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WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the
Corporation") announced today its operating and financial results for the fourth
quarter and year ended December 31, 2011.
A summary of WesternZagros's highlights and activities for the year ended
December 31, 2011 and up to and including March 26, 2012 include:
Health, Safety, Environment and Security (HSE&S)
WesternZagros has operated in Kurdistan with an excellent safety and security
record since 2004. On October 27, 2011, WesternZagros's operations celebrated
having worked one full year without a recordable injury incident. As at March
23, 2012, over 1.7 million hours of work have been performed safely and
WesternZagros has achieved a total of 514 days without any Lost Time Incidents
("LTIs").
Kurdamir-2 Well
On March 26, 2012, The Corporation announced the discovery of a major oil column
in the Oligocene reservoir at the Kurdamir-2 exploration well. The well has
reached an intermediate casing depth of 2,812 metres and has drilled through the
Oligocene interval. Wireline logs indicated a porous zone of 140 metres
thickness within the Oligocene interval, between 2,422 and 2,562 metres, all of
which is hydrocarbon bearing. Within this hydrocarbon zone, well log data
indicates 22 metres of gross gas pay above 118 metres of gross oil pay. No
evidence of water has been encountered with the Oligocene interval. An open hole
drill stem test was conducted from 2,315 metres to 2,477 metres, which included
55 metres of the Oligocene porous zone. This test was conducted across the
interpreted gas-oil contact at 2,444 metres. The test achieved a flow rate of
7.3 million cubic feet ("MMcf") per day of gas and a stabilized flow rate of 950
barrels per day ("bbl/d") of 47 degree API mixture of light oil and condensate
over the final seven hours of the main flow period. This rate was achieved
through a 56/64 inch choke at an average flowing well head pressure of 650
pounds per square inch and without any stimulation. There was no observed
decline and no formation water was recovered during the testing. According to
analysis by an independent third party engineering expert, the 33 metres of oil
pay tested to date is capable of flowing at rates of 4,000 barrels per day if
isolated from the gas pay and stimulated. The Corporation is working with the
operator, Talisman (K44) B.V. ("Talisman") to examine options for additional
cased hole testing focused on the 118 metres of gross oil pay in the Oligocene
after the well has met the Production Sharing Contract ("PSC") commitments. The
Kurdamir-2 test and wireline log data will be analyzed to update contingent and
prospective resource estimates for the Oligocene which, in the Company's views,
are likely to materially increase. The co-venturers are also planning a 3D
seismic program and a further appraisal well to help determine the ultimate size
of the Oligocene reservoir.
Sarqala-1 Re-Entry
On March 29, the Corporation re-entered the Sarqala-1 well bore on the Garmian
Block, having originally drilled Sarqala-1 in 2008 and early 2009 and suspending
the well after equipment problems prevented logging. Subsequent analysis of the
drilling cuttings from, and wireline well logs across, the interval showed good
oil potential and led to the decision to re-enter the well bore and to undertake
a sidetrack operation. In April 2011, the Corporation completed an approximate
100 metre sidetrack through the Jeribe Formation into the Dhiban Formation to a
depth of 3,897 metres. In May, 2011, the Corporation announced an oil discovery
in the Jeribe Formation, achieving maximum flow rates in excess of 9,000 bbl/d
of light, 40 degree API oil. No hydrogen sulphide ("H2S") and no formation water
were identified during testing.
Sarqala Extended Well Test Production
In September, 2011, WesternZagros received approval from the Ministry of Natural
Resources of the KRG to start an extended well test at the Sarqala-1 well and in
October 2011, first oil production from the extended well test was achieved.
Production started of approximately 2,000 bbl/d. On October 27, 2011,
WesternZagros sold its first oil produced from Sarqala-1 into the domestic
market. The Sarqala crude is being processed in local refineries under the
auspices of the Ministry of Natural Resources. Under the terms of these sales
agreements, all proceeds are currently being credited against recoverable costs
under the Garmian PSC. As at December 31, 2011, the Corporation had generated
$12.9 million of proceeds from the sales of test oil and the Corporation entered
into further contracts to sell test oil for additional proceeds of $25.9 million
in the first quarter of 2012. Production continues at an average rate of 5,000
bbl/d.
Mil Qasim-1 Well
In August 2011, drilling commenced on the Corporation's third exploration well,
Mil Qasim-1, located on the Garmian Block. The well was drilled to a total depth
of 2,425 metres, ahead of time and on budget. The well encountered a gross
hydrocarbon bearing interval of approximately 800 metres containing numerous
sandstones (each in the range of 2-13 metres thick) in the Lower Bakhtiari and
Upper Farms Formations. A drill stem testing operation, consisting of four
tests, was concluded on February 14, 2012. The testing program resulted in the
flow of light, 43 to 44 degree API oil to surface from low permeability
sandstone reservoirs and natural fractures in the Upper Farms Formation. Test 1
resulted in an average flow rate of 108 bbl/d; Test 2 resulted in an inability
to evaluate the potential of this section due to ineffective perforations; Test
3 resulted in an average rate of 488 bbl/d; and Test 4 resulted in an estimated
250 bbl/d. All tests were conducted over a one to two day period utilizing an
assortment of choke sizes. WesternZagros plans to conduct further testing over
the Test 4 interval in order to clean up the well and gain additional
information on its long term deliverability.
The Mil Qasim-1 well also encountered hydrocarbon shows in a high porosity
conglomerate and sandstone interval of approximately 25 metres thickness in the
Upper Bakhtiari Formation at a depth of approximately 500 metres. The
Corporation is actively investigating a shallow, relatively lower cost,
multi-well drilling program to evaluate this reservoir as it is encouraged by
the existence of numerous highly productive water wells drilled in the Upper
Bakhtiari Formation in the southern Garmian area that have typical flow rates of
up to 6,000 bbl/d.
Exploration and Appraisal of Discoveries
During 2011, Sproule International Limited, ("Sproule"), completed a total of
four independent audits of the Corporation's contingent and prospective
resources including:
-- January 14, 2011: Tertiary Eocene and Cretaceous reservoir intervals at
Kurdamir-1, Jeribe reservoir at Sarqala-1 and the Upper Fars reservoir
at Mil Qasim-1.
-- January 31, 2011: Oligocene, Eocene and Cretaceous reservoir intervals
at the Qulijan prospect; Oligocene and Eocene reservoirs at the Baran
prospect; and the Oligocene, Eocene and Cretaceous reservoirs at the
Sarqala prospect.
-- July 19, 2011: Jeribe, Mio-Oligocene, Eocene and Shiranish (Cretaceous)
reservoirs (Tilako, Zardi, Segrdan, Chwar, and Alyan prospects) and two
Upper Fars plays (Fault Trap Play, Bawanoor Saddle).
-- September 7, 2011: Jeribe/Upper Dhiban reservoir interval at Sarqala-1.
With the completion of these additional assessments on the Corporation's two
contract areas in Kurdistan, the combined mean estimate of gross unrisked
contingent resources is 54.0 million barrels of oil, or 258 million barrels of
oil equivalent, and gross unrisked prospective resources is 2.3 billion barrels
of oil, or 3.7 billion barrels of oil equivalent.
During the year ended December 31, 2011, the Corporation submitted and received
approval from the KRG for an appraisal work program and budget with respect to
the Sarqala discovery. The Corporation plans to complete the EWT on Sarqala,
conduct a 3D seismic program and drill two appraisal wells, the first of which
will be Sarqala-2. The Corporation further submitted and received approval from
the KRG for the exploration well, Hasira-1, to comply with the Garman PSC
commitments for the second exploration sub-period.
Financial
In March 2011, WesternZagros completed a private placement of approximately 89.7
million Common Shares at a price of Cdn$0.48 per Common Share for gross proceeds
of approximately Cdn$43 million through a syndicate of agents.
On October 25, 2011, WesternZagros closed a strategic investment with the Abu
Dhabi National Energy Company PJSC ("TAQA") whereby TAQA has purchased from
WesternZagros, through a private placement, 74 million Common Shares of the
Corporation at a price of Cdn$0.63 per share for gross proceeds of Cdn$46.6
million. TAQA holds approximately 19.9 percent of the Corporation's issued and
outstanding Common Shares.
Corporate
In July 2011, WesternZagros finalized an agreement with the KRG and Talisman to
amend the Original Production Sharing Contract which had been signed by
WesternZagros and the KRG on February 28, 2008 with respect to the entirety of
the PSC Lands (the "Original PSC") that governed the Corporation's exploration
activities in the Kalar-Bawanoor Block in Kurdistan. The amendments divided the
contract area of the Original PSC into the Garmian Block and the Kurdamir Block,
which are now governed by the Garmian PSC and the Kurdamir PSC, respectively.
The Corporation retained its 40 percent working interest in each of the PSCs.
Under the Kurdamir PSC, Talisman is the operator, with a 40 percent working
interest and the KRG has a 20 percent working interest which is carried by the
Corporation. Under the Garmian PSC, WesternZagros is the operator, the KRG has a
20 percent working interest and the remaining 40 percent working interest is
held by the KRG to be assigned to another third party participant. The
Corporation is currently funding 100 percent of the activities under the Garmian
PSC until the third party participant interest is assigned, at which time the
Corporation will be reimbursed for the third party participant's share of costs.
WesternZagros's PSC terms, under both the Garmian and Kurdamir PSCs remain
unchanged from the Original PSC.
On October 27, 2011, David Cook, TAQA Executive Officer and Head of Oil and Gas,
was appointed to the WesternZagros Board of Directors. Mr. Cook has in excess of
20 years of experience in the upstream oil and gas sector through a variety of
global technical, commercial and managerial positions based from the United
States, United Kingdom, and Russia, as well as board directorships.
Corporate Social Responsibility
WesternZagros has proven to be an industry leader with respect to corporate
social responsibility. The Corporation continues to focus on five key corporate
social responsibility initiatives in the PSC Lands, namely, local employment,
water supply, education, health care and recreation.
WesternZagros continues to place a strong emphasis on the incremental
development of local personnel capacity. As at December 31, 2011, WesternZagros
had 342 full-time local national employees and service contractors directly
employed due to the presence of its operations, 61 of which are employed in the
Corporation's field and staff offices in professional/semi-professional roles.
Commenting on the year end results, WesternZagros's Chief Executive Officer
Simon Hatfield said, "We are pleased with the success in all our initiatives in
2011, including oil discoveries at both Sarqala and Mil Qasim and the first
production of crude oil from Sarqala. This success has continued into 2012 with
the discovery of a major oil column in the Oligocene reservoir at the Kurdamir-2
exploration well. These successes are a result of our entrepreneurial energy,
our proven expertise, our disciplined delivery, and our commitment to bring
everyone home safely at the end of the day. Our objectives for the remainder of
2012 include the completion of drilling and testing activities at Kurdamir-2,
further exploration on the Garmian Block with the Hasira-1 well and the
continuation of appraisal activities on our Sarqala, Mil Qasim and Kurdamir
discoveries."
Management's Discussion and Analysis
This Management's Discussion and Analysis ("MD&A") of the financial and
operating results for WesternZagros Resources Ltd. ("WesternZagros" or the
"Corporation") should be read in conjunction with the Corporation's audited
consolidated financial statements (the "Annual Financial Statements") prepared
in accordance with International Financial Reporting Standards ("IFRS") as
issued by the International Accounting Standards Board ("IASB") and the related
notes for the years ended December 31, 2011 and 2010.
Additional information relating to the Corporation, including its quarterly MD&A
for the year is available on SEDAR at www.sedar.com
This MD&A is dated March 26, 2012.
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 Corporation's amended Production Sharing
Contract for the Kurdamir area ("Kurdamir PSC") and Production Sharing Contract
for the Garmian area ("Garmian PSC"), anticipated capital and operating budgets,
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
Corporation cautions readers and prospective investors in the Corporation'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 and results are not
necessarily indicative of long-term performance or of ultimate recovery.
Forward looking information is not based on historical facts but rather on
management's current expectations as well as assumptions made by, and
information currently available to management, concerning, among other things,
outcomes of future well operations, plans for and results of extended well tests
and 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, the successful
resolution of disputes, the Corporation's continued ability to employ qualified
staff and to obtain equipment in a timely and cost efficient manner, the
participation of the Corporation's co-venturers in exploration activities, the
timing of and quantum of costs reimbursed by the third party participant
interest assignment in the Garmian PSC and continued sales of test production.
In addition, budgets are based upon WesternZagros's current exploration and
appraisal 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 and testing activity, unexpected delays, availability of future
financing and changes in market conditions. Although the Corporation 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 and production; 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 any dispute resolution
proceedings, 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. "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. "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. All resource
estimates presented are gross volumes for the indicated reservoirs, without any
adjustment for the Corporation's 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 Corporation's Statement of Oil and Gas Information contained in its Annual
Information Form for the 2011 financial year ("AIF") filed on SEDAR at
www.sedar.com contains additional detail with respect to the resource
assessments and includes the significant risks and uncertainties associated with
the estimates and the recovery and development of the resources, and, in respect
of contingent resources, the specific contingencies which prevent the
classification of the resources as reserves. In addition, combined mean
estimates of resources which are presented in this MD&A are an arithmetic sum of
the mean estimates for individual reservoirs and each such mean estimate is the
average from the probabilistic assessment that was completed for the reservoir.
Readers should refer to the AIF for a detailed breakdown of the high (P10), low
(P90) and best (P50) estimates for each of the individual reservoir assessments.
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 the Corporation's AIF 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
Corporation's AIF.
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 holds two Production
Sharing Contracts ("PSCs") with the Kurdistan Regional Government ("KRG") in the
Kurdistan Region of Iraq that are both on trend with, and adjacent to, a number
of prolific historic oil and gas discoveries. The Kurdamir and Garmian PSCs each
govern separate contract areas (collectively referred to as the "PSC Lands").
The Garmian contract area (1,780 square kilometres) is operated by
WesternZagros. The Kurdamir contract area (340 square kilometres) is operated by
Talisman (Block K44) B.V. ("Talisman") with a 40 percent working interest.
WesternZagros holds a 40 percent working interest in both PSCs. The KRG holds a
20 percent working interest in both PSCs. The remaining 40 percent third party
participant interest ("TPPI") in the Garmian PSC is held pending assignment by
the KRG to a third party participant.
Basis of Presentation
Reporting and Functional Currency
December 31, 2011 marks the Corporation's first annual reporting date under
IFRS. Accordingly, the comparative information for 2010, including that utilized
in this MD&A, has been prepared in accordance with the Corporation's IFRS
accounting policies. Please refer to "Adoption of IFRS" section of this MD&A for
further descriptions of this impact. Comparative information presented for
periods prior to 2010 is presented in accordance with previous GAAP, prior to
the adoption of IFRS.
The reporting and functional currency of the Corporation 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. During 2011, the
average conversion rate was Cdn$0.9891 to US$1, and the closing conversion rate
at December 31, 2011 was Cdn$1.017 to US$1.
Strategy
WesternZagros's main focus is the exploration and development of its PSC Lands
in the Kurdistan Region of Iraq. WesternZagros's objective is to be recognized,
through consistently superior business performance and operations excellence, as
one of the leading junior oil and gas companies active in Iraq. The Corporation
is committed to apply the lessons learned from its operations and from
operations occurring elsewhere within the Kurdistan Region to improve its
operating performance. The Corporation is committed to operating in Iraq in a
safe and secure manner. In executing its strategy, WesternZagros has made it a
priority to recruit and retain local personnel and to actively participate in,
and contribute to, community development projects. WesternZagros believes it has
developed a relationship with government authorities, local communities and the
business community in the Kurdistan Region that has enabled access to
opportunities and to facilitate the cooperation needed to successfully execute
projects.
Highlights
WesternZagros is currently exploring for and appraising discoveries of crude oil
and natural gas in the Kurdistan Region of Iraq and the Corporation currently
has no reserves. WesternZagros's revenue is comprised entirely of interest
earned on cash and cash equivalent balances and short-term investments. During
the fourth quarter of 2011, the Corporation commenced an extended well test on
its Sarqala-1 oil discovery. The approximate 5,000 barrels of oil per day
currently produced under the extended well test is sold by the Corporation and
refined in local plants in Kurdistan under the auspices of the Ministry of
Natural Resources. Under the terms of these sales agreements, all proceeds are
currently being credited against recoverable costs under the Garmian PSC. The
oil sales are based on local market prices and the Corporation receives payment
in advance of delivering oil to the buyer. As the Corporation is currently
within the exploration and evaluation phase, including an extended well test for
the Sarqala discovery, the proceeds received from these sales are being credited
against the exploration and evaluation costs it has incurred. WesternZagros's
highlights and activities to March 26, 2012 include the following.
Health, Safety, Environment and Security (HSE&S)
-- WesternZagros has operated in Kurdistan with an excellent safety and
security record since 2004. On October 27, 2011, WesternZagros's
operations celebrated having worked one full year without a recordable
injury incident. As at March 23, 2012, over 1.7 million hours of work
have been performed safely and WesternZagros has achieved a total of 514
days without any Lost Time Incidents ("LTIs").
-- The dedication to safety demonstrated by all of the Corporation's
employees and contractors has produced a world class safety culture.
-- As WesternZagros conducts its operations in Kurdistan, health, safety,
environment and security are of utmost importance. WesternZagros has
adopted western and international health, safety and environment
standards for its Kurdistan operations. Kurdistan features an emerging
regulatory regime consistent with a rapidly developing region.
WesternZagros is committed to meeting local regulations and to acting
responsibly, and the Corporation will follow relevant Canadian oil and
gas regulations and environmental practices where none have yet been
developed locally.
-- Security risks still exist in Iraq outside of Kurdistan although they
have greatly improved over the last few years. In WesternZagros's
experience, Kurdistan maintains the safest operating environment in
Iraq. Within Kurdistan, the limited number of insurgent activities have
been directed towards the offices and personnel of the KRG. The
beneficial security environment in Kurdistan is a direct result of the
influence of the KRG through the Peshmerga and the Asaiysh. Through the
deployment of the Peshmerga and the Asaiysh, the KRG has been largely
effective in controlling its borders and maintaining security in the
Region. Based on the general success achieved by the KRG and on advice
from the Corporation's security advisors, WesternZagros assesses the
threat level within the PSC Lands as low.
Operations
Kurdamir-2 Well
-- On October 25, 2011, drilling commenced on the Corporation's exploration
commitment well, Kurdamir-2, with Talisman as the operator. The well is
being drilled on the flank of the Kurdamir structure approximately two
kilometres northeast of the Corporation's Kurdamir-1 discovery well and
will target the Oligocene, Eocene and Cretaceous reservoirs.
-- On March 26, 2012, the Corporation announced a major oil discovery in
the Oligocene reservoir at the Kurdamir-2 exploration well in the
Kurdistan Region of Iraq. The well is being drilled on the flank of the
Kurdamir structure approximately two kilometers northeast of the
Corporation's Kurdamir-1 discovery well and will target the Oligocene,
Eocene and Cretaceous reservoirs.
-- The Kurdamir-2 well has reached the intermediate casing depth of 2,812
metres, and has drilled through the Oligocene interval. Wireline logs
indicate a porous zone of 140 metres thickness within the Oligocene
interval, between 2,422 and 2,562 metres, all of which is hydrocarbon
bearing. Within this hydrocarbon zone, well log data indicates 22 metres
of gross natural gas pay above 118 metres of gross oil pay. No evidence
of water has been encountered within the Oligocene interval.
-- When the well reached a depth of 2,477 metres, a drill stem test was
conducted of the open hole from the base of the 13 5/8" liner at 2,315
metres to 2,477 metres, which included 55 metres of the Oligocene porous
zone. This test was conducted across the interpreted gas-oil contact at
2,444 metres and tested 22 metres of gas pay in contact with 33 metres
of oil pay. The test achieved a flow rate of 7.3 million cubic feet per
day of gas and a stabilized flow rate of 950 barrels per day of 47
degree API mixture of light oil and condensate over the final seven
hours of the main flow period. This rate was achieved through a 56/64
inch choke at an average flowing well head pressure of 650 pounds per
square inch and without any stimulation. There was no observed decline
and no formation water was recovered during the testing. The deeper
Oligocene oil pay will not be tested at this time due to time
constraints, as the well is required to drill and evaluate the deeper
Cretaceous by the end of June 2012. The Corporation interprets these
results as an additional successful confirmation of a significant oil
column underlying the gas cap in the Oligocene reservoir. (The first
confirmation was provided in Kurdamir-1 as disclosed in the
Corporation's news release of December 16, 2010.)
-- WesternZagros interprets that since the test was conducted across the
gas-oil contact, and the fact that gas flow impedes oil flow, the
results do not represent the true oil rate potential of this interval.
According to analysis by an independent third party engineering
expert, the 33 metres of oil pay tested to date is capable of flowing at
rates of 4,000 barrels per day if isolated from the gas pay and
stimulated. The Corporation is working with the operator, Talisman (K44)
B.V. ("Talisman"), to examine options for additional cased hole testing
focused on the full 118 metres of gross oil pay in the Oligocene after
the well has met the PSC commitments. The co-venturers are also planning
a 3D seismic program and a further appraisal well to help determine the
ultimate size of the Oligocene reservoir.
-- These interim results from the Kurdamir-2 well are significant for two
reasons.
1. The 327 metres of Oligocene hydrocarbon column that was proven in
the Kurdamir-1 well, has now increased significantly to at least 420
metres (i.e. from the top of the Oligocene reservoir in Kurdamir-1
well at 2,142 metres to the base of the gross oil pay in the
Kurdamir-2 well at 2,562 metres.) As no oil-water contact has been
encountered in Kurdamir-2, the maximum thickness of the oil column
is not yet known.
2. The bottom of the known oil column extends down to at least 2,562
metres, which is significantly deeper than the limit of closure of
the Kurdamir structure as mapped from seismic data. This finding, in
turn, supports the observation that the Oligocene reservoir is
involved in a considerably larger trap and that Kurdamir and the
neighbouring Topkhana structure share a common oil leg.
-- The Kurdamir-2 test and wireline log data will be analyzed to update
contingent and prospective resource estimates for the Oligocene which,
in the Company's views, are likely to materially increase. Once
confirmed by the Corporation's independent auditors, this update will
be publicly released. Prior to these latest results, the independently
audited unrisked mean estimates for the contingent resources in the
Oligocene reservoir of the Kurdamir structure were 920 billion cubic
feet of gas, 35 million barrels ("MMbbl") of condensate and 30 MMbbl
oil, plus an unrisked mean estimate of 280 MMbbl prospective oil
resources as of December 14, 2010.
Sarqala-1 Re-Entry
-- On March 29, 2011, the Corporation re-entered the Sarqala-1 well bore on
the Garmian Block in the Kurdistan Region of Iraq with the 1,500 HP
Romfor Rig #23. The Corporation originally drilled Sarqala-1 in 2008 and
early 2009, suspending the well after equipment problems prevented
logging. Subsequent analysis of the drilling cuttings from, and wireline
well logs across, the interval showed good oil potential and led to the
decision to re-enter the well bore and to undertake a sidetrack
operation.
-- On April 14, 2011, the Corporation completed an approximate 100 metre
sidetrack through the Jeribe Formation into the Dhiban Formation to a
depth of 3,897 metres in the Sarqala-1 well. Drilling shows and log
results indicated a potential gross pay interval of over 55 metres in
this zone.
-- Testing commenced in late May. The Jeribe/Upper Dhiban Formations 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.
-- On June 7, 2011 the Corporation successfully completed the main flow.
The well achieved maximum flow rates in excess of 9,000 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 the testing program.
-- The total gross costs for the Sarqala-1 re-entry were $27.5 million
comprising $17.2 million for remediation and sidetracking (includes
approximately $10 million on Sarqala-1 remediation and $7.2 million for
sidetracking operations) plus $10.3 million for completion and testing.
Sarqala Extended Well Test Production
-- In September 2011, WesternZagros received approval from the Ministry of
Natural Resources of the KRG to start an extended well test at the
Sarqala-1 well and on October 18, 2011, first oil production from the
extended well test was achieved. Production started at approximately
2,000 barrels of oil per day ("bbl/d").
-- On October 27, 2011, WesternZagros sold its first oil produced from
Sarqala-1 into the domestic market. The Sarqala crude is being processed
in local refineries under the auspices of the Ministry of Natural
Resources. Under the terms of these sales agreements, all proceeds are
currently being credited against recoverable costs under the Garmian
PSC. As at December 31, 2011, the Corporation had generated $12.9
million of proceeds from the sales of test oil and the Corporation
entered into further contracts to sell test oil for additional proceeds
of $25.9 million in the first quarter of 2012.
-- On December 21, 2011, production reached a record high of 5,248 bbl/d.
Production continues at an average rate of approximately 5,000 bbl/d.
WesternZagros plans to use the information gathered from the extended
well test in determining future appraisal programs and potential
development activities. Horizontal completions may be considered in
order to take advantage of the fractured nature of the reservoir and the
potential to achieve significantly higher deliverabilities from the
Jeribe reservoir.
Mil Qasim-1 Well
-- On August 29, 2011, drilling commenced on the Corporation's third
exploration well, Mil Qasim-1, on the Garmian Block in the Kurdistan
Region of Iraq. On November 24, 2011, Mil Qasim-1 was drilled to a total
depth of 2,425 metres ahead of time and on budget. The well encountered
a gross hydrocarbon bearing interval of approximately 800 metres
containing numerous sandstones (each in the range of 2-13 metres thick)
in the Lower Bakhtiari and Upper Fars Formations. Hydrocarbon shows and
wireline logs indicated the presence of oil in the Upper Fars Formation
and this was the focus of the testing program. Hydrocarbon shows and
wireline logs also indicated the potential for additional oil in both
the Upper and the Lower Bakhtiari Formations, but testing of these
intervals has been deferred to a later date.
-- On February 14, 2012, the drill-stem testing operations were concluded.
The testing program resulted in the flow of light, 43 to 44 degree API
oil to surface from low permeability sandstone reservoirs and natural
fractures in the Upper Fars Formation. No hydrogen sulphide ("H2S") and
no formation water were identified during testing. Four tests were
conducted in the Mil Qasim-1 well. Test 1 was an open hole test, while
tests 2 to 4 were cased hole tests.
-- Test 1 was conducted over the open hole section between the depths of
2,129 metres and 2,168 metres. Test 1 resulted in a flow of 44 degree
API gravity oil with no formation water, at an average rate of 108
bbl/d over a two day period using an 8/64" choke with a flowing well
head pressure of 1,606 psi. Initial reservoir pressure was calculated
to be 6,405 psi.
-- Test 2 was conducted over a gross perforated interval of 49 metres
between the depths of 2,054 metres and 2,103 metres. Although Test 2
successfully flowed limited amounts of oil to surface, the test failed
to evaluate the potential of this section of the reservoir interval due
to unsuccessful(NTD: "ineffective" was used in our news release)
perforations.
-- Test 3 was conducted over a gross perforated interval of 167 metres
between 1,799 metres and 1,966 metres. Test 3 resulted in a flow of 44
degree API oil with no formation water, at an average rate of 488 bbl/d
over a one day period using a 48/64" choke with a flowing well head
pressure of 113 psi. Initial reservoir pressure was calculated to be
5,338 psi. Test 3 analysis conducted by an independent third party
engineering expert indicates that this interval has the potential to
produce at over 1,000 bbl/d if formation damage can be mitigated by
stimulation or use of alternative drilling techniques. The Company is
considering additional measures to enhance future flow from this
interval.
-- Test 4 was conducted over a gross perforated interval of 107 metres
between the depths of 1,636 metres and 1,743 metres. Test 4 resulted in
a flow of 43 degree API oil and an emulsion at an estimated rate of 250
barrels per day ("bpd") over a one day period. Test 4 was conducted
using a 32/64" choke with a flowing well head pressure of 90 psi.
-- WesternZagros plans to conduct further testing over the Test 4 interval
in order to clean-up the well and gain additional information on its
long term deliverability. The Corporation will conduct additional
analysis to determine how to increase flow rates and unlock the
considerable potential of the low permeability, naturally fractured
sandstones of the Upper Fars Formation.
-- The total gross costs for the Mil Qasim-1 well were $47.6 million
including $19.5 million for testing (includes approximately $17 million
on Mil Qasim-1 testing plus $2.5 million on clean up and rig tear down).
-- Drilling Mil Qasim-1 fulfills WesternZagros's work obligation under the
first exploration sub period of the Garmian PSC. The Corporation has now
entered the second exploration sub-period of the Garmian PSC.
-- The Mil Qasim-1 well also encountered hydrocarbon shows in a high
porosity conglomerate and sandstone interval of approximately 25 metres
thickness in the Upper Bakhtiari Formation at a depth of approximately
500 metres. The Company is actively investigating a shallow, relatively
lower cost, multi-well drilling program to evaluate this reservoir as it
is encouraged by the existence of numerous highly productive water wells
drilled in the Upper Bakhtiari Formation in the southern Garmian area
that have typical flow rates of up to 6,000 bpd.
Exploration and Appraisal of Discoveries
-- During the year ended December 31, 2011, WesternZagros undertook a range
of exploration activities to further its understanding of the petroleum
potential on its Kurdamir and Garmian Blocks (the "PSC Lands"). These
included geological outcrop studies, advanced wireline log analysis and
reservoir modeling based on testing results at Sarqala.
-- During 2011, Sproule International Limited ("Sproule"), completed a
total of four independent audits of the Corporation's contingent and
prospective resources including:
-- January 14, 2011: Tertiary Eocene and Cretaceous reservoir intervals
at Kurdamir-1, Jeribe reservoir at Sarqala-1 and the Upper Fars
reservoir at Mil Qasim-1.
-- January 31, 2011: Oligocene, Eocene and Cretaceous reservoir
intervals at the Qulijan prospect; Oligocene and Eocene reservoirs
at the Baran prospect; and the Oligocene, Eocene and Cretaceous
reservoirs at the Sarqala prospect.
-- July 19, 2011: Jeribe, Mio-Oligocene, Eocene and Shiranish
(Cretaceous) reservoirs (Tilako, Zardi, Segrdan, Chwar, and Alyan
prospects) and two Upper Fars plays (Fault Trap Play, Bawanoor
Saddle).
-- September 7, 2011: Jeribe/Upper Dhiban reservoir interval at
Sarqala-1.
-- With the completion of these additional assessments on the
Corporation's two contract areas in Kurdistan, the combined mean
estimate of gross unrisked contingent resources is 54.0 million
barrels of oil, or 258 million barrels of oil equivalent, and gross
unrisked prospective resources is 2.3 billion barrels of oil, or 3.7
billion barrels of oil equivalent (contingent and prospective
resources estimated as of, January 14, 2011, January 31, 2011, July
19, 2011, and September 7, 2011, as audited by Sproule International
Limited - see "Forward Looking Information").
-- During the year ended December 31, 2011, the Corporation submitted and
received approval from the KRG for an appraisal work program and budget
with respect to the Sarqala discovery. The Corporation plans to complete
the EWT on Sarqala, conduct a 3D seismic program and drill two appraisal
wells, the first of which will be Sarqala-2. The Corporation further
submitted and received approval from the KRG for the exploration well,
Hasira-1, to comply with the Garman PSC commitments for the second
exploration sub-period. Key areas of focus for the Corporation's
subsurface and exploration work in 2011 included:
-- Planning a 3D seismic program for appraising the Sarqala structure.
-- Conducting wellbore imaging studies through independent third party
experts at Kurdamir-1, Sarqala-1 and Mil Qasim-1.
-- Building an initial reservoir simulation model for the Sarqala
Jeribe/Upper Dhiban discovery.
-- Geological field work including fracture studies and evaluation of
prospective subsurface reservoirs at outcrop.
-- Finalizing surface locations and well prognoses for the planned 2012
Sarqala-2 and Hasira-1 wells.
-- 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.
-- All of the above exploration work in 2011 refined the Corporation's
understanding of the regional geology, and reinforced management's view
of the excellent prospects for significant oil discoveries on the
Corporation's PSC Lands.
Financial
-- As at December 31, 2011, WesternZagros had $41.0 million in working
capital.
-- During the fourth quarter of 2011 the Corporation commenced an extended
well test at the Sarqala-1 oil discovery which generated $12.9 million
in proceeds from the sale of test oil up to December 31, 2011. During
the first quarter of 2012, the Corporation contracted to sell additional
test oil from January to March 2012 from the ongoing well test and
received additional proceeds of $25.9 million. While the KRG may decide
to halt its allowance of crude sales from the extended well test, the
Corporation believes this risk to be low. With the passing of the 2012
Iraqi budget, Kurdistan is committed to producing 175,000 bbl/d for the
export market (from the current approximate 100,000 bbl/d). In addition,
Kurdistan needs to maintain production for the domestic market to supply
diesel and fuel oil. Due to WesternZagros's light crude, it is highly
desired by the domestic market for its high yield for finished products.
-- For the year ended December 31, 2011, WesternZagros's share of
exploration and evaluation expenditures ("E&E") associated with its
Garmian and Kurdamir PSC activities and other capitalized costs was
$95.6 million (prior to the impact of changes in non-cash investing
capital, insurance recoveries, proceeds received from the extended well
test and disposals). Expenditures for 2011 included $71.3 million of
drilling-related costs; $5.7 million for appraisal activities; $2.2
million of geological and geosciences related work; $5.9 million of
supervision and local office costs; $3.0 million of PSC related
expenditures; and $7.5 million of corporate related expenditures.
-- On March 10, 2011, WesternZagros completed a private placement of
approximately 89.7 million Common Shares at a price of Cdn$0.48 per
Common Share for gross proceeds of approximately Cdn$43 million through
a syndicate of agents. 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.
-- On October 25, 2011, WesternZagros closed a strategic investment with
the Abu Dhabi National Energy Company PJSC ("TAQA") whereby TAQA has
purchased from WesternZagros, through a private placement, 74 million
Common Shares of the Corporation at a price of Cdn$0.63 per share for
gross proceeds of Cdn$46.6 million. TAQA holds approximately 19.9
percent of the Corporation's issued and outstanding Common Shares. The
Common Shares issued to TAQA are subject to a contractual hold period
until June 30, 2012, pursuant to the terms of the investment agreement
(the "Investment Agreement") entered into between the Corporation and
TAQA on October 16, 2011.
Insurance
-- WesternZagros initiated a control of well insurance claim in the first
quarter of 2010 related to the events at Kurdamir-1, which began when
the well was drilled into a high pressure, sour water bearing interval
in the Gulneri Formation. During the third quarter 2011, WesternZagros
and the insurers settled the balance of the claim; the total insurance
recoveries were $45 million.
-- During 2011, WesternZagros and its insurers renewed the Corporation's
insurance policy for the drilling of the Kurdamir-2 well. The terms of
the policy included an increase in the net aggregate limit from $45
million to $75 million.
Corporate
-- On July 25, 2011, WesternZagros finalized an agreement with the KRG and
Talisman to amend the Original Production Sharing Contract which had
been signed by WesternZagros and the KRG on February 28, 2008 with
respect to the entirety of the PSC Lands ("the Original PSC") that
governed the Corporation's exploration activities in the Kalar-Bawanoor
Block in Kurdistan. The amendments divided the contract area of the
Original PSC into the Garmian Block and the Kurdamir Block, which are
now governed by the Garmian PSC and the Kurdamir PSC, respectively. The
Corporation retained its 40 percent working interest in each of the
PSCs. Under the Kurdamir PSC, Talisman is the operator, with a 40
percent working interest and the KRG has a 20 percent working interest
which is carried by the Corporation. Under the Garmian PSC,
WesternZagros is the operator, the KRG has a 20 percent working interest
and the remaining 40 percent working interest is held by the KRG to be
assigned to another third party participant. The Corporation is
currently funding 100 percent of the activities under the Garmian PSC
until the third party participant interest is assigned, at which time
the Corporation will be reimbursed for the third party participant's
share of costs. WesternZagros's PSC terms, under both the Garmian and
Kurdamir PSCs remain unchanged from the Original PSC.
-- On October 27, 2011, David Cook, TAQA Executive Officer and Head of Oil
and Gas, was appointed to the WesternZagros Board of Directors pursuant
to the terms of the Investment Agreement. Mr. Cook has in excess of 20
years of experience in the upstream oil and gas sector through a variety
of global technical, commercial and managerial positions based from the
United States, United Kingdom, and Russia, as well as board
directorships.
Political
-- Despite the fact that certain Iraq federal laws have yet to be enacted
to address the future organization of Iraq's petroleum industry or the
sharing of petroleum and other revenues within Iraq, an interim
agreement was reached in February 2011, between the KRG and the federal
government of Iraq with respect to the export and sale of 100,000 bbl/d
of crude oil from Kurdistan. The agreement is reported to provide 50
percent of the revenues from such sales to the KRG in order to reimburse
the operators for costs associated with the producing fields. The KRG
has confirmed receipt of two payments to date under this agreement, with
the first payment received from the federal government equaling $243
million for production from February and March and distributed to the
operators in June. The second payment to the KRG pursuant to this
interim agreement occurred in the third quarter of 2011, with the KRG
confirming it has received $207 million from the federal government for
production from the second quarter of 2011. Subsequent to December 31,
2011, the Council of Representatives, or Parliament, of Iraq passed the
2012 Iraq budget in which Kurdistan is required to export 175,000
barrels per day. Contained within the budget legislation is explicit
language that requires the federal government to pay pursuant to the
terms of the agreement between the Federal Ministry of Oil and the
Kurdistan Ministry of Natural Resources. It does not clarify if this
legislation refers to the previous interim agreement reached in February
2011 (to pay 50 percent of the revenues to reimburse operators for the
costs) or if a new agreement will be enacted.
-- During 2011, the Kurdistan Region has attracted interest globally,
including new entrants to the region: Afren plc, PetroCeltic
International plc, Repsol YPF, SA, and Hess Corporation, each purchasing
interests in license blocks, as well as ExxonMobil which purchased
interests in six blocks in the Kurdistan Region.
-- As at December 31, 2011, the passage of federal oil and gas legislation
remained stalled due to a lack of political agreement. The oil and gas
legislation has been the major point of dispute between the federal
government of Iraq and the KRG for several years.
-- The Parliament committee reviewing draft legislation has three different
draft laws before it: the 2007 draft law, to which the Kurds have
suggested specific alterations; an amended law proposed by the federal
government's Ministry of Oil and Deputy Prime Minister for Energy
affairs, Hussain al-Shahristani; and a draft crafted under the oversight
of Parliament oil committee members with the backing of the Kurds.
-- The major difference between the two versions drafted post-2007 is that
the draft law prepared by the federal Ministry of Oil would give more
power to the federal government and the prime minister. Kurds advocate
for the passing of the original draft law from 2007 or the Parliament's
version that would give provinces and federal regions authority to
independently manage their own natural resources without referring to
the federal government as they argue the draft prepared by the Ministry
of Oil is not aligned with the Constitution of Iraq or Kurdish
interests.
-- The Prime Minister's office has stated that parliament will approve the
Parliament's version of the drafted legislation in 2012 as the federal
government and the KRG are both determined about resolving the issue.
Corporate Social Responsibility
-- In addition to its commitment to being an industry leader in many areas,
WesternZagros has proven to be an industry leader with respect to
corporate social responsibility. The Corporation continues to focus on
five key corporate social responsibility initiatives in the PSC Lands,
namely, local employment, water supply, education, health care and
recreation. Activities in 2011, which continue in 2012, include drilling
and repairing water wells in several villages, commencement of a
Community Health Awareness Program in Hasira and Mil Qasim villages;
refurbishment of several medical clinics, completion of approximately
twenty earthwork projects, refurbishment and upgrading of six primary
schools in local villages and partnering with local NGOs to facilitate
"mobile literary bus" education visits to villages in the Sarqala sub-
district.
-- WesternZagros continues to place a strong emphasis on the incremental
development of local personnel capacity. As at December 31, 2011,
WesternZagros had 342 full-time local national employees and service
contractors directly employed due to the presence of its operations, 61
of which are employed in the Corporation's field and staff offices in
professional/semi-professional roles.
FINANCIAL PERFORMANCE
----------------------------------------------------------------------------
Selected Annual Information
US$(000's), unless otherwise
specified 2011 2010 2009(1)
----------------------------------------------------------------------------
Total Interest Revenue 92 87 184
Net Loss 6,873 5,801 5,491
Net Loss Per Share (US$ Per
Share)(Basic and Diluted) 0.023 0.028 0.03
E&E Expenditures(2) 95,557 66,853 54,356
Oil Sales Proceeds from
Extended Well Test (3) 12,879 Nil Nil
Total Assets 339,439 240,290 241,077
Total Non-Current Liabilities 1,903 649 175
Dividends (US$ Per Share) Nil Nil Nil
----------------------------------------------------------------------------
(1): Numbers as presented are prior to the adoption of IFRS.
(2): E&E expenditures are prior to change in non-cash investing activities,
and do not reflect insurance recoveries (2011: $20.6 million and 2010:
$24.4 million) nor disposal of E&E assets at 2011: $0.5 million)
(3): Includes proceeds from the sale of crude oil from the extended well
test on Sarqala-1 for the period of October 27 to December 31, 2011.
General and Administrative Expenses
For the year ended December 31, 2011, WesternZagros expensed $8.5 million in
general and administrative expenses ("G&A") as compared to $6.4 million for the
prior year. Total G&A expenses were higher in 2011 due to increased personnel
costs and a relatively stronger Canadian dollar in 2011, which impacts a large
portion of the Corporation's G&A expenditures.
The Corporation capitalized $4.8 million of G&A in 2011 as compared to $2.0
million in 2010, including the capitalized portion of share-based payments. The
amounts capitalized are directly related to the supervision of the Corporation's
exploration and evaluation activities. The increase in 2011 reflects the
requirement that WesternZagros fund 100 percent of the activities on the Garmian
Block, prior to the assignment of the TPPI by the KRG.
Depreciation, Depletion and Amortization (DD&A)
For the year ended December 31, 2011, WesternZagros had $0.2 million of
depreciation related to certain administrative assets, compared to $0.6 million
for the year ended December 31, 2010. No depletion of exploration and evaluation
assets will be recognized until such time that the technical feasibility and
commercial viability has been demonstrated and development has been sanctioned,
in which case the applicable E&E assets would be tested for impairment and
reclassified as development expenditures and then depleted on a unit of
production basis.
Stock Based Compensation
The Corporation recognizes the expense associated with share-based payments on a
graded vesting basis for all stock options granted. For the year ended December
31, 2011, WesternZagros recorded $0.9 million in stock based compensation
expense and $0.6 million as part of capitalized G&A, with a corresponding
increase to contributed surplus. For the year ended December 31, 2010,
WesternZagros recorded $1.3 million in stock-based compensation expense, and
$0.3 million as part of capitalized G&A. Total stock based compensation was
relatively flat in 2011 ($1.5 million) as compared to 2010 ($1.6 million). The
reduction in the expensed portion of stock based compensation related to the
timing of tranches that vested in 2010 (i.e. fully expensed). The increased
portion of capitalized stock based compensation in 2011 relates mainly to
unvested options that were forfeited in 2010 that did not repeat in 2011 for
employees directly related to the supervision of the Corporation's exploration
and evaluation activities.
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 December 31, 2011, WesternZagros held approximately 85 percent of its cash
and cash equivalents and short-term investments in U.S. dollar accounts and U.S.
dollar overnight term deposits. The Corporation 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's 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 year ended December 31, 2011, WesternZagros
recorded a foreign exchange gain of $0.2 million relating to these conversions,
compared to a $0.1 million foreign exchange loss for the year ended December 31,
2010.
As at December 31, 2011, had the US Dollar changed by one percent against the
Canadian Dollar, with all other variables held constant, the Corporation's
foreign exchange gain or loss would have been affected by approximately $100,000
(2010: $11,000).
Income Taxes
For the year ended December 31, 2011, WesternZagros had a net income tax
recovery of $1.5 million (2010: $1.2 million recovery), comprised of $1.7
million of current income tax recovery (2010: $1.3 million recovery) and reduced
by $0.2 million of deferred income tax expense (2010: $0.2 million expense). The
current tax recovery relates to the net impact of previously unrecognized
foreign exchange gains and losses which were now recognized in the current year,
and the utilization of non-capital loss carry forwards and G&A costs incurred,
the combination of which resulted in the expected recovery of taxes originally
incurred in 2008.
The Corporation received proceeds of $0.8 million for prior year tax recoveries
during the year ended December 31, 2011 (2010: $2.2 million recovery).
Other Income
WesternZagros's other income is comprised entirely of interest earned on cash
and cash equivalents and short-term investment balances. Interest of $0.1
million was earned for the year ended December 31, 2011 compared to $0.1 million
for the year ended December 31, 2010.
Net Loss
For the year ended December 31, 2011, WesternZagros recorded a net loss of $6.9
million compared to $5.8 million for the year ended December 31, 2010.
WesternZagros is an early stage exploration enterprise and, apart from its
working interest in the Kurdamir and Garmian PSCs, cash and cash equivalents and
short-term investments, the Corporation has no other significant assets. The
increase in G&A expenses during 2011 was partially offset by increased tax
recoveries and increased foreign exchange gains as compared to 2010.
Capital Expenditures
For the year ended December 31, 2011, WesternZagros's share of E&E expenditures
was $95.6 million (prior to the impact of changes in non-cash investing capital,
insurance recoveries and proceeds from the extended well test and disposals).
Expenditures for the year included $71.3 million of drilling-related costs; $5.7
million for appraisal activities; $2.2 million of geological and geosciences
related work; $5.9 million for supervision and local office costs; $3.0 million
for PSC related expenditures; and $7.5 million for corporate activities.
By comparison, WesternZagros's share of E&E expenditures for the year ended
December 31, 2010, was $66.9 million (prior to the impact of changes in non-cash
investing capital and insurance recoveries). Expenditures for the year included
$62.6 million of drilling-related costs; $1.0 million of geological and
geosciences related work; $2.5 million for supervision and local office costs;
$0.2 million for PSC related expenditures; and $0.6 million for corporate
activities.
In the fourth quarter of 2011, the Corporation began the Sarqala-1 extended well
test ("EWT") which resulted in the Corporation's first sales of test oil. At
December 31, 2011, the Corporation had collected a total of $12.9 million of
proceeds from the sales of test oil. The Corporation is still in the exploration
stage of development and the proceeds received, net of costs, were credited
against E&E expenditures.
During 2011, the Corporation settled the balance of the Kurdamir-1 insurance
claim which had started in 2010. Insurance proceeds received from the claim were
credited against E&E expenditures. The Corporation received a total of $45.0
million in insurance proceeds under the claim, of which $42.0 million had been
recognized as a credit against E&E expenditures for the year ended December 31,
2010. Hence, $3.0 million was credited to E&E expenditures in 2011.
The Corporation's share of E&E expenditures increased in 2011 due to the
requirement that WesternZagros fund 100 percent of activities on the Garmian
Block, which included drilling Mil Qasim-1, the Sarqala-1 re-entry operation and
the related Sarqala-1 appraisal activities. In addition, Kurdamir-2 drilling
activities (non-operated) commenced during the fourth quarter of 2011 and the
Corporation was required to fund 60 percent of those activities. In comparison,
during 2010 the Corporation's share of E&E expenditures related mainly to the
Kurdamir-1 well control and recovery operations as well as completing and
testing a portion of the well. The Corporation was required to fund 60 percent
of these activities.
Quarterly Information
The following table summarizes key financial information on a quarterly
basis for the 2011 and 2010 fiscal periods:
----------------------------------------------------------------------------
(US$ thousands, unless Year
otherwise specified) Ended Three Month Periods Ended
----------------------------------------------------------------------------
Dec 31, Dec 31 Sep 30 June 30 March 31
2011 2011 2011 2011 2011
----------------------------------------------------------------------------
Revenue 92 25 16 34 17
----------------------------------------------------------------------------
Net Loss 6,873 1,964 2,013 1,416 1,480
----------------------------------------------------------------------------
Net Loss Per Share (US$
Per Share)(Basic and
Fully Diluted) 0.023 0.005 0.007 0.005 0.006
----------------------------------------------------------------------------
E&E Expenditures(1) 95,557 36,531 24,651 18,420 15,955
----------------------------------------------------------------------------
Oil Sales Proceeds from
Extended Well Test (2) 12,879 12,879 Nil Nil Nil
----------------------------------------------------------------------------
Total Assets 339,439 339,439 275,078 272,650 271,720
----------------------------------------------------------------------------
Total Non-Current
Liabilities 1,903 1,903 1,417 864 816
----------------------------------------------------------------------------
Dividend (US$ per Share) Nil Nil Nil Nil Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year
Ended Three Month Periods Ended
----------------------------------------------------------------------------
Dec 31, Dec 31 Sep 30 June 30 March 31
2010 2010 2010 2010 2010
----------------------------------------------------------------------------
Revenue 87 13 38 17 19
----------------------------------------------------------------------------
Net Loss 5,801 2,003 819 1,646 1,333
----------------------------------------------------------------------------
Net Loss Per Share (US$
Per Share)(Basic and
Fully Diluted) 0.028 0.010 0.004 0.008 0.006
----------------------------------------------------------------------------
E&E Expenditures(1) 66,853 17,283 20,455 15,962 13,153
----------------------------------------------------------------------------
Oil Sales Proceeds from
Extended Well Test (2) Nil Nil Nil Nil Nil
----------------------------------------------------------------------------
Total Assets 240,290 240,290 233,770 235,295 235,514
----------------------------------------------------------------------------
Total Non-Current
Liabilities 649 649 665 624 573
----------------------------------------------------------------------------
Dividend (US$ per Share) Nil Nil Nil Nil Nil
----------------------------------------------------------------------------
(1): E&E expenditures as presented are prior to change in non-cash investing
capital, insurance recoveries, proceeds received from the extended well
test and disposals.
(2): Includes proceeds from the sale of crude oil from the extended well
test on Sarqala-1 for the period of October 27 to December 31, 2011.
Fourth Quarter
In the fourth quarter of 2011, WesternZagros had a net loss of $2.0 million in
comparison to the fourth quarter of 2010 which was also a net loss of $2.0
million. Increased G&A expenses in the fourth quarter of 2011 were offset by
increased foreign exchange gains, resulting in a negligible difference in the
net loss between the two quarters.
WesternZagros's E&E expenditures (prior to changes in non-cash investing
capital, insurance recoveries, proceeds received from the EWT and disposals)
totaled $36.5 million in the fourth quarter of 2011 compared to $17.3 million in
the fourth quarter of 2010. The increase in the fourth quarter of 2011 was
primarily due to the Corporation's 100 percent funding requirement for Garmian
Block activities in addition to the Corporation's 60 percent funding requirement
for the Kurdamir Block non-operated activities, including the drilling
operations that commenced at Kurdamir-2. In comparison, activities during the
fourth quarter of 2010 related to Kurdamir-1 operations, including completing
and testing a portion of the well. The Corporation funded 60 percent of these
activities.
On October 27, 2011, WesternZagros sold its first oil produced from Sarqala-1
into the domestic market. The Sarqala crude is being processed in local
refineries under the auspices of the Ministry of Natural Resources and proceeds
are applied against the Corporation's cost recovery pools. As at December 31,
2011, the Corporation had generated $12.9 million of proceeds from the sales of
test oil.
Kurdamir and Garmian Production Sharing Contracts: Summary and Commitments
Under the terms of its Kurdamir and Garmian PSCs, WesternZagros has a 40 percent
working interest in each PSC and the KRG has a 20 percent working interest which
is carried by WesternZagros. The remaining 40 percent TPPI in the Kurdamir PSC
is held by Talisman and the remaining 40 percent TPPI in the Garmian PSC is held
by the KRG to be assigned to another third party participant. WesternZagros, the
KRG and Talisman for the Kurdamir PSC and WesternZagros, the KRG, and the third
party participant for the Garmian PSC, are each a "Contractor Group."
WesternZagros's remaining PSC exploration commitments are summarized in the
following table:
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Kurdamir PSC Garmian PSC
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First exploration June 30, 2012 December 31, 2011
sub-period (expires)
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Exploration Kurdamir-2 Mil Qasim-1 exploration
obligation well (completed)
(remaining)
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Second exploration Additional two years Additional two years
sub-period
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Exploration One appraisal well One exploration well
obligation (Kurdamir-3) (Hasira-1)
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Other extensions Six month extension One year extension
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Work commitments One appraisal well One exploration well
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Economic terms Unchanged Unchanged
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PSC payments Additional Capacity Additional Capacity
Building Support Payment Building Support Payment
payable equal to 3% of payable equal to 3% of
WesternZagros Profit Oil. WesternZagros Profit Oil.
Continuation of previous Annual payments 50% of
annual payments. previous payments.
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Operator Talisman WesternZagros
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Working interest WesternZagros 40% WesternZagros 40%
Talisman 40% KRG 40%(ii)
KRG 20% (i) Unassigned TPPI 20% (i)
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Contract area 340 km2 1,780 km2
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(i) WesternZagros funds the KRG costs, ultimately to be recovered by
WesternZagros through the KRG's share of Cost Recovery Oil. For the
Garmian Block, the current PSC requires that the third party
participant will be required to pay for half of the KRG's carried
share. This will be confirmed once the TPPI is assigned.
(ii) WesternZagros initially funds the 40% of the costs for the third party
participant until the TPPI is assigned by the KRG. The amounts funded
by WesternZagros for the TPPI will be repaid upon assignment of this
interest.
As at December 31, 2011, the Corporation estimates expenditures of approximately
$32 million to meet its 60 percent funding requirement to fulfill its remaining
commitments for the first exploration sub-period under the Kurdamir PSC. This
estimate includes the Corporation's portion of costs for drilling the Kurdamir-2
commitment well by June 30, 2012; planned initial testing activities while
drilling Kurdamir-2; and associated supervision and local office support costs
and other planned Kurdamir Block activities to December 31, 2012.
During the year ended December 31, 2011, the Corporation finished drilling the
Mil Qasim-1 exploration well in order to meet its commitments for the first
exploration sub-period under the Garmian PSC. The Corporation has now entered
the second exploration sub-period of the Garmian PSC. During the second
exploration sub-period the Corporation is required to drill one exploration
commitment well (Hasira-1) by December 31, 2013, and spend a minimum of $25
million on drilling and associated geological and geophysical activities. Upon
fulfilling these minimum exploration commitments, the Corporation would then be
entitled to a one year extension of the second exploration sub-period (i.e. to
December 31, 2014) if the Corporation committed to drilling one additional
exploration well during the extension period.
At the end of the first exploration sub-period, the Corporation and the other
parties to the Kurdamir 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. At the end of the second
exploration sub-period, WesternZagros, and the other parties to the Kurdamir 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 period subject to the following relinquishment requirements. If the
second sub-period option is exercised, the Kurdamir PSC specifies the obligation
to drill one appraisal well with the commitment of a minimum financial amount of
$30 million for this purpose. It further states that either thirty-five (35)
line kilometres of two dimensional seismic data or forty (40) square kilometres
of three dimensional seismic data within the Kurdamir Block area must be
acquired, processed or interpreted. At the end of the second exploration
sub-period, and at the end of the subsequent extension period, the Kurdamir PSC
requires WesternZagros, and other parties who have elected to participate, to
relinquish 25 percent of the remaining undeveloped area within the Kurdamir
Block or the entire contract area (other than any discovery or development
areas).
At the end of the second exploration sub-period, the Corporation, and the other
parties to the Garmian 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 PSC requires the Corporation and other
parties who have elected to participate, to relinquish 25 percent of the
remaining undeveloped area within the Garmian Block or the entire contract area
(other than any discovery or development areas).
During the year ended December 31, 2011, the Corporation submitted and received
approval from the KRG for an appraisal work program and budget with respect to
the Sarqala discovery. The Corporation plans to continue the EWT on Sarqala-1,
conduct a 3D seismic program and drill two appraisal wells, the first of which
will be Sarqala-2.
Kurdamir and Garmian Production Sharing Contracts: Production
The Kurdamir and Garmian PSCs provide each respective 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 applicable 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 Kurdamir and Garmian PSCs, WesternZagros maintains
the right to market its share of oil on the world market. There is an obligation
under the Kurdamir and Garmian PSCs to make oil production available to meet
regional market demand. During the fourth quarter of 2011, the Corporation
commenced selling test oil from the Sarqala-1 extended well test into the local
domestic Kurdistan market under the approval from the Ministry of Natural
Resources of the KRG. Under the terms of these sales agreements, all proceeds
are currently being credited against recoverable costs under the Garmian PSC.
With continued approval from the Ministry of Natural Resources of the KRG, any
future sales contracts for ongoing test oil from Sarqala-1 could continue to be
sold via the local auction market process or alternatively sold for export
depending on local demand.
Pursuant to the terms of the Kurdamir and Garmian PSCs, the price for natural
gas is based on local commercial value and Iraq tariffs. Limited markets exist
for natural gas within Iraq and there is limited infrastructure for export and
no such price for natural gas has yet to be established in Kurdistan. The KRG
has the expansion of its electricity generation as one of its priorities and is
pursuing a number of projects that may expand these markets and the demand for
natural gas.
Kurdamir and Garmian Production Sharing Contracts: Commercial Terms
Once a declaration of commerciality has been made under the Kurdamir and Garmian
PSCs, 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 PSCs; the remaining oil is subject to a 10 percent royalty
payable to the KRG (the residual is considered to be "net available oil"). 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
sharing 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 December 31, 2011, the Corporation had approximately $146 million related
to the Garmian PSC and $88 million relating to the Kurdamir PSC, both net to
WesternZagros, of recoverable costs available that may ultimately be recovered
from future crude oil or natural gas sales in accordance with the PSCs. Pursuant
to the terms of the PSCs, these estimated cost pools are subject to government
audit.
Other Commitments
The Corporation has entered into various exploration-related contracts,
including contracts for drilling equipment, services and other tangible
equipment. The following table summarizes the estimated commitments in relation
to these exploration-related contracts relating to the Garmian PSC and other
contractual obligations at December 31, 2011:
US$(000's), unless
otherwise specified For the Years Ending December 31,
2012 2013 2014 2015 2016+ Total
----------------------------------------------------------------------------
Exploration $1,067 - - - - $1,067
Office $657 $559 $456 - - $1,672
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$1,724 $559 $456 - - $2,739
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Legal Proceedings
From time to time, the Corporation may become involved in legal or
administrative proceedings in the normal conduct of business. The Corporation is
currently in disputes with two contractors, one is related to compensation owing
to a contractor under a terminated agreement and the other is over a potential
breach of contract by a contractor related to services provided to the
Corporation. Although there has been no formal claim of monetary damages to date
in either of the matters, the Corporation does not currently expect that the
matters, individually or in aggregate, would have a material impact on the
Corporation's financial position. The Corporation continues to pursue resolution
of these disputes, and will enforce its contractual rights through arbitration
if necessary. Notice of arbitration has been received by the Corporation with
respect to one of these disputes. Given the early stage of the disputes there is
no certainty as to the ultimate outcome of any such proceedings. Amounts
involved in such matters are not reasonably estimable due to uncertainty as to
the final outcome.
Off Balance Sheet Arrangements
The Corporation does not presently utilize any off-balance sheet arrangements to
enhance its liquidity and capital resource positions, or for any other purpose.
During the year ended December 31, 2011, WesternZagros did not enter into any
off-balance sheet transactions.
Outlook for 2012
WesternZagros's plans for 2012 and early 2013 are to focus its exploration and
appraisal programs on the highly prospective formations discovered through the
drilling of the Sarqala-1, Mil Qasim-1 and Kurdamir wells. These exploration and
appraisal programs will further delineate the approximately one billion barrels
of oil equivalent of mean gross unrisked prospective resources that these
formations are estimated to contain (prospective resources estimated as of
December 14, 2010, January 14, 2011, January 31, 2011, July 19, 2011, and
September 7, 2011, as audited by Sproule International Limited - see "Forward
Looking Information").
Activities on the Kurdamir Block for the remainder of 2012 are planned to
include the drilling and testing of Kurdamir-2 and planning for further
appraisal activities, including a potential 3D seismic program, a potential
extended well test, a potential early production system, and future appraisal
wells. Activities on the Garmian Block for 2012 are planned to include the
necessary engineering and design work for the expansion of facilities for
Sarqala; the appraisal program for the Sarqala and Mil Qasim discoveries and
further exploration activities including the design, drilling plan and necessary
long-lead procurement for the Sarqala-2 well and the Hasira-1 well (the
commitment well required during the second exploration sub-period for the
Garmian PSC) and potential wells on the Upper Bakhtiari reservoir encountered
while drilling Mil Qasim-1.
Kurdamir
With the significant crude oil, condensate and natural gas discovery in the
Oligocene reservoir at Kurdamir, which has been confirmed in the Kurdamir-2
well, WesternZagros is working with its co-venturer, Talisman, to advance
appraisal efforts. WesternZagros expects the deeper Eocene and Cretaceous
reservoirs to be drilled and evaluated in Kurdamir-2 by the end of the second
quarter of 2012 followed by a fulsome testing program. Subsequently, further
activities to appraise the Kurdamir discovery will commence planning for a 3D
seismic program over the Kurdamir structure with acquisition to commence in late
2012 or early 2013, a possible extended well test in the Kurdamir-2 well and a
further appraisal well (Kurdamir-3) to be drilled in 2013/2014.
Garmian
WesternZagros will continue the EWT at Sarqala to gain additional information
with respect to appraising the Sarqala structure for future development
opportunities. The Corporation commenced engineering work in the fourth quarter
of 2011 with respect to sourcing permanent facilities and optimizing the
location of these facilities for increasing future production beyond 5,000
barrels per day from the Sarqala-1 EWT and future wells on the Sarqala
structure. This work will include the necessary facilities to utilize the
associated natural gas from this crude oil production to minimize the flaring of
natural gas.
WesternZagros will conduct further testing on the Test 4 interval at Mil Qasim-1
to further clean-up the well and gain additional information on the long term
deliverability of the Upper Fars reservoir. The Corporation will also conduct
additional analysis to determine how to increase flow rates and unlock the
considerable potential of the low permeability, naturally fractured sandstones
of the Upper Fars Formation.
The Mil Qasim-1 well also encountered hydrocarbon shows in a high porosity
conglomerate and sandstone interval of approximately 25 metres thickness in the
Upper Bakhtiari Formation at a depth of approximately 500 metres. WesternZagros
is actively investigating a shallow, relatively lower cost, multi-well drilling
program to evaluate this reservoir. The Corporation is encouraged by the
existence of numerous highly productive water wells drilled in the Upper
Bakhtiari Formation in the southern Garmian area that have typical flow rates of
up to 6,000 bpd. These wells may be indicative of the potentially high
productivity Upper Bakhtiari reservoir at relatively shallow depths.
During the first half of 2012, WesternZagros is designing and planning a 3D
seismic appraisal program over the Sarqala and Mil Qasim structures. Seismic
acquisition is anticipated to commence in the second half of 2012, and the
Corporation will utilize the information to optimize the number and placement of
future appraisal wells, improve its understanding of fracturing within these
structures and further evaluate the Bakhtiari, Upper Fars, Jeribe, Oligocene,
Eocene and Cretaceous reservoirs. In addition, WesternZagros plans to acquire 2D
seismic at Chwar to elevate this low risk, Jeribe oil opportunity to drill ready
status.
WesternZagros expects to design, plan and contract geophysical services with the
intention of spudding the Sarqala-2 appraisal well in the third or fourth
quarter of 2012. Sarqala-2 will be the Corporation's first appraisal well to
delineate the Jeribe reservoir and is anticipated as the next potential
producing well.
WesternZagros also expects to design, plan and procure the necessary long lead
materials and services with the intention of spudding the Hasira-1 well in the
fourth quarter of 2012. Hasira-1 has been approved as the Corporation's
exploration well to comply with the Garmian PSC commitments for the second
exploration sub-period. Hasira-1 will be designed to test the Oligocene
reservoir. It will also appraise the Jeribe reservoir and will have the
potential to complete as a producer in either the Oligocene or Jeribe reservoirs
dependent on results.
The Sarqala-2 and Hasira-1 wells will also drill through and evaluate the Upper
Fars and Upper Bakhtiari discovered while drilling Mil Qasim-1. The Corporation
will utilize the information from the further testing of the Test 4 interval to
determine the potential opportunity to test the Upper Fars in these wells.
For the first half of fiscal 2012, WesternZagros estimates its capital
expenditures, including the requirement for the Corporation to fund 100 percent
of Garmian activities in 2012 until the assignment of the TPPI by the KRG and to
fund its share of the costs of the Kurdamir-2 well, to be approximately $58-68
million. This includes approximately $30-35 million for drilling and testing
Kurdamir-2; $11 million of incremental costs to test Mil-Qasim-1; $10-15 million
for designing, planning and procurement of the necessary long lead materials for
the Sarqala-2 and Hasira-1 wells and the appraisal 3D seismic program; $4
million for in-country support costs and other PSC expenditures for both the
Kurdamir and Garmian Blocks; and approximately $3 million for corporate and
general and administrative costs. This excludes any of the proceeds from the
sale of crude oil from the extended well test at Sarqala-1 and the reimbursement
of the costs on the Garmian Block that WesternZagros has funded and will be
reimbursed upon the assignment of the TPPI by the KRG.
The KRG is committed to gas development with the focus initially on domestic
power generation and by other industrial usages. This would be followed by
development of infrastructure to facilitate exports to other parts of Iraq,
Turkey and, ultimately, Europe. WesternZagros is working with the KRG to
determine how the large gas cap discovered at Kurdamir can be mutually
beneficial to their larger development plan. In addition, WesternZagros is also
in discussions with TAQA, the Corporation's strategic investor and the sixth
largest independent power producer in the world, to explore alternate private
development options for potentially utilizing Kurdamir's gas resources.
Liquidity and Capital Resources
WesternZagros is currently exploring for and appraising discoveries of crude oil
and natural gas in the Kurdistan Region of Iraq. WesternZagros's other income is
comprised entirely of interest earned on cash and cash equivalent balances and
short-term investments. WesternZagros invests its cash and cash equivalents and
short-term investments 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. As
at December 31, 2011, WesternZagros had $41.0 million in working capital and
short-term investments with no outstanding bank debt or other interest bearing
indebtedness.
During the fourth quarter of 2011, WesternZagros began oil production from the
Sarqala-1 extended well test and sales of this test production into the domestic
market in Kurdistan. Under the terms of the contracts entered into for the sale
of this production, the purchasers have prepaid WesternZagros for the
production. Proceeds received up to December 31, 2011, totaled $12.9 million.
Subsequently, the Corporation contracted to sell any further test oil from
January to March 2012 and received additional proceeds of $25.9 million.
WesternZagros will use these cash proceeds, along with additional sales proceeds
received for test oil from the extended well test to fund future exploration and
appraisal activities.
WesternZagros will monitor the timing and likelihood of the TPPI being assigned
by the KRG in the Garmian PSC in determining its future capital requirements, as
WesternZagros will continue to fund 100 percent of the costs incurred on the
Garmian Block until such a time as the TPPI is assigned by the KRG. Upon
assignment of the TPPI by the KRG, WesternZagros will be reimbursed for the
costs that it has funded on the Garmian PSC and will be able to utilize these
funds for other exploration and appraisal activities and the ongoing capital
obligations under the Garmian PSC should be reduced to 50percent with the TPPI
responsible for their 50percent share.
Currently, the Corporation does not anticipate the need to raise additional debt
or equity financing during 2012 given the continued production from the extended
well test and likely assignment of the TPPI. However, WesternZagros may be
required to access further funding dependent on the level and timing of
exploration and appraisal activities pursued by the Corporation and the funding
requirements under the relevant PSCs. WesternZagros, in considering the proper
timing to potentially access further capital, will also assess the following
factors:
-- Further exploration results from Kurdamir-2 and timing of future
appraisal activities;
-- The expected timing for appraisal activities at Sarqala and Mil Qasim
and the future exploration activities on the Garmian Block;
-- The ability to export oil and natural gas from the Kurdistan Region of
Iraq in accordance with the economic terms under the PSCs 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.
Outstanding Share Data
As at December 31, 2011, and as at March 26, 2012, there were 371,209,472 shares
issued and outstanding. The number of common shares reserved for issuance
pursuant to options granted will not exceed 10 percent of the issued and
outstanding common shares.
For the year ended December 31, 2011, there were 630,000 stock options granted,
79,800 options exercised in exchange for common shares, and 2,126,400 options
forfeited by employees and contractors, bringing the total stock options
outstanding as of December 31, 2011 to 18,778,700. Subsequent to December 31,
2011, there were 7,104,000 stock options granted to directors, officers,
employees and contractors, and 18,400 forfeited by employees, bringing the total
stock options outstanding as of March 26, 2012 to 25,864,300.
RISK FACTORS
The oil and gas industry is very competitive and is subject to many risks. Many
of these risks are outside of WesternZagros's control. The ability of
WesternZagros to successfully carry out its business plan beyond exploration is
primarily dependent upon the continued support of its shareholders, the
discovery of economically recoverable reserves, meeting all commitments under
the PSCs, the resolution of remaining political disputes in Iraq, progress on
the Federal Petroleum Law and the ability to export oil and natural gas from the
Kurdistan Region of Iraq in accordance with the economic terms under the PSCs,
the state of the capital markets, the ability of WesternZagros to obtain
financing as required to develop reserves, and the continued receipt of proceeds
from the Sarqala-1 EWT. Management of WesternZagros has identified certain key
risks and their potential impact on WesternZagros's operations.
For further information on risk factors affecting the business of WesternZagros,
see "Risk Factors" relating to the Corporation as referenced in the March 26,
2012 Annual Information Form ("AIF").
Adoption of International Financial Reporting Standards ("IFRS")
The Corporation has prepared its December 31, 2011 Consolidated Financial
Statements in accordance with International Financial Reporting Standards, this
is the Corporation's first annual reporting date under IFRS. Accordingly, the
comparative information for 2010 has also been prepared in accordance with the
Corporation's IFRS accounting policies. The adoption of IFRS has not had a
material impact on the Corporation's operations, strategic decisions, cash flow,
or overall capital expenditures.
The Corporation's IFRS accounting policies are provided in detail in Note 3 to
the December 31, 2011, Consolidated Financial Statements. Prior period
reconciliations between IFRS and previous GAAP are included within Note 23 to
the December 31, 2011 Consolidated Financial Statements. In summary, Note 23
includes the following reconciliations:
-- Balance Sheets as at January 1, 2010, and December 31, 2010;
-- Statement of Comprehensive Loss for the year ended December 31, 2010;
and
-- Statement of Cash Flow for the year ended 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 originally had only one PSC in that region
covering all of the PSC Lands, 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 for
the first time 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 cost
basis as at January 1, 2010.
Upon conversion to IFRS, WesternZagros also adopted 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 Corporation 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
Corporation'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 Corporation 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 Corporation 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 Corporation was
required to adopt IAS 37, "Provisions, Contingent Liabilities and Contingent
Assets", for which the Corporation judged that a 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 Corporation 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's 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 December 31, 2011 Consolidate Financial
Statements.
Use of Estimates
The preparation of the consolidated 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 consolidated financial statements. Accordingly, actual
results may differ from these estimated amounts as future confirming events
occur. Significant estimates used in the preparation of the consolidated
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 Corporation 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 Corporation to continue fulfilling ongoing commitments; and
significant changes in the Corporation's market value.
If factors indicate that the Corporation 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 ("FVLCS"). It is
anticipated that the FVLCS, would be more readily computed. Determination of the
FVLCS 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 Corporation is still in the exploration phase of
operations on its PSC Lands. The Corporation has not recognized any impairment
for exploration and evaluation expenditures nor for property, plant, and
equipment.
Provision for decommissioning obligations
The Corporation 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 Corporation'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 Corporation 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 judgments 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, estimated forfeitures, 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 Corporation 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 27, "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 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.
The following standard issued by the IASB becomes effective January 1, 2015:
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.
Consolidated Statements of Financial Position
(thousands of United States dollars)
December 31, January 1,
December 31, 2010 2010
Note 2011 (Note 23) (Note 23)
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash
equivalents 7 $64,511 $31,482 $76,708
Short-term investments 7 9,997 - -
Trade and other
receivables 8 327 8,648 6,880
Insurance recoveries
receivable 9 - 17,597 -
Deposits held in trust 10 - 420 -
Prepaid expenses 275 39 183
Income tax recoverable 11 2,632 887 1,738
----------------------------------------------------------------------------
Total current assets 77,742 59,073 85,509
Non-current assets
Deposits held in trust 10 - - 420
Property, plant and
equipment 12 89 261 814
Exploration and
evaluation
expenditures 9 261,608 180,770 154,097
Deferred tax assets 11 - 186 371
----------------------------------------------------------------------------
Total non-current
assets 261,697 181,217 155,702
----------------------------------------------------------------------------
Total assets $339,439 $240,290 $241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Trade and other
payables 13 $35,922 $21,525 $18,297
Income tax payable 813 - -
----------------------------------------------------------------------------
Total current
liabilities 36,735 21,525 18,297
Non-current liabilities
Provision for
decommissioning
obligations 14 1,728 509 432
Deferred tax
liabilities 11 175 140 134
----------------------------------------------------------------------------
Total non-current
liabilities 1,903 649 566
----------------------------------------------------------------------------
Total liabilities 38,638 22,174 18,863
----------------------------------------------------------------------------
Equity
Equity attributable to
shareholders
Share capital 15 341,681 253,583 253,583
Contributed surplus 16 12,683 11,223 9,654
Accumulated deficit (53,563) (46,690) (40,889)
----------------------------------------------------------------------------
Total equity 300,801 218,116 222,348
----------------------------------------------------------------------------
Total equity and
liabilities $339,439 $240,290 $241,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments and
contingencies (Note 22)
The notes are an integral part of these consolidated financial statements.
These consolidated financial statements were authorized for issue by the
Audit Committee of the Board of Directors on March 23, 2012. They are signed
on the Corporation's behalf by:
(Signed) "Fred J. Dyment" (Signed) "Randall Oliphant"
Director Director
Consolidated Statements of Comprehensive Loss
For the years ended December 31, 2011 and 2010
(thousands of United States dollars, except per share amounts)
Note 2011 2010
----------------------------------------------------------------------------
Other Income
Interest income $92 $87
Expenses
General and administrative expenses 17,
18 8,472 6,413
Depreciation 201 553
Accretion on decommissioning
obligations 14 25 16
Foreign exchange (gain) loss (228) 62
----------------------------------------------------------------------------
Total expenses 8,470 7,044
----------------------------------------------------------------------------
Loss before taxation 8,378 6,957
Taxation
Current 11 (1,726) (1,347)
Deferred 11 221 191
----------------------------------------------------------------------------
Total taxation (recovery) (1,505) (1,156)
----------------------------------------------------------------------------
Total loss and comprehensive loss
attributable to shareholders $ 6,873 $5,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net loss per share - basic and diluted 19 $0.023 $0.028
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these consolidated financial statements.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2011 and 2010
(thousands of United States dollars)
Number of Share Contributed Accumulated Total
Note shares capital surplus deficit equity
----------------------------------------------------------------------------
Balance
January 1,
2010 23 207,464,320 $253,583 $ 9,654 $(40,889) $222,348
Share based
payments - - 1,569 - 1,569
Loss for the
period - - - (5,801) (5,801)
----------------------------------------------------------------------------
Balance
December 31,
2010 23 207,464,320 253,583 11,223 (46,690) 218,116
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Issuance of
common
shares 163,665,352 90,185 - - 90,185
Options
exercised 16 79,800 64 (22) 42
Share
issuance
costs - (2,151) - - (2,151)
Share based
payments 16,17 - - 1,482 - 1,482
Loss for the
period - - - (6,873) (6,873)
----------------------------------------------------------------------------
Balance
December 31,
2011 371,209,472 $341,681 $12,683 (53,563) $300,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flow
For the years ended December 31, 2011 and 2010
(thousands of United States dollars)
Note 2011 2010
----------------------------------------------------------------------------
Cash flow from operating activities
Net loss before taxation $(8,378) $(6,957)
Adjustments for
Depreciation 201 553
Accretion 14 25 16
Share based payments 16,17 860 1,310
Income taxes recovered 794 2,198
Change in non-cash operating working
capital 21 (232) (123)
----------------------------------------------------------------------------
Net cash from (used in) operating
activities (6,730) (3,003)
----------------------------------------------------------------------------
Cash flow from investing activities
Short-term investments (9,997) -
Expenditures on exploration and
evaluation activities 21 (72,298) (66,626)
Oil sales proceeds from extended well
test 9 12,879 -
Disposals of exploration and
evaluation assets 482 -
Insurance recoveries 20,646 24,403
Additions to property, plant and
equipment (29) -
----------------------------------------------------------------------------
Net cash from (used in) investing
activities (48,317) (42,223)
----------------------------------------------------------------------------
Cash flow from financing activities
Issuance of common shares, net of
costs 88,034 -
Proceeds from options exercised 42 -
----------------------------------------------------------------------------
Net cash from (used in) financing
activities 88,076 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change in cash and cash equivalents 33,029 (45,226)
----------------------------------------------------------------------------
Cash and cash equivalents, beginning of
year 31,482 76,708
----------------------------------------------------------------------------
Cash and cash equivalents, end of year $64,511 $31,482
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The notes are an integral part of these consolidated financial statements.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2011 and 2010
(thousands of United States dollars)
1. General information
WesternZagros Resources Ltd. (the "Corporation" or "WesternZagros") is
headquartered in Calgary, Canada. The Corporation is incorporated under the laws
of the Province of Alberta, Canada. The address for the Corporation is Suite
600, 440 - 2nd Avenue S.W., Calgary, Alberta, T2P 5E9.
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 holds two Production
Sharing Contracts ("PSCs") with the Kurdistan Regional Government ("KRG") in the
Kurdistan Region of Iraq. The Kurdamir and Garmian PSCs each govern a separate
contract area. The Garmian contract area (1,780 square kilometres) is operated
by WesternZagros. The Kurdamir contract area (340 square kilometres) is operated
by Talisman (Block K44) B.V. ("Talisman") with a 40 percent working interest.
WesternZagros holds a 40 percent working interest in both PSCs. The KRG holds a
20 percent working interest in both PSCs. The remaining 40 percent third party
participant interest ("TPPI") in the Garmian PSC is held pending assignment by
the KRG to a third party participant (refer to Note 22 "Commitments and
contingencies" for a description of the PSCs).
The Corporation has its listing on the TSX Venture Exchange under the symbol
"WZR.V".
Authorization of financial statements
These consolidated financial statements as at and for the year ended December
31, 2011 were authorized for issuance in accordance with a resolution of the
Board of Directors on March 23, 2012.
2. Basis of preparation and adoption of IFRS
The Corporation prepares its financial statements in accordance with
International Financial Reporting Standards ("IFRS"). In 2010, the CICA Handbook
was revised to incorporate IFRS as issued by the International Accounting
Standards Board ("IASB") which required publicly accountable enterprises to
apply these standards effective for years beginning on or after January 1, 2011.
Accordingly, these are the Corporation's first annual consolidated financial
statements prepared in accordance with IFRS, as issued by the IASB, and
interpretations issued by the IFRS Interpretations Committee ("IFRIC") that were
published at the time of preparation and that were effective or available for
early adoption on December 31, 2011.
These consolidated financial statements, including the prior year comparative
information, have been prepared in compliance with IFRS. Subject to certain
transition elections disclosed in Note 23 "Explanation of transition to IFRS",
the Corporation has consistently applied the accounting policies disclosed
within these financial statements to all periods presented herein as if these
policies had always been in effect. This includes the opening statement of
financial position at January 1, 2010 required for the purposes of transition to
IFRS in accordance with IFRS 1, First Time Adoption of International Financial
Reporting Standards. Prior to 2011, the Corporation prepared its consolidated
annual financial statements in accordance with GAAP prior to the adoption of
IFRS.
As is typical with exploration stage companies, the Corporation has incurred
losses from operations and negative cash flows from operating activities, and
has an accumulated deficit at December 31, 2011. During the year ended December
31, 2011, the Corporation had expenditures of $6.7 million for operating
activities and $72.3 million for investing activities related to exploration and
evaluation assets, including changes in non-cash working capital. During the
fourth quarter of 2011, the Corporation completed a private placement of common
shares for total gross proceeds of Cdn $46.6 million and commenced an extended
well test at the Sarqala-1 oil discovery that generated an additional $12.9
million of proceeds from the sales of test oil. The test oil produced under the
extended well test is sold by the Corporation and refined in local plants under
the auspices of the Ministry of Natural Resources and proceeds are being applied
to the Corporation's cost recovery pools. Subsequent to December 31, 2011, the
Corporation entered into contracts to sell test oil from January through March
2012 from the ongoing Sarqala-1 extended well test and received additional
proceeds of $25.9 million. Proceeds received from the sale of test oil during
the Sarqala-1 extended well test will be utilized to fund the Corporation's
ongoing activities. Currently the Corporation does not anticipate the need to
raise additional debt or equity financing during the next twelve months.
Accordingly, the Corporation has continued to adopt the going concern basis of
accounting in preparing these financial statements, which assumes the
Corporation can continue to meet its financial obligations and continue
operations during the next fiscal year. These consolidated financial statements
do not reflect adjustments in the carrying value of assets and liabilities,
revenue or expense, nor the balance sheet classification that would be necessary
if the going concern assumption was not valid, such adjustments could be
material. Refer to Note 4 "Financial risk management" and the section within
entitled "Liquidity and funding risk" for a detailed description of the
potential requirement for additional debt or equity financing.
3. Significant accounting policies
The significant accounting policies used in the preparation of these
consolidated financial statements are described below.
A. Basis of measurement
These consolidated financial statements have been prepared on a going concern
basis under the historical cost convention, 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 consolidated financial
statements.
These consolidated financial statements, unless otherwise indicated, are
expressed in United States dollars ("U.S."). The Corporation has adopted the
U.S. dollar as its functional and reporting currency since most of its expenses
are directly or indirectly denominated in U.S. dollars. When revenues are
realized, it is expected that U.S. 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 consolidated financial statements are
rounded to the nearest thousand (U.S. $000) except where otherwise indicated.
The preparation of these consolidated 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 judgment or
complexity, or areas where assumptions and estimates are significant to the
consolidated financial statements are disclosed in Note 5 "Critical accounting
judgements, estimates and assumptions".
B. Basis of consolidation
These consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiaries as follows:
Wholly-owned subsidiary Jurisdiction Nature of operations
----------------------------------------------------------------------------
WesternZagros Resources Inc. Canada Holding Company
Western Oil International Holdings Limited Cyprus Holding Company
WesternZagros Limited Cyprus Exploration Company
WesternZagros (Garmian) Limited Cyprus Inactive
These subsidiaries are entities over which the Corporation has the power to
govern the financial and operating policies. The Corporation has 100 percent
direct ownership of these entities. Accordingly, the subsidiaries are fully
consolidated within the Corporation's consolidated financial statements.
Inter-company transactions and balances, including unrealized income and
expenses arising from inter-company transactions, are eliminated in full in
preparing these consolidated financial statements.
C. Jointly controlled assets under the PSCs
The jointly controlled assets under the PSCs offer joint ownership by the
Corporation and its co-venturers to the PSCs for assets contributed to the
ongoing exploration project in the Kurdistan Region of Iraq. The Corporation
recognizes its share of the jointly controlled assets and its share of the joint
liabilities incurred under the PSCs (refer to Note 22 "Commitments and
contingencies" for a description of the PSCs).
D. Foreign currency translation
These consolidated financial statements are presented in U.S. dollars, which is
the Corporation'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, any resulting exchange rate differences are
recorded in the statement of comprehensive loss. Non-monetary items are measured
at historical exchange rates.
E. Exploration and evaluation expenditures
Crude oil and natural gas exploration and evaluation expenditures ("E&E
expenditures") are accounted for using a modified 'successful efforts' method of
accounting. Accordingly, the Corporation 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 E&E expenditures. E&E expenditures 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. Costs incurred
prior to obtaining the rights to explore are expensed in the statement of
comprehensive loss.
The costs continue to be carried as E&E expenditures until such time that the
technical feasibility and commercial viability of the crude oil and natural gas
hydrocarbons has been demonstrated and development has been sanctioned. At that
point the E&E expenditures are assessed for impairment and then transferred to
development expenditures. Prior to sanctioning development, any production is
considered to be test production and any associated proceeds received, net of
applicable costs, are credited to E&E expenditures. As at the date of these
financial statements the Corporation is an exploration stage company and has not
yet incurred any development expenditures.
Accumulated E&E 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, E&E expenditures are allocated on a cash-generating unit ("CGU") basis.
The Corporation has established that each PSC entered into be identified as a
separate CGU. An impairment loss is recognized for the amount by which the E&E
expenditure's carrying value exceeds its recoverable amount. The recoverable
amount is the higher of the E&E 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
expenditures.
F. 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 Corporation compares the carrying
value of property, plant and equipment to the higher of its value in use and
fair value less costs to sell, based on estimated discounted future cash flows,
to determine whether there is any indication of impairment.
G. Cash and cash equivalents and short-term investments
Cash and cash equivalents consist of cash in the bank, less outstanding cheques,
and short-term highly liquid deposits with maturity dates of three months or
less.
Short-term investments are highly liquid deposits with maturity dates between
three and six months.
H. Financial instruments
Financial assets and liabilities are recognized on the Corporation's statement
of financial position when the Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation's loans and receivables are comprised of cash and cash
equivalents, short-term investments, trade and other receivables, insurance
recoveries receivable and deposits held in trust 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.
I. Impairment of financial instruments
At each reporting date, the Corporation assesses whether there is objective
evidence that a financial asset is impaired. If such evidence exists, the
Corporation 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 through 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.
J. Provision for decommissioning obligations
Provision for decommissioning obligations are recognized when the Corporation
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 Corporation recognizes the initial
spud date as the obligating event for each well location. The Corporation
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 E&E 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 E&E 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.
K. Taxation including deferred taxation
Tax expense represents current tax and deferred tax. Income tax is recognized in
the statement of comprehensive 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 using tax rates
enacted or substantively enacted 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 consolidated 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.
Tax assets and liabilities are recognized on an entity by entity basis as the
Corporation does not have the legal right to offset recognized amounts between
entities.
L. Share capital
Common shares are classified as equity. Incremental costs directly attributable
to the issuance of shares are recognized as a deduction from equity.
M. Share-based payments
The Corporation has established a Stock Option Plan for the issuance of options
to directors, officers, employees and consultants to purchase Common Shares of
the Corporation. 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 each reporting date, with any
impact being recognized immediately.
The cash proceeds received, net of any directly attributable transaction costs,
together with the amount recorded to contributed surplus are credited to share
capital when the options are exercised.
N. Other income
The Corporation recognizes other income on an accrual basis and is related to
the interest income earned on the Corporation's cash and cash equivalents and
short-term investment balances.
O. 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.
P. Loss per share
The Corporation presents the basic and diluted loss per share data for its
common shares, calculated by dividing the loss attributable to the shareholders
of the Corporation 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.
Q. 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 Corporation 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 27, "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 10 - Consolidated Financial Statements:
IFRS 10 requires an entity to consolidate an investee when it has power over the
investee, is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns through its power
over the investee. Under existing IFRS, consolidation is required when an entity
has the power to govern the financial and operating policies of an entity so as
to obtain benefits from it activities. 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 its 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 comprehensive IFRS framework
for measuring fair value and the required disclosures about fair value
measurements for use across all IFRS standards. The new standard clarifies that
fair value is the price that would be received to sell an asset, or paid to
transfer a liability in an orderly transaction between market participants, at
the measurement date. 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.
The following standard issued by the IASB becomes effective January 1, 2015:
IFRS 9 - Financial Instruments:
IFRS 9 addresses the classification and measurement of financial assets and
liabilities and replaces the multiple category and measurement models contained
in IAS 39, "Financial Instruments: Recognition and Measurements". For financial
assets, IFRS 9 contains only two measurement categories: amortized cost and fair
value through profit and loss. IFRS 9 also replaces the models for measuring
equity instruments, all equity instruments are measured at fair value, either
through profit and loss or other comprehensive income. Where equity investments
are measured at fair value through other comprehensive income, dividends are
recognized in profit or loss to the extent they do not clearly represent a
return of investment; however, other gains and losses (including impairments)
associated with such instruments remain in accumulated comprehensive income
indefinitely.
For financial liabilities, IFRS 9 largely carries forward the existing
requirements of IAS 39, except that fair value changes due to credit risk for
liabilities designated at fair value through profit and loss are generally
recorded in other comprehensive income.
4. Financial risk management
The Corporation's financial instruments consist of cash and cash equivalents,
short-term investments, trade and other receivables, insurance recoveries
receivable, deposits held in trust and trade and other payables. The main risks
that could adversely affect the Corporation's financial instruments are credit
risk, liquidity and funding risk, and market and interest rate risk.
Risk management is carried out by senior management, and is reviewed regularly
by the Board of Directors. The Corporation's risk management program
concentrates mainly on securing the necessary financial resources required to
minimize the potential risk that the Corporation is not able to meet its ongoing
obligations and commitments. The risk management policies employed by the
Corporation are discussed below:
Credit risk
Credit risk is the risk of loss associated with the counterparty's inability to
fulfill its payment obligations. The Corporation is currently exposed to credit
risk on its cash and cash equivalents and short-term investments to the extent
these balances are invested with various institutions. The Board of Directors of
the Corporation 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 Corporation has entered
into transactions for cash equivalents and short-term investments with major
Canadian financial institutions with investment grade credit ratings.
The Corporation is also normally exposed to credit risk on trade and other
receivables, mainly associated with its role as operator for the Garmian PSC and
its share of related expenditures and the potential reimbursement of costs
incurred under the Garmian PSC that may ultimately be due upon assignment by the
KRG of the third party participant interest in the Garmian PSC. Previously, the
Corporation was exposed to credit risk on trade and other receivables for
Talisman's 40 percent interest in the Kurdamir PSC for gross costs incurred by
WesternZagros while operator for the Kurdamir PSC. However, Talisman has been
the operator for the Kurdamir PSC since August 1, 2011, accordingly there was
essentially a $NIL receivable balance with Talisman as at December 31, 2011. The
ability of the Corporation to successfully carry out the exploration, appraisal
and development of its PSC contract areas may be impacted by the continued
participation of the parties in these activities and the potential assignment of
the third party participant interest in the Garmian PSC by the KRG and any
corresponding reimbursement of costs incurred under the Garmian PSC (refer to
Note 22 "Commitments and contingencies" for a description of the PSCs).
With respect to the Corporation'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:
As at December 31 2011 2010
----------------------------------------------------------------------------
Cash and cash equivalents $64,511 $31,482
Short-term investments 9,997 -
Trade and other receivables 327 8,648
Insurance recoveries receivable - 17,597
Deposits held in trust - 420
----------------------------------------------------------------------------
Total $74,835 $58,147
----------------------------------------------------------------------------
----------------------------------------------------------------------------
There are no past due or impaired amounts as at the reporting date.
Accordingly, the Corporation 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.
There is no credit risk associated with sales of test oil from the Sarqala-1
extended well test into the local Kurdistan domestic market, as each of the
purchase and sales contracts are prepaid in advance by the buyer.
Liquidity
Liquidity and funding risk
Liquidity and funding risk is the risk that the Corporation 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. The
Corporation is in the exploration phase of operations and is engaged in
acquiring properties and exploring for crude oil and natural gas. During the
fourth quarter of 2011, the Corporation completed a private placement of common
shares for total gross proceeds of Cdn $46.6 million and commenced an extended
well test at the Sarqala-1 oil discovery that generated an additional $12.9
million of proceeds from the sales of test oil. Subsequent to December 31, 2011,
the Corporation contracted to sell further test oil from January to March 2012
from the ongoing Sarqala-1 extended well test and received additional proceeds
of $25.9 million. Furthermore and under the continued auspices of the KRG, the
Corporation anticipates receiving additional proceeds from the Sarqala-1
extended well test beyond March 2012. The Corporation funds its share of all
commitments from existing cash balances and short-term investments, the sales
proceeds received from any extended well tests, and, if required, by accessing
additional sources of funding from debt or equity markets.
The Corporation may require additional funding over time to maintain ongoing
exploration programs and property commitments, as well as for administration
expenses. In general, the Corporation's ability to continue its operations and
exploration activities is dependent upon its ability to sell oil and gas from
any extended well tests or from any of its discoveries that are ultimately
developed, or to obtain additional funding over time as required. Any additional
funding that may be required above and beyond the amount of sales proceeds
received from extended well tests or other discoveries that may be developed is
dependent upon the level and timing of exploration and appraisal activities
pursued by the Corporation and the funding requirements of the Corporation under
the relevant PSCs. While the Corporation has been successful in obtaining
required funding in the past, including having completed two equity financing
transactions during 2011 which generated $90.2 million in gross proceeds, there
is no assurance that sufficient funds will be available to the Corporation in
the future, or if available, available on favourable terms. The inability of the
Corporation to access sufficient capital for its operations could have a
material adverse impact on the Corporation's financial condition, results of
operations and prospects. Factors that could affect the availability of
financing include the continued support of its shareholders; the results of
exploration activities; the potential assignment by the KRG of the third party
participant interest in the Garmian PSC and timing thereof (see Note 22
"Commitment and contingencies" for a description of the PSCs); results
associated with the ongoing Sarqala-1 extended well test and the continued
receipt of any associated proceeds; results and timing associated with other
potential future production and sales; the political climate in Iraq and the
general effect it has on the oil and gas industry; and the overall state of the
capital markets.
The Corporation has not entered into any debt financing arrangements as at the
reporting date and is not subject to any externally imposed capital
requirements. Financial liabilities include trade and other payables and income
tax payable. Commitments are comprised of PSC commitments for the Kurdamir and
Garmian Blocks as well as other various commitments (refer to Note 22
"Commitments and contingencies" for a further description of the Corporation's
commitments). The estimated timing of cash outflows relating to financial
liabilities and the Corporation's exploration commitments as at the reporting
date is summarized as follows (U.S. $000s):
Less than Six months
six months to 1 year 2-5 years Total
----------------------------------------------------------------------------
Trade and other payables $35,922 - - $35,922
Income tax payable 813 - - 813
Kurdamir Block commitments
(Note 22) 27,000 $5,000 - 32,000
Garmian commitments((i))
(Note 22) 6,500 18,500 - 25,000
Other commitments (Note 22) 1,153 571 $1,015 2,739
----------------------------------------------------------------------------
Total expected cash outflow $71,388 $24,071 $1,015 $96,474
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Based on the Corporation's current 100% funding requirement of
activities on the Garmian Block.
Pursuant to the terms of the sales and purchase contracts related to the
Sarqala-1 extended well test, the Corporation is prepaid for all contracted
deliveries. The Corporation has yet to provide approximately $4 million of test
oil to fulfill the terms of the most recent contract, which concludes at the end
of March 2012.
The Corporation's capital structure consists of shareholder's equity and working
capital. The Corporation will adjust its capital structure to manage its
drilling programs though the issuance of shares and adjustments to capital
spending. The Corporation's objectives when managing its capital structure are
as follows:
i. Ensure adequate levels of available cash and cash equivalents and short-
term investments to meet the Corporation's commitments under the Garmian
and Kurdamir PSCs (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 Board of Directors regularly reviews the Corporation's cash and cash
equivalents and short-term investments against the Corporation's expenditure
commitments and estimates the need and timing for additional financing. This
review includes anticipating the likelihood and timing of an assignment of the
third party participant interest by the KRG under the Garmian PSC and any
corresponding reimbursement of costs under the Garmian PSC (refer to Note 22
"Commitments and contingencies" for a description of the PSCs), as well as
estimating potential proceeds to be derived from crude oil sales during extended
well testing. Management has a reasonable expectation that the Corporation 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
received from both the export market or from the local Kurdistan domestic
market. The Corporation is exposed to interest rate risk to the extent that
changes in market interest rates will impact interest earned on the
Corporation's cash and cash equivalents and short-term investments. The
Corporation 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 Corporation'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 Corporation and the instruments
that can be utilized by the Corporation to meet its day to day requirements.
This Foreign Exchange Policy requires the Corporation 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
Corporation's day to day foreign exchange requirements. The Foreign Exchange
Policy does allow the Corporation 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 Corporation to enter into any economic hedging as it relates to interest or
foreign exchange risks. As at December 31, 2011, had the U.S. dollar changed by
one percent against the Canadian dollar, with all other variables held constant,
the Corporation's foreign exchange gain (loss) would have been affected by
approximately $100 thousand (2010: $11 thousand).
In general, both crude oil and natural gas prices are subject to wide
fluctuation. During the year ended December 31, 2011, Brent daily spot crude
prices ranged in value from $93 to $126 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 received below that price that are subject to the
terms of the PSCs may impact the feasibility of WesternZagros's business plan.
Currently, the Corporation is subject to both market conditions and commodity
price fluctuations related to its ongoing sales of test oil from the Sarqala-1
extended well test into the local domestic Kurdistan market. Local sales prices
are lower than the prevailing international prices. Any change in the
sustainability of the local domestic Kurdistan market or fluctuation in the
prices received could have a considerable impact on the cash proceeds received
by WesternZagros.
If the Corporation were to export crude oil and natural gas from the Kurdistan
Region of Iraq, the marketability and price of any crude oil and natural gas
that may be exported 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. In
addition, the timing of payments received by the Corporation for any exports
would be uncertain as the payment mechanism for export sales from Iraq is still
developing. The Corporation's ability to market its crude oil and natural gas
may depend on its ability to secure transportation. The Corporation 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. To date, the Corporation has
not exported any oil or natural gas from the Kurdistan Region of Iraq.
5. Critical accounting judgments, estimates and assumptions
The preparation of these consolidated 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 judgment
or complexity, or areas where assumptions and estimates are significant to the
consolidated financial statements are disclosed below.
A. Recoverability of asset carrying values
At each reporting date, the Corporation 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 Corporation to continue fulfilling ongoing commitments; and
significant changes in the Corporation's market value.
If factors indicate that the Corporation 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 Corporation is still in the exploration phase of
operations on both the Garmian and Kurdamir Blocks. The Corporation has not
recognized any impairment for E&E expenditures nor for property, plant, and
equipment.
B. Provision for decommissioning obligations
The Corporation 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 Corporation has chosen to base the fair value
calculations on a risk-free discount rate, rather than a credit-adjusted
risk-free rate, which is a critical accounting judgement under IFRS. Provisions
for environmental clean-up and remediation costs associated with the
Corporation'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 Corporation 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 judgments 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
For the purposes of segment reporting, the Corporation is in the exploration
phase and has one significant asset related to its interest in the PSCs with the
KRG in respect of an exploration project in the Kurdistan Region of Iraq.
Accordingly, the Corporation has identified one segment for operational
activities carried out in the country of Iraq. Refer to Note 22 "Commitments and
contingencies" for a description of the PSCs.
7. Cash and cash equivalents and short-term investments
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Cash and cash equivalents:
Bank balances $3,212 $3,613 $6,609
Term deposits 61,299 27,869 70,099
----------------------------------------------------------------------------
Total cash and cash equivalents $64,511 $31,482 $76,708
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Short-term investments:
Term deposits $9,997 $- $-
----------------------------------------------------------------------------
Total short-term investments $9,997 $- $-
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. Trade and other receivables
Current as at
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Joint venture receivables $ - $7,675 $6,636
Other receivables 327 973 53
Loan receivable from related
party - - 191
----------------------------------------------------------------------------
Total trade and other
receivables $327 $8,648 $6,880
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other receivables relates mainly to a GST receivable and 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.
All classes within trade and other receivables do not contain any impaired assets.
9. Exploration and evaluation expenditures
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Costs $261,608 $180,770 $ 154,097
----------------------------------------------------------------------------
Net book value $261,608 $180,770 $ 154,097
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the years ended December 31 2011 2010
----------------------------------------------------------------------------
Opening net book value $180,770 $ 154,097
Additions, net of insurance
recoveries 94,199 26,673
Proceeds received from extended
well testing (12,879) -
Disposals (482) -
----------------------------------------------------------------------------
Closing net book value $261,608 $ 180,770
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All E&E expenditures pertain to the Kurdistan Region exploration project with
respect to the Corporation's PSCs and have been capitalized in accordance with
the Corporation's exploration and evaluation accounting policy. Included in E&E
expenditures as at December 31, 2011 is $1.4 million related to provisions for
decommissioning obligations (December 31, 2010: $0.2 million). For the year
ended December 31, 2011, the Corporation has capitalized $4.8 million of general
and administrative costs (2010: $2.0 million), including $0.6 million of
share-based compensation costs (2010: $0.3 million) directly related to
exploration activities. All E&E expenditures are excluded from depreciation.
In the fourth quarter of 2011, the Corporation began the Sarqala-1 extended well
test ("EWT") which resulted in the Corporation's first sales of test oil into
the local Kurdistan domestic market. For the period ended December 31, 2011, the
Corporation executed four sales contracts and received payments totaling $12.9
million. As at December 31, 2011, WesternZagros was still in the exploration
stage of development and has credited the proceeds received from test oil sales
against E&E expenditures.
The Corporation 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 had a net aggregate limit to the
Corporation of $45 million, with a $0.4 million deductible. Under the terms of
the insurance policy, the Corporation submitted claims for these costs as they
were incurred and paid and these claims were then subject to the review and
approval of an adjuster appointed by the insurers. During 2011, the Corporation
and the insurers settled the balance of the claim which brought the total amount
of insurance recoveries received and credited against E&E expenditures to
approximately $45.0 million. As at December 31, 2010, $42.0 million had been
credited to E&E expenditures for insurance recoveries, which also recognized an
insurance recoveries receivable of $17.6 million that was subsequently collected
during 2011.
As at December 31, 2011, the Corporation had approximately $88 million relating
to the Kurdamir PSC and $146 million related to the Garmian 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 PSCs (refer to
Note 22 "Commitments and contingencies" for a description of the PSCs). Under
each PSC, costs subject to recovery include all costs and expenditures incurred
for exploration, development, production and decommissioning operations, as well
as any other costs and expenditures incurred directly or indirectly from these
activities. Pursuant to the terms of the PSCs, these estimated cost pools are
subject to government audit.
10. Deposits held in trust
The Corporation had deposited an amount in trust for a supplier to be utilized
to fund certain expenditures for drilling operations. During the first quarter
of 2011 these funds held in trust were released back to the Corporation.
11. Taxation
For the years ended December 31 2011 2010
----------------------------------------------------------------------------
Current tax:
Recovery for the year $(1,819) $(887)
Adjustments in respect of prior years 93 (460)
----------------------------------------------------------------------------
Total current tax expense (recovery) $(1,726) $(1,347)
----------------------------------------------------------------------------
Deferred tax:
Origination and reversal of temporary
differences - current year $221 $202
Expense (recovery) due to change in tax rate
applied - (11)
----------------------------------------------------------------------------
Total deferred tax expense $221 $191
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total taxation (recovery) $(1,505) $(1,156)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income tax expense (recovery) differs from that which would be expected from
applying the combined statutory Canadian federal and provincial tax rate of
26.5 percent (2010: 28 percent) due to the following:
For the years ended December 31 2011 2010
----------------------------------------------------------------------------
Net loss before taxation $(8,378) $(6,957)
Statutory tax rate 26.5% 28%
----------------------------------------------------------------------------
Taxation (recovery) at statutory tax rate (2,220) $(1,948)
----------------------------------------------------------------------------
Reconciling items:
Losses in foreign jurisdiction with no tax
benefit 853 1,055
Stock-based compensation 228 367
Adjustments in respect of prior years 93 (460)
Previously unrecognized non-capital losses (69) -
Impact of issuance costs not included in
loss before taxation (99) -
Effect of carrying back losses at a higher
year tax rate (155) (48)
Non-deductible expense 7 12
Impact of recognized currency differential
on loss carry-backs (446) (167)
Current year loss not recognized as a
deferred tax asset 337 -
Other (34) 33
----------------------------------------------------------------------------
Total taxation (recovery) $(1,505) $(1,156)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Canadian statutory tax rate decreased to 26.5% in 2011 from 28% in 2010
as a result of tax legislation enacted in 2007.
The analysis of deferred tax assets and deferred tax liabilities is as
follows:
December 31, December 31,
Deferred tax assets 2011 2010
----------------------------------------------------------------------------
To be recovered within 12 months $- $186
To be recovered after more than 12 months - -
----------------------------------------------------------------------------
Total deferred income tax asset $- $186
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, December 31,
Deferred tax liabilities 2011 2010
----------------------------------------------------------------------------
To be recovered within 12 months - -
To be recovered after more than 12 months $175 $140
----------------------------------------------------------------------------
Total deferred income tax liability $175 $140
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The deferred income tax asset is comprised of:
December 31, December 31, January 1,
Deferred income tax asset as at 2011 2010 2010
----------------------------------------------------------------------------
Share issue costs $- $204 $408
Temporary differences on
property, plant and equipment - (18) (37)
----------------------------------------------------------------------------
Total deferred income tax asset $- $186 $371
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The deferred income tax liability is comprised of:
Deferred income tax liability December 31, December 31, January 1,
as at 2011 2010 2010
----------------------------------------------------------------------------
Temporary differences on
property, plant and equipment $175 $140 $134
Non-capital loss carry-forwards - - -
----------------------------------------------------------------------------
Total deferred income tax
liability $175 $140 $134
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred tax assets are recognized to the extent that it is probable that
taxable profit will be available against which the deductible temporary
differences and the carry-forward of unused tax credits and unused tax
losses can be utilized.
The Corporation has not recorded deferred tax assets in respect of the
following temporary differences:
Deferred tax assets not December 31, December 31, January 1,
recognized as at 2011 2010 2010
----------------------------------------------------------------------------
Non-capital loss carry-forward $1,270 - -
Share issue costs 2,508 $691 $691
Property, plant and equipment 51 - -
----------------------------------------------------------------------------
Taxation (recovery) at
statutory tax rate 3,829 $691 $691
----------------------------------------------------------------------------
As at December 31, 2011, the Corporation had a $1,270 non-capital loss
carry-forward that would be available to offset against future taxable income.
This loss will expire on December 31, 2031.
As at December 31, 2011, the Corporation also had a deferred tax liability of
$469 (2010: $469) for temporary differences of $3,751 related to an investment
in the shares of a subsidiary which was not recognized because the Corporation
controls whether the liability will be incurred and is satisfied that it will
not be incurred in the foreseeable future.
12. 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 Corporation 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.
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Costs $1,860 $1,831 $ 1,831
Accumulated depreciation (1,771) (1,570) (1,017)
----------------------------------------------------------------------------
Net book value $89 $261 $ 814
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the years ended December 31 2011 2010
----------------------------------------------------------------------------
Opening net book value $261 $ 814
Additions 29 -
Depreciation (201) (553)
----------------------------------------------------------------------------
Closing net book value $89 $ 261
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. Trade and other payables
Current
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Trade payables $7,031 $ 4,052 $ 6,705
Accruals 28,891 17,473 11,592
----------------------------------------------------------------------------
Total trade and other payables $35,922 $21,525 $18,297
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Trade payables are non-interest bearing and are normally settled on 30 to 60 day
terms. Accruals relate mainly to E&E and other expenditures incurred as at the
reporting date.
14. Provision for decommissioning obligations
Decommissioning liabilities are recognized when the Corporation 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 assumed to be incurred in the years 2035 and 2036 in respect of
well locations as at the reporting date. The Corporation's share of the total
undiscounted amount of estimated cash flow required to settle the obligation is
$3.2 million. The Corporation 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 obligations incurred in 2011 relate to
the Corporation's 100 percent working interest funding for both the Sarqala-1
re-entry operation and drilling operations at Mil Qasim-1, as well as the
Corporation's 60 working interest in the drilling operations at Kurdamir-2 (also
refer to Note 22 "Commitments and contingencies" for a description of the PSCs).
The following table presents the reconciliation of the Corporation's provision
for decommissioning liabilities:
For the years ended December 31 2011 2010
----------------------------------------------------------------------------
Balance, beginning of year $509 $432
Additional obligations incurred 1,046 -
Changes in estimates or timing of cash flows 148 61
Accretion 25 16
----------------------------------------------------------------------------
Balance, end of year $1,728 $509
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15. Share capital
As at December 31, 2011, the Corporation 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.
The common shares issued and outstanding were as follows:
Number of
shares Amount
----------------------------------------------------------------------------
Balance as at January 1, 2010 and December 31,
2010 207,464,320 $253,583
Issuance of common shares, net of issuance
costs 163,665,352 88,034
Options exercised for common shares 79,800 64
----------------------------------------------------------------------------
Balance as at December 31, 2011 371,209,472 $341,681
----------------------------------------------------------------------------
----------------------------------------------------------------------------
16. Share based payments
Pursuant to the stock option plan, the Board of Directors may grant options to
directors, officers, employees and other service providers. The aggregate number
of shares that may be reserved for issuance pursuant to stock options may not
exceed 10 percent of the issued and outstanding common shares of the Corporation
on a non-diluted basis as at the time of granting. Stock options expire not more
than five years from the date of grant, or earlier if the individual ceases to
be associated with the Corporation, and the option vesting period is determined
at the discretion of the Board of Directors when granted. These options are
equity settled share based payment transactions.
The following tables present the reconciliation of stock options granted:
For the year ended December 31, 2010 Weighted
average
Number of exercise
options price ($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 $1.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the year ended December 31, 2011 Weighted
average
Number of exercise
Options price ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of year 20,354,900 $1.00
Granted 630,000 0.55
Exercised (79,800) 0.51
Forfeited and expired (2,126,400) 1.15
----------------------------------------------------------------------------
Outstanding, end of year 18,778,700 $0.97
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at December 31, 2011 14,707,466 $1.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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:
For the years ended December 31 2011 2010
----------------------------------------------------------------------------
Weighted average fair value of stock options
granted $0.37 $0.29
Average Risk Free Interest Rate $1.14% 1.62%
Expected Life 3 years 2 - 3 years
Average Expected Volatility 108% 120%
Dividend Per Share Nil Nil
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes Stock Options outstanding and exercisable
under the Stock Option Plan at December 31, 2010:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Range of Remaining Average Remaining Average
Exercise Number of Contractual Exercise Number of Contractual Exercise
Price Options Life Price Options Life Price
Cdn$ Outstanding (years) Cdn$ Exercisable (years) Cdn$
----------------------------------------------------------------------------
$0.38 -
$0.49 9,739,900 4.97 0.49 3,226,634 4.97 0.49
$0.50 -
$1.00 4,756,667 3.10 0.63 3,275,664 3.09 0.65
$1.01 -
$2.00 435,000 2.85 1.37 263,334 2.79 1.34
$2.01 -
$3.28 5,423,333 2.12 2.19 5,378,333 2.12 2.19
----------------------------------------------------------------------------
Total 20,354,900 3.73 1.00 12,143,965 3.15 1.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes Stock Options outstanding and exercisable
under the Stock Option Plan at December 31, 2011:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Range of Remaining Average Remaining Average
Exercise Number of Contractual Exercise Number of Contractual Exercise
Price Options Life Price Options Life Price
Cdn$ Outstanding (years) Cdn$ Exercisable (years) Cdn$
----------------------------------------------------------------------------
$0.38 -
$0.49 9,411,700 3.97 0.49 6,222,466 3.97 0.49
$0.50 -
$1.00 4,142,000 2.43 0.57 3,286,667 2.04 0.57
$1.01 -
$2.00 255,000 1.95 1.43 228,333 1.89 1.39
$2.01 -
$3.28 4,970,000 1.11 2.17 4,970,000 1.11 2.17
----------------------------------------------------------------------------
Total 18,778,700 2.85 0.97 14,707,466 2.54 1.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the year ended December 31, 2011, the Corporation recognized $0.9 million
(2010: $1.3 million) of share based compensation costs as general and
administrative expense and capitalized $0.6 million (2010: $0.3 million).
17. General and administrative expenses, by nature
For the years ended December 31 2011 2010
----------------------------------------------------------------------------
Staff expensesShare-based payments $6,677 $4,668
860 1,310
Travel expenses 1,005 434
Professional fees 1,956 1,513
Office costs 1,084 1,017
Regulatory and corporate project costs 581 623
Other administrative expenses 532 426
Less capitalized general and administrative
costs (4,223) (3,578)
----------------------------------------------------------------------------
Total administrative expenses $8,472 $6,413
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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(B) have been included in the
consolidated accounts.
The remuneration of the twelve key management personnel of the Corporation,
which includes the Directors and Officers and other Executive Management
personnel, is set out below in aggregate:
For the years ended December 31 2011 2010
----------------------------------------------------------------------------
Salaries and wages $2,351 $1,378
Short-term benefits 48 45
Share-based compensation (expensed and
capitalized portions) 867 951
----------------------------------------------------------------------------
Total $3,266 $2,374
----------------------------------------------------------------------------
----------------------------------------------------------------------------
19. Loss per share, basic and diluted
The basic loss per share is calculated by dividing the loss attributable to
shareholders of the Corporation by the weighted average number of common shares
issued during the period. In computing diluted per share amounts, all of the
Corporation's options at the reporting date totaling 18,778,700 (2010:
20,354,900) 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 years ended December 31 2011 2010
----------------------------------------------------------------------------
Loss for the period $6,873 $5,801
Weighted-average common shares (000's) 294,247 207,464
----------------------------------------------------------------------------
Loss per share (basic and diluted) $0.023 $0.028
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 years ended December 31 2011 2010
----------------------------------------------------------------------------
Expenditures on exploration and evaluation
assets $(95,557) $(66,853)
Change in non-cash investing working capital 23,259 227
----------------------------------------------------------------------------
$(72,298) $(66,626)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes in non-cash working capital is comprised of:
For the years ended December 31 2011 2010
----------------------------------------------------------------------------
Related to operating activities
Trade and other receivables $6 $(270)
Prepaid expenses (236) 144
Trade and other payables (2) 3
----------------------------------------------------------------------------
$(232) $(123)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Related to investing activities
Trade and other receivables $8,735 $(1,498)
Trade and other payables 14,524 1,725
----------------------------------------------------------------------------
$23,259 $227
----------------------------------------------==============================
22. Commitments and contingencies
A. PSC commitments
During the year ended December 31, 2011, the Corporation finalized an agreement
with the Kurdistan Regional Government and Talisman to amend the original
Production Sharing Contract ("Original PSC") that governed the Corporation's
exploration activities in the Kalar-Bawanoor Block in Kurdistan. The agreement
divided the contract area of the Original PSC into the Garmian Block and the
Kurdamir Block, which are now governed by the Garmian PSC and Kurdamir PSC,
respectively (also refer to chart below). The Corporation retained its 40
percent working interest in each of the PSCs.
Under the Kurdamir PSC, Talisman is the operator, with a 40 percent working
interest and the KRG has a 20 percent working interest which is carried by the
Corporation. Under the Garmian PSC, WesternZagros is the operator, the KRG has a
20 percent working interest and the remaining 40 percent working interest is
held by the KRG to be assigned to another third party participant. The
Corporation is currently funding 100 percent of the activities under the Garmian
PSC until the third party participant interest is assigned, at which time the
Corporation will be reimbursed for the third party participant's share of the
costs. WesternZagros's production sharing terms, under both the Garmian and
Kurdamir PSCs, remain unchanged from the Original PSC.
A summary of the material amendments to the Original PSC is as follows:
----------------------------------------------------------------------------
Original PSC Amended PSC New PSC
(Kalar-Bawanoor) (Kurdamir) (Garmian)
----------------------------------------------------------------------------
First December 31, 2010 June 30, 2012 December 31, 2011
Exploration
Sub-Period
(expires)
----------------------------------------------------------------------------
Exploration Third Exploration Kurdamir-2 Mil Qasim-1
Obligation Well Exploration Well
(remaining) (completed)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Second Additional Two Years Additional Two Years Additional Two Years
Exploration
Sub-Period
----------------------------------------------------------------------------
Exploration Two Exploration One Appraisal One Exploration Well
Obligation Wells Well(Kurdamir-3) (Hasira-1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Two One Year Six Month Extension One Year Extension
Extensions Extensions
----------------------------------------------------------------------------
Work None One appraisal well One exploration well
commitments
----------------------------------------------------------------------------
Economic 10% Royalty Oil, Unchanged Unchanged
Terms remainder available
for Cost Recovery
and Profit Oil
----------------------------------------------------------------------------
PSC Payments $ 5 Million Additional Capacity Additional Capacity
Signature Bonus Building Support Building Support
$40 Million Capacity Payment payable Payment payable equal
Building Support equal to 3% of to 3% of
Payment WesternZagros Profit WesternZagros Profit
$ 1.1 Million Annual Oil. Continuation of Oil. Annual payments
Payments previous annual 50% of previous
payments. payments.
----------------------------------------------------------------------------
Operator WesternZagros Talisman WesternZagros
----------------------------------------------------------------------------
Ownership WesternZagros 40% WesternZagros 40% WesternZagros 40%
Talisman 40% Talisman 40% Unassigned
TPPI 40%(ii)
KRG 20%(i) KRG 20%(i) KRG 20% (i)
----------------------------------------------------------------------------
Contract 2,120 km2 340 km2 1,780 km2
Area
----------------------------------------------------------------------------
(i) WesternZagros funds the KRG costs, ultimately to be recovered by
WesternZagros through KRG's share of Cost Recovery Oil. For the Garmian
Block, the current PSC requires that the third party participant will
be required to pay for half of the KRG's carried share. This will be
confirmed once the TPPI is assigned.
(ii) WesternZagros initially funds the 40% of the costs for the third party
participant until it is assigned by the KRG. The amounts funded by
WesternZagros for the TPPI will be repaid upon assignment of this
interest.
As at December 31, 2011, the Corporation estimates expenditures of approximately
$32 million to meet its 60 percent funding requirement related to Kurdamir Block
activities, including its remaining commitments for the first exploration
sub-period under the Kurdamir PSC. This estimate includes the Corporation's
funding requirement of costs for drilling the Kurdamir-2 commitment well by June
30, 2012; planned initial testing costs while drilling Kurdamir-2; and
associated supervision and local office support costs and other planned Kurdamir
Block activities to December 31, 2012.
During the year ended December 31, 2011, the Corporation finished drilling the
Mil Qasim-1 exploration well in order to meet its commitments for the first
exploration sub-period under the Garmian PSC. The Corporation has now entered
the second exploration sub-period of the Garmian PSC. During the second
exploration sub-period the Corporation is required to drill one exploration
commitment well (Hasira-1) by December 31, 2013, and spend a minimum of $25
million on drilling and associated geological and geophysical activities. Upon
fulfilling these minimum exploration commitments, the Corporation would then be
entitled to a one year extension of the second exploration sub-period (i.e. to
December 31, 2014) if the Corporation committed to drilling one additional
exploration well during the extension period.
During the year ended December 31, 2011, the Corporation submitted and received
approval from the KRG for an appraisal work plan and budget with respect to the
Sarqala discovery. The Corporation plans to complete the EWT on Sarqala, conduct
a 3D seismic program and drill two appraisal wells, the first of which will be
Sarqala-2. The Corporation further submitted and received approval from the KRG
for the exploration well, Hasira-1, to comply with the Garmian PSC commitments
for the second exploration sub-period.
B. Other commitments
The Corporation has entered into various exploration-related contracts,
including contracts for drilling equipment, services and other tangible
equipment. The following table summarizes the estimated commitments in relation
to these exploration-related contracts relating to the Garmian PSC and other
contractual obligations at December 31, 2011 (U.S. $000's):
For the Years Ending December 31,
2012 2013 2014 2015 2016+ Total
----------------------------------------------------------------------------
Exploration $1,067 - - - - $1,067
Office $657 $559 $456 - - $1,672
----------------------------------------------------------------------------
$1,724 $559 $456 - - $2,739
----------------------------------------------------------------------------
----------------------------------------------------------------------------
C. Contingencies
i. Litigation
From time to time, the Corporation may become involved in legal or
administrative proceedings in the normal conduct of business. The Corporation is
currently in disputes with two contractors, one is related to compensation owing
to a contractor under a terminated agreement and the other is over a potential
breach of contract by a contractor related to services provided to the
Corporation. Although there has been no formal claim of monetary damages to date
in either of the matters, the Corporation does not currently expect that the
matters, individually or in aggregate, would have a material impact on the
Corporation's financial position. The Corporation continues to pursue resolution
of these disputes, and will enforce its contractual rights through arbitration
if necessary. The Corporation has entered into arbitration proceedings with
respect to one of these disputes. Given the early stage of the disputes, there
is no certainty as to the ultimate outcome of such proceedings. Amounts involved
in such matters are not reasonably estimable due to uncertainty as to the final
outcome.
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
Corporation's operations may require licenses and permits from various
governmental authorities in the countries in which it operates. Under the
Garmian and Kurdamir PSCs, 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 Corporation 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
Corporation'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
As described in Note 2 "Basis of preparation and adoption of IFRS", these
consolidated financial statements present the Corporation's financial results of
operations and financial position prepared in accordance with IFRS, as issued by
the IASB, and interpretations issued by IFRIC that were published at the time of
preparation and that were effective or available for early adoption on December
31, 2011, in respect of the Corporation's first annual reporting date under
IFRS. Previously the Corporation prepared its consolidated annual and
consolidated interim financial statements in accordance with Canadian GAAP prior
to the adoption of IFRS. In accordance with IFRS 1, First Time Adoption of IFRS,
certain disclosures relating to the transition to IFRS are given in this note.
IFRS 1 allows first time adopters of IFRS to utilize a number of voluntary
exemptions from the general principal of retrospective restatement. The
Corporation 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 Corporation'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
Corporation did follow a full cost approach under GAAP prior to the adoption of
IFRS and has elected to utilize this exemption to measure E&E 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:
Effect of
transition to
Notes Canadian 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
Deferred 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
Trade and other
payables $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:
a. Reclassification of the current portion of deferred income tax assets
recognized under previous GAAP to non-current assets in accordance with IAS 12,
Income Taxes. Net effect was a decrease in the current portion of deferred 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 E&E expenditures previously classified as property, plant
and equipment under previous GAAP in accordance with IFRS 1, First Time Adoption
of IFRS. The Corporation 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.
C. Reconciliation of equity from Canadian GAAP to IFRS as at the end of the last
reporting year under Canadian GAAP - December 31, 2010:
Effect of
transition to
Notes Canadian 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
Deferred 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
Deferred 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
Trade and other
payables $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:
a. Reclassification of the current portion of deferred income tax assets
recognized under previous GAAP to non-current assets in accordance with IAS 12,
Income Taxes. Net effect is a decrease in the current portion of deferred 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 E&E expenditures were
as follows:
i. E&E expenditures previously classified as property, plant and equipment
under GAAP were reclassified in accordance with IFRS 1, First Time
Adoption of IFRS. The Corporation 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, E&E 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 E&E 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 Corporation's PSC contract areas, have been expensed
as part of general and administrative costs for the year ended December
31, 2010. The net effect was a decrease in E&E 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 E&E 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 E&E 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 $0.1 million. The net
effect was a corresponding increase in E&E expenditures of $0.1
million.
v. The total net impact of items (i) through (iv) was an increase in
exploration and evaluation expenditures 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.
D. Reconciliation of comprehensive loss from Canadian GAAP to IFRS for the
year ended December 31, 2010:
Effect of
transition to
Note Canadian GAAP IFRS IFRS
----------------------------------------------------------------------------
Other income
----------------------------------------------------------------------------
Other income $ 87 $ - $ 87
----------------------------------------------------------------------------
Expenses
General and
administrative
expenses a 6,362 51 6,413
Depreciation 553 - 553
Accretion on
decommissioning
liabilities 14 2 16
Foreign exchange loss 62 - 62
----------------------------------------------------------------------------
Total expenses a 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)
----------------------------------------------------------------------------
Total loss and
comprehensive loss
attributable to
shareholders $5,748 $53 $5,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS:
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 Corporation's PSC contract areas, 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.
E. Reconciliation of statement of cash flows from Canadian GAAP to IFRS for
the year ended December 31, 2010:
Effect of
transition to
Note Canadian 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
Deferred 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:
a. Adjustments to net loss prior to taxation, 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. Decreased 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
prior to taxation 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 IFRS, 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 deferred tax expense and the net effect was a reduction of
the adjusting item to zero.
e. Adjustments to change in non-cash working capital were as follows:
i. 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 which results in an increase in the change in
non-cash working capital for operating activities of $1.3 million.
ii. In addition, actual taxes recovered are reflected separately, which
results in a $2.2 million decrease to the change in non-cash working
capital for operating activities.
iii. The net effect of items (i) and (ii) resulted in a decrease in the net
change for non-cash working capital items of $0.9 million.
f. The net change in E&E expenditures is as follows:
i. Reclassification of expenditures on property, plant and equipment of
$67.2 million.
ii. Decrease in expenditures of $0.3 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 E&E
expenditures of $66.6 million.
g. Expenditures for property, plant and equipment were reclassified as E&E
expenditures, net effect was a decrease of $67.2 million.
About WesternZagros Resources Ltd.
WesternZagros is an international exploration and production company engaged in
acquiring properties and exploring for, developing and producing crude oil and
natural gas in the Kurdistan Region of Iraq. WesternZagros, through its
wholly-owned subsidiaries, holds two Production Sharing Contracts ("PSCs") with
the Kurdistan Regional Government, through a 40 percent working interest in both
the Garmian and Kurdamir PSCs. WesternZagros's 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 drilling and testing plans, future
well designs and completions and future production rates and the timing
associated therewith. Forward-looking information typically contains statements
with words such as "anticipate", "plan", "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.
Readers are also cautioned that disclosed test rates and AOFs may not be
indicative of ultimate production levels. 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.
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 and testing programs, future capital
and other expenditures (including the amount, nature and sources of funding
thereof), continued political stability, and timely receipt of any necessary
government or regulatory approvals. 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 current Annual
Information Form which is available on SEDAR at www.sedar.com.
WESTERNZAGROS RESOURCES WAS RECOGNIZED AS A TSX VENTURE 50(R) COMPANY IN 2012.
TSX VENTURE 50 IS A TRADE-MARK OF TSX INC. AND IS USED UNDER LICENSE.
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