Commitments and Contingencies
|12 Months Ended|
Dec. 31, 2019
|Commitments and Contingencies [Abstract]|
|Commitments and Contingencies||
12. COMMITMENTS AND CONTINGENCIES
In connection with the charter of the FPSO (the “FPSO charter”), the Company, as operator of the Etame Marin block, guaranteed all of the lease payments under the FPSO charter through its contract term, which expires in September 2022. At the Company’s election, the FPSO charter may be terminated as early as September 2020. The Company obtained guarantees from each of the joint owners for their respective shares of the payments. Although the Company believes the need for performance under the charter guarantee is remote, the Company recorded a liability of $0.4 million and $0.3 million as of December 31, 2019 and 2018, respectively, representing the guarantee’s estimated fair value.
Estimated future minimum obligations through the end of the FPSO charter, which reflects the right of early termination in September 2021 are as follows:
The FPSO charter payment includes a $0.93 per barrel charter fee for production up to 20,000 barrels of crude oil per day and a $2.50 per barrel charter fee for those barrels produced in excess of 20,000 barrels of crude oil per day. VAALCO’s net share of payments was $12.1 million, $10.8 million and $12.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Drilling and other commitments
In connection with the PSC Extension, the Etame Marin block joint owners are required to drill two wells and two appraisal wellbores by September 16, 2020. As a result of drilling the Etame 9P appraisal wellbore in 2019 and the South East Etame 4P appraisal wellbore in 2020 and drilling the Etame 9H and the Etame 11H development wells in 2019, this drilling commitment has been fulfilled. In addition to the drilling commitment, the Etame Marin block joint owners are required to pay $5.0 million ($1.7 million, net to VAALCO) in cash to the government of Gabon following the end of the drilling activities for the two wells. As the payment is not contingent on the success of these wells and at least $5.0 million would be paid if no wells are drilled, the Company has accrued a liability for the net $1.7 million share as of December 31, 2019, which was paid in February 2020. The joint owners are also obligated to perform two technical studies by September 16, 2020 estimated to cost $1.3 million ($0.4 million, net to VAALCO). These studies are currently being performed. The costs related to these studies will be recognized in future periods when the studies are performed. See Note 13 for discussion related to equipment lease commitments.
In 2019, the Company contracted a drilling rig to be used to drill two wells, including two appraisal wellbores, for the Etame Marin joint operations. The agreement includes options to drill four additional wells at the Etame Marin block, and it elected to exercise these options to drill a third development well and perform three workovers. The drilling rig contract stipulates a day rate of approximately $75,000. The Company expects the term associated with the drilling rig commitment to be less than one year. As of March 9, 2020, the only remaining commitment under the contract was related to two workovers which the Company expects will be completed in the second quarter of 2020.
Gabon domestic market obligation and other investment obligations
Under the terms of the Etame PSC the Consortium is required to provide to the local government refinery a volume of crude oil at a 15% discount to market price (the “Gabon DMO”). The volume required to be furnished is the amount of the Etame Marin block production divided by total Gabon production times the volume of crude oil refined by the refinery per year. In 2019, the Company paid $1.2 million for the share of the 2018 obligation. In 2018, the Company paid $1.1 million for the share of the 2017 obligation. In 2017, the Company paid $1.2 million for the share of the 2016 obligation. The Company accrues an amount for the Gabon DMO based on management’s best estimate of the volume of crude oil required because the refinery does not publish throughput figures. The amount accrued at December 31, 2019, for the share of the 2019 obligation was $1.1 million. The amount accrued at December 31, 2018, for the share of the 2018 obligation was $1.2 million. These costs are cost recoverable under the terms of the Etame PSC. Also, the Consortium is required to pay an additional 1% of revenues for provisions for diversified investments (“PID”) and for investments in hydrocarbons (“PIH”). The amount accrued at December 31, 2019, for the share of the 2019 obligation was $2.2
million. The amount accrued at December 31, 2018, for the share of the 2018 obligation was $1.9 million. 75% of PID and PIH costs are cost recoverable under the terms of the Etame PSC.
Under the terms of the Etame PSC, the Company has a cash funding arrangement for the eventual abandonment of all offshore wells, platforms and facilities on the Etame Marin block. As a result of the PSC Extension, annual funding payments are spread over the periods from 2018 through 2028. The amounts paid will be reimbursed through the Cost Account and are non-refundable. The abandonment estimate used for this purpose is approximately $61.8 million ($19.2 million, net to VAALCO) on an undiscounted basis. Through December 31, 2019, $36.7 million ($11.4 million, net to VAALCO) on an undiscounted basis has been funded. This cash funding is reflected under “Other noncurrent assets” in the “Abandonment funding” line item of the consolidated balance sheet. Future changes to the anticipated abandonment cost estimate could change the asset retirement obligation and the amount of future abandonment funding payments.
Regulatory and Joint Interest Audits
The Company is subject to periodic routine audits by various government agencies in Gabon, including audits of the petroleum Cost Account, customs, taxes and other operational matters, as well as audits by other members of the contractor group under the joint operating agreements.
In 2016, the government of Gabon conducted an audit of the operations in Gabon, covering the years 2013 through 2014. The Company received the findings from this audit and responded to the audit findings in January 2017. Since providing the response, there have been changes in the Gabonese officials responsible for the audit. The Company is working with the currently appointed representatives to resolve the audit findings. The Company does not anticipate that the ultimate outcome of this audit will have a material effect on the financial condition, results of operations or liquidity.
In 2017, the government of Gabon conducted a tax audit of the Gabon subsidiary covering the years 2013 through 2016, and in December 2017, the Company received a report on their findings. In April 2018, the Company reached a final settlement of the audit resulting in a payment for taxes of $0.2 million and penalties of $0.2 million, net to VAALCO.
At December 31, 2018, the Company had accrued $1.3 million, net to VAALCO, in the “Accrued liabilities and other” line item of the consolidated balance sheet for potential fees, which may result from a customs audit. This matter was fully resolved in January 2019 for $1.3 million, net to VAALCO.
In July 2019, the Company reached an agreement in principle to resolve a legacy issue related to findings from Etame joint venture owners’ audits for the periods from 2007 through 2016 for $4.4 million net to VAALCO. The agreement in principle also provides for procedures to minimize the chances of future audit claims. Accordingly, the Company recorded an expense in the consolidated statements of operations in the line item “Other operating income (expense), net”. The final settlement agreements were executed by all the joint venture owners effective September 9, 2019. In October 2019, the Company paid $1.1 million of the $4.4 million. The balance of the amount due was paid in February 2020.
The Company’s Chief Executive Officer has an employment agreement, which provides for payments of annual salary, incentive compensation and certain other benefits if their employment is terminated without cause.
The entire disclosure for commitments and contingencies.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef