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WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the
Company") provides its results for the period ended March 31, 2011, key
highlights, and activities to date.
On May 31, 2011, WesternZagros made an oil discovery in the Jeribe Formation at
the Sarqala-1 exploration well. The Company tested the well at rates up to 9,444
barrels per day of 40 degree API oil. This rate was reached after flowing and
stabilizing the well at progressively bigger choke sizes until reaching the
limits of the surface equipment. The final rate was achieved on a 52/64 inch
choke with a wellhead pressure of 2,475 psi. No water was produced during this
initial testing program. No stimulation was applied to the well but there
remains the potential to do so at a later date. Efforts will now be directed
toward evaluating and sourcing surface equipment and trucking facilities by the
end of 2011 to start producing and selling oil during an extended well testing
program.
Subsequent to March 31, 2011, the Company concluded negotiations with the
Ministry of Natural Resources of the Kurdistan Regional Government of Iraq
("KRG") and Talisman (Block K44) B.V. ("Talisman") to amend the Production
Sharing Contract ("the "Original PSC") that governs the Company's exploration
activities in the Kalar-Bawanoor Block in Kurdistan. Once approved, the
amendments will divide the contract area of the Original PSC into two contract
areas, each under a separate PSC. The northern contract area (comprising some
340 square kilometres) will remain under an amended version of the Original PSC
(the "Kurdamir PSC") and will be called the Kurdamir Block. The southern
contract area (comprising some 1,780 square kilometres) will be governed under a
new Garmian PSC and will be known as the Garmian Block. The Company is awaiting
formal approval of both the Kurdamir and Garmian PSC's from the Oil and Gas
Council of the KRG and execution of the PSC's by the KRG. The PSC's will extend
the time available to complete the remaining first exploration sub-period work
obligations to drill Mil Qasim-1 by December 31, 2011, and will add an
additional well commitment to drill Kurdamir-2 by June 30, 2012. WesternZagros'
40 percent ownership and other economic terms will remain unchanged in both the
Kurdamir PSC and the Garmian PSC.
Commenting on the first quarter results and subsequent events, WesternZagros
Chief Executive Officer Simon Hatfield said, "We are pleased with the negotiated
amendments to the Original PSC to enable us to focus our efforts on our drilling
operations over the next year. The Company is looking forward with great
anticipation to evaluating the full potential of the Sarqala-1 oil discovery
through an extended well testing program. We're proceeding with our target of
discovering over one billion barrels of oil equivalent through drilling the next
two wells at Mil Qasim-1 and Kurdamir-2."
Summary of Exploration Activities Completed and Exploration Opportunities Being
Pursued
About Kurdamir
- WesternZagros began drilling the Kurdamir-1 well in May 2009, and announced a
large Oligocene gas and condensate discovery in November 2009. The well reached
a total depth of 4,077 metres in January 2010. Testing performed in December
2010 confirmed an oil column in the Oligocene reservoir at Kurdamir-1 beneath
the gas cap. Technical analysis of the oil shows encountered in the well to date
support oil potential in the Oligocene, Eocene and Cretaceous formations. Under
the Kurdamir PSC, the Kurdamir-2 well will be required to be drilled by June 30,
2012 and it is expected to commence drilling in the fourth quarter of 2011.
About Sarqala
- WesternZagros began drilling the Sarqala-1 well in May 2008 and suspended the
well in early 2009. In March 2011, the Company re-entered the well and drilled a
100 metre sidetrack through the Jeribe Formation. The Company confirmed an oil
discovery in the Jeribe Formation after flowing light, 40 degree API oil.
Currently the Company is evaluating and preparing for an extended well test at
Sarqala-1 by the end of 2011 including sourcing the required surface and
trucking facilities to start producing and selling oil.
About Mil Qasim
- Mil Qasim is a structure, the crest of which lies approximately three
kilometres from the Sarqala-1 well. Target reservoirs are Upper Fars sandstones,
which are anticipated to be oil bearing. The Mil Qasim-1 well must be drilled by
December 31, 2011 and it is expected to commence drilling in July 2011.
About Qulijan and Baran
- Qulijan and Baran are attractive prospects located close to the Kurdamir-1
discovery well. Both Qulijan and Baran are anticline structures with upside
potential related to the fault that separates them from Kurdamir in the
Oligocene, Eocene and Cretaceous Formations.
Management's Discussion and Analysis
The following management's discussion and analysis ("MD&A") reviews
WesternZagros Resources Ltd.'s ("WesternZagros" or the "Company") financial
condition, activities and results of operations for the period ended March 31,
2011. It should be read in conjunction with the unaudited condensed consolidated
interim financial statements prepared under International Financial Reporting
Standards for the period ended March 31, 2011, and the audited consolidated
financial statements for the year ended December 31, 2010 prepared under
Canadian Generally Accepted Accounting Principles and the related notes. The
effective date of this MD&A is June 29, 2011.
Forward-Looking Information
This discussion offers management's analysis of the financial and operating
results of WesternZagros and contains certain forward-looking statements
relating to, but not limited to, operational information, future drilling plans
and testing programs and the timing associated therewith, future production and
sales, estimated commitments under the Company's existing Production Sharing
Contract (the "Original PSC"), an amended Production Sharing Contract ("Kurdamir
PSC") and new Production Sharing Contract for the Garmian area ("Garmian PSC"),
anticipated capital and operating budgets, anticipated insurance recoveries,
anticipated working capital and estimated costs. Forward-looking information
typically contains statements with words such as "anticipate", "estimate",
"expect", "potential", "could", or similar words suggesting future outcomes. The
Company cautions readers and prospective investors in the Company's securities
to not place undue reliance on forward-looking information as, by its nature, it
is based on current expectations regarding future events that involve a number
of assumptions, inherent risks and uncertainties, which could cause actual
results to differ materially from those anticipated by WesternZagros. Readers
are also cautioned that disclosed test rates may not be indicative of ultimate
production levels.
Forward looking information is not based on historical facts but rather on
management's current expectations and assumptions regarding, among other things,
outcomes of future well operations, extended well tests, plans for and results
of drilling activity, future capital and other expenditures (including the
amount, nature and sources of funding thereof), future economic conditions,
future currency and exchange rates, continued political stability, timely
receipt of any necessary government or regulatory approvals including those for
the Kurdamir PSC and Garmian PSC, the Company's continued ability to employ
qualified staff and to obtain equipment in a timely and cost efficient manner,
the participation of the Company's co-venture partners in exploration
activities, the timing of the third party participant assignment in the Garmian
PSC, and the timely receipt of insurance proceeds. In addition, budgets are
based upon WesternZagros' current exploration plans and anticipated costs, both
of which are subject to change based on, among other things, the actual outcomes
of well operations and the results of drilling activity, unexpected delays,
availability of future financing and changes in market conditions. Although the
Company believes the expectations and assumptions reflected in such
forward-looking information are reasonable, they may prove to be incorrect.
Forward-looking information involves significant known and unknown risks and
uncertainties. A number of factors could cause actual results to differ
materially from those anticipated by WesternZagros including, but not limited
to, risks associated with the oil and gas industry (e.g. operational risks in
exploration; inherent uncertainties in interpreting geological data; changes in
plans with respect to exploration or capital expenditures; interruptions in
operations together with any associated insurance proceedings; denial of any
portion of the insurance claims; the uncertainty of estimates and projections in
relation to costs and expenses and health, safety and environmental risks), the
risk of commodity price and foreign exchange rate fluctuations, the uncertainty
associated with negotiating with foreign governments, and risk associated with
international activity.
In addition, statements relating to "resources" contained herein are deemed to
be forward-looking statements, as they involve the implied assessment, based on
certain estimates and assumptions that the resources described can be
economically produced in the future. Terms related to resource classifications
referred to herein are based on the definitions and guidelines in the Canadian
Oil and Gas Evaluation Handbook which are as follows. "Contingent resources" are
those quantities of petroleum estimated, as of a given date, to be potentially
recoverable from known accumulations using established technology or technology
under development, but which are not currently considered to be commercially
recoverable due to one or more contingencies. Contingent resources have an
associated chance of development (economic, regulatory, market and facility,
corporate commitment or political risks). The estimates referred to herein have
not been risked for the chance of development. There is no certainty that the
contingent resources will be developed and, if developed, there is no certainty
as to the timing of such development or that it will be commercially viable to
produce any portion of the contingent resources. "Prospective resources" are
those quantities of petroleum estimated, as of a given date, to be potentially
recoverable from undiscovered accumulations by application of future development
projects. Prospective resources have both an associated chance of discovery
(geological chance of success) and a chance of development (economic,
regulatory, market, facility, corporate commitment or political risks). The
chance of commerciality is the product of these two risk components. The
estimates referred to herein have not been risked for either the chance of
discovery or the chance of development.
There is no certainty that any portion of the prospective resources will be
discovered. If a discovery is made, there is no certainty that it will be
developed or, if it is developed, there is no certainty as to the timing of such
development or that it will be commercially viable to produce any portion of the
prospective resources. All resource estimates presented are gross volumes for
the indicated reservoirs, without any adjustment for working interest or
encumbrances. A barrel of oil equivalent (BOE) is determined by converting a
volume of natural gas to barrels using the ratio of 6 million cubic feet (Mcf)
to one barrel. BOEs may be misleading, particularly if used in isolation. A BOE
conversion ratio of 6 Mcf:1 BOE is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent a value
equivalency at the wellhead. The Company's material change reports filed on
SEDAR at www.sedar.com and dated December 16, 2010, January 17, 2011 and
February 22, 2011 contain additional detail on the information used in the
resource assessments and include the risks and level of uncertainty associated
with the recovery and development of the resources, the significant positive and
negative factors relevant to the estimates and, in respect of contingent
resources, the specific contingencies which prevent the classification of the
resources as reserves.
Readers are cautioned that the foregoing list of important factors is not
exhaustive. The forward-looking statements contained in this MD&A are made as of
the date of this MD&A and, except as required by law, WesternZagros does not
undertake any obligation to update publicly or to revise any of the included
forward-looking statements, whether as a result of new information, future
events or otherwise. The forward-looking statements contained in this MD&A are
expressly qualified by this cautionary statement. See the Risk Factors section
of this MD&A for a further description of these risks and uncertainties facing
WesternZagros. Additional information relating to WesternZagros is also
available on SEDAR at www.sedar.com, including the Company's Annual Information
Form.
Overview
WesternZagros is a publicly-traded, Calgary-based, international oil and gas
company engaged in acquiring properties and exploring for, developing and
producing crude oil and natural gas in Iraq. WesternZagros currently holds the
Original PSC with the Kurdistan Regional Government ("KRG") which covers a 2,120
square kilometre exploration block (the "Kalar-Bawanoor Block" or "PSC Lands")
and it is on trend with, and adjacent to, a number of prolific historic oil and
gas discoveries. WesternZagros holds a 40 percent working interest, the KRG
holds a 20 percent working interest (the costs of which are carried by
WesternZagros) and a wholly-owned subsidiary of Talisman Energy Inc.
("Talisman"), holds the remaining 40 percent working interest (collectively
known as the "Contractor Group"). Subsequent to March 31, 2011, the Company
concluded negotiations with the Ministry of Natural Resources of the KRG and
Talisman to amend the Original PSC that governs the Company's exploration
activities in the Kalar-Bawanoor Block. Once approved, the amendments will
divide the contract area of the Original PSC into two contract areas, each now
under a separate PSC. The Company is awaiting formal approval of both the
Kurdamir and Garmian PSC's from the Oil and Gas Council of the KRG and execution
of the PSC's by the KRG. (See "PSC Commitments" discussion in this MD&A for a
summary of the material amendments to the Original PSC and remaining
commitments.)
Basis of Presentation
Reporting and Functional Currency
The Company has prepared its March 31, 2011 unaudited Condensed Consolidated
Interim Financial Statements in accordance with International Financial
Reporting Standards ("IFRS"). These are the Company's first condensed
consolidated interim financial statements prepared under IFRS. Accordingly, the
transition date to IFRS was January 1, 2010, and comparative information for
2010, including that utilized in this MD&A, has been prepared in accordance with
the Company's IFRS accounting policies. Please refer to "Adoption of IFRS"
section of this MD&A for further descriptions of this impact.
The reporting and functional currency of the Company is the United States
("U.S.") dollar. All references herein to US$ or to $ are to United States
dollars and references herein to Cdn$ are to Canadian dollars.
Highlights
WesternZagros is currently exploring for crude oil and natural gas in the
Kurdistan Region of Iraq and the Company currently has no reserves or
production. WesternZagros' revenue is comprised entirely of interest earned on
cash and cash equivalent balances and short-term investments. WesternZagros'
highlights and activities for the first quarter of 2011 to June 29, 2011 include
the following.
HSE&S
- Awareness and implementation of best practices with respect to health, safety,
environment and security continues to be a high priority commitment of the Board
of Directors, Executive Management, employees and contractors to all of the
local residents and to the staff and contractors involved in its operations.
WesternZagros has achieved a total of 245 days without any Lost Time Incidents
("LTIs") to June 29, 2011.
Operations
- WesternZagros made an oil discovery in the Jeribe Formation at the Sarqala-1
exploration well. The Company re-entered the Sarqala-1 well bore on March 29,
2011, and completed an approximate 100 metre sidetrack to a depth of 3,893
metres. Drilling shows and log results indicated a potential gross pay interval
of over 55 metres in this zone. The Jeribe Formation flowed light, 40 degree API
oil at a stabilized rate of 6,000 barrels per day over the 24 hours of the
initial flow period. This rate was achieved through a 36/64 inch choke at a
flowing well head pressure of 3,900 psi and without any stimulation. No water
was produced during this flow. The Company then tested the well at rates up to
9,444 barrels per day of 40 degree API oil. This rate was reached after flowing
and stabilizing the well at progressively bigger choke sizes until reaching the
limits of the surface equipment. The final rate was achieved on a 52/64 inch
choke with a wellhead pressure of 2,475 psi. No water was produced during this
initial testing program. No stimulation was applied to the well but there
remains the potential to do so at a later date. On June 7, 2011 the Company
successfully completed the initial testing of this oil discovery.
- WesternZagros has completed site construction and secured the 2,000 HP Viking
Drilling Rig #10 through a contract with Maritas Co., a subsidiary of Viking
International of the United States, to drill the Mil-Qasim-1 well. The
anticipated spud date of the Mil Qasim-1 well is in July 2011.
- During the first quarter of 2011, WesternZagros and Talisman agreed on the
drilling location for Kurdamir-2. Kurdamir-2 is approximately two kilometres
away from Kurdamir-1 and the well will target the Oligocene, Eocene and
Cretaceous Formations. WesternZagros and Talisman are currently preparing the
drilling plan for Kurdamir-2, and have begun to source long lead time materials.
Exploration
- The exploration work performed during the three month period ended in March
31, 2011 refined the Company's understanding of the regional geology and
petroleum geology on its PSC Lands, and reinforced management's view of the
excellent prospects for significant oil discoveries on the Company's PSC Lands.
- The Company's exploration work included integration of field geology work into
the Company's understanding of the Oligocene and Jeribe reservoirs and a
detailed fracture analysis study of the Oligocene reservoir in the Kurdamir-1
well.
- WesternZagros also continues to compile seismic data and information from
wells adjacent to its PSC Lands and to integrate the data, together with the
reprocessed seismic data on its PSC Lands, into its seismic interpretations to
further define and update its prospects and leads inventory.
- On January 17, 2011 Sproule International Limited ("Sproule") completed an
independent audit of the Company's resource assessment of the following: the
Tertiary Eocene and Cretaceous reservoir intervals of Kurdamir-1; and the Jeribe
reservoir at Sarqala-1 and the Upper Fars reservoir at Mil Qasim-1. The combined
mean estimate of gross unrisked prospective resources for these five prospects
is 792 million barrels of oil or 1,083 million barrels of oil equivalent when
gas and condensate are included.
- On February 22, 2011, Sproule completed a further independent audit of the
Company's resource assessment that covered stacked reservoirs in three multiple
prospect areas of the PSC Lands in the Kurdistan Region of Iraq. The audit
covered the following: the Oligocene, Eocene and Cretaceous reservoir intervals
at the Qulijan prospect; the Oligocene and Eocene reservoirs at the Baran
prospect; and the Oligocene, Eocene and Cretaceous reservoirs at the Sarqala
prospect. This audit, together with the previous audit results announced on
December 16, 2010 and January 17, 2011, increased the combined mean estimate of
gross unrisked prospective resources on the Company's PSC Lands to 1,092 million
barrels of oil, or 1,771 million barrels of oil equivalent when gas and
condensate are included.
Financial
- WesternZagros closed a private placement offering (the "Offering") of common
shares of the Company on March 10, 2011. The Company sold, through a syndicate
of agents, 89,665,352 shares at a price of Cdn. $0.48 per share for gross
proceeds of Cdn. $43 million. The syndicate of agents was led by TD Securities
Inc. and Scotia Capital Inc. and included Macquarie Capital Markets Canada Ltd.,
RBC Capital Markets and Stifel Nicolaus Canada Inc. The net proceeds from the
Offering will be used by the Company for: the drilling of the Company's
Sarqala-1 re-entry well and the Mil Qasim-1 exploration well; future exploration
on the Company's oil and gas properties; working capital and for general
corporate purposes. As at March 31, 2011, WesternZagros had $66.0 million in
working capital.
- For the three months ended March 31, 2011, WesternZagros' share of capital
expenditures, associated with its Original PSC activities and other capitalized
costs was $15.5 million (net of disposals and prior to the impact of changes in
non-cash investing capital). Expenditures for the first quarter of 2011 included
$13.0 million of drilling-related costs; $0.3 million of geological and
geosciences related work; $1.6 million of supervision and field office costs;
and $0.6 million of other Original PSC-related expenditures. These Original PSC
expenditures reflect the requirement that WesternZagros fund 100 percent of the
Sarqala-1 sidetracking and testing as an exclusive operation.
Insurance
- WesternZagros has reached an agreement with its insurers to settle its
insurance claim for a total of $45 million (of which $40.6 million has been
received to date). The Company and its insurers have also agreed to terms to
renew its insurance policy for the drilling of Kurdamir-2. These terms include
an increase in the net aggregate limit from $45 million to $75 million.
Corporate
- Subsequent to March 31, 2011, the Company concluded negotiations with the
Ministry of Natural Resources of the KRG and Talisman to amend the Original PSC
that currently governs the Company's exploration activities in Kurdistan. Once
approved, the amendments will divide the contract area of the Original PSC into
two contract areas, each under a separate PSC. The northern contract area
(comprising some 340 square kilometres) will remain under an amended version of
the Original PSC (the "Kurdamir PSC") and will be called the Kurdamir Block. The
southern contract area (comprising some 1,780 square kilometres) will be
governed under a new Garmian PSC and will be known as the Garmian Block. The
Company is awaiting formal approval of both the Kurdamir and Garmian PSC's from
the Oil and Gas Council of the KRG and execution of the PSC's by the KRG.
- The PSC's will extend the time available to complete the first exploration
sub-period work obligations and will add an additional commitment well. The
drilling commitments will comprise a well (Mil Qasim-1) on the Garmian Block and
a well (Kurdamir-2) on the Kurdamir Block. Under the Kurdamir PSC, the
Kurdamir-2 well will be required to be drilled by June 30, 2012 to evaluate the
Oligocene, Eocene and Cretaceous formations, with Talisman as operator. Under
the Garmian PSC, WesternZagros will remain the operator of the Garmian Block,
which contains the Sarqala-1 well and a number of attractive drill-ready
prospects including Mil Qasim, Baran and Qulijan. WesternZagros will be
committed to drill the Mil Qasim-1 exploration well on the Garmian Block by the
end of 2011. WesternZagros' 40 percent ownership and other economic terms will
remain unchanged in both the Kurdamir PSC and the Garmian PSC.
Political
- In late 2010 and early 2011, Prime Minister Maliki and Minister of Oil Luaibi,
of the Federal Government of Iraq were both quoted as voicing their support for
the Kurdistan Region's PSC's in their current form. Further to this, an
agreement was reached to resume exports in February, 2011 from the Kurdistan
Region including from both the Taq Taq field and the Tawke field with a goal to
export 200,000 barrels per day by the end of 2011.
- In April 2011, the Prime Minister of the Kurdistan Regional Government ("KRG")
presented the first KRG oil export statement to the Iraq federal Finance
Ministry of over five million barrels delivered to the State Oil Marketing
Organization ("SOMO"). Subsequently, the Iraqi Federal Ministry of Finance
confirmed the release of the first oil export payment to the KRG to compensate
the KRG's contractors for past costs. The amount released to the KRG was equal
to approximately 50 percent of net revenues and several of the KRG's contractors
involved in the production of the exported crude oil, (DNO International ASA,
TTOPCO), have confirmed receipt of their portion of the net revenue. This is the
first time that KRG contractors have been paid as a result of revenues received
from the Federal Government of Iraq and provides the opportunity for the
generation of cash flows from an extended well test at Sarqala.
Corporate Social Responsibility
- WesternZagros and its co-venturers continued to focus on three key corporate
social responsibility initiatives in the Garmian region of Kurdistan - water
supply, education and health care. Activities included:
-- Requested water resistivity studies in relation to Qulijan Sarhad village
from the Garmian Water Directorate, with the view to examining potential for a
water well project.
-- Reviewing the feasibility of a water project in Shakal.
-- Purchase of material for a school refurbishment project in Kawa Churma village.
-- Distribution of school supply backpacks to approximately 1,300 primary school
children in Sarqala sub-district.
-- Refurbishment of Omer Mil Health Clinic, near Sarqala Village that services
up to 1,000 people in the area.
-- Planning a comprehensive refurbishment to Aziz Zadr Health Clinic.
-- Purchase and distribution of sports equipment to villages in the Garmian region.
General and Administrative Expenses
For the quarter ended March 31, 2011, WesternZagros expensed $1.8 million in
general and administrative expenses ("G&A"), compared to $1.8 million for the
prior year, and capitalized $1.0 million of G&A compared to $0.6 million in
2010. The amounts capitalized are directly related to the supervision of the
Company's exploration and evaluation activities. Total G&A costs were relatively
consistent between the first quarter of 2011 and 2010, as the increase in US
dollar costs incurred resulting from a stronger Canadian dollar in 2011, which
impacts a large portion of the Company's G&A expenditures, was offset by lower
legal and other consulting fees as compared to the same quarter in 2010.
Depreciation, Depletion and Amortization (DD&A)
For the quarter ended March 31, 2011, WesternZagros had $0.05 million
depreciation related to certain administrative assets, compared to $0.2 million
for the quarter ended March 31, 2010. No depletion of exploration and evaluation
expenditures will be recognized until such time that the technical feasibility
and commercial viability of reserves have been demonstrated and the development
of those reserves has been sanctioned, in which case the assets would then be
reclassified as development expenditures, tested for impairment, and depleted on
a unit of production basis.
Share based payments
The Company recognized the expense associated with share based payments on a
graded vesting basis for all stock options granted. For the quarter ended March
31, 2011, WesternZagros recorded $0.2 million in stock based compensation
expense and $0.1 million as part of capitalized G&A, with a corresponding
increase to contributed surplus. For the quarter ended March 31, 2010,
WesternZagros recorded $0.3 million in stock-based compensation expense, and
$0.1 million as part of capitalized G&A.
Foreign Exchange
WesternZagros adopted the U.S. dollar as its measurement and reporting currency
since the majority of its expenditures are or will be directly or indirectly
denominated in U.S. dollars and to facilitate a more direct comparison to other
international crude oil and natural gas exploration and development companies.
As at March 31, 2011, WesternZagros held approximately 80 percent of its cash
and cash equivalents in U.S. dollar accounts and U.S. dollar overnight term
deposits. The Company also has certain assets and liabilities in currencies
other than the U.S. dollar (mainly Canadian dollars). For financial statement
presentation purposes, WesternZagros converts other currencies to U.S. dollars
at the end of each period resulting in foreign exchange gains and losses.
Canadian dollar balances are held for the purpose of funding WesternZagros'
Canadian dollar expenditures, which are mainly related to the costs associated
with general and administrative costs for its head office and certain
drilling-related services and tangible equipment procured from Canadian
suppliers. For the quarter ended March 31, 2011, WesternZagros recorded a
foreign exchange loss of $0.1 million relating to these conversions, compared to
a $0.05 million foreign exchange loss for the quarter ended March 31, 2010.
Income Taxes
For the quarter ended March 31, 2011, WesternZagros had a net income tax
recovery of $0.5 million (2010: $0.6 million recovery), comprised of $0.5
million of current income tax recovery (2010: $0.7 million recovery) and a
negligible future income tax recovery (2010: $0.1 million expense). The current
tax recovery relates to the expected recovery of taxes incurred in 2008 on
realized foreign exchange gains and losses in WesternZagros' wholly-owned
Canadian subsidiary through the utilization of share issuance costs as well as
the associated G&A costs incurred by the subsidiary.
Revenue
WesternZagros' revenue is comprised entirely of interest earned on cash and cash
equivalents and short-term investment balances. Interest of $0.02 million was
earned for the quarter ended March 31, 2011 compared to $0.02 million for the
quarter ended March 31, 2010. The change in first quarter revenue from year to
year was essentially flat, but was limited in the first quarter of 2011 due to
the relatively short time frame available for investing proceeds received from
the private equity financing.
Net Loss
For the quarter ended March 31, 2011, WesternZagros recorded a net loss of $1.5
million compared to $1.3 million for the quarter ended March 31, 2010.
WesternZagros is an early stage exploration enterprise and, apart from its
working interest in the Original PSC and cash and cash equivalents, the Company
has no other significant assets. The increased net loss in the first quarter of
2011 resulted mainly from reduced tax recoveries as compared to 2010.
Capital Expenditures
WesternZagros closed a private placement offering (the "Offering") of common
shares of the Company on March 10, 2011. The Company sold, through a syndicate
of agents, 89,665,352 shares at a price of Cdn$0.48 per share for gross proceeds
of Cdn$43 million. The syndicate of agents was led by TD Securities Inc. and
Scotia Capital Inc. and included Macquarie Capital Markets Canada Ltd., RBC
Capital Markets and Stifel Nicolaus Canada Inc. The net proceeds from the
Offering will be used by the Company for: the drilling of the Company's
Sarqala-1 re-entry well and the Mil Qasim-1 exploration well; future exploration
on the Company's oil and gas properties; working capital and for general
corporate purposes. As at March 31, 2011, WesternZagros had $66.0 million in
working capital.
For the three months ended March 31, 2011, WesternZagros' share of capital
expenditures, associated with its Original PSC activities and other capitalized
costs was $15.5 million (net of disposals and prior to the impact of changes in
non-cash investing capital). Expenditures for the first quarter of 2011 included
$13.0 million of drilling-related costs; $0.3 million of geological and
geosciences related work; $1.6 million of supervision and field office costs;
and $0.6 million of other Original PSC-related expenditures. These Original PSC
expenditures reflect the requirement that WesternZagros funded the Sarqala-1
sidetracking and testing as an exclusive operation, which requires the Company
to fund 100 percent.
By comparison, WesternZagros' share of exploration and evaluation expenditures
for the quarter ended March 31, 2010 associated with its Original PSC activities
was $13.2 million. Capital expenditures for the first quarter of 2010 included
$12.4 million of drilling-related costs; $0.1 million of geological and
geosciences-related work; $0.6 million for related field office and supervision
costs in support of operations; and $0.1 for other Original PSC-related costs.
WesternZagros capitalized $1.0 million of G&A expenses, including $0.1 million
of stock-based compensation, for the quarter ended March 31, 2011, compared to
capitalizing $0.6 million of G&A expenses, including $0.1 million of stock-based
compensation, for the quarter ended March 31, 2010.
Production Sharing Contract - Summary
Under the terms of its Original PSC, WesternZagros has a 40 percent working
interest, the KRG holds a 20 percent working interest (the costs of which are
carried by WesternZagros) and Talisman holds the remaining 40 percent working
interest.
Subsequent to March 31, 2011, the Company concluded negotiations with the
Ministry of Natural Resources of the KRG and Talisman to amend the Original PSC.
Once approved, the amendments will divide the contract area of the Original PSC
into two contract areas, each under a separate PSC. The northern contract area
(comprising some 340 square kilometres) will remain under an amended version of
the Original PSC (the "Kurdamir PSC") and will be called the Kurdamir Block. The
southern contract area (comprising some 1,780 square kilometres) will be
governed under a new Garmian PSC and will be known as the Garmian Block. The
Company is awaiting formal approval of both the Kurdamir and Garmian PSC's from
the Oil and Gas Council of the KRG and execution of the PSC's by the KRG.
WesternZagros' 40 percent ownership and other economic terms will remain
unchanged in both.
The Kurdamir PSC and Garmian PSC will extend the time period available to
complete the first exploration sub-period work obligations and adds an
additional well. The drilling commitments will comprise Mil Qasim-1 on the
Garmian Block (to be drilled by December 31, 2011) and Kurdamir-2 on the
Kurdamir Block (to be drilled by June 30, 2012). WesternZagros will remain the
operator on the Garmian Block while Talisman will become operator of the
Kurdamir Block. Also, Talisman's future participation in activities on the
Original PSC Lands will be limited to the Kurdamir Block and it will not be a
party of the Garmian PSC. Under the Garmian PSC, the KRG will have the ability
to assign the remaining 40 percent interest in the Garmian Block to a new third
party participant following the completion of Mil Qasim-1. As such, the Company
will be required to initially, or entirely, fund 100 percent of the costs
associated with Mil Qasim-1.
WesternZagros continues to work toward drilling the third exploration commitment
well under the terms of the force majeure provision of the Original PSC in order
to ensure that it meets the current requirements of the Original PSC in the
event the Kurdamir and Garmian PSC's are not approved by the Oil and Gas Council
of the KRG and subsequently executed by the KRG.
Production Sharing Contract - Commercial Terms
Under the Original PSC, the sharing of oil occurs as follows: of the total oil
produced, operations oil is available to the Contract Group for use in carrying
out its obligations under the Original PSC; the remaining oil is subject to a 10
percent royalty payable to the KRG (the residual is considered to be "net
available oil"). The net available oil is determined on a development by
development basis. Up to 45 percent of the net available oil is available for
cost recovery with the remainder as "profit oil". Costs subject to cost recovery
include all costs and expenditures incurred by the Contractor Group for
exploration, development, production and decommissioning operations, as well as
any other costs and expenditures incurred directly or indirectly with these
activities. The portion of profit oil available to the Contractor Group is based
on a sliding scale from 35 percent to 16 percent depending on a calculated
R-Factor. The R-Factor is established by reference to the ratio of cumulative
revenues over cumulative costs. When the ratio is below one, the Contractor
Group is entitled to 35 percent of the profit oil. The percentage is then
reduced on a linear sliding scale to a minimum of 16 percent at an R-Factor
ratio of two or greater.
The production sharing terms for natural gas are the same as the oil production
share terms except that the net available gas available for cost recovery is 55
percent and the profit sharing component is on a different scale. For natural
gas, the portion of profit natural gas available for the Contractor Group is
based on a sliding scale from 40 percent to 20 percent depending on a calculated
R-factor. The R-Factor is established by reference to the ratio of the
Contractor Group's cumulative revenue over cumulative costs. When the R-Factor
is below one, the Contractor Group is entitled to 40 percent of the profit oil.
The Contractor Group's percentage is then reduced on a linear scale to a minimum
of 20 percent at a ratio of 2.75 or greater.
As at March 31, 2011, the Company had approximately $174 million relating to the
Original PSC, net to WesternZagros of recoverable costs available that may
ultimately be recovered from future crude oil or natural gas sales in accordance
with the Original PSC.
Production
The Original PSC provides the Contractor Group with the exclusive right to
develop and produce any commercial discoveries. The development period for
producing a commercial discovery is an initial term of 20 years from the date of
declaring a commercial discovery with a further automatic right to a five year
extension. If commercial production is possible at the end of the last period
then the Contractor Group shall be entitled to an extension of a further five
years under the same terms as in the Original PSC if a request is made by the
Contractor Group at least six months before the end of the first five year
extension.
Pursuant to the terms of the Original PSC, WesternZagros maintains the right to
market its share of oil on the world market. There is an obligation under the
Original PSC to make oil production available to meet regional market demand.
The price of such oil is a market-based oil price based on a basket of crudes.
The price for natural gas is based on local commercial value and Iraq tariffs.
Currently, no markets exist for natural gas within Iraq and there is no
infrastructure for export.
Original PSC Commitments
The Original PSC contemplates two exploration sub-periods of three years and two
years, respectively, with two possible one-year extensions. The first
exploration sub-period ended December 31, 2010, subject to an extension under a
force majeure claim described below. During such time the Contractor Group is
required to complete a minimum of 1,150 kilometres of seismic surveying (which
has been completed), to drill three exploration wells (two of which have been
drilled,) and to commit a minimum of $75 million in the aggregate on these
activities (which has been completed). The Original PSC also includes capacity
building support payments (which concluded in April 2009) and annual funding for
certain technological, logistical, recruitment and training support during the
exploration sub-periods.
During the drilling of the Kurdamir-1 well, certain situations occurred which
caused additional time to be spent on well control and repair operations under
conditions of force majeure. Under the terms of the Original PSC, when a force
majeure event occurs, the timing resulting from any such delay and the time
necessary to repair any damage resulting from the delay is to be added to any
time period provided under the Original PSC, including the first exploration
sub-period. The period of force majeure started on January 22, 2010 and
continued until October 14, 2010, a period of 265 days. The Corporation, on
behalf of the Contractor Group, has notified the KRG of a force majeure event
under the terms of the Original PSC and claimed a corresponding 265-day
extension of the first exploration sub-period, i.e. until September 22, 2011.
At the end of the first exploration sub-period, WesternZagros and the other
parties to the Original PSC may relinquish the entire contract area (other than
any discovery or development areas), or continue further exploration operations
by entering into the second exploration sub-period, or request a one-year
extension for future exploration and appraisal activities prior to deciding to
enter into the second exploration sub-period.
As at March 31, 2011, the Company estimates expenditures of approximately $35
million, prior to the costs of any testing, to meet its remaining commitments
for the first exploration sub-period. This estimate includes 100 percent of the
remaining costs associated with drilling the Mil Qasim-1 exploration commitment
well by December 31, 2011, and providing associated supervision and local office
support in support of drilling operations.
During the second exploration sub-period, the Contractor Group, or those parties
that have elected to participate in further exploration, is required to complete
a minimum of 575 kilometres of seismic surveying, drill at least two exploration
wells and commit a minimum of $35 million to these activities. At the end of the
second exploration sub-period, WesternZagros and the other parties to the
Original PSC who have elected to participate in the second exploration
sub-period, may relinquish the entire contract area (other than any discovery or
development areas) or continue further exploration and appraisal operations into
the extension periods subject to the following relinquishment requirements. At
the end of the second exploration sub-period, and at the end of each subsequent
extension period, the Original PSC requires WesternZagros, and other parties who
have elected to participate, to relinquish 25 percent of the remaining
undeveloped area within the PSC Lands or the entire contract area (other than
any discovery or development areas).
Other Commitments
The Company has entered into various exploration-related contracts, including
contracts for drilling equipment, services and tangibles. The following table
summarizes the commitments the Company has under these exploration-related
contracts related to the Original PSC and other contractual obligations at March
31, 2011:
For the Years Ending December 31,
2011 2012 2013 2014 2015+ Total
----------------------------------------------------------------------------
Exploration $ 2,272 $ - - - $ 2,272
Office $ 457 $ 223 $ 13 - - $ 693
----------------------------------------------------------------------------
$ 2,729 $ 223 $ 13 - - $ 2,965
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consulting Service Agreements
In 2003 the Corporation entered into a consulting service agreement that
provided for a three percent right to participate indirectly in the future
profits the Company may earn in respect to the Original PSC, in exchange for
consulting services provided since that date. In the determination of profits
under this agreement, the Company was entitled to deduct the consultant's
proportionate share of all costs associated with acquiring the Original PSC and
the exploration, appraisal, development and production expenditures incurred by
the Company ("eligible costs"), together with interest on such percentage of
eligible costs at LIBOR plus three percent. Subsequent to March 31, 2011, the
Company reached agreement for the termination of this right contemporaneously
with the execution of the Kurdamir and Garmian PSC's by the KRG.
Further, in 2004 the Company entered into a consulting service agreement that
provided for a two percent right to participate indirectly in the future profits
the Company may earn in respect to the Original PSC, in exchange for the
provision of consulting services during the period 2004 to 2006. In
determination of profits under this agreement, the Company was entitled to
deduct one percent of all eligible costs, together with interest on such
percentage of eligible costs at LIBOR plus ten percent. The consultant was
required to fund the additional one percent of all eligible costs. Subsequent to
March 31, 2011, the Company terminated this right.
Off Balance Sheet Arrangements
The Company does not presently utilize any off-balance sheet arrangements to
enhance its liquidity and capital resource positions, or for any other purpose.
During the period ended March 31, 2011, WesternZagros did not enter into any
off-balance sheet transactions.
Insurance Claim Update
WesternZagros initiated a control of well insurance claim in the first quarter
of 2010 in relation to certain events at Kurdamir-1 which commenced when the
well was drilled into a high pressure formation in the Gulneri Seal. These
operations continued after a subsequent additional high pressure zone was
encountered in the Aaliji Seal and continued until October 14, 2010, when the
open hole in the Kurdami-1 well was plugged and cemented to approximately 2,500
metres, concluding well control operations.
The control of well insurance policy covering these claims has a net aggregate
limit to the Company of $45 million, with a $0.4 million deductible. Under the
terms of the insurance policy, the Company submits claims for these costs as
they are incurred and paid and these claims are then subject to the review and
approval by the adjuster appointed by the insurers. WesternZagros submitted its
initial claim in the first quarter of 2010 and received initial confirmation of
coverage from the insurers during the second quarter of 2010.
WesternZagros has reached an agreement with its insurers to settle its insurance
claim for a total of $45 million (of which $40.6 million has been received to
date). The Company and its insurers have also agreed to terms to renew its
insurance policy for the drilling of Kurdamir-2. These terms include an increase
in the net aggregate limit from $45 million to $75 million.
Outlook for 2011
In 2011 and the first half of 2012, WesternZagros plans to focus on a program of
drilling and testing to evaluate the highly prospective formations discovered
through the Sarqala-1 and Kurdamir-1 wells. This program will test the
approximately one billion barrels of oil equivalent of mean gross unrisked
prospective resources that these formations are estimated to contain as of
December 14, 2010 and January 14, 2011, as audited by Sproule International
Limited.
On March 29, 2011, the Company began the first of these operations by
re-entering the Sarqala-1 well bore and completed an approximate 100-metre
sidetrack to 3,893 metres to evaluate and test the Jeribe Formation which is the
primary reservoir target in the Sarqala-1 well. Drilling shows and log results
indicated potential gross pay interval of over 55 metres in this zone. The
Company tested the well at rates up to 9,444 barrels per day of 40 degree API
oil. This rate was reached after flowing and stabilizing the well at
progressively bigger choke sizes until reaching the limits of the surface
equipment. The final rate was achieved on a 52/64 inch choke with a wellhead
pressure of 2,475 psi. No water was produced during this initial testing
program. No stimulation was applied to the well but there remains the potential
to do so at a later date. Efforts will now be directed toward evaluating and
sourcing surface equipment and trucking facilities by the end of 2011 to start
producing and selling oil during an extended testing program with the objective
of further evaluating the Jeribe reservoir and the generation of cash flow from
operations.
Commencing in July 2011, WesternZagros plans to drill the remaining commitment
well at Mil Qasim-1, located three kilometres from Sarqala-1. Mil Qasim-1 will
target potential oil-bearing sandstones in the Upper Fars reservoir, which
exhibited oil shows when penetrated in Sarqala-1. With a proposed total depth of
2,000 to 2,400 metres, Mil Qasim-1 will be a shallower well with less technical
risk than either Sarqala-1 or Kurdamir-2.
Concurrent with the Company's drilling operations at Mil Qasim-1, Talisman is
continuing to drill the Topkhana prospect on its adjacent Block 39, where
operations commenced on January 31, 2011. Topkhana-1 will be drilled to evaluate
and test the Oligocene, Eocene and Cretaceous reservoirs. Although WesternZagros
has no working interest in Topkhana-1, results from the well could provide
information confirming the potential of the Kurdamir and Topkhana structures
being both part of one large structure. During the first quarter of 2011,
WesternZagros and Talisman agreed on the drilling location for Kurdamir-2. The
drilling location is approximately two kilometres away from Kurdamir-1 and will
target the Oligocene, Eocene and Cretaceous Formations. WesternZagros and
Talisman are currently preparing the drilling plan for Kurdamir-2, and have
sourced long lead time materials.
With the objective of maximizing its options and flexibility to increase the
likelihood of success, WesternZagros' priorities for 2011 are as follows:
- Prepare for and implement an extended well test program for the Jeribe
Formation in Sarqala-1, including the trucking of and sale of crude oil.
- Drill Mil Qasim-1 to test the oil potential of the Upper Fars Formation;
- Begin drilling Kurdamir-2 to test the Oligocene, Eocene and Cretaceous
formations; and
- Evaluate the commercial potential of and design an appraisal program for the
natural gas, gas condensate and oil discovered at Kurdamir, and evaluate the
commercial potential for any discoveries from the Mil Qasim-1.
WesternZagros estimates its capital and operating budget for the remaining three
quarters of 2011, including the requirement for the Company to fund 100 percent
of the Sarqala-1 re-entry and Mil Qasim-1 as an exclusive operation and to fund
its share of the costs of Kurdamir-2 well, to be approximately $80 million. This
includes approximately $70 million for drilling and related costs with the
remainder of the budget comprised of funds for certain annual Original PSC
payments, initial technical studies as part of the Kurdamir Discovery appraisal
program, in-country operational support and corporate general and administrative
costs.
Liquidity and Capital Resources
WesternZagros is currently exploring for crude oil and natural gas in the
Kurdistan Region of Iraq and currently has no reserves, production or
operational cash flows. WesternZagros' revenue is comprised entirely of interest
earned on cash and cash equivalent balances and short-term investments.
WesternZagros invests its cash and cash equivalents with major Canadian
financial institutions with investment grade credit ratings and in Government of
Canada instruments. This is in accordance with an Investment Policy approved by
the Board of Directors. WesternZagros had no outstanding bank debt or other
interest bearing indebtedness as at March 31, 2011.
On March 10, 2011, WesternZagros successfully completed a brokered private
placement for gross proceeds of approximately Cdn$43 million (net proceeds of
approximately Cdn$41 million after fees). The working capital and the proceeds
of this private placement will be used to fund a portion of the future capital
expenditures as described in the "Outlook" section, specifically both the
drilling operations for the Sarqala-1 re-entry and Mil Qasim-1 which the Company
anticipates funding 100 percent. At March 31, 2011, WesternZagros had $66.0
million in working capital.
WesternZagros may be required to access further funding in 2011, in particular
as it relates to the drilling of Kurdamir-2, and ultimately to fund any
appraisal programs and future development programs from successful exploration
activities. During the remainder of 2011, WesternZagros will focus its efforts
on the sale of crude oil and generation of cash flow from operations from the
Sarqala extended well testing under the terms agreed to by the KRG and the
Federal Government of Iraq. The generation of cash flow from these operations
could then be used to fund or partially fund future exploration and appraisal
activities.
In considering the proper timing to access further capital, the Company will
assess the following factors:
- The required capital and timing associated with the extended well test being
planned for Sarqala-1, including the potential cash flow generation from the
potential trucked crude oil sales;
- Talisman's future participation in activities on the PSC Lands being limited
to the Kurdamir prospect, with the expectation that the KRG would assign
Talisman's prior 40 percent interest in the remaining PSC Lands to a new third
party participant following completion of the third exploration commitment well,
which would be located on those remaining PSC Lands. As such, this would require
the Corporation to initially, or entirely fund 100 percent of the costs
associated with the third commitment well;
- The exploration result of Mil Qasim-1;
- The ability to export oil and natural gas from the Kurdistan Region of Iraq in
accordance with the economic terms under the PSC's likely following the
promulgation of the new Federal Petroleum Law of Iraq; and
- The current conditions in the financial markets, including the potential for
further market instability.
With the successful oil test at Sarqala-1 and the commencement of payments for
oil exported from the Kurdistan Region of Iraq, management has a reasonable
expectation that any future capital requirements can be met through either
further equity raises or cash flow generated from extended well tests.
Outstanding Share Data
As at March 31, 2011 there were 297,129,672 shares issued and outstanding,
including the 89,665,352 common shares issued during the first quarter of 2011
when WesternZagros completed a private placement of shares. The number of common
shares reserved for issuance pursuant to options granted will not exceed 10
percent of the issued and outstanding common shares. As at December 31, 2010
there were 207,464,320 shares issued and outstanding. As at June 29, 2011, the
total number of shares outstanding was 297,138,872.
As at December 31, 2010 there were 20,354,900 stock options issued and
outstanding. For the quarter ended March 31, 2011, there were 27,000 stock
options that were granted to employees and 605,400 forfeited by employees,
bringing the total stock options outstanding as of March 31, 2011 to 19,776,500.
Subsequent to March 31, 2011, there were 20,000 stock options granted to
employees, 9,200 stock options exercised and 202,267 stock options forfeited by
employees and contractors, bringing the total stock options outstanding as of
June 29, 2011 to 19,585,033.
Supplemental Quarterly Information
The following table summarizes key financial information on a quarterly basis
for the periods indicated, note that only the quarters for 2011 and 2010 are in
accordance with accounting policies under IFRS, while the presented 2009 data is
in accordance with previous GAAP:
----------------------------------------------------------------------------
(US$ thousands, unless otherwise
specified) Three Month Periods Ended
----------------------------------------------------------------------------
Mar 31 Dec 31 Sept 30 June 30
2011 2010 2010 2010
----------------------------------------------------------------------------
Revenue 17 13 38 17
----------------------------------------------------------------------------
Net Loss 1,480 2,003 819 1,646
----------------------------------------------------------------------------
Net Loss Per Share (US$ Per Share) 0.006 0.010 0.004 0.008
(Basic and Fully Diluted)
----------------------------------------------------------------------------
Capital Expenditures, net of disposals 15,494 17,283 20,455 15,962
----------------------------------------------------------------------------
Total Assets 271,720 240,290 233,770 235,295
----------------------------------------------------------------------------
Total Long-term Liabilities 816 649 665 624
----------------------------------------------------------------------------
Dividend (US$ per Share) Nil Nil Nil Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Month Periods Ended
----------------------------------------------------------------------------
March 31 Dec 31 Sep 30 June 30
2010 2009 2009 2009
----------------------------------------------------------------------------
Revenue 19 32 36 35
----------------------------------------------------------------------------
Net Loss 1,333 1,035 2,712 1,404
----------------------------------------------------------------------------
Net Loss Per Share (US$ Per Share) 0.006 0.005 0.013 0.006
(Basic and Fully Diluted)
----------------------------------------------------------------------------
Capital Expenditures 13,153 11,250 11,456 14,796
----------------------------------------------------------------------------
Total Assets 235,514 241,077 241,600 241,171
----------------------------------------------------------------------------
Total Long-term Liabilities 573 175 171 197
----------------------------------------------------------------------------
Dividend (US$ per Share) Nil Nil Nil Nil
----------------------------------------------------------------------------
RISK FACTORS
The risks factors that could influence actual results have not changed since the
2010 Annual Report and Annual Information Form including the risk that
WesternZagros' ability to access the equity or debt markets in the future may be
affected by further drilling challenges and related increases to exploration
well costs. Any financial market instability may impact WesternZagros' ability,
and that of other exploration and development companies, to access equity or
debt markets at all or with acceptable terms. The inability to access the equity
or debt markets for sufficient capital, at acceptable terms and within required
time frames, could have a material adverse effect on WesternZagros' financial
condition, results of operations and prospects.
An investment in WesternZagros should be considered highly speculative due to
the nature of its activities, the present stage of its development, the need for
continued participation of the Company's co-venturers in the Original PSC
activities and its need for additional financing in the future for any
acquisition, exploration, development and production of oil and gas reserves
beyond current funding levels. WesternZagros' risk factors include, but are not
limited to, all the risks normally incidental to the exploration, development
and operation of crude oil and natural gas properties and the drilling of crude
oil and natural gas wells, including geological risk, encountering unexpected
formations or pressures, potential environment damage, blow-outs, fires and
spills, all of which could result in personal injuries, loss of life and damage
to property of WesternZagros and others; premature declines of reservoirs;
environment risks; delay or changes in plans with respect to exploration or
development projects or capital expenditures; the ability to attract key
personnel; the risk of commodity price and foreign exchange rate fluctuations.
All of WesternZagros' assets are located in the Kurdistan Region of Iraq. As
such, WesternZagros is subject to political, economic, and other uncertainties,
including, but not limited to, the uncertainty of negotiating with foreign
governments, expropriation of property without fair compensation, adverse
determinations or rulings by governmental authorities, changes in energy
policies or the personnel administering them, nationalization, currency
fluctuations and devaluations, disputes between various levels of authorities,
arbitrating and enforcing claims against entities that may claim sovereignty,
authorities claiming jurisdiction, potential implementation of exchange
controls, royalty and government take increases and other risks arising out of
foreign governmental sovereignty over the areas in which WesternZagros'
operations are conducted, as well as risks of loss due to civil strife, acts of
war, guerrilla activities and insurrections. WesternZagros' operations may be
adversely affected by changes in government policies and legislation or social
instability and other factors which are not within the control of WesternZagros
including, among other things, adverse legislation in Iraq and/or the Kurdistan
Region, a change in crude oil or natural gas pricing policy, the risks of war,
terrorism, abduction, expropriation, nationalization, renegotiation or
nullification of existing concessions and contracts, taxation policies, economic
sanctions, the imposition of specific drilling obligations and the development
and abandonment of fields.
For a complete list of risk factors please refer to Company's Annual Information
Form, which is available at www.westernzagros.com or on SEDAR at www.sedar.com.
Adoption of International Financial Reporting Standards ("IFRS")
The Company has prepared its March 31, 2011 condensed consolidated interim
financial statements in accordance with IAS 34, "Interim Financial Reporting"
and in accordance with IFRS 1, "First Time Adoption of International Financial
Reporting Standards". These were the Company's first condensed consolidated
interim financial statements prepared under IFRS. Accordingly, the transition
date to IFRS was January 1, 2010 and comparative information for 2010 has been
prepared in accordance with the Company's IFRS accounting policies. The adoption
of IFRS has not had a material impact on the Company's operations, strategic
decisions, cash flow, or overall capital expenditures.
The Company's IFRS accounting policies are provided in detail in Note 3 to the
March 31, 2011 Condensed Consolidated Interim Financial Statements. Prior period
reconciliations between IFRS and previous GAAP are included within Note 23 to
the March 31, 2011 Condensed Consolidated Interim Financial Statements. In
summary, Note 23 includes the following reconciliations:
- Balance Sheets as at January 1, 2010, March 31, 2010 and December 31, 2010;
- Statements of Comprehensive Loss for the periods ended March 31, 2010 and
December 31, 2010; and
- Statements of Cash Flows for the periods ended March 31, 2010 and December 31,
2010.
Financial Statement Impacts Upon Conversion to IFRS
The following discussion explains the significant impacts on the financial
statements upon conversion to IFRS.
Exploration and Evaluation Expenditures "(E&E")
WesternZagros previously utilized the full cost method under Canadian GAAP for
accounting for its exploration activities in the Kurdistan Region of Iraq. Under
the full cost method, all costs associated with the acquisition of, exploration
for, and development of crude oil and natural gas, including asset retirement
obligations, were capitalized and accumulated within cost centres on a
country-by-country basis. Such costs included land acquisition, geological and
geophysical activity, drilling and testing of productive and non-productive
wells, carrying costs directly related to unproved properties, major development
projects as well as insurance and administrative costs directly related to
exploration and development activities. As WesternZagros was only operating in
the Kurdistan Region of Iraq and had only one Original PSC in that region, it
capitalized all costs associated with those exploration activities, including
certain costs incurred prior to entering into the Original PSC.
IFRS 1 sets out the procedures that an entity must follow when adopting IFRS as
the basis for preparing financial statements. IFRS 1 also provides entities with
a number of optional exemptions upon conversion to IFRS, the most significant of
which that WesternZagros utilized was the exemption that allows the December 31,
2009 full cost pool under previous GAAP which are related to costs where the
technical feasibility and commercial viability have not yet been determined to
be reclassified as exploration and evaluation assets under IFRS. This resulted
in $154 million of costs being reclassified from property, plant and equipment
("PP&E") to E&E expenditures on a deemed costs basis as at January 1, 2010.
Upon conversion to IFRS, WesternZagros was also required to adopt IFRS 6,
"Exploration for and Evaluation of Mineral Resources", which is the standard
that deals with accounting for exploration and evaluation expenditures for
extractive industries. Typical costs included in the E&E expenditures are
acquisition of rights to explore, topographical, geological, geochemical and
geophysical studies, exploratory drilling, trenching, sampling, activities in
relation to evaluating the technical feasibility and commercial viability of
extracting mineral resources, as well as insurance and certain general and
administrative costs. Under IFRS 6, costs incurred prior to the legal rights to
explore an area being obtained may no longer be capitalized within E&E
expenditures. During 2010 the Company reclassified a further $27 million from
PP&E to E&E expenditures. As at December 31, 2010 a total of $181 million in
costs had been reclassified from PP&E under previous GAAP to E&E expenditures
relating to the Company's Original PSC upon conversion to IFRS.
WesternZagros was also required to complete an impairment test of E&E
expenditures as at January 1, 2010. There was no impairment of E&E assets upon
transition to IFRS.
Share Based Payments
The Company previously valued stock option issuances based on each grant as a
whole and expensed the valuation of each grant on a straight line basis over the
expected lives of the options. Upon conversion to IFRS, the Company was required
to adopt IFRS 2, "Share-Based Payment" which provides that the valuation and
expensing of share-based payment be done on a graded vesting basis. This
resulted in an accelerated expensing of share-based payments based on each
individual vesting tranche of options under IFRS as compared to previous GAAP,
less the impact of estimated forfeiture rates under IFRS that had not previously
been estimated under GAAP. As at January 1, 2010 the adoption of IFRS 2 resulted
in an increase in contributed surplus of approximately $0.9 million, with a
corresponding increase in the accumulated deficit. As at December 31, 2010 the
adoption of IFRS 2 resulted in a net minor overall decrease in contributed
surplus as compared to previous GAAP as the timing of expense recognition was
similar between IFRS and previous GAAP at that point in time.
Provision for Decommissioning Liabilities
The provisions for decommissioning obligations under IFRS are treated similarly
to previous Canadian GAAP, which had previously been disclosed as asset
retirement obligations ("ARO"). Upon conversion to IFRS, the Company was
required to adopt IAS 37, "Provisions, Contingent Liabilities and Contingent
Assets", which required that a risk-free discount rate, that was not credit risk
adjusted, be applied to the present value calculation of estimated future
abandonment costs. This resulted in a lower discount rate utilized in the
present value calculation under IFRS as compared to previous GAAP. As a result
of the lower discount rate under IFRS, the provision for decommissioning
liabilities increased by $0.3 million under IFRS as at January 1, 2010 and
remained at a $0.3 million increase as at December 31, 2010 when compared to
GAAP.
Other IFRS 1 Exemptions Utilized
IFRS 1 allows first time adopters of IFRS to utilize a number of voluntary
exemptions from the general principal of retrospective treatment. Beyond the
full-cost book value as deemed cost exemption utilized for E&E expenditures as
discussed in the E&E section of this MD&A, the Company also utilized the allowed
exemption relating to IFRS 3, "Business Combinations". Accordingly, IFRS 3 has
not been applied to acquisitions that occurred prior to January 1, 2010.
CRITICAL ACCOUNTING ESTIMATES
WesternZagros' critical accounting estimates are defined as those estimates that
have a significant impact on the portrayal of its financial position and
operations and that require management to make judgments, assumptions and
estimates in the application of IFRS. Judgments, assumptions and estimates are
based on historical experience and other factors that management believes to be
reasonable under current conditions. As events occur and additional information
is obtained, these judgments, assumptions and estimates may be subject to
change. WesternZagros believes the following are the critical accounting
estimates used in the preparation of its consolidated financial statements,
which can also be found in Note 5 to the March 31, 2011 Condensed Consolidated
Interim Financial Statements.
Use of Estimates
The preparation of the condensed consolidated interim financial statements in
conformity with IFRS requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as at the date of the condensed consolidated
interim financial statements, and the reported amounts of revenues and expenses
during the reporting period. Such estimates relate to unsettled transactions and
events as of the date of the condensed consolidated interim financial
statements. Accordingly, actual results may differ from these estimated amounts
as future confirming events occur. Significant estimates used in the preparation
of the condensed consolidated interim financial statements include, but are not
limited to, recovery of asset carrying values, provision for decommissioning
liabilities, incomes tax, and share-based payments.
Recoverability of asset carrying values
At each reporting date, the Company assesses its exploration and evaluation and
property, plant and equipment expenditures for possible impairment if events or
circumstances indicate the carrying values of the assets might not be
recoverable. Relevant indicators include the following: the continued
progression of Management's operational plans; new information obtained from
wells that have been drilled or tested; changes or restrictions in access to
drilling sites; changes in legal, regulatory, market, environmental,
technological, or political factors that could impact ongoing operations; the
ability of the Company to continue fulfilling ongoing commitments; and
significant changes in the Company's market value.
If factors indicate that the Company may need to recognize impairment, the
carrying value of the assets for each cash-generating-unit is compared to the
greater of value-in-use or fair-value less costs to sell. It is anticipated that
the value-in-use model, based on discounted estimated future net cash flows,
would be more readily computed. Determination of the value-in-use amount and any
resulting impairment involves the use of significant estimates and assumptions
about future events and factors such as future commodity prices, the impact of
inflation on operating expenses, discount rates, production profiles, the
ability to produce and export crude oil and natural gas, the future capital
costs needed to develop reserves, as well as the future marketability and
availability of transportation for crude oil and natural gas that is produced.
At the reporting date, the Company is still in the exploration phase of
operations on its PSC Lands. The Company has not recognized any impairment for
exploration and evaluation expenditures nor for property, plant, and equipment.
Provision for decommissioning obligations
The Company recognizes both an asset and a provision for decommissioning
obligations in the period in which they are incurred by estimating the fair
value of the obligation. Provisions for environmental clean-up and remediation
costs associated with the Company's drilling operations are based on current
legal and constructive requirements, technology, price levels and expected plans
for remediation. Actual costs and cash outflows and the timing of those cash
outflows can differ from estimates because of changes in laws and regulations,
public expectations, prices, discovery and analysis of site conditions, future
performance of wells drilled, and changes in clean-up technology. Estimating the
timing and amount of cash outflows required to settle these obligations are
inherently difficult and are based on Management's current experience. A risk
free rate has been used in the calculations. Any differences between actual and
estimated decommissioning obligations would impact both the asset and the
provision which then would impact future depletion on the asset as well as
accretion on the provision.
Income tax
Tax regulations and legislation and the interpretations thereof in the
jurisdictions that the Company operates are subject to change. As such, income
taxes are subject to measurement uncertainty. Deferred income tax assets are
assessed by Management based on all available information at the end of the
reporting period to determine the likelihood that they will be realized from
future taxable earnings.
Share-based payments
The estimates, assumptions, and judgements made in relation to the fair value of
share-based payments and the associated expense recognition is subject to
measurement uncertainty. The fair value of employee stock options is measured
using a Black Scholes option pricing model. Measurement inputs include share
price on measurement date, exercise price of the instrument, expected
volatility, expected life of the instrument, expected dividends, and the
risk-free interest rate.
Recent accounting pronouncements issued but not yet effective
The IASB has issued the following standards which are effective for annual
periods beginning on or after January 1, 2013, with early adoption permitted.
The Company is currently evaluating the impact, if any, of each of these new
standards, which are briefly summarized as follows:
IAS 27 - Separate Financial Statements:
IAS 27 replaces the existing IAS 28, "Consolidated and Separate Financial
Statements". IAS 27 contains accounting and disclosure requirements for
investments in subsidiaries, joint ventures and associates when an entity
prepares separate financial statements. IAS 27 requires an entity preparing
separate financial statements to account for those investments at cost or in
accordance with IFRS 9, "Financial Instruments".
IAS 28 - Investments in Associates and Joint Ventures:
IAS 28 prescribes the accounting for investments in associates and sets out the
application of the equity method when accounting for investments in associates
and joint ventures.
IFRS 9 - Financial Instruments:
IFRS 9 is the first part of a new standard on classification and measurement of
financial assets and liabilities that will replace IAS 39, "Financial
Instruments: Recognition and Measurements".
For financial assets, IFRS 9 has two measurement categories: amortized cost and
fair value. All equity instruments are measured at fair value. A debt instrument
is at amortized cost only if the entity is holding it to collect contractual
cash flows and the cash flows represent principal and interest. Otherwise it is
at fair value through profit and loss.
For financial liabilities, although the classification criteria for financial
liabilities will not change under IFRS 9, the approach to the fair value option
for financial liabilities may require different accounting for changes to the
fair value of a financial liability as a result of changes to an entity's own
credit risk.
IFRS 10 - Consolidated Financial Statements:
IFRS 10 establishes the principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more other
entities. IFRS 10 replaces IAS 27 "Consolidated and Separate Financial
Statements" and SIC-12 "Consolidation - Special Purpose Entities".
IFRS 11 - Joint Arrangements:
IFRS 11 establishes principles for financial reporting by parties to a joint
arrangement, and requires entities to classify interests in joint arrangements
as either a joint venture or a joint operation. Joint ventures will be accounted
for using the equity method of accounting whereas for joint operations the
entity will recognize it share of the assets, liabilities, revenue and expenses
of the joint operation. IFRS 11 replaces IAS 31 "Interests in Joint Ventures"
and SIC-13 "Jointly Controlled Entities - Non-monetary Contributions by
Venturers".
IFRS 12 - Disclosure of Interests in Other Entities:
IFRS 12 establishes disclosure requirements relating to an entity's interests in
other entities such as joint arrangements, associates or unconsolidated
structured entities, including special purpose vehicles and off balance sheet
vehicles. The standard carries forward existing disclosure requirements and also
introduces significant additional disclosure requirements that address the
nature and risk associated with interests in other entities.
IFRS 13 - Fair Value Measurements:
IFRS 13 defines fair value and sets out a single IFRS framework for measuring
fair value and the required disclosures about fair value measurements for use
across all IFRS standards. IFRS 13 is intended to eliminate the inconsistencies
in fair value measurement and the disclosure requirements contained in various
other IFRS standards that refer to fair value.
----------------------------------------------------------------------------
Condensed consolidated interim statements of financial position
(United States dollars thousands)
(Unaudited)
January 1,
March December 31, 2010
Note 31, 2011 2010 (Note 23) (Note 23)
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 7 $ 64,863 $ 31,482 $ 76,708
Trade and other
receivables 8 1,876 8,648 6,880
Insurance recoveries
receivable 9 9,092 17,597 -
Deposits held in trust 11 - 420 -
Prepaid expenses 534 39 183
Income tax recoverable 12 1,351 887 1,738
----------------------------------------------------------------------------
Total current assets 77,716 59,073 85,509
Non-current assets
Deposits held in trust 11 - - 420
Property, plant and
equipment 10 211 261 814
Exploration and evaluation
expenditures 9 193,560 180,770 154,097
Deferred tax assets 12 233 186 371
----------------------------------------------------------------------------
Total non-current assets 194,004 181,217 155,702
----------------------------------------------------------------------------
Total assets $ 271,720 $ 240,290 $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Trade and other payables 13 $ 11,701 $ 21,525 $ 18,297
----------------------------------------------------------------------------
Total current liabilities 11,701 21,525 18,297
Non-current liabilities
Provision for
decommissioning
obligations 14 667 509 432
Deferred tax liabilities 12 149 140 134
----------------------------------------------------------------------------
Total non-current
liabilities 816 649 566
----------------------------------------------------------------------------
Total liabilities 12,517 22,174 18,863
----------------------------------------------------------------------------
Equity
Share capital 15 295,761 253,583 253,583
Contributed surplus 16 11,612 11,223 9,654
Deficit (48,170) (46,690) (40,889)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total equity 259,203 218,116 222,348
----------------------------------------------------------------------------
Total equity and
liabilities $ 271,720 $ 240,290 $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments and contingencies (Note 22)
The notes are an integral part of these condensed consolidated interim
financial statements.
These condensed consolidated interim financial statements were authorized
for issue by the Board of Directors on June 29, 2011. They are signed on the
Company's behalf by:
(Signed) "Fred J. Dyment" (Signed) "Randall Oliphant"
Director Director
Condensed consolidated interim statements of comprehensive loss
(United States dollars thousands, except per share amounts)
(Unaudited)
For the three months ended March 31 Note 2011 2010
----------------------------------------------------------------------------
Revenue
Other income 17 19
Expenses
General and administrative expenses 17, 18 1,796 1,763
Depreciation 50 179
Accretion on decommissioning liabilities 14 6 4
Foreign exchange loss 148 52
----------------------------------------------------------------------------
Total expenses 2,000 1,998
----------------------------------------------------------------------------
Loss before taxation 1,983 1,979
Taxation
Current 12 (465) (697)
Deferred 12 (38) 51
----------------------------------------------------------------------------
Total taxation (recovery) (503) (646)
----------------------------------------------------------------------------
Total loss and comprehensive loss for the
period attributable to the shareholders $ 1,480 $ 1,333
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss per share
- basic and diluted 19 $ 0.006 $ 0.006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these condensed consolidated interim
financial statements.
Condensed consolidated interim statements of changes in equity
(United States dollars thousands)
(Unaudited)
Number of Share
Note shares capital
----------------------------------------------------------------------------
Balance January 1, 2010 23 207,464,320 $ 253,583
Share based payments - -
Loss for the period - -
----------------------------------------------------------------------------
Balance March 31, 2010 23 207,464,320 253,583
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Share based payments - -
Loss for the period - -
----------------------------------------------------------------------------
Balance December 31, 2010 23 207,464,320 253,583
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Issue of common shares 89,665,352 44,227
Share issue costs - (2,049)
Share based payments 16 - -
Loss for the period - -
----------------------------------------------------------------------------
Balance March 31, 2011 297,129,672 $ 295,761
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contributed Accumulated Total
surplus deficit equity
----------------------------------------------------------------------------
Balance January 1, 2010 $ 9,654 $ (40,889) $ 222,348
Share based payments 357 - 357
Loss for the period - (1,333) (1,333)
----------------------------------------------------------------------------
Balance March 31, 2010 10,011 (42,222) 221,372
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Share based payments 1,212 - 1,212
Loss for the period - (4,468) (4,468)
----------------------------------------------------------------------------
Balance December 31, 2010 11,223 (46,690) 218,116
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Issue of common shares - - 44,227
Share issue costs - - (2,049)
Share based payments 389 - 389
Loss for the period - (1,480) (1,480)
----------------------------------------------------------------------------
Balance March 31, 2011 $ 11,612 (48,170) $ 259,203
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these condensed consolidated interim
financial statements.
Condensed consolidated interim statements of cash flows
(United States dollars thousands)
(Unaudited)
For the three months ended March 31 Note 2011 2010
----------------------------------------------------------------------------
Cash flow from operating activities
Net loss before taxation $ (1,983) $ (1,979)
Adjustments for
Depreciation 50 179
Accretion 14 6 4
Share based payments 16, 17 245 273
Income tax recovered (paid) - -
Change in non-cash operating working
capital 21 (52) (307)
----------------------------------------------------------------------------
Net cash from (used in) operating
activities (1,734) (1,830)
----------------------------------------------------------------------------
Cash flow from investing activities
Expenditure on exploration and evaluation
assets 21 (19,029) (19,795)
Disposals of exploration and evaluation
assets 461 -
Insurance recoveries 9 11,505 -
----------------------------------------------------------------------------
Net cash from (used in) investing
activities (7,063) (19,795)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flow from financing activities
Issuance of common shares, net of issuance
costs 42,178 -
----------------------------------------------------------------------------
Net cash from (used in) financing
activities 42,178 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash equivalents 33,381 (21,625)
----------------------------------------------------------------------------
Cash and cash equivalents, beginning of
period 31,482 76,708
----------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 64,863 $ 55 ,083
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these condensed consolidated interim
financial statements.
Notes to the condensed consolidated interim financial statements
For the three months ended March 31, 2011
(Tabular amounts in United States dollars thousands)
(Unaudited)
1. General information
WesternZagros Resources Ltd. (the "Company" or "WesternZagros") and its
subsidiaries are headquartered in Calgary, Canada. The Company is incorporated
under the laws of the Province of Alberta, Canada. The registered address for
the Company is Suite 600, 440 - 2nd Avenue S.W., Calgary, Alberta, T2P 5E9.
The Company is an international oil and gas company engaged in acquiring
properties and exploring for, developing, and producing crude oil and natural
gas in Iraq. The Company is in the exploration stage, and through its
subsidiaries, the Company's operations are related to its interest in a
Production Sharing Contract ("PSC") with the Kurdistan Regional Government
("KRG") in respect of a 2,120 square kilometre exploration block (the
"Kalar-Bawanoor Block" or "PSC Lands") within the Kurdistan Region of Iraq.
WesternZagros holds a 40 percent working interest, the KRG holds a 20 percent
working interest (the costs of which are carried by WesternZagros) and a
wholly-owned subsidiary of Talisman Energy Inc. ("Talisman") holds the remaining
40 percent working interest (collectively known as the "Contractor Group").
Subsequent to March 31, 2011, the Company concluded negotiations with the
Ministry of Natural Resources of the KRG and Talisman to amend the PSC that
governs the Company's exploration activities in the Kalar-Bawanoor Block (the
"Original PSC"). Once approved, the amendments to the agreement will divide the
contract area of the Original PSC into two contract areas, each under a separate
PSC. The northern contract area (comprising approximately 340 square kilometers)
will remain under an amended version of the Original PSC (the "Kurdamir PSC"),
while the southern area (comprising approximately 1,780 square kilometers) will
be governed under a new "Garmian PSC". The Company is awaiting formal approval
of both the Kurdamir and Garmian PSC's from the Oil and Gas Council of the KRG
and execution of the PSC's by the KRG. WesternZagros' 40 percent ownership and
other economic terms will remain unchanged in both the Kurdamir PSC and the
Garmian PSC (refer to Note 22 "Commitments and contingencies" for a description
of the PSC's).
The Company has its listing on the TSX Venture Exchange under the symbol "WZR.V".
Authorization of financial statements
These condensed consolidated interim financial statements for the period ending
March 31, 2011 were authorized for issuance in accordance with a resolution of
the Audit Committee of the Board of Directors on June 29, 2011.
2. Basis of preparation
These condensed consolidated interim financial statements, including prior year
comparative information, have been prepared in accordance with International
Accounting Standard ("IAS") 34, Interim Financial Reporting, and International
Financial Reporting Standard 1, First Time Adoption of IFRS, using accounting
policies consistent with International Financial Reporting Standards("IFRS") as
issued by the International Accounting Standards Board ("IASB"), and
interpretations issued by the IFRS Interpretations Committee, that are published
at the time of preparation and that are effective or available for early
adoption on December 31, 2011, the Company's first annual reporting date under
IFRS. These are the Company's first condensed consolidated interim financial
statements prepared in accordance with IFRS. Previously the Company prepared its
consolidated annual and consolidated interim financial statements in accordance
with Canadian generally accepted accounting principles ("GAAP").
These condensed consolidated interim financial statements have been prepared on
a going concern basis under the historical cost convention. These condensed
consolidated interim financial statements should be read in conjunction with the
Company's annual financial statements and the notes thereto in the Company's
annual report for the year ended December 31, 2010, which were prepared in
accordance with previous GAAP.
As is typical with exploration stage companies, the Company has incurred losses
from operations and negative cash flows from operating activities, and has an
accumulated deficit at March 31, 2011. During the three months ended March 31,
2011, the Company had expenditures of $1.7 million for operating activities and
$7.1 million for investing activities related to exploration and evaluation
assets, including changes in non-cash working capital. The Company will require
additional funding over time to maintain ongoing exploration programs and
property commitments, as well as for administration expenses. In general, the
Company's ability to continue operations and exploration activities is dependent
upon its ability to obtain additional funding over time. While the Company has
been successful in obtaining its required funding in the past, there is no
assurance that sufficient funds will be available to the Company in the future,
or if available, available on favourable terms. Factors that could affect the
availability of financing include the continued support of its shareholders; the
results of exploration activities; obtaining formal approval by the Oil and Gas
Council of the KRG and the execution by the KRG of the Kurdamir and Garmian
PSC's and the potential assignment by the KRG of the Third Party Participant in
the Garmian PSC and timing thereof (see Note 22 "Commitment and contingencies"
for a description of the PSC's); the results and timing associated with
potential future production and sales; the political climate in Iraq and the
general affect it has on the oil and gas industry; and the overall state of the
capital markets. This requirement for funding may occur during the fiscal year
ending December 31, 2011 and is dependent on the level and timing of exploration
activities pursued by the Company and the funding requirement of the Company
under the relevant PSC's.
The Company realizes that the combination of circumstances and risks represent
an uncertainty that may cast doubt upon the Company's ability to realize its
assets and discharge its liabilities in the normal course of business.
Nevertheless, after considering the uncertainties, Management has a reasonable
expectation that the Company has adequate resources or can raise the additional
resources required in order to continue to adopt the going concern basis of
accounting in preparing the financial statements.
3. Significant accounting policies
The significant accounting policies used in the preparation of these condensed
consolidated interim financial statements are described below.
A. Conversion to IFRS
The Canadian Accounting Standards Board ("AcSB") confirmed in February 2008 that
IFRS would replace Canadian generally accepted accounting principles for
publicly accountable enterprises for financial periods beginning on or after
January 1, 2011.
These condensed consolidated interim financial statements for the period ended
March 31, 2011 were the Company's first condensed consolidated interim financial
statements prepared under IFRS, with a corresponding transition date of January
1, 2010. Consequently, the comparative figures for 2010 and the Company's
consolidated statement of financial position as at January 1, 2010 have been
restated from GAAP to comply with IFRS. The reconciliations between previously
reported GAAP and IFRS are explained in Note 23 of these condensed consolidated
interim financial statements.
B. Basis of measurement
These condensed consolidated interim financial statements have been prepared on
a historical costs basis, and have been prepared using the accrual basis of
accounting, except for certain cash flow information. The accounting policies,
as described in further detail in this note, have been consistently applied to
all periods presented in these condensed consolidated interim financial
statements. They also have been applied in preparing an opening statement of
financial position at January 1, 2010 for the purposes of transition to IFRS as
required by IFRS 1, First Time Adoption of International Financial Reporting
Standards.
These condensed consolidated interim financial statements, unless otherwise
indicated, are expressed in United States dollars ("US"). The company has
adopted the US dollar as its functional and reporting currency since most of its
expenses are directly or indirectly denominated in US dollars. When revenues are
realized, it is expected that US dollars would be received. All references
herein to U.S. $ or to $ are to United States dollars and references herein to
Cdn $ are to Canadian dollars. These condensed consolidated interim financial
statements are rounded to the nearest thousand (U.S. $000) except where
otherwise indicated.
The preparation of these condensed consolidated interim financial statements in
conformity with IFRS requires the use of critical accounting estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the reporting date, as well
as the reported amounts of revenues and expenses during the reporting period.
Such estimates relate to unsettled transactions and events at the reporting
date. Accordingly, actual results may ultimately differ from the estimated
amounts as future confirming events occur. Areas that involve a higher degree of
judgement or complexity, or areas where assumptions and estimates are
significant to the condensed consolidated interim financial statements are
disclosed in Note 5.
C. Basis of consolidation
These condensed consolidated interim financial statements include the accounts
of the Company and its wholly-owned subsidiaries as follows:
Nature of
Wholly-owned subsidiary Jurisdiction operations
----------------------------------------------------------------------------
WesternZagros Resources Inc. Canada Holding Company
Western Oil International Holdings Limited Cyprus Holding Company
WesternZagros Limited Exploration
Cyprus Company
These subsidiaries are entities over which the Company has the power to govern
the financial and operating policies. The Company has 100% direct ownership of
these entities. Accordingly, the subsidiaries are fully consolidated within the
Company's condensed consolidated interim financial statements.
Inter-company transactions and balances, including unrealized income and
expenses arising from inter-company transactions, are eliminated in full in
preparing these condensed consolidated interim financial statements.
D. Jointly controlled assets under the Original PSC
The jointly controlled assets under the Original PSC offer joint ownership by
the Company and its co-venturers to the Original PSC for assets contributed to
the ongoing exploration project in the Kurdistan Region of Iraq. The Company
recognizes its share of the jointly controlled assets and its share of the joint
liabilities incurred under the Original PSC.
E. Foreign currency translation
These condensed consolidated interim consolidated financial statements are
presented in U.S. dollars, which is the Company's functional and reporting
currency.
Transactions in currencies other than the functional currency are recorded at
the rates of exchange prevailing on the dates of the transactions. At the
reporting date, monetary assets and liabilities that are denominated in foreign
currencies are translated at the exchange rates prevailing at the date of the
statement of financial position. Non-monetary items are measured at historical
exchange rates.
F. Exploration and evaluation expenditures
Crude oil and natural gas exploration and evaluation expenditures are accounted
for using a modified 'successful efforts' method of accounting. Accordingly, the
Company accounts for its share of costs relating to the acquisition of,
exploration for, and evaluation of crude oil and natural gas assets, including
related provisions for decommissioning liabilities, as exploration and
evaluation expenditures. Exploration and evaluation costs include, but are not
limited to, license and land acquisition costs; topographical, geological,
geochemical, and geophysical costs or studies; drilling and testing of
exploratory and non-productive wells; costs related to evaluating the technical
feasibility or commercial viability of extracting mineral reserves; carrying
costs directly related to unproved properties; major development projects; and
administrative costs directly related to exploration and evaluation activities.
The costs continue to be carried as exploration and evaluation expenditures
until such time that the technical feasibility and commercial viability of the
crude oil and natural gas hydrocarbons has been demonstrated and development of
reserves has been sanctioned. At that point the exploration and evaluation
expenditures are assessed for impairment and then transferred to development
expenditures. As at the date of these financial statements the Company is an
exploration stage company and has not yet incurred any development expenditures.
Accumulated exploration and evaluation expenditures are assessed for impairment
if: a) sufficient data exists to determine technical feasibility and commercial
viability; and b) facts or circumstances suggest the carrying amount exceeds the
recoverable amount. Indicators of impairment are considered at least annually or
whenever facts and circumstances indicate potential impairment. For the purposes
of impairment testing, exploration and evaluation expenditures are allocated on
a cash-generating unit ("CGU") basis. The Company has established that each PSC
entered into will be identified as a separate CGU. An impairment loss is
recognized for the amount by which the exploration and evaluation expenditure's
carrying value exceeds it recoverable amount. The recoverable amount is the
higher of the exploration and evaluation expenditure's fair value less costs to
sell and their value in use. Impairment losses are recognized immediately in the
statement of comprehensive income (loss). If facts and circumstances
subsequently indicate that a reversal of a previous impairment loss is
warranted, the carrying value is increased up to the recoverable amount, with
the reversal limited to the original loss amount. As at the reporting date no
impairment has been recognized.
No depreciation or amortization is charged against exploration and evaluation
assets.
G. Property, plant and equipment ("PP&E")
Property, plant and equipment are stated at historical cost, less depreciation,
and are depreciated on a straight-line basis over their estimated useful lives
based on the following annual rates:
Furniture, fixtures and office equipment 20-33%
Computer hardware and software 33-50%
Whenever events or circumstances dictate, the Company compares the carrying
value of other property, plant and equipment to estimated net recoverable
amounts, based on estimated discounted future cash flows, to determine whether
there is any indication of impairment.
H. Cash and cash equivalents
Cash and cash equivalents consist of cash in the bank, less outstanding cheques,
and short-term deposits with original maturity dates of three months or less.
I. Financial instruments
Financial assets and liabilities are recognized on the Company's statement of
financial position when the Company becomes party to the contractual provisions
of the instrument. Financial assets are de-recognized when the contractual
rights to the cash flows from the financial assets expire or when the
contractual rights to those assets are transferred. Financial liabilities are
derecognized when the obligation specified in the contract is discharged,
cancelled, or expired.
Upon initial recognition, the Company classifies its financial instruments into
one of the following categories based on the purpose for which the instruments
were acquired:
Financial assets and liabilities at fair value through profit or loss - this
category is comprised of derivatives, or assets acquired or incurred principally
for the purpose of selling or repurchasing in the near term, except for those
derivatives designated as hedges. They are carried in the statement of financial
position at fair value with changes in fair value recognized in the
comprehensive statement of income (loss) for the period. The Company has not
classified any instruments in this category, and has not identified any material
embedded derivatives in any of its financial instruments.
Available-for-sale financial assets - this category is comprised of
non-derivative investments designated as available for sale and can include
marketable securities and investments in debt and equity securities.
Available-for-sale investments are recognized initially at fair value plus
transaction costs and are subsequently carried at fair value. Gains or losses
arising from changes in fair value are recognized in other comprehensive income.
Available-for-sale investments are classified as non-current, unless the
investments mature within twelve months, or management expects to dispose of
them within twelve months. The Company has not classified any instruments in
this category.
Loans and receivables - this category is comprised of non-derivative financial
assets with fixed or determinable payments that are not quoted in an active
market. The Company's loans and receivables are comprised of cash and cash
equivalents, trade and other receivables, insurance recoveries receivable,
deposits held in trust and income tax recoverable and are included in current
assets due to their short-term nature.
Loans and receivables are initially recognized at the amount expected to be
received less, when material, a discount to reduce the loans and receivables to
fair value. Subsequently, loans and receivables are measured at amortized cost
using the effective interest rate method.
Financial liabilities at amortized cost - this category is comprised of
financial liabilities measured at amortized cost using the effective interest
rate method, which includes trade and other payables.
J. Impairment of financial instruments
At each reporting date, the Company assesses whether there is objective evidence
that a financial asset is impaired. If such evidence exists, the Company
recognizes an impairment loss as follows:
Financial assets carried at amortized cost - the impairment loss is the
difference between the amortized cost of the loan or receivable and the present
value of the estimated future cash flows, discounted using the instrument's
original effective interest rate. The carrying amount of the asset is reduced by
this amount either directly or indirectly though the use of an allowance
account.
Available for sale financial assets - the impairment loss is the difference
between the original cost of the asset and its fair value at the measurement
date, less any impairment losses previously recognized in the statement of loss.
This amount represents the cumulative loss in accumulated other comprehensive
income that is reclassified to net income.
Impairment losses on financial instruments carried at amortized cost are
reversed in subsequent periods if the amount of the loss decreases and the
decrease can be related objectively to an event occurring after the impairment
was recognized. Impairment losses on available-for-sale equity instruments are
not reversed.
K. Provision for decommissioning obligations
Provision for decommissioning obligations are recognized when the Company has a
present legal or constructive obligation as a result of past events, and it is
probable that an outflow of resources will be required to settle the obligation,
and a reliable estimate of the amount of obligation can be made. Provision is
made for the present value of the future cost of abandonment of oil and gas
wells and related facilities. The Company recognizes the initial spud date as
the obligating event for each well location. The Company currently has no other
facilities or infrastructure relating to petroleum operations that would require
future abandonment activities. When the provision is first recognized a
corresponding amount equivalent to the provision is also currently recognized as
part of the cost of exploration and evaluation expenditures.
The amount recognized is the estimated cost of decommissioning activities based
on internal engineering estimates prevailing at the reporting date, discounted
to its present value utilizing a pre-tax risk-free interest rate. Changes in the
estimated timing of decommissioning or decommissioning cost estimates are dealt
with prospectively by recording an adjustment to the provision, with a
corresponding adjustment to exploration and evaluation expenditures, and are
updated at each reporting date to reflect the current market assessments of the
time value of money and the risks specific to the obligation.
The liability is increased each period due to the passage of time and the
associated accretion is expensed to income in the period.
L. Taxation including deferred taxation
Tax expense represents current tax and deferred tax. Income tax is recognized in
the statement of income or loss except to the extent that it relates to items
directly in equity, in which case the related income tax impact is recognized in
equity.
Current tax is based on the taxable profits for the period and any adjustment to
tax payable or receivable in respect of previous years.
Deferred tax assets and liabilities are determined on a non-discounted basis,
using the liability method, based on the differences between the carrying values
in the condensed consolidated interim financial statements and the tax bases of
assets and liabilities. Deferred tax assets are recognized to the extent that it
is probable that the assets can be recovered. Deferred income tax assets and
liabilities are presented as non-current.
Deferred taxes are calculated using tax rates that have been enacted or
substantively enacted by the reporting date.
Taxes on income in interim periods are accrued using the tax rate that would be
applicable to expected total annual earnings.
M. Share capital
Common shares are classified as equity. Incremental costs directly attributable
to the issuance of shares are recognized as a deduction from equity.
N. Share-based payments
The Company has established a Stock Option Plan for the issuance of options to
directors, officers, employees and consultants to purchase Common Shares of the
Company. The vesting period and expiry date for each option grant is set at the
discretion of the Board of Directors. Each vesting tranche is considered a
separate award with its own vesting period. The fair value of each tranche is
measured at the grant date using the Black-Scholes option pricing model.
Compensation costs are recognized over the vesting period for each particular
tranche based on the number of awards expected to vest, with a corresponding
increase to contributed surplus. Compensation costs directly related to
exploration activities are capitalized, costs related to non-exploration
activities are treated as general and administrative expenses. The number of
option awards expected to vest is reviewed at least annually, with any impact
being recognized immediately.
The cash proceeds received, net of any directly attributable transaction costs,
together with the amount recorded to other reserves are credited to share
capital when the options are exercised.
O. Revenue
The Company recognizes revenue on an accrual basis, which is related to the
interest income earned on the Company's cash and cash equivalents balances.
P. Fair value
The fair value of instruments, trade and other receivables, and trade and other
payables approximate their carrying amounts due to the short term maturity of
the instruments.
Q. Loss per share
The Company presents the basic and diluted loss per share data for its common
shares, calculated by dividing the loss attributable to the shareholders of the
Company by the weighted-average number of common shares outstanding during the
period. Diluted income per share is determined by adjusting the income
attributable to the common shareholders and the average number of common shares
outstanding for the period for the effects of all potential dilutive common
shares. Note that by definition, for periods in which there is a loss
attributable to the common shareholders, there can be no dilutive impact on the
loss per share calculation.
R. Recent accounting pronouncements issued but not yet effective
The IASB has issued the following standards which are effective for annual
periods beginning on or after January 1, 2013, with early adoption permitted.
The Company is currently evaluating the impact, if any, of each of these new
standards, which are briefly summarized as follows:
IAS 27 - Separate Financial Statements:
IAS 27 replaces the existing IAS 28, "Consolidated and Separate Financial
Statements". IAS 27 contains accounting and disclosure requirements for
investments in subsidiaries, joint ventures and associates when an entity
prepares separate financial statements. IAS 27 requires an entity preparing
separate financial statements to account for those investments at cost or in
accordance with IFRS 9, "Financial Instruments".
IAS 28 - Investments in Associates and Joint Ventures:
IAS 28 prescribes the accounting for investments in associates and sets out the
application of the equity method when accounting for investments in associates
and joint ventures.
IFRS 9 - Financial Instruments:
IFRS 9 is the first part of a new standard on classification and measurement of
financial assets and liabilities that will replace IAS 39, "Financial
Instruments: Recognition and Measurements".
For financial assets, IFRS 9 has two measurement categories: amortized cost and
fair value. All equity instruments are measured at fair value. A debt instrument
is at amortized cost only if the entity is holding it to collect contractual
cash flows and the cash flows represent principal and interest. Otherwise it is
at fair value through profit and loss.
For financial liabilities, although the classification criteria for financial
liabilities will not change under IFRS 9, the approach to the fair value option
for financial liabilities may require different accounting for changes to the
fair value of a financial liability as a result of changes to an entity's own
credit risk.
IFRS 10 - Consolidated Financial Statements:
IFRS 10 establishes the principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more other
entities. IFRS 10 replaces IAS 27 "Consolidated and Separate Financial
Statements" and SIC-12 "Consolidation - Special Purpose Entities".
IFRS 11 - Joint Arrangements:
IFRS 11 establishes principles for financial reporting by parties to a joint
arrangement, and requires entities to classify interests in joint arrangements
as either a joint venture or a joint operation. Joint ventures will be accounted
for using the equity method of accounting whereas for joint operations the
entity will recognize it share of the assets, liabilities, revenue and expenses
of the joint operation. IFRS 11 replaces IAS 31 "Interests in Joint Ventures"
and SIC-13 "Jointly Controlled Entities - Non-monetary Contributions by
Venturers".
IFRS 12 - Disclosure of Interests in Other Entities:
IFRS 12 establishes disclosure requirements relating to an entity's interests in
other entities such as joint arrangements, associates or unconsolidated
structured entities, including special purpose vehicles and off balance sheet
vehicles. The standard carries forward existing disclosure requirements and also
introduces significant additional disclosure requirements that address the
nature and risk associated with interests in other entities.
IFRS 13 - Fair Value Measurements:
IFRS 13 defines fair value and sets out a single IFRS framework for measuring
fair value and the required disclosures about fair value measurements for use
across all IFRS standards. IFRS 13 is intended to eliminate the inconsistencies
in fair value measurement and the disclosure requirements contained in various
other IFRS standards that refer to fair value.
4. Financial risk management
The Company's financial instruments consist of cash and cash equivalents, trade
and other receivables, insurance recoveries receivable, deposits held in trust,
and trade and other payables. The main risks that could adversely affect the
Company's financial instruments are credit risk, liquidity and funding risk, and
market and interest rate risk.
Risk management is carried out by senior management, in particular, the Board of
Directors. The risk management policies employed by the Company are discussed
below:
Credit risk
Credit risk is the risk of loss associated with the counterparty's inability to
fulfill its payment obligations. The Company is currently exposed to credit risk
on its cash and cash equivalents to the extent these balances are invested with
various institutions. The Board of Directors of the Company has approved an
Investment Policy to dictate the various types of instruments and institutions
that can be invested in and monitors these against this policy on a regular
basis. Currently, the Company has entered into transactions for cash equivalents
with major Canadian financial institutions with investment grade credit ratings.
The Company is also normally exposed to credit risk on trade and other
receivables, mainly associated with Talisman's 40 percent interest in the
Original PSC. Accordingly, the ability of the Company to successfully carry out
the exploration, appraisal and development of its PSC Lands may be impacted by
the continued participation of the parties in these activities. As at March 31,
2011, the Company had a net receivable balance owing from Talisman of $1.7
million for its share of expenditures under the terms of the Original PSC,
including penalty provisions for any amounts in default (also refer to Note 22
"Commitments and contingencies").
With respect to the Company's financial assets, the maximum exposure to credit
risk due to default of a counter party is equal to the carrying value of these
instruments. The maximum exposure to credit risk as at the reporting date is as
follows:
March 31, December 31,
As at 2011 2010
----------------------------------------------------------------------------
Cash and cash equivalents 64,863 31,482
Trade and other receivables $ 1,876 $ 8,648
Insurance recoveries receivable 9,092 17,597
Deposits held in trust - 420
----------------------------------------------------------------------------
Total $ 75,831 $ 58,147
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company does not expect any losses from non-performance by these
counterparties, and has not recorded a provision against any of these amounts as
it does not consider the balances to be impaired.
Liquidity and funding risk
Liquidity and funding risk is the risk that the Company may be unable to
generate or obtain sufficient cash or its equivalent in a timely and
cost-effective manner to meet its commitments as they become due. As the Company
is engaged in acquiring properties and exploring for crude oil and natural gas
and is in the exploration phase, it currently does not have a revenue source
outside of interest on its cash and cash equivalent balances. The Company is
therefore required to funds its share of all commitments from existing balances
or access additional sources of funding from debt or equity markets.
The Company's capital structure consists of shareholder's equity and working
capital. The Company will adjust its capital structure to manage its drilling
program though the issuance of shares and adjustments to capital spending.
The Company's objectives when managing its capital structure are as follows:
i. Ensure adequate levels of available cash and cash equivalents to meet the
Company's commitments under the Original PSC (also refer to Note 22 "Commitments
and contingencies"); and
ii. To prudently fund expenditures related to the acquisition of properties, and
for exploration, appraisal and development of crude oil and natural gas
properties.
The Company funds its share of expenditures of all commitments from existing
cash and cash equivalent balances received primarily from issuances of
shareholder's equity. The Company has not entered into any debt financing
arrangements as at the reporting date and is not subject to any externally
imposed capital requirements. Trade and other payables of $12 million are all
current liabilities due in less than 1 year. Certain commitments of
approximately $3 million identified in Note 22 are also due within 1 year of the
reporting date.
The Board of Directors regularly reviews the Company's cash and cash equivalents
against the Company's expenditure commitments and assesses the need and timing
for additional financing. However, the Company's results will impact its access
to the capital necessary to meet these expenditure commitments. There can be no
assurance that debt or equity financing will be available or sufficient to meet
those commitments, or for other corporate purposes, or if debt or equity
financing is available, that it will be on terms acceptable to the Company. The
inability of the Company to access sufficient capital for its operations could
have a material adverse impact on the Company's financial condition, results of
operations and prospects. Management has a reasonable expectation that the
Company can raise the additional capital required in order to meet future
expenditures.
Market and interest rate risk
Market risk is the risk of loss that may arise from changes in market factors
such as interest rates, foreign exchange rates and equity or commodity prices.
The Company is exposed to interest rate risk to the extent that changes in
market interest rates will impact interest earned on the Company's cash and cash
equivalents. The Company is also exposed to foreign exchange risk, as the
majority of costs are anticipated to be incurred in U.S. dollars while the funds
it will have available to it may be in other currencies.
The Company's Investment Policy dictates the various types of instruments and
institutions that can be invested in and monitors these against this policy on a
regular basis. The Board of Directors has also approved a Foreign Exchange
Policy to dictate the currencies held by the Company and the instruments that
can be utilized by the Company to meet its day to day requirements. This Foreign
Exchange Policy requires the Company to hold the majority of its cash and cash
equivalents and short term investments in U.S. dollars and sets out the type and
duration of instruments that can be used to meet the Company's day to day
foreign exchange requirements. The Foreign Exchange Policy does allow the
Company to hold other balances, mainly Canadian dollars, to meet its funding
needs for general and administrative and other spending requirements in these
currencies. Neither aforementioned policy permits the Company to enter into any
economic hedging as it relates to interest or foreign exchange risks. As at
March 31, 2011, had the U.S. dollar changed by one percent against the Canadian
dollar, with all other variables held constant, the Company's foreign exchange
gain (loss) would have been affected by approximately $0.1 million.
The marketability and price of crude oil and natural gas that may be acquired or
discovered by the Company is, and will continue to be, affected by numerous
factors beyond its control including the impact that the various levels of
government may have on the ultimate price received for crude oil and natural gas
sales. The Company's ability to market its crude oil and natural gas may depend
on its ability to secure transportation. The Company may also be affected by
deliverability uncertainties related to the proximity of its potential
production to pipelines and processing facilities and operational problems
affecting such pipelines and facilities as well as potential government
regulation relating to price, the export of crude oil and natural gas and other
aspects of the crude oil and natural gas business.
Both crude oil and natural gas prices are subject to wide fluctuation. During
the last 15 months ended March 31, 2011, both crude oil and natural gas prices
remained volatile with West Texas Intermediate ranging from $64 to $113 per
barrel. WesternZagros originally negotiated the economic terms of the Original
PSC in 2007 in a crude oil price environment of approximately $50 per barrel.
Any significant and sustained decline in crude oil prices from that price may
impact the feasibility of WesternZagros' business plan.
5. Critical accounting judgements, estimates and assumptions
The preparation of these condensed consolidated interim financial statements in
conformity with IFRS requires the use of critical accounting estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as at the reporting date, as
well as the reported amounts of revenues and expenses during the reporting
period. Such estimates relate to unsettled transactions and events as at the
reporting date. Accordingly, actual results may ultimately differ from the
estimated amounts as future confirming events occur. Areas that involve a higher
degree of judgement or complexity, or areas where assumptions and estimates are
significant to the condensed consolidated interim financial statements are
disclosed below.
A. Recoverability of asset carrying values
At each reporting date, the Company assesses its exploration and evaluation and
property, plant and equipment expenditures for possible impairment if events or
circumstances indicate the carrying values of the assets might not be
recoverable. Relevant indicators include the following: the continued
progression of Management's operational plans; new information obtained from
wells that have been drilled or tested; changes or restrictions in access to
drilling sites; changes in legal, regulatory, market, environmental,
technological, or political factors that could impact ongoing operations; the
ability of the Company to continue fulfilling ongoing commitments; and
significant changes in the Company's market value.
If factors indicate that the Company may need to recognize impairment, the
carrying value of the assets for each cash-generating-unit is compared to the
greater of value-in-use or fair-value less costs to sell. The determination of
the value-in-use amount, which is based on discounted future cash flows, and any
resulting impairment involves the use of significant estimates and assumptions
about future events and factors such as future commodity prices, the impact of
inflation on operating expenses, discount rates, production profiles, the
ability to produce and export crude oil and natural gas, the future capital
costs needed to develop reserves, as well as the future marketability and
availability of transportation for crude oil and natural gas that is produced.
At the reporting date, the Company is still in the exploration phase of
operations on its PSC Lands. The Company has not recognized any impairment for
exploration and evaluation expenditures nor for property, plant, and equipment.
B. Provision for decommissioning obligations
The Company recognizes both an asset and a provision for decommissioning
obligations in the period in which they are incurred by estimating the fair
value of the obligation. The fair value calculations are based on a risk-free
discount rate. Provisions for environmental clean-up and remediation costs
associated with the Company's drilling operations are based on current legal and
constructive requirements, technology, price levels and expected plans for
remediation. Actual costs and cash outflows and the timing of those cash
outflows can differ from estimates because of changes in laws and regulations,
public expectations, prices, discovery and analysis of site conditions, future
performance of wells drilled, and changes in clean-up technology. Estimating the
timing and amount of cash outflows required to settle these obligations are
inherently difficult and are based on Management's current experience. Any
differences between actual and estimated decommissioning obligations would
impact both the asset and the provision, which would then impact future
depreciation of the asset as well as accretion on the provision.
C. Income tax
Tax regulations and legislation and the interpretations thereof in the
jurisdictions that the Company operates are subject to change. As such, income
taxes are subject to measurement uncertainty. Deferred income tax assets are
assessed by Management based on all available information at the end of the
reporting period to determine the likelihood that they will be realized from
future taxable earnings.
D. Share-based payments
The estimates, assumptions, and judgements made in relation to the fair value of
share-based payments and the associated expense recognition is subject to
measurement uncertainty. The fair value of employee stock options is measured
using a Black Scholes option pricing model. Measurement inputs include share
price on measurement date, exercise price of the instrument, expected
volatility, expected life of the instrument, expected dividends, and the
risk-free interest rate.
6. Segment reporting
At the reporting date, the Company had only one significant asset related to its
interest the Original PSC with the KRG in respect of an exploration project in
the Kurdistan Region of Iraq. The Company is still in the exploration phase and
has identified one segment for operational activities carried out in the country
of Iraq.
7. Cash and cash equivalents
March 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Bank balances $ 3,752 $ 3,613 $ 6,609
Term deposits 61,111 27,869 70,099
----------------------------------------------------------------------------
Cash and cash equivalents $ 64,863 $ 31,482 $ 76,708
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. Trade and other receivables
Current March 31, December 31, January 1,
2011 2010 2010
---------------------------------------------------------------------------
Joint venture receivables $ 1,724 $ 7,675 $ 6,636
Other receivables 152 973 53
Loan receivable from related party - - 191
---------------------------------------------------------------------------
Total trade and other receivables $ 1,876 $ 8,648 $ 6,880
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Joint venture receivables relate to amounts owing from Talisman for its working
interest share of costs incurred in relation to the Original PSC agreement.
Other receivables include balances owing from certain payables vendors that have
yet to be realized. The loan receivable at January 1, 2010 was in respect of a
loan to a senior officer, this loan was fully repaid in the third quarter of
2010.
At the reporting date, there were joint venture receivables of $0.2 million
(December 31, 2010: $0.2 million) that were more than ninety days past due but
were not considered impaired. The other classes within trade and other
receivables do not contain any impaired assets.
9. Exploration and evaluation expenditures
March 31, December 31, January 1,
As at 2011 2010 2010
----------------------------------------------------------------------------
Costs $ 193,560 $ 180,770 $ 154,097
Accumulated impairment - - -
----------------------------------------------------------------------------
Net book value $ 193,560 $ 180,770 $ 154,097
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Twelve months
ended ended
March 31, December 31,
Period ended 2011 2010
----------------------------------------------------------------------------
Opening net book value $ 180,770 $ 154,097
Additions, net of insurance recoveries 13,251 26,673
Disposals (461) -
Impairment - -
----------------------------------------------------------------------------
Closing net book value $ 193,560 $ 180,770
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All exploration and evaluation expenditures pertain to the Kurdistan Region
Exploration Project with respect to the Company's PSC and have been capitalized
in accordance with the Company's exploration and evaluation accounting policy.
Included in exploration and evaluation expenditures as at March 31, 2011 is $0.4
million related to provisions for decommissioning obligations (December 31,
2010: $0.2 million). For the three months ended March 31, 2011, the Company has
capitalized $1.0 million of general and administrative costs (March 31, 2010:
$0.6 million), including $0.1 million of share-based compensation costs (March
31, 2010: $0.1 million) directly related to exploration activities. All
exploration and evaluation expenditures are excluded from depreciation.
The Company initiated an insurance claim during 2010 related to the cost of the
well control and recovery operations at Kurdamir-1. The control of well
insurance policy covering these claims has a net aggregate limit to the Company
of $45 million, with a $0.4 million deductible. Under the terms of the insurance
policy, the Company submits claims for these costs as they are incurred and paid
and these claims are then subject to the review and approval of an adjuster
appointed by the insurers. As at March 31, 2011, the Company had received
insurance proceeds of $35.9 million related to approved interim claims.
Subsequent to March 31, 2011, the insurers approved a further payment of $4.7
million, which was fully received as at the reporting date. Also subsequent to
March 31, 2011, the Company and insurers reached an agreement to settle the
balance of the claim which will bring the total amount credited for insurance
recoveries to approximately $45.0 million. As at December 31, 2010, $42.0
million had been credited for insurance recoveries.
As at March 31, 2011, the Company had approximately $174 million, net to
WesternZagros, of recoverable costs available that may ultimately be recovered
from future crude oil or natural gas sales in accordance with the Original PSC.
10. Property plant and equipment
As at the reporting date, property, plant and equipment is comprised of office
and computer equipment and leasehold improvements. As the Company is still in
the exploration stage all oil and gas assets, including assets related to
provisions for decommissioning obligations, are classified within exploration
and evaluation assets.
March 31, December 31, January 1,
As at 2011 2010 2010
----------------------------------------------------------------------------
Costs $ 1,830 $ 1,830 $ 1,830
Accumulated impairment - - -
Accumulated depreciation (1,619) (1,569) (1,016)
----------------------------------------------------------------------------
Net book value $ 211 $ 261 $ 814
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Twelve months
ended ended
March 31, December 31,
Period ended 2011 2010
----------------------------------------------------------------------------
Opening net book value $ 261 $ 814
Additions - -
Impairment - -
Depreciation (50) (553)
----------------------------------------------------------------------------
Closing net book value $ 211 $ 261
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. Deposits held in trust
The Company had deposited in trust for a supplier amounts to be utilized to fund
certain expenditures for drilling operations. During the three months ended
March 31, 2011, these funds held in trust were released back to the Company.
12. Income taxes
For the three months ended March 31 2011 2010
----------------------------------------------------------------------------
Current income tax recovery $ (465) $ (697)
Future income tax expense (recovery) (38) 51
----------------------------------------------------------------------------
Income tax expense (recovery) $ (503) $ (646)
----------------------------------------------------------------------------
The deferred income tax asset is comprised of:
Deferred income tax asset as at March 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Share issue costs $ 244 $ 204 $ 408
Book value in excess of tax values (11) (18) (37)
----------------------------------------------------------------------------
Total deferred income tax asset $ 233 $ 186 $ 371
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The deferred income tax liability is comprised of:
March 31, December 31, January 1,
Deferred income tax liability as at 2011 2010 2010
---------------------------------------------------------------------------
Book value in excess of tax values $ 149 $ 140 $ 161
Non-capital loss carryforwards - - (27)
---------------------------------------------------------------------------
Total deferred income tax liability $ 149 $ 140 $ 134
13. Trade and other payables
March 31, December 31, January 1,
Current 2011 2010 2010
---------------------------------------------------------------------------
Trade payables $ 1,405 $ 4,052 $ 6,705
Accruals 10,296 17,473 11,592
---------------------------------------------------------------------------
Total trade and other payables $ 11,701 $ 21,525 $ 18,297
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Trade payables are non-interest bearing and are normally settled on 30 to 60 day
terms. Accruals relate mainly to exploration and evaluation expenditures
incurred as at the reporting date.
14. Provision for decommissioning obligations
Decommissioning liabilities are recognized when the Company has a present legal
or constructive obligation as a result of past events, and it is probable that
an outflow of resources will be required to settle the obligation, and a
reliable estimate of the amount of obligation can be made. Provisions are made
for the present value of the future cost of abandonment of oil and gas wells and
related facilities.
The amount recognized is the estimated cost of decommissioning activities based
on internal engineering estimates prevailing at the reporting date, discounted
to its present value utilizing a pre-tax risk-free interest rate. Changes in the
estimated decommissioning costs or the estimated timing of decommissioning costs
are dealt with prospectively by recording an adjustment to the provision, with a
corresponding adjustment to exploration and evaluation assets, and are updated
at each reporting date to reflect the current market assessments of the time
value of money and the risks specific to the obligation.
These costs are expected to be incurred in the year 2035 in respect of well
locations as at the reporting date. The Company's share of total undiscounted
amount of estimated cash flow required to settle the obligation is $1.7 million.
The Company has used the Bank of Canada long-term bond yield rate and an
inflation rate of 4 percent to calculate the net present value of the future
obligations. The additional obligation incurred in the first quarter of 2011
relates to the Company's current 100 percent working interest funding for the
Sarqala-1 re-entry operation for which Talisman has elected not to participate
(also refer to Note 22 "Commitments and contingencies").
The following table presents the reconciliation of the Company's provision for
decommissioning liabilities:
Three months Twelve months
ended March 31, ended December
2011 31, 2010
----------------------------------------------------------------------------
Balance, beginning of period $ 509 $ 432
----------------------------------------------------------------------------
Additional obligations incurred 173 -
Changes in estimates or timing of cash
flows (21) 61
Accretion 6 16
----------------------------------------------------------------------------
Balance, end of period $ 667 $ 509
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15. Share capital
As at March 31, 2011, the Company is authorized to issue an unlimited number of
common shares and preferred shares, issuable in series. The common shares are
without nominal or par value.
16. Share based payments
Pursuant to the stock option plan, the Board of Directors may grant options to
directors, officers, employees and other service providers. The aggregate number
of shares that may be reserved for issuance pursuant to stock options may not
exceed 10 per cent of the issued and outstanding common shares of the Company on
a non-diluted basis as at the time of granting. Stock options expire not more
than five years from the date of grant, or earlier if the individual ceases to
be associated with the Company, and the option vesting period is determined at
the discretion of the Board of Directors when granted. These options are equity
settled share based payment transactions.
The following tables present the reconciliation of stock options granted:
Weighted average
Number of exercise price
For the year ended December 31, 2010 options ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of year 13,007,334 $ 1.50
Granted 9,764,900 0.49
Exercised - -
Forfeited and expired (2,417,334) 1.67
----------------------------------------------------------------------------
Outstanding , end of year 20,354,900 $ 1.00
----------------------------------------------------------------------------
Exercisable at December 31, 2010 12,143,965 $ 1.30
----------------------------------------------------------------------------
Weighted average
Number of exercise price
For the three months ended March 31, 2011 Options ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of period 20,354,900 $ 1.00
Granted 27,000 0.58
Exercised - -
Forfeited and expired (605,400) 1.97
----------------------------------------------------------------------------
Outstanding, end of period 19,776,500 $ 0.97
----------------------------------------------------------------------------
Exercisable at March 31, 2011 11,736,965 $ 1.26
----------------------------------------------------------------------------
The fair value of all options granted have been estimated at the grant date
using the Black-Scholes option pricing model and are summarized in the following
table:
----------------------------------------------------------------------------
Three months ended Twelve months ended
March 31, 2011 December 31, 2010
----------------------------------------------------------------------------
Weighted average fair value of stock
options granted $0.40 $0.29
Average Risk Free Interest Rate $1.74% 1.62%
Expected Life 3 years 2 - 3 years
Average Expected Volatility 116% 120%
Dividend Per Share Nil Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the quarter ended March 31, 2011, the Company recognized $0.2 million (Q1
2010: $0.3 million) of stock based compensation as general and administrative
expense and capitalized $0.1 million (Q1 2010: $0.1 million).
17. General and administrative expenses, by nature
For the three months ended March 31 2011 2010
----------------------------------------------------------------------------
Staff expenses $ 1,484 $ 1,179
Share-based payments 245 273
Travel expenses 215 119
Professional fees 268 442
Office costs 267 284
Regulatory and corporate project costs 69 312
Other administrative expenses 124 83
Less capitalized general and administrative
costs (876) (929)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total administrative expenses $ 1,796 $ 1,763
----------------------------------------------------------------------------
Key management personnel have been identified as the Board of Directors and the
Executive Management Team. Details of key management remuneration are shown in
Note 18.
18. Related party transactions and balances
All wholly-owned subsidiaries as listed in Note 3(c) have been included in the
consolidated accounts.
The remuneration of the ten key management personnel of the Company, which
includes the Directors and Officers and other Executive Management personnel, is
set out below in aggregate:
For the three months ended March 31
2011 2010
----------------------------------------------------------------------------
Salaries and employee benefits $ 339 $ 320
Share-based compensation expense 201 172
----------------------------------------------------------------------------
Total $ 540 $ 492
----------------------------------------------------------------------------
19. Loss per share, basic and diluted
The basic loss per share is calculated by dividing the loss attributable to
shareholders of the Company by the weighted average number of common shares
issued during the period. In computing diluted per share amounts, all of the
Company's options at the reporting date totaling 19,776,500 (March 31, 2010 -
12,904,000) have been excluded as they are anti-dilutive. Accordingly no
additional common shares were added to the basic weighted average shares
outstanding to account for dilution.
The basic and diluted loss per share was calculated as follows:
For the three months ended March 31 2011 2010
----------------------------------------------------------------------------
Loss for the period $ 1,480 $ 1,333
Weighted-average number of common shares 229,382,517 207,464,320
----------------------------------------------------------------------------
Loss per share (basic and diluted) $ 0.006 $ 0.006
20. Shareholder rights plan
On October 18, 2007, the Corporation adopted a shareholder rights plan (the
"Plan"). Under the Plan, one right has been issued in respect of each currently
issued common share and one right will be issued with each additional common
share which is issued. The rights remain attached to the common shares and are
not exercisable or separable unless one or more of certain specified events
occur. If a person or group acting in concert acquires 20 per cent or more of
the common shares of the Corporation, the rights will entitle the holders
thereof (other than the acquiring person or group) to purchase common shares at
a substantial discount from the then market price. The rights are not triggered
by a "Permitted Bid" as defined in the Plan. The Plan will remain in effect
until termination of the annual meeting of shareholders in 2013, unless extended
by resolution of the shareholders at such meeting.
21. Supplemental cash flow information
Expenditures on exploration and evaluation assets are comprised of:
For the three months ended March 31 2011 2010
----------------------------------------------------------------------------
Expenditures on exploration and evaluation assets $(15,955) $(13,153)
Change in non-cash investing working capital (3,074) (6,642)
----------------------------------------------------------------------------
$(19,029) $(19,795)
----------------------------------------------------------------------------
Changes in non-cash working capital is comprised of:
For the three months ended March 31 2011 2010
----------------------------------------------------------------------------
Related to operating activities
Trade and other receivables $ 438 $ (98)
Prepaid expenses (494) (213)
Income tax recoverable - -
Trade and other payables 4 4
----------------------------------------------------------------------------
$ (52) $ (307)
----------------------------------------------------------------------------
Related to investing activities
Trade and other receivables $ 6,754 $ (1,907)
Trade and other payables (9,828) (4,735)
----------------------------------------------------------------------------
$ (3,074) $ (6,642)
----------------------------------------------------------------------------
22. Commitments and contingencies
A. Production sharing contract
Under the terms of its Original PSC, the Company has a 40 percent working
interest and the KRG has a 20 percent working interest which is carried by the
Company. The remaining 40 percent working interest is held by Talisman, which
was allocated the interest by the KRG, as announced on June 23, 2008. The
Company, the KRG and Talisman are collectively the "Contractor Group" under the
Original PSC. WesternZagros is the operator of the PSC Lands until the end of
the first exploration sub-period of the Original PSC, when a joint operating
company may be established if so elected by the Contractor Group.
The Original PSC contemplates two exploration sub-periods of three years and two
years, respectively, with two possible one-year extensions. The first
exploration sub-period ended December 31, 2010, subject to an extension under a
force majeure claim described below. During such time, the Contractor Group was
required to complete a minimum of 1,150 kilometres of seismic surveying (which
has been completed), to drill three exploration wells (two of which have been
drilled), and to commit a minimum of $75 million in the aggregate on these
activities (which has been completed). The Original PSC also includes capacity
building support payments (which concluded in April 2009) and annual funding for
certain technological, logistical, recruitment and training support during the
exploration sub-periods.
During the drilling of the Kurdamir-1 well, certain situations occurred which
caused additional time to be spent on well control and repair operations under
conditions of force majeure. Under the terms of the Original PSC, when a force
majeure event occurs, the time resulting from any such delay and the time
necessary to repair any damage resulting from the delay is to be added to any
time period provided under the Original PSC, including the first exploration
sub-period. The period of force majeure started on January 22, 2010 and
continued until October 14, 2010, a period of 265 days. The Company, on behalf
of the Contractor Group, has notified the KRG of a force majeure event under the
terms of the Original PSC and claimed a corresponding 265 day extension of the
first exploration sub-period, i.e. until September 22, 2011.
Following the submission of the force majeure claim to the KRG, the KRG proposed
certain contractual amendments in order to resolve the timing issues created by
the force majeure event and other commercial concerns. Subsequent to March 31,
2011, negotiations among the Contractor Group were concluded with respect to
these proposed amendments. See "Future PSC Operations".
At the end of the first exploration sub-period, the Company and the other
parties to the Original PSC may relinquish the entire contract area (other than
any discovery or development areas), or continue further exploration operations
by entering into the second exploration sub-period, or request a one-year
extension for further exploration and appraisal activities prior to deciding to
enter into the second exploration sub-period.
To meet its remaining commitments for the first exploration sub-period as at
March 31, 2011, the Company estimates expenditures of approximately $35 million,
prior to the costs of any testing, to meet its remaining commitments for the
first exploration sub-period related to the third exploration commitment well.
This estimate assumes that the Company will be required to fund 100 percent of
the remaining costs associated with drilling the Mil Qasim-1 exploration
commitment well, and provide associated supervision and local office support in
support of drilling operations. See "Future PSC Operations".
During the second exploration sub-period under the Original PSC Agreement, the
Contractor Group, or those parties who elected to participate in further
exploration, is required to complete a minimum of 575 kilometres of seismic
surveying, drill at least two exploration wells and commit a minimum of $35
million to these activities. At the end of the second exploration sub-period,
the Company and the other parties to the Original PSC who elected to participate
in the second exploration sub-period, may relinquish the entire contract area
(other than any discovery or development areas) or continue further exploration
and appraisal operations into the extension periods subject to the following
relinquishment requirements. At the end of the second exploration sub-period,
and at the end of each subsequent extension period, the Original PSC requires
the Company, and other parties who elected to participate, to relinquish 25
percent of the remaining undeveloped area within the PSC Lands or the entire
contract area (other than any discovery or development areas).
Future PSC Operations
Subsequent to March 31, 2011, and as an alternative to the force majeure claim,
the Company concluded negotiations with the Ministry of Natural Resources of the
KRG and Talisman to amend the Original PSC that governs the Company's
exploration activities in the Kalar-Bawanoor Block in the Kurdistan Region of
Iraq. Once approved, the amendments will divide the contract area of the
Original PSC into two contract areas, each under a separate PSC. The northern
contract area (or "Kurdamir Block", which comprises approximately 340 square
kilometers) will remain under an amended version of the Original PSC called the
"Kurdamir PSC", while the southern contract area (or "Garmian Block", which
comprises approximately 1,780 square kilometers) will be governed under a new
"Garmian PSC". The Company is awaiting formal approval of both the Kurdamir and
Garmian PSC's from the Oil and Gas Council of the KRG and execution of the PSC's
by the KRG. WesternZagros' 40 percent ownership and other economic terms will
remain unchanged in both the Kurdamir PSC and the Garmian PSC.
The Kurdamir PSC and Garmian PSC will extend the time period available to
complete the first exploration sub-period work obligations and add an additional
well. The drilling commitments will comprise Mil Qasim-1 on the Garmian Block
(to be drilled by December 31, 2011) and Kurdamir-2 on the Kurdamir Block (to be
drilled by June 30, 2012). WesternZagros will remain the operator on the Garmian
Block while Talisman will become operator of the Kurdamir Block. Also,
Talisman's future participation in activities on the Original PSC Lands will be
limited to the Kurdamir Block and it will not be a party to the Garmian PSC.
Under the Garmian PSC, the KRG will have the ability to assign the remaining 40
percent interest in the Garmian Block to a new third party participant following
the completion of Mil Qasim-1. As such, the Company will be required to
initially, or entirely, fund 100 percent of the costs associated with Mil
Qasim-1.
WesternZagros continues to work toward drilling the third exploration commitment
well under the terms of the force majeure provision of the Original PSC in order
to ensure that it meets the current requirements of the Original PSC in the
event the Kurdamir and Garmian PCS's are not approved by the Oil and Gas Council
of the KRG and subsequently executed by the KRG.
B. Other commitments
The Company has entered into various exploration-related contracts, including
contracts for drilling equipment, services and tangibles. The following table
summarizes the commitments the Company has under these exploration-related
contracts relating to the Original PSC and other contractual obligations at
March 31, 2011:
For the Years Ending December 31,
2011 2012 2013 2014 2015+ Total
----------------------------------------------------------------------------
Exploration $ 2,272 - - - - $ 2,272
Office $ 457 $ 223 $13 - - $693
----------------------------------------------------------------------------
$ 2,729 $ 223 $13 - - $ 2,965
----------------------------------------------------------------------------
----------------------------------------------------------------------------
C. Consulting service agreements
In 2003 the Corporation entered into a consulting service agreement that
provided for a three percent right to participate indirectly in the future
profits the Company may earn in respect to the Original PSC, in exchange for
consulting services provided since that date. In the determination of profits
under this agreement, the Company was entitled to deduct the consultant's
proportional share of all costs associated with acquiring the Original PSC and
the exploration, appraisal, development and production expenditures incurred by
the Company ("eligible costs"), together with interest on such percentage of
eligible costs at LIBOR plus three percent. Subsequent to March 31, 2011, the
Company reached agreement for the termination of this right upon execution of
the Kurdamir and Garmian PSC's by the KRG.
Further, in 2004 the Company entered into a consulting service agreement that
provided for a two percent right to participate indirectly in the future profits
the Company may earn in respect to the Original PSC, in exchange for the
provision of consulting services during the period 2004 to 2006. In
determination of profits under this agreement, the Company was entitled to
deduct one percent of all eligible costs, together with interest on such
percentage of eligible costs at LIBOR plus ten percent. The consultant was
required to fund the additional one percent of all eligible costs. Subsequent to
March 31, 2011, the Company terminated this right.
D. Contingencies
i. Litigation
From time to time the Company may become involved in legal or administrative
proceedings in the normal conduct of business. Amounts involved in such matters
are not reasonably estimable due to uncertainty as to the final outcome. The
Company's assessment of the likely outcome of these matters is based on its
judgement of a number of factors, including precedents and facts specific to the
matters. The Company does not believe these matters, individually or in
aggregate will have a material adverse effect on its consolidated financial
position or consolidated comprehensive loss.
ii. Regulatory
Oil and gas operations are subject to extensive controls and regulations imposed
by various levels of government that may be amended from time to time. The
Company's operations may require licenses and permits from various governmental
authorities in the countries in which it operates. Under the Original PSC, the
KRG is obligated to assist in obtaining all permits and licenses from any
government agencies in the Kurdistan Region and from any other government
administration in Iraq. There can be no assurance that the Company will be able
to obtain all necessary licenses and permits that may be required to carry out
exploration and development of its projects.
The political and security situation in Iraq is unsettled and volatile. The
Kurdistan Region is the only "Region" of Iraq that is constitutionally
established pursuant to the Iraq Constitution, which expressly recognizes the
Kurdistan Region. The political issues of federalism and the autonomy of the
Regions of Iraq are matters about which there are major differences between the
various political factions in Iraq. These differences could adversely impact the
Company's interest in the Kurdistan Region including the ability to export any
hydrocarbons as a result of our activities.
23. Explanation of transition to IFRS
These are the Company's first condensed consolidated interim financial
statements that have been prepared in accordance with IFRS in respect of the
Company's first annual reporting date under IFRS of December 31, 2011.
Previously the Company prepared its consolidated annual and consolidated interim
financial statements in accordance with Canadian generally accepted accounting
principles. In accordance with IFRS 1, First Time Adoption of IFRS, certain
disclosures relating to the transition to IFRS are given in this note. These
disclosures are prepared under IFRS as set out in the basis of preparation in
Note 2.
IFRS 1 allows first time adopters of IFRS to utilize a number of voluntary
exemptions from the general principal of retrospective restatement. The Company
has utilized the following exemptions:
A. IFRS 3 Business combinations
This standard has not been applied to acquisitions that occurred before January
1, 2010, the Company's transition date.
B. Full-cost book value as deemed costs
In July 2009, the IASB published an amendment to IFRS 1, Additional Exemptions
for First-Time Adopters, to allow a first time adopter that had previously
utilized full-cost accounting for oil and gas activities under previous GAAP to
elect to measure exploration and evaluation assets at the date of transition at
the book value amount determined under the adopter's previous GAAP. The Company
did follow a full cost approach under previous GAAP and has elected to utilize
this exemption to measure exploration and evaluation expenditures on a deemed
cost basis at the date of transition to IFRS.
C. Reconciliation of equity from Canadian GAAP to IFRS as at the date of IFRS
transition - January 1, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Notes GAAP IFRS IFRS
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 76,708 $ - $ 76,708
Trade and other receivables 6,880 - 6,880
Prepaid expenses 183 - 183
Income tax recoverable 1,738 - 1,738
Future income tax assets a 231 (231) -
----------------------------------------------------------------------------
Total current assets 85,740 (231) 85,509
Non-current assets
Property, plant and equipment b 154,911 (154,097) 814
Exploration and evaluation
expenditures b - 154,097 154,097
Deposits held in trust 420 - 420
Deferred tax assets a 6 365 371
----------------------------------------------------------------------------
Total non-current assets 155,337 365 155,702
----------------------------------------------------------------------------
Total assets $ 241,077 $ 134 $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 18,297 $ - $ 18,297
----------------------------------------------------------------------------
Total current liabilities 18,297 - 18,297
Non-current liabilities
Provision for decommissioning
obligations c 175 257 432
Deferred tax liabilities a - 134 134
----------------------------------------------------------------------------
Total non-current liabilities 175 391 566
----------------------------------------------------------------------------
Total liabilities 18,472 391 18,863
----------------------------------------------------------------------------
Equity
Share capital 253,583 - 253,583
Contributed surplus d 8,749 905 9,654
Deficit e (39,727) (1,162) (40,889)
----------------------------------------------------------------------------
Total equity 222,605 (257) 222,348
----------------------------------------------------------------------------
Total equity and liabilities $ 241,077 $ 134 $ 241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a) Reclassification of the current portion of future income tax assets
recognized under previous GAAP to non-current assets in accordance with IAS 12,
Income Taxes. Net effect was a decrease in current future income tax assets of
$0.2 million. In addition, the presentation of net deferred tax assets and
liabilities are based on a separate legal entity basis which resulted in a net
increase of $0.4 million in deferred tax assets and an increase of $0.1 million
in deferred tax liabilities. The net overall change to deferred taxes was NIL.
b) Reclassification of exploration and evaluation expenditures previously
classified as property, plant and equipment under previous GAAP in accordance
with IFRS 1, First Time Adoption of IFRS. The Company utilized the exemption
under IFRS 1 that allows entities following a full-cost approach under previous
GAAP to recognize exploration and evaluation assets on a deemed cost basis upon
transition to IFRS. Net effect was a decrease in property, plant and equipment
of $154.1 million with a corresponding increase in exploration and evaluation
assets.
c) Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent
Assets, the provision for decommissioning obligations (previously referred to as
"asset retirement obligation") was increased due to a change in the discount
rate utilized for the present value calculation of these obligations. Under
previous GAAP a credit adjusted risk-free rate was utilized, but under IFRS a
non-credit adjusted risk-free rate is utilized in the valuation of the
discounted cash flows associated with estimated future abandonment costs. Net
effect was an increase in the provision for decommissioning liabilities of $0.3
million, with a corresponding increase in the accumulated deficit.
d) Upon adoption of IFRS 2, Share Based Payments, the expense relating to
options granted to employees was recognized over the vesting period for each
individual vesting tranche, as opposed to previous GAAP which recognized the
expense on a straight-line basis over the total vesting period of the entire
grant. Upon transition to IFRS this resulted in an accelerated recognition of
the expense associated with share-based payments, but was partially offset by a
reduction in expense due to estimated forfeitures associated with unvested
options not previously estimated under GAAP. Net effect was an increase in
contributed surplus of $0.9 million, with a corresponding increase in the
accumulated deficit.
e) The cumulative effect of these transition adjustments on the accumulated
deficit as at the date of transition to IFRS is based on the combination of
items (c) and (d). The net effect was an increase in the accumulated deficit of
$1.2 million.
D. Reconciliation of equity from Canadian GAAP to IFRS as at the end of the
prior year comparative interim period - March 31, 2010 (United States dollars
thousands):
Effect of
Canadian transition to
Notes GAAP IFRS IFRS
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $55,083 $ - $ 55,083
Trade and other receivables 8,886 - 8,886
Prepaid expenses 397 - 397
Income tax recoverable 2,436 - 2,436
Future income tax assets a 178 (178) -
----------------------------------------------------------------------------
Total current assets 66,980 (178) 66,802
Non-current assets
Property, plant and equipment b 168,570 (167,935) 635
Exploration and evaluation b
expenditures - 167,336 167,336
Deposits held in trust 420 - 420
Deferred income tax assets a 7 314 321
----------------------------------------------------------------------------
Total non-current assets 168,997 (285) 168,712
----------------------------------------------------------------------------
Total assets $ 235,977 $ (463) $ 235,514
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
liabilities $13,569 $ - $ 13,569
----------------------------------------------------------------------------
Total current liabilities 13,569 - 13,569
Non-current liabilities
Provision for decommissioning
obligations c 178 259 437
Deferred tax liabilities a - 136 136
----------------------------------------------------------------------------
Total non-current liabilities 178 395 573
----------------------------------------------------------------------------
Total liabilities 13,747 395 14,142
----------------------------------------------------------------------------
Equity
Share capital 253,583 - 253,583
Contributed surplus d 9,380 631 10,011
Deficit e (40,733) (1,489) (42,222)
----------------------------------------------------------------------------
Total equity 222,230 (858) 221,372
----------------------------------------------------------------------------
Total equity and liabilities $ 235,977 $ (463) $ 235,514
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Reclassification of the current portion of future income tax assets
recognized under previous GAAP to non-current assets in accordance with IAS 12,
Income Taxes. Net effect is a decrease in current future income tax assets of
$0.2 million. In addition, the presentation of net deferred tax assets and
liabilities are based on a separate legal entity basis which resulted in a net
increase of $0.3 million in deferred tax assets and an increase of $0.1 million
in deferred tax liabilities. The net overall change to deferred taxes was NIL.
b. Adjustments to property, plant and equipment as well as exploration and
evaluation expenditures were as follows:
i. Exploration and evaluation expenditures previously classified as property,
plant and equipment under GAAP were reclassified in accordance with IFRS 1,
First Time Adoption of IFRS. The Company utilized the IFRS 1 exemption allowing
entities following a full-cost approach under previous GAAP to recognize
exploration and evaluation assets on a deemed cost basis upon transition to
IFRS. In addition, exploration and evaluation expenditures incurred during the
three months ended March 31, 2010 were also reclassified in accordance with IFRS
6, Exploration for and Evaluation of Mineral Resources. The net effect was a
decrease in property, plant and equipment of $167.9 million with an associated
increase in exploration and evaluation expenditures of $167.9million.
ii. Certain corporate projects that were previously capitalized within the full
cost pool as allowed under previous Canadian GAAP, but which were unrelated to
the Company's PSC Lands, have been expensed as part of General and
administrative costs for the three months ended March 31, 2010 after conversion
to IFRS. The net effect was a decrease in exploration and evaluation
expenditures of $0.2 million.
iii. Share-based payment amounts associated with employees that directly
contribute to exploration and evaluation activities are recognized as part of
exploration and evaluation expenditures. Upon adoption of IFRS 2, Share Based
Payments, the expense relating to options granted to those employees is
recognized over the vesting period for each individual vesting tranche, as
opposed to previous GAAP which recognized the expense on a straight-line basis
over the total vesting period of the entire grant. The net effect of the change
in the timing of recognition of share-based payments associated with those
employees that directly contributed to exploration and evaluation activities
during the three months ended March 31, 2010 resulted in a decrease in
exploration and evaluation expenditures of $0.4 million.
iv. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent
Assets, the provision for decommissioning obligations (previously referred to as
"asset retirement obligation") is prospectively adjusted each period for any
changes in the estimated future decommissioning expenditures or the timing of
estimated future decommissioning expenditures. Changes to estimates during the
three months ended March 31, 2010 resulted in an overall increase in the
provision for decommissioning obligations of $.1 million. The net effect was NIL
for exploration and evaluation expenditures.
v. The total net impact of items (i) through (iv) was an increase in exploration
and evaluation assets of $167.3 million.
c. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent
Assets, the provision for decommissioning obligations (previously referred to as
"asset retirement obligation") increased due to a change in the discount rate
utilized for the present value calculation of these obligations upon conversion
to IFRS. Under previous GAAP a credit adjusted risk-free rate was utilized, but
under IFRS a non-credit adjusted risk-free rate is utilized in the valuation of
the discounted cash flows associated with estimated future abandonment costs. In
addition, during the three months ended March 31, 2010, the provision for
decommissioning obligations was also adjusted prospectively each period for
changes in the estimated future decommissioning expenditures or the timing of
estimated future decommissioning expenditures. The total net effect of these
changes was an increase in the provision for decommissioning obligations of $0.3
million.
d. Upon adoption of IFRS 2, Share Based Payments, the expense relating to
options granted to employees is recognized over the vesting period for each
individual vesting tranche, as opposed to previous GAAP which recognized the
expense on a straight-line basis over the total vesting period of the entire
grant. Upon transition to IFRS this resulted in an accelerated recognition of
the expense associated with share-based payments, but was partially offset by a
reduction in expense associated with estimated forfeitures associated with
unvested options that had not been estimated under previous GAAP. The net effect
at March 31, 2010 was an increase in contributed surplus of $0.6 million.
e. The cumulative change in the accumulated deficit is summarized as follows:
i. Impact of increased provision for decommissioning obligation at January 1,
2010 was an increase in accumulated deficit of $0.3 million.
ii. Impact of increased contributed surplus related to share based payments at
January 1, 2010 was an increase in accumulated deficit of $0.9 million.
iii. Impact from expensed portion of share based payments during the three
months ended March 31, 2010 was an increase in accumulated deficit of $0.1
million.
iv. Impact from increased accretion expense associated with decommissioning
liabilities for the three months ended March 31, 2010 was NIL.
v. Impact of expensing certain Corporate projects that had been capitalized
under previous GAAP during the period ended March 31, 2010 was an increase in
the accumulated deficit of $0.2 million.
vi. The total impact of all of items (i) through (v) was an increase in the
accumulated deficit of $1.5 million as at March 31, 2010.
E. Reconciliation of equity from Canadian GAAP to IFRS as at the end of the last
reporting year under Canadian GAAP - December 31, 2010 (United States dollars
thousands):
Effect of
Canadian transition to
Notes GAAP IFRS IFRS
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 31,482 $ - $ 31,482
Trade and other receivables 8,648 - 8,648
Insurance recoveries receivable 17,597 - 17,597
Deposits held in trust 420 - 420
Prepaid expenses 39 - 39
Income tax recoverable 887 - 887
Future income tax assets a 102 (102) -
---------------------------------------------------------------------------
Total current assets 59,175 (102) 59,073
Non-current assets
Property, plant and equipment b 182,056 (181,795) 261
Exploration and evaluation
expenditures b - 180,770 180,770
Future income tax assets a - 186 186
---------------------------------------------------------------------------
Total non-current assets 182,056 (839) 181,217
---------------------------------------------------------------------------
Total assets $ 241,231 $ (941) $ 240,290
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
liabilities $ 21,525 $ - $ 21,525
---------------------------------------------------------------------------
Total current liabilities 21,525 - 21,525
Non-current liabilities
Provision for decommissioning
obligations c 189 320 509
Deferred tax liabilities 56 84 140
---------------------------------------------------------------------------
Total non-current liabilities 245 404 649
---------------------------------------------------------------------------
Total liabilities 21,770 404 22,174
---------------------------------------------------------------------------
Equity
Share capital 253,583 - 253,583
Contributed surplus d 11,353 (130) 11,223
Deficit e (45,475) (1,215) (46,690)
---------------------------------------------------------------------------
Total equity 219,461 (1,345) 218,116
---------------------------------------------------------------------------
Total equity and liabilities $ 241,231 $ (941) $ 240,290
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Reclassification of the current portion of future income tax assets
recognized under previous GAAP to non-current assets in accordance with IAS 12,
Income Taxes. Net effect is a decrease in current future income tax assets of
$0.1 million. In addition, the presentation of net deferred tax assets and
liabilities are based on a separate legal entity basis which resulted in a net
increase of $0.2 million in deferred tax assets and an increase of $0.1 million
in deferred tax liabilities. The net overall change to deferred taxes was NIL.
b. Adjustments to property, plant, and equipment as well as exploration and
evaluation expenditures were as follows:
i. Exploration and evaluation expenditures previously classified as property,
plant and equipment under GAAP were reclassified in accordance with IFRS 1,
First Time Adoption of IFRS. The Company utilized the IFRS 1 exemption allowing
entities following a full-cost approach under previous GAAP to recognize
exploration and evaluation assets on a deemed cost basis upon transition to
IFRS. In addition, exploration and evaluation expenditures incurred during the
year ended December 31, 2010 were also reclassified in accordance with IFRS 6,
Exploration for and Evaluation of Mineral Resources. The net effect was a
decrease in property, plant and equipment of $181.8 million and an associated
increase in exploration and evaluation expenditures of $181.8 million.
ii. Certain corporate projects that were previously capitalized within the full
cost pool as allowed under previous Canadian GAAP, but which were unrelated to
the Company's PSC Lands, have been expensed as part of General and
administrative costs for the year ended December 31, 2010. The net effect was a
decrease in exploration and evaluation expenditures of $0.3 million.
iii. Share-based payment amounts associated with employees that directly
contribute to exploration and evaluation activities are recognized as part of
intangible exploration and evaluation expenditures. Upon adoption of IFRS 2,
Share Based Payments, the expense relating to options granted to those employees
is recognized over the vesting period for each individual vesting tranche, as
opposed to previous GAAP which recognized the expense on a straight-line basis
over the total vesting period of the entire grant. The net effect of the change
in the timing of recognition of share-based payments associated with those
employees that directly contributed to exploration and evaluation activities
during the year ended December 31, 2010 resulted in a decrease in exploration
and evaluation expenditures of $0.8 million.
iv. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent
Assets, the provision for decommissioning obligations (previously referred to as
"asset retirement obligation") is prospectively adjusted each period for changes
in the estimated future decommissioning expenditures or the timing of estimated
future decommissioning expenditures. Changes to estimates during the year ended
December 31, 2010 resulted in an overall increase in the provision for
decommissioning obligations of $61. The net effect was a corresponding increase
in exploration and evaluation expenditures of $0.1 million.
v. The total net impact of items (i) through (iv) was an increase in exploration
and evaluation assets of $180.8 million.
c. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent
Assets, the provision for decommissioning obligations (previously referred to as
"asset retirement obligation") increased due to a change in the discount rate
utilized for the present value calculation of these obligations upon conversion
to IFRS. Under previous GAAP a credit adjusted risk-free rate was utilized, but
under IFRS a non-credit adjusted risk-free rate is utilized in the valuation of
the discounted cash flows associated with estimated future abandonment costs. In
addition, during the year ended December 31, 2010, the provision for
decommissioning obligations was also adjusted prospectively each period for
changes in the estimated future decommissioning expenditures or the timing of
estimated future decommissioning expenditures. The total net effect of these
changes was an increase in the provision for decommissioning obligations of $0.3
million.
d. Upon adoption of IFRS 2, Share Based Payments, the expense relating to
options granted to employees is recognized over the vesting period for each
individual vesting tranche, as opposed to previous GAAP which recognized the
expense on a straight-line basis over the total vesting period of the entire
grant. Upon transition to IFRS this resulted in an accelerated recognition of
the expense associated with share-based payments in prior periods and resulted
in less expense recognition during 2010. In addition, the expense associated
with share based payments was slightly reduced due to estimated forfeitures
associated with unvested options that had not been estimated under previous
GAAP. The net effect at December 31, 2010 was a reduction in contributed surplus
of $0.1 million.
e. The cumulative change in the accumulated deficit is summarized as follows:
i. Impact of increased provision for decommissioning obligation at January 1,
2010 was an increase in accumulated deficit of $0.3 million.
ii. Impact of increased contributed surplus related to share based payments at
January 1, 2010 was an increase in accumulated deficit of $0.9 million.
iii. Impact from expensed portion of share based payments during the year ended
December 31, 2010 was a decrease in accumulated deficit of $0.3 million.
iv. Impact from increased accretion expense associated with decommissioning
liabilities for the year ended December 31, 2010 was NIL.
v. Impact of expensing certain Corporate projects that had been capitalized
under previous GAAP during the year ended December 31, 2010 was an increase in
the accumulated deficit of $0.3 million.
vi. The total impact of all of items (i) through (v) was an increase in the
accumulated deficit of $1.2 million.
F. Reconciliation of comprehensive loss from Canadian GAAP to IFRS for the three
months ended March 31, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Note GAAP IFRS IFRS
----------------------------------------------------------------------------
Revenue
----------------------------------------------------------------------------
Interest income $ 19 $ - $ 19
----------------------------------------------------------------------------
Expenses
General and administrative
expenses a 1,437 326 1,763
Depreciation 179 - 179
Accretion on decommissioning
liabilities 3 1 4
Finance cost 52 - 52
----------------------------------------------------------------------------
Total expenses 1,671 327 1,998
----------------------------------------------------------------------------
Loss before taxation 1,652 327 1,979
Taxation
Current (697) - (697)
Deferred 51 - 51
----------------------------------------------------------------------------
Total taxation (recovery) (646) - (646)
----------------------------------------------------------------------------
Comprehensive loss for the period
attributable to shareholders $ 1,006 $ 327 $ 1,333
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to general and administrative expenses were as follows:
i. Certain corporate projects that were previously capitalized within the full
cost pool as allowed under previous Canadian GAAP, but which were unrelated to
the Company's PSC Lands, have been expensed as part of general and
administrative costs for the three months ended March 31, 2010 after conversion
to IFRS. The net effect was an increase in general and administrative costs of
$0.2 million.
ii. Share-based payment amounts associated with employees that do not directly
contribute to exploration and evaluation activities are recognized as part of
general and administrative expenses. Upon adoption of IFRS 2, Share Based
Payments, the expense relating to options granted to those employees is
recognized over the vesting period for each individual vesting tranche, as
opposed to previous GAAP which recognized the expense on a straight-line basis
over the total vesting period of the entire grant. The net effect of the change
in the timing of recognition of share-based payments during the three months
ended March 31, 2010 resulted in an increase in general and administrative
expenses of $0.1 million.
iii. The total net impact of items (i) and (ii) was an increased net loss of
$0.3 million, including a $1k adjustment relating to accretion.
G. Reconciliation of comprehensive loss from Canadian GAAP to IFRS for the year
ended December 31, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Note GAAP IFRS IFRS
----------------------------------------------------------------------------
Revenue
----------------------------------------------------------------------------
Interest income $ 87 $ - $ 87
----------------------------------------------------------------------------
Expenses
General and administrative
expenses a 6,362 51 6,413
Depreciation 553 - 553
Accretion on decommissioning
liabilities 14 2 16
Finance cost 62 - 62
----------------------------------------------------------------------------
Total expenses 6,991 53 7,044
----------------------------------------------------------------------------
Loss before taxation 6,904 53 6,957
Taxation
Current (1,347) - (1,347)
Deferred 191 - 191
----------------------------------------------------------------------------
Total taxation (recovery) (1,156) - (1,156)
----------------------------------------------------------------------------
Comprehensive loss for the period
attributable to shareholders $ 5,748 $ 53 $ 5,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to general and administrative expenses were as follows:
i. Certain corporate projects that were previously capitalized within the full
cost pool as allowed under previous Canadian GAAP, but which were unrelated to
the Company's PSC Lands, have been expensed as part of general and
administrative costs for the year ended December 31, 2010 after conversion to
IFRS. The net effect was an increase in general and administrative costs of $0.3
million.
ii. Share-based payment amounts associated with employees that do not directly
contribute to exploration and evaluation activities are recognized as part of
general and administrative expenses. Upon adoption of IFRS 2, Share Based
Payments, the expense relating to options granted to those employees is
recognized over the vesting period for each individual vesting tranche, as
opposed to previous GAAP which recognized the expense on a straight-line basis
over the total vesting period of the entire grant. The net effect of the change
in the timing of recognition of share-based payments associated with employee's
activities during the year ended December 31, 2010 resulted in a decrease in
general and administrative expenses of $0.3 million.
iii. The total net impact of items (i) and (ii) was an increased net loss of
$0.1 million, including a $2k adjustment to accretion.
H. Reconciliation of statement of cash flows from Canadian GAAP to IFRS for the
three months ended March 31, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Note GAAP IFRS IFRS
----------------------------------------------------------------------------
Cash flow from operating
activities
Net loss prior to taxation a $ (1,006) $ (973) $ (1,979)
Adjustments for
Depreciation 179 - 179
Accretion on decommissioning
liabilities 3 1 4
Share based payments b 128 145 273
Income tax recovered (paid) - - -
Future income tax expense c 51 (51) -
Change in non-cash working capital d (1,004) 697 (307)
----------------------------------------------------------------------------
Net cash from (used in) operating
activities (1,649) (181) (1,830)
----------------------------------------------------------------------------
Cash flow from investing activities
Expenditure on exploration and
evaluation assets e - (19,795) (19,795)
Expenditure on property, plant, and
equipment f (13,334) 13,334 -
Change in non-cash working capital e (6,642) 6,642 -
----------------------------------------------------------------------------
Net cash from (used in) investing
activities (19,976) 181 (19,795)
----------------------------------------------------------------------------
Cash flow from financing activities
None - - -
----------------------------------------------------------------------------
Net cash from (used in) financing
activities - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash equivalents (21,625) - (21,625)
----------------------------------------------------------------------------
Cash and cash equivalents, beginning
of period 76,708 - 76,708
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 55,083 - $ 55,083
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to net loss, which total to $(0.9 million), were as follows:
i. Presentation of net loss under IFRS is prior to taxation. The net effect was
an increased net loss prior to total taxation (current and deferred) of $0.6
million.
ii. Increased expense associated with share-based payments, net effect was an
increased net loss of $0.1 million.
iii. Increased general and administrative expense for corporate projects
previously capitalized under IFRS, the net effect was an increased net loss of
$0.2 million.
iv. Total net effect of items (i) through (iii) is an increased net loss of $0.9
million.
b. Increased expense relating to timing of recognition of share based payment
under IFRS 2, net effect an increase of $0.1 million.
c. Presentation of net loss under IFRS is prior to taxation, accordingly there
is no adjustment for future income tax expense, net effect was a reduction of
the adjusting item to zero.
d. Presentation of net loss under IFRS is prior to taxation, as a result the
change in current income tax recovery is removed from the change in non-cash
working capital. The net effect was a decrease in the net change from non-cash
working capital items of $0.7 million.
e. The net change in exploration and evaluation expenditures is as follows:
i. Reclassification of expenditures on property, plant and equipment of $13.3
million.
ii. Decrease in expenditures of $0.2 million for corporate projects previously
capitalized under GAAP that were expensed as general and administrative expenses
under IFRS.
iii. Combine changes in non-cash investing working capital with E&E expenditures
for proper presentation under IFRS, which reduces the change in non-cash working
capital to NIL.
iv. The net effect of items (i) through (iii) results in an increase in
exploration and evaluation expenditures of $19.8 million.
f. Expenditures for property, plant and equipment were reclassified as
exploration and evaluation expenditures, net effect was a decrease of $13.3
million.
I. Reconciliation of statement of cash flows from Canadian GAAP to IFRS for the
year ended December 31, 2010 (United States dollars thousands):
Effect of
Canadian transition to
Note GAAP IFRS IFRS
----------------------------------------------------------------------------
Cash flow from operating
activities
Net loss prior to taxation a $ (5,748) $(1,209) $ (6,957)
Adjustments for
Depreciation 553 - 553
Accretion on decommissioning
liabilities 14 2 16
Share based payments b 1,568 (258) 1,310
Income tax recovered (paid) c - 2,198 2,198
Future income tax expense d 191 (191) -
Change in non-cash working
capital e 728 (851) (123)
----------------------------------------------------------------------------
Net cash from (used in)
operating activities (2,694) (309) (3,003)
----------------------------------------------------------------------------
Cash flow from investing
activities
Expenditure on exploration and
evaluation assets f - (66,626) (66,626)
Expenditure on property, plant,
and equipment g (67,162) 67,162 -
Insurance recoveries 24,403 - 24,403
Change in non-cash working
capital f 227 (227) -
----------------------------------------------------------------------------
Net cash from (used in)
investing activities (42,532) 309 (42,223)
----------------------------------------------------------------------------
Cash flow from financing
activities
None - - -
----------------------------------------------------------------------------
Net cash from (used in)
financing activities - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash
equivalents (45,226) - (45,226)
----------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period 76,708 - 76,708
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 31,482 - $ 31,482
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS (United States dollars thousands):
a. Adjustments to net loss, which total to $(1.2 million), were as follows:
i. Presentation of net loss under IFRS is prior to total taxation (current and
deferred). The net effect was an increased net loss prior to taxation of $1.2
million.
ii. Increased expense associated with share-based payments, net effect was a
decreased net loss of $0.3 million.
iii. Increased general and administrative expense for corporate projects
previously capitalized under IFRS, the net effect was an increased net loss of
$0.3 million.
iv. Total net effect of items (i) through (iii) is an increased net loss of $1.2
million.
b. Decreased expense relating to timing of recognition of share based payment
under IFRS 2, net effect a decrease of $0.3 million.
c. For proper presentation under, actual taxes recovered of $2.2 million are
reflected directly in the cash flow statement.
d. Presentation of net loss under IFRS is prior to taxation, accordingly there
is no adjustment for future income tax expense, net effect was a reduction of
the adjusting item to zero.
e. Presentation of net loss under IFRS is prior to taxation, as a result the
change in current income tax recovery is removed from the change in non-cash
working capital. In addition actual taxes recovered are shown separately in the
cash flow statement under IFRS. The net effect of both of these items was a
decrease in the net change from non-cash working capital items of $0.9 million.
f. The net change in exploration and evaluation expenditures is as follows:
i. Reclassification of expenditures on property, plant and equipment of $67.2
million.
ii. Decrease in expenditures of $.3 million for corporate projects previously
capitalized under GAAP that were expensed as general and administrative expenses
under IFRS.
iii. Combine changes in non-cash investing working capital with E&E expenditures
for proper presentation under IFRS, which reduces the change in non-cash working
capital to NIL.
iv. The net effect of items (i) through (iii) results in an increase in
exploration and evaluation expenditures of $66.6 million.
Expenditures for property, plant and equipment were reclassified as exploration
and evaluation expenditures, net effect was a decrease of $67.2 million.
About WesternZagros Resources Ltd.
WesternZagros is an international natural resources company engaged in acquiring
properties and exploring for, developing and producing crude oil and natural gas
in Iraq. WesternZagros, through its wholly-owned subsidiaries, holds a
Production Sharing Contract with the Kurdistan Regional Government in the
Kurdistan Region of Iraq.
WesternZagros' shares trade in Canada on the TSX Venture Exchange under the
symbol "WZR".
This news release contains certain forward-looking information relating, but not
limited, to operational information, future production plans and the timing
associated therewith. Forward-looking information typically contains statements
with words such as "anticipate", "estimate", "expect", "potential", "could", or
similar words suggesting future outcomes. The Company cautions readers not to
place undue reliance on forward-looking information as by its nature, it is
based on current expectations regarding future events that involve a number of
assumptions, inherent risks and uncertainties, which could cause actual results
to differ materially from those anticipated by WesternZagros. In addition, the
forward-looking information is made as of the date hereof, and the Company
assumes no obligation to update or revise such to reflect new events or
circumstances, except as required by law. Readers are also cautioned that test
rates may not be indicative of ultimate production levels.
Forward-looking information is not based on historical facts but rather on
management's current expectations and assumptions regarding, among other things,
plans for and results of drilling activity, future capital and other
expenditures (including the amount, nature and sources of funding thereof),
continued political stability, timely receipt of any necessary government or
regulatory approvals, and the timely receipt of any insurance proceeds due to
the Company. Although the Company believes the expectations and assumptions
reflected in such forward-looking information are reasonable, they may prove to
be incorrect. Forward-looking information involves significant known and unknown
risks and uncertainties. A number of factors could cause actual results to
differ materially from those anticipated by WesternZagros including, but not
limited to, risks associated with the oil and gas industry (e.g. operational
risks in exploration; inherent uncertainties in interpreting geological data;
changes in plans with respect to exploration or capital expenditures;
interruptions in operations together with any associated insurance proceedings;
the uncertainty of estimates and projections in relation to costs and expenses
and health, safety and environmental risks), the risk of commodity price and
foreign exchange rate fluctuations, the uncertainty associated with negotiating
with foreign governments and risk associated with international activity. For
further information on WesternZagros and the risks associated with its business,
please see the Company's Annual Information Form dated April 11, 2011, which is
available on SEDAR at www.sedar.com.
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