the estimated proved reserves of the properties of which the Company is the operator, whereas the estimated proved reserves contained in Item 8 hereof include only the Company's percentage share of the estimated proved reserves of all properties in which the Company has an interest. Production, Sales Prices and Costs The following table summarizes the Company's oil production in thousands of barrels and natural gas production in millions of cubic feet for the years indicated: Year ended December 31, ---------------------------------- 2001 2000 1999 ------ ------ ------ Oil (1) United States 33 49 57 Colombia 61 157 365 Gas United States 24 25 53 Colombia - - - (1) Includes crude oil and condensate. 8 The average sales price per barrel of oil and per thousand cubic feet ("MCF") of gas produced by the Company and the average production (lifting) cost per dollar of oil and gas revenue and per barrel of oil equivalent (6 MCF: 1 barrel) were as follows for the years indicated:
Year ended December 31, (1) ---------------------------------- 2001 2000 1999 -------- -------- -------- Average sales price per barrel of oil(2) United States $ 23.93 $ 28.94 $ 17.13 Colombia $ 20.67 $ 27.18 $ 15.57 Average sales price per MCF of gas United States $ 4.27 $ 4.11 $ 2.42 Colombia $ - $ - $ - Average production cost per dollar of oil and gas revenue United States $ 0.89 $ 0.72 $ 1.05 Colombia $ 0.49 $ 0.31 $ 0.42 Average production cost per barrel of oil equivalent United States $ 21.41 $ 20.59 $ 17.69 Colombia $ 10.18 $ 8.33 $ 6.58
(1) All amounts are stated in United States dollars. (2) Includes crude oil and condensate. Significant Properties Colombia. -------- The Company's Colombian properties currently consist of three contracts, two of which are located in the Putumayo Basin in southwestern Colombia along the eastern front of the eastern cordillera of the Andes Mountains. The Rio Magdalena contract, covering approximately 145,000 acres, is located in central Colombia in the prolific Upper Magdalena region. The Company's interest in each of the contracts is subject to certain reversionary interests in favor of Ecopetrol as described below. Argosy, as operator of the properties, carries out the program of operations for the three concessions. The program is determined by Argosy and approved by Ecopetrol. The Santana contract, which now consists of approximately 52,000 acres and contains 14 productive wells, has been in effect since 1987 and is the focus of the Company's current production activities. Argosy expects to sign a fourth contract, the Guayuyaco contract, in April 2002. The Guayuyaco and Rio Magdalena contracts are the focus of the Company's exploration activities. The Aporte Putumayo block, which consisted of approximately 77,000 acres and contains three shut-in wells, produced from 1976 to 1995. The block has been relinquished, however Argosy remains obligated for abandonment and restoration operations on the old wells in the block. Production from the Santana concession is sold pursuant to a sales contract with Ecopetrol. The contract provides that at least 25% of the sales proceeds will be paid in Colombian pesos. As a result of certain currency restrictions, pesos resulting from these payments must generally remain in Colombia and are used by the Company to pay local expenses. The Company's pretax income from Colombian sources, as defined under Colombian law, is subject to Colombian income taxes at a statutory rate of 35%, although a "presumptive" minimum income tax based on net assets, as defined under Colombian law, may apply in years of little or no net income. The Company's income after Colombian income taxes is subject to a Colombian remittance tax that accrues at a rate of 7%. Payment of the remittance tax may be deferred under certain circumstances if the Company reinvests such income in Colombia. Santana Contract. The Santana block is held pursuant to a "risk-sharing" ---------------- contract for which Ecopetrol has the option to participate on the basis of a 30% working interest in exploration activities in the contract area. If a commercial field is discovered, Ecopetrol's working interest increases to 50% and the costs theretofore incurred and attributable to the 20% working interest differential will be recouped by Argosy from Ecopetrol's share of production on a well by well basis. The risk-sharing contract provides that, when 7 million barrels of cumulative production from 9 the concession have been attained, Ecopetrol's revenue interest and share of operating costs increases to 65% but it remains obligated for only 50% of capital expenditures. In June 1996, the 7 million barrel threshold was reached. At that time, Argosy's revenue interest in the contract declined from 40% to 28% and its share of operating expenses declined from 50% to 35%. The Santana block is divided by the Caqueta River. Two fields located south of the river, the Toroyaco and Linda fields, were declared commercial by Ecopetrol and commenced production in 1992. There are currently four producing wells in the Toroyaco field and four producing wells in the Linda field. During 1995, a 3-D seismic survey covering the Toroyaco and Linda fields was completed. Based on this survey, one development well was drilled in each field during 1996 and one additional development well was drilled in the Linda field in 1997. No further drilling is anticipated for these fields. The Company constructed a 42-kilometer pipeline (the "Uchupayaco Pipeline") which was completed and commenced operations during 1994 to transport oil production from the Toroyaco and Linda fields to the Trans-Andean Pipeline owned by Ecopetrol, through which the Company's production is transported to the port of Tumaco on the Pacific coast of Colombia. Two additional fields, the Mary and Miraflor fields, were discovered north of the Caqueta River and were declared commercial by Ecopetrol during 1993. Except for oil produced during production tests of wells located in these fields, the production was shut-in until the first quarter of 1995 when construction of a pipeline was completed and commercial production began. Completion of this pipeline provided the Company with direct pipeline access from all of its fields to the Pacific coast port of Tumaco. There are currently four producing wells in the Mary field and one producing well in the Miraflor field. A 3-D seismic survey was completed over the Mary and Miraflor fields during early 1997. Although the survey confirmed that additional development drilling is not required for the Miraflor field, it did confirm the presence of several prospects and leads previously identified from two-dimensional seismic data. These prospects and leads are now covered by the Guayuyaco contract described below. Argosy has fulfilled all the exploration obligations required by the Santana risk-sharing contract. The current work program contemplates the recompletion of certain existing wells to increase production therefrom. The Santana contract has a term of 28 years and expires in 2015. In 1993, the Company relinquished 50% of the original Santana area in accordance with the terms of the contract. In July 1995, an additional 25% of the original contract area was relinquished. A final relinquishment was made in 1997 such that all remaining contract areas except for those areas within five kilometers of a commercial field were relinquished. All oil produced from the Santana contract area is sold to Ecopetrol pursuant to the terms of the applicable sales contract with Ecopetrol. The contracts applicable to periods prior to December 1, 2001 generally provided that if Ecopetrol exported the oil, the price paid was the export price received by Ecopetrol, adjusted for quality differences, less a marketing fee of $0.165 per barrel. If Ecopetrol did not export the oil, the price paid was based on the price received from Ecopetrol's Cartagena refinery, adjusted for quality differences, less Ecopetrol's cost to transport the crude to Cartagena and a marketing fee of $0.165 per barrel. Effective December 1, 2001, Argosy entered into a new sales contract with Ecopetrol whereby the price paid, adjusted for quality differences, for each barrel of oil sold is determined based on the monthly average of West Texas Intermediate - Cushing ("WTI") less a variable differential as follows: Average WTI ("US$/bbl.") Contract Sales Price - ------------------------ -------------------- $15 or less Ave. WTI less $4.38 per bbl. $15.01 to $20.00 Ave. WTI less $4.88 per bbl. $20.01 to $25.00 Ave. WTI less $5.38 per bbl. $25.01 to $30.00 Ave. WTI less $6.38 per bbl. Over $30 Ave. WTI less $7.38 per bbl. In 2001, Ecopetrol exported the crude each month through October. November and December crude sales were sent to Ecopetrol's Cartagena refinery. The 2001 crude sales price averaged $20.67 per barrel. 10 Rio Magdalena Contract. The Rio Magdalena contract, acquired by ---------------------- Argosy in December 2001, is an "association" contract whereunder Argosy and a 50% co-owner fulfill all exploration obligations without Ecopetrol's participation until a field is declared commercial by Ecopetrol, whereupon Ecopetrol will earn an initial 30% share in the field and must reimburse its 30% share of successful exploratory wells, seismic and stratigraphic wells, dry step-out exploratory wells and development wells and facilities through its 30% share of production. The contract provides that Ecopetrol's working interest will be 30% until aggregate oil production from the contract area reaches 60 million barrels. For production in excess of 60 million barrels, Ecopetrol's interest will increase from 30% to 65% based on a measure of profitability as defined in the contract. The contract obligations of the Rio Magdalena contract require Argosy and its co-owner to reprocess 40 kilometers of 2D seismic during the initial 18-month exploration phase of the contract. In the following 12-month exploration phase, Argosy and its co-owner are obligated to perform one of the following: (i) a seismic survey to acquire 30 kilometers of 3D seismic; (ii) a seismic survey to acquire 2D seismic at a cost equivalent to the 3D program; or (iii) drill an exploratory well. If Argosy and its co-owner decide to proceed into the third phase of the contract, the drilling of an exploratory well would be required. If a field is discovered, the exploitation period is 22 years in the case of an oil discovery and 30 years, extendable to 40 years under certain circumstances, in the case of a natural gas discovery. Argosy has not yet completed the seismic reprocessing required in the first phase of the contract. Such reprocessing is currently underway. Guayuyaco Contract. The Guayuyaco contract, expected to be signed by ------------------ Argosy in April 2002, will be an "association" contract that overlays the undeveloped acreage contained within the Santana contract area. Under the proposed Guayuyaco contract, Argosy will fulfill all exploration obligations without Ecopetrol's participation until a field is declared commercial by Ecopetrol, whereupon Ecopetrol will earn an initial 30% share in the field and must reimburse its 30% share of direct exploration costs, as defined in the contract, through payment of 50% of its 30% share of production. The proposed contract provides that Ecopetrol's working interest will be 30% until aggregate oil production from the contract area reaches 60 million barrels. For production in excess of 60 million barrels, Ecopetrol's interest will increase from 30% to 65% based on a measure of profitability as defined in the contract. The proposed obligations of the Guayuyaco contract will require Argosy to drill one exploratory well during the initial 12-month exploration phase of the contract. Upon completion of the initial exploration phase, Argosy may relinquish the contract or proceed to the following 18-month exploration phase, whereunder Argosy will be obligated to drill a second exploratory well. The contract will terminate following the second phase if, not having discovered a field, Argosy does not request an extension to the contract. Upon request by Argosy, Ecopetrol may extend the contract an additional three years obligating Argosy to drill one exploration well in each of the three years of the extension. If a field is discovered, the exploitation period is 22 years in the case of an oil discovery and 30 years in the case of a natural gas discovery. Argosy is continuing its efforts to secure an industry partner to farm-in to this acreage and expects to drill the first exploratory well during the second quarter of 2003. Failure by Argosy to meet the obligations under the proposed contract will result in the loss of the proposed contract terms. The existing Santana production and acreage will not be affected. Failure by the Company to fund its share of Argosy's obligations under the proposed contract, assuming Argosy funds the obligation, could result in a decrease in the Company's ownership interest in Argosy. United States. ------------- The Company's remaining oil and gas properties in the United States are located in the Gulf of Mexico offshore Louisiana at Breton Sound 31 field. The Breton Sound 31 field is operated by the Company. Breton Sound Block 31 is located 20 miles offshore Louisiana in 16 feet of water. The field is approximately 55 miles southeast of New Orleans on state leases. During 2001, five wells averaged 90 barrels of oil per day and 65 MCF of gas per day, net to the Company's interest, from three sands completed between 3,850 feet and 6,500 feet. The Company's working interests in the leases comprising the field vary from 64% to 90%. The interpretation of 3-D seismic data in 1996 identified two deep and several shallow prospects in the Breton Sound Block 31 field. On June 1, 2000, the Company signed a farmout agreement covering the deep prospects. The farmee was unable to conclude a drilling arrangement prior to June 30, 2001, the date to which the contract had been extended. 11 During the latter part of 2001, an offset operator drilled a successful exploratory well approximately 4,000 feet from the eastern boundary of the Company's Breton Sound acreage. Management of the Company is currently in discussions with such operator, and other interested parties, with a view towards negotiating an arrangement to explore the Company's Breton Sound prospects. Papua New Guinea. ---------------- The area covered by PPL-206 is located in the Western, Gulf and Southern Highland Provinces of Papua New Guinea. The northern section of the area is in a mountainous tropical rain forest while the southern section of the area is predominantly lowlands, jungle and coastal swamps. In 1986 oil was discovered approximately 20 kilometers from the northern border of PPL-206 in an adjoining license area and in 1999 gas was discovered approximately 20 kilometers southwest of the western border. In accordance with the terms of the agreement governing PPL-206, the parties have performed surface geological work and completed seismic programs during 1998 and 2000. The 2000 program (the "Okoni Program") was followed by strike line acquisition in the first quarter of 2001 to determine the drilling location for the Bosavi exploratory well. Site preparation is currently underway and drilling of the Bosavi well is scheduled to begin in August 2002. Pursuant to the Company's 2% carried working interest, the Company is not obligated to pay any of the costs relative to the work presently underway nor is it obligated to pay any of the costs of drilling, testing or completing the exploratory well. Under the provisions of PPL-206 the terms of any oil and gas development are set forth in a Petroleum Agreement with the Government of Papua New Guinea. The Petroleum Agreement provides that the operator must carry out an appraisal program after a discovery to determine whether the discovery is of commercial interest. If the appraisal is not carried out or the discovery is not of commercial interest, the license may be forfeited. If the discovery is of commercial interest, the operator must apply for a Petroleum Development License. The Government retains a royalty on production equal to 1.25% of the wellhead value of the petroleum and, at its election, may acquire up to a 22.5% interest in the petroleum development after recoupment by the operator of the project costs attributable thereto out of production. In addition, income from petroleum operations is subject to a Petroleum Income Tax at the rate of 50% of net income, which is defined as gross revenue less royalties, allowances for depreciation, interest deductions, operating costs and previous tax losses carried forward. An Additional Profits Tax of 50% of cash flow (after deducting ordinary income tax payments) is also payable when the accumulated value of net cash flows becomes positive. For annual periods in which net cash flows are negative, the cumulative amount is carried forward and increased at an annual accumulation of 27%. The Additional Profits Tax is calculated separately for each Petroleum Development License. In calculating the applicable tax, interest expenses paid by Garnet PNG prior to the issuance of a Petroleum Development License and, thereafter, to the extent that Garnet PNG's debt to equity ratio exceeds two-to-one, are not deductible. The Company leases corporate office space in Dallas, Texas containing approximately 5,100 square feet pursuant to a lease which expires in January 2007. The annual lease payments for these offices are approximately $94,000. ITEM 3. LEGAL PROCEEDINGS In "Terrebonne Parish School Board v. Quintana Petroleum Corporation, et al.," Case No. 00-0443, Sect. T (2) in the United States District Court for the Eastern District of Louisiana, the Terrebonne Parish School Board, also referred to as the "Board," has sued various oil and gas companies, including the Company, alleging that they dredged canals and moved equipment across Board property for the purpose of developing the minerals thereunder, but subsequently failed to restore the surface of the property, thus causing erosion to Louisiana coastal wetlands. The Company's involvement, as a successor to Jackson Exploration, Inc., with respect to any such Board property was brief, and records from the period are scarce. This lawsuit is currently stayed by this District Court pending resolution of an appeal made to the United States Court of Appeals for the Fifth Circuit of an unrelated case in which this same District Court granted summary judgment to the defendants for the same type of claims being made in this lawsuit because such claims were barred by Louisiana's limitation doctrine. Based on current information, Management of the Company does not expect this lawsuit to have a materially adverse effect on the Company's results of operations. 12 There are no other legal proceedings to which the Company is a party or to which its properties are subject which are, in the opinion of management, likely to have a material adverse effect on the Company's results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the Company's fiscal year ended December 31, 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Price Range of Depositary Shares and Common Stock The Company's Depositary Shares, each representing the beneficial ownership of five shares of Common Stock, traded on the OTC Bulletin Board (the "OTCBB") from May 13, 1999 until April 30, 2001, when the Company discontinued trading of the Depositary Shares. On May 16, 2001, the Common Shares began trading on the OTCBB under the symbol "AVVP". During 2001, an aggregate of 2,190,400 Depositary Shares and 2,052,200 Common Shares were traded on the OTCBB. The following table sets forth, for the periods indicated, the high and low prices for the Depositary Shares and the Common Stock on the OTCBB. 2001 2000 --------------------- ----------------- High Low High Low -------- --------- ------- ------- OTC Bulletin Board: Common Stock ------------ First Quarter $ n/a $ n/a $ n/a $ n/a Second Quarter $ 0.17 $ 0.06 $ n/a $ n/a Third Quarter $ 0.10 $ 0.05 $ n/a $ n/a Fourth Quarter $ 0.11 $ 0.05 $ n/a $ n/a Depositary Shares(1) ---------------------- First Quarter $ 0.38 $ 0.15 $ 0.25 $ 0.06 Second Quarter $ 0.40 $ 0.20 $ 0.38 $ 0.06 Third Quarter $ n/a $ n/a $ 0.38 $ 0.13 Fourth Quarter $ n/a $ n/a $ 0.38 $ 0.06 (1) Representing five shares of Common Stock. As of February 28, 2002, the Company had approximately 4,400 shareholders of record, including nominees for an undetermined number of beneficial holders. 13 Dividend History and Restrictions No dividends have been paid since June 1983, nor is there any current intention on the part of the directors of the Company to pay dividends in the future. ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain selected financial data with respect to the Company for, and as of the end of, each of the five years ended December 31, 2001, which should be read in conjunction with the Consolidated Financial Statements included elsewhere herein.
For the Years Ended December 31, --------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------- -------- --------- --------- --------- (in thousands, except per share, per barrel and per MCF data) For the period Revenues $ 2,609 $ 6,183 $ 6,797 $ 3,332 $ 9,726 Earnings (loss) before extraordinary item $ 77 $ 4,961 $ (403) $ (16,881) $ (22,482) Extraordinary item - debt extinguishment $ - $ 5,543 $ - $ (197) $ - Net earnings (loss) $ 77 $ 10,504 $ (403) $ (17,078) $ (22,482) Earnings (loss) before extraordinary item per common share $ 0.00 $ 0.10 $ (0.01) $ (0.49) $ (0.71) Basic and diluted net earnings (loss) per common share $ 0.00 $ 0.22 $ (0.01) $ (0.50) $ (0.71) Weighted average shares outstanding 46,900 46,900 46,813 34,279 31,483 Cash dividends per common share $ - $ - $ - $ - $ - Total annual net oil production (barrels) Colombia 61 157 365 255 426 United States 33 49 57 44 76 --------- -------- --------- --------- --------- Total 94 206 422 299 502 --------- -------- --------- --------- --------- Total annual net gas production (MCF) United States 24 25 53 68 316 Average price per barrel of oil Colombia $ 20.67 $ 27.18 $ 15.57 $ 10.31 $ 17.39 United States $ 23.93 $ 28.94 $ 17.13 $ 12.03 $ 19.17 Average price per MCF of Gas - United States $ 4.27 $ 4.11 $ 2.42 $ 2.42 $ 2.73 At period end Total assets $ 3,134 $ 3,311 $ 8,986 $ 11,422 $ 16,445 Long term debt, including current portion $ - $ - $ 14,495 $ 14,805 $ 7,690 Stockholders' equity (deficit) $ 1,953 $ 1,876 $ (11,483) $ (11,083) $ 3,748
In connection with the application of the full cost method, the Company recorded ceiling test write-downs of oil and gas properties of $12,343,000 in 1998 and $19,953,000 in 1997 (see Note 1 of Notes to Consolidated Financial Statements). 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements included elsewhere herein. Critical Accounting Policies The Company's significant accounting policies are included in Note 1 to the Consolidated Financial Statements. These policies, along with the underlying assumptions and judgments made by the Company's management in their application, have a significant impact on the Company's consolidated financial statements. The Company identifies its most critical accounting policies as those that are the most pervasive and important to the portrayal of the Company's financial position and results of operations, and that require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. The Company's most critical policies are those related to property and equipment and impairment of assets. Results of Operations 2001 versus 2000 - ---------------- United States Colombia Oil Gas Oil Total -------- ------ -------- -------- (Thousands) Oil and gas sales - 2000 $ 1,428 $ 100 $ 4,268 $ 5,796 Volume variance (482) (28) (2,584) (3,094) Price variance (164) 29 (431) (566) -------- ------ -------- -------- Oil and gas sales - 2001 $ 782 $ 101 $ 1,253 $ 2,136 ======== ====== ======== ======== Colombian oil volumes were 61,000 barrels in 2001, a decrease of 96,000 barrels from 2000. Such decrease is due to an 84,000 barrel decrease resulting from the transfer of partnership interests to Crosby on June 8, 2000 and a 19,000 barrel decrease resulting from production declines, partially offset by a 7,000 barrel increase due to the transfer of a 7.5% partnership interest to Aviva from Crosby on August 14, 2001 (see note 2 of the consolidated financial statements included elsewhere herein). U.S. oil volumes were 33,000 barrels in 2001, down approximately 16,000 barrels from 2000. Such decrease is primarily due to the relinquishment of Main Pass 41 effective November 7, 2000. U.S. gas volumes were 24,000 MCF in 2001, down 1,000 MCF from 2000. Such decrease is due to the relinquishment of Main Pass 41 as discussed above. Colombian oil prices averaged $20.67 per barrel during 2001. The average price for the same period in 2000 was $27.18 per barrel. The Company's average U.S. oil price decreased to $23.93 per barrel in 2001, down from $28.94 per barrel in 2000. In 2001 prices were lower than in 2000 due to an overall decrease in world oil prices. U.S. gas prices averaged $4.27 per MCF in 2001 compared to $4.11 per MCF in 2000. Service fees of $473,000 for administering the Colombian assets were received in 2001 compared to $387,000 in 2000. The 2001 amount covers three months at a monthly rate of $71,000 and nine months at a monthly rate of $46,000. The 2000 amount covers seven months at a monthly rate of $71,000. The recorded amounts are net of Aviva Overseas' 22.1196% (29.6196% after August 14, 2001) share of the fees. Operating costs decreased approximately 42%, or $1,005,000, primarily as a result of the transfer of partnership interests to Crosby. Depreciation, depletion and amortization ("DD&A") decreased by 38%, or $195,000, primarily as a result of the transfer of partnership interests to Crosby and a decrease in the amount of oil produced. 15 General and administrative ("G&A") expenses decreased $151,000 or 13% primarily as a result of the reversal of over accrued public ownership costs, lower state franchise taxes, lower legal fees and lower stock-based compensation. During 2000, in connection with the restructuring of the Company's long-term debt, the Company realized a $3,452,000 gain on the transfer of partnership interests to Crosby and an extraordinary gain of $5,543,000, net of income taxes of $2,855,000, on the extinguishment of a portion of the debt. There were no similar gains during 2001. Interest expense decreased $802,000 in 2001 due to the extinguishment of the Company's long-term debt in 2000. Income taxes were $169,000 lower in 2001 principally as a result of the net transfer of partnership interests to Crosby. 2000 versus 1999 - ---------------- United States Colombia Oil Gas Oil Total -------- ----- ------- -------- (Thousands) Oil and gas sales - 1999 $ 987 $ 127 $ 5,683 $ 6,797 Volume variance (141) (90) (3,671) (3,902) Price variance 582 66 2,256 2,904 Other - (3) - (3) ------- ----- ------- -------- Oil and gas sales - 2000 $ 1,428 $ 100 $ 4,268 $ 5,796 ======= ===== ======= ======== Colombian oil volumes were 157,000 barrels in 2000, a decrease of 208,000 barrels from 1999. Such decrease is due to a 108,000 barrel decrease resulting from the transfer of partnership interests to Crosby and a 100,000 barrel decrease resulting from production declines. U.S. oil volumes were 49,000 barrels in 2000, down approximately 8,000 barrels from 1999, primarily due to normal production declines. U.S. gas volumes before gas balancing adjustments were 24,000 MCF in 2000, down 26,000 MCF from 1999. Such decrease is due to a significant decline in production from the Main Pass 41 field. Effective November 7, 2000, the Company assigned all of its interest in the Main Pass 41 field to the field operator. Colombian oil prices averaged $27.18 per barrel during 2000. The average price for the same period of 1999 was $15.57 per barrel. The Company's average U.S. oil price increased to $28.94 per barrel in 2000, up from $17.13 per barrel in 1999. In 2000 prices were higher than in 1999 due to an increase in world oil prices. U.S. gas prices averaged $4.11 per MCF in 2000 compared to $2.42 per MCF in 1999. Service fees of $387,000 for administering the Colombian assets were received pursuant to a Service Agreement with Crosby (see note 2 of the consolidated financial statements included elsewhere herein). This amount is net of Aviva Overseas' 22.1196% share of the fee. Operating costs decreased approximately 33%, or $1,168,000, primarily as a result of the transfer of partnership interests to Crosby. DD&A decreased by 49%, or $485,000, primarily as a result of the transfer of partnership interests to Crosby and lower volumes of oil produced. G&A expenses declined $88,000 mainly as a result of lower public ownership costs and lower fees paid to consultants, partially offset by higher employee related costs. 16 In connection with the Company's restructuring, the Company realized a $3,452,000 gain on the transfer of partnership interests in Argosy Energy International and a $5,543,000 extraordinary gain on the extinguishment of debt, net of income taxes of $2,855,000. Interest and other income decreased $52,000 from 1999 primarily due to a foreign exchange gain of $193,000 in 1999. During 2000, the foreign currency exchange gain was only $44,000. The decrease in foreign exchange gain was partially offset by higher miscellaneous income. Interest expense decreased $591,000 during 2000, primarily as a result of the extinguishment of the Company's long-term debt. New Accounting Pronouncements In July 2001 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method, and SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. As of December 31, 2001 there is no impact on the Company's financial statements as we have not entered into any business combinations and have not acquired goodwill. Also, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" which establishes requirements for the accounting of removal-type costs associated with asset retirements. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company is currently assessing the impact on its financial statements. On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years with earlier application encouraged. The Company is currently assessing the impact on its financial statements. Liquidity and Capital Resources Cash and cash equivalents totaled $1,010,000 and $820,000 at December 31, 2001 and 2000, respectively. The increase in cash and cash equivalents resulted almost exclusively from net cash provided by operating activities. Net cash provided by operating activities was $190,000 in 2001, compared to $1,722,000 for 2000. The decrease in net cash provided by operating activities from 2000 to 2001 is primarily due to the sale of a major partnership interest in Argosy during 2000 combined with lower oil prices. During the latter part of 2001, an offset operator drilled a successful exploratory well approximately 4,000 feet from the eastern boundary of the Company's Breton Sound acreage. Management of the Company is currently in discussions with such operator, and other interested parties, with a view towards negotiating an arrangement to explore the Company's Breton Sound prospects. At this time it is not possible to predict the cost, if any, net to the Company, that may arise should management successfully negotiate such an arrangement. The Company is also engaged in ongoing operations in Colombia. The obligations under the Santana contract have been met; however, Argosy plans to recomplete certain existing wells and engage in various other projects. The first of these recompletions is scheduled during 2003, and the majority of the remaining recompletions are scheduled during 2004. The Company's share of the estimated future costs of these activities is approximately $0.2 million at December 31, 2001. The contract obligations of the Rio Magdalena contract require Argosy and its co-owner to reprocess 40 kilometers of 2D seismic during the initial 18-month exploration phase of the contract. The Company's current share of the estimated future costs of this phase is approximately $74,000 at December 31, 2001. Additional expenditures will be required should Argosy decide to enter into the second phase of the contract. The proposed obligations of the Guayuyaco contract will require Argosy to drill one exploratory well during the initial 12-month exploration phase of the contract. Upon completion of the initial exploration phase, Argosy may 17 relinquish the contract or proceed to the following 18-month exploration phase, whereunder Argosy will be obligated to drill a second exploratory well. Argosy is continuing its efforts to secure an industry partner to farm-in to this acreage and expects to drill the first exploratory well during the second quarter of 2003. Failure by Argosy to meet the obligations under the proposed Guayuyaco contract will result in the loss of the proposed contract terms. The existing Santana production and acreage will not be affected. Failure by the Company to fund its share of Argosy's obligations, assuming Argosy funds the obligation, could result in a decrease in the Company's ownership interest in Argosy. The Company expects to fund its share of the cost of the recompletions on the Santana contract and the seismic commitments on the Rio Magdalena contract using existing cash and cash provided from operations. Risks that could adversely affect funding of such activities include, among others, delays in obtaining any required environmental permits, failure to produce the reserves as projected or a decline in the sales price of oil. Any substantial increases in the amounts of these required expenditures could adversely affect the Company's ability to fund these activities. Any substantial delays could, through the impact of inflation, increase the required expenditures. Cost overruns resulting from factors other than inflation could also increase the required expenditures. Historically, the inflation rate of the Colombian peso has been in the range of 15-30% per year. Devaluation of the peso against the U.S. dollar has historically been slightly less than the inflation rate in Colombia. The Company has historically funded capital expenditures in Colombia by converting U.S. dollars to pesos at such time as the expenditures have been made. As a result of the interaction between peso inflation and devaluation of the peso against the U.S. dollar, inflation, from the Company's perspective, had not been a significant factor. During 1994, the first half of 1995 and 1996, however, devaluation of the peso was substantially lower than the rate of inflation of the peso, resulting in an effective inflation rate in excess of that of the U.S. dollar. There can be no assurance that this condition will not occur again or that, in such event, there will not be substantial increases in future capital expenditures as a result. Due to Colombian exchange controls and restrictions and the lack of an effective market, it is not feasible to hedge against the risk of net peso inflation against the U.S. dollar and the Company has not done so. Depending on the results of future exploration and development activities, substantial expenditures which have not been included in the Company's cash flow projections may be required. Although the ultimate outcome of these matters cannot be projected with certainty, management believes that the Company's existing capital resources are adequate to fund its current obligations. If, however, the Company enters into an arrangement to explore its Breton Sound acreage, the Company's existing capital resources may be inadequate to fund the Company's share, if any, of the exploration program. Accordingly, the Company may be required to raise additional capital through equity issues, incurring debt or by sales of assets. There can be no assurance that such attempts to raise additional capital would be successful. With the exception of historical information, the matters discussed in this annual report to shareholders contain forward-looking statements that involve risks and uncertainties. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, among other things, general economic conditions, volatility of oil and gas prices, the impact of possible geopolitical occurrences world-wide and in Colombia, imprecision of reserve estimates, the assessment of geological and geophysical data, changes in laws and regulations, unforeseen engineering and mechanical or technological difficulties in drilling, working-over and operating wells during the periods covered by the forward-looking statements, as well as other factors described in "Item 1. Business - Risks Associated with the Company's Business." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk from changes in commodity prices. The Company produces and sells crude oil and natural gas. These commodities are sold based on market prices established with the buyers. The Company does not use financial instruments to hedge commodity prices. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Financial Statements of Aviva Petroleum Inc. attached hereto and listed in Item 14 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors of the Company The by-laws of the Company provide that the number of directors may be fixed by the Board of Directors at a number between one and seven, except that a decrease in the number of directors shall not have the effect of reducing the term of any incumbent director. Effective October 28, 1998, the Board of Directors, by resolution, decreased the number of directors from five to three. Effective April 6, 2000, Eugene C. Fiedorek resigned from the Board of Directors decreasing the number of directors from three to two. The information set forth below, furnished to the Company by the respective individuals, shows as to each individual his name, age and principal positions with the Company. Name Age Positions Director Since ---- --- --------- -------------- Ronald Suttill 70 President, Chief Executive Officer 1985 and Director Robert J. Cresci 58 Director 1998 The following sets forth the periods during which directors have served as such and a brief account of the business experience of such persons during at least the past five years. Ronald Suttill has been a director of the Company since August 1985 and has been President and Chief Executive Officer of the Company since January 1992. Robert J. Cresci has been a director of the Company since October 1998. Mr. Cresci has been a Managing Director of Pecks Management Partners Ltd., an investment management firm, since September 1990. Mr. Cresci currently serves on the boards of Sepracor, Inc., Film Roman, Inc., Castle Dental Centers, Inc., j2 Global Communications, Inc., Candlewood Hotel Co., Inc., SeraCare Life Sciences, Inc., Learn2 Corporation and several private companies. Executive Officers of the Company The following table lists the names and ages of each of the executive officers of the Company and their principal occupations for the past five years. Name and Age Positions - ------------ --------- Ronald Suttill, 70 President and Chief Executive Officer since January 1992. James L. Busby, 41 Chief Financial Officer since February 2000, Treasurer since May 1994, Secretary since June 1996, Controller since November 1993. Meetings and Committees of the Board of Directors The Board of Directors of the Company held one formal meeting during 2001. Each director attended at least 75% of the aggregate of (i) the total number of meetings of the Board of Directors held during the period in which he was a director and (ii) the total number of meetings held by all committees on which he served. The Audit Committee and the Compensation Committee are the only standing committees of the Board of Directors, and the members of such committees are appointed at the initial meeting of the Board of Directors each year. The Company does not have a formal nominating committee; the Board of Directors performs this function. The Audit Committee, of which Mr. Cresci is the sole member, consults with the independent accountants of the Company and such other persons as the committee deems appropriate, reviews the preparations for and scope of the audit of the Company's annual financial statements, makes recommendations as to the engagement and fees of the independent accountants and performs such other duties relating to the financial statements of the Company as the 19 Board of Directors may assign from time to time. The Audit Committee held no formal meetings during 2001, however, business was conducted via telephone conferences. The Compensation Committee, of which Mr. Cresci is the sole member, makes recommendations to the Board of Directors regarding the compensation of executive officers of the Company, including salary, bonuses, stock options and other compensation. The Compensation Committee held no formal meetings during 2001. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires officers, directors and holders of more than 10% of the Common Stock (collectively, "Reporting Persons") to file reports of ownership and changes in ownership of the Common Stock with the SEC within certain time periods and to furnish the Company with copies of all such reports. Based solely on its review of the copies of such reports furnished to the Company by such Reporting Persons or on the written representations of such Reporting Persons, the Company believes that, during the year ended December 31, 2001, all of the Reporting Persons complied with their Section 16(a) filing requirements. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth certain information regarding compensation earned in each of the last three fiscal years by the President and Chief Executive Officer of the Company (the "Named Executive Officer").
Summary Compensation Table -------------------------- Long Term Compensation --------------------------------------- Annual Compensation Awards Payouts -------------------------------------------------------- --------------------------------------- Other Annual Restricted Securities Name and Compen- Stock Underlying LTIP All Other Principal Salary sation Award(s) Options/ Payouts Compensa- Position Year ($) Bonus ($) ($) ($) SARs (#) ($) tion ($) - --------- --------- --------- --------- --------- --------- --------- --------- --------- Ronald Suttill(1) President and CEO 2001 150,000 - - - - - 9,000 President and CEO 2000 150,000 7,500 - - - - 9,000 President and CEO 1999 150,000 - - - - - 4,500
(1) The amount recorded under bonus represents the market value of 300,000 shares of the Company's common stock transferred to Mr. Suttill in connection with the debt restructuring and transfer of partnership interests to Crosby, effective June 8, 2000. The amounts reported for all other compensation for Mr. Suttill represent matching contributions made under the Aviva Petroleum Inc. 401(k) Retirement Plan (the "401(k) Plan"). Directors' Fees The directors of the Company are not paid a cash fee. Directors are, however, reimbursed for travel and lodging expenses. Mr. Suttill receives no compensation as a director but is reimbursed for travel and lodging expenses incurred to attend meetings. On July 1 each year, non-employee directors who have served in such capacity for at least the entire proceeding calendar year each receive an option to purchase 5,000 shares of the Company's Common Stock pursuant to the Aviva Petroleum Inc. 1995 Stock Option Plan, as amended. Effective June 8, 2000, in connection with the debt restructuring and transfer of partnership interests to Crosby, 200,000 shares of the Company's common stock with a market value of $5,000 were transferred to Mr. Robert J. Cresci. Option Grants During 2001 There were no options granted to the Named Executive Officer during 2001. No stock appreciation rights have been issued by the Company. Option Exercises During 2001 and Year End Option Values 20 The following table provides information related to options exercised by the Named Executive Officer during 2001 and the number and value of options held at year-end. No stock appreciation rights have been issued by the Company.
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at FY-End (#) at FY-End ($) (1) Shares Acquired Value ---------------------------- -------------------------- Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ---- --------------- ------------ ------------- ------------- ----------- ------------- Ronald Suttill none none 250,000 - - -
(1) No values are ascribed to unexercised options of the Named Executive Officer at December 31, 2001 because the fair market value of a share of the Company's Common Stock at December 31, 2001 ($0.08) did not exceed the exercise price of any such options. Compensation Committee Interlocks and Insider Participation in Compensation Decisions As indicated above, the Compensation Committee, none of the members of which is an employee of the Company, makes recommendations to the Board of Directors regarding the compensation of the executive officers of the Company, including salary, bonuses, stock options and other compensation. There are no Compensation Committee interlocks. Employment Contracts The Named Executive Officer serves at the discretion of the Board of Directors, except that, effective February 1, 2000, the Company entered into an employment contract with Mr. Suttill. Mr. Suttill's contract provides for annual compensation of not less than $200,000 and a severance amount of $300,000 if his employment is terminated for any reason other than death, disability or cause, as defined in the contract. Compensation Committee Report on Executive Compensation The Company currently employs only two executive officers, the names of whom are set forth above under "Item 10. Directors and Executive Officers of the Registrant--Executive Officers of the Company." Decisions regarding compensation of the executive officers are made by the Board of Directors, after giving consideration to recommendations made by the Compensation Committee. The Company's compensation policies are designed to provide a reasonably competitive level of compensation within the industry in order to attract, motivate, reward and retain experienced, qualified personnel with the talent necessary to achieve the Company's performance objectives. These objectives are to increase oil and gas reserves and to control costs, both objectives selected to increase shareholder value. These policies were implemented originally by the entire Board of Directors, and, following its establishment, were endorsed by the Compensation Committee. It is the intention of the Compensation Committee and the Board of Directors to balance compensation levels of the Company's executive officers, including the Chief Executive Officer, with shareholder interests. The incentive provided by stock options and bonuses, in particular, is intended to promote congruency of interests between the executive officers and the shareholders. Neither the Compensation Committee nor the Board of Directors, however, believes that it is appropriate to rely on a formulaic approach, such as profitability, revenue growth or return on equity, in determining executive officer compensation because of the nature of the Company's business. The Company's business objectives include obtaining funding for and overseeing exploration and development activities in Colombia and offshore in the United States. Success in one such area is not measurable by the same factors as those used in the other. Accordingly, the Compensation Committee and the Board of Directors rely primarily on their assessment of the success of the executive officers, including the Chief Executive Officer, in fulfilling the Company's performance objectives. The Board of Directors also considers the fact that the Company competes with other oil and gas companies for qualified executives and therefore it considers available information regarding compensation levels for executives of companies similar in size to the Company. Compensation for the Company's executive officers during 2001 was comprised of salary and matching employer contributions made pursuant to the Company's 401(k) Plan. The Company's 401(k) Plan is generally available to all employees after one year of service. The Company makes matching contributions of 100% of the amount deferred by the employee, up to 6% of an employee's annual salary. Compensation Committee R. J. Cresci 21 Performance Graph The following line-graph presentation compares five-year cumulative shareholder returns on an indexed basis with a broad equity market index and a published industry index. The Company has selected the American Stock Exchange Market Value Index as a broad equity market index, and the SIC Index "Crude Petroleum and Natural Gas" as a published industry index. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN OF THE COMPANY, INDUSTRY INDEX AND BROAD MARKET
---------------------------FISCAL YEAR ENDING------------------------- COMPANY/INDEX/MARKET 12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/29/2000 12/31/2001 AVIVA PETROLEUM INC. 100.00 42.31 2.56 1.28 7.69 10.26 Crude Petroleum & Natural Gas 100.00 101.36 81.19 99.18 125.99 115.60 AMEX Market Index 100.00 120.33 118.69 147.98 146.16 139.43
22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners The following table sets forth certain information as to each person who, to the knowledge of the Company, is the beneficial owner of more than five percent of the outstanding Common Stock of the Company. Unless otherwise noted, the information is furnished as of February 28, 2002.
Name and Address of Amount and Nature of Beneficial Owner or Group Beneficial Ownership (1) Percent of Class (2) - ------------------------- ------------------------ -------------------- Ramat Securities Ltd.(3) 10,632,470 22.67% Chagrin Plaza East 23811 Chagrin Blvd., Suite 200 Beachwood, Ohio 44122 Ronald Suttill(4) (5) 3,073,273 6.42%/(6)/ 8235 Douglas Avenue, Suite 400 Dallas, Texas 75225 Lehman Brothers Inc.(7) 2,966,876 6.33% 745 Seventh Avenue New York, New York 10019 Yale University(8) 2,551,886 5.44% 230 Prospect Street New Haven, Connecticut 06511
(1) Except as set forth below, to the knowledge of the Company, each beneficial owner has sole voting and sole investment power. (2) Based on 46,900,132 shares of the Common Stock issued and outstanding on February 28, 2002. (3) Information regarding Ramat Securities Ltd. ("Ramat") is based on a Schedule 13D/A filed on May 17, 2001, as a joint filing for Ramat, David Zlatin, Howard Amster, Amster Trading Company Charitable Remainder Unitrusts ("Amster Unitrusts"), and Amster Trading Company. Ramat owns 6,577,370 shares (14.02% of the outstanding) and has shared voting and dispositive power as to those shares. Through his ownership in Ramat, David Zlatin beneficially owns an aggregate of 6,577,370 shares and has shared voting and dispositive power over those shares. The Amster Unitrusts own 4,055,100 shares (8.65% of the outstanding) and have shared voting and dispositive power as to those shares. Howard Amster is the trustee of the Amster Unitrusts. Howard Amster beneficially owns an aggregate of 6,577,370 shares and has shared voting and dispositive power as to 4,055,100 shares. The Amster Unitrusts have been funded 100% by Amster Trading Company. Howard Amster is the 100% owner of Amster Trading Company. Because Amster Trading Company has the right to change the trustee of the trusts, it can be deemed to have the right to shared voting and dispositive power as to the 4,055,100 shares owned by the Amster Unitrusts. Amster Trading Company disclaims beneficial ownership of the securities owned by the Amster Unitrusts. (4) Included are options for 283,334 shares exercisable on or within 60 days of February 28, 2002. (5) Includes the entire ownership of AMG Limited, a limited liability company of which Mr. Suttill is a member, as of February 28, 2002, of 935,550 shares of Common Stock. (6) Treated as outstanding for purposes of computing the percentage ownership of Mr. Suttill are 981,500 shares issuable to all participants upon exercise of vested stock options granted pursuant to the Company's stock option plans. (7) Information regarding Lehman Brothers Inc. is based on information received from Lehman Brothers Inc. on March 16, 1998. (8) Information regarding Yale University is based on a Schedule 13G dated March 11, 1994 filed by Yale University with the SEC. 23 Security Ownership of Management The following table sets forth certain information as of February 28, 2002, concerning the Common Stock of the Company owned beneficially by each director, by the Named Executive Officer listed in the Summary Compensation Table above, and by directors and executive officers of the Company as a group:
Name and Address of Amount and Nature Beneficial Owner of Beneficial Ownership(1) Percent of Class(2) - ---------------- ---------------------------- --------------------- Ronald Suttill 3,073,273(3)(4) 6.42% 8235 Douglas Avenue, Suite 400 Dallas, TX 75225 Robert J. Cresci 232,500(5) * Pecks Management Partners Ltd. One Rockefeller Plaza New York, NY 10020 All directors and executive officers as a group (3 persons) 4,595,192(6) 9.60%
(1) Except as noted below, each beneficial owner has sole voting power and sole investment power. (2) Based on 46,900,132 shares of Common Stock issued and outstanding on February 28, 2002. Treated as outstanding for purposes of computing the percentage ownership of each director, the Named Executive Officer and all directors and executive officers as a group are 981,500 shares issuable upon exercise of vested stock options granted pursuant to the Company's stock option plans. (3) Included are options for 283,334 shares exercisable on or within 60 days of February 28, 2002. (4) Includes the entire ownership of AMG Limited, a limited liability company of which Mr. Suttill is a member, as of February 28, 2002, of 935,550 shares of Common Stock. (5) Included are options for 32,500 shares exercisable on or within 60 days of February 28, 2002. (6) Included are 935,550 shares beneficially owned through AMG Limited and options for 492,500 shares exercisable on or within 60 days of February 28, 2002. * Less than 1% of the outstanding Aviva Common Stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a. The following documents are filed as part of this report: (1) Financial Statements: The Financial Statements of Aviva Petroleum Inc. filed as part of this report are listed in the "Index to Financial Statements" included elsewhere herein. (2) Financial Statement Schedules: All schedules called for under Regulation S-X have been omitted because they are not applicable, the required information is not material or the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits: *2.1 Loan, Settlement and Acquisition Agreement dated effective May 31, 2000, by and among Crosby Capital, LLC, Aviva Petroleum Inc., Aviva America, Inc., Aviva Operating Company, Aviva Overseas, Inc., Neo Energy, Inc., Garnet Resources Corporation, Argosy Energy, Inc., and Argosy Energy International (filed as exhibit 2.1 to the Company's Form 8-K dated June 8, 2000, File No. 0-22258, and incorporated herein by reference). *2.2 Confirmed Plan of Reorganization of Aviva America, Inc. (filed as exhibit 2.4 to the Company's annual report on Form 10-K for the year ended December 31, 2000, File No. 0-22258, and incorporated by reference). *3.1 Restated Articles of Incorporation of the Company dated July 25, 1995 (filed as exhibit 3.1 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *3.2 Amended and Restated Bylaws of the Company, as amended as of January 23, 1995 (filed as exhibit 3.2 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.1 Risk Sharing Contract between Empresa Colombiana de Petroleos ("Ecopetrol"), Argosy Energy International ("Argosy") and Neo Energy, Inc. ("Neo") (filed as exhibit 10.1 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.2 Contract for Exploration and Exploitation of Sector Number 1 of the Aporte Putumayo Area ("Putumayo") between Ecopetrol and Cayman Corporation of Colombia dated July 24, 1972 (filed as exhibit 10.2 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.3 Operating Agreement for Putumayo between Argosy and Neo dated September 16, 1987 and amended on January 4, 1989 and February 23, 1990 (filed as exhibit 10.3 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.4 Operating Agreement for the Santana Area ("Santana") between Argosy and Neo dated September 16, 1987 and amended on January 4, 1989, February 23, 1990 and September 28, 1992 (filed as exhibit 10.4 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.5 Santana Block A Relinquishment dated March 6, 1990 between Ecopetrol, Argosy and Neo (filed as exhibit 10.8 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.6 Employee Stock Option Plan of the Company (filed as exhibit 10.13 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.7 Santana Block B 50% relinquishment dated September 13, 1993 between Ecopetrol, Argosy and Neo (filed as exhibit 10.26 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.8 Aviva Petroleum Inc. 401(k) Retirement Plan effective March 1, 1992 (filed as exhibit 10.29 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.9 Relinquishment of Putumayo dated December 1, 1993 (filed as exhibit 10.30 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). 25 *10.10 Deposit Agreement dated September 15, 1994 between the Company and Chemical Shareholder Services Group, Inc. (filed as exhibit 10.29 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.11 Letter from Ecopetrol dated December 28, 1994, accepting relinquishment of Putumayo (filed as exhibit 10.38 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.12 Amendment to the Incentive and Nonstatutory Stock Option Plan of the Company (filed as exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.13 Santana Block B 25% relinquishment dated October 2, 1995 (filed as exhibit 10.51 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.14 Aviva Petroleum Inc. 1995 Stock Option Plan, as amended (filed as Appendix A to the Company's definitive Proxy Statement for the Annual Meeting of Shareholders dated June 10, 1997, and incorporated herein by reference). *10.15 Restated Credit Agreement dated as of October 28, 1998, between Neo Energy, Inc., Aviva Petroleum Inc. and ING (U.S.) Capital Corporation (filed as exhibit 99.1 to the Company's Form 8-K dated October 28, 1998, File No. 0-22258, and incorporated herein by reference). *10.16 Joint Finance and Intercreditor Agreement dated as of October 28, 1998, between Neo Energy, Inc., Aviva Petroleum Inc., ING (U.S.) Capital Corporation, Aviva America, Inc., Aviva Operating Company, Aviva Delaware Inc., Garnet Resources Corporation, Argosy Energy Incorporated, Argosy Energy International, Garnet PNG Corporation, the Overseas Private Investment Corporation, Chase Bank of Texas, N.A. and ING (U.S.) Capital Corporation as collateral agent for the creditors (filed as exhibit 99.2 to the Company's Form 8-K dated October 28, 1998, File No. 0-22258, and incorporated herein by reference). *10.17 Amended and Restated Aviva Petroleum Inc. Severance Benefit Plan dated December 31, 1999 (filed as exhibit 10.18 to the Company's annual report on Form 10-K for the year ended December 31, 1999, File No. 0-22258, and incorporated herein by reference). *10.18 Santana Crude Sale and Purchase Agreement dated January 3, 2000 (filed as exhibit 10.19 to the Company's annual report on Form 10-K for the year ended December 31, 1999, File No. 0-22258, and incorporated herein by reference). *10.19 Employment Agreement between the Company and Ronald Suttill dated February 1, 2000 (filed as exhibit 10.20 to the Company's annual report on Form 10-K for the year ended December 31, 1999, File No. 0-22258, and incorporated herein by reference). *10.20 Employment Agreement between the Company and James L. Busby dated February 1, 2000 (filed as exhibit 10.21 to the Company's annual report on Form 10-K for the year ended December 31, 1999, File No. 0-22258, and incorporated herein by reference). *10.21 Service Agreement between Argosy Energy International and Aviva Overseas, Inc. dated as of June 1, 2000 (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.22 Letter Agreement dated June 8, 2000 between Crosby Capital, LLC and Aviva America, Inc. (filed as exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.23 Guaranty dated May 31, 2000 made by Aviva Overseas, Inc. in favor of Crosby Capital, LLC (filed as exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.24 Assignment and Assumption Agreement dated June 1, 2000, between Crosby Capital, LLC and Neo Energy, Inc. (filed as exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.25 Assignment and Assumption Agreement dated June 1, 2000 between Crosby Acquisition LLC and Argosy Energy, Inc. (filed as exhibit 10.5 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.26 Assignment and Assumption Agreement dated June 1, 2000 between Crosby Capital, LLC and Garnet Resources Corp. (filed as exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). 26 *10.27 Assignment and Assumption Agreement dated June 1, 2000 between Crosby Capital, LLC and Aviva Overseas, Inc. (filed as exhibit 10.7 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.28 Assignment and Assumption Agreement dated June 1, 2000 between Argosy Energy, Incorporated and Crosby Acquisition, LLC (filed as exhibit 10.8 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.29 Assignment and Assumption Agreement dated June 1, 2000 between Crosby Capital, LLC and Aviva Overseas, Inc. (filed as exhibit 10.9 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.30 Pledge Agreement dated May 31, 2000 executed by Aviva Overseas, Inc. (Debtor) in favor of Crosby Capital, LLC (Secured Party) (filed as exhibit 10.10 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.31 Third Amendment to Second Amended and Restated Limited Partnership Agreement of Argosy Energy International dated May 31, 2000 (filed as exhibit 10.11 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.32 Fourth Amendment to Second Amended and Restated Limited Partnership Agreement of Argosy Energy International dated June 1, 2000 (filed as exhibit 10.12 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.33 Assignment of Stock Warrant Rights dated May 31, 2000 executed by Crosby Capital, LLC in favor of Aviva Petroleum Inc. (filed as exhibit 10.13 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.34 Assignment of Neo Debt and Collateral, dated December 21, 2000 from Crosby Capital, LLC to Aviva Operating Company (filed as exhibit 10.34 to the Company's annual report on Form 10-K for the year ended December 31, 2000, File No. 0-22258, and incorporated herein by reference). *10.35 Conveyance of Net Profits Interest, dated December 21, 2000 from Aviva America, Inc. to Crosby Capital, LLC (filed as exhibit 10.35 to the Company's annual report on Form 10-K for the year ended December 31, 2000, File No. 0-22258, and incorporated herein by reference). *10.36 Santana Crude Sale and Purchase Agreement dated January 3,2001 (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2001, File No. 0-22258, and incorporated herein by reference). **10.37 Santana Crude Sale and Purchase Agreement dated January 30, 2002. **10.38 Rio Magdalena Association Contract dated December 10, 2001 between Ecopetrol and Argosy. *21.1 List of subsidiaries of Aviva Petroleum Inc. (filed as exhibit 21.1 to the Company's annual report on Form 10-K for the year ended December 31, 2000, File No. 0-22258, and incorporated herein by reference). ------------------------------------------ * Previously Filed ** Filed Herewith b. Reports on Form 8-K ------------------- The Company did not file any Current Reports on Form 8-K during and subsequent to the end of the fourth quarter. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AVIVA PETROLEUM INC. By: /s/ Ronald Suttill ----------------------------------- Ronald Suttill Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Ronald Suttill President, Chief Executive Officer March 22, 2002 - ----------------------- -------------- Ronald Suttill and Director (principal executive officer) /s/ James L. Busby Secretary, Treasurer and March 22, 2002 - ----------------------- --------------- James L. Busby Chief Financial Officer (principal financial and accounting officer) /s/ Robert J. Cresci Director March 22, 2002 - ----------------------- --------------- Robert J. Cresci 28 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page ------ Independent Auditors' Report............................................. 30 Consolidated Balance Sheet as of December 31, 2001 and 2000.............. 31 Consolidated Statement of Operations for the years ended December 31, 2001, 2000 and 1999.............................. 32 Consolidated Statement of Cash Flows for the years ended December 31, 2001, 2000 and 1999.............................. 33 Consolidated Statement of Stockholders' Equity (Deficit) for the years ended December 31, 2001, 2000 and 1999.............................. 34 Notes to Consolidated Financial Statements............................... 35 Supplementary Information Related to Oil and Gas Producing Activities (Unaudited).............................................. 46 All schedules called for under Regulation S-X have been omitted because they are not applicable, the required information is not material or the required information is included in the consolidated financial statements or notes thereto. 29 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors Aviva Petroleum Inc.: We have audited the accompanying consolidated financial statements of Aviva Petroleum Inc. and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aviva Petroleum Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP ---------------------------- Dallas, Texas March 1, 2002 30 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 2001 AND 2000 (in thousands, except number of shares)
2001 2000 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 1,010 $ 820 Accounts receivable (note 7): Oil and gas revenue 42 132 Trade 66 65 Other 79 40 Inventories 209 161 Prepaid expenses and other 140 187 ---------- ---------- Total current assets 1,546 1,405 ---------- ---------- Property and equipment, at cost: Oil and gas properties and equipment (full cost method) 20,244 16,414 Other 334 333 ---------- ---------- 20,578 16,747 Less accumulated depreciation, depletion and amortization (19,981) (15,791) ---------- ---------- 597 956 Other assets (note 3) 991 950 ---------- ---------- $ 3,134 $ 3,311 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 776 $ 945 Accrued liabilities 37 115 ---------- ---------- Total current liabilities 813 1,060 ---------- ---------- Other liabilities 368 375 Stockholders' equity (notes 2 and 5): Common stock, no par value, authorized 348,500,000 shares; issued 46,900,132 shares 2,345 2,345 Additional paid-in capital 37,710 37,710 Accumulated deficit* (38,102) (38,179) ---------- ---------- Total stockholders' equity 1,953 1,876 Commitments and contingencies (note 8) ---------- ---------- $ 3,134 $ 3,311 ========== ==========
*Accumulated deficit of $70,057 was eliminated at December 31, 1992 in connection with a quasi-reorganization. See note 5. See accompanying notes to consolidated financial statements. 31 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (in thousands, except per share data)
2001 2000 1999 ---------- ---------- ---------- Revenue: Oil and gas sales (note 7) $ 2,136 $ 5,796 $ 6,797 Service fees (note 2) 473 387 - ---------- ---------- ---------- Total revenue 2,609 6,183 6,797 ---------- ---------- ---------- Expense: Production 1,402 2,407 3,575 Depreciation, depletion and amortization 320 515 1,000 General and administrative 1,006 1,157 1,245 Recovery of losses on accounts receivable (48) (256) (101) Severance - - 62 ---------- ---------- ---------- Total expense 2,680 3,823 5,781 ---------- ---------- ---------- Other income (expense): Gain on transfer of partnership interests (note 2) - 3,452 - Interest and other income (expense), net (note 4) 235 207 259 Interest expense (3) (805) (1,396) ---------- ---------- ---------- Total other income (expense) 232 2,854 (1,137) ---------- ---------- ---------- Earnings (loss) before income taxes and extraordinary item 161 5,214 (121) Income taxes (note 6) (84) (253) (282) ---------- ---------- ---------- Earnings (loss) before extraordinary item 77 4,961 (403) Extraordinary item - debt extinguishment, net of income taxes of $2,855 (notes 2 and 9) - 5,543 - ---------- ---------- ---------- Net earnings (loss) $ 77 $ 10,504 $ (403) ========== ========== ========== Weighted average common shares outstanding - basic and diluted 46,900 46,900 46,813 ========== ========== ========== Basic and diluted net earnings (loss) per common share: Before extraordinary item $ 0.00 $ 0.10 $ (0.01) Extraordinary item - 0.12 - ---------- ---------- ---------- Net earnings (loss) $ 0.00 $ 0.22 $ (0.01) ========== ========== ==========
See accompanying notes to consolidated financial statements. 32 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (in thousands)
2001 2000 1999 -------- -------- -------- Net earnings (loss) $ 77 $ 10,504 $ (403) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 320 515 1,000 Recovery of losses on accounts receivable (48) (256) (101) Gain on transfer of partnership interests - (3,452) - Gain on debt extinguishment - (5,543) - Loss (gain) on sale of assets, net (4) 4 (11) Foreign currency exchange gain, net (11) (44) (193) Other (127) (357) 247 Changes in assets and liabilities, net of effects of transfer of partnership interests: Escrow account - 4 413 Accounts receivable 155 204 120 Inventories 8 10 112 Prepaid expenses and other 51 27 38 Accounts payable and accrued liabilities (231) 106 (1,703) -------- -------- -------- Net cash provided by (used in) operating activities 190 1,722 (481) -------- -------- -------- Cash flows from investing activities: Costs of and cash balances acquired (surrendered) in connection with the transfer of partnership interests from (to) Crosby 41 (1,414) - Property and equipment expenditures (135) (382) (285) Proceeds from sale of assets 4 - 37 Other 80 - - -------- -------- -------- Net cash used in investing activities (10) (1,796) (248) -------- -------- -------- Cash flows from financing activities- Principal payments on long term debt - - (300) -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents 10 48 163 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 190 (26) (866) Cash and cash equivalents at beginning of year 820 846 1,712 -------- -------- -------- Cash and cash equivalents at end of year $ 1,010 $ 820 $ 846 ======== ======== ========
See accompanying notes to consolidated financial statements. 33 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (in thousands, except number of shares)
Common Stock ------------------- Additional Total Number of Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity (Deficit) --------- ------- --------- ----------- ---------------- Balances at December 31, 1998 46,700,132 $ 2,335 $ 34,862 $ (48,280) $ (11,083) Issuance of common stock pursuant to investment banking agreement 200,000 10 (7) - 3 Net loss - - - (403) (403) ---------- -------- --------- ---------- ----------- Balances at December 31, 1999 46,900,132 2,345 34,855 (48,683) (11,483) Tax benefits relating to January 1, 1993 valuation allowance (note 6) - - 2,855 - 2,855 Net earnings - - - 10,504 10,504 ---------- -------- --------- ---------- ----------- Balances at December 31, 2000 46,900,132 2,345 37,710 (38,179) 1,876 Net earnings - - - 77 77 ---------- -------- --------- ---------- ----------- Balances at December 31, 2001 46,900,132 $ 2,345 $ 37,710 $ (38,102) $ 1,953 ========== ======== ========= =========== ==========
See accompanying notes to consolidated financial statements. 34 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Aviva Petroleum Inc. and its subsidiaries (the "Company") are engaged in the business of exploring for, developing and producing oil and gas in Colombia and in the United States. The Company's Colombian oil production is sold to Empresa Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"), while the Company's U.S. oil and gas production is sold to principally one U.S. purchaser (See notes 7 and 10). Oil and gas are the Company's only products, and there is substantial uncertainty as to the prices that the Company may receive for its production. A decrease in these prices would affect operating results adversely. Principles of Consolidation The consolidated financial statements include the accounts of Aviva Petroleum Inc. and its subsidiaries. The Company proportionately consolidates less than 100% owned oil and gas partnerships in accordance with industry practice. All significant intercompany accounts and transactions have been eliminated in consolidation. Inventories Inventories consist primarily of tubular goods, oilfield equipment and spares and are stated at the lower of average cost or market. Property and Equipment Under the full cost method of accounting for oil and gas properties, all productive and nonproductive property acquisition, exploration and development costs are capitalized in separate cost centers for each country. Such capitalized costs include lease acquisition costs, delay rentals, geophysical, geological and other costs, drilling, completion and other related costs and direct general and administrative expenses associated with property acquisition, exploration and development activities. Capitalized general and administrative costs include internal costs such as salaries and related benefits paid to employees to the extent that they are directly engaged in such activities, as well as all other directly identifiable general and administrative costs associated with such activities, including rent, utilities and insurance and do not include any costs related to production, general corporate overhead, or similar activities. Capitalized internal general and administrative costs were $66,000 in 2001, $57,000 in 2000 and $46,000 in 1999. Evaluated capitalized costs of oil and gas properties and the estimated future development, site restoration, dismantlement and abandonment costs are amortized by cost center, using the units-of-production method. Total net future site restoration, dismantlement and abandonment costs are estimated to be $799,000. Depreciation, depletion and amortization expense per equivalent barrel of production was as follows: 2001 2000 1999 -------- -------- -------- United States $ 5.24 $ 2.62 $ 1.10 Colombia $ 1.66 $ 2.29 $ 2.40 In accordance with the full cost method of accounting, the net capitalized costs of oil and gas properties less related deferred income taxes for each cost center are limited to the sum of the estimated future net revenues from the properties at current prices less estimated future expenditures, discounted at 10%, and unevaluated costs not being amortized, less income tax effects related to differences between the financial and tax bases of the properties, computed on a quarterly basis. An excess of the capitalized costs relating to the U.S. cost center over the limitation at December 31, 2001 was not charged against earnings because of a price increase subsequent to year-end. Depletion expense and limits on capitalized costs are based on estimates of oil and gas reserves which are inherently imprecise and assume current prices for future net revenues. Accordingly, it is reasonably possible that the estimates of reserves quantities and future net revenues could differ materially in the near term from 35 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) amounts currently estimated. Moreover, a future decrease in the prices the Company receives for its oil and gas production or downward reserve adjustments could result in a ceiling test write-down that is significant to the Company's operating results. Gains and losses on sales of oil and gas properties are not recognized in income unless the sale involves a significant portion of the reserves associated with a particular cost center. Capitalized costs associated with unevaluated properties are excluded from amortization until it is determined whether proved reserves can be assigned to such properties or until the value of the properties is impaired. Unevaluated costs of $303,000 and $272,000 were excluded from amortization at December 31, 2001 and 2000, respectively. Unevaluated properties are assessed quarterly to determine whether any impairment has occurred. The unevaluated costs at December 31, 2001 represent exploration costs and were incurred primarily during the five-year period ended December 31, 2001. Such costs are expected to be evaluated and included in the amortization computation within the next three years. Other property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets. Gas Balancing The Company uses the entitlements method of accounting for gas sales. Gas production taken by the Company in excess of amounts entitled is recorded as a liability to the other joint owners. Excess gas production taken by others is recognized as income to the extent of the Company's proportionate share of the gas sold and a related receivable is recorded from the other joint owners. Interest Expense The Company capitalizes interest costs on qualifying assets, principally unevaluated oil and gas properties. During 2000 and 1999, the Company capitalized $43,000 and $59,000 of interest, respectively. Earnings Per Common Share Basic earnings per share ("EPS") is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For the years presented herein, basic and diluted EPS are the same since the effects of potential common shares (note 5) are either antidilutive or insignificant. For fiscal year 2001, options for 599,000 common shares were not included in the computation of diluted earnings per share, because their exercise price approximated the average market price of the common shares and the effect would be insignificant. For fiscal year 2000, options for 1,024,000 common shares were not included in the computation of diluted earnings per share because their exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("Statement 109") which requires recognition of deferred tax assets in certain circumstances and deferred tax liabilities for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Statement of Cash Flows The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. The Company paid interest, net of amounts capitalized, of $3,000 in 2001, $(37,000) in 2000 and $547,000 in 1999 and paid income taxes of $107,000 in 2001, $267,000 in 2000 and $201,000 in 1999. Fair Value of Financial Instruments The reported values of cash, cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. 36 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Foreign Currency Translation The accounts of the Company's foreign operations are translated into United States dollars in accordance with Statement of Financial Accounting Standards No. 52. The United States dollar is used as the functional currency. Exchange adjustments resulting from foreign currency transactions are recognized in expense or income in the current period. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive Income Comprehensive income includes net income and other comprehensive income which is generally comprised of changes in the fair value of available-for-sale marketable securities, foreign currency translation adjustments and adjustments to recognize additional minimum pension liabilities. For each period presented in the accompanying consolidated statement of operations, comprehensive income and net income are the same amount. (2) DEBT RESTRUCTURING AND TRANSFER OF PARTNERSHIP INTERESTS On June 8, 2000, the Company entered into agreements with the Company's senior secured lender, Crosby Capital, LLC ("Crosby"), in order to restructure the Company's senior debt which, including unpaid interest, aggregated $16,103,064 as of May 31, 2000. Crosby acquired the debt from ING Capital and OPIC on May 1, 2000. Pursuant to the agreements, Crosby canceled $13,353,064 of such debt and transferred to the Company warrants for 1,500,000 shares of the Company's common stock in exchange for the general partner rights and an initial 77.5% partnership interest in Argosy Energy International ("Argosy"), a Utah limited partnership, which holds the Company's Colombian properties. Following the transaction, Aviva Overseas Inc. ("Aviva Overseas"), a wholly owned subsidiary of the Company, owns a 22.1196% limited partnership interest in Argosy. An additional 7.5% limited partnership interest was transferred from Crosby to Aviva Overseas when Crosby had received in distributions from Argosy an amount equal to $3,500,000 plus interest at the prime rate plus 1% on the outstanding balance thereof. The Company's remaining debt of $2,750,000 was reacquired from Crosby on December 21, 2000, in exchange for a 15% net profits interest in any new production at Breton Sound Block 31 field. This transaction substantially completed the restructuring of the Company and the reorganization of the Company's wholly owned subsidiary Aviva America, Inc. ("AAI") (see note 9). In order to assist Crosby in maximizing the value of its interest in Argosy, Crosby entered into a Service Agreement with Aviva Overseas pursuant to which Aviva Overseas would provide certain services in administering the Colombian assets in exchange for a monthly fee. The fee was $71,000 per month for the period June 1, 2000 through March 31, 2001, $46,000 per month for the period April 1, 2001 through March 31, 2002, and $21,000 per month thereafter if the contract continued in effect. The Service Agreement provided for a term of 22 months and allowed termination with a 30-day written notice by either party. The Company has been notified that Crosby will cancel the contract effective March 31, 2002. The Company recognized a gain of $3,452,000 on the transfer of the partnership interests to Crosby, representing the excess of the fair value over the book value of the interests transferred. The Company recognized an extraordinary gain of $4,888,000 on the extinguishment of the debt due to Crosby, net of income taxes of $2,517,000. In connection with the above-referenced transaction, 1,000,000 shares of the Company's common stock which were held by Crosby prior to the transaction, were transferred to members of management and the Board of Directors of the Company, effective June 8, 2000. As of such date, the aggregate market value of the common 37 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) stock transferred to members of management and the Board of Directors was approximately $25,000 based on the last sale price on the OTC Bulletin Board of a depositary share representing five shares of the Company's common stock. Additionally, 200,000 shares of the Company's common stock which were held by Crosby prior to the transaction were transferred to a consultant of the Company effective as of the same date. (3) OTHER ASSETS A summary of other assets follows: December 31 ----------------------- (thousands) 2001 2000 -------- -------- Abandonment funds for U.S. offshore properties $ 989 $ 948 Other 2 2 -------- -------- $ 991 $ 950 ======== ======== (4) INTEREST AND OTHER INCOME (EXPENSE) A summary of interest and other income (expense) follows: (thousands) 2001 2000 1999 --------- --------- ------- Interest income $ 56 $ 97 $ 94 Gain on settlement of disputed payable 99 - - Foreign currency exchange gain (loss) 11 44 193 Gain (loss) on sale of assets, net 4 (4) 11 Other, net 65 70 (39) --------- --------- ------- $ 235 $ 207 $ 259 ========= ========= ======= (5) STOCKHOLDERS' EQUITY Quasi-Reorganization Effective December 31, 1992, the Board of Directors of the Company approved a quasi-reorganization which resulted in a reclassification of the accumulated deficit of $70,057,000 at that date to paid-in capital. No adjustments were made to the Company's assets and liabilities since the historical carrying values approximated or did not exceed the estimated fair values. Stock Option Plans At December 31, 2001, the Company has two stock option plans, which are described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock option plans been determined consistent with FASB Statement No. 123, the Company's net earnings (loss) and earnings (loss) per share would have been changed to the pro forma amounts indicated below (in thousands, except per share data): 2001 2000 1999 ---- ---- ---- Net earnings (loss) As reported $ 77 $ 10,504 $ (403) Pro forma $ 77 $ 10,496 $ (413) Earnings (loss) per share As reported $ 0.00 $ 0.22 $ (0.01) Pro forma $ 0.00 $ 0.22 $ (0.01) 38 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Aviva Petroleum Inc. 1995 Stock Option Plan, as amended (the "Current Plan") is administered by a committee (the "Committee") composed of outside directors of the Company. Except as indicated below and except for non-discretionary grants to non-employee directors, the Committee has authority to determine all terms and provisions under which options are granted pursuant to the Current Plan. An aggregate of up to 1,000,000 shares of the Company's common stock may be issued upon exercise of stock options or in connection with restricted stock awards that may be granted under the Current Plan. The Current Plan also provides for the grant, on July 1, each year, to each non-employee director who has served in such capacity for at least the entire preceding calendar year of an option to purchase 5,000 shares of the Company's common stock (the "Annual Option Awards"), exercisable as to 2,500 shares on the first anniversary of the date of grant and as to the remaining shares on the second anniversary thereof. The aggregate fair market value (determined at the time of grant) of shares issuable pursuant to incentive stock options which first become exercisable in any calendar year by a participant in the Current Plan may not exceed $100,000. The maximum number of shares of common stock which may be subject to an option or restricted stock grant awarded to a participant in a calendar year cannot exceed 100,000. Incentive stock options granted under the Current Plan may not be granted at a price less than 100% of the fair market value of the common stock on the date of grant (or 110% of the fair market value in the case of incentive stock options granted to participants in the Current Plan holding 10% or more of the voting stock of the Company). Non-qualified stock options may not be granted at a price less than 50% of the fair market value of the common stock on the date of grant. As a result of the adoption of the Current Plan, during 1995 the Company's former Incentive and Non-Statutory Stock Option Plan was terminated as to the grant of new options, but options then outstanding for 250,000 shares of the Company's common stock remain in effect as of December 31, 2001. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2001 2000 1999 ---------- --------- --------- Expected life (years) 10.0 10.0 10.0 Risk-free interest rate 5.42% 6.03% 5.8% Volatility 103.0% 124.0% 87.0% Dividend yield 0.0% 0.0% 0.0% A summary of the status of the Company's two fixed stock option plans as of December 31, 2001, 2000 and 1999, and changes during the years ended on those dates is presented below:
2001 2000 1999 --------------------- -------------------- ----------------------- Weighted- Weighted- Weighted- Average Average Average Shares Exercise Shares Exercise Shares Exercise Fixed Options (000) Price (000) Price (000) Price - ------------- -------- ----------- -------- --------- --------- ---------- Outstanding at beginning of year 1,024 $ .51 1,072 $ .51 1,148 $ .53 Granted 5 .07 5 .08 5 .01 Forfeited (140) .81 (53) .17 (81) .74 ------ ------ ------ Outstanding at end of year 889 .45 1,024 .51 1,072 .51 ====== ====== ====== Options exercisable at year-end 882 1,007 825 ====== ====== ====== Weighted-average fair value of options granted during the year $ .06 $ .07 $ .01 ====== ====== ======
39 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about fixed stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable ---------------------------------------------- -------------------------------- Range Number Weighted-Avg. Number of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. Exercise Prices at 12/31/01 Contractual Life Exercise Price at 12/31/01 Exercise Price - ------------------- ------------ ---------------- -------------- ------------- ---------------- $ .01 to .08 609,000 6.83 years $ .06 601,500 $ .06 .52 30,000 1.45 .52 30,000 .52 1.08 to 2.45 250,000 1.24 1.41 250,000 1.41 - ----------------- ----------- ------------ $ .01 to 2.45 889,000 5.08 .45 881,500 .46 ================= =========== ============
(6) INCOME TAXES Income tax expense includes current Colombian income taxes of $74,000 in 2001, $241,000 in 2000, and $282,000 in 1999. Income tax expense also includes state income taxes of $10,000 in 2001, $12,000 in 2000 and $-0- in 1999. Income tax expense for the years ended December 31, 2001 and 2000, differed from the amount computed by applying the statutory U.S. federal income tax rate (34%) to income before income taxes as a result of the following (in thousands): 2001 2000 --------- ---------- Computed expected tax expense $ 55 $ 1,773 Decrease in valuation allowance (5,362) (17,856) Expiration of net operating loss carryforwards 3,555 15,467 Foreign income taxes and other 1,836 869 --------- ---------- $ 84 $ 253 ========= ========== During the year ended December 31, 1999, the Company's effective tax rate differed from the U. S. statutory rate principally due to losses without tax benefit. The Company has deferred tax assets of $18,259,000 and $23,621,000 at December 31, 2001 and 2000, respectively, consisting principally of net operating loss carryforwards. The valuation allowance for deferred tax assets at January 1, 1999 was $46,028,000. The net change in the valuation allowance was a $5,362,000 decrease in 2001, a $20,711,000 decrease in 2000, and a $1,696,000 decrease in 1999. Subsequently recognized tax benefits relating to the valuation allowance of $9,327,000 for deferred tax assets at January 1, 1993 will be credited to additional paid in capital. Such benefits were $2,855,000 during the year ended December 31, 2000. At December 31, 2001, the Company and its subsidiaries have aggregate net operating loss carryforwards for U.S. federal income tax purposes of approximately $47,000,000, expiring from 2002 through 2021, which are available to offset future federal taxable income. The utilization of a portion of these net operating losses is subject to an annual limitation of approximately $2,400,000 and a portion may only be utilized by certain subsidiaries of the Company. (7) FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS Financial instruments which are subject to risks due to concentrations of credit consist principally of cash and cash equivalents and receivables. Cash and cash equivalents are placed with high credit quality financial institutions to minimize risk. Receivables are typically unsecured. Historically, the Company has not experienced any material collection difficulties from its customers. The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value due to the current maturities of these financial instruments. 40 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Ecopetrol has an option to purchase all of the Company's production in Colombia. For the years ended December 31, 2001, 2000 and 1999, Ecopetrol exercised that option and sales to Ecopetrol accounted for $1,253,000 (59%), $4,267,000 (74%) and $5,683,000 (84%) respectively, of the Company's aggregate oil and gas sales. For the years ended December 31, 2001 and 2000, sales to one U.S. purchaser accounted for $782,000 (37%) and $968,000 (17%), respectively, of oil and gas sales. During 1999, the Company did not receive more than 10% of its revenue from any one domestic purchaser. (8) COMMITMENTS AND CONTINGENCIES During the latter part of 2001, an offset operator drilled a successful exploratory well approximately 4,000 feet from the eastern boundary of the Company's Breton Sound acreage. Management of the Company is currently in discussions with such operator, and other interested parties, with a view towards negotiating an arrangement to explore the Company's Breton Sound prospects. At this time it is not possible to predict the cost, if any, net to the Company, that may arise should management successfully negotiate such an arrangement. The Company is also engaged in ongoing operations in Colombia. The obligations under the Santana contract have been met; however, Argosy plans to recomplete certain existing wells and engage in various other projects. The first of these recompletions is scheduled during 2003, and the majority of the remaining recompletions are scheduled during 2004. The Company's share of the estimated future costs of these activities is approximately $0.2 million at December 31, 2001. The contract obligations of the Rio Magdalena contract require Argosy and its co-owner to reprocess 40 kilometers of 2D seismic during the initial 18-month exploration phase of the contract. The Company's current share of the estimated future costs of this phase is approximately $74,000 at December 31, 2001. Additional expenditures will be required should Argosy decide to enter into the second phase of the contract. The proposed obligations of the Guayuyaco contract will require Argosy to drill one exploratory well during the initial 12- month exploration phase of the contract. Upon completion of the initial exploration phase, Argosy may relinquish the contract or proceed to the following 18-month exploration phase, whereunder Argosy will be obligated to drill a second exploratory well. Argosy is continuing its efforts to secure an industry partner to farm-in to this acreage and expects to drill the first exploratory well during the second quarter of 2003. Failure by Argosy to meet the obligations under the proposed Guayuyaco contract will result in the loss of the proposed contract terms. The existing Santana production and acreage will not be affected. Failure by the Company to fund its share of Argosy's obligations, assuming Argosy funds the obligation, could result in a decrease in the Company's ownership interest in Argosy. The Company expects to fund its share of the cost of the recompletions on the Santana contract and the seismic commitments on the Rio Magdalena contract using existing cash and cash provided from operations. Any substantial increase in the amount of the above referenced expenditures could adversely affect the Company's ability to fund these activities. Risks that could adversely affect funding of such activities include, among others, delays in obtaining any required environmental permits, cost overruns, failure to produce the reserves as projected or a decline in the sales price of oil. Depending on the results of future exploration and development activities, substantial expenditures which have not been included in the Company's projections may be required. Although the ultimate outcome of these matters cannot be projected with certainty, management believes that the Company's existing capital resources are adequate to fund its current obligations. If, however, the Company enters into an arrangement to explore its Breton Sound acreage, the Company's existing capital resources may be inadequate to fund the Company's share, if any, of the exploration program. Accordingly, 41 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the Company may be required to raise additional capital through equity issues, incurring debt or by sales of assets. There can be no assurance that such attempts to raise additional capital would be successful. During 1998, leftist Colombian guerrillas inflicted significant damage on Argosy's oil processing and storage facilities. Since that time Argosy has been subject to lesser attacks on its pipelines and equipment resulting in only minor interruptions of oil sales. The Colombian army guards the Company's operations; however, there can be no assurance that such operations will not be the target of additional guerrilla attacks in the future. The damages resulting from the above referenced attacks were covered by insurance. During 2001 the cost of such insurance became prohibitively high and, accordingly, Argosy has elected to no longer maintain terrorism insurance. Under the terms of the contracts with Ecopetrol, a minimum of 25% of all revenues from oil sold to Ecopetrol is paid in Colombian pesos which may only be utilized in Colombia. To date, the Company has experienced no difficulty in repatriating the remaining 75% of such payments, which are payable in U.S. dollars. Activities of the Company with respect to the exploration, development and production of oil and natural gas are subject to stringent foreign, federal, state and local environmental laws and regulations, including but not limited to the Oil Pollution Act of 1990, the Outer Continental Shelf Lands Act, the Federal Water Pollution Control Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation, and Liability Act. Such laws and regulations have increased the cost of planning, designing, drilling, operating and abandoning wells. In most instances, the statutory and regulatory requirements relate to air and water pollution control procedures and the handling and disposal of drilling and production wastes. Although the Company believes that compliance with environmental laws and regulations will not have a material adverse effect on the Company's future operations or earnings, risks of substantial costs and liabilities are inherent in oil and gas operations and there can be no assurance that significant costs and liabilities, including civil or criminal penalties for violations of environmental laws and regulations, will not be incurred. Moreover, it is possible that other developments, such as stricter environmental laws and regulations or claims for damages to property or persons resulting from the Company's operations, could result in substantial costs and liabilities. The Company's policy is to accrue environmental and restoration related costs once it is probable that a liability has been incurred and the amount can be reasonably estimated. The Company is involved in certain litigation involving its oil and gas activities. Management of the Company believes that these litigation matters will not have any material adverse effect on the Company's financial condition or results of operations. The Company has one lease for office space in Dallas, Texas, which expires in January 2007. Rent expense relating to the lease was $90,000, $88,000, and $94,000 for 2001, 2000 and 1999, respectively. Future minimum payments under the lease are approximately $94,000 for each year through 2006 and $8,000 for 2007. (9) SUBSIDIARY'S REORGANIZATION UNDER CHAPTER 11 On July 21, 2000, AAI, a wholly-owned subsidiary of the Company, filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy code. AAI is a Delaware corporation which holds the Company's interests in oil and gas properties located offshore Louisiana. The filing, in the Northern District of Texas, was initiated in order to achieve a comprehensive restructuring of AAI's debts Following approval by the court and creditors, the voluntary petition for reorganization became effective on November 17, 2000. In connection with the reorganization, the Company recognized an extraordinary gain of $655,000 on the extinguishment of certain AAI debts, net of income taxes of $338,000. 42 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) GEOGRAPHIC AREA INFORMATION The Company is engaged in the business of exploring for, developing and producing oil and gas in the United States and Colombia. Information about the Company's operations in different geographic areas as of and for the years ended December 31, 2001, 2000 and 1999 follows:
(Thousands) United States Colombia Total ----------- ----------- ----------- 2001 - ---- Revenue: Oil and gas sales $ 883 $ 1,253 $ 2,136 Service fees 473 - 473 ----------- ----------- ----------- 1,356 1,253 2,609 ----------- ----------- ----------- Expense: Production 785 617 1,402 Depreciation, depletion and amortization 219 101 320 General and administrative 904 102 1,006 Recovery of losses on accounts receivable (48) - (48) ----------- ----------- ----------- 1,860 820 2,680 ----------- ----------- ----------- Interest and other income (expense), net 56 179 235 Interest expense (3) - (3) ----------- ----------- ----------- Earnings (loss) before income taxes and extraordinary item (451) 612 161 Income taxes (10) (74) (84) ----------- ----------- ----------- Net earnings (loss) $ (461) $ 538 $ 77 =========== =========== =========== Total assets $ 1,602 $ 1,532 $ 3,134 =========== =========== ===========
43 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Thousands) United States Colombia Total --------- --------- --------- 2000 - ---- Revenue: Oil and gas sales $ 1,528 $ 4,268 $ 5,796 Service fees 387 - 387 --------- --------- --------- 1,915 4,268 6,183 --------- --------- --------- Expense: Production 1,099 1,308 2,407 Depreciation, depletion and amortization 131 384 515 General and administrative 1,077 80 1,157 Recovery of losses on accounts receivable (256) - (256) --------- --------- --------- 2,051 1,772 3,823 --------- --------- --------- Gain on transfer of partnership interests - 3,452 3,452 Interest and other income (expense), net 39 168 207 Interest expense (183) (622) (805) --------- --------- --------- Earnings (loss) before income taxes and extraordinary item (280) 5,494 5,214 Income taxes (12) (241) (253) --------- --------- --------- Earnings (loss) before extraordinary item (292) 5,253 4,961 Extraordinary item - debt extinguishment 655 4,888 5,543 --------- --------- --------- Net earnings $ 363 $ 10,141 $ 10,504 ========= ========= ========= Total assets $ 1,662 $ 1,649 $ 3,311 ========= ========= ========= 1999 - ---- Oil and gas sales $ 1,114 $ 5,683 $ 6,797 --------- --------- --------- Expense: Production 1,173 2,402 3,575 Depreciation, depletion and amortization 59 941 1,000 General and administrative 1,148 97 1,245 Recovery of losses on accounts receivable (101) - (101) Severance - 62 62 --------- --------- --------- 2,279 3,502 5,781 --------- --------- --------- Interest and other income (expense), net 154 105 259 Interest expense (397) (999) (1,396) --------- --------- --------- Earnings (loss) before income taxes (1,408) 1,287 (121) Income taxes - (282) (282) --------- --------- --------- Net earnings (loss) $ (1,408) $ 1,005 $ (403) ========= ========= ========= Total assets $ 1,908 $ 7,078 $ 8,986 ========= ========= =========
44 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly operating results for 2001 and 2000 are summarized as follows (in thousands, except per share data):
Quarter Ended March 31 June 30 September 30 December 31 ----------- ----------- ------------ ----------- 2001 - ---- Revenues $ 766 $ 682 $ 654 $ 507 ======== ======== ======== ======== Operating earnings 77 (26) 35 (157) ======== ======== ======== ======== Net earnings (loss) 229 (44) 40 (148) ======== ======== ======== ======== Basic and diluted earnings (loss) per common share $ 0.00 $ (0.00) $ 0.00 $ (0.00) ======== ======== ======== ======== 2000 - ---- Revenues $ 2,541 $ 1,827 $ 907 $ 908 ======== ======== ======== ======== Operating earnings 1,247 696 208 209 ======== ======== ======== ======== Net earnings before extraordinary item 733 3,887 134 207 ======== ======== ======== ======== Extraordinary item - debt extinguishment - 3,089 (5) 2,459 ======== ======== ======== ======== Net earnings 733 6,976 129 2,666 ======== ======== ======== ======== Basic and diluted earnings (loss) per common share: Before extraordinary item 0.02 0.08 0.00 0.00 ======== ======== ======== ======== Extraordinary item - 0.07 (0.00) 0.05 ======== ======== ======== ======== Net earnings $ 0.02 $ 0.15 $ 0.00 $ 0.05 ======== ======== ======== ========
45 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) The following information relating to the Company's oil and gas activities is presented in accordance with Statement of Financial Accounting Standards No. 69. The Financial Accounting Standards Board has determined the information is necessary to supplement, although not required to be a part of, the basic financial statements. Capitalized costs and accumulated depreciation, depletion and amortization relating to oil and gas producing activities were as follows: (Thousands) United States Colombia Total --------- --------- --------- December 31, 2001 - ----------------- Unevaluated oil and gas properties $ 184 $ 119 $ 303 Proved oil and gas properties 4,008 15,933 19,941 --------- --------- --------- Total capitalized costs 4,192 16,052 20,244 Less accumulated depreciation, depletion and amortization 4,368 15,335 19,703 --------- --------- --------- Capitalized costs, net $ (176) $ 717 $ 541 ========= ========= ========= December 31, 2000 - ----------------- Unevaluated oil and gas properties $ 184 $ 88 $ 272 Proved oil and gas properties 3,936 12,206 16,142 --------- --------- --------- Total capitalized costs 4,120 12,294 16,414 Less accumulated depreciation, depletion and amortization 4,177 11,360 15,537 --------- --------- --------- Capitalized costs, net $ (57) $ 934 $ 877 ========= ========= ========= 46 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) Costs incurred in oil and gas property acquisition, exploration and development activities were as follows: (Thousands) United States Colombia Total ----------- ----------- ----------- 2001 - ---- Exploration $ - $ - $ - Development 72 19 91 ----------- ----------- ----------- Total costs incurred $ 72 $ 19 $ 91 =========== =========== =========== 2000 - ---- Exploration $ 10 $ 4 $ 14 Development 238 110 348 ----------- ----------- ----------- Total costs incurred $ 248 $ 114 $ 362 =========== =========== =========== 1999 - ---- Exploration $ 17 $ 41 $ 58 Development 85 81 166 ----------- ----------- ----------- Total costs incurred $ 102 $ 122 $ 224 =========== =========== =========== 47 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) The following schedule presents the Company's estimate of its proved oil and gas reserves. The proved oil and gas reserves in Colombia and the United States were determined by independent petroleum engineers, Huddleston & Co., Inc. and Netherland, Sewell & Associates, Inc., respectively. The figures presented are estimates of reserves which may be expected to be recovered commercially at current prices and costs. Estimates of proved developed reserves include only those reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Estimates of proved undeveloped reserves include only those reserves which are expected to be recovered on undrilled acreage from new wells which are reasonably certain of production when drilled or from presently existing wells which could require relatively major expenditures to effect recompletion.
Changes in the Estimated Quantities of Reserves -------------------------------------------------------- United States Colombia Total ------------- ------------- ------------- Year ended December 31, 2001 - ---------------------------- Oil (Thousands of barrels) Proved reserves: Beginning of period 174 696 870 Revisions of previous estimates (66) 3 (63) Purchase of reserves 5 - 5 Production (33) (61) (94) ------------- ------------- ------------- End of period 80 638 718 ============= ============= ============= Proved developed reserves, end of period 80 638 718 ============= ============= ============= Gas (Millions of cubic feet) Proved reserves: Beginning of period 114 - 114 Revisions of previous estimates (67) - (67) Purchase of reserves 2 - 2 Production (24) - (24) ------------- ------------- ------------- End of period 25 - 25 ============= ============= ============= Proved developed reserves, end of period 25 - 25 ============= ============= =============
48 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
Changes in the Estimated Quantities of Reserves -------------------------------------------------------- United States Colombia Total ------------- ------------- ------------- Year ended December 31, 2000 - ---------------------------- Oil (Thousands of barrels) Proved reserves: Beginning of period 144 2,208 2,352 Revisions of previous estimates 79 259 338 Sales of reserves - (1,614) (1,614) Production (49) (157) (206) ------------- ------------- ------------- End of period 174 696 870 ============= ============= ============= Proved developed reserves, end of period 174 696 870 ============= ============= ============= Gas (Millions of cubic feet) Proved reserves: Beginning of period 101 - 101 Revisions of previous estimates 38 - 38 Production (25) - (25) ------------- ------------- ------------- End of period 114 - 114 ============= ============= ============= Proved developed reserves, end of period 114 - 114 ============= ============= =============
49 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
Changes in the Estimated Quantities of Reserves ----------------------------------------------------- United States Colombia Total ---------- ---------- ---------- Year ended December 31, 1999 - ---------------------------- Oil (Thousands of barrels) Proved reserves: Beginning of period 8 2,352 2,360 Revisions of previous estimates 193 221 414 Discoveries and extensions - - - Sales of reserves - - - Production (57) (365) (422) ---------- ---------- ---------- End of period 144 2,208 2,352 ========== ========== ========== Proved developed reserves, end of period 144 2,208 2,352 ========== ========== ========== Gas (Millions of cubic feet) Proved reserves: Beginning of period 4 - 4 Revisions of previous estimates 150 - 150 Discoveries and extensions - - - Sales of reserves - - - Production (53) - (53) ---------- ---------- ---------- End of period 101 - 101 ========== ========== ========== Proved developed reserves, end of period 101 - 101 ========== ========== ==========
50 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) The following schedule is a standardized measure of the discounted net future cash flows applicable to proved oil and gas reserves. The future cash flows are based on estimated oil and gas reserves utilizing prices and costs in effect as of the applicable year end, discounted at ten percent per year and assuming continuation of existing economic conditions. The standardized measure of discounted future net cash flows, in the Company's opinion, should be examined with caution. The schedule is based on estimates of the Company's proved oil and gas reserves prepared by independent petroleum engineers. Reserve estimates are, however, inherently imprecise and estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. Therefore, the standardized measure of discounted future net cash flows does not necessarily reflect the fair value of the Company's proved oil and gas properties. (Thousands) United States Colombia Total --------- --------- --------- At December 31, 2001: - -------------------- Future gross revenues $ 1,436 $ 10,519 $ 11,955 Future production costs (1,288) (6,335) (7,623) Future development costs, including abandonment of U.S. offshore platforms (799) (354) (1,153) --------- --------- --------- Future net cash flows before income taxes (651) 3,830 3,179 Future income taxes - - - --------- --------- --------- Future net cash flows after income taxes (651) 3,830 3,179 Discount at 10% per annum 236 (1,130) (894) --------- --------- --------- Standardized measure of discounted future net cash flows $ (415) $ 2,700 $ 2,285 ========= ========= ========= At December 31, 2000: - -------------------- Future gross revenues $ 5,520 $ 12,501 $ 18,021 Future production costs (3,887) (5,994) (9,881) Future development costs, including abandonment of U.S. offshore platforms (745) (390) (1,135) --------- --------- --------- Future net cash flows before income taxes 888 6,117 7,005 Future income taxes - - - --------- --------- --------- Future net cash flows after income taxes 888 6,117 7,005 Discount at 10% per annum 120 (1,942) (1,822) --------- --------- --------- Standardized measure of discounted future net cash flows $ 1,008 $ 4,175 $ 5,183 ========= ========= ========= 51 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) (Thousands) United States Colombia Total --------- --------- --------- At December 31, 1999: - -------------------- Future gross revenues $ 3,708 $ 53,112 $ 56,820 Future production costs (2,792) (15,195) (17,987) Future development costs, including abandonment of U.S. offshore platforms (970) (1,075) (2,045) --------- --------- --------- Future net cash flows before income taxes (54) 36,842 36,788 Future income taxes - - - --------- --------- --------- Future net cash flows after income taxes (54) 36,842 36,788 Discount at 10% per annum 171 (8,699) (8,528) --------- --------- --------- Standardized measure of discounted future net cash flows $ 117 $ 28,143 $ 28,260 ========= ========= ========= The following schedule summarizes the changes in the standardized measure of discounted future net cash flows. (Thousands) 2001 2000 1999 --------- --------- --------- Sales of oil and gas, net of production costs $ (735) $ (3,389) $ (3,222) Sales of reserves in place - (20,094) - Development costs incurred that reduced future development costs 35 36 - Accretion of discount 518 2,826 462 Discoveries and extensions - - - Purchase of reserves in place (32) - - Revisions of previous estimates: Changes in price (2,561) (1,921) 24,161 Changes in quantities (146) 1,422 4,103 Changes in future development costs (78) (236) 297 Changes in timing and other changes 101 (1,721) (2,160) Changes in estimated income taxes - - - --------- --------- --------- Net increase (decrease) (2,898) (23,077) 23,641 Balances at beginning of year 5,183 28,260 4,619 --------- --------- --------- Balances at end of year $ 2,285 $ 5,183 $ 28,260 ========= ========= ========= 52 INDEX TO EXHIBITS
Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *2.1 Agreement and Plan of Merger dated as of June 24, 1998, by and among Aviva Petroleum Inc., Aviva Merger Inc. and Garnet Resources Corporation (filed as exhibit 2.1 to the Registration Statement on Form S-4, File No. 333-58061, and incorporated herein by reference). *2.2 Debenture Purchase Agreement dated as of June 24, 1998, between Aviva Petroleum Inc. and the Holders of the Debentures named therein (filed as exhibit 2.2 to the Registration Statement on Form S-4, file No. 333-58061, and incorporated herein by reference). *3.1 Restated Articles of Incorporation of the Company dated July 25, 1995 (filed as exhibit 3.1 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *3.2 Amended and Restated Bylaws of the Company, as amended as of January 23, 1995 (filed as exhibit 3.2 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.1 Risk Sharing Contract between Empresa Colombiana de Petroleos ("Ecopetrol"), Argosy Energy International ("Argosy") and Neo Energy, Inc. ("Neo") (filed as exhibit 10.1 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.2 Contract for Exploration and Exploitation of Sector Number 1 of the Aporte Putumayo Area ("Putumayo") between Ecopetrol and Cayman Corporation of Colombia dated July 24, 1972 (filed as exhibit 10.2 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.3 Operating Agreement for Putumayo between Argosy and Neo dated September 16, 1987 and amended on January 4, 1989 and February 23, 1990 (filed as exhibit 10.3 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.4 Operating Agreement for the Santana Area ("Santana") between Argosy and Neo dated September 16, 1987 and amended on January 4, 1989, February 23, 1990 and September 28, 1992 (filed as exhibit 10.4 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.5 Santana Block A Relinquishment dated March 6, 1990 between Ecopetrol, Argosy and Neo (filed as exhibit 10.8 to the Company's Registration Statement on Form10, File No. 0- 22258, and incorporated herein by reference). *10.6 Employee Stock Option Plan of the Company (filed as exhibit 10.13 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.7 Santana Block B 50% relinquishment dated September 13, 1993 between Ecopetrol, Argosy and Neo (filed as exhibit 10.26 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.8 Aviva Petroleum Inc. 401(k) Retirement Plan effective March 1, 1992 (filed as exhibit 10.29 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.9 Relinquishment of Putumayo dated December 1, 1993 (filed as exhibit 10.30 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0- 22258, and incorporated herein by reference). *10.10 Deposit Agreement dated September 15, 1994 between the Company and Chemical Shareholder Services Group, Inc. (filed as exhibit 10.29 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.11 Letter from Ecopetrol dated December 28, 1994, accepting relinquishment of Putumayo (filed as exhibit 10.38 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference).
Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *10.12 Amendment to the Incentive and Nonstatutory Stock Option Plan of the Company (filed as exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.13 Santana Block B 25% relinquishment dated October 2, 1995 (filed as exhibit 10.51 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0- 22258, and incorporated herein by reference). *10.14 Aviva Petroleum Inc. 1995 Stock Option Plan, as amended (filed as Appendix A to the Company's definitive Proxy Statement for the Annual Meeting of Shareholders dated June 10, 1997, and incorporated herein by reference). *10.15 Restated Credit Agreement dated as of October 28, 1998, between Neo Energy, Inc., Aviva Petroleum Inc. and ING (U.S.) Capital Corporation (filed as exhibit 99.1 to the Company's Form 8-K dated October 28, 1998, File No. 0-22258, and incorporated herein by reference). *10.16 Joint Finance and Intercreditor Agreement dated as of October 28, 1998, between Neo Energy, Inc., Aviva Petroleum Inc., ING (U.S.) Capital Corporation, Aviva America, Inc., Aviva Operating Company, Aviva Delaware Inc., Garnet Resources Corporation, Argosy Energy Incorporated, Argosy Energy International, Garnet PNG Corporation, the Overseas Private Investment Corporation, Chase Bank of Texas, N.A. and ING (U.S.) Capital Corporation as collateral agent for the creditors (filed as exhibit 99.2 to the Company's Form 8-K dated October 28, 1998, File No. 0-22258, and incorporated herein by reference). *10.17 Amended and Restated Aviva Petroleum Inc. Severance Benefit Plan dated December 31, 1999 (filed as exhibit 10.18 to the Company's annual report on Form 10-K for the year ended December 31, 1999, File No. 0-22258, and incorporated herein by reference). *10.18 Santana Crude Sale and Purchase Agreement dated January 3, 2000 (filed as exhibit 10.19 to the Company's annual report on Form 10-K for the year ended December 31, 1999, File No. 0-22258, and incorporated herein by reference). *10.19 Employment Agreement between the Company and Ronald Suttill dated February 1, 2000 (filed as exhibit 10.20 to the Company's annual report on Form 10-K for the year ended December 31, 1999, File No. 0-22258, and incorporated herein by reference). *10.20 Employment Agreement between the Company and James L. Busby dated February 1, 2000 (filed as exhibit 10.21 to the Company's annual report on Form 10-K for the year ended December 31, 1999, File No. 0-22258, and incorporated herein by reference). *10.21 Service Agreement between Argosy Energy International and Aviva Overseas, Inc. dated as of June 1, 2000 (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.22 Letter Agreement dated June 8, 2000 between Crosby Capital, LLC and Aviva America, Inc. (filed as exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.23 Guaranty dated May 31, 2000 made by Aviva Overseas, Inc. in favor of Crosby Capital, LLC (filed as exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.24 Assignment and Assumption Agreement dated June 1, 2000, between Crosby Capital, LLC and Neo Energy, Inc. (filed as exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.25 Assignment and Assumption Agreement dated June 1, 2000 between Crosby Acquisition LLC and Argosy Energy, Inc. (filed as exhibit 10.5 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.26 Assignment and Assumption Agreement dated June 1, 2000 between Crosby Capital, LLC and Garnet Resources Corp. (filed as exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference).
Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *10.27 Assignment and Assumption Agreement dated June 1, 2000 between Crosby Capital, LLC and Aviva Overseas, Inc. (filed as exhibit 10.7 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.28 Assignment and Assumption Agreement dated June 1, 2000 between Argosy Energy, Incorporated and Crosby Acquisition, LLC (filed as exhibit 10.8 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.29 Assignment and Assumption Agreement dated June 1, 2000 between Crosby Capital, LLC and Aviva Overseas, Inc. (filed as exhibit 10.9 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.30 Pledge Agreement dated May 31, 2000 executed by Aviva Overseas, Inc. (Debtor) in favor of Crosby Capital, LLC (Secured Party) (filed as exhibit 10.10 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.31 Third Amendment to Second Amended and Restated Limited Partnership Agreement of Argosy Energy International dated May 31, 2000 (filed as exhibit 10.11 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.32 Fourth Amendment to Second Amended and Restated Limited Partnership Agreement of Argosy Energy International dated June 1, 2000 (filed as exhibit 10.12 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.33 Assignment of Stock Warrant Rights dated May 31, 2000 executed by Crosby Capital, LLC in favor of Aviva Petroleum Inc. (filed as exhibit 10.13 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-22258, and incorporated herein by reference). *10.34 Assignment of Neo Debt and Collateral, dated December 21, 2000 from Crosby Capital, LLC to Aviva Operating Company (filed as exhibit 10.34 to the Company's annual report on Form 10-K for the year ended December 31, 2000, File No. 0-22258, and incorporated herein by reference). *10.35 Conveyance of Net Profits Interest, dated December 21, 2000 from Aviva America, Inc. to Crosby Capital, LLC (filed as exhibit 10.35 to the Company's annual report on Form 10-K for the year ended December 31, 2000, File No. 0-22258, and incorporated herein by reference). *10.36 Santana Crude Sale and Purchase Agreement dated January 3, 2001 (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2001, File No. 0-22258, and incorporated herein by reference). **10.37 Santana Crude Sale and Purchase Agreement dated January 30, 2002. **10.38 Rio Magdalena Association Contract dated December 10, 2001 between Ecopetrol and Argosy. *21.1 List of subsidiaries of Aviva Petroleum Inc. (filed as exhibit 21.1 to the company's annual report on Form 10-K for the year ended December 31, 2000, file No. 0-22258, and incorporated herein by reference).
- --------------------------------- *Previously Filed **Filed Herewith EX-10.37 3 dex1037.txt SANTA CRUDE SALE AND PURCHASE AGREEMENT EXHIBIT 10.37 CONTRACT: VRM 020 2001 OBJECTIVE: PURCHASE / SALE OF CRUDE OF THE SANTANA RISK SHARING CONTRACT (CPR SANTANA) TOTAL VALUE: NON-DETERMINED TOTAL TERM: DECEMBER 1, 2001 TO NOVEMBER 30, 2002 To acknowledge the contracting parties, for the one part, The EMPRESA COLOMBIANA DE PETROLEOS, in this contract to be called ECOPETROL, Empresa Industrial and Comercial del Estado authorized by law 165 of 1948 and governed by its Statutes reformed by decree 1209 of 1994, with principal domicile in Bogota, D. C., represented by JOSE LUIS SAAVEDRA VENEGAS, of legal age, identified by Document No. 14209215 issued in Ibaque, acting in his capacity as Vice President of Refining and Marketing and in the name and representation of ECOPETROL, fully authorized in conformance with rules established in the manual of Contracting and Administrative Control of the Company. For the other part, ARGOSY ENERGY INTERNATIONAL, company domiciled in Bogota, D. C., according to public deed no. 5323 of October 25, 1983 under No. 2092 of Book VI, is represented by ALVARO JOSE CAMACHO RODRIGUEZ, of legal age living in Bogota, acting in his capacity as Legal Representative, identified by Document No. 79142747 issued in Bogota, which company in this contract shall be called THE VENDOR, the parties have agreed to endorse the present crude purchase and sales contract under the following terms: CONSIDERATIONS: a) The twenty-seventh (27) of May 1987, ECOPETROL AND THE VENDOR entered into an association contract for the exploration and exploitation of hydrocarbons, said contract is known as the Santana Association, with the effective date of July 27, 1987. b) THE VENDOR drilled the wells Toroyaco, Linda, Mary and Miraflor and continues with exploratory drilling in the area to make the necessary tests to define the production potential and possible commerciality of the field. c) Taking into account the request presented by the Management of Production and Planning of the Vice Presidency of Refining and Marketing of Ecopetrol, the Vice President authorized the completion of this contract by way of communication VRM-GPP-000003-1. d) ECOPETROL and THE VENDOR have agreed to the purchase and sale of the crude, property of THE VENDOR, produced under the Santana Association, within the foreseen period December 1, 2001 and November 30, 2002 in the terms and conditions designated in communiques GPP-342A and GEG-01-383 dated November 30, 2001. e) ECOPETROL, in its expense budget, cost center 18-30300, "Commercialization Expense" has the necessary budget available for the execution of the contract, subject of this document, according to Certificate of Budget Availability No. 18-UCR-GC12-2126684SAN. ----------------------- CONTRACT: VRM 020 2001 In accordance with the above ECOPETROL AND THE VENDOR AGREE: CLAUSE ONE - OBJECTIVE AND AMOUNTS: THE VENDOR agrees to sell and deliver to ECOPETROL, and ECOPETROL agrees to receive and pay for under the conditions hereunder foreseen, the petroleum crude oil produced under the Santana Association, corresponds to THE VENDOR. CLAUSE TWO - QUALITY: The typical quality of the crude to purchase shall have the specifications indicated below and shall be determined according to the Clause Seven of this contract: CRUDE API % S BSW SALT In Weight % in Vol. Lbs per 1000 Bbls Maximum Maximum ASSOCIATION SANTANA 26.8 0.68 0.5 20.0 a) The gravity of the crude oil will be determined by the laboratory method ASTM-D-287 (API Gravity). b) The water and sediment content, BSW, will be determined by the methods ASTM-D4377 "Water in petroliferous products and bituminous materials by Karl Fisher", ultimate revision and ASTM-D473 "Sediments in crude and fuel oil by extraction", ultimate revision. c) The sulfur content will be determined by the method ASTM-D4294 "Sulfur analysis by X ray, ultimate revision. d) The content of salt will be determined by the method ASTM-D3230 "Salts in crude (Electrometric method)" ultimate revision. PARAGRAPH 1: For the content of water and sediments in the crude, maximum individual values that shall be accepted: 0.49% in volume for water and 0.01% in volume for sediments. PARAGRAPH 2: When some of the specifications indicated are not within the permitted margins, ECOPETROL reserves the right to receive and purchase the crude. But if ECOPETROL opts to accept the crude with specifications in API, % of sulfur, BSW and salt different from those previously specified, the crude price will be corrected as follows: a) Correction for API: plus or minus 0.15 US$ per unit of API or prorated for fraction thereof. The price adjustments will be positive for API gravity over the reference value and negative for inferior gravities. These adjustments shall be permitted in the range of plus or minus 3.0 API; for values outside of this range there will be renegotiation of prices. b) Correction for SULFUR: plus or minus 0.50 US$ per unit of % of sulfur in weight or prorated for fraction thereof. The price adjustments will be positive for % of sulfur in the crude below the reference value and negative for values above the reference. c) Correction for BSW and Salt: - Shall be applied in accordance with the following tables: c) Correction for BSW and Salt: - Shall be applied in accordance with the following tables: Page 2 of 8 CONTRACT: VRM 020 2001 Content of BSW Penalization Charged to % In Volume US Dollars per Bbl 0.51 to 0.80 0.10 THE VENDOR 0.81 to 1.00 0.20 THE VENDOR 1.01 to 1.20 0.30 THE VENDOR 1.21 to 1.50 0.40 THE VENDOR Equal to or greater than 1.51 0.50 THE VENDOR Content of Salt Penalization Charged to Lbs per 1000 Bbl US Dollars per Bbl 20.1 to 30.0 0.160 THE VENDOR 30.1 to 40.0 0.180 THE VENDOR 40.1 to 60.0 0.200 THE VENDOR 60.1 to 80.0 0.220 THE VENDOR 80.1 to 100.0 0.240 THE VENDOR Equal to or greater than 100.0 0.300 THE VENDOR
It is understood that THE VENDOR shall make all possible efforts to deliver the crude oil contracted, with contents of BSW and salt within the agreed parameters. Any variation to the quality specifications previously mentioned that may be accepted by both parties must be documented in written minutes between the representatives of ECOPETROL and THE VENDOR. CLAUSE THREE - DELIVERY POINT AND OWNERSHIP: The crude oil that is the object of this purchase and sales agreement shall be delivered by THE VENDOR to ECOPETROL at the Santana Station, Municipality of Puerto Asis, in the LACT UNIT/LAFERT property of the Joint Operation CPR Santana where the quality and quantity of the delivered crude will be certified and in which location the ownership of the crude shall pass to ECOPETROL. CLAUSE FOUR - VALIDITY: This contract shall be valid until November 30, 2002, starting from December 1, 2001, date from which was previously accepted the purchase offer and registration of the corresponding budget, starting delivery and receipt of the crude oil, which is the object of the purchase and sale being formalized in this contract. CLAUSE FIVE - PRICES: The prices for the crude oil, which is the object of this purchase and sale, deposited in the agreed location for delivery, shall be referenced to West Texas Intermediate (WTI), Cushing - Monthly Average - with discounts that function with the quotation of said bench mark as follows: WTI US$ PER BBL PRICE US$ PER BBL Less than 15.00 WTI - 4.38 Between 15.01 and 20.00 WTI - 4.88 Between 20.01 and 25.00 WTI - 5.38 Between 25.01 and 30.00 WTI - 6.38 Over 30.00 WTI - 7.38 Page 3 of 8 CONTRACT: VRM 020 2001 The West Texas Intermediate crude price will be calculated as an arithmetic average of the quotation of the daily-published mean price, in the month of delivery, as quoted in the Platt's Crude Oil Market wire for the Gulf Coast of the United States. PARAGRAPH: The price determined by way of the previously designated formula, comprises the costs of transportation, handling, measurement, taxes, etc. for the account of THE VENDOR, incurred prior to delivery of the crude oil, which is the object of this purchase and sale, therefore ECOPETROL shall not recognize any additional costs for such sales. CLAUSE SIX - INVOICING AND FORM OF PAYMENT: Based on the volume and quality of the crude received by ECOPETROL, THE VENDOR shall invoice and charge ECOPETROL, in their offices of the Management of the Refinery of Cartagena for the crude delivered during the calendar month just ended prior to the billing month, within the first 10 days following the end of the respective calendar month. Within the first (7) days of the term previously noted, ECOPETROL will supply to THE VENDOR, the information required to prepare the corresponding billing. The billing shall be made based on the net volumes, free of water & sediment, corrected to 60 degrees F (60 F). The billing must be sent by certified mail and the presentation date will be that indicated by receipt of the mail company. Payments will be made monthly within thirty (30) calendar days following presentation of the invoices properly prepared, after legal retentions if any, as follows: One portion payable in Colombian pesos equivalent to twenty-five percent (25%) of the determined volume and delivered in conformity with this contract. The seventy-five percent (75%) remainder, in United States Dollars. In relation of the previously mentioned payments, THE VENDOR shall communicate to ECOPETROL in writing, the bank account where the respective payment is to be made. To convert dollars to pesos, the exchange rate representative of the market certified by the Banking Superintendence, calculated as an arithmetic average of the corresponding month of the crude oil deliveries. In relation to the previously mentioned payments, THE VENDOR shall communicate to ECOPETROL in writing the bank account where the respective payment is to be made. PARAGRAPH 1: In case of unjustified delay of payment ECOPETROL shall accept to pay the maximum interest authorized by law. Invoices charging interest shall be paid by ECOPETROL within the first ten (10) calendar days following receipt of the corresponding invoice. PARAGRAPH 2: ECOPETROL shall have a period of fifteen (15) working days counting from date of receipt to review or object to the crude oil sales invoices and a period of five (5) calendar days, counting from date of receipt, to review and object to invoices charging interest referred to in the previous paragraph. Whatever invoice is not objected to within this period shall be considered final, correct and non-objectionable. Whatever adjustment or correction is required of an invoice, shall originate what is considered the valid presentation date, which is the same date, said adjustment or correction is received by ECOPETROL. ECOPETROL shall inform THE VENDOR within the previously defined term, of any invoice that is rejected and to be adjusted or corrected, specifying clearly the parts to be adjusted or corrected and the corresponding reasons. CLAUSE SEVEN - INSPECTION AND MEASUREMENT: The determination of the parameters of quality under the Second Clause of this contract (API, % of sulfur, BSW and Salt) will be made according to operating procedures that will be established by mutual agreement between the parties by written minutes. Whichever party may Page 4 of 8 CONTRACT: VRM 020 2001 designate if so desired, an independent inspector to certify the quality and quantity, verify tank volumes or the calibration of volume measuring instruments. ECOPETROL and THE VENDOR shall share the cost in equal parts. CLAUSE EIGHT - DESTINATION: ECOPETROL may ship the crude oil acquired to any destination they consider appropriate for their interests, always and when said destination is permitted by applicable legal measures in force at that moment. CLAUSE NINE - TERMINATION: THE VENDOR or ECOPETROL can terminate, at any moment, this purchase and sales contract without being obligated to indemnify the other party for any injustice, always and when such decision is made by written communication to the other party more than thirty (30) calendar days in advance, respecting the effective date of termination of the contract. CLAUSE TEN - CESSATION: Neither of the parties may cede, sell or transfer in total or part its rights and obligations herein contracted, to third parties, without the previous written consent of the other party. The cessation of the Association Contract, in total or part, implies the cessation in the same proportion, of the rights derived in the present contract, except when in the negotiation of the cessation of the Association Contract, the parties agree otherwise. In this last case, ECOPETROL must be informed of the cessation of the Association Contract and its effects over the present contract, attaching pertinent support. CLAUSE ELEVEN - FORCE MAJEURE: Neither ECOPETROL nor THE VENDOR shall be responsible for failing to comply or for imperfect compliance in total or for any of their obligations noted in this agreement, if said failure is caused by events that constitute Force Majeure or an act of God properly proven. Force Majeure shall not relieve ECOPETROL from its obligation to pay THE VENDOR for those invoices for the sale of crude oil, which has been delivered by THE VENDOR in conformity with the terms stipulated in this contract. CLAUSE TWELVE - APPLICATION OF COLOMBIAN LAWS: Colombian law shall govern this contract and the parties renounce any attempt at a diplomatic claim in relation to rights and obligations stemming from this contract, except in the case of denial of justice. PARAGRAPH: For all effects of the present contract it is understood that it incorporates the orders of Article 25 of Law 40 of 1993, together with the sentence over this article proclaimed by the Constitutional Court the twenty fourth (24) of November 1993 (Case D-275) and of the Second Chapter, Title II, Second Part, of Law 418 of 1997. CLAUSE THIRTEEN - NOTICES. All notices issued in conformity with this contract must be sent by certified mail, facsimile, telex, or delivered to the addresses indicated below and shall be considered received at the respective address, on the date of receipt stamp on the letter or on the date the telex or fax was sent: ECOPETROL, Calle 37 No. 7-43, Edificio Guadalupe, 9th Floor - Bogota, Fax No. 2345848, Attention: Vice Presidency of Refining and Marketing - Management of Planning and Production. THE VENDOR: ARGOSY ENERGY INTERNATIONAL, Diagonal 108 No. 7-54, Attention Alvaro Camacho R., Legal Representative. Fax No. 6192098. Page 5 of 8 CONTRACT: VRM 020 2001 CLAUSE FOURTEEN - TAXES & EXPENSES: Each of the parties of this purchase and sale declares that they know and accept the taxes and/or retentions that correspond to them in accordance with the law in force. In case of incurring remittance taxes, those shall be paid by THE VENDOR. The stamp tax will be paid in equal parts between THE VENDOR and ECOPETROL. For determination of the stamp tax, this purchase and sale shall be considered non-determinable. Its value will be the result of applying the unit prices agreed to the volume of crude sold in conformity with the terms established in this document. THE VENDOR recognizes that his participation in the Stamp Tax will be subject to retention at the source in conformity with applicable norms. Equally, THE VENDOR declares that he knows and submits to those retentions that take place by virtue of entering into and compliance with this transaction. CLAUSE FIFTEEN - SOLUTION OF DISAGREEMENTS: a) All the controversies arising from the present contract related to technical matters and cannot be resolved directly by the parties during the execution of the contract, will be resolved turning to procedures of arbitration as set forth and regulated by the Colombian Commercial Code. The arbitrator for each controversy shall be named by common agreement between ECOPETROL and the VENDOR. The process of arbitration must take place in the offices of the arbitrator in Bogota D.C. in the Castellan language. Each party shall have the right to refer any controversy to the arbitrator notifying the other party and the arbitrator opportunely, such notice indicating the following terms, which must be accepted by the arbitrator under a three party agreement with ECOPETROL and the VENDOR. (I) The arbitration will be made in accordance with applicable Colombian law; (II) It is not required that the documentary evidence be legally certified unless required by the arbitrator; (III) The term for preparation of arguments and supporting evidence for the parties shall be forty-five (45) business days from the date of the three party agreement previously mentioned; (IV) The ultimate day of the period of forty-five (45) business days referred to in numeral (III) shall be the only date on which the declaration of arguments can be presented before the arbitrator; and (V) A term of 30 Colombian business days for the arbitrator to resolve the controversy in writing starting from the first Colombian business day following the forty-five business days referred to in numeral (III). Each act of arbitration shall have the effect of a transaction under Colombian Law, hence constituting a judgment. If the arbitrator fails to deliver a decision within the term previously established, the decision, if there had been one would not have been binding upon the parties and each party would have the right to refer the controversy to arbitration in accordance with paragraph b) of the present clause. If the VENDER and ECOPETROL cannot agree over the arbitrator, on or before the thirtieth (30) day following the notification of the controversy, each party shall have the right to refer the matter to arbitration under regulations of paragraph b) of the current clause. b) All controversies relative to this contract different from controversies resolved in accordance with paragraph a) of the current clause, save that expressly agreed therein, and cannot be resolved directly by the parties during execution of the contract, shall be resolved by arbitration in accordance with the rules of arbitration subject to the Chamber of Commerce of Bogota. Such arbitration shall be made with a panel of three Arbitrators selected by mutual agreement between the parties. If there is no agreement between the parties the arbitrators shall be selected by the Chamber of Commerce, with a forum in Page 6 of 8 CONTRACT: VRM 020 2001 Bogota D. C. Colombia and shall be conducted in the Castellan language. The arbitration finding shall be definitive and binding for the parties, in the form in which they may ask for a judicial decision of compliance in any court with jurisdiction over the executing party. c) The arbitrators shall make their decision based on applicable Colombian rights and laws d) Fees and expenses associated with arbitration under paragraph a) of the present clause or with arbitration in accordance with paragraph b) of the present clause shall be paid by the losing party. Fees and expenses related to acts necessary for each party to comply with the arbitration decision shall be for their own account. PARAGRAPH: Not withstanding the foregoing, ECOPETROL and the VENDOR may agree to use whatever method of resolution of controversies that is contained in law 80 of 1993. CLAUSE SIXTEEN - DELEGATION: In relation to this contract, the Vice President of Refining and Marketing of the Empresa Colombiana de Petroleos delegates to the Management of the Cartagena Refinery (GRC), the total administration, its control, ordering of payments, executing auxiliary contracts and additional items and the administration of inspection. THE VENDOR, hereby expressly accepts this delegation. The administration of the contract comprises the organization, coordination and control of the diverse factors that intervene in the development of the contract, starting with its signing, so it may comply to its finalization within the term foreseen and with the assigned budget. The inspection of the contract is the activity comprising the verification and control of the obligations of the contract to insure completion of its objective within the term foreseen and with the value stipulated. CLAUSE SEVENTEEN - ADMINISTRATION: The GRC management shall exercise the powers mentioned in the previous clause complying with foreseen laws and internal manuals of ECOPETROL, under direction of the Superintendent of Production of the GRC. CLAUSE EIGHTEEN - FUNCTIONS OF THE ADMINISTRATION: The principle functions of administration of the contract are the following: a) Collaborate with THE VENDOR and THE INSPECTOR for the development of the contract; b) Control the compliance of contractual periods; c) Coordinate the delivery of technical and administrative information required by THE VENDOR and THE INSPECTOR for their duties; d) Authorize the payment of invoices and accounts payable presented by THE VENDOR previously reviewed by the INSPECTOR; e) Analyze the reports pertaining to progress of the contract agree to pertinent items with THE VENDOR and THE INSPECTOR and take the necessary measures to insure proper conduct of the same; f) Coordinate corresponding steps for delivery of materials on the part of ECOPETROL when is the case; g) Emit for one time only and within the fifteen (15) days following termination or liquidation of the contract, the Certificate of Contractual Experience with destination to THE VENDOR and the report of EVALUATION regarding the execution and development of the contract with destination of the Information System of the Directorate of Offerings of ECOPETROL (SIDOE); h) Sign minutes of liquidation. Page 7 of 8 CONTRACT: VRM 020 2001 CLAUSE NINETEEN - INSPECTION: The GRC will designate a functionary of the management or of a firm contracted for the purpose of supervising this contract. ECOPETROL shall maintain for its account during the total duration of time of execution of the contract and until its final liquidation, the supervision and auditing personnel that is necessary to oversee the compliance of all the obligations related to the contract. CLAUSE TWENTY - FUNCTIONS OF THE INSPECTOR: The principle functions of the INSPECTOR, will be the following; a) Cooperate with THE ADMINISTRATOR and with THE VENDOR, for development of the contract; b) Verify the agreed resources available at the disposal of the contract; c) Diligently attend to requests and opinions of THE VENDOR and hold meetings that are necessary for the execution of the contract; d) Sign with THE VENDOR the minutes necessary in development of the contract, complying with pertinent requirements; e) Endorse the accounts payable or the invoices presented by THE VENDOR in conformity with stipulations of the contract, previously reviewed by the functionary designated for this purpose; f) Verify and respond for accurate compliance with the norms for protection of the environment, industrial security and occupational health; g) Supervise compliance of tax matters established in Clause 14 of this contract; h) Keep a record of events occurring during development of the contract and offer recommendations if that will be the case; i) Collaborate with the functionary who's charge is liquidation of the contract. CLAUSE TWENTY-ONE - PRICE RENEGOTIATION: Either of the parties may request to the other the review of the prices referred to in Clause Five of this contract when there are changes in market conditions. In any case, mutual written agreement shall be required between the parties to modify the prices herein agreed. As a matter of record signed in Bogota D. C. this thirtieth (30) day of January of the year two thousand and two (2002), in two copies with legal tenor. EMPRESA COLOMBIANA DE PETROLEOS ARGOSY ENERGY INTERNATIONAL ECOPETROL /s/ Jose Luis Saavedra Vanegas /s/ Alvaro Jose Camacho Rodriguez - ------------------------------ --------------------------------- JOSE LUIS SAAVEDRA VANEGAS ALVARO JOSE CAMACHO RODRIGUEZ VICE PRESIDENT OF REFINING LEGAL REPRESENTATIVE AND MARKETING This is a fair and accurate English translation of the original document which is in the Colombian language. /s/ James L. Busby ------------------ James L. Busby Secretary and Treasurer of Aviva Petroleum Inc. Page 8 of 8 EX-10.38 4 dex1038.txt RIO MAGDALENA ASSOCIATION CONTRACT EMPRESA COLOMBIANA EXHIBIT 10.38 DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 1 "RIO MAGDALENA"ASSOCIATION CONTRACT ASSOCIATE : ARGOSY ENERGY INTERNATIONAL SECTOR : RIO MAGDALENA EFFECTIVE DATE : FEBRUARY 8TH OF 2002 The contracting parties, namely: on the one hand, Empresa Colombiana de Petroleos, hereinafter ECOPETROL, a State industrial and commercial company, authorized by Law 165 of 1948, currently governed by its by-laws, amended by Decree 1209 of 15 June 1994, and 2933 of 10 December 1997, domiciled in Bogota, represented by ALBERTO CALDERON ZULETA of legal age, bearer of Colombian Identity Card No. 19,248.238, issued in Bogota, domiciled in Bogota, who states that: 1. In his capacity as President of ECOPETROL, he acts herein on behalf of said Company and 2. The ECOPETROL Board of Directors authorized him to enter into this Contract, as witnessed by Minutes No. 2263 of November 16th, 2001; and on the other hand, ARGOSY ENERGY INTERNATIONAL, a corporation established pursuant to the laws of the State of UTAH, with its main domiciled in the United States of America, hereinafter THE ASSOCIATE, with a duly established Colombian branch and its main domicile in Bogota, pursuant to Public Deed No. 5323 of 25 October 1983, granted by the Seventh Public Notary (7th) of the Bogota Circle, represented by ALVARO JOSE CAMACHO RODRIGUEZ, of legal age, bearer of Colombian Identity Card No. 79,142.747 issued in Usaquen, who states that: 1. He acts, in his capacity as legal representative of ARGOSY ENERGY INTERNATIONAL, 2. He is fully authorized to execute this contract, as certified by the certificate of incorporation and legal representation issued by the Chamber of Commerce of Bogota, and 3. THE ASSOCIATE, assures that it has the financial capability, the technical competence, and the necessary professional skills to perform the activities provided for in this contract. Based on the aforementioned conditions, ECOPETROL and THE ASSOCIATE hereby certify that they have entered into the contract contained in the following clauses: EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 2 CHAPTER I - GENERAL PROVISIONS CLAUSE 1 - PURPOSE OF THIS CONTRACT 1.1 The purpose of this contract is the exploration of the Contracted Area and the exploitation of Hydrocarbons of Colombian property that may be found in such area, described in Attachment A that is part of this contract. 1.2 In compliance with Article 1 of Decree 2310 of 1974, the exploration and exploitation of Hydrocarbons of Colombian property will be carried out by ECOPETROL, a company that may carry out said activities either directly or through contracts with private entities. Based on the aforementioned provision, ECOPETROL has agreed with THE ASSOCIATE to explore the Contracted Area and exploit the Hydrocarbons that may be found in it, in compliance with the terms and conditions set forth herein, Attachment "A", Attachment "B" (Operations Agreement) and Attachment "C", which are an integral part of this contract. 1.3 Without prejudice of the provisions in this contract, it is understood that THE ASSOCIATE shall have, with regard to the hydrocarbons produced in the Contracted Area and their respective portion, the same rights and obligations than those who exploit State-owned Hydrocarbons within its territory, as per Colombian law. 1.4 ECOPETROL and THE ASSOCIATE agree to carry out Exploration and Exploitation Works on the lands located in the Contracted Area, according to the terms set forth herein, and to split the costs and risks of same in the proportions and pursuant to that provided herein, and that the Hydrocarbons produced shall belong to each of the Parties as per shares established herein. CLAUSE 2 - CONTRACT APPLICATION This contract is applied to the Contracted Area, identified and delimited in Clause 3 and Attachment A hereto, or to the remnant portion thereof, whenever area relinquishment has taken place pursuant to this contract. CLAUSE 3 - CONTRACTED AREA The Contracted Area is called "RIO MAGDALENA", with an area of fifty eight thousand five hundred forty six (58,546) hectares, with forty-six (46) square meters. This sector is located within the municipal jurisdictions of San Juan de Rioseco, Beltran, Puli, and EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 3 Guataqui, in the province of Cundinamarca and Guatabal, Lerida, Venadillo, Ambalema and Piedras, in the province of Tolima. This area is described in Attachment "A" which is part of this contract. Paragraph 1.- Should any person file a claim asserting ownership of the Hydrocarbons in the subsoil within the Contracted Area, ECOPETROL shall deal with the case, assuming such obligations as may arise. Paragraph 2.- Should a part of the Contracted Area extend over the areas that are or have been reserved and declared as included in the National Park System, THE ASSOCIATE is thus committed to comply with the conditions set forth by the competent authorities, not implying an amendment to this Contract and not allowing for any claim against ECOPETROL, pursuant to the provisions set forth in Clause 30 (item 30.2) herein. CLAUSE 4 - DEFINITIONS. For purposes of this contract, the terms mentioned below shall have the following meanings: 4.1 Contracted Area is the land defined in Clause 3 above, and described in Attachment "A" hereto. 4.2 Field: Portion of the Contracted Area where there are one or more structures and/or totally or partially superposed stratigraphic traps with one or more Producing Reservoirs, or in which the capacity to produce Hydrocarbons in commercial quantities has been proven. Such Reservoirs can be found separated vertically and/or laterally by geological barriers or impermeable strata, or both. 4.3 Commercial Field: It is the Field which ECOPETROL accepts that is capable of producing Hydrocarbons in economically exploitable quantity and quality in one or more Production Targets defined by ECOPETROL upon acceptance of commerciality, without prejudice of the possibility of other Production Targets being found during the development phase. 4.4 Gas Field: The field which, based on the information supplied by THE ASSOCIATE, is designated by ECOPETROL as a Non-Associated Natural Gas (or free natural gas) producer, when determining commerciality thereof. 4.5 Executive Committee: This is the body formed within thirty (30) calendar days following the acceptance of the first Commercial Reservoir to supervise, monitor, and approve all the operations and actions carried out during the term of the contract. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 4 4.6 Exploration Direct Costs: Monetary expenses incurred reasonably by THE ASSOCIATE for the acquisition of seismic data and the drilling of Exploratory Wells, and for locations, termination, equipment and tests for such wells. The Exploration Direct Costs do not include either administrative or technical support from the home office or the Company central office. 4.7 Joint Account: The records to be kept on accounting books, in accordance with Colombian law, to credit or debit each Party their corresponding share in the Joint Operation of each Commercial Field. 4.8 Budget Execution: Funds actually spent and/or committed in each of the programs and projects approved for a specific calendar year. 4.9 Structure: The geometric shape with geological closure (anticlinal, synclinal, etc.) present in the formations, in which fluid accumulations are found. 4.10 Effective Date: The date on which the sixty (60) calendar day term expires, as of the date on which this contract is executed, and starting date for all time limits agreed to herein, regardless of the date of approval thereof by the Ministry of Mines and Energy. 4.11 Cash Flow: Represented by the physical currency transactions (revenue and disbursement) that are to be made by the Joint Account to meet the different obligations acquired by the Association in performance of normal operations. 4.12 Associated Natural Gas: Blend of light Hydrocarbons that exist as a gas layer or solution state gas in the Reservoir, which is produced jointly with liquid Hydrocarbons. 4.13 Non-Associated Natural Gas (Production of): Hydrocarbons produced in gaseous state on the surface and reported at standard conditions, with average values (weighted by production), with an initial gas/oil ratio greater than 15,000 standard cubic feet of gas per barrel of liquid Hydrocarbon, and a molar heptane plus composition (C7 +) below 4.0%. 4.14 Direct Costs: All expenditures charged the Joint Account on account of personnel expenses related to personnel directly hired by the Association, procurement of materials and supplies, contracting of services with third parties, and other general expenses required by the Joint Operation in the normal development of its activities. 4.15 Indirect Costs: Expenditures charged to the Joint Account, on account of technical and/ or administrative support provided by the Operator thorough its own organization to the Joint Operation. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 5 4.16 Interest in Arrears: When dealing with Colombian pesos, it shall mean the rate for payment in arrears on the date of the default; when dealing with Dollars of the United States of America, it shall mean the LIBOR (London Interbank Borrowing Offered Rate) prime rate on three-month term deposits in USA currency, plus four per cent (LIBOR plus 4%). 4.17 Participating Interest: It is the share in the obligations and rights acquired by each of the Parties in the exploration and exploitation of the Contracted Area. 4.18 Development Investment: It refers to the amount of money invested in assets and equipment, to be capitalized as assets for the Joint Operation in a Commercial Field, once the existence thereof has been accepted by the Parties. 4.19 Hydrocarbons: All organic compounds, made up mainly by the natural blend of carbon and hydrogen, as well as all other accompanying substances or their by-products, excepting helium and rare gases. 4.20 Gaseous Hydrocarbons: All those Hydrocarbons produced in gaseous state on the surface and reported at standard conditions (1 atmosphere of absolute pressure and a temperature of 60 F degrees). 4.21 Liquid Hydrocarbons: Crude oil and condensates, as well as those produced in such state as a result of treating the gas, as necessary, reported at standard conditions. 4.22 Production Targets: These are the reservoir(s) located within the discovered Commercial Field, and proved as commercial producers. 4.23 Joint Operation: Activities and works either performed or being performed on behalf and at the expense of the Parties. 4.24 Operator: Person designated by the Parties to directly perform the necessary operations, on their account and without representing them, to explore and exploit the Hydrocarbons found in the Contracted Area. 4.25 Parties: As of the Effective Date, ECOPETROL and THE ASSOCIATE. Subsequently, and at any time, ECOPETROL on the one hand, and THE ASSOCIATE and/or its assignees, on the other. 4.26 Exploration Period: This is the term that THE ASSOCIATE has to fulfill the obligations set forth in Clause 5 hereunder, which shall not exceed six (6) years as of the Effective Date, except for the cases set forth in Clauses 5 (Item 5.4), 9 (Item 9.3), and 34. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 6 4.27 Exploitation Period: The period elapsed from the expiration of the Exploration Period, or Retention Period, if any, until the expiration of this contract. 4.28 Retention Period: The period that may be requested by THE ASSOCIATE and granted by ECOPETROL to commence the Exploitation Period of each Gas Field discovered within the Contracted Area, which, due to its specific conditions cannot be developed in the short term and, therefore, requires an additional period to perform feasibility studies for the construction of infrastructure and/or market development. 4.29 Development Plan: Is the guideline document for carrying out the exploitation of each Field in a technical, efficient, and economic manner, and shall contain, among others, development strategy, environmental considerations, activities to be performed, short and medium-term production forecasts, a five-year (5) forecast of development investment and expenses and, specifically, a description of the projects, operations program, and the Budget for the rest of the current calendar year or the following calendar year, as the case may be. The guidelines for preparing this Development Plan are described in Attachment "C" , which is part of this contract. 4.30 Exploratory Well: This is the well that has been classified as such by THE ASSOCIATE to be drilled or deepened, on its account in the Contracted Area, in search for new reservoirs, or to prove the extension of a Reservoir, or to determine the stratigraphy of an area. In order to comply with the obligations agreed in Clause 5 of this contract, the relevant Exploratory Well will be previously qualified by ECOPETROL and THE ASSOCIATE. 4.31 Discovery Well: Is the Exploratory Well in which the existence of one or more Reservoirs is discovered or proven, which may require a further evaluation to determine whether such Reservoir or Reservoirs may be commercially exploited. 4.32 Exploitation Well (or Development Well): Is the well previously considered as such by the Executive Committee for the production of Hydrocarbons discovered in the Production Targets within the area of each Commercial Field. 4.33 Budget: Is the basic planning instrument, through which resources are allocated to specific projects, to be applied within one calendar year or part of it, to meet the targets and objectives proposed by THE ASSOCIATE or the Operator. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 7 4.34 Long-Term Tests: Are operations performed in one or several producer Exploratory Wells, in order to evaluate the production conditions and Reservoir behavior, with temporary production facilities. 4.35 Reimbursement: Is the payment of thirty percent (30%) of the Direct Exploration Costs incurred by THE ASSOCIATE. 4.36 Exploration Works: Are operations performed by THE ASSOCIATE in regard to the prospecting and discovery of Hydrocarbons in the Contracted Area. 4.37 Reservoir: Is all rock beneath the surface, in which Hydrocarbons are accumulated in the pore or fractured spaces, which is producing, or able to produce Hydrocarbons, and which behaves as an independent unit as to its petrophysical and fluid properties, and has a common pressure system throughout its entire expanse. CHAPTER II - EXPLORATION CLAUSE 5. TERMS AND CONDITIONS 5.1 THE ASSOCIATE is committed to carry out Exploration Work in accordance with modern standards and practices commonly accepted and used by the international oil industry and in compliance with all legal and regulatory provisions in force. The Exploration Period will be divided in two (2) Phases. The First Phase will last eighteen (18) months, and the Second Phase will last twelve (12) months. The first Phase will commence as of the Effective Date, and the next phase will commence on the calendar day immediately following the expiration of the first one. During the Exploration Period, THE ASSOCIATE is committed to perform, at least, the following Exploration Works: During the First Phase, which lasts eighteen (18) months, THE ASSOCIATE must carry out the assessment of the wells drilled in the area, the reprocessing of the area's existing seismic data, and the acquisition of a 40 kilometer 2D seismic program, or the drilling of an Exploratory Well that penetrates and tests the formations able to produce hydrocarbons in the Contracted Area. Upon conclusion of the First Phase, THE ASSOCIATE may opt for rescinding the Association Contract or continue with it, upon having complied with the exploration commitments agreed to for this phase. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 8 During the Second Phase, which lasts twelve (12) months, THE ASSOCIATE is to undertake: the acquisition of a 30 square kilometer 3D seismic program, or the acquisition of a 2D seismic program equivalent to the cost of the 3D seismic program, or the drilling of an Exploratory Well that penetrates and tests the formations able to produce hydrocarbons in the Contracted Area. Upon expiration of the Exploration Period the contract will end, if its extension has not been requested and authorized pursuant to item 5.2 in this Clause or a field has not been discovered. 5.2 If THE ASSOCIATE has satisfactorily fulfilled the obligations set forth in Clause 5.1, ECOPETROL, upon request by THE ASSOCIATE, shall extend for up to three (3) additional phases, the Exploration Period, the fourth phase will last eighteen (18) months and the Fifth and Sixth Phases will last twelve (12) months each. For such purpose, THE ASSOCIATE, shall report its intention to continue exploring the contracted block with an anticipation of not less than thirty (30) calendar days prior to the date of termination of the Exploration phase, attaching to such request the proposed schedule for the Exploration Work to be performed in each extension period. Within the thirty (30) calendar days following the date of receipt by ECOPETROL of THE ASSOCIATE's request, the Parties may agree the Exploration Work Program to be performed during these extensions. In the absence of an agreement, THE ASSOCIATE shall be committed, at least, to perform Exploration Work in the Contracted Area, comprising the drilling of one Exploratory Well until penetrating and test the formations likely to produce hydrocarbons in the Contracted Area per each phase. At the end of each extension, THE ASSOCIATE shall have the option to rescind the CONTRACT, after fulfilling the exploratory commitments agreed for each of them. 5.3 THE ASSOCIATE may, at its discretion and at its own expense and risk, carry out additional Exploration Work, beyond that agreed, for each respective period. Nevertheless, if THE ASSOCIATE wishes such additional Exploration Work to be credited to compliance with exploratory commitments of the following phase in the Exploration Period, it must request the appropriate approval from ECOPETROL. If the request is accepted by ECOPETROL, the latter shall determine how and in what amount the transfer of the mentioned obligations shall be made. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 9 5.4 If at the end of the six (6) year Exploration Period, THE ASSOCIATE has drilled one or several Discovery Wells that may indicate the possible existence of a Commercial Field, upon written request from THE ASSOCIATE, ECOPETROL may authorize the extension of the Exploration Period for a term not exceeding two (2) years, in order for THE ASSOCIATE to have the opportunity to prove the existence of such Commercial Field. In order to enforce the provisions contained herein, prior to the termination of the Exploration Period and, simultaneously with its request, THE ASSOCIATE shall supply ECOPETROL with the maps and other descriptions of the area that THE ASSOCIATE may consider capable of producing Hydrocarbons, the Exploration Work program, as well as that of other operations to be carried out by THE ASSOCIATE, and the budget for carrying out such work at its own expense and risk, to determine the extension of the Reservoir or Reservoirs that have been discovered, and to prove the existence of a Commercial Field, without prejudice to the provisions of Clause 8. In order to enforce the partial relinquishing of areas, during this extension of the Exploration Period, THE ASSOCIATE shall retain the greater area of two: fifty percent (50%) of the Contracted Area, and the area it considers capable of producing Hydrocarbons plus its reserve zone, having a width of two and a half (2.5) kilometers around the latter, within the boundaries of the Contracted Area. If the proposed work program meets international standards and is aimed at proving the commerciality of the Reservoirs discovered within the agreed term, ECOPETROL shall grant its authorization to perform this program. 5.5 Throughout the term of this Contract, and pursuant to provisions in Clause 7 herein, THE ASSOCIATE may conduct Exploration Works on the areas it keeps, as per Clause 8 hereto, and THE ASSOCIATE shall be exclusively responsible for the risks and costs of these activities and, thus, it shall have the full and exclusive control of such activities, without changing the maximum term of the contract for this reason. CLAUSE 6 - SUPPLY OF INFORMATION DURING EXPLORATION 6.1 ECOPETROL will supply THE ASSOCIATE, with all the information available it possesses on the Contracted Area, when THE ASSOCIATE so requests. The costs incurred in the reproduction and delivery of said information shall be borne by THE ASSOCIATE. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 10 6.2 During the Exploration Period, THE ASSOCIATE shall provide ECOPETROL, as it obtains it, and in accordance with ECOPETROL's information provision manual, all geological and geophysical information, cores, edited magnetic tapes, processed seismic sections, and all support field information, magnetic and gravimetric profiles, all in reproducible originals, copies of geophysical reports, reproducible originals of all well logs of the wells drilled by THE ASSOCIATE, including a final composite log of each well, and copies of the final drilling report, including core sample analysis, results of production tests, and any other information related to the drilling, the study or interpretation of any nature performed by THE ASSOCIATE on the Contracted Area, without any limitation. ECOPETROL is entitled, at all times, to use the procedures it deems appropriate, to witness all operations and verify all the above mentioned data. 6.3 The Parties hereby agree that all geological, geophysical and engineering information obtained in the Contracted Area valid during performance of this contract will be strictly confidential during the three (3) years following the acquisition date or upon termination of the contract, whatever occurs first. The information released comprises, without limitation, seismic information, potential methods, remote sensors, geochemistry, along with their corresponding supports, surface and subsurface cartography, well reports, electric logs, formation tests, biostratigraphic, petrophysical and fluid analyses, and production records. In spite of confidentiality stated herein, the Parties agree that in each case they may exchange such information with companies that are or not associated with ECOPETROL, or release same to a potential assignee of part or all of the share of one of the Parties, considering that prior to such release, the Party that makes such a release must have signed a confidentiality agreement with the potential assignee, whereby the latter commits to give a strictly confidential treatment to the information received during the three (3) years following the date of acquisition thereof or until contract termination, whatever occurs first, pursuant to and in accordance with the exceptions set forth in this item 6.3. It is understood that all that is agreed to herein will take place without prejudice to the obligation to submit to the Ministry of Mines and Energy all the information requested by the latter in compliance with the legal and regulatory provisions in force. Nevertheless, it is hereby understood and agreed that the Parties may supply, as they may deem appropriate, all the information that their affiliates, consultants, contractors, and financial entities may request, required by the EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 11 relevant authorities having jurisdiction over the Parties or their affiliates, or by regulations from any stock exchange in which the shares of the Parties or related corporations are registered. 6.4 Within the ninety (90) calendar days following completion of the drilling operations of each Exploratory Well, THE ASSOCIATE shall advise ECOPETROL in writing on the status of the corresponding well, its classification derived from the results obtained (Dry or Discovery) and the type of fluids produced, if any. CLAUSE 7 - BUDGET AND EXPLORATION PROGRAMS According to the provisions of this contract, THE ASSOCIATE shall be responsible for preparing the programs, activity schedule, and Budget to be executed in the short term (the following calendar year), and the plan for the following two (2) years, under the estimated budget, to carry out the exploration in the Contracted Area. Said plan, programs, schedule, and budgets shall be submitted to ECOPETROL, for the first time, within the sixty (60) calendar days following the execution of this contract and, subsequently, no later than fifteen (15) December every year. Every six months, THE ASSOCIATE shall deliver to ECOPETROL a technical and financial report listing the different exploratory activities performed, the area's prospects based on information acquired, the allocated Budget, and the exploration costs incurred up to the date of the report, along with the comments on the reasons for any deviations. At ECOPETROL's request, THE ASSOCIATE will provide explanations, as requested, on the report at meetings summoned to this end. The information presented by THE ASSOCIATE in the reports and the aforementioned explanations shall, in no case, be understood as accepted by ECOPETROL. The financial information will be subject to auditing by ECOPETROL within the terms established in Clause 22 of Attachment "B" (Operation Agreement) of this contract. CLAUSE 8 - AREA RELINQUISHMENT 8.1 Upon conclusion of the first and second phase of the Exploration Period or any extension thereof obtained by THE ASSOCIATE, pursuant to Clause 5 (item 5.2)m should a Commercial Field have been discovered in the Contracted Area and accepted by ECOPETROL, such area shall be reduced to fifty per cent (50%); two (2) years later, it shall be reduced to the area of the Commercial Field or Fields that may be producing EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 12 or being developed, plus a two and a half (2.5) kilometers wide reserve area surrounding each Commercial Field, and it shall be the only part of the Contracted Area subjected to the terms established herein. Pursuant to this item, the discovered Commercial Fields shall be included in the areas retained by THE ASSOCIATE. 8.2 Notwithstanding the obligation to relinquish the areas to which Clause 8 (Item 8.1) refer to, THE ASSOCIATE shall not be compelled to relinquish the Commercial Fields that are being developed or producing, or under a Retention Period, including the two and a half (2.5) kilometers wide reserve zone surrounding such areas, unless that, for reasons imputable to THE ASSOCIATE, the development or production operations are continuously suspended for over one year, without a just cause therefor, in which case Commercial Fields will revert to ECOPETROL, thus terminating the contract for such areas or part thereof. The provisions set forth herein are equally applicable to the Fields developed under the Sole Risk method. Paragraph: To demonstrate just cause, THE ASSOCIATE shall present to ECOPETROL the reasons and grounds for acceptance thereof. 8.3 Retention Period: If THE ASSOCIATE has discovered a Gas Field and it requests the commerciality of such Field as discussed in Clause 9, item 9.1, it may require at the same time from ECOPETROL the approval of a Retention Period, fully justifying the reasons for acceptance thereof. 8.3.1 The Retention Period shall be requested by THE ASSOCIATE and granted by ECOPETROL prior to the date on which the last area relinquishment mentioned in item 8.1 in this Clause is to take place. Should the Retention Period be granted, it is understood that the term foreseen in Clause 9 (item 9.1) for ECOPETROL to decide regarding the acceptance or not acceptance of the existence of a Commercial Gas Field, shall be extended for the same term of the Retention Period. 8.3.2 The Retention Period shall not exceed four (4) years. Should the term initially granted as a Retention Period be insufficient, ECOPETROL, prior written and duly supported request by THE ASSOCIATE, may extend the Retention Period for an additional term, without the addition of the initial retention period and the extensions thereof exceeding four (4) years. The Retention Period applies exclusively to the Gas Field area that ECOPETROL in principle determines as able to produce Hydrocarbons, EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 13 including the reserve zones of two and a half (2.5) kilometers wide area surrounding such area. CHAPTER III - EXPLOITATION CLAUSE 9 - TERMS AND CONDITIONS 9.1 To initiate the Joint Operation under the terms and conditions of this contract, it is understood that the Exploitation Work will begin once the Parties recognize the existence of the first Commercial Field or upon compliance with the provisions of Clause 9 (Item 9.5). The existence of a Commercial Field will be determined by the drilling, carried out by THE ASSOCIATE in the proposed Commercial Field, of a sufficient number of Exploratory Wells so as to allow to reasonably define the area capable of producing Hydrocarbons and the commercial nature of the Field. If, after evaluating the results obtained from the Discovery Wells, THE ASSOCIATE considers that it has discovered a Commercial Field, it shall inform ECOPETROL in writing, providing it with the studies on which it has based the conclusion, as well as the relevant Development Plan. ECOPETROL, within a ninety (90) calendar day period, starting on the date on which THE ASSOCIATE supplies all the support documentation, must accept or reject the existence of the Commercial Field. ECOPETROL may request all the additional information deemed necessary within the thirty (30) days following the date of submission of the first support documentation. 9.2. Should ECOPETROL accept the existence of the Commercial Field, it shall inform THE ASSOCIATE thereof, within the period specified in Clause 9, (Item 9.1), and shall specify the area and the Production Target of the Commercial Field, and begin to participate, pursuant to the terms set forth herein, in the exploitation of the Commercial Field discovered by THE ASSOCIATE. 9.2.1 ECOPETROL shall reimburse THE ASSOCIATE thirty percent (30%) of the Direct Exploration Costs incurred by THE ASSOCIATE, at its own risk and expense, within the Contracted Area and prior to the date of acceptance of commerciality by ECOPETROL for each new Commercial Field discovered, as established in item 9.1 of this Clause, provided such expenses have not been charged previously to another Field. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 14 9.2.2 The amount of these costs will be determined in United States dollars, using as a reference date, the date on which THE ASSOCIATE has made the relevant disbursements; therefore, costs incurred in Colombian currency will be calculated at the representative market exchange rate prevailing on the date established herein and certified by the Banking Superintendence or its substitute agency. Paragraph: Once the amount of the Direct Exploration Costs to be reimbursed in USA currency has been determined, such amount will be updated monthly according to the average consumer price index of industrialized countries, as of the date of disbursement, in constant U.S. dollars at the rate prevailing on the date on which ECOPETROL disburses as provided for in the Operation Agreement (Attachment "B") hereto. Balances to be reimbursed shall also be updated up to the date in which ECOPETROL reimburses its total share in the respective Commercial Field. 9.2.3 Reimbursement of Direct Exploration Costs, according to Clause 9 (Item 9.2.1) will be made by ECOPETROL to THE ASSOCIATE as of the date on which the Commercial Field is put on line by the Operator, through payment of the dollar equivalent to fifty percent (50%) of its direct share in the total production of the Commercial Field, after deducting the corresponding royalties. Paragraph: If dealing with a Commercial Gas Field, such reimbursement will be made by ECOPETROL to THE ASSOCIATE, as of the date on which the Commercial field is put on line by the Operator, through payment of the dollar equivalent to one hundred percent (100%) of its direct share in the total production of the Commercial Field, after deducting the corresponding royalties. 9.3 Should ECOPETROL, based on the information supplied, not accept the existence of the Commercial Field as stated in Clause 9 (Item 9.1), it may request THE ASSOCIATE to submit and carry out an additional work program, to demonstrate Field commerciality. Such work shall be performed at THE ASSOCIATE'S risk and expense and its duration may not exceed two (2) years. In such case, the Exploration Period for the Contracted Area will be automatically extended for a period equal to that agreed between the Parties as required for performing the additional work provided for in this Clause, without prejudice, however, of provisions regarding area reduction in Clause 8 (item 8.1). THE ASSOCIATE may submit and carry out a work program that complies with the requested objective, or submit such request for additional information to the EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 15 opinion of an expert, according to Clause 28 of this contract. Should the expert opinion favor ECOPETROL, THE ASSOCIATE shall meet the requirements and, once again, submit the commerciality studies and a revised Development Plan to ECOPETROL's consideration. Should the expert opinion favor THE ASSOCIATE, it shall be understood that ECOPETROL has the necessary information and, consequently, the ninety (90) calendar day term discussed in Clause 9.1 for accepting or objecting the existence of the Commercial Field shall be counted as of the date in which ECOPETROL received the experts' opinion. 9.4 If, after performance of the additional work or if the disagreement has been resolved by an expert as motioned herein in the previous number in compliance with Clause 9, ECOPETROL accepts the existence of the Commercial Field referred to in Clause 9 (Item 9.1), it shall commence participating in the development activities of the aforementioned Commercial Field, under the terms and conditions established in this contract and shall reimburse THE ASSOCIATE as provided for in Clause 9 (Items 9.2.2 and 9.2.3), thirty percent (30%) of the cost of the additional work requested, referred to in Clause 9 (Item 9.3), and the works performed shall become property of the Joint Account. 9.5 Sole Risk Method: If ECOPETROL does not accept the existence of a Commercial Field, even after the additional work described in Clause 9 (Item 9.3) has been completed, THE ASSOCIATE shall be entitled to perform, on its own account and risk, the work deemed necessary for the exploitation of said Field, according to the Development Plan presented to ECOPETROL and following good practices of the international petroleum industry, and to recover the cost of such work, and the Direct Exploration Costs incurred by THE ASSOCIATE prior to the presentation date of the commerciality studies of the respective Field, provided such costs have not been charged previously to another Field. For purposes of this Clause, the recovery of the aforementioned costs will be achieved through THE ASSOCIATE's share in the Hydrocarbons produced in the respective Field, minus the royalties referred to in Clause 13, as provided in Clause 14 (Item 14.2.3) of this contract for exploitation under the Sole Risk Method. For purposes of calculating the dollar amount of disbursements made in pesos, the representative market rate of exchange will be used, as certified by the Bank EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 16 Superintendence or the agency replacing it, on the date on which THE ASSOCIATE made the disbursements. For purposes of this clause, the value of each barrel of Hydrocarbon produced in said Field during a calendar month shall be the price of reference agreed on by the Parties. If THE ASSOCIATE wishes to use the right to develop the Reservoir under the Sole Risk Method, it should expressly state so at the latest during the one hundred and twenty (120) calendar days following the date in which ECOPETROL informs about the non-acceptance of the Commercial Field existence. Should THE ASSOCIATE fail to use this right, it shall return the Field and its reserve zone to ECOPETROL, terminating the contract for such area or part of the Contracted Area. 9.6 In order to define the limits of a Commercial Field, all geological, geophysical and data related to wells drilled in said Field, or related thereto, will be taken into consideration. 9.7 If upon acceptance of one or more Commercial Fields, or after having commenced the Sole Risk Method as per Clause 9.5, THE ASSOCIATE continues fulfilling its exploratory obligations agreed in Clause 5, it may simultaneously exploit such Fields before the end of the Exploration Period defined in Clause 4, but the Exploitation Period shall not be considered to have commenced until the expiration date of the former. If dealing with Gas Fields on which ECOPETROL has granted a Retention Period, the Exploitation Period for each Field shall commence as of the expiration date of the respective Retention Period. 9.8 If, as a result of the drilling of Exploration Wells after a decision has been made regarding the existence of a Commercial Field, THE ASSOCIATE proves the presence of additional Hydrocarbon accumulations associated with such Field, it must request that ECOPETROL expand the Commercial Field area and its commerciality, following the procedure provided for in Clause 9 (Item 9.1). If ECOPETROL accepts commerciality, it shall reimburse THE ASSOCIATE thirty percent (30%) of the Direct Exploration Costs exclusively related to the expansion of the Commercial Field area, under the terms provided for in items 9.2.2 and 9.2.3. If ECOPETROL does not accept the existence of a Commercial Field, THE ASSOCIATE shall be entitled to a reimbursement of up to two hundred percent (200%) of the total cost of the work performed at its own account and risk for the exploitation of the Exploratory Wells classified as producers, and up to EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 17 seventy percent (70%) of the Direct Exploration Costs incurred by THE ASSOCIATE, related exclusively to the extension of the requested area prior to ECOPETROL's decision on this matter. Such reimbursement shall be effected through the production from Exploratory Wells classified as producers, minus the royalty, following the procedure established in Clause 21 (Item 21.2) up to the percentages stipulated herein. CLAUSE 10 - OPERATOR 10.1 The Parties hereby agree that ARGOSY ENERGY INTERNATIONAL is the Operator and, as such, and with the limitations contained herein, shall have full control of all operations and activities deemed necessary for the technical, efficient, and economic exploitation of the Hydrocarbons that may be found in the area of the Commercial Field. They further agree that, despite the fact that this Contract - entered into for the commercial purposes provided in Clause 1 - ARGOSY ENERGY INTERNATIONAL is the Operator, it is hereby understood by the Parties who have so decided, that for all legal purposes of a labor nature, ARGOSY ENERGY INTERNATIONAL does not act as a representative of the Parties, but rather as the sole and true employer of the workers it contracts for the operation of a commercial field and, consequently, it shall be responsible for all labor obligations arising from the associated relations or labor contracts, such as payment of wages and fringe benefits, parafiscal contributions, affiliation and payments on account of pensions, health, and professional risks to the Social Security Integral System, as provided for in Law 100 of 1993 and its regulatory decrees or other regulations which may substitute or amend it. 10.2 The Operator is committed to carry out all development and production operations in compliance with the known standards and practices, to which end it shall use the best technical methods and systems required for the economic and efficient exploitation of the Hydrocarbons and apply all relevant legal and regulatory provisions. Likewise, it shall, in a timely manner, provide the Parties with the reports and documents set forth in the contract, as well as any other information required by the executive Committee with regard to the Joint Account and/or Operation. 10.3 In view of the above and considering that for the performance of and compliance with the Commercial Field operation, ARGOSY ENERGY INTERNATIONAL will perform all its activities using its own resources, with technical and administrative autonomy, EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 18 such Operator shall be considered an entity different from the Parties for all purposes of this contract, as well as for the application of civil, labor, and administrative law, and for its relations with the personnel hired in accordance with Clause 32. 10.3 The Operator shall have the right to resign from its position, by means of a written notice given to the Parties at least six (6) months prior to its effective date of resignation. The Executive Committee shall designate the new Operator in compliance with Clause 19 (Item 19.3.5). In the event that the Operator designated by the Executive Committee were a third party, other than the Parties hereto, a contract must be executed between the Parties and the new Operator. 10.5 The Operator shall carry out the operations provided for in this contract in a diligent, responsible, efficient, technically and economically appropriate, whereby it is understood that it shall, in no way be responsible for errors of judgment, or losses or damage not resulting from the Operator's gross negligence. 10.6 The Operator shall be entitled to perform any work through a contractor, subject to the powers of the Executive Committee, according to Clause 11 (Item 11.1). For purposes of compliance herewith, the Operator shall enter into contracts following the procedure described in Attachment "B", and subject to the principles of good faith, transparency, economy, equity, responsibility, planning, quality, expeditiousness, and social and environmental responsibility that should govern all contracting. CLAUSE 11 - EXPLOITATION PROGRAMS AND BUDGETS 11.1 Within three (3) months following the acceptance of a Commercial Field in the Contracted Area, the Operator shall submit to the Parties the proposed projects, programs, and Budget for the Development Plan of the Commercial Field, for the rest of the respective calendar year, to be approved by the Executive Committee. In the event that less than six and a half (6 1/2) months remain before the end of said year, the Operator shall prepare and submit the proposed projects, programs, and budget for the following calendar year, within a three-month period. 11.1.1. The projects, programs and Budget contained in the Development Plan for the Commercial Field shall be reviewed and revised annually, and submitted to the Parties by the Operator during the month of May, each calendar year, to which end, the Operator shall submit its proposal within the first ten (10) days of May. Within twenty EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 19 (20) days following the receipt of the proposed projects, programs, and Budget of the Development Plan for the Commercial Field, the Parties shall inform in writing to the Operator in regards to the changes they wish to propose. When this occurs, the Operator shall take into consideration the remarks and amendments proposed by the Parties in the preparation of the revised Development Plan that will be submitted to the Executive Committee for final approval in the ordinary meeting of July of each year. In case that the total budget of the Commercial Field has not been approved before July, those aspects of the Budget on which an agreement has been reached will be approved by the Executive Committee, and those aspects not approved will be immediately submitted to the Parties for further approval and final decision as provided for in Clause 20. 11.2 The Parties may propose additions or revisions to the projects, programs, and annual budget approved for every Commercial Field, but except for emergency cases, they should not be suggested with a frequency less than three (3) months. The Executive Committee will decide about the additions and revisions proposed in a meeting, which will be summoned within the thirty (30) days following the submission of the proposals. 11.3 The main objectives of projects, programs, and budgets are the following: 11.3.1 To determine the operations to be carried out, and the expenses and investments (Budget), which the Operator is authorized to execute in each Commercial Field during the following calendar year. 11.3.2 To keep a mid and long-term view on the development of every Field. 11.4 The projects, programs, and annual budget approved by the Executive Committee and contemplated in the Development Plan for each Commercial Field are the scheduled working plan, as well as the estimated expenses and investments to be made by the Operator in the different aspects of the operation, such as: 11.4.1 Capital investment for production: Reservoir development drilling, reconditioning or workover of wells, and specific production facilities. 11.4.2 General construction and equipment: industrial and camp facilities, transportation and construction equipment, drilling and production equipment. Other construction and equipment. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 20 11.4.3 Maintenance and operating expenses: production, geological, and administrative operating expenses. 11.4.4 Working capital requirements 11.4.5 Contingency funds 11.5 The Operator shall incur all expenses and investments and shall carry out all development and production operations in accordance with the project, programs and the annual budget approved in the Development Plan for each Commercial Field to which Clause 11 (Item 11.1), refers, as per the Operating Agreement (Attachment B) that is an integral part of this Contract, without exceeding the total Budget for each year, except for authorization of the Executive Committee in special cases. 11.6 The Operator is fully authorized to make disbursements which are not expressly included in each Commercial Field's Budget and charge them to the Joint Account without the Executive Committee's prior authorization, in the event of emergency measures intended to protect the Parties' personnel or property; emergency expenses caused by fires, floods, storms or other disasters; emergency expenses considered essential to the operation and maintenance of production facilities, including all maintenance works for producing wells to work with maximum efficiency; emergency expenses essential to the protection and preservation of materials and equipment required in the operations. In such cases, the Operator must summon, as soon as possible, a special Executive Committee meeting, to obtain its approval of carrying on with the emergency measures. 11.7 The Operator shall be the only responsible for the expenses incurred and the contracts executed by the Operator for amounts higher than the annual Budget authorized by the Executive Committee for each Commercial Field, in accordance with Clause 19 (Item 19.3.9) without having been approved timely by the Executive Committee, except for the assumptions regulated by Clause 11 (Item 11.6). Therefore, the Operator shall assume the corresponding total value of this expense. When the Executive Committee ratifies such expense or contract, the Operator will be reimbursed with the corresponding value, in accordance with the guidelines to be defined by the Executive Committee. In the event that the expenditure or the contract are not accepted by the Executive Committee, the Operator, whenever it is possible, will be entitled to withdraw the asset by reimbursing the Parties for any expenditure that its withdrawal EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 21 may cause. In the event that the Operator cannot withdraw such asset, or if he decides not to do so, the benefit or patrimony increase resulting from such expenditures or contracts will become the property of the Parties in a proportion equal to their share in the operation. CLAUSE 12 - PRODUCTION 12.1 Subject to the approval of the Executive Committee, the Operator will determine with the necessary frequency, the Maximum Efficiency Rate (MER) for each Commercial Field. This Maximum Efficiency Rate (MER) will be the hydrocarbon maximum production rate that can be extracted from a Reservoir to obtain the maximum economic benefit in the final recovery of reserves, in accordance with the economic and engineering principles and the practices and procedures generally employed and in use within the international petroleum industry, under conditions and circumstances similar to the activities performed under this contract. The estimated production shall be adjusted as necessary to compensate the actual or anticipated operational conditions, such as wells being repaired that are not producing, capacity limitations in collecting lines, pumps, separators, tanks, pipelines, and other facilities. 12.2 The Operator will determine periodically, at least once a year, upon approval of the Executive Committee, the area considered capable of producing hydrocarbons in commercial quantities in each Commercial Field. 12.3 The Operator shall prepare and deliver to each of the Parties, with regular three (3) month intervals, a program indicating each Party's share of production, and another one indicating the share of production for each Party for the following six (6) months. The production forecast will be based on the Maximum Efficiency Rate (MER), as stipulated in Clause 12 (Item 12.1), and adjusted to the rights of each Party, in accordance with this contract. The production sharing program will be determined based on the periodic request of each Party, and in accordance with Clause 14 (Item 14.2) with the necessary revisions to ensure that none of the Parties, entitled to a share, will receive less than the amount it is entitled to in accordance with the provisions in Clause 14, and without prejudice to the provisions in Clauses 21 (Item 21.2), and 22 (Item 22.5). 12.4 If any of the Parties foresees a reduction in its capacity to lift hydrocarbons with respect to the forecast submitted to the Operator, it must so inform him as soon as possible, and if such reduction is due to an emergency situation, it will notify the EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 22 Operator within twelve (12) hours immediately following the event causing the reduction. Consequently, said Party will submit the new lift program taking into account the pertinent reduction. 12.5 The Operator may use the hydrocarbons that are necessary in performance of production operations in the Contracted Area, and such consumption shall be exempt from royalties mentioned in Clause 13 (number 13.1). CLAUSE 13. ROYALTIES 13.1 For purposes of paying royalties for the exploitation of State-owned Hydrocarbons, the Operator shall pay ECOPETROL a production percentage as determined by Law. The delivery of said production shall take place at the same point and in the same moment in which the Parties distribute their production share pursuant to Clause 14 herein. In the case of Fields being exploited under the Sole Risk Method, THE ASSOCIATE will deliver to ECOPETROL the percentage of production corresponding to royalties at the point agreed by the Parties. 13.2 From the percentage of production delivered to ECOPETROL under the above numbered terms, ECOPETROL, in the manner and under the terms established by Law, shall pay to those agencies established by Law, the royalties caused in favor of the State over the Field's total production and, in no event, will THE ASSOCIATE be responsible for any payment to such agencies. CLAUSE 14 - DISTRIBUTION AND DISPOSAL OF THE HYDROCARBONS 14.1 The Hydrocarbons produced, excepting those which may have been used in benefit of the operations under this contract, and those which will inevitably be wasted throughout the operation, will be transported to the jointly owned tanks of the Parties or to other measuring facilities agreed by the Parties. Should no agreement be reached, it shall be the metering location nearest to the inspection site determined by the Ministry of Mines and Energy. Hydrocarbons will be measured in compliance with the standards and methods accepted by the petroleum industry and, based on such measurement, the volumes referred to in Clause 13 will be determined. As of that moment, the remaining Hydrocarbons will be the property of each Party, in the proportions specified in this contract. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 23 14.2 Production Distribution 14.2.1 After deducting the percentage that corresponds to royalties, the rest of the hydrocarbons produced from each Commercial Reservoir is the property of the Parties in a proportion of thirty per cent (30%) for ECOPETROL, and seventy per cent (70%) for THE ASSOCIATE, until the time in which the audited accumulated production in the respective Commercial Reservoir reaches sixty (60) million barrels of standard condition liquid hydrocarbons or nine hundred (900) cubic giga feet of standard condition gaseous hydrocarbons, whatever occurs first. (1 cubic giga feet = 1x10/9/ cubic feet). For Reservoirs exploited under the Sole Risk Method, the distribution of the production, after deducting the royalty percentage, is the property of the Parties in a proportion of (100%) for THE ASSOCIATE, and zero per cent (0%) for ECOPETROL, until the audited accumulated production from the respective Reservoir first reaches either one of the aforementioned production limits. 14.2.2 Regardless of the classification of the Commercial Reservoir granted by ECOPETROL upon declaring commerciality, above the limits defined in number 14.2.1 hereunder, the distribution of the production in each Commercial Reservoir (after deducting the percentage that corresponds to royalties) is the property of the Parties in the proportion resulting from applying the R Factor, as explained herein below: 14.2.2.1 If the Hydrocarbon that first reached the limit stated in number 14.2.1 in this Clause was the liquid hydrocarbon, the following table will apply: R Factor Production Distribution after Royalties (%) THE ASSOCIATE ECOPETROL 0.0 to 1.5 70 30 1.5 to 2.5 70/( R-0.5) 100 - [70 / R-0.5)] 2.5 or more 35 65 14.2.2.2 If the Hydrocarbon that first reached the limit stated in number 14.2.1 in this Clause was the gaseous hydrocarbon, the following table will apply: R Factor Production Distribution after Royalties (%) EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 24 THE ASSOCIATE ECOPETROL 0.0 to 2.0 70 30 2.0 to 3.0 70 / (R - 1.0) 100 - [70 / (R - 1.0)] 3.0 or more 35 65 14.2.3 Regardless of the classification of the Reservoir granted by ECOPETROL when the commerciality is defined, above the limits set in number 14.2.1 hereunder, the production from each Commercial Reservoir exploited under the Sole Risk Method, as per Clause 9 (number 9.5), after deducting the percentage that corresponds to royalties, is the property of the Parties in the proportion resulting from applying the R Factor, as explained herein below: 14.2.3.1 If the Hydrocarbon that first reached the limit stated in number 14.2.1 in this Clause was the liquid hydrocarbon, the following table will apply: R Factor Production Distribution after Royalties (%) THE ASSOCIATE ECOPETROL 0.0 to 1.5 100 0 1.5 to 2.5 197.5 - (65R) 100 - [197.5 - (65R)] 2.5 or over 35 65 14.2.3.2 If the Hydrocarbon that first reached the limit stated in number 14.2.1 in this Clause was the gaseous hydrocarbon, the following table will apply R Factor Production Distribution after Royalties (%) THE ASSOCIATE ECOPETROL 0.0 to 2.0 100 0 2.0 to 3.0 230 - (65R) 100 - [230 - (65R)] 3.0 or over 35 65 EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 25 14.2.4 For purposes of the above tables, the R Factor shall be defined as the relation of accumulated income expressed in constant terms, over accumulated expenses, also expressed in constant terms, which correspond to THE ASSOCIATE for every Commercial Reservoir in the following terms: IA R = --------------------------- ID + A - B + GO where IA (THE ASSOCIATE's ACCUMULATED INCOME): This is the appraisal of the accumulated income corresponding to THE ASSOCIATE's Hydrocarbons yield produce after royalties, at the reference price agreed between the Parties except for Hydrocarbons reinjected in the Fields of the Contracted Area, those consumed in the operation, and the burnt gas. Hydrocarbons average price will be mutually agreed between the Parties. Monthly income will be the basis to determine the accumulated income that will be determined as the result of multiplying the average monthly reference price for the monthly production, in accordance with the forms that have been issued by the Ministry of Mines and Energy for such purpose. ID (Accumulated Development Investments): Seventy percent (70%) of the accumulated Development Investment approved by the Association's Executive Committee for each Commercial Field. A: These are the Exploration Direct Costs incurred by THE ASSOCIATE, in accordance with Clause 9 of this contract and adjusted in accordance to Paragraph in Clause 9 (Item 9.2.2). B: This is the accumulated reimbursement of the aforementioned direct exploration costs, according to Clause 9 of this contract. GO (Accumulated Operation Expenses): These are the accumulated operation expenses approved by the Association's Executive Committee, in the proportion that EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 26 corresponds to THE ASSOCIATE, plus THE ASSOCIATE's accumulated transportation expenses. It is understood as transportation costs the investment and operation costs of Hydrocarbons produced in the Commercial Fields located in the Contracted Area, from the Contracted Area to the exportation port or the place that has been agreed to take the price to be used for IA income calculation. Such transportation costs will be agreed by the Parties upon commencement of the development phase of the Fields, whose commerciality has been accepted by ECOPETROL. Special contributions or the like that can be applied over Hydrocarbons production in the Contracted Area are included in the operation's expenses. All values included in the equation to determine the R Factor will be taken in constant terms and to such effect they will be updated monthly with the average consumer index prices in industrialized countries, as of its execution date to the last day of the month to which the R factor is being applied. For the monthly update, 1/12 of the value resulting of averaging the annual percentage variation during the last two years of the consumer index price in industrialized countries will be used, taken from "International Financial Statistics" of the International Money Market Fund (page S63 or its substitute), or in absence thereof, the publication agreed by the Parties. To such effect, expenses in Colombian currency must be exchanged to U.S. dollars at the representative rate in the market, duly approved by the Banking Superintendence, or its substitute, that is in force on the date that the respective reimbursements are made. Paragraph: For Fields exploited under the Sole Risk Method, according to Clause 9 (Item 9.5) of this contract, to the purpose of applying the equation to calculate the R Factor , the following will be considered: The ID corresponds to 100% of the accumulated development investment made by THE ASSOCIATE. The value of the accumulated Reimbursement of the Exploration Direct costs (B) will equal zero (0). The GO refers to accumulated operation expenses incurred by THE ASSOCIATE, including the transport costs incurred by THE ASSOCIATE for the transport of Hydrocarbons produced in the Field to the export port or the place where it is agreed to take the price to be used in calculating the IA income. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 27 Calculation of the R Factor: The distribution of production based on the R Factor will start being applied as of the first day in the third calendar month following that in which the accumulated production of the respective Commercial Field has reached (60) million barrels of liquid hydrocarbon or an amount of nine hundred (900) cubic giga feet gaseous hydrocarbon, at standard condition, as per above number 14.2.1. The calculation of the R Factor of the respective Commercial Field shall be based on the accounting close corresponding to the calendar month in which the audited accumulated production of (60) million barrels of liquid hydrocarbon or an amount of nine hundred (900) cubic giga feet gaseous hydrocarbon, at standard condition, as per above number 14.2.1. The resulting production distribution will be applied until June 30th of the next year. From that moment on, the production distribution to which the R Factor has been applied will be made for one-year terms (from July 1st to June 30th) over factor R's liquidation based on the accumulated values as of December 31st of the immediately previous year, in accordance with the corresponding accounting closing term. Provisions contained herein also apply for the Fields developed under the Sole Risk Method. 14.3 In addition to the tanks and other jointly-owned facilities, each Party will be entitled to build its own production facilities in the Contracted Area for its own and exclusive use, previous fulfilling of legal regulations. Transportation and delivery of Hydrocarbons by each Party to the pipeline and other receivers different from the jointly-owned ones will be made on the sole account and risk of the Party receiving the Hydrocarbons. 14.4 In case that production is yielded in places not connected to pipelines, the Parties will be able to agree the installation of pipelines up to a hydrocarbon point of sale, or to a location connected to the pipeline. If the Parties agree to the construction of such pipelines, they shall enter into the contracts they deem appropriate to this end, and shall designate the Operator in keeping with the legal provisions in force. 14.5 Each Party will be the owner of the Hydrocarbons that have been yielded and stored as a result of the Operation and that have been made available to it, as provided for herein, and, at its expense, it should receive them in kind, sell them, or dispose of them separately, pursuant to Clause 14 (Item 14.3). EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 28 14.6 If any of the Parties, for any reason, cannot dispose of separately or withdraw from the Joint Account's tanks, partially or totally, its share of the Hydrocarbons, the following procedure will apply, pursuant to this Contract: 14.6.1 If ECOPETROL is the party that cannot withdraw, partially or totally, its Hydrocarbon share (share plus royalties), according to Clause 12 (Item 12.3), the Operator will be able to go ahead with the Field's production and deliver to THE ASSOCIATE besides the portion represented by THE ASSOCIATE's share in the operation, based on one hundred percent (100%) of the MER, all those Hydrocarbons that THE ASSOCIATE decides and is capable of withdrawing up to a limit of one hundred per cent (100%) of the Maximum Efficiency Rate and crediting ECOPETROL, for further delivery, the amount of Hydrocarbons that ECOPETROL was entitled to withdraw but did not. However, with regard to the amount of not-withdrawn Hydrocarbons corresponding to ECOPETROL's monthly royalties, the ASSOCIATE, upon request by ECOPETROL, shall pay to ECOPETROL, in U.S. Dollars ,the difference between the pertinent amount of hydrocarbon on account of royalties, to which Clause 13 refers to, and the amount of Hydrocarbons that ECOPETROL has taken, on account of royalties, it being understood that any Hydrocarbon withdrawal by ECOPETROL will be applied, first, to the payment of royalties in kind and, after paying these, any additional Hydrocarbon withdrawals made will be applied to its corresponding share, according to Clause 14 (Item 14.2). 14.6.2. In the event that THE ASSOCIATE is the Party which cannot take all or part of its share designated under Clause 12 (Item 12.3), the Operator shall deliver to ECOPETROL, on the basis of one hundred percent (100%) of the MER, not only its own share and quota, but also all the hydrocarbons that ECOPETROL is capable of taking up to a limit of one hundred percent (100%) of the MER, crediting THE ASSOCIATE for later delivery, with the portion that corresponds to its quota and that it has not been able to take. 14.7 When both Parties are able to take the Hydrocarbons designated as per Clause 12 (Item 12.3), the Operator will deliver to the Party that has previously been unable to take its share of the production, and upon its request, and in addition to its participation EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 29 in the operation, a minimum of ten percent (10%) per month of the production belonging to the other Party, and by mutual agreement, until one hundred percent (100%) of the quota not taken, up to the point in which the total amount that had not been credited to the Party that was unable to take its Hydrocarbon share has been canceled. 14.8 Without prejudice of legal regulations on the subject, each Party will be free, at any time, to sell or export its share of the Hydrocarbons obtained, according to this contract, or dispose of same in any manner. CLAUSE 15 - UTILIZATION OF ASSOCIATED NATURAL GAS In the event that one or more Associated Natural Gas Fields are discovered, the Operator within the three (3) years following the date of commencement of field exploitation, as defined by the Ministry of Mines and Energy, shall submit a project for utilization of Natural Gas for the benefit of the Joint Operation. The Executive Committee will decide on the project, and if that is the case, it shall determine the timing for execution of same. If the Operator does not submit any project within the three (3) years or does not perform the project approved in the terms determined by the Executive Committee, ECOPETROL may take, gratuitously, all the Associated Natural Gas available from the Reservoirs being developed, as long as it is not required for the efficient development of the field. CLAUSE 16 - UNIFICATION When an economically exploitable field extends continuously into another area or areas out of the Contracted Area, the Operator, in agreement with the Parties, and other interested Parties, subject to prior approval of the Ministry of Mines and Energy, shall formulate a unified exploitation plan, which must conform to the engineering techniques for hydrocarbon exploitation. CLAUSE 17 - INFORMATION SUPPLY AND INSPECTION DURING EXPLOITATION 17.1 The Operator shall deliver to the Parties, as they are obtained, reproducible originals (sepias) and copies of the drilled wells' electric, radioactive, and sonic logs, history, core analyses, cores, production tests, reservoir studies, and other relevant technical data, as well as any routine data produced or received in relation with the operations and activities performed in the Contracted Area. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 30 17.2 Each of the Parties, at its own risk and expense, shall be entitled, through authorized representatives, to inspect the wells and facilities in the Contracted Area, as well as all the activities related thereto. Such representatives shall have the right to examine cores, samples, maps, records of drilled wells, surveys, books, and any other source of information related to performance of this contract. 17.3 In order for ECOPETROL to comply with the provisions of Clause 29, the Operator shall prepare and deliver to ECOPETROL all the reports required by the National Government. 17.4 All information and data related to exploitation works must be held as confidential pursuant to the same conditions of Clause 6 (Item 6.3) of this contract. CHAPTER IV - EXECUTIVE COMMITTEE CLAUSE 18. CONSTITUTION 18.1 Within the first thirty (30) calendar days following the acceptance of the first Commercial Field, each Party must appoint a representative and its respective first and second alternates, to form the Executive Committee and shall notify the other party in writing the names and addresses of its representative and alternates. The Parties may change their representative or alternates at any time, but must so advise the other Party in writing. The vote or decision of each Party representative is binding on said Party. Should the main representative of one of the Parties not be able to attend a Committee meeting, his first or second alternates, in order, may attend and will have the same authority as the principal. 18.2 The Executive Committee shall hold ordinary meetings during the months of March, July, and November, at which the Operator's development program and immediate plans will be reviewed. Annually, in the ordinary meeting held in July, the Operator shall submit to the Executive Committee for its approval, the annual operations program and the expense and investment Budget for each Commercial Field for the next calendar year, and if such is the case, the revised Development Plan. 18.3 The Parties and the Operator may request summons for special meetings of the Executive Committee, to analyze specific operating conditions. The representative of the EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 31 interested Party shall notify ten (10) calendar days in advance about the date of the meeting and the topics that will be dealt in them. Any matter not included in the meeting agenda may be dealt during such meeting, after acceptance by the representatives of the Parties in the Committee. 18.4 The representative of each of the Parties will have a right to vote equivalent to the percentage of his total interest in the Joint Operation when discussing all matters discussed in the Executive Committee. However, Executive Committee's decisions related to items contained in clauses 19.3.4 to 19.3.9 herein, will be adopted by unanimous vote of the Parties. All Executive Committee's decisions, in accordance with the aforementioned procedure, will be mandatory and final for the Parties and for the Operator. CLAUSE 19 - FUNCTIONS 19.1 The representatives of the Parties will form the Executive Committee, having full authority and responsibility to set and adopt exploitation, development, operations plans and budgets related to this contract. One representative of the Operator will attend the meetings of the Executive Committee. 19.2 The Executive Committee will appoint a Secretary for every session. This Secretary will write the corresponding Minutes containing a summary of all the discussions and determinations adopted by the Committee. The Minutes must be approved and signed by the representatives of the Parties within ten (10) working days following the closing of the meeting and delivered to them as soon as possible. 19.3 The functions of the Executive Committee are, among others, the following: 19.3.1 Adopt its own regulations. 19.3.2 Decide about the matters submitted by the Operator for its consideration. 19.3.3 Supervise the operation of the Joint Account and the Joint Operation. 19.3.4 Create the subcommittees deemed necessary and assign their functions under its direction. 19.3.5 Appoint the Operator in case of resignation or removal, and write the regulations to be followed by the Operator, when it is a third party other than the Parties, indicating in detail the reasons for his removal. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 32 19.3.6 Appoint the external auditor of the Joint Account. 19.3.7 Approve or reject projects, and any subsequent change or revision. 19.3.8 Determine the expense regulations and policies. 19.3.9 Approve or reject projects, programs and annual Budgets of each Commercial Field and authorize extra-expenses that have not been included in the approved Budgets. 19.3.10 In general, perform all the functions authorized by this contract and not corresponding to the Operator or another entity or individual, based on an express clause or by legal or regulatory provision. CLAUSE 20 - DECISION IN CASE OF DISAGREEMENT 20.1. Any disagreement that cannot be resolved in the Executive Committee will be directly submitted to the highest executive of each of the Parties who resides in Colombia, so as to take a joint decision. If in the sixty calendar days following the submission of the consultation, the Parties agree on a decision in regards to the matter in question, they will so inform the Operator, who should call for an extraordinary meeting of the Executive Committee, within the fifteen (15) calendar days following the receipt of the communication, where the agreement or decision taken will be approved. 20.2 If within sixty (60) calendar days following the date of consultation to the highest executive of each of the Parties who resides in Colombia, an agreement is not reached, the procedure will be as provided for in Clause 28 of this contract, except for differences related to the operations, in which case they could be executed in accordance with Clause 21. CLAUSE 21. OPERATIONS AT THE RISK OF ONE OF THE PARTIES 21.1 If at any time one of the Parties wishes to drill a Development Well not approved in the operating program, it shall notify the other Party in writing, at least thirty (30) calendar days prior to the following meeting of the Executive Committee, of its desire to drill such well and include information, such as location, drilling recommendation, depth and estimated costs. The Operator shall include this proposal among the items to be discussed at the following Executive Committee meeting. Should the proposal be approved by the Executive Committee, said well will be drilled with charge to the Joint EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 33 Account. Should the proposal not be accepted by the Executive Committee, the party wishing to drill such well, hereinafter the "Participating Party", shall have the right to drill, complete, produce, or abandon such well at its own risk and expense. The party not wishing to participate in the above-mentioned operation shall be known as the "Non Participating Party". The Participating Party must commence drilling of the well within one hundred eighty (180) days following the refusal of the Executive Committee. Should drilling not be commenced within this period, it must be submitted to the Executive Committee's consideration once again. At the request of the Participating Party, the Operator shall drill the aforementioned well at the risk and expense of the Participating Party, provided that in the Operator's opinion, such operation does not interfere with the normal operation of the Field, whereby the Participating Party shall have advanced to the Operator the amount that the Operator deems necessary to drill the well. In the event that such well cannot be drilled by the Operator without interfering with the normal operation of the field, the Participating Party shall have the right to drill such well by itself, or through a service company that is competent and, in such event, the Participating Party shall be responsible for such operation, without interfering with the normal development of field operations. 21.2 Should the well referred to in Clause 21 (Item 21.1), be completed as producer, it shall be administered by the Operator and the production from such well, after deducting the royalties referred to in Clause 13, shall be property of the Participating Party, which will bear all costs of operating such well until the net value of production, after deducting production, collection, storage, transport and other similar costs, as well as the cost of sale, equal to hundred percent (200%) of the costs of drilling and completing such well. As of that moment, and for the purposes of this contract, such well shall become the property of the Joint Account holders, in the proportion established, as though it had been drilled with the approval of the Executive Committee at the Parties' risk and expense. To this effect, the investments made and costs incurred in the development of this well shall be part of the R Factor of the Commercial Field. For purposes of this clause, the value of each barrel of Hydrocarbon produced from such well, during a calendar month, before deducting the aforementioned costs, shall be the reference price agreed on by the Parties. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 34 21.3 If at any time, one of the Parties wishes to workover, deepen to reach the production targets, or plug a well that is not producing commercial quantities, or if that is a dry hole that was drilled by the Joint Account, and if such operations have not been included in a program approved by the Executive Committee, such Party must notify the other Party of its intention to workover, deepen, or plug such well. Should there be no equipment on site, the procedure described in Clause 21 (Items 21.1 and 21.2) shall be followed. Should there be adequate equipment to conduct the proposed operations at the wellsite, the Party receiving the notice of the operations that the other Party wishes to conduct, shall have forty-eight (48) hours, as of the time it received the notice, within which to approve or disapprove the operation and, if during this term no reply is received, it is understood that the operation will be carried out at the risk and expense of the Joint Account. Should the proposed work be carried out at the sole risk and expense of a Participating Party, the well shall be managed subject to Clause 21 (Item 21.2). 21.4 If at any time, one of the Parties wishes to build new facilities for the extraction of gaseous Hydrocarbon liquids and for the transport and export of the Hydrocarbons produced, hereinafter additional facilities, said Party shall notify the other Party in writing and provide the following information: 21.4.1 General description, design, specifications, and estimated costs of the additional facilities. 21.4.2 Projected capacity 21.4.3 Approximate date of commencement of the construction and duration thereof. Within ninety (90) days starting on the date of notification, the other Party shall have the right to decide whether it intends to participate in the projected additional facilities, by giving written notice. In the event that such Party should elect to not participate in the additional facilities, or does not reply to the Participating Party's proposal, hereinafter "the Constructing Party", the latter may proceed with the additional facilities and will instruct the Operator to build, operate, and maintain such facilities at the exclusive risk and expense of the Constructing Party, without prejudice to the normal development of the Joint Operation. The Constructing Party may negotiate the use of such facilities for the Joint Operations, with the other Party. During the time the facilities are operated at the risk and expense of the Constructing Party, the Operator shall charge such Party for EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 35 all operating and maintenance costs of the additional facilities, in accordance with generally accepted accounting practices. CHAPTER V - JOINT ACCOUNT CLAUSE 22. MANAGEMENT 22.1 Without prejudice to the provisions of other clauses in this contract, the expenses attributable to exploration works will be at the risk and expense of THE ASSOCIATE. 22.2 From the moment ECOPETROL accepts the existence of a Commercial Field and subject to the provisions of Clause 5 (Item 5.2) and of Clause 13 (Items 13.1 and 13.2), the ownership of the rights or interests in the Contracted Area shall be divided as follows: ECOPETROL, thirty percent (30%), THE ASSOCIATE, seventy percent (70%). From that point on, all the expenses, payments, investments, costs, and obligations performed and assumed for development of the Joint Operation, in compliance with this contract, shall be charged to the Joint Account and the Exploration Direct Costs incurred by THE ASSOCIATE before and after acceptance of the existence of each Commercial Field and its extensions, in compliance with Clause 9 (Item 9.8), shall be entered into the Joint Account. Except as provided for in Clauses 14 (Item 14.3) and 21, all the property acquired or used from that moment on for the fulfillment of operating activities of the Commercial Field, shall be paid for and belong to the Parties, in the same proportions described in this clause. 22.3 The Parties shall tender to the Operator, to the Joint Operation banking account, their proportionate shares in the budget of each Commercial Field, as needed, within the first five (5) days of each month, in the same currency in which the expenses must be made, that is, in Colombian pesos, or in USA dollars, as requested by the Operator, in accordance with the programs and budgets approved by the Executive Committee. When THE ASSOCIATE does not have the necessary pesos to cover its portion of this currency, ECOPETROL shall have the right to furnish such pesos and be credited for the contribution that is to be made in dollars, converted at the official rate for purchase of exchange certified by the Banking Superintendence, or the official agency in charge, on the day in which ECOPETROL should make the corresponding contribution, provided such transaction does not violate any legal provision. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 36 22.4 The Operator shall submit to the Parties, within the ten (10) calendar days following the end of each month, a monthly statement showing the anticipated amounts, the expenses made, the outstanding obligations, and a report of all charges and credits to the Joint Account. Such report shall be prepared in compliance with Attachment B and in a separate attachment, the parameters and R Factor calculation referred to in Clause 14 (Items 14.2.4 and 14.2.5). If the payments referred to in Clause 22 (Item 22.3) are not made within the agreed term and the Operator decides to make them, the delinquent Party shall pay the commercial interest for payment in arrears, in the same currency during the delinquency period. 22.5 Should one of the Parties fail to pay to the Joint Account the corresponding amounts on time, from that date on, said Party shall be considered a Delinquent Party and the other Party the Performing Party. If the Performing Party should make the payment belonging to the Delinquent Party, in addition to its own, said party shall have the right, after sixty (60) days of delinquency, to have the Operator deliver to it the total of the Delinquent Party's production share in the Contracted Area (excluding the percentage corresponding to royalties), up to a production amount such that permits the Performing Party a net income from the sales made equal to the amount the Delinquent Party failed to pay, plus an annual interest equal to the Commercial Interest for Payment in Arrears starting sixty (60) days after the initial date of the delinquency. "Net income" is understood as the difference between the sale price of the Hydrocarbons taken by the Performing Party, less the cost of transport, storage, loading and other reasonable expenses incurred by the Performing Party from the sale of the products taken. The right of the Performing Party may be exercised at any time thirty (30) calendar days after written notification to the Delinquent Party of its intention to take part or all of the production corresponding to the Delinquent Party. 22.6 Direct and Indirect costs 22.6.1 All Direct Costs of the Joint Operation shall be charged to the Parties in the same proportion that the production is allocated after royalties. 22.6.2 Indirect Costs shall be charged to the Parties in the same proportion that has been established for Direct Costs in Item 22.6.1 of this Clause. The amount of such costs shall be the result of taking the total annual investment value and direct expenses (excepting technical and administrative support) and applying the equation "a + m EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 37 (X-b)" In such equation, "X" is the total value for investments and annual expenses and "a", "m", and "b" are constants whose values are indicated in the following table in relation with the amount of investments and annual expenses: INVESTMENT AND EXPENSES VALUE OF THE CONSTANTS "X"(US$) "a"(US$) m(fracc.) "b"(US$) 1. 0 to 25.000.000 0 0.10 0 2. 25.000.001 to 50.000.000 2.500.000 0.08 25.000.000 3. 50.000.001 to 100.000.000 4.500.000 0.07 50.000.000 4. 100.000.001 to 200.000.000 8.000.000 0.06 100.000.000 5. 200.000.001 to 300.000.000 14.000.000 0.04 200.000.000 6. 300.000.001 to 400.000.000 18.000.000 0.02 300.000.000 7. 400.000.001 and over 20.000.000 0.01 400.000.000 The equation will be applied once a year in each case with the value of the constants corresponding to the total value of annual investments and expenses. 22.7 The monthly statements referred to in Clause 22 (Item 22.4) may be reviewed or objected to by either of the Parties from the moment they receive them, up to two (2) years after the end of the calendar year to which they pertain, specifying clearly the entries corrected or objected to and the reason therefor. Any account which has not been corrected or objected to within such period shall be considered final and correct. 22.8 The Operator shall keep accounting records, vouchers and reports for the Joint Account in Colombian pesos in accordance with Colombian law, and all charges and credits to the Joint Account shall be made following the accounting procedure described in Attachment B, which is part of this contract. In the event of discrepancy between such Accounting Procedure and the provisions of this contract, the provisions of the latter shall prevail. 22.9 The Operator may perform sales of materials or equipment during the first twenty (20) years of the Exploitation Period, or the first twenty eight (28) years of the Exploitation Period, in the case of a Gas Field, for the benefit of the Joint Account when the value of the sold items does not exceed five thousand USA dollars (US$5,000) or its equivalent in Colombian pesos. This type of operation, per calendar year, may not EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 38 exceed fifty thousand USA Dollars (US$50,000) or its equivalent in Colombian pesos. The sales exceeding these amounts or those of real estate property are subject to the Executive Committee's approval. The sale of such materials or equipment will be made at a reasonable commercial price in accordance with the conditions of use of the item. 22.10 All the machinery, equipment, or other goods or property acquired by the Operator for the execution of this contract and charged to the Joint Account, will be the property of the Parties in equal shares. However, in the event that one of the Parties should decide to terminate its interest in the contract before the end of the first seventeen (17) years of the Exploitation Period, except as foreseen in Clause 25, said Party agrees to sell to the other Party, its interest in said assets at a reasonable commercial price or their book value, whichever is lower. In the event that the other Party does not wish to buy such assets within ninety (90) days following the formal offer to sell, the Party wishing to withdraw shall have the right to assign to a third party the interest corresponding it in such machinery, equipment and items. If THE ASSOCIATE decides to withdraw after seventeen (17) years of the Exploitation Period, its right in the Joint Operations will pass free of charge to ECOPETROL upon its acceptance. CHAPTER VI - DURATION OF THE CONTRACT CLAUSE 23 - MAXIMUM TERM This contract shall have a maximum term, as of its Effective Date, of twenty-eight (28) years, distributed as follows: up to six (6) years as the Exploration Period, pursuant to Clause 5 without prejudice of that stipulated in Clause 5 (number 5.4) and Clause 9 (number 9.3); and twenty two (22) years as the Exploitation Period, as of the date of expiration of the Exploration Period. It is understood that the events contemplated hereunder, in which the Exploration Period is extended, shall not extend the total twenty eight (28) year total term. Paragraph 1: The Exploitation Period for the Gas Fields discovered within the Contracted Area shall have a maximum duration of thirty (30) years as of the date of expiration of the Exploration Period or Retention Period granted. Anyhow, the total contract term for such Reservoirs shall not exceed forty (40) years, as of the Effective Date. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 39 Paragraph 2: Notwithstanding the above, ECOPETROL and THE ASSOCIATE, with no less than five (5) years in advance of the expiration date of the Exploitation Period of each Reservoir, will undertake the study of conditions to continue exploitation thereof after the expiration mentioned in this Clause. Should the Parties agree to pursue such development, they shall define the terms and conditions for performance thereof. CLAUSE 24 - TERMINATION This contract shall terminate in each of the following cases on which THE ASSOCIATE's rights contained within this contract shall cease, either in its capacity as interested Party, or as Operator, provided both mentioned capacities concur in THE ASSOCIATE at the time of termination: 24.1 Upon expiration of the Exploration Period if THE ASSOCIATE has not discovered a Commercial Field, except as provided in Clauses 5 (Item 5.4), 9 (Item 9.5), and 34. 24.2 When the contract term established in Clause 23 expires. 24.3 At any time, and at THE ASSOCIATE's will, after having complied with its obligations referred to in Clause 5, and the other obligations acquired in compliance with this contract up to the date of termination. 24.4 Should THE ASSOCIATE assign this contract, in whole or in part, without complying with the provisions of Clause 27. 24.5 Due to breach of the obligations assumed by THE ASSOCIATE in accordance with this contract. 24.5.1 ECOPETROL shall not be able to terminate this contract until sixty (60) calendar days after having notified THE ASSOCIATE or its assignees in writing, clearly specifying the causes for making such a declaration and only if the other Party has not submitted explanations that are satisfactory to ECOPETROL or if THE ASSOCIATE has not corrected the fault in complying with the contract, without prejudice to THE ASSOCIATE's right to file the legal suits it deems convenient. 24.5.2 If, within the period mentioned above, THE ASSOCIATE submits explanations that are satisfactory to ECOPETROL and if the remaining term for completing the period of sixty (60) days it is insufficient to meet the obligations pending according to good petroleum industry practice, the Parties may agree to an additional term to allow said compliance, without prejudice to ECOPETROL's right to demand the guarantees EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 40 necessary for backing it. If, after this time has elapsed, all of the works agreed to have still not been performed, ECOPETROL shall terminate the contract. 24.6 At any time upon mutual agreement between the Parties. 24.7 Due to the unilateral termination causes contemplated in Clause 25. CLAUSE 25 - CAUSES OF UNILATERAL TERMINATION 25.1 Unilaterally, ECOPETROL may terminate this contract at any time before the period agreed in Clause 23 expires, in the following cases: 25.1.1 Death or permanent physical disability or legal interdiction of THE ASSOCIATE in the case of an individual. 25.1.2 Due to initiation of a wind-up process of THE ASSOCIATE, if it is a company. 25.1.3 Due to legal embargo of THE ASSOCIATE that seriously affects contract performance. 25.1.4 When THE ASSOCIATE is made up of several companies and/or individuals, the reasons given in items 25.1.1 and 25.1.2 shall be applied when they seriously affect contract performance. 25.2 In the event of a declaration of unilateral termination, the rights of THE ASSOCIATE's rights stated in this contract shall cease, not only as an interested Party, but also as Operator, if at the moment of the declaration of unilateral termination THE ASSOCIATE acts in both capacities. CLAUSE 26 - OBLIGATIONS IN CASE OF TERMINATION 26.1 If the contract is terminated as per the provisions in Clause 24, during its Exploration Retention, or Exploitation Period, THE ASSOCIATE shall leave in production those wells which on that date are producing and shall deliver the facilities, pipelines, transfer lines and other real estate property belonging to the Joint Account (located in the Contracted Area), all of which shall pass, free of charge, to ECOPETROL's ownership, together with the rights of way and assets acquired exclusively for the benefit of the contract, regardless of whether or not these assets are located outside the Contracted Area. 26.2 If the contract is terminated for any reason after the first seventeen (17) years of its Exploitation Period, all of THE ASSOCIATE's machinery, equipment or other assets or EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 41 items used or acquired by THE ASSOCIATE or by the Operator in performance of this contract shall pass, free of charge, to ECOPETROL. 26.3 If the contract is terminated before the end of the seventeen (17) year Exploitation Period, the provisions of Clause 22 (Item 22.10) shall apply. 26.4 If the contract is terminated through a declaration of unilateral termination issued at any time, all current assets and fixed assets acquired for the exclusive benefit of the Joint Account, shall pass, free of charge, to ECOPETROL's ownership. 26.5 If the contract is terminated for any reason and at any time, the Parties have the obligation to satisfactorily fulfill their legal obligations to each other and to third Parties and those acquired under this contract, which are in force or have become due as of the date of termination. CHAPTER VII - MISCELLANEOUS PROVISIONS CLAUSE 27 - ASSIGNMENT RIGHTS 27.1 After previous written approval by ECOPETROL, THE ASSOCIATE is hereby entitled to assign or transfer either partially or totally its interests, rights and obligations in this contract to another individual, company or group that has the economic capacity, the technical competence, the professional skills necessary, and the legal capacity to operate in Colombia. For such purpose, THE ASSOCIATE shall submit a written request to ECOPETROL, indicating the main elements of the negotiation, such as the name of the possible assignee, information on its legal, financial, technical, and operational capacities, value of the rights and obligations to be assigned, scope of the operation, etc. Within sixty (60) workdays following receipt of the complete request, ECOPETROL shall exercise the discretional faculty of analyzing the information furnished by THE ASSOCIATE, after which it shall make its decision, without the obligation of expressing its reasons for it. 27.1.1 When assignments are made in favor of companies that control or direct THE ASSOCIATE, or to any of the companies that make it up or their affiliates or subsidiaries, or between companies that are part of the same economic group, it shall suffice to inform ECOPETROL beforehand and in a timely manner regarding the essential elements of the negotiation mentioned above. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 42 27.1.2 The actions taken to develop this clause that might be taxable according to the Colombian tax legislation will cause payment of the corresponding taxes. Paragraph 1: When THE ASSOCIATE is made up of more than one company and one of them wishes to assign their interests, rights and obligations in the contract, in whole or in part, in accordance with this clause, it must prefer the other companies that comprise THE ASSOCIATE, offering to them before than other interested third parties, the interests, rights and obligations it wishes to assign, unless the companies that make up THE ASSOCIATE have agreed otherwise. CLAUSE 28 - DISAGREEMENTS 28.1 In any case where a discrepancy or contradiction arises in the interpretation of the clauses of this Contract relative to the contents in Attachment B called "Operation Agreement", or in Attachment "C" called "Guidelines for the Preparation of the Development Plan", the stipulations of the former shall prevail. Likewise, should a conflict arise between the terms of Attachment B and Attachment C, the terms of the former shall prevail. 28.2 Disagreements between the Parties as to legal matters related to the interpretation and performance of the contract, which cannot be resolved amicably, shall be submitted for examination and determination by the proper Colombian legal public authority. 28.3 Any factual or technical difference between the Parties, related to the interpretation and application of this contract, which cannot be resolved amicably, shall be submitted to the final decision of experts in the following manner: each Party shall appoint an expert representative, one for each Party, and a third one mutually agreed by the main experts appointed. If they cannot agree as to the naming of the third expert, the Board of Directors of the Colombian Association of Engineers (Sociedad Colombiana de Ingenieros-SCI), with headquarters in Bogota, will choose the third candidate, upon the request by either Party. 28.4 Any difference concerning the accounting which may arise between the Parties by reason of the interpretation and performance of this contract, which cannot be resolved amicably, shall be submitted to a decision taken by experts. Such experts shall be sworn Certified Public Accountants, and shall be appointed as follows: one by each of the Parties and a third one mutually agreed by the two main experts. Upon failure of the EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 43 former two to reach an agreement and, at the request of either of the Parties, said third expert shall be appointed by the Central Board of Accountants (Junta Central de Contadores) in Bogota. 28.5 Both parties accept that the decision of the experts shall have the same effect as a transaction between themselves and, consequently, said decision shall be binding. 28.6 In the event of a disagreement between the Parties concerning the technical, accounting or legal aspects of the controversy, said disagreement shall be considered legal and Clause 28 (Item 28.2) shall apply. CLAUSE 29. LEGAL REPRESENTATION Without prejudice to the rights that THE ASSOCIATE may legally have, as a consequence of legal regulations or pursuant to the provisions of this contract, ECOPETROL shall represent the Parties before the Colombian authorities with respect to the exploitation of the Contracted Area as required, and it shall submit to governmental officials and entities all the data and information which may be legally required. The Operator shall be obliged to prepare and furnish ECOPETROL with the pertinent information. Any expense that ECOPETROL may incur pursuant to any matter referred to herein, shall be at the expense of the Joint Account, and when such expenses exceed five thousand USA dollars (US$5,000) or its equivalent in Colombian pesos, THE ASSOCIATE prior approval shall be required. The Parties declare that, insofar as any relationship with third Parties is concerned, neither the conditions of this clause nor of any other clause of this contract, shall imply the granting of a General Power of Attorney, or that the Parties have established a joint civil or commercial venture or other relationship under which any of the Parties may be considered jointly and severally responsible for the other Party's acts or omissions, or to have the authority or mandate which could commit the other Party with regard to any obligation whatsoever. This contract refers to operations within the territory of the Republic of Colombia, and even though ECOPETROL is a Colombian State-owned industrial and commercial company, the parties agree that THE ASSOCIATE, if necessary, may elect to be excluded from the application of all the provisions in Subchapter K, entitled PARTNERS AND PARTNERSHIPS of the Internal Revenue Code of the United States of America. THE ASSOCIATE shall make this election on its behalf in a proper manner. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 44 CLAUSE 30. RESPONSIBILITIES 30.1 The responsibilities acquired by ECOPETROL and THE ASSOCIATE in connection with this contract before third parties shall not be joint liabilities and, therefore, each Party shall be solely responsible for its share of the expenses, investment, and obligations derived from such responsibilities. 30.2 Environmental Management: THE ASSOCIATE or the Operator, in performance of all contract activities, must timely comply with that set forth in the National Code of Renewable Natural Resources and Protection of the Environment, and other legal provisions on the subject. Likewise, they shall promote amongst their contractors, suppliers, intermediaries and/or workers working in benefit of the contract, the conservation of a healthy environment, taking the necessary precautions to protect the environment, human life and property of others and prevent contamination of the Contracted Area. As of contract initiation, THE ASSOCIATE shall prepare a general diagnosis of the environmental and social reality of the zones where the Exploration Works shall be performed and shall establish the communication channels with the local authorities and communities. THE ASSOCIATE agrees to implement a permanent plan, of a preventive nature, to ensure the conservation and restoration of the natural resources within the zones where the Exploration, Exploitation and Transportation works that are the subject-matter of this contract are performed. THE ASSOCIATE must convey said plans and programs to the communities and national and regional order agencies that are related to this subject. Likewise, specific contingency plans must be established to take care of the emergencies that may arise and to perform the remedial actions called for. For such purpose, THE ASSOCIATE must coordinate said plans and actions with the competent agencies. THE ASSOCIATE, in accordance with the pertinent Clauses of this contract, must prepare the respective plans and budgets. All costs caused shall be borne by THE ASSOCIATE during the Exploration Period and Exploitation under the Sole Risk Method, and by both Parties, charged to the Joint Account in the Exploitation Period. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 45 CLAUSE 31. TAXES, LIENS, AND OTHERS All taxes and liens caused after establishing the Joint Account and before the Parties receive their production shares in and that are chargeable to Hydrocarbon exploitation, shall be charged to the Joint Account. The income, patrimony and complementary taxes will be at the exclusive expense of each of the Parties, accordingly. CLAUSE 32. PERSONNEL 32.1 When THE ASSOCIATE is the Operator, the Operator Manager's appointment will be consulted previously with ECOPETROL. 32.2 Pursuant to the terms of this contract and subject to the regulations established herein, the Operator, as the sole and actual employer, shall have administrative autonomy to designate personnel required for the operations under this contract, and may establish their salaries, functions, categories, and conditions. The Operator will adequately and diligently train the Colombian personnel required to substitute the foreign personnel that the Operator may consider required for the performance of the operations of this contract. In all cases, the Operator shall comply with any legal provisions that set forth the proportion of local and expatriate employees and workers. 32.3 TECHNOLOGY TRANSFER THE ASSOCIATE agrees to implement, at its expense, a training program for ECOPETROL professionals in areas related to the development of the contract. For compliance with this obligation in the Exploration Period, training may be, among others, in the areas of geology, geophysics and related areas, evaluation and definition of characteristics of reservoirs, drilling and production. Training shall take place throughout the six (6) year Exploration Period and extensions thereof, through the integration of the professionals appointed by ECOPETROL to the work group THE ASSOCIATE organizes for the Contracted Area or for other similar activities of THE ASSOCIATE. To decide on the waiver mentioned in Clause 5 of this contract, THE ASSOCIATE must have previously complied with the training programs herein provided for. In the Exploitation Period, the scope, duration, place, participants, training conditions and other aspects shall be established by the Association's Executive Committee EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 46 All of the costs of supervised training, with the exception of labor-related ones caused in favor of the professionals who receive said training, shall be borne by THE ASSOCIATE in the Exploration Period, and by both Parties charged to the Joint Account in the Exploitation Period. PARAGRAPH: For fulfillment of obligations regarding Technology Transfer, as per provisions contained herein, THE ASSOCIATE hereby commits to carry out training programs directed to ECOPETROL professionals for a value up to twenty five thousand U.S. Dollars (US$25.000.oo), for each phase of the Exploration Period. Likewise, and for each extended year of the Exploration Period THE ASSOCIATE commits to carry out training directed to ECOPETROL professionals for the same amount mentioned. The subject and type of program shall be agreed in advance between ECOPETROL and THE ASSOCIATE. Should the Exploration period be extended, the supervised training shall consist in programs directed to ECOPETROL professionals for each extended year, for a value up to fifty thousand U.S. Dollars (US$50,000). CLAUSE 33. INSURANCE THE ASSOCIATE or the Operator will take all the insurance policies required by the Colombian law. Likewise, it will require each contractor that perform any job in development of this contract to acquire and keep in effect all the insurance policies that the Operator may consider necessary. Likewise, the Operator will take all the insurance policies that the Executive Committee may consider advisable. Upon termination of this contract, at any time during the Exploitation period or due to expiration of the term set forth in Clause 23, the Operator and/or THE ASSOCIATE shall take out an insurance policy to guarantee payment of salaries, benefits and indemnities and other labor debts due to eventual legal sentences derived from claims from the workers hired by the Operator in its condition as their sole and true employer and during the time of operation of the Commercial Field. The policy term shall not be less than three (3) years counted as of the date of termination of the Association Contract, and the insured value shall be defined by the Executive Committee, subject to that set forth in the labor provisions applicable to the respective employment contracts. EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 47 CLAUSE 34 - FORCE MAJEURE OR ACTS OF GOD The obligations of this contract shall be suspended for as long as the Parties are unable to fulfill them totally or partially, due to unforeseen events that constitute force majeure or acts of God such as strikes, shutdowns, war, earthquakes, floods or other catastrophes, governmental laws, regulations or decrees that prevent obtainment of essential material and, in general, any non-financial cause which may actually obstruct the works, even if not mentioned above, but affecting the Parties beyond their control. If one of the Parties is not able, due to force majeure or acts of God, to fulfill its obligations under this contract, it must immediately notify the other Party for its consideration, specifying the causes of such impediment. In no event shall the occurrences of force majeure or acts of God extend the total Exploration and Exploitation Periods beyond the maximum term of the Contract, as per provisions in Clause 23, but any impediment due to force majeure during the six (6) year Exploration Period mentioned in Clause 5, which lasts longer than sixty (60) consecutive days, will extend this six (6) year term for the same period that the impediment lasts. CLAUSE 35 - APPLICATION OF COLOMBIAN LAW For all the purposes of this contract, the Parties set as their domicile the city of Bogota, D.C., Republic of Colombia. This contract is fully in force under Colombian Law and THE ASSOCIATE is subject to the jurisdiction of the Colombian Courts and waives any attempt to make any diplomatic claim in regards to the rights and obligations arising from this contract, except in the event that justice is denied. It is understood that justice will not be denied when THE ASSOCIATE, in its capacity as Operator or Party, has exhausted all the resources and actions that, in compliance with Colombian Law, may be used before Colombian legal authorities. CLAUSE 36. NOTICES The services or communications between the Parties in regards to this contract will require to be valid, the mention of the relevant clauses and should be sent to the representatives or delegates designated by the Parties to the following addresses: EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 48 To ECOPETROL: Cra 13 #36-24, Santa Fe de Bogota, D.C., Colombia. To THE ASSOCIATE: Diagonal 108 No. 7 - 54, Bogota, D.C., Colombia Santa Fe de Bogota, Colombia. Any change of address and representatives should be duly notified in advance to the other Party. CLAUSE 37. HYDROCARBON VALUATION The payments or reimbursements referred to in Clauses 9 (Items 9.2 and 9.4) and 22 (Item 22.5), will be made in USA dollars, or in Hydrocarbons, based on its current market price and the limitations established or that may be established by Colombian Law for the sale of the portion payable in USA dollars of Hydrocarbons coming from the Contracted Area to be used in refining in the Colombian territory. CLAUSE 38. HYDROCARBON PRICES 38.1 The Hydrocarbons corresponding to THE ASSOCIATE in performance of this contract, destined to the refinery or to domestic supply, shall be paid placed at the refinery that must process them or at the receiving station agreed to by the Parties, in accordance with the governmental provisions or rules in force, or that replace them. 38.2 The differences arising from the application of this clause will be settled in the manner provided for in this contract. CLAUSE 39. PERFORMANCE BOND At ECOPETROL,s discretion, in order to ensure completion of the Exploration Works corresponding to each phase of the Exploration Period, in accordance with Clause 5, THE ASSOCIATE, at its expense, agrees to submit in favor of ECOPETROL one or more irrevocable Stand-By Letters of Credit or Bank Bonds issued by a financial corporation acceptable to ECOPETROL, for an amount in dollars of the United States of America equal to the estimated cost of the Exploration Works agreed to as the minimal program to be developed during each phase and with a term corresponding to the phase covered plus ninety (90) days more, counted as of the date on which it is issued. The bond for backing the First Phase of the Exploration Period shall be submitted within the ten (10) business days following the date on which the resolution of approval of this contract by the Ministry of Mines and Energy is official, and the subsequent ones, within EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 49 the first ten (10) business days following the initiation of each subsequent phase. Upon request of THE ASSOCIATE, the value of this bond may be reduced every six (6) months as of the Effective Date, in proportion to the physical amount of Exploration Works performed, as agreed to in Clause 5. CLAUSE 40 - DELEGATION AND ADMINISTRATION The President of EMPRESA COLOMBIANA DE PETROLEOS - ECOPETROL -delegates on the Exploration and Production Vice-President the administration of this contract, according to ECOPETROL's standards and regulatory provisions, with power for executing all transactions and processes inherent in Contract performance. The Vice-President of Exploration and Production may exercise this delegation through the Joint Exploration and Production Vice-Presidents. CLAUSE 41. LANGUAGE For all purposes and actions regarding this contract, the official language is Spanish. CLAUSE 42. VALIDITY This contract requires approval from the Ministry of Mines and Energy. In witness whereof, this is signed in Bogota, D.C., in the presence of witnesses, on the tenth (10) day of the month of December in the year two thousand one(2001). EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL /s/ Alberto Calderon Zuleta ---------------------------------- ALBERTO CALDERON ZULETA PRESIDENT EMPRESA COLOMBIANA DE PETROLEOS ECOPETROL RIO MAGDALENA ASSOCIATION CONTRACT Pag. 50 ARGOSY ENERGY INTERNATIONAL /s/ Alvaro Jose Camacho Rodriquez --------------------------------- ALVARO JOSE CAMACHO RODRIQUEZ LEGAL REPRESENTATIVE Witnesses /s/ Edgar L. Dyes /s/ R. Suttill /s/ Victor Hugo Franco /s/ Edward Tovar This is a fair and accurate English translation of the original document which is in the Colombian language. /s/ James L. Busby ----------------------- James L. Busby Secretary and Treasurer of Aviva Petroleum Inc. -----END PRIVACY-ENHANCED MESSAGE-----