First Calgary Petroleums Ltd. 2005 Year End Results
CALGARY, March 21 /CNW/ - First Calgary Petroleums Ltd. (FCP or the
Company) announces its results for the year ended December 31, 2005.
HIGHLIGHTS
- Commercialisation and gas marketing discussions on the MLE field
progressing with Sonatrach with target of field declaration of
commerciality in 3rd quarter 2006
- Reserves independently assessed at gross proved and probable reserves
of approximately 4 Tcfe (FCP share 0.7 Tcfe) - in line with 2004
- New 7 well exploration/appraisal programme underway on Ledjmet Block
405b; first well LES-3 logged, cased and currently testing, with very
encouraging results to date
- 2 additional drilling rigs due to commence drilling on Block 405b in
April
- Target of significantly increasing proved and probable reserves on
Block 405b
- ZCH-2 well on Yacoub Block 406a penetrated a small hydrocarbon pool
separate from ZCH-1 discovery - decision on future activity on the
Block to be made by August 2006
- Management strengthened with appointment of new COO and CFO, and other
senior technical staff
Richard Anderson, President and CEO, commented:
"FCP has entered 2006 with renewed energy. The strategy is
straightforward. The Company has discovered reserves which are recognized as
world class in size. The focus now is to turn FCP into a full cycle
exploration and production company in order to maximize shareholder value. We
are pleased and excited with the calibre of people we are recruiting to assist
in the growth of the Company. We believe 2006 is going to be a year of great
progress."
There will be an analyst presentation on Tuesday March 21, 2006 at the
offices of Pelham PR starting at 8:15 a.m. GMT. The updated corporate
presentation will be available from the Company's website at www.fcpl.ca.
FCP has scheduled a conference call on March 21, 2006 for 9:00 a.m. ET,
2:00 p.m. GMT for investors and analysts. To participate in the conference
call, please dial:
UK: +44 (0) 208 515 2379 (2:00 p.m. GMT)
North America: +1 416 644 3416 (9:00 a.m. ET)
An archived recording of the conference call will be available for 30
days by calling:
UK: +44 (0) 208 515 2499 Passcode: 611692 followed by the
number sign
North America: +1 416 640 1917 Passcode: 21181900 followed by the number
sign
ENQUIRIES:
For further information, contact: First Calgary Petroleums Ltd., Richard
G. Anderson, President and CEO or John van der Welle, Finance Director
and CFO, Tel: (403) 264-6697, Website: www.fcpl.ca.
Other contacts: James Henderson, Pelham Public Relations,
Tel: +44 (0) 207 743 6673; Carina Corbett, 4C - Burvale Limited,
Tel: +44 (0) 207 907 4761.
Note: Throughout this press release, $ refers to the U.S. dollar and C$
refers to the Canadian dollar.
PRESIDENT'S REPORT TO SHAREHOLDERS
The decision was made in mid-2005 to commence a new phase in the
Company's development, transforming FCP from a pure exploration company into
an exploration and production company, initially focusing on the
commercialisation of the MLE reserves on Ledjmet Block 405b. Excellent
progress has been made to date in this regard, as well as with the drill-bit,
as the Company embarks on a further period of intense drilling and testing
operations.
STRATEGY
In late 2004 and the first half of 2005, FCP undertook an evaluation of
its strategic alternatives to determine the best way of maximizing shareholder
value following its earlier exploration successes in Algeria. A corporate
sales process was undertaken with the support of financial advisors; however
no acceptable commitments were received from interested third-parties and the
Board determined that the best way forward was to continue to explore,
appraise and develop its interests in the country.
Accordingly the strategy of the Company incorporates two principal
initiatives:
- commercialise Block 405b with a staged development plan initially based
on the MLE area of the Block; and
- increase proved and probable reserves through a programme of
exploration, appraisal drilling and completion activities.
In addition, looking at the longer term, FCP will seek to deploy its
existing exploration skills, knowledge and relationships to add value to its
asset base, such as by seeking other exploration opportunities in Algeria and
in the region.
OPERATIONAL PROGRESS
The Company has commenced a seven well drilling programme that, in
conjunction with a completion programme of recently drilled wells, will have
the goal of significantly increasing the gross proved and probable reserves of
approximately 4 trillion cubic feet equivalent (Tcfe) as established by
independent engineers DeGolyer and MacNaughton. The first well of the new
drilling programme, LES-3, has been logged and cased and is currently being
production tested, with very encouraging results to date. The drilling rig has
moved onto the next location, LEW-2. Two additional rigs are expected to
arrive on Block 405b and commence drilling during April.
COMMERCIALISATION
The commercialisation of the MLE field involves approval by the Algerian
authorities of the Final Discovery Report already submitted, leading to the
eventual approval of a development. A gas sale contract for dry gas will be
required, and discussions with Sonatrach on transportation and marketing,
amongst other matters, are now underway. In tandem, further engineering work
will be undertaken ahead of the award of an engineering, procurement and
construction (EPC) contract to a major upstream services company for the
development. FCP is targeting MLE development approval by the authorities -
the declaration of commerciality - in the third quarter of 2006, leading to an
EPC contract award in the first half of 2007 and first production in 2009.
FINANCE
The Company had working capital of $92.9 million at the end of 2005 -
sufficient to fund the current drilling programme. As stated in the 2005
quarterly reports to shareholders, beyond the current planned expenditures and
obligations, FCP will require additional capital to finance future capital
spending and operations. Financing alternatives are currently being
investigated to enable the Company to proceed to the development phase.
MANAGEMENT
To progress FCP from a pure exploration company to a full cycle
exploration and production company requires the strengthening of management
and staff. To this effect, FCP is pleased to report the new additions
effective January of this year.
Chief Operating Officer, Mr. Shane O'Leary, joins FCP with prior
experience with Encana, BP and Amoco. Mr. O'Leary has focused the majority of
his career in the international arena and brings valued leadership to the
commercialisation and project management processes.
Chief Financial Officer, Mr. John van der Welle, joins the FCP Board with
prior experience with Premier Oil, Hardy Oil and Gas, and Enterprise Oil; all
UK based international exploration and production companies. Mr. van der Welle
has considerable experience in business development and upstream financing and
will be based in the UK.
London: Mr. van der Welle has been joined in London by Mr. Martin
Layzell, formerly Vice President Exploration and now Senior Vice President and
Algeria Country Manager. As well, it is expected that additional professional
staff will be located in London, primarily involved in the commercialisation
process.
CalgaryStaff: Mr. Roger Whittaker has assumed the position of Vice
President Exploration and FCP is actively recruiting exploration, development
and support staff to continue the technical work on the projects in Calgary.
OPERATIONAL UPDATES
As stated, the Company is entering a period of increased operational
activity with three drilling rigs active from next month, and with multiple
testing and fraccing of wells as part of the ongoing testing programme. This
will generate considerable amounts of new data to be interpreted. It is
understood that shareholders and the market are interested in receiving
regular updates on progress. In addition to our quarterly and annual reports,
periodic press releases on operational matters will be made in accordance with
stock exchange disclosure rules. However, due to the complexity of the
operational programme, and the need to properly interpret and understand the
significance of drilling and testing data, individual well results will
normally only be released following completion of all drilling, fraccing and
testing operations on the well.
SUMMARY
FCP has entered 2006 with renewed energy. The strategy is
straightforward. The Company has discovered reserves which are recognized to
be world class in size. The focus now is to turn FCP into a full cycle
exploration and production company in order to maximize shareholder value. We
are pleased and excited with the calibre of people we are recruiting to assist
in the growth of the Company. We believe 2006 is going to be a year of great
progress.
OPERATIONS REVIEW
2005 saw continued activity on Blocks 405b and 406a in the Berkine Basin
onshore Algeria.
MENZEL LEDJMET BLOCK 405B
To date, FCP has drilled 12 wells on Block 405b with a 100 percent
success rate.
During the year, extensive geological studies were conducted which
assimilated the considerable amount of technical data acquired during the
drilling programmes of the previous two years. These included examinations of
the sedimentology, reservoir modelling and seismic attributes analysis. This
provided a detailed geological picture of the prolific and extensive
reservoirs of Block 405b.
Drilling activity on Block 405b during 2005 was minimal, as the rig was
utilized on Block 406a. However, site preparation and road construction work
continued throughout the year. To date, FCP has built 105 km of access road to
facilitate drilling operations. The LES-3 well commenced drilling in November
2005 and continued into early 2006. The rig then moved across to LEW-2, which
is currently drilling, and which is a step-out to the LEW-1 discovery.
In addition to the drilling of new wells, completions and testing
operations have continued steadily since the fourth quarter of 2005. This
activity has included testing operations on the LES-2 and -3 appraisal wells,
the MLE-5 and -6 appraisal wells, and on the LEW-1 and LEC-1 discoveries.
Hydraulic fracturing of tighter zones has also been done on four wells (MLE-6,
LEW-1, MZLN-1 and MZLS-1). The programme is still in its early stages but some
encouraging results have been seen on certain wells. On the basis of these
results, the techniques being applied will be modified for future operations.
The data arising from all this activity continues to be analysed and
incorporated into the overall geological model.
Readers are referred to the map of Block 405b which is available on the
Company's website at www.fcpl.ca.
RHOURDE YACOUB BLOCK 406A
The overall operational activity level on Block 406a in 2005 was
significant. The 610 km2 3D seismic programme started in 2004 was completed in
January 2005. This survey focused on the south-eastern part of the Block, in
the area of the ZCH-1 gas and condensate discovery which was drilled and
tested in 2004. The interpretation of the seismic survey identified two
suitable exploration locations: ZCHW-1 and RTN-1. These wells represented the
final two commitment wells required to be drilled under the terms of the
Rhourde Yacoub joint venture agreement.
The ZCHW-1 exploration well commenced drilling in April 2005 and reached
total depth in early June. Initial review of the petrophysical logs indicated
that several potential pay zones had been encountered but due to mechanical
problems during the cementing of the liner in this wellbore, the well was
abandoned without testing.
RTN-1 was the final commitment well on Block 406a and was drilled in late
summer 2005. No appreciable hydrocarbon shows were seen on logs and the well
was abandoned in September 2005.
With the end of the exploration period approaching and all commitments
completed, FCP decided to drill an appraisal well, ZCH-2, approximately 3 km
east of the ZCH-1 discovery well. In parallel with the operational programme,
a request was made of the Algerian authorities for an extension beyond
November 10, 2005 (the end of the exploration phase according to the contract)
to allow time for data analysis and evaluation of the ZCH field area.
The scheduled relinquishment of Block 406a, with the exception of a
112 km2 Appraisal Area around the ZCH-1 discovery, occurred on November 10,
2005. Following an initial three month extension, a further six month
extension was granted early in 2006, to August 10, 2006, by Sonatrach and the
Ministry of Energy and Mines.
The ZCH-2 well was tested in the first quarter of 2006. The logging and
testing results from ZCH-2 confirmed hydrocarbons in one zone, however the
data also indicated the well to be isolated from the ZCH-1 discovery well.
This essentially means that each well had penetrated a small, independent
hydrocarbon pool as opposed to a large areal accumulation. The results of the
Rhourde Yacoub drilling programme are being evaluated together with Sonatrach
and a decision will be made regarding future activity on the Block prior to
the end of the extension period.
Readers are referred to the map of Block 406a which is available on the
Company's website at www.fcpl.ca.
COMMERCIALISATION
The MLE field on Block 405b is now defined by six wells and has a large
proved and probable reserves base attributed to it. Late in 2005 discussions
were held with Sonatrach regarding the best approach to bringing the MLE field
into production. A key step in the process of commercialising a field in
Algeria is the presentation of a Final Discovery Report which covers the
following areas: geological mapping and reserves assessment; reservoir
modelling; conceptual engineering studies; economics; and gas markets.
The MLE field Final Discovery Report has been prepared in co-operation
with Sonatrach and submitted to the Algerian authorities for their review and
finalisation. FCP has also commenced discussions with Sonatrach regarding
either jointly (with Sonatrach) marketing the gas directly to an end buyer, or
contracting with Sonatrach for it to market our interest in the MLE gas on our
behalf, as part of its overall gas marketing process. FCP's development staff
are working closely with Sonatrach and the Algerian Ministry of Energy and
Mines on how best to bring the MLE field on production. The anticipated
timeline for the project leading to first production in 2009 is shown below.
To achieve this timing, it is planned to award a front end engineering and
design (FEED) contract by mid year. Following FEED, an EPC contract is planned
to commence in early 2007.
Readers are referred to the Production Timeline which is available on the
Company's website at www.fcpl.ca.
Although the MLE field is often referred to as a gas field there is a
significant amount of hydrocarbons in liquid form that will also be produced.
The liquids component is split predominantly into condensate and LPG. These
products are valuable components to the production stream, and may eventually
yield about 50 percent of the total revenue from the field. It is envisaged
that the field would initially produce at: dry gas 328 million cubic feet per
day; hydrocarbon liquids 40,000 barrels per day.
Eastern Algeria, where the Ledjmet Block is located, has been a petroleum
province for many years and has an extensive pipeline system to handle
production of liquids and gases from the region. Gas and liquids pipelines run
approximately 120 km west of the Block carrying hydrocarbons for export and
domestic use through a national grid extending from the eastern deserts to the
Mediterranean coast and the Algerian borders. The system is under constant
expansion by Sonatrach and plans are already in place for further increases in
capacity to handle the MLE production.
In addition to the detailed analysis of the MLE field characteristics,
the Final Discovery Report looks beyond the field boundaries at the other
significant discoveries made by FCP on Block 405b. The 'Block Plan' as
outlined in this document shows that the MLE field is only a starting point
for the region's gas production. Before the MLE field is on production, work
is planned to commence on the commercialisation of the other discoveries on
Block 405b to the west of MLE. This area will require further delineation
drilling before new field development activity can be initiated.
RESERVES
The gross and FCP net recoverable reserves attributable to its interests
in Block 405b and 406a estimated by independent engineers DeGolyer and
MacNaughton as at December 31, 2005 are set out in the table below. A further
analysis by Block is shown in Management's Discussion and Analysis.
Reserves have remained broadly the same as at the end of 2004, mainly due
to the limited drilling activity on Block 405b, which constitutes the major
portion of total reserves from the two Blocks.
RESERVES AS AT DECEMBER 31, 2005
-------------------------------------------------------------------------
Gross Recoverable Reserves Net Recoverable Reserves
-------------------------- ------------------------
Total Gas Total Gas
Gas Liquids Equivalent Gas Liquids Equivalent
(Bcf) (MMBbls) (Bcfe) (Bcf) (MMBbls) (Bcfe)
-------------------------------------------------------------------------
Proved
Undeveloped 636 81 1,122 131 19 245
Probable 1,539 250 3,039 187 48 475
-------------------------------------------------------------------------
Proved and
Probable 2,175 331 4,161 318 67 720
Possible 4,727 676 8,783 525 126 1,281
-------------------------------------------------------------------------
Proved,
Probable and
Possible 6,902 1,007 12,944 843 193 2,001
-------------------------------------------------------------------------
Notes:
(1) See explanatory notes in the Block 405b and Block 406a reserves
tables in Management's Discussion and Analysis.
(2) FCP's net reserves allocations are based upon the terms of the
contracts relating to each Block. The Ledjmet Block 405b reserves are
allocated annually based upon a sliding scale formula that considers
capital investment, production levels, product prices and rates of
inflation. Accordingly, the net allocation can vary annually and will
be dependant upon the costs, production levels and product prices
realised. For Yacoub Block 406a, FCP is allocated the equivalent of
49 percent of the gross production on an equivalent barrel basis.
(3) Gross development costs used in the determination of the future net
revenues were $619 million, $1.46 billion and $2.99 billion, on a
proved, proved plus probable, and proved plus probable plus possible
basis, respectively. FCP's share of these costs are $452 million,
$1.07 billion and $2.18 billion.
The net present value of future net revenues attributable to FCP's
interests in Blocks 405b and 406a as at the end of 2005 are shown in the table
below, at various discount rates and in constant prices. The prices used were
based on the Brent crude oil reference price of $58.21 per barrel at the end
of 2005. This represents a 44 percent increase from the price used as at the
end of 2004 ($40.47 per barrel). The Company's net present value has increased
significantly as at the end of 2005, predominantly as the result of the higher
prices assumed.
NET PRESENT VALUE OF FUTURE NET REVENUES
-------------------------------------------------------------------------
Discounted at (%/year)
------------------------------------
0 5 8
(M US$) (M US$) (M US$)
------------ ----------- -----------
Proved Undeveloped 1,316,249 807,967 599,229
Probable 2,701,914 1,734,001 1,336,998
------------ ----------- -----------
Total Proved Plus Probable 4,018,163 2,541,968 1,936,227
Possible 7,134,754 4,346,750 3,285,517
------------ ----------- -----------
Total Proved Plus Probable
Plus Possible 11,152,917 6,888,718 5,221,744
------------ ----------- -----------
------------ ----------- -----------
Discounted at (%/year)
------------------------------------
0 5 8
(M US$) (M US$) (M US$)
------------ ----------- -----------
Proved Undeveloped 488,370 283,303 149,947
Probable 1,125,280 729,575 466,343
------------ ----------- -----------
Total Proved Plus Probable 1,613,650 1,012,878 616,290
Possible 2,739,855 1,757,798 1,130,791
------------ ----------- -----------
Total Proved Plus Probable
Plus Possible 4,353,505 2,770,676 1,747,081
------------ ----------- -----------
------------ ----------- -----------
Notes:
(1) See explanatory notes in the Block 405b and Block 406a net preset
value tables in Management's Discussion and Analysis.
DRILLING PLAN
The operational plan for 2006 is an active one, as FCP plans to have
three drilling rigs operating on Block 405b before the end of April. The
principal aim of this programme is to generate additional proved and probable
reserves. Wells have been located in such a way as to maximize the probability
of achieving this goal. With LES-3 now undergoing production testing, the next
six wells have been approved by Sonatrach and comprise three appraisal and
three exploration wells. The Drilling Timeline below shows the currently
anticipated drilling schedule in respect of the programme.
Readers are referred to the Drilling Timeline which is available on the
Company's website at www.fcpl.ca.
Management's Discussion and Analysis
The discussion and analysis that follows is intended to provide a summary
of First Calgary Petroleums Ltd.'s (FCP, First Calgary or the Company)
activities and results over the past two years as well as its financial
position and future prospects. It should be read in conjunction with the
audited financial statements for the years ended December 31, 2005 and 2004.
All of the numbers in this discussion and analysis are expressed in U.S.
dollars unless otherwise indicated. Additional information is available on
FCP's website at www.fcpl.ca or on SEDAR's website at www.sedar.com.
BACKGROUND
First Calgary is an international oil and gas company currently operating
in the Republic of Algeria. Through hydrocarbon agreements with Sonatrach, the
national oil company of Algeria, FCP holds rights to explore, appraise and
develop two large acreage Blocks in the hydrocarbon bearing Berkine Basin;
Menzel Ledjmet Block 405b and Rhourde Yacoub Block 406a. The Company is in the
development stage, and as a result, currently has no revenue from oil and gas
operations.
Since acquiring the Blocks in late 2000 and 2001, First Calgary has made
a number of significant oil and gas discoveries. Independent reserve engineers
have assigned between 4.2 and 12.9 Tcfe(1) of reserves to the Blocks as at
December 31, 2005 (2P and 3P basis, respectively) (2 ).
FCP's share of the potential future net revenues(3) from these reserves
are estimated to be $1.9 billion to $5.2 billion, in present value terms
discounted at eight percent.
In creating these assets for its shareholders, First Calgary has spent
approximately $374 million of capital in Algeria. This capital was invested
in:
- Establishing the Company to do business in Algeria;
- Acquiring lease interests;
- Acquiring and processing over 2,000 km2 of three dimensional (3D)
seismic data providing complete coverage of FCP's lands;
- Drilling 17 wells, of which 13 were successful (76 percent). Eight of
the wells drilled were exploration, while the other nine were appraisal
wells; and
- Completing appraisal activities and a development plan for the first
segment to be commercialised (MLE field).
The ultimate commercialisation of the discoveries will transform the
Company into a significant oil and gas production company.
------------------------------
(1) Tcfe means trillion cubic feet of natural gas equivalent.
(2) 2P means Proved plus Probable reserves, 3P means Proved plus Probable
plus Possible reserves as defined by NI 51-101, Standards of Disclosures
for Oil and Gas Activities
(3) Net present value of future net revenues determined in accordance
with NI 51-101, Standards of Disclosures for Oil and Gas Activities,
using an 8 percent discount rate. Refer to the Company's Annual
Information Form (AIF) for details on the assumptions made in determining
the future net revenues. The estimated future net revenues do not
represent fair market value.
MENZEL LEDJMET BLOCK 405B
In 2001, First Calgary entered into a Production Sharing Contract (PSC)
with Sonatrach to explore and appraise Block 405b. The PSC consists of the
following periods:
- a five year exploration and appraisal period where FCP is required to
conduct certain drilling and seismic activities and identify any oil
and gas discoveries;
- an additional appraisal period that is extendable up to two years to
complete appraisal activities on oil and gas discoveries made during
the exploration period; and
- an exploitation period for each commercial oil and gas discovery of 25
to 30 years, respectively.
Exploration and Appraisal Activities
The five year exploration period of the PSC ends on December 29, 2006 at
which time First Calgary is required to have drilled its last commitment well
under the PSC. FCP's next well to be drilled, ZER-1, is scheduled to commence
in April and will satisfy this commitment.
During 2005, First Calgary spent $24.7 million on the following
exploration and appraisal activities on the Block:
- ongoing geological and geophysical analysis and studies;
- completed and production tested the LES-2 well;
- finished drilling and cased the MLE-6 well;
- prepared access roads and drill platforms for future drilling
locations;
- commenced drilling the LES-3 well; and
- initiated various testing and reservoir stimulation activities.
FCP's 2006 currently planned exploration and appraisal activities for
Block 405b are budgeted at approximately $80 million and includes a seven well
drilling programme, continued geological and geophysical analysis and a
testing and reservoir stimulation programme. These seven wells, including
LES-3 that commenced drilling in November 2005, are shown as proposed drilling
locations in the Block 405b map which is available on the Company's website at
www.fcpl.ca. The goal of the 2006 drilling programme is to further delineate
existing discoveries and explore undrilled structures before the end of the
exploration period, to retain the maximum area for appraisal and development.
The work completed on Block 405b to date has significantly exceeded the
minimum work obligations in the PSC. Exploration wells were spread out over
various locations in order to explore the Block as effectively as possible
within the five year exploration window provided by the PSC, and to maximize
acreage retained for appraisal and possible exploitation.
Exploitation Activities
Following the appraisal of each oil and gas discovery, FCP and Sonatrach
will obtain exploitation permits for any reserves determined to be commercial.
All areas not subject to an exploitation permit will be returned to the
Algerian government.
The PSC will allocate hydrocarbon production between FCP, Sonatrach and
the Algerian state in accordance with a sliding scale formula based on such
factors as production levels, product prices and project investment. Pursuant
to the formula, First Calgary's annual share of production will range from
27.72 percent to 8.16 percent. FCP will be allocated the 27.72 percent of
production until the Block's cumulative return on investment exceeds six
times. Once the Block's cumulative return on investment exceeds eight times,
FCP will be allocated 8.16 percent of production. Return on investment is
calculated in 2001 dollars based on the ratio of gross revenues to gross
capital investment on the entire Block. All Algerian state royalties and
income taxes are paid by Sonatrach from its share of hydrocarbon production.
The PSC provides Sonatrach with the right to participate in any field
development with a 25 percent interest.
The MLE field is the first discovery that has been appraised by FCP and
will be the first stage in the development of the Block. During 2005, reserve
analysis, reservoir modeling and conceptual engineering work continued in
order to evaluate various development scenarios. A development plan has been
outlined and submitted to Sonatrach as part of the MLE field Final Discovery
Report, for review. Subject to finalizing marketing and financing
arrangements, First Calgary expects to obtain a declaration of commerciality
from Sonatrach and apply to the Ministry for an exploitation permit.
Simultaneously, FCP will move forward on front end engineering and design
(FEED), the next step towards commercialisation, in order to accelerate the
project.
The reserves, and associated potential future net cash flows of a staged
Block development attributable to FCP, are as follows:
BLOCK 405B RESERVES AS AT DECEMBER 31, 2005
-------------------------------------------------------------------------
Gross Recoverable Reserves Net Recoverable Reserves
-------------------------- ------------------------
Total Gas Total Gas
Gas Liquids Equivalent Gas Liquids Equivalent
(Bcf) (MMBbls) (Bcfe) (Bcf) (MMBbls) (Bcfe)
-------------------------------------------------------------------------
Proved
Undeveloped 622 77 1,084 131 16 227
Probable 1,468 227 2,830 187 30 367
-------------------------------------------------------------------------
Proved and
Probable 2,090 304 3,914 318 46 594
Possible 4,504 599 8,098 525 69 939
-------------------------------------------------------------------------
Proved,
Probable and
Possible 6,594 903 12,012 843 115 1,533
-------------------------------------------------------------------------
Notes:
(1) The gross and net recoverable reserves volumes are estimated under
the constant price case.
(2) Liquids consist of Oil, Condensate and LPG.
(3) FCP's net reserves allocations are based on the PSC where production
is allocated annually based upon a sliding scale formula that
considers capital investment, production levels, product prices and
rates of inflation. Accordingly, the net allocation can vary annually
and will be dependant upon the costs, production levels and product
prices realized.
(4) Gas equivalents have been calculated by the Company at one barrel for
six thousand cubic feet of gas equivalent. Using gas equivalent units
may be misleading, particularly if used in isolation. A conversion
ratio of one barrel to six thousand cubic feet of gas is based on an
energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the
wellhead.
(5) Bcf means billion cubic feet of gas, Bcfe means billion cubic feet of
gas equivalent and MMBbls means millions of barrels of liquid.
(6) Net recoverable reserves assumes Sonatrach exercises its right to
participate in the developments.
BLOCK 405B NET PRESENT VALUE OF FUTURE NET REVENUES
-------------------------------------------------------------------------
Discounted at (%/year)
------------------------------------
0 5 8
(M US$) (M US$) (M US$)
------------ ----------- -----------
Proved Undeveloped 1,239,467 755,016 556,844
Probable 2,412,482 1,553,503 1,199,786
------------ ----------- -----------
Total Proved Plus Probable 3,651,949 2,308,519 1,756,630
Possible 6,187,123 3,740,018 2,817,379
------------ ----------- -----------
Total Proved Plus Probable
Plus Possible 9,839,072 6,048,537 4,574,009
------------ ----------- -----------
------------ ----------- -----------
Discounted at (%/year)
------------------------------------
10 15 20
(M US$) (M US$) (M US$)
------------ ----------- -----------
Proved Undeveloped 451,832 258,120 132,649
Probable 1,010,582 655,446 417,709
------------ ----------- -----------
Total Proved Plus Probable 1,462,414 913,566 550,358
Possible 2,344,826 1,496,902 956,379
------------ ----------- -----------
Total Proved Plus Probable
Plus Possible 3,807,240 2,410,468 1,506,737
------------ ----------- -----------
------------ ----------- -----------
Notes:
(1) The net present values of future net revenues are estimated under the
constant price case using prices based on the Brent crude reference
price of $58.21 per barrel at the end of 2005.
(2) Refer to the Company's AIF for further details on the assumptions
made in determining the future net revenues. Gross development costs
used in the determination of the future net revenues were
$569 million, $1.37 billion and $2.75 billion, on a proved, proved
plus probable, and proved plus probable plus possible basis,
respectively. Assuming Sonatrach exercises its right to back-in for
25 percent, FCP will be responsible for 75 percent of these costs.
(3) The estimated future net revenues do not represent fair market value.
(4) Calculated as at the end of 2005.
RHOURDE YACOUB BLOCK 406A
In 2000, First Calgary entered into a Joint Venture Agreement (JVA) with
Sonatrach to explore and appraise Block 406a. The Block was exploratory in
nature, but adjacent to existing oil production. The JVA's five year
exploration period ended on November 10, 2005 and was extended to August 10,
2006 to complete appraisal activities. The Block acreage has been relinquished
except for that portion surrounding the ZCH discovery.
During 2005, First Calgary spent $27.4 million on the following
exploration and appraisal activities on the Block:
- completed the acquisition and interpretation of the 2004 3D seismic
programme
- drilled and cased the ZCHW-1 commitment well;
- drilled and abandoned the RTN-1 commitment well; and
- drilled and cased the ZCH-2 appraisal well.
Pursuant to the JVA, exploitation periods for each commercial oil and gas
discovery are 15 and 20 years, respectively, plus a five year extension
option. During the exploitation period, the JVA allocates to the Company
49 percent of the hydrocarbon production (as gas and liquids value or as
equivalent liquids value). FCP is responsible for paying Algerian state
royalties and income taxes on its share of production. A portion of the total
recoverable natural gas reserves will be considered strategic reserves and
excluded by Algerian law from the JVA.
The Block 406a 2006 capital programme is budgeted at approximately $5
million and includes completing and production testing the ZCH-2 well,
reprocessing the ZCH 3D seismic data and evaluating potential development
scenarios. A decision on the way forward with this Block is planned by
August 2006.
BLOCK 406A RESERVES AS AT DECEMBER 31, 2005
-------------------------------------------------------------------------
Gross Recoverable Reserves Net Recoverable Reserves
-------------------------- ------------------------
Total Gas Total Gas
Gas Liquids Equivalent Gas Liquids Equivalent
(Bcf) (MMBbls) (Bcfe) (Bcf) (MMBbls) (Bcfe)
-------------------------------------------------------------------------
Proved
Undeveloped 14 4 38 - 3 18
Probable 71 23 209 - 18 108
-------------------------------------------------------------------------
Proved and
Probable 85 27 247 - 21 126
Possible 223 77 685 - 57 342
-------------------------------------------------------------------------
Proved,
Probable and
Possible 308 104 932 - 78 468
-------------------------------------------------------------------------
Notes:
(1) The gross and net recoverable reserves volumes are estimated under
the constant price case.
(2) Liquids consist of Oil, Condensate and LPG.
(3) FCP's net reserves allocations are defined as the volume of oil,
condensate and LPG that comprise First Calgary's 49 percent joint
venture interest in the estimated recoverable reserves of the Block,
on a barrel of oil equivalent basis.
(4) Gas equivalents have been calculated by the Company at one barrel for
six thousand cubic feet of gas equivalent. Using gas equivalent units
may be misleading, particularly if used in isolation. A conversion
ratio of one barrel to six thousand cubic feet of gas is based on an
energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the
wellhead.
(5) Bcf means billion cubic feet of gas, Bcfe means billion cubic feet of
gas equivalent and MMBbls means millions of barrels of liquid.
BLOCK 406A NET PRESENT VALUE OF FUTURE NET REVENUES (1)
-------------------------------------------------------------------------
Discounted at (%/year)
------------------------------------
0 5 8
(M US$) (M US$) (M US$)
----------------------------------- ------------ ----------- -----------
Proved Undeveloped 76,782 52,951 42,385
Probable 289,432 180,498 137,212
------------ ----------- -----------
Total Proved Plus Probable 366,214 233,449 179,597
Possible 947,631 606,732 468,138
------------ ----------- -----------
Total Proved Plus Probable
Plus Possible 1,313,845 840,181 647,735
------------ ----------- -----------
------------ ----------- -----------
Discounted at (%/year)
------------------------------------
10 15 20
(M US$) (M US$) (M US$)
----------------------------------- ------------ ----------- -----------
Proved Undeveloped 36,538 25,183 17,298
Probable 114,698 74,129 48,634
------------ ----------- -----------
Total Proved Plus Probable 151,236 99,312 65,932
Possible 395,029 260,896 174,412
------------ ----------- -----------
Total Proved Plus Probable
Plus Possible 546,265 360,208 240,344
------------ ----------- -----------
------------ ----------- -----------
Notes:
(1) The net present values of future net revenues are estimated under the
constant price case using prices based on the Brent crude reference
price of $58.21 per barrel at the end of 2005.
(2) Refer to the Company's AIF for further details on the assumptions
made in determining the future net revenues. Gross development costs
used in the determination of the future net revenues were
$50 million, $96 million and $238 million, on a proved, proved plus
probable, and proved plus probable plus possible basis, respectively.
FCP's share of these costs is 49 percent.
(3) The estimated future net revenues do not represent fair market value.
(4) Calculated as at the end of 2005.
CAPITAL EXPENDITURES
The Company's 2005 capital expenditures on Blocks 405b and 406a totaled
$64.1 million compared to $108.6 million in 2004, reflecting a decreased level
of exploration and appraisal activity.
2005 CAPITAL EXPENDITURES Block 405b Block 406a Total
-------------------------------------------------------------------------
Drilling, completion and testing $ 24,266 $ 26,251 $ 50,517
Geological and geophysical 336 1,269 1,605
MLE commercialisation 5,501 - 5,501
Training bonuses 161 168 329
-------------------------------------------------------------------------
$ 30,264 $ 27,688 $ 57,952
Block management and administration 6,158
-------------------------------------------------------------------------
$ 64,110
-------------------------------------------------------------------------
2004 CAPITAL EXPENDITURES Block 405b Block 406a Total
-------------------------------------------------------------------------
Drilling, completion and testing $ 81,265 $ 10,330 $ 91,595
Geological and geophysical 5,697 4,993 10,690
MLE commercialisation 823 - 823
Training bonuses 152 156 308
-------------------------------------------------------------------------
$ 87,937 $ 15,479 $ 103,416
Block management and administration 5,193
-------------------------------------------------------------------------
$ 108,609
-------------------------------------------------------------------------
There are a number of factors that impact drilling costs, including the
well location and access, surface condition, well depth and availability of
services and supplies. The Block 406a wells are being drilled to depths
averaging 3950 metres and the Block 405b wells to 4500 metres. Ongoing
drilling costs are expected to range between $6 and $7 million per well on
Block 406a and between $7 and $8 million per well on Block 405b. In addition,
testing and completion costs on the Block 405b wells have averaged $2 to $3
million per well due to multiple zones being tested and to maximize the data
collected.
LIQUIDITY AND CAPITAL RESOURCES
Without revenue from oil and gas operations, FCP relies upon equity to
fund its short-term operations and capital programmes. In 2005, FCP raised
$104.6 million, net of issue costs, from the sale of 16,925,000 common shares.
Additional funding is derived periodically from the exercise of stock options
and warrants. In 2005, 2,835,919 common shares were issued from the exercise
of options and warrants, resulting in $2.3 million in proceeds.
Development of the Ledjmet Block 405b reserves through to commercial
production will require significant funding. This funding is expected to be in
the form of debt, equity, joint ventures or some combination thereof. With the
current high commodity price environment, the capital markets appear receptive
to the oil and gas industry and the Company believes this environment will
continue into the foreseeable future. First Calgary has been approached by a
number of parties seeking to fund the Ledjmet development. To date, no
arrangements have been entered into, however the Company believes the
necessary funding will be available when required on reasonable commercial
terms.
FCP's 2006 ongoing seven well exploration and appraisal programme will be
funded from the Company's 2005 year end working capital. The Company's year
end working capital was $92.9 million compared to $52.1 million in the prior
year. Changes in the Company's working capital are primarily a function of the
timing and magnitude of its equity financings and capital expenditures, as
detailed below:
SOURCES (USES) OF WORKING CAPITAL
-------------------------------------------------------------------------
Working capital at December 31, 2004 $ 52,115
Equity issues 104,610
Proceeds from the exercise of options and warrants 2,271
Capital expenditures (64,110)
Net administrative costs (1,966)
-------------------------------------------------------------------------
Working capital at December 31, 2005 $ 92,920
-------------------------------------------------------------------------
The Company is listed on the Toronto Stock Exchange and the AIM market of
the London Stock Exchange. The fully-diluted number of shares outstanding at
the following dates were:
SHARES OUTSTANDING March 14, December 31,
2006 2005
-------------------------------------------------------------------------
Common shares 203,052,127 202,847,594
Employee stock options 9,638,500 9,132,033
-------------------------------------------------------------------------
Fully-diluted shares outstanding 212,690,627 211,979,627
-------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
The Company has the following contractual obligations outstanding as at
December 31, 2005:
CONTRACTUAL OBLIGATIONS Payments Due by Period
-------------------------------------------------------------------------
less than 1 - 3 greater than
Total 1 year years 4 years
-------------------------------------------------------------------------
Operating Leases $ 742 $ 421 $ 321 -
Consulting Agreements 5,000 5,000 - -
Exploration Commitments(1) 7,000 7,000 - -
Drill Rig Contracts(2) 8,985 6,690 2,295 -
-------------------------------------------------------------------------
$ 21,727 $ 19,111 $ 2,616 -
-------------------------------------------------------------------------
(1) Relates to the last exploration well commitment under the Block 405b
PSC, to be drilled in Q2 2006.
(2) Amounts are the minimum payments required under the rig contracts.
OPERATING RESULTS
Selected Annual Information
(000's of U.S. dollars) 2005 2004 2003
-------------------------------------------------------------------------
Interest income $ 3,013 $ 1,290 $ 638
-------------------------------------------------------------------------
Expenses
General and administrative 4,746 4,027 2,604
Stock-based compensation 5,514 5,181 4,679
Foreign exchange loss (gain) 208 (1,542) 578
Write-off Yemen investment - - 1,035
Earthquake donation - Algeria - - 1,000
Other expenses 116 189 392
-------------------------------------------------------------------------
10,584 7,855 10,288
-------------------------------------------------------------------------
Net loss (7,571) (6,565) (9,650)
Net loss per share (0.04) (0.04) (0.07)
Total Assets $ 482,776 $ 393,042 $ 164,363
-------------------------------------------------------------------------
Interest income increased $1.7 million in 2005 as a result of higher
average interest rates and higher average cash and term-deposit balances.
General and administrative expenses increased $0.7 million in 2005 from
2004. The increase is primarily the result of incremental costs associated
with the strategic review process.
FCP recorded a net foreign exchange loss of $0.2 million during 2005,
arising from the effects of exchange rate fluctuations on Canadian dollar and
British pound cash and accounts payable balances.
Selected Quarterly Information
2005
(000's of U.S. dollars) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Interest income $ 887 $ 1,039 $ 428 $ 659
-------------------------------------------------------------------------
Expenses
General and
administrative 1,192 1,001 1,414 1,139
Stock-based compensation 3,892 373 503 746
Foreign exchange loss
(gain) (70) (2,181) 932 1,527
Other expenses 54 49 46 (33)
-------------------------------------------------------------------------
5,068 (758) 2,895 3,379
-------------------------------------------------------------------------
Net income (loss) (4,181) 1,797 (2,467) (2,720)
Net income (loss) per share (0.02) 0.01 (0.01) (0.01)
Total Assets $ 482,776 $ 478,103 $ 475,286 $ 375,384
-------------------------------------------------------------------------
2004
(000's of U.S. dollars) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Interest Income $ 386 $ 251 $ 238 $ 415
-------------------------------------------------------------------------
Expenses
General and
administrative 1,165 904 1,048 910
Stock-based compensation 1,442 975 1,375 1,389
Foreign exchange loss
(gain) (820) (2,151) 1,137 292
Other expenses (102) 109 92 90
-------------------------------------------------------------------------
1,685 (163) 3,652 2,681
-------------------------------------------------------------------------
Net Income (loss) (1,299) 414 (3,414) (2,266)
Net Income (loss) per share (0.01) 0.00 (0.02) (0.01)
Total Assets $ 393,042 $ 179,912 $ 169,229 $ 169,912
-------------------------------------------------------------------------
Stock-based compensation increased in the fourth quarter of 2005 as a
result of the expense relating to a company-wide stock option grant and
options granted to new employees.
During the third quarter of 2005 FCP realized a foreign exchange gain on
the conversion of the June equity financing proceeds into U.S. dollars. Those
financing proceeds were denominated in Canadian dollars and British pounds.
BUSINESS RISKS AND UNCERTAINTIES
The Company's business is subject to risks inherent in oil and gas
exploration and development operations. In addition, there are risks
associated with the Company's development stage of operations and the foreign
jurisdiction in which it operates. The Company has identified certain risks
pertinent to its business including: exploration and reserve risks, drilling
and operating risks, costs and availability of materials and services, capital
markets and the requirement for additional capital, loss of or changes to
production sharing, joint venture or related agreements, economic and
sovereign risks, possibility of less developed legal systems, reliance on
strategic relationships, market risk, volatility of future oil and gas prices
and foreign currency risk.
FCP attempts to monitor, assess and mitigate certain of these risks by
retaining an experienced team of professionals and using modern technology.
Further, the Company has focused its activities in a known hydrocarbon basin
in a jurisdiction that has previously established long-term oil and gas
ventures with foreign oil and gas companies, existing infrastructure of
services and oil and gas transportation facilities, and reasonable proximity
to markets. The Company also retains consultants resident in Algeria to
monitor economic and political developments and to assist with operating,
administrative and legal matters. There are certain risks, however, over which
the Company has little or no control.
OUTLOOK
First Calgary's strategy is primarily to commercialise Block 405b and
increase proved and probable reserves. The plan for 2006 is to make progress
with both of these, through its commercialisation discussions with Sonatrach
and capital investment programme. In addition, financing alternatives are
currently being investigated to enable the Company to proceed to the
development phase.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Petroleum and Natural Gas Operations
FCP follows the full cost method to account for its petroleum and natural
gas operations, whereby all costs of exploring for and developing petroleum
and natural gas reserves are capitalized and accumulated in country-by-country
cost centres. These capitalized costs will be depleted using the unit-of-
production method based on estimates of proved reserves. The costs in cost
centres from which there has been no commercial production are not subject to
depletion until commercial production commences. These capitalized costs are
assessed to determine whether it is likely such costs will be recovered in the
future. Costs which are not likely to be recovered in the future are written-
off.
Petroleum and natural gas reserves form the basis for a number of
accounting estimates and support for the carrying amount of petroleum and
natural gas properties. The estimation of reserves is a subjective process.
Forecasts are based on engineering data, projected future rates of production,
estimated commodity price forecasts and the timing of future expenditures, all
of which are subject to numerous uncertainties and various interpretations.
The Company expects that its estimates of reserves will change to reflect
updated information. Reserve estimates can be revised upward or downward based
on the results of future drilling, testing, production levels and economics of
recovery based on cash flow forecasts.
ADVISORY REGARDING FORWARD-LOOKING STATEMENTS
Certain information with respect to the Company contained in this report,
including management's assessment of future plans and operations, contains
forward-looking statements. These forward-looking statements are based on
assumptions and are subject to numerous risks and uncertainties, some of which
are beyond FCP's control, including the impact of general economic conditions,
industry conditions, volatility of commodity prices, currency exchange rate
fluctuations, reserve estimates, environmental risks, competition from other
explorers, stock market volatility and ability to access sufficient capital.
FCP's actual results, performance or achievement could differ materially from
those expressed in, or implied by, these forward-looking statements and,
accordingly, no assurance can be given that any events anticipated by the
forward-looking statements will transpire or occur.
March 20, 2006
FIRST CALGARY PETROLEUMS LTD.
Consolidated Balance Sheets
December 31
(Expressed in thousands of U.S. dollars)
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
Assets
Current assets:
Cash and short-term deposits (note 3) $ 107,882 $ 81,874
Accounts receivable 338 357
Deposits and prepaid expenses 387 758
-----------------------------------------------------------------------
108,607 82,989
Property, plant and equipment (note 4) 374,169 310,053
-------------------------------------------------------------------------
$ 482,776 $ 393,042
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities
(note 5) $ 15,687 $ 30,874
Asset retirement obligations (note 6) 436 339
Shareholders' equity:
Capital stock (note 7) 484,694 377,288
Contributed surplus (note 7) 14,430 9,441
Cumulative translation adjustment 6,502 6,502
Deficit (38,973) (31,402)
-----------------------------------------------------------------------
466,653 361,829
Operations and commitments (notes 2 and 10)
Contingency (note 12)
-------------------------------------------------------------------------
$ 482,776 $ 393,042
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
FIRST CALGARY PETROLEUMS LTD.
Consolidated Statements of Operations and Deficit
Years ended December 31
(Expressed in thousands of U.S. dollars)
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
Revenue:
Interest $ 3,013 $ 1,290
-----------------------------------------------------------------------
Expenses:
General and administrative 4,746 4,027
Stock-based compensation (note 7) 5,514 5,181
Foreign exchange loss (gain) 208 (1,542)
Capital taxes 25 110
Depreciation and accretion 91 79
-----------------------------------------------------------------------
10,584 7,855
-------------------------------------------------------------------------
Loss for the year (7,571) (6,565)
Deficit, beginning of year (31,402) (24,837)
-------------------------------------------------------------------------
Deficit, end of year $ (38,973) $ (31,402)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loss per share (note 7) $ (0.04) $ (0.04)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
FIRST CALGARY PETROLEUMS LTD.
Consolidated Statements of Cash Flows
Years ended December 31
(Expressed in thousands of U.S. dollars)
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
Operating activities:
Loss for the year $ (7,571) $ (6,565)
Items not involving cash:
Stock-based compensation 5,514 5,181
Unrealized foreign exchange loss (gain) 398 (1,612)
Depreciation and accretion 91 79
---------------------------------------------------------------------
(1,568) (2,917)
Change in non-cash working capital (3,220) 1,430
-----------------------------------------------------------------------
(4,788) (1,487)
Financing activities:
Proceeds from issuance of shares 110,502 74,242
Proceeds from exercise of warrants 177 6,602
Proceeds from exercise of options 2,094 2,394
Issue costs (5,892) (4,320)
-----------------------------------------------------------------------
106,881 78,918
Investing activities:
Capital expenditures (64,110) (108,609)
Change in non-cash working capital (11,821) 16,255
-----------------------------------------------------------------------
(75,931) (92,354)
-------------------------------------------------------------------------
Increase (decrease) in cash and short-term
deposits 26,162 (14,923)
Effect of exchange rate fluctuations on cash
and short-term deposits (154) 1,612
Cash and short-term deposits, beginning of year 81,874 95,185
-------------------------------------------------------------------------
Cash and short-term deposits, end of year $ 107,882 $ 81,874
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
FIRST CALGARY PETROLEUMS LTD.
Notes to Consolidated Financial Statements
Years ended December 31, 2005 and 2004
(Expressed in thousands of U.S. dollars unless otherwise indicated)
-------------------------------------------------------------------------
First Calgary Petroleums Ltd. (the "Company" or "FCP") is incorporated in
Alberta under the Business Corporations Act (Alberta) and its primary
business activity is the exploration for and development of petroleum and
natural gas in Algeria.
1. Significant accounting policies:
(a) Basis of presentation:
The consolidated financial statements have been prepared using
Canadian generally accepted accounting principles and include the
accounts of the Company and its wholly owned subsidiaries.
(b) Petroleum and natural gas operations:
The Company follows the full cost method of accounting for
petroleum and natural gas operations, whereby all costs of
exploring for and developing petroleum and natural gas reserves
are capitalized and accumulated in country-by-country cost
centres. Such costs include land acquisition costs, geological
and geophysical costs, carrying charges on non-producing
properties, costs of drilling both productive and non-productive
wells, interest costs on major development projects and overhead
charges directly related to acquisition, exploration and
development activities.
The costs (including exploratory dry holes) in cost centres from
which there has been no commercial production are not subject to
depletion until commercial production commences. The capitalized
costs are periodically assessed, using a ceiling test, to
determine whether it is likely such costs will be recovered in
the future. To the extent there are costs which are not likely to
be recovered in the future, they are written-off.
Petroleum and natural gas properties are subject to a ceiling
test in each reporting period to determine that the costs are
recoverable and do not exceed the fair value of the properties.
The costs are assessed to be recoverable if the sum of the
undiscounted cash flows expected from the production of proved
reserves and the lower of cost and market of unproved properties
exceed the carrying values of the petroleum and natural gas
properties. If the carrying value of the petroleum and natural
gas properties is not assessed to be recoverable, an impairment
loss is recognized to the extent that the carrying value exceeds
an estimated fair value. The fair value estimate is normally
based on the sum of the discounted cash flows expected from the
production of proved and probable reserves and the lower of cost
and market of unproved properties. The cash flows are estimated
using forecast product prices and costs and are discounted using
a risk-free interest rate.
(c) Asset retirement obligations:
The Company recognizes the estimated fair value of legal
obligations associated with the retirement of petroleum and
natural gas properties in the period in which they are incurred.
The obligation is recorded as a liability with a corresponding
increase in the carrying amount of the petroleum and natural gas
properties. The capitalized amount will be depleted on a unit-of-
production basis over the life of the proved reserves. The
obligation is increased each period, or accretes, due to the
passage of time and is recorded in the statement of operations.
Revisions to the estimated fair value would result in an
adjustment to the obligation and carrying amount of the petroleum
and natural gas properties.
(d) Foreign currency:
All of the Company's operations are considered financially and
operationally integrated. The U.S. dollar is the Company's
functional currency. As a result, monetary assets and liabilities
denominated in foreign currencies are translated at exchange
rates in effect at the balance sheet date and non-monetary assets
and liabilities are translated at rates in effect when the assets
were acquired or liabilities incurred. Revenues and expenses are
translated at rates of exchange prevailing on the transaction
dates. Foreign exchange gains and losses are recorded in the
statement of operations.
(e) Stock-based compensation:
The Company accounts for all stock options and warrants granted
using the fair value method. Under this method, compensation
expense is measured at fair value at the grant date using the
Black-Scholes option pricing model and recognized over the
vesting period with a corresponding credit to contributed
surplus.
Consideration received upon the exercise of stock options
together with the amount of non-cash compensation expense
recognized in contributed surplus is recorded as share capital.
(f) Income taxes:
The Company uses the asset and liability method of accounting for
income taxes. Under this method current income taxes are
recognized for the estimated income taxes payable for the current
year. Future income taxes are recognized for temporary
differences between the tax and accounting bases of assets and
liabilities and for the benefit of losses available to be carried
forward for tax purposes that are likely to be realized. Future
tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on future tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the date of enactment or
substantive enactment.
(g) Use of estimates:
The preparation of financial statements in conformity with
Canadian generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses.
The ceiling test is based upon estimates of market values of
unproved properties, proved reserves, petroleum and natural gas
prices, future costs and other assumptions. These estimates are
subject to measurement uncertainty and the effect on the
financial statements of changes in such estimates could be
significant.
(h) Per share amounts:
Basic per share amounts are computed by dividing the earnings or
loss by the weighted average shares outstanding during the
reporting period. Diluted amounts are computed using the treasury
stock method. The treasury stock method assumes that proceeds
received from the exercise of in-the-money options and warrants
are used to repurchase shares at the average market price for the
period. The difference between the number of shares that could
have been purchased at market prices in the period and the number
of in-the-money options and warrants is added to the weighted
average shares outstanding.
2. Operations and commitments:
The Company's operations are in Algeria where it has the rights to
explore, appraise and develop two blocks, Ledjmet Block 405b ("Block
405b") and Yacoub Block 406a ("Block 406a"). The Company's rights and
obligations in each Block are set out in agreements with Sonatrach,
the national oil company of Algeria.
(a) Block 405b:
In 2001 the Company entered into a production-sharing contract
(PSC) with Sonatrach to explore and appraise Block 405b in the
Berkine Basin. The five year exploration period of the PSC ends
on December 29, 2006. FCP's remaining work commitment under the
PSC is to drill one exploration well (ZER-1) prior to the end of
the exploration period and is expected to cost $7 million. If the
Company fails to satisfy this work obligation, the rights, other
than for which an exploitation permit has been granted or
requested, will be returned and the Company will be liable to pay
Sonatrach a penalty of $6.25 million. In addition, the Company is
obligated to pay an annual training bonus in the amount of $150
for the duration of the contract, including exploitation periods.
Each discovery made during the exploration period is subject to
an appraisal work programme that may extend up to two years
beyond the exploration period. Following the appraisal of each
discovery, the Company and Sonatrach will obtain exploitation
permits for any reserves determined to be commercial and all
lands not subject to an exploitation permit will be returned to
the government. During the exploitation period, the PSC allocates
hydrocarbon production between FCP, Sonatrach and the Algerian
State in accordance with a sliding scale formula based on such
factors as production levels, product prices, project
investments and rates of inflation. Pursuant to the formula, the
Company's annual share of production may range from 27.72 to
8.16 percent. All Algerian state royalties and income taxes are
paid by Sonatrach from its share of hydrocarbon production.
Exploitation periods for each commercial oil and natural gas
discovery are 25 and 30 years, respectively.
The PSC provides the Company with the right to appraise and
develop the MLE reserves discovered with the MLE-1 well. As
compensation for this right, the Company is committed to pay
Sonatrach a reserve-based access fee of twenty-five cents per
barrel of oil equivalent calculated on the total estimated
recoverable MLE reserves. The access fee will be determined at
the time MLE reserves are declared commercial by Sonatrach and
will be payable as a deduction from Sonatrach's share of the MLE
development expenditures.
(b) Block 406a:
In 2000 the Company entered into a joint venture agreement (JVA)
with Sonatrach to explore Block 406a in the Berkine Basin. The
five year exploration period ended on November 10, 2005 at which
time the Block acreage, excluding the acreage surrounding the ZCH
discovery, was returned to the Algerian government. All of the
exploration work commitments on this Block were satisfied. The
Company has been granted an extension to August 10, 2006 to
complete its appraisal and delineation of the ZCH reserves and to
submit a development plan.
Pursuant to the JVA, exploitation periods for each commercial oil
and natural gas discovery are 15 and 20 years respectively, plus
a five year extension option. During the exploitation period, the
JVA allocates 49 percent of the hydrocarbon production or
equivalent volume thereof to the Company. FCP is responsible for
paying Algerian state royalties and income taxes on its share of
production. A portion of the total recoverable natural gas
reserves above a certain threshold will be considered strategic
reserves and excluded by Algerian law from the JVA. In addition,
the Company is obligated to pay an annual training bonus in the
amount of $150 for the duration of the contract, including
exploitation periods.
While the Company currently has sufficient resources to meet its
required work commitments, these resources may be directed to other,
optional capital programmes depending on the success of expenditures
and other opportunities which become available to the Company. In
addition, the development of the Company's reserves through to
commercial production will require additional funding in the form of
debt, equity, joint ventures or some combination thereof. FCP is
currently evaluating several development scenarios for the MLE field.
The estimated gross development costs of the various scenarios range
up to $860 million (FCP net $645 million). To develop the Block 405b
total proved, probable and possible reserves, gross development costs
could reach an estimated $2.75 billion (FCP net $2.1 billion). FCP is
obligated to finance 75 percent of the development expenditures,
assuming Sonatrach will exercise its right to participate in a
development.
3. Cash and short-term deposits:
The Company considers deposits in banks, certificates of deposit and
short-term investments with original maturities of three months or
less as cash and short-term deposits. The components of cash and
short-term deposits are as follows:
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Cash on deposit:
U.S. dollars $ 2,759 $ 1,833
Algerian dinars 1,614 577
Canadian dollars 438 482
British pounds 152 1,574
Bank term deposits:
U.S. dollars 98,454 506
Canadian dollars 3,672 22,079
British pounds 793 54,823
---------------------------------------------------------------------
$ 107,882 $ 81,874
---------------------------------------------------------------------
---------------------------------------------------------------------
As at December 31, 2005, $1.8 million of cash was restricted until
January 2006 for an inventory purchase.
4. Property, plant and equipment:
---------------------------------------------------------------------
Accumulated Net book
2005 Cost depreciation value
---------------------------------------------------------------------
Petroleum and natural gas
properties - Algeria $ 373,809 $ - $ 373,809
Office furniture and equipment 626 266 360
---------------------------------------------------------------------
$ 374,435 $ 266 $ 374,169
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated Net book
2004 Cost depreciation value
---------------------------------------------------------------------
Petroleum and natural gas
properties - Algeria $ 309,751 $ - $ 309,751
Office furniture and equipment 504 202 302
---------------------------------------------------------------------
$ 310,255 $ 202 $ 310,053
---------------------------------------------------------------------
---------------------------------------------------------------------
During the year, the Company capitalized $6.1 million (2004 -
$5.2 million) of overhead charges relating directly to the
exploration and development activities in Algeria.
5. Accounts payable and accrued liabilities:
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Trade payables:
U.S. dollars $ 6,160 $ 13,004
Algerian dinars 2,760 3,746
Canadian dollars 456 2,151
British pounds 119 423
Capital accrual:
U.S. dollars 6,192 11,550
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$ 15,687 $ 30,874
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6. Asset retirement obligations:
The Company has an obligation to plug and abandon its petroleum and
natural gas wells at the end of their useful lives provided Sonatrach
does not elect to continue production after the hydrocarbon contract
expiry dates. The present value of this obligation has been projected
using estimates of the future costs and the timing of abandonment. At
December 31, 2005 the Company estimated the present value of its
asset retirement obligations to be $0.4 million (2004 - $0.3 million)
based on a future liability of $1.9 million (2004 - $1.6 million).
These costs are expected to be incurred near the end of the
exploitation phase under the Algerian hydrocarbon contracts. A
credit-adjusted risk-free discount rate of seven percent and an
inflation rate of two percent were used to calculate the present
value.
7. Capital stock:
(a) Authorized share capital:
Unlimited number of common shares without nominal or par value
Unlimited number of preferred shares without nominal or par value
(b) Issued share capital:
---------------------------------------------------------------------
Number of
Shares Amount
---------------------------------------------------------------------
Common Shares:
Balance, December 31, 2003 163,056,686 $ 165,181
Acquisition of net profits interest (i) 10,150,000 132,600
Issued on public offering (ii) 6,000,000 74,242
Issued on exercise of share purchase
warrants 1,844,424 6,602
Issued on exercise of employee stock
options 2,035,565 2,394
Transfer from contributed surplus on
exercise of stock options and warrants - 589
Issue costs - (4,320)
---------------------------------------------------------------------
Balance, December 31, 2004 183,086,675 377,288
Issued on public offering (iii) 16,925,000 110,502
Issued on exercise of share purchase
warrants 68,785 177
Issued on exercise of employee stock
options 1,867,134 1,576
Issued on exercise of non-employee
stock options (iv) 900,000 518
Transfer from contributed surplus on
exercise of stock options and warrants - 525
Issue costs - (5,892)
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Balance, December 31, 2005 202,847,594 $ 484,694
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---------------------------------------------------------------------
(i) In October 2004, the Company issued 10,150,000 common shares to
acquire an overriding five percent net profits interest that
previously encumbered Blocks 405b and 406a.
(ii) In December 2004, the Company issued 6,000,000 common shares
for gross proceeds of $74.2 million (4,637,192 common shares at
pnds stlg 6.50 per share and 1,362,808 common shares at C$14.46
per share). The issue costs were $4.2 million.
(iii) In June 2005, the Company issued 16,925,000 common shares for
gross proceeds of $110.5 million (10,577,100 common shares at
C$8.10 per share and 6,347,900 common shares at pnds stlg 3.59
per share). The issue costs were $5.9 million.
(iv) Relates to stock options granted to consultants in 2002. All
options were exercised in 2005.
(c) Employee stock options:
The Company has 10,309,096 common shares reserved for issuance
pursuant to its Stock Option Plan. Stock options granted under
the plan have a term of five years and vesting terms are at the
discretion of the Board. The exercise price of each option is
equal to the closing market price of the shares on the date
preceding the date of the grant.
The following table summarizes the changes in stock options
outstanding:
----------------------------------------------------------------------
Weighted
Average
Number of Exercise
Options Price
---------------------------------------------------------------------
Outstanding, December 31, 2003 9,018,401 C$ 2.47
Granted 880,000 9.83
Exercised (2,035,565) 1.45
Cancelled (233,335) 6.55
---------------------------------------------------------------------
Outstanding, December 31, 2004 7,629,501 3.47
Granted 3,563,000 6.34
Exercised (1,867,134) 1.01
Cancelled (193,334) 10.03
---------------------------------------------------------------------
Outstanding, December 31, 2005 9,132,033 C$ 4.95
---------------------------------------------------------------------
----------------------------------------------------------------------
The following table summarizes information about the options
outstanding and exercisable at December 31, 2005:
---------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Price Options Life Price Options Price
---------------------------------------------------------------------
C$0.50-0.82 902,700 0.84 years C$0.66 902,700 C$0.66
C$1.25-1.25 505,000 1.42 years 1.25 505,000 1.25
C$2.36-2.95 900,000 2.09 years 2.60 900,000 2.60
C$4.72-4.72 2,497,333 2.83 years 4.72 2,497,333 4.72
C$6.21-6.39 3,378,000 4.91 years 6.27 1,109,333 6.27
C$7.45-8.59 610,000 3.77 years 7.68 383,333 7.65
C$10.95-15.77 339,000 3.51 years 11.72 224,000 11.43
---------------------------------------------------------------------
9,132,033 3.34 years C$4.95 6,521,699 C$4.26
---------------------------------------------------------------------
---------------------------------------------------------------------
(d) Common share purchase warrants:
The following table summarizes the changes in common share
purchase warrants outstanding:
---------------------------------------------------------------------
Weighted
Average
Number of Exercise
Warrants Price
---------------------------------------------------------------------
Outstanding, December 31, 2003 1,913,209 C$ 4.70
Exercised (1,844,424) 4.76
---------------------------------------------------------------------
Outstanding, December 31, 2004 68,785 3.15
Exercised (68,785) 3.15
---------------------------------------------------------------------
Outstanding, December 31, 2005 - C$ -
---------------------------------------------------------------------
---------------------------------------------------------------------
(e) Stock-based compensation expense:
For the year ended December 31, 2005, the Company recorded
$5.5 million (2004 - $5.2 million) as stock-based compensation
expense with a corresponding increase in contributed surplus. The
fair value of the options granted in 2005 was estimated to be
C$2.98 (2004 - C$5.34) per option and was determined using the
Black-Scholes option pricing model with the following
assumptions: expected volatility of 67 percent (2004 - 81
percent), risk-free interest rate of 3.7 percent (2004 - 3.7
percent) and expected lives of 3 years (2004 - 3 years).
(f) Contributed surplus:
The changes in contributed surplus balance are as follows:
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Balance, beginning of year $ 9,441 $ 4,849
Options granted 5,514 5,181
Options and warrants exercised (525) (589)
---------------------------------------------------------------------
Balance, end of year $ 14,430 $ 9,441
---------------------------------------------------------------------
---------------------------------------------------------------------
(g) Per share amounts:
The loss per share is based on the weighted average shares
outstanding for the year. The weighted average shares outstanding
for 2005 were 192,873,482 (2004 - 167,749,193).
8. Income taxes:
Income tax expense differs from the amount that would be computed by
applying the Canadian federal and provincial statutory income tax
rates to the loss for the year as follows:
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Loss for the year $ (7,571) $ (6,565)
Statutory tax rate 37.6% 38.6%
Expected income tax recovery at statutory
rate (2,848) (2,534)
Increase (decrease) resulting from:
Non-deductible stock-based compensation
expenses 2,074 2,000
Increase in valuation allowance 1,263 498
Other (489) 36
---------------------------------------------------------------------
$ - $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
The components of the future income tax asset at December 31 are
summarized below:
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Operating losses $ 5,362 $ 4,115
Property, plant and equipment 3,341 3,211
Share issue costs 5,236 3,255
---------------------------------------------------------------------
13,939 10,581
Less: valuation allowance (13,939) (10,581)
---------------------------------------------------------------------
$ - $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
The operating losses expire over the following years:
$
2006 425
2007 340
2008 880
2009 1,090
Thereafter to 2015 13,215
9. Financial instruments:
The Company is exposed to foreign currency fluctuations as it holds
Canadian dollar and British pound cash and short-term deposits and
accounts payable. In addition, a portion of the Company's costs are
incurred in Canadian dollars. There are no exchange rate contracts in
place.
The fair value of the Company's financial instruments, including cash
and short-term deposits, accounts receivable and accounts payable and
accrued liabilities approximate their carrying values due to their
short terms to maturity.
10. Leases and other commitments:
The Company is committed to office and equipment leases over the next
five years as follows:
$
2006 421
2007 262
2008 40
2009 19
In addition, as part of its Algerian operations, the Company has
minimum contractual commitments for drilling rigs and consulting
services totaling $11.7 million in 2006 and $2.3 million in 2007.
11. Segmented information:
The Company's activities are conducted in two geographic segments:
Canada and Algeria. All activities relate to exploration and
development of petroleum and natural gas in Algeria.
---------------------------------------------------------------------
2005 Canada Algeria Total
---------------------------------------------------------------------
Revenue $ 3,013 $ - $ 3,013
Expenses 10,584 - 10,584
---------------------------------------------------------------------
Loss for the year $ (7,571) $ - $ (7,571)
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures $ 35 $ 64,075 $ 64,110
---------------------------------------------------------------------
---------------------------------------------------------------------
Assets $ 108,732 $ 374,044 $ 482,776
---------------------------------------------------------------------
---------------------------------------------------------------------
----------------------------------------------------------------------
2004 Canada Algeria Total
---------------------------------------------------------------------
Revenue $ 1,290 $ - $ 1,290
Expenses 7,855 - 7,855
---------------------------------------------------------------------
Loss for the year $ (6,565) $ - $ (6,565)
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital expenditures $ 67 $ 241,142 $ 241,209
---------------------------------------------------------------------
---------------------------------------------------------------------
Assets $ 81,991 $ 311,051 $ 393,042
---------------------------------------------------------------------
----------------------------------------------------------------------
Capital expenditures in 2004 include the non-cash acquisitions of the
overriding five percent net profits interest of $132.6 million.
12. Contingency:
The Company has received a notification of a potential claim from a
third party referring to a consultancy agreement and purporting to be
entitled to a remuneration of 2.5 percent of the general revenue
generated by the Company's Algerian oil fields, as a net profits
interest and $250 thousand of fees payable. FCP disputes the validity
of this potential claim.
For further information: contact: First Calgary Petroleums Ltd., Richard
G. Anderson, President and CEO or John van der Welle, Finance Director and
CFO, Tel: (403) 264-6697, Website: www.fcpl.ca; Other contacts: James
Henderson, Pelham Public Relations, Tel: +44 (0) 207 743 6673; Carina Corbett,
4C - Burvale Limited, Tel: +44 (0) 207 907 4761
(FPL)
END
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