Geopark Ltd
Annual Report 2008

Plain-text annual report

ANNUAL REPORT 2008 ASSETS CAPABILITIES PERFORMANCE OPPORTUNITY COMMITMENT CONTENTS 2 10 12 26 Letter to Shareholders from Chairman & CEO Performance Assets Capabilities 32 Opportunity 38 41 44 46 Commitment Directors’ Report Corporate Governance Directors’ Remuneration Report 48 49 50 51 52 53 54 76 77 Statement of Directors’ Responsibilities Report of the Independent Auditor Consolidated Income Statement Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes to the Consolidated Financial Statements Board of Directors Directors, Secretary & Advisors BOTTOM LINE Production Up Boepd Reserves Up 3P mmboe 180 % 123 % Acreage Up mm acres 517 % 8000 7000 6000 5000 4000 3000 2000 1000 0 40 30 20 10 0 200 180 160 140 120 100 80 60 40 20 0 4 3.5 3 2.5 2 1.5 1 0.5 0 2007 2008 2007 2008 2007 2008 Revenues Up US$ mm 248 % Operating Cash Flow Up US$ mm Profits Up US$ mm 15 12 9 6 3 0 -3 10 5 0 -5 -10 -15 -20 2007 2008 2007 2008 2007 2008 DEAR SHAREHOLDERS For GeoPark, 2008 was a year of results. Positive bottom-line results produced by the drill bit. During the year, we exceeded our targets and gained in every measurement of value growth in our business: oil and gas production increased, oil and gas reserves grew, revenues and operating cash flow were higher, net income became positive, the balance sheet was strengthened, the project portfolio expanded and our team was improved. GeoPark's vision to build a successful upstream oil and gas company has always been based on patiently laying the necessary foundation. This required long term investments in people, blocks, tools, know-how, and assembling the right mix of strategic partners. Our strong performance this year - despite the severity of the world economic crisis - demonstrates the momentum of our growth and the durability of our business plan. In 2006, when GeoPark became a publicly-listed company in London, our Fell Block in Chile was a nonproducing asset. Today, less than three years later, GeoPark has developed the Fell Block into a valuable asset with production of approximately 8,000 barrels of oil equivalent per day (boepd), a solid base of proven oil and gas reserves, a reliable operations infrastructure and continuing attractive and high potential growth prospects. In this short period, GeoPark became the first private oil and gas producer in Chile - such that it now produces over 30% of Chile's total oil production and 25% of Chile's total gas production. The science, capital, experience and drive required to achieve this result represent the true measure of your Company - as well as the engine for delivering our continued success. 2 Letter to Shareholders LETTER TO SHAREHOLDERS FOR GEOPARK, 2008 WAS A YEAR OF DELIVERING RESULTS: IMPORTANT BOTTOM-LINE RESULTS PRODUCED BY THE DRILL BIT Letter to Shareholders 3 2008 Performance • 180% Increase in Oil and Gas Production: Year-end exit GeoPark's drilling successes in 2008 and 2009 year to date, which production of over 6,500 barrels of oil equivalent per day (boepd) are expected to significantly increase the Company's oil and gas exceeded GeoPark's 2008 production target of 6,000 boepd and reserves in its next independent engineering appraisal. represented a 180% increase from its 2007 exit production. Average annual oil and gas production increased by 138% from 1,425 boepd • Attractive Blocks Acquired: In Chile, GeoPark acquired a 30% during 2007 to 3,390 boepd during 2008. Current production (May interest in the Tranquilo Block (with Pluspetrol, IPR and Manas) and 2009) is approximately 8,000 boepd consisting of approximately was awarded, following the Chilean bidding round, a 42% interest 38 million cubic feet per day (mmcfpd) of gas and 1,500 barrels per in the Otway Block (with Wintershall and Methanex). Both consortia day (bpd) of oil. have requested GeoPark to be the Operator. The Otway and Tranquilo blocks are located in southern Chile near GeoPark's Fell • 90% Oil and Gas Drilling Success: GeoPark's track record of finding Block and contain both short term production opportunities and oil and gas is illustrated by its record of drilling 10 productive attractive exploration targets. These new blocks, which comprise wells out of 11 wells completed during 2008 and the rapid over 12,000 square kilometres (over 3.1 million acres), represent a commercialisation of this success into production revenue. During major growth opportunity and demonstrate GeoPark's expansion the first quarter 2009, two additional wells were successfully tested strategy in the Southern Cone. and put on production - resulting in a record of 12 successful wells out of the last 13 wells completed. The drilling program represented • Strategic Funding: In May 2008, GeoPark raised US$23.6 million in a balance of exploration, appraisal and development wells - and equity from Chilean institutional investors, the International Finance included five new field discoveries. Corporation of the World Bank (IFC) and certain London financial institutions. The strong interest from the Chilean investment • 248% Revenues Increase: Oil and gas production revenue community provides a regional foundation and security for the increased by over 248% from US$11.0 million in 2007 to US$38.4 Company’s activities and growth plans. The IFC continues to provide million in 2008. long term financial and advisory support to the Company as both a • Profitability and Cash Flow Growth: GeoPark achieved its first shareholder and lender. positive earnings result with a net income of US$3.7 million in 2008 • Increased Potential: Following the continuous acquisition and versus a net loss of US$13.8 million in 2007. This positive result interpretation of geological, geophysical and engineering data on occurred during an intensive capital investment program of US$58 GeoPark's large block position (3.7 million acres) by the Company’s million in 2008 and US$39 million in 2007. The Group also reduced experienced geoscience team, additional new prospects were added its operating costs per produced barrel by approximately 25% with a to the expanding portfolio -- thereby ensuring an attractive consequent reduction in GeoPark's overall breakeven operating cost inventory of high potential drilling opportunities for 2009 and future position. years. • 41% Growth in Proved Oil and Gas Reserves: As informed • Oil and Gas Sales Price Increase: GeoPark increased its gas sale previously, engineering consultants DeGolyer & MacNaughton prices by 45% and crude oil sale prices by 56% during 2008. reported a 123% increase in GeoPark's overall 3P reserves in GeoPark's Chilean Fell Block gas production was sold at an average its appraisal of March 2008 - and which included a 41% increase in price of US$4.70 per thousand cubic feet (mcf ) during 2008 proved reserves to 16.8 million barrels of oil equivalent (mmboe); a compared to an average gas sales price of US$3.23 per mcf during 9% increase in P2 reserves to 18.8 mmboe; and a 231% increase in 2007 as a result of its new long term gas contract with the Methanex possible reserves to 91.9 mmboe. These figures do not yet include Corporation of Canada. The price for Fell Block gas is dependent on 4 Letter to Shareholders LETTER TO SHAREHOLDERS Letter to Shareholders 5 IN 2008, GEOPARK GAINED IN EVERY MEASUREMENT OF VALUE GROWTH: OIL AND GAS PRODUCTION INCREASED, OIL AND GAS RESERVES GREW, REVENUES AND OPERATING CASH FLOW WERE HIGHER, NET INCOME BECAME POSITIVE, THE BALANCE SHEET WAS STRENGTHENED, THE PROJECT PORTFOLIO EXPANDED AND THE TEAM WAS IMPROVED. 6 Letter to Shareholders LETTER TO SHAREHOLDERS 2009 Outlook global methanol prices and current gas prices have declined due The extent of the global economic crisis and the accompanying oil to weaker methanol prices worldwide. Crude oil prices increased in and gas price volatility have compounded the uncertainty in Chile to an average of US$96 per barrel in 2008 from US$59 per accurately forecasting future activities. GeoPark, like virtually every barrel in 2007 and in Argentina to an average of US$46 per barrel enterprise in every industry today, faces a period of adjustment. from US$39 per barrel in 2007. Following its successes in 2008, GeoPark is in the fortunate position • Client Project Funding: During 2008, the Company drew down of having a secure production base and positive cash flow stream - US$26.3 million to fully utilise the US$40 million funding coupled with low operating costs and the flexibility of a facility provided by its gas purchaser, Methanex. The objective of discretionary investment program that can be maintained, reduced the financing is to increase gas deliveries to Methanex's large or increased in the short term depending on the severity or duration methanol plant located in southern Chile by accelerating GeoPark's of the downturn. The Company's cost structure allows it to sustain development of the Fell Block. It is structured as a gas pre-sale itself in a very low oil and gas price environment. agreement with a six year pay-back period with an interest rate of LIBOR even. Our priorities during this period will be to increase and protect cash flow by lowering our breakeven operating cost position and by • Market Access Infrastructure Expanded: The Company expanded accessing quick cash flow producing investments within our the Kimiri Aike Gas Treatment and Compression Plant in Chile during portfolio. GeoPark's 2009 capital investment program is designed to: 2008, which increased GeoPark's total gas processing and selling capacity in the Fell Block to over 40 million cubic feet per day 1. Increase oil and gas production and reserves: By drilling new (mmcfpd). The Kimiri Aike facility permits access for Fell Block gas to wells (6-9) and performing workovers to explore for new fields and the regional gas pipeline infrastructure and to the Methanex to develop existing fields; optimising reservoir performance by methanol plant - as well as rapid hook-up and commercialisation hydraulic fracturing and stimulation; performing geological and of any new discovery wells. During 2008, the Company also geophysical surveys to increase inventory of drilling opportunities; constructed new production and storage facilities and 75 kilometres and constructing additional production facilities to accommodate of new gas pipelines in Chile. new well discoveries and production. • Strengthened Cost-Effective Organization: During 2008, GeoPark 2. Increase cash flow and improve project economics and continued to invest in its oil and gas finding, drilling and production performance: By reducing costs and increasing efficiency in capabilities. Important improvements were made to the manage- production operations and administrative management; reducing ment team, and to the drilling, reservoir engineering, production, capital expenditures (drilling and facilities) by technological and geological and finance and administrative departments resulting in design improvements; continue strengthening core competences increased cost-efficient operations and increased overall capabilities. (i.e. the ability to economically find and produce oil and gas); and The Company also expanded its employee share plans to include expanding SPEED (GeoPark's integrated safety, shareholder, all employees. employee, environmental and community development program). 3. Manage risk: By prioritising projects with short cycle time to production; re-balancing production profile between oil and gas; balancing work program exposure between production, development and exploration projects; expanding funding exposure and capital sources; and farming-out higher risk / non-core areas. Letter to Shareholders 7 4. Grow and expand portfolio: By exploiting exceptional current • Secure Cash Flow and Asset Base: Our record shows a profitable availability of growth opportunities by acquiring new projects / and growing platform of acreage, production, revenues and reserves. acreage at attractive terms. In 2009, GeoPark is projecting to invest US$25-35 million (dependent shows an exceptional technical team supported by the equipment on oil and gas prices throughout the year) in Chile and Argentina necessary to do the job and by reliable capital partners. with the expectation of approximately doubling total annual oil and • Right People with Necessary Tools and Capital: Our record gas production. Investment Case • Proven Performance: Our record shows the ability to plan, execute, overcome obstacles, seize opportunities and achieve results. We believe the investment case for GeoPark rests on the substance consisting of both organic growth and new project acquisition of five basic building blocks of our business plan. This 2008 Annual opportunities - coupled with the commercial abilities to buy right. • High Growth Potential: Our record shows an attractive portfolio Report details our collective progress in each area and provides the rationale for your support. • Commitment: Our record shows an in-house culture which values and protects our shareholders, employees, environment and communities. 8 Letter to Shareholders LETTER TO SHAREHOLDERS We again salute the GeoPark team and express our appreciation and admiration for its many accomplishments in 2008. The ability and persistence demonstrated by our Employees, Management and Directors during these formative years remain our principal strength and the key to our ability to consistently deliver value growth now and in the future. Additionally, we express our appreciation to our Shareholders for your continued support during 2008. Your management and employees look forward to the challenges and opportunities of 2009 and to further demonstrating our performance and achievements throughout the year. Sincerely, Gerald E. O'Shaughnessy, Chairman James F. Park, Chief Executive Officer Letter to Shareholders 9 GEOPARK'S VISION TO BUILD A SUCCESSFUL COMPANY HAS ALWAYS BEEN BASED ON PATIENTLY LAYING THE NECESSARY FOUNDATION --INVOLVING CONTINUOUS INVESTMENTS IN PEOPLE, BLOCKS, TOOLS AND ASSEMBLING THE RIGHT MIX OF STRATEGIC PARTNERS BUSINESS PLAN Gas Production Gas Mm3/d 1,000 900 800 700 600 500 400 300 200 100 6 0 r p A 6 0 y a M 6 0 n u J 6 0 l u J 6 0 g u A 6 0 p e S 6 0 t c O 6 0 v o N 6 0 c e D 7 0 n a J 7 0 b e F 7 0 r a M 7 0 r p A 7 0 y a M 7 0 n u J 7 0 l u J 7 0 g u A 10 Year in Review / Performance PERFORMANCE Tranquilo Block Otway Block OUR STRONG PERFORMANCE THIS YEAR DESPITE THE SEVERITY OF THE WORLD ECONOMIC CRISIS PROVES THE MOMENTUM AND DURABILITY OF OUR BUSINESS PLAN 7 0 p e S 7 0 t c O 7 0 v o N 7 0 c e D 8 0 n a J 8 0 b e F 8 0 r a M 8 0 r p A 8 0 y a M 8 0 n u J 8 0 l u J 8 0 g u A 8 0 p e S 8 0 t c O 8 0 v o N 8 0 c e D 9 0 n a J 9 0 b e F 9 0 r a M 9 0 r p A 9 0 y a M Year in Review / Performance 11 Argentina Chile TRANQUILO OTWAY 12 Year in Review / Assets DEL MOSQUITO FELL BLOCK Strait of Magellan ASSETS GeoPark's portfolio of oil and gas assets consists of six hydrocarbon blocks totaling approximately 3.7 million gross acres - with oil and gas production, proven oil and gas reserves, operating licenses, associated infrastructure and production facilities, an extensive technical database - and managed by a team with a record of success in the region. The properties represent high potential blocks (with multiple play types and objectives that are offset by major oil and gas fields) with a large risk-balanced basket of opportunities including well reactivation, stranded and producing field development and multiple exploration projects. Atlantic Ocean Year in Review / Assets 13 YEAR IN REVIEW 14 Year in Review / Assets RESERVES AND PRODUCTION / ASSETS Oil and Gas Reserves GeoPark has achieved strong oil and gas reserve growth from its investment activities on its properties and DeGolyer & MacNaughton, independent petroleum engineers, appraised an 123% increase in 3P reserves in its report dated March 2008. In this report, DeGolyer & MacNaughton estimated, on four of GeoPark's six blocks, a total of 16.8 million barrels oil equivalent (mmboe) of proved reserves, a total of 18.8 mmboe of probable reserves, and a total of 91.9 mmboe of possible reserves. DeGolyer & MacNaughton also appraised 45.6 mmboe of contingent resources (best estimate). Country Chile Argentina GeoPark's important drilling successes realised during the last three quarters of 2008 and first quarter of 2009 have not yet been appraised by DeGolyer & MacNaughton. A new reserve appraisal Total report is targeted for completion in the third quarter 2009. Reserve Type P1 P2 P3 P1+P2 P1+P2+P3 P1 P2 P3 P1+P2 P1+P2+P3 P1 P2 P3 P1+P2 P1+P2+P3 Oil (MMBO) 2.0 3.3 7.1 5.3 12.4 0.9 1.8 4.0 2.7 6.7 2.9 5.1 11.1 8.0 19.1 Gas (BCF) 82.0 81.9 485.5 163.9 649.4 1.0 0.0 0.0 1.0 1.0 83.0 81.9 485.5 164.9 650.4 BOE (MMBOE) 15.7 17.0 88.0 32.6 120.6 1.1 1.8 4.0 2.9 6.9 16.7 18.8 92.0 35.5 127.5 The chart to the right summarises the reserves appraised by DeGolyer & MacNaughton in March 2008. Approximately 95% of the Company's total oil and gas reserves are in Chile and approximately 5% in Argentina. In this appraisal, gas represents approximately 85% of total reserves and oil represents approximately 15% of total reserves. Oil and Gas Production Production GeoPark's oil and gas production currently is generated from the Fell Block in Chile and the Del Mosquito Block in Argentina. During 2008, approximately 98% of the Company's total oil and gas production was produced in Chile and approximately 2% in Argentina. During 2008, gas represented approximately 90% of the total production and oil represented approximately 10% of the total production volume. Oil and gas production is shown in the chart to the right: 500 450 400 350 300 250 200 150 100 50 0 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 6 0 r p A 6 0 n u J 6 0 g u A 6 0 t c O 6 0 c e D 7 0 b e F 7 0 r p A 7 0 n u J 7 0 g u A 7 0 t c O 7 0 c e D 8 0 b e F 8 0 r p A 8 0 n u J 8 0 g u A 8 0 t c O 8 0 c e D 9 0 b e F 9 0 r p A Oil m3/d Gas Mm3/d Year in Review / Assets 15 YEAR IN REVIEW CHILE GeoPark became the first private-sector oil and gas producer in Chile when it began production on the Fell Block in May 2006 and currently is producing approximately 25% of Chile's oil and gas production. Its substantial acreage position with over 3.4 million gross acres (14,420 square kilometres) in Chile represents an important platform for continued growth and expansion. GeoPark's blocks in Chile consist of: GEOPARK PIONEERED PRIVATE SECTOR OIL AND GAS DEVELOPMENT IN CHILE - AND NOW CONTRIBUTES APPROXIMATELY 25% OF CHILE'S DOMESTIC HYDROCARBON PRODUCTION 16 Year in Review / Assets CHILE BLOCKS / ASSETS Block Fell Tranquilo Otway Area (Sq Km) 1,780 6,648 5,992 Operator GeoPark GeoPark GeoPark Basin Magellan / Austral Magellan / Austral Magellan / Austral Substantial technical data (seismic, drilling and production information) provides an excellent base for technical re-evaluation. Log interpretations by engineers experienced in the region indicate by-passed oil and gas production zones in certain existing wells. Shut-in and abandoned fields also have the potential to be put back The Blocks are located in the continental Magallanes region in a on production by constructing new pipelines and plants. proven oil and gas producing basin (Magellan or Austral Basin) and Geophysical reinterpretations by GeoPark suggest additional on trend with recent discoveries to the north in Argentina and to the development potential in known fields and exploration potential in south in Tierra del Fuego. The Magallanes region currently produces new un-drilled prospects and plays - including opportunities in the all of Chile's oil and gas production. Although it has been producing Springhill, Tertiary, Tobifera, and Estratos con Favrella formations. for over 50 years, the basin remains relatively undeveloped with new exploration frontiers being opened. Year in Review / Assets 17 YEAR IN REVIEW FELL BLOCK The Fell Block has an area of approximately 440,000 acres (1780 production. Since GeoPark has been Operator, it has carried out sq km) and its center is located approximately 140 km northeast 693 sq km of 3D seismic and drilled 22 exploration, appraisal and from the city of Punta Arenas. The Fell Block's northern border development wells resulting in current oil and gas production of coincides with the international border between Argentina and approximately 38 mmcfpd of gas and 1,500 bpd of oil. Chile and its southern limit is bordered by the Magellan Straits. The Block is located geologically in the Cretaceous depocenter of The first exploration efforts began on the Fell Block in the 1950's and the Magellan Basin - in the northwest area comprising the structural from then until 2005, ENAP (the Chilean State Oil Company) carried platform (developing to the east) and the slope (developing out 2,400 km of 2D seismic and 256 sq km of 3D seismic and drilled to the west). The source rocks relate to the Estratos con Favrella 146 wells. In 2006, GeoPark became Operator and 100% interest (Cretaceous) deposits. The principal producing reservoir is owner of the Fell Block when the Fell Block had no oil and gas the Springhill formation sandstone (Lower Cretaceous) at depths of 18 Year in Review / Assets CHILE BLOCKS / ASSETS 2,500 - 3,500 metres. Other potential reservoirs, which have tested and produced hydrocarbons, include the Tobifera (Jurassic) volcaniclastics (2,600 to 3,600 metres) and the Upper Tertiary and Upper Cretaceous sandstones (700 to 2,000 metres). Trap types are fundamentally structural traps defined by anticlines developed in the basement and involving the Cretaceous and Tertiary sequences. Stratigraphic and combined traps are developed in the southern and northern sector of the Block. GeoPark's geoscience team has identified a large and attractive inventory of prospects and drilling opportunities on the Fell Block - Year in Review / Assets 19 SantiagoAtacama desertPampasPatagoniaChileArgentinaFellBuenos AiresArgentinaChileFellStrait ofMagellanYEAR IN REVIEW GEOPARK'S TRACK RECORD OF FINDING OIL AND GAS IS DEMONSTRATED BY ITS RECORD OF DRILLING 12 PRODUCTIVE WELLS OUT OF THE LAST 13 WELLS COMPLETED - AND THE RAPID COMMERCIALISATION OF THIS SUCCESS INTO PRODUCTION REVENUE including both exploration and development projects - and the Company intends to continue its successful drilling program over the coming years. The recent oil discoveries in the Alakaluf and Aonikenk fields have opened up a new oil potential in the northeastern portion of the Block where additional prospects have been identified. Increased oil production on the Fell Block will further balance the hydrocarbon stream which is currently weighted towards gas. In the Santiago Norte Field Complex, DeGolyer & MacNaughton estimated approximately 427 bcf of 3P gas reserves and approximately 174 bcf of contingent gas resources. GeoPark is currently developing a reservoir stimulation and development program to further test and exploit this substantial gas resource potential. The chart below summarises GeoPark's successful drilling program on the Fell Block during 2008: Well name Selknam 1 Cerro Sutlej 1 Puesto Ranger 1 Bump Hill 1 Aonikenk 1 Nika Oeste 3 Santiago Norte 5 Estancia Zunilda 1 Ovejero 2 Dicky 15 Manekenk 1 Aonikenk 2 Alakaluf 1 Monte Aymond 33 Yagan 1* Well type Exploration Appraisal Exploration Exploration Exploration Exploration Development Appraisal Development Appraisal Exploration Appraisal Exploration Appraisal Appraisal Hydrocarbon / Formation Oil / Springhill Gas / Springhill Status Waiting on Completion On Production Gas / Springhill Temporarily Abandoned Gas / Springhill Oil / Springhill Gas / Springhill Gas / Springhill Gas / Springhill Gas / Springhill Gas / Springhill Gas / Springhill On Production On Production On Production On Production On Production On Production On Production On Production Oil / Springhill Waiting on Completion Oil / Springhill Gas / Springhill Gas / Springhill On Production On Production On Production * Drilled and completed first quarter 2009. 20 Year in Review / Assets CHILE BLOCKS / ASSETS Year in Review / Assets 21 YEAR IN REVIEW 22 Year in Review / Assets OTWAY BLOCK The Otway Block consists of an area of approximately 1,480,000 acres (5,992 sq km) and is located approximately 110 km from the city of Punta Arenas. The Block consists of onshore areas (Peninsula Brunswick and Isla Riesco) and offshore areas (Seno Skyring and Seno Otway). The first hydrocarbon exploration activities began in the 1920's and during the 30's and 40's several wells were drilled with gas manifestations. To date, 31 wells have been drilled and 875 km of 2D seismic carried out on the Block. During a drilling campaign in the 1970's, gas was tested in three structures on the Block. GeoPark is the Operator of the Otway Block and holds a 42% working interest participation. Other partners in the Block are Wintershall Energia of Germany (42%) and Methanex Corporation of Canada (16%). Historically, the Block has tested and produced oil and gas, however, there is currently no oil or gas production and no reserves have been independently appraised by GeoPark's engineering consultants on the Block. Geologically, the Block is located in the Magellan Basin's northwest area comprising the Folded Belt and Thrust Front and the Tertiary Foreland Basin. The source rocks relate to the deep marine basal Cretaceous deposits. The proven reservoirs with production history relate to the Agua Fresca formations marine and/or deltaic sandstones at depths of 200-1,500 metres. Other potential reservoirs include the Chorillo Chico sandstones (1,500 to 1,900 metres) and the Loreto formation (Upper Tertiary) and Rocallosa and Rosa formations (Upper Cretaceous). Trap types are fundamentally SantiagoAtacama desertPampasPatagoniaChileArgentinaOtwayTranquiloBuenos AiresChileOtway BlockChileArgentinaTranquiloArgentinaChileFellStrait of`Magallanes CHILE BLOCKS / ASSETS structural traps defined by anticlines developed in the Folded Belt Pluspetrol Corporation of Argentina (30%), IPR Energy of USA (20%) and Thrust Front and involving the basement and Cretaceous and Manas Petroleum of Switzerland (20%). Historically, the Block and Tertiary sequences. Stratigraphic traps are developed toward has tested and produced oil and gas, however, there is currently no the Foreland Basin in the northern sector of Peninsula Brunswick oil or gas production and no reserves have been independently including Upper Cretaceous and Lower Tertiary deltaic and appraised by GeoPark's engineering consultants on the Block. turbiditic deposits. Geologically, the Tranquilo Block is located in the Magellan Basin's GeoPark's current exploration focus is in the Folded Belt (southern northwest area, comprising the Folded Belt and Thrust Front and the and central areas of Peninsula Brunswick and western portion of Tertiary Foreland Basin. The source rocks relate to the deep marine Isla Riesco). In the eastern sector, there is the potential of gas basin Cretaceous deposits. The proven reservoirs with production accumulations in stratigraphic traps in the Upper Tertiary. GeoPark is history relate to the Loreto formations deltaic sandstones at depths currently performing geological and geophysical surveys to further of 500-700 metres. Other potential reservoirs include the Chorillo delineate the Block's potential. Existing wells are also being studied Chico (Basal Tertiary) sandstones and the Rocallosa (Upper to determine the feasibility of early production opportunities in Cretaceous) sandstones. Trap types are fundamentally structural the sector of Peninsula Brunswick. traps defined by anticlines developed in the Folded Belt and Thrust TRANQUILO BLOCK Front involving the basement and Cretaceous and Tertiary sequences. Stratigraphic traps are developed toward the Foreland Basin including Upper Tertiary deltaic and turbiditic deposits. The Tranquilo Block extends over an area of approximately GeoPark's current exploration focus is in the Folded Belt, Esperanza, 1,643,000 acres (6,648 sq km) and is located approximately 110 km Kerber and Diana areas. In the southeast sector, there is the potential northwest of Punta Arenas. The first hydrocarbon exploration efforts of gas accumulations in stratigraphic traps. GeoPark is currently began in the 1940's and the Tranquilo gas field was discovered in performing geological and geophysical surveys to further delineate 1958. To date, ENAP has drilled 21 wells and carried out 1,428 km of the Block's potential. Early geological re-interpretations suggest the 2D seismic on the Block. potential for a very large structure in the Esperanza-Gales region. Existing wells are also being evaluated to determine the feasibility of GeoPark is the Operator of the Tranquilo Block and holds a 30% early production opportunities in the Esperanza area. working interest participation. Other partners in the Block are Year in Review / Assets 23 YEAR IN REVIEW ARGENTINA GeoPark has interests in the following blocks in Argentina: Block Del Mosquito Cerro Doña Juana Loma Cortaderal Area (Sq Km) 485 80 115 Operator GeoPark GeoPark GeoPark Basin Austral Neuquén Neuquén DEL MOSQUITO BLOCK CERRO DOÑA JUANA & LOMA CORTADERAL BLOCKS The Cerro Doña Juana and Loma Cortaderal Blocks (47,959 total acres) are located in the Neuquén Basin (west-central Argentina) which represents the most prolific hydrocarbon-producing basin in Argentina, accounting for over forty per cent of its total oil production and over sixty per cent of its total gas production. The Del Mosquito Block is located in the Austral basin in southern Argentina. The Austral Basin produces nearly ten per cent of The blocks are located in the Andean fold and thrust belt, along a Argentina's total oil production and nearly twenty per cent of its proven producing fairway, where large hydrocarbon accumulations total gas production. (Although the Fell and Del Mosquito Blocks exist. There are excellent source rocks, multiple reservoir objectives are located in different countries, they are situated in the and large structural traps. The oil potential on the blocks can be same geological basin and, at their closest point, are less than 20 characterized as high risk with potentially high associated costs. kilometres apart.) GeoPark is the operator of the Cerro Doña Juana and Loma The Del Mosquito Block (120,000 acres) is surrounded by Cortaderal Blocks and has a 100 per cent working interest in each producing oil and gas fields to the north, south, east and west. block. In 2007, GeoPark established oil production on the Loma There is oil production currently from two fields and there is good Cortaderal Block after repairing an existing well. (The well is currently infrastructure, nearby gas plants and pipelines and an easily shut-in waiting for a workover). In accordance with prevailing accessible crude oil market (40 kilometres by truck). Eighty per cent regulations, GeoPark relinquished approximately 36% of the two of the block is at an early stage of exploration covered by few wells. blocks back to the province of Mendoza at the end of 2007. Two 3D seismic surveys, totaling an area of 355 square kilometres, Further geological studies were performed on the blocks during cover approximately 73 per cent of the block and GeoPark's 2008 with the expectation of developing a future exploration and geoscience team has identified and delineated multiple potential development program and providing a basis for potentially hydrocarbon-bearing prospects. The potential of the farming-out the blocks. Lower Magallanes and Tobifera geological formations has been underexplored. GeoPark is the operator of the Del Mosquito Block and has a 100 per cent working interest. GeoPark established oil production on the block in 2002 by rehabilitating the abandoned Del Mosquito field. In 2004, GeoPark discovered a new field - Del Mosquito Norte - which currently has two producing wells. The discovery well on Del Mosquito Norte was the first well drilled on the block since the 1980's. In accordance with prevailing regulations, GeoPark relinquished approximately 38% of the Del Mosquito Block back to the province of Santa Cruz at the end of 2008. GeoPark is evaluating potential drilling opportunities on Del Mosquito and also evaluating the option of bringing a partner into the project to increase investment activity. 24 Year in Review / Assets ARGENTINA BLOCKS / ASSETS Year in Review / Assets 25 SantiagoAtacama desertPampasPatagoniaChileArgentinaDel MosquitoBuenos AiresLoma CortaderalDoña JuanaChileArgentinaDelMosquitoAtlanticOceanLomaCortaderalBlockCerro Doña JuanaBlockArgentinaYEAR IN REVIEW THE UNDERLYING PRINCIPLE OF GEOPARK'S LONG TERM STRATEGY IS TO ATTRACT AND INVEST IN THE BEST PEOPLE AND SUPPORT THOSE PEOPLE WITH THE PROPER TOOLS AND FINANCIAL RESOURCES NECESSARY TO ACHIEVE SUCCESS 26 Year in Review / Capabilities GeoPark deems it critical to continuously develop creative and long term solutions to build its capabilities and acquire the capital, tools, and people necessary to achieve its growth plans. The Company’s record of performance demonstrates that its attention to these basics are creating an important differentiating factor and a competitive advantage over the longer term. PEOPLE GeoPark's management, professional and field operation teams provide an unusual mix of experience and depth for a company of its size - bringing with them the diverse range of tools and technical know-how necessary to create success and endure in an international PEOPLE / CAPABILITIES oil and gas venture. GeoPark's team has a history of proven technical organizational restructuring to insure the right people are in the and commercial performance in frontier and complex projects in right jobs. As GeoPark continues to grow, its management and Latin America and around the world, as well as in the specific structure need to continuously evolve to meet new demands and geological basins where the Company operates. Most of GeoPark's opportunities. The Company also is continuously working to reduce employees joined from other larger companies with the ambition to costs in order to increase profitability and to expand its range of help build GeoPark into a successful and unique company - new opportunities. A lower cost structure permits the Company to incorporating the best they had learned over their careers. reduce risks and participate in a broader range of projects. During 2008, GeoPark continued to improve its organization to GeoPark is managed from its head office in Buenos Aires, Argentina and ensure its ability both to effectively develop and cost-efficiently from its field operating and administrative offices in Punta Arenas and on manage its assets. This included adding key managers and the Fell Block in Chile and in Rio Gallegos and on the Del Mosquito Block employees in Senior Management, Geoscience, Drilling, Production, in Argentina.The Company has legal offices located in Santiago, Chile Safety, Environmental and Support Departments - as well as and Hamilton, Bermuda and a representative office in London, England. Year in Review / Capabilities 27 YEAR IN REVIEW 28 Year in Review / Capabilities TOOLS AND INFRASTRUCTURE / CAPABILITIES TOOLS AND INFRASTRUCTURE In new regions such as Chile where oilfield services are scarce or in tight oilfield equipment supply markets (as recently experienced), GeoPark works to develop solutions to ensure the availability of needed services and equipment - including drilling and workover rigs. In order to commercialise its oil and gas reserves, GeoPark also invests in and builds the infrastructure (plants and pipelines) necessary to produce, process, store and transport its hydrocarbon reserves to market. Examples of these projects in 2008 include: • Operated a drilling rig with a depth capacity of 10,500 feet contracted from Quintana WellPro (US/Argentine drilling contractor) under a three year contract, with an option for an additional two years. This rig was imported from China as a result of the tight local rig market. The Quintana rig was used to drill thirteen wells in 2008. • Created a new service company subsidiary - Southern Cross Services - to own and operate a workover rig for testing and completion operations. The workover rig was assembled and rebuilt during 2007 and, during 2008, was used to test and complete fourteen wells. • Expanded the capacity of the Kimiri Aike gas production plant (dew point and compression facility) on the Fell Block from 24 million cubic feet per day of gas to 35 million cubic feet per day with the addition of another compressor. This expanded GeoPark's total gas processing and selling capacity to 40 million cubic feet per day. The Kimiri Aike facility, which originated in Bolivia and is being leased from the Exterran Compression Company under a long term contract, was put into operation during 2007 after an investment (including the construction of associated tank batteries) of US$6.5 million. The plant provides direct access to the main regional gas pipeline. • Built new oil and gas production gathering centers and constructed an additional 75 kilometres of gas pipelines on the Fell Block to connect new oil and gas fields to production. Approximately 125 kilometres of gas pipelines have been built on the Block since 2006. Year in Review / Capabilities 29 YEAR IN REVIEW CAPITAL To successfully participate in the capital-intensive oil and gas • 2007 business, GeoPark is continuously developing potential funding Methanex Gas Pre-Sale Facility providing for GeoPark to borrow up sources to ensure the efficient development of its assets. To date, to US$40 million from Methanex in order to increase development over US$150 million has been raised by GeoPark - demonstrating its investment on the Fell Block. ability to attract the capital and strong shareholders needed to Conditions include: facilitate its future growth. - Pay back in gas production over six years - Interest rate paid on borrowed funds of LIBOR flat Each year, GeoPark has made progress in strengthening its balance sheet through new funding, increased revenues and debt • 2008 repayments. Key financings included: New equity funding of approximately US$24 million (3,080,000 • 2006 shares at GBP 3.94) in May 2008 from a strategic block of Chilean investors and pension funds, the IFC and certain London International Finance Corporation of the World Bank (“IFC”) equity institutional investors. The placing, which was limited to 10% of the investment in February 2006 for US$10 million following a thorough current issued share capital of the Company, was significantly technical, financial and environmental review of GeoPark. oversubscribed. Admission to the London Stock Exchange Alternative Investment • 2009 Market (AIM) in May 2006 which resulted in: New equity funding of approximately US$11.7 million (3,437,000 - US$35 million for new capital investment shares at GBP 2.25) in May 2009 from a strategic block of GeoPark's - Access to the capital markets founders, directors and shareholders and including the IFC and - A base of strong institutional shareholders certain London and Chilean institutional investors. The placing, - Improvement in GeoPark's ability to attract, recruit and retain key which was limited to 10% of the current issued share capital of the employees - Potential acquisition currency Company, was significantly oversubscribed. (This event and funding occurred following the issue of the 2008 accounts and was not reviewed by the Auditors or included in the 2008 audited results). IFC loan in December 2006 for US$20 million to accelerate the development program and which reconfirmed the IFC's long term support for GeoPark. 30 Year in Review / Capabilities World Bank GroupInternationalFiananceCorporationCAPITAL / CAPABILITIES TO SUCCESSFULLY PARTICIPATE IN THE CAPITAL-INTENSIVE OIL AND GAS BUSINESS, GEOPARK IS CONTINUOUSLY DEVELOPING STRATEGIC FUNDING SOURCES TO ENSURE THE EFFICIENT DEVELOPMENT OF ITS ASSETS. Year in Review / Capabilities 31 YEAR IN REVIEW GEOPARK INTENDS TO LEVERAGE ITS STRATEGIC OPERATING BASE AND TECHNICAL CAPABILITIES TO EXPAND THROUGHOUT LATIN AMERICA -- A RICH UNDEREXPLORED REGION WITH AN ECONOMIC FUTURE DEPENDENT ON THE DEVELOPMENT OF SECURE ENERGY SUPPLIES. 32 Year in Review / Opportunity OPPORTUNITY GeoPark is focused on Latin America because of its: • • • • • • • • • Resource Base: vast under-explored areas and opportunity for expansion Regulatory Environment: competitive regulatory and fiscal framework Infrastructure: existing oil and gas services, transportation and markets Human Resources: availability of qualified and experienced personnel Security: negligible security concerns Economics: easy access and low cost operating environment Hedge: multi-country position provides political risk balance Market: substantial immediate and long term energy requirements Trends: regional industry reorientation favours smaller technically- proficient companies Year in Review / Opportunity 33 SantiagoChileArgentinaBuenos AiresYEAR IN REVIEW GROWTH GeoPark's management believes shareholder value is increased most Its full-cycle exploration and production work program allows the by the discovery and addition of new oil and gas reserves and that Company to move forward along different lines simultaneously and these reserves are most economically discovered and developed independently. This available mix of rehabilitation, development, in areas in or nearby existing oil and gas fields. GeoPark's business exploration and acquisition opportunities allows GeoPark to balance plan is based on its: its risk exposure and ensure continuous growth. • • • Technical strength in economically finding, developing and Organic Growth producing new and bypassed oil and gas reserves; Commercial capabilities in acquiring high potential assets at With over 3.7 million gross acres and a large and balanced prospect attractive prices; and inventory, GeoPark has an attractive land position and high growth Risk-management in expanding the portfolio, increasing options potential from its existing properties. and protecting against uncertainties. GeoPark's opportunity portfolio includes multiple in-house projects to drill 6-9 new wells and to expand its production facilities and and a strategic base from which to pursue a targeted acquisition infrastructure in Chile and Argentina. The program is targeted plan, which is expected to include both asset and corporate targets. to develop existing fields and discover new fields in order to both In 2009, GeoPark will pursue a US$25-35 million investment program 34 Year in Review / Opportunity GROWTH / OPPORTUNITY GEOPARK'S GROWING OPPORTUNITY PORTFOLIO CONSISTS OF A LARGE RISK-BALANCED DRILLING PROSPECT INVENTORY ON EXISTING ACREAGE AND AN ATTRACTIVE CATALOGUE OF UNDERVALUED ACQUISITION PROJECTS. increase oil and gas production and increase oil and gas reserves - development opportunities with attractive exploration acreage, with the objective of increasing total annual oil and gas production utilising where applicable, various forms of participation including (boepd) by approximately 100%. Efforts also will be focused on block acquisitions, farm-ins, corporate transactions, work and increasing oil production to balance current high gas production, investment commitments and/or operator-earned interests. In the improving reservoir performance by fracture stimulation programs, current world economic climate, GeoPark has identified several expanding the prospect inventory, and increasing the efficiency attractive properties which have become available for acquisition of all expenditures. Exploration and early production start-up efforts at favorable terms. will also begin on GeoPark's large new blocks in Chile - Tranquilo and Otway - where some attractive targets are now being identified. With its team and platform in Latin America, GeoPark is well New Projects positioned to assess and participate in these opportunities. This position is further enhanced by GeoPark's strategic relationships with the IFC (World Bank), ENAP (Chilean State Oil Company), GeoPark intends to leverage its strategic operating and and Methanex (largest regional gas consumer) - as well as its management base and its technical and commercial capabilities to extensive Latin American operating experience. acquire new assets where suitable opportunities arise. The Company is targeting assets which bring a mix of production and Year in Review / Opportunity 35 YEAR IN REVIEW 36 Year in Review / Opportunity MARKET / OPPORTUNITY MARKET Natural Gas Crude Oil GeoPark has continued to benefit from the major changes Crude oil markets in the region are both accessible and secure. undergoing the regional gas markets. In particular, the supply of gas In Chile, GeoPark's crude oil and condensate production are sold to from Argentina to Chile has been severely limited and, as the only ENAP (the Chilean State Oil Company) and delivered by truck from private-sector oil and gas producer currently in Chile, this market the GeoPark wells to ENAP's refining facilities or pipeline access. shift has substantially increased the value of GeoPark's Chilean gas The sales price is equivalent to WTI less quality adjustments (based reserves. on degrees API and mercury content). To accommodate increased oil deliveries, GeoPark has also built truck reception, metering and Located approximately 140 kilometres from GeoPark's Fell Block, storage facilities at the ENAP San Gregorio refinery. Methanex operates a US$1.2 billion plant in Chile which has the capacity to consume 350 million cubic feet per day of gas and In Argentina, GeoPark's oil production is sold to Petrobras (the produce over 10 per cent of the world's methanol supply. Over sixty Brazilian State Oil Company) at WTI less quality and Argentina percent of the Methanex gas supply, which historically has retention tax adjustments. GeoPark's crude oil is trucked to a local originated in Argentina, was cut-off by Argentina export duties and facility located 40 kilometres from the Del Mosquito field. restrictions in 2007; thereby creating an important market opportunity for GeoPark. As a result, GeoPark entered into a strategic alliance with Methanex providing for a ten year gas purchase and supply contract at an improved gas price (linked to the international price of methanol) and with the opportunity to pre-sell gas to generate future work program funding and to jointly acquire new hydrocarbon blocks in Chile. This marketing alliance has substantially de-risked GeoPark's Chile investment activities. Year in Review / Opportunity 37 YEAR IN REVIEW COMMITMENT Long term success for international resource companies depends • GeoPark is committed to minimising the impact of our projects on upon solving complex logistical and operational challenges, the environment. As our footprint becomes cleaner and smaller - the overcoming competition for new opportunities and good people, more areas and opportunities will be opened up for us to work in. and meeting a broadening set of demands and standards from local Our long term well-being requires us to properly fit within our governments and core constituencies. Meeting these challenges natural surroundings. and performing to these new standards are what differentiate a successful company from the rest of the pack. GeoPark's specific methodology is focused on undertaking realistic and practical programs based on best world practices. Our emphasis “Creating Value and Giving Back” represents GeoPark's integrated is on building key principles and company-wide ownership and and market-based approach for meeting these challenges then expanding programs from within as we continue to grow. Our and achieving our objectives through the alignment of our values, comprehensive in-house designed EHSS management program, responsibilities and business goals. entitled S.P.E.E.D. (for Safety, Prosperity, Employees, Environment and Community Development), is being developed in accordance with: GeoPark's overall business plan is to create long term value by ISO 14001 for environmental management issues; OSHA 18001 finding and producing energy, based on good science and efficient for occupational health and safety management issues; SA 8000 operations, and to return that value to our core constituencies, for social accountability and worker rights issues; the Development which we define as our: Shareholders, Employees, Communities Standards of the World Bank; and the Quoted Companies Alliance and Environment. standards for good corporate governance. • GeoPark is committed to delivering significant bottom-line financial “Creating Value and Giving Back” represents GeoPark's underlying value to our shareholders. Only a financially-healthy company value system which provides us the leadership, confidence can continue to grow, attract needed resources and create real long and foundation required for long term success. It is our competitive term benefits. advantage. And, it reflects our pride in achieving an important mission in the right way. • GeoPark is committed to creating a safe and motivating workplace for employees. With today's shortage of capable energy professionals, the company which is able to attract, protect, retain and train the best team with the best attitude will always prevail. • GeoPark is committed to being the preferred neighbour and partner by creating a mutually beneficial exchange with the local communities where we work. Unlocking valuable local knowledge contributes an important asset to our projects - and if our efforts enhance local goals and customs, we will be invited to do more. 38 Year in Review / Commitment COMMITMENT IF WE ARE THE TRUE PERFORMER, THE BEST PLACE TO WORK, THE PREFERRED PARTNER AND THE CLEANEST OPERATOR - OUR FUTURE IS BIGGER, BETTER AND MORE SECURE. Year in Review / Commitment 39 40 Directors’ Report Directors’ Report The Directors submit their report together with the audited consolidated A description of financial risk management objectives and policies of the financial statements of GeoPark Holdings Limited (the Company) for the year Group, together with the principal risks to which the Group is exposed, ended 31 December 2008. The Company and its subsidiaries together are is contained in Note 30 to the financial statements. referred to herein as the Group. Addresses The business address of the Group’s Head Office is Florida 981, 4th Floor, Costs of Exploration and Appraisal Oil and gas exploration and production properties and assets are accounted for by the Group in accordance with the “successful efforts” method of 1005 Buenos Aires, Argentina. accounting for exploration and appraisal costs: The Registered office address is Milner House, 18 Parliament Street, Hamilton - Drilling costs of the exploratory wells, including wells for stratigraphical HM 12, Bermuda. The Company has a representative office at 35 Piccadilly, tests, and 3D seismic are capitalised as intangible fixed assets in cost centres London, United Kingdom. by field or exploration area as appropriate, pending the determination of commercial reserves. If those reserves are not found, these costs are written Principal Activity The principal activity of the Group in the period under review was to off. Following the discovery of a commercially viable field, the attributable costs are transferred to property, plant and equipment in single field cost produce, develop and explore for oil and gas reserves in the Fell and Tranquilo centres. Blocks in Chile and in the Del Mosquito, Cerro Doña Juana and Loma Cortaderal Blocks in Argentina. In addition, the Group was awarded, following - Exploration expenditures incurred in the process of determining exploration the Chilean bidding round, an interest in the Otway Block in Chile. targets and other exploration costs not directly relating to drilling of Business Review The business review contains the following components: - Development and property acquisition costs incurred in development wells - a fair review of the business of the Company; and (including seismic surveys for development purposes) and production - a description of the principal risks and uncertainties facing the Group. facilities and machinery are capitalised within property, plant and equipment. exploratory wells are written off as incurred. The business review is a balanced and comprehensive analysis of the - Costs related to works that increase the total commercially recoverable development and performance of the business of the Company during the reserves or speed up the extraction of reserves are included in the carrying year and its position at the year end. The review includes an analysis using amount of the asset and are depreciated using the unit of production financial and non financial key performance indicators to the extent that method. these are necessary for an understanding of the development, performance and position of the Group. Where appropriate, the Annual Report uses other - Licence acquisition costs are included in the total exploration cost to be performance indicators, including information relating to employees, health tested for impairment if any indicators exist. and safety and the environment. The review, where appropriate, includes references to, and explanations of, amounts included in the annual accounts. - Commercial reserves are proved and probable oil and gas reserves The requirements of the business review are fulfilled in the disclosures contained within the Year In Review on pages 10 to 39 ; the Chairman’s and Chief Executive’s Letter to Shareholders on pages 2 to 9 and the Corporate Governance report on pages 44 to 45. as defined in chapter 19 of the listing rules of the United Kingdom Listing Authority (UKLA). Directors’ Report 41 Functional Currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The functional currency of Group companies incorporated in Bermuda (including the parent company) is the US Dollar. For the Argentine subsidiaries, the functional currency continues to be the Argentine Peso. Results and Dividends The Group’s profit after tax for the year has increased to US$3,651,000 from a loss of US$ 13,808,000 in 2007. The cumulative earnings for the Group are negative (US$ 19,207,000), and therefore the Directors do not recommend the The consolidated financial statements are presented in US Dollars, which is payment of any dividend for the period ended 31 December 2008; (2007: nil). the Group’s presentational currency. The Group is currently reinvesting all cash generated by its operations and intends to continue to reinvest these funds for the near future. Based on the rapid growth of the Company’s operations in Chile during 2008 and the funding strategy followed, the Directors have concluded that the functional currency for the Chilean subsidiaries has effectively changed to Events since the Balance Sheet Date Since 31 December 2008, GeoPark successfully completed and tied into US Dollars. Therefore, effective from 1 January 2008, the Chilean subsidiaries production the Alakaluf 1 and Monte Aymond 33 wells and drilled, completed changed the functional currency from Chilean Pesos to US Dollars. and tied into production the Yagan 1 well. These results together with the As there has been a change in the underlying transactions, conditions and success of the 2008 drilling program enabled the Group to reach events, IAS 21 requires the change to be accounted for prospectively approximately 8,000 boe per day of oil and gas production during April 2009. from the date of change and the comparatives have not been restated. Directors’ Interests The Directors who served the Company during the year and subsequently, together with their (and their families’) beneficial interests in shares in the Company, were as follows: Name Re-Appointment Audit Nomination Remuneration 31 December 2008 Ordinary Shares of Committees USD 0.001 Each at Gerry O’Shaughnessy Executive Chairman James F. Park Chief Executive Officer Sir Michael Jenkins Non Executive Director Christian Weyer Non Executive Director Juan Cristóbal Pavez Non Executive Director Peter Ryalls Non Executive Director 13 August 2008 (*) 13 August 2008 (*) 13 August 2008 (*) 13 August 2008 (*) 13 August 2008 (*) 13 August 2008 (*) 6,617,925 6,943,068 32,370 203,596 658,709 (**) 25,230 Committee Member Committee Chairman (*) Most recent reappointment date (**) Not issued 42 Directors’ Report Supplier Payment Policy The Group makes payments to its suppliers in accordance with the agreed Going Concern The current global economic conditions have created uncertainties, terms of each transaction. Trade creditors of the Group at 31 December 2008 particularly over future oil and gas prices and the availability and cost of new were equivalent to 73 days’ purchases (2007: 62), based on the year end finance. The Directors regularly monitor the Group’s cash position and balance. Charitable and Political Donations During 2008, the Group made charitable donations of US$ 16,645 (2007: US$ 14,285). For its community development efforts, the Group encourages the development of new local businesses by contracting services and liquidity risks throughout the year to ensure that it has sufficient funds to meet forecast operational and investment funding requirements. Sensitivities are run to reflect latest expectations of expenditures, oil and gas prices and other factors to enable the Group to manage the risk of any funding short falls and/or potential loan covenant breaches. As highlighted in Note 30, the Group remains in discussion with different financing sources to assist people for its needs and work program where it operates. with funding its 2009 capital expenditure program. No political donations are made by the Group. The Directors prepare detailed cash flow forecasts under different scenarios that include the Group not obtaining additional financing. Such detailed Directors’ Remuneration Executive and Non Executive Directors remuneration is discussed in the short term cash flow forecasts are prepared for a period in excess of one year from the balance sheet date. These cash flow forecasts are based on current Director’s Remuneration Section. Safety and Environment GeoPark seeks to ensure that its operations are conducted in a safe manner oil and gas prices and operating costs. In the event that global economic conditions worsen and oil and gas prices fall further, the Directors would be able to manage the resulting impact on the Group’s cash position by implementing cost reductions, deferring capital expenditure commitments and to minimise any impact on the environment. During 2008, the Group and selling non core assets. has continued to develop its integrated SPEED Program which establishes objectives, benchmarks and monitoring processes regarding Safety, After making enquiries, the Directors have formed a judgement, at the time Prosperity, Employees, Environment and Community Development. The of approving the financial statements, that there is a reasonable expectation SPEED Program is described in the section titled “Commitment”. that the Group has adequate resources to continue in operational existence Auditor Grant Thornton UK LLP offers themselves for reappointment as auditor. for the foreseeable future. For this reason, the Directors have continued to adopt the going concern basis in preparing the consolidated financial statements. Nomad Oriel Securites Limited is the Company’s Nominated Advisor under the AIM On behalf of the Board rules of the London Stock Exchange. Annual General Meeting At the Annual General Meeting of the Company, resolutions will be proposed to re-elect the Directors, according to the Company’s Bye Laws. Other resolutions may be proposed in accordance with the circular to be sent out. James F. Park Further details will be set forth in the formal Notice of Meeting. 5 May 2009 Chief Executive Officer Directors’ Report 43 Corporate Governance GeoPark is committed to maintaining high standards of corporate and policy, acquisition and divestment proposals, approval of major capital governance which it defines as managing the Group in an efficient, effective investments, risk management policy, significant financing matters and and entrepreneurial manner for the benefit of all shareholders over the statutory shareholder reporting. longer term. The Directors strongly intend, as is feasible given the Group’s size and the constitution of the Board, to comply with the guidelines on corporate governance of the Quoted Companies Alliance for AIM companies. Board Members The composition of the Board is a key factor in ensuring that the right mix of skills and experience are in place to lead the Group. Chairman and Chief GeoPark’s good corporate governance goals include: Executive roles are not exercised by the same individual and the Company has at least two independent non Executive directors. All directors are - Efficiency: a governing body of an appropriate size to permit efficient submitted to re-election at regular intervals. The Board is responsible to decision-taking with transparency for major decisions, clear definition shareholders for the proper management of the Group. of responsibilities and performance targets, and procedures in place to protect and ensure protection of the Company’s assets. The Chairman is responsible for the effective running of the Board, ensuring that the Board plays a full and constructive part in the development and - Effectiveness: a governing body with the required skills, provided with determination of the Group’s strategy, and acting as guardian and facilitator the proper information and collectively involved to make the best decisions of the Board’s decision-making process. for the Company. - Entrepreneurial: definition of a vision for the Company with an proposing and developing the Group’s strategy and overall commercial understanding of goals, timing and necessary resources. objectives in consultation with the Board and, as leader of the Executive team, implementing the decisions of the Board and its Committees. In addition, - Shareholder Common Good: decisions taken which consider the good of the Chief Executive is responsible for maintaining regular dialogue with all shareholders and which, if they involve management, major shareholders shareholders as part of the Group’s overall investor relations program. The Chief Executive is responsible for managing the Group’s business, and other related parties, are reported in a transparent manner. Board Matters The role of the Board is to provide strategic leadership, guidance and The Board comprises: Executive Directors: - Gerald E. O’Shaughnessy - Chairman perspective to the business on behalf of the shareholders and to ensure that - James F. Park - Chief Executive Officer the risks and rewards of the business are properly managed through different phases of the industry’s cycle. Non Executive Directors: - Sir Michael R. Jenkins The Board sets the Group’s strategic aims, ensuring that the necessary - Christian M. Weyer resources are in place to achieve those aims, and reviews management - Juan Cristóbal Pavez and financial performance. It is accountable to shareholders for the creation - Peter Ryalls and delivery of strong, sustainable financial performance and long-term shareholder value. To achieve this, the Board directs and monitors the Group’s Together, the Executive and Non Executive Directors bring a broad range affairs within a framework of controls which enable risk to be assessed of business, commercial and other relevant experience to the Board, which is and managed effectively through clear procedures, lines of responsibility and vital to the management of an expanding company. delegated authorities. The Board also has responsibility for setting the Group’s core values and standards of business conduct and for ensuring that these, together with the Group’s obligations to its stakeholders, are widely Timely Information Directors have access to a regular supply of financial, operational, strategic understood throughout the Group. The Board meets at least quarterly and and regulatory information to assist them in the discharge of their duties. when issues arise and has a schedule of matters reserved for decisions of Much of this information is provided as part of the normal management the Board. In addition to those formal matters required by relevant local laws reporting process. Board papers are circulated in time to allow Directors to to be set before a Board of Directors, the Board will also consider strategy be properly briefed in advance of meetings. In addition, Board meetings 44 Corporate Governance generally include a review of the history, performance and future potential are independent Non Executive Directors. The Committee is chaired by of a material individual asset or business unit. This is designed to ensure Sir Michael Jenkins and meets as required. The Nomination Committee that all material assets are considered on a cyclical basis and to enable Board considers the size, structure and composition of the Board, retirements and members to familiarise themselves with the key assets and operations appointments of additional and replacement Directors and makes of the Group. appropriate recommendations to the Board. Internal Control Review Directors review on an ongoing basis, inter alia, financial, operational, Remuneration Committee The Remuneration Committee is comprised of two independent Non compliance matters and risk management, and approve the annual budget Executive Directors (currently being Mr. Ryalls and Mr. Weyer). The Committee and monitor performance. The Board has the responsibility to establish is chaired by Mr. Ryalls and is responsible for reviewing the performance of and maintain the Group’s system of internal controls and to review its the Executive Directors and for setting the scale and structure of their effectiveness. The procedures are reviewed on an ongoing basis. The Group remuneration, paying due regard to the interests of Shareholders as a whole has defined an approval system for capital expenditures and expenses. and the performance of the Group. The Committee meets as required This system includes different levels of authorisation based on functions during the year. (As described in note 28, Mr. Peter Ryalls provided operating and position of individuals. The Board has approved the annual budget. consultancy to the Group in 2008. It is the Board’s opinion that his role Performance against budget is monitored and reported to the Board. as a consultant does not affect his effectiveness, performance or independent The internal control system can only provide reasonable and not absolute judgment in carrying out his duties as a Director.) The Director’s assurance against material misstatement or loss. The Board has considered Remuneration report on pages 46 to 47 contains further details of the role the need for an internal audit function but does not consider it necessary and activities of the Remuneration Committee. at the current time. Induction All new Directors receive an induction as soon as practicable after Shareholder Relations Communication with shareholders is given high priority and there is regular dialogue with institutional investors, as well as general presentations appointment. This includes meetings with senior management, functional to analysts at the time of the release of the annual and interim results. and business unit heads and where appropriate, visits to the Company’s Throughout 2008, Executive Directors and senior management met with main properties. The Company Secretary also provides new Directors with institutional investors in Europe, as well as in North America and Chile. an overview of their duties as Directors, corporate governance policies and established Board procedures as part of the induction process. Press releases have been issued throughout the year and the Company Insurance The Company maintains Directors’ and Officers’ liability insurance coverage, the level of which is reviewed annually. maintains a website (www.geo-park.com) on which all press releases are posted and which also contains major corporate presentations and the Financial Statements. Regular updates to record news in relation to the Group and the status of exploration and development programs are also included on the website. Additionally, this Annual Report, which is sent to all Audit Committee The Audit Committee is comprised of two independent Non Executive Directors (currently being Mr. Weyer and Sir Michael Jenkins), is chaired by registered shareholders, contains extensive information about the Group’s activities. Enquiries from individual shareholders on matters relating to their shareholdings and the business of the Group are welcomed. Shareholders Mr. Weyer and meets at least twice a year. The Audit Committee will review are also encouraged to attend the Annual General Meeting to discuss the Group’s interim and annual financial statements before submission the progress of the Group. to the Board for approval. The Audit Committee also reviews reports from management and the external auditors on accounting and internal control matters. Nomination Committee The Nomination Committee is comprised of three Directors (currently Sir Michael Jenkins, Mr. Ryalls and Mr. O’Shaughnessy), the majority of whom Financial Accounts A statement of Director’s responsibilities in respect of the accounts is set out on page 48. Corporate Governance 45 Directors’ Remuneration Report The following information is not subject to audit. certain employees the right to buy GeoPark shares during a defined period Remuneration Committee The Company has a Remuneration Committee. The members of the of time (allocating a percentage of their salary), at the end of which they will be awarded a determined amount of free “matching shares”. Committee during 2008 were Peter Ryalls (Chairman) and Christian Weyer - Program D: Stock Appreciation Rights - Under this program, the Board may who are Non Executive Directors. decide to pay an employee a cash amount related to the market value appreciation of GeoPark shares during a certain period of time. (This scheme The Remuneration Committee agrees with the Board the framework for the does not need to be counted within the 12% limit for employee remuneration of the Chief Executive, the Chairman of the Company and such compensation programs.) other members of the Executive Management as it is designated to consider. There are approximately 2.6 million shares available for distribution under the No Director plays a part in any discussion about his own remuneration. Employee Long Term Incentive Program Executive remuneration packages are designed to attract, motivate and retain Directors of the calibre required to grow the business and enhance value IPO Award Program and Executive Stock Option Plan On admission to AIM, the Executive Directors, the management and key to Shareholders. The performance measurement of the Executive Directors employees of the Company received the following options over Common and the determination of their annual remuneration package are undertaken shares of the Company granted under the Executive stock options plan: by the Committee. Management and Key Employees The Company’s policy is that a substantial proportion of the remuneration of the Executive Directors should be performance related. No. of % of Issued Underlying Common Performance-Based Employee Long Term Incentive Program - Key Terms Intending to align the interests of its management, employees and Common Shares key advisors with those of the Company and its shareholders, the Directors Share Capital Approxi- established a new Performance-based Employee Long Term Incentive 605,000 mately 1.8% Program (“the Plan”). At the Annual General Meeting held on 19 November 2007, Shareholders voted to authorise the Board to use up to 12% of the Executive Directors Grant Date 15 May 2006 Exercise Price (US$) 4.00 Earliest Exercise Date 15 May 2008 Expiry Date 15 May 2013 issued share capital of the Company at the relevant time for the purposes of the Plan. GeoPark’s Shareholders authorised the Board of Directors to implement this Plan and determine the specific conditions for each program within some broadly-defined guidelines. Name Gerald During 2008, the Directors considered and approved the following programs: O’Shaughnessy James F. Park - Program A: Stock Awards - Under this program, the Board grants the participant a certain number of shares for nominal (USD 0.001 per share) or nil value - which can only be exercised after a defined period of time subject to meeting specific performance conditions. No. of Underlying Common Shares 153,345 306,690 153,345 306,690 Exercise Price (£) Earliest Exercise Date Expiry Date 3.20 4.00 3.20 4.00 15 May 2008 15 May 2013 15 May 2008 15 May 2013 15 May 2008 15 May 2008 15 May 2013 15 May 2013 2008 Awards Program: Since no awards were made in 2007, the Directors approved the award of approximately 1,000,000 shares to employees for the 2008 Program. The - Program B: Stock Options - Under this program, the Board grants the awards will have the following characteristics: participant a certain number of stock options - to be exercised after a defined period of time, subject to meeting specific performance conditions, and at a - Stock Awards (Program A). predetermined exercise price. - Program C: Stock Purchase Program - Under this program, the Board grants - All GeoPark employees are eligible. - Grant date of 15 December 2008. - Vesting period: up to 4 years. 46 Directors’ Remuneration Report 2008 Stock Awards will be determined for each employee in accordance with The remuneration package approved for Non Executive Directors, which is a formula and procedure that takes into consideration their individual detailed in the corresponding service contracts, contains the following contribution to the Company and recruitment conditions. Awards are based components: on exceptional performance and contributions to the growth of the Company. The specific award amounts have been reviewed and approved by the in shares. The share price to determine the quantity of shares is the simple Executive Directors and the Remuneration Committee of the Board of Directors. average to the daily closing price of the stock in the quarter prior to the a) Annual salary of £35,000 payable quarterly in arrears; 50% in cash and 50% payment date. Considering the previously issued IPO Awards, the total share capital being b) Committee Chairman fee: annual remuneration of £5,750 payable quarterly awarded to employees represents approximately 14% of the shares issued. in arrears in cash. Executive Directors’ Contracts It is the Group’s policy that Executive Directors should have contracts of an The following chart summarises the detail of payments made to Non c) Notice for contract termination: 2 months. indefinite term providing for a maximum of one year’s notice. The details Executive Directors. of the Director’s contracts are summarised below: Gerald O’Shaughnessy Gerald O’Shaughnessy has a service contract with the Company which 2008 Cash Payment Stock Payment Non Executive Committee Director Fees Director’s Fees Chairman Fees Paid in Shares provides for him to act as Executive Chairman of the Company at a salary of Sir Michael Jenkins (1) £75,000 per annum. The agreement is stated to continue indefinitely, subject Peter Ryalls (2) to it being terminable by either party by giving not less than 12 months’ Christian Weyer (3) notice in writing at any time. The payment of any bonus to Mr. O’Shaughnessy Juan Cristóbal Pavez £17,500 £17,500 £17,500 £4,375 £5,750 £5,750 £5,750 - 4,295 (*) 4,295 4,295 1,159 is at the Company’s discretion. Mr. O’Shaughnessy’s service agreement contains restrictive covenants which restrict him, for a period of 12 months Additionally Mr. Peter Ryalls received US$ 123,000 corresponding to operating following the termination of employment, from soliciting senior employees of consultancy in 2008 (2007: US$ 124,000). the Company and, for a period of 6 months following the termination of employment, from being involved in any competing undertaking. (1) Nomination Committee Chairman James F. Park James F. Park has a service contract with the Company which provides for him to act as Chief Executive Officer of the Company at a salary of £75,000 (2) Remuneration Committee Chairman (3) Audit Committee Chairman (*) Not issued per annum. The agreement is stated to continue indefinitely, subject to it Approval being terminable by either party by giving not less than 12 months’ notice in writing at any time. The payment of any bonus to Mr. Park is at the This report was approved by the Board of Directors on 5 May 2009 and signed Company’s discretion. Mr. Park’s service agreement contains restrictive covenants which restrict him, for a period of 12 months following the on its behalf by: termination of employment, from soliciting senior employees of the Company and, for a period of 6 months following the termination of employment, from being involved in any competing undertaking. No bonuses were awarded in 2008 to the Executive Directors. Non Executive Directors Contracts In August 2008, at the Annual General Meeting the shareholders re-elected the Non Executive Directors, and approved the nomination of Juan Cristóbal Pavez to become a Non Executive Director of the Company. Peter Ryalls Chairman, Remuneration Committee 5 May 2009 Directors’ Remuneration Report 47 Statement of Directors’ Responsibilities The Directors are responsible for preparing the Annual Report and the financial statements. The Directors have elected to prepare financial statements for the Group in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. International Accounting Standard 1 requires that financial statements present fairly for each financial year for the Company’s and Group’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standard Board’s “Framework for the preparation and presentation of Financial Statements”. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. The Directors are also required to: - select suitable accounting policies and apply them consistently; - make judgments and estimates that are reasonable and prudent; - present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; - provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company and Group’s financial position and financial performance; and - prepare the financial statements on the going concern basis unless it is inappropriate to presume the Group will continue in business. The Directors are responsible for keeping proper accounting records, for safeguarding the assets of the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. In so far as the Directors are aware: - there is no relevant audit information of which the Group’s auditors are unaware; and - the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. 48 Statement of Directors’ Responsibilities Report of the Independent Auditor to the Members of GeoPark Holdings Limited We have audited the Group financial statements of GeoPark Holdings Limited for the year ended 31 December 2008 which comprise Basis of Audit Opinion We conducted our audit in accordance with International Standards the consolidated income statement, the consolidated balance sheet, the on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit consolidated statement of changes in equity, the consolidated cash flow includes examination, on a test basis, of evidence relevant to the amounts statement and notes 1 to 30. These Group financial statements have been and disclosures in the Group financial statements. It also includes an prepared under the accounting policies set out therein. assessment of the significant estimates and judgments made by the Directors in the preparation of the Group financial statements, and of whether the This report is made solely to the Company’s members, as a body, in accounting policies are appropriate to the Group’s circumstances, accordance with International Auditing Standards (UK and Ireland). Our audit consistently applied and adequately disclosed. work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and We planned and performed our audit so as to obtain all the information for no other purpose. To the fullest extent permitted by law, we do not accept and explanations which we considered necessary in order to provide us with or assume responsibility to anyone other than the Company and the sufficient evidence to give reasonable assurance that the Group financial Company’s members as a body, for our audit work, for this report, or for the statements are free from material misstatement, whether caused by fraud or opinions we have formed. other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the Group financial Respective Responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the Annual Report and the Group statements. financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Opinion In our opinion, the Group financial statements give a true and fair view Statement of Directors’ Responsibilities. in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2008 and of its profit for the Our responsibility is to audit the Group financial statements in accordance year then ended. with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Group financial statements give a true and fair view in accordance with IFRSs as adopted by the European Union. In addition we report to you if, in our opinion, we have not received all the Registered Auditor information and explanations we require for our audit, or if information Chartered Accountants specified by law regarding Directors’ remuneration and other transactions is Gatwick not disclosed. 5 May 2009 Grant Thornton UK LLP We read other information contained in the Annual Report and consider whether it is consistent with the audited Group financial statements. The other information comprises only the Letter to Shareholders, the Year in Review, the Directors’ Report, Corporate Governance, the Directors’ Remuneration Report and the Statement of Directors’ Responsibilities. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any other information. Report of the Independent Auditor 49 Consolidated Income Statement 1 January - 31 December Amounts in US$ ’000 Note 2008 2007 Revenue Production Costs Gross Profit Exploration Costs Administrative Costs Selling Expenses Other Operating Costs Operating Profit/ (Loss) Financial Income Financial Expenses Profit / (Loss) before Tax Income Tax Profit / (Loss) for the Year Earnings / (Loss) per Share (in US$) Basic Earnings / (Loss) per Share (in US$) Diluted 3 4 7 8 9 10 11 13 13 38,376 (19,141) 19,235 (4,444) (6,988) (451) (170) 7,182 673 (3,928) 3,927 (276) 3,651 0.11 0.11 11,028 (7,827) 3,201 (6,616) (9,648) (503) (14) (13,580) 2,036 (2,262) (13,806) (2) (13,808) (0.45) (0.45) The profit of the year is entirely attributable to the shareholders. The notes on pages 54 to 74 are an integral part of these consolidated financial statements. 50 Consolidated Income Statement Consolidated Balance Sheet 31 December Amounts in US$ ’000 Note Intangible Assets Property, Plant and Equipment Prepaid Taxes Investments Deferred Tax Asset Non Current Assets Inventory Trade Receivables Prepayment and Other Receivables Prepaid Taxes Cash and Cash Equivalents Current Assets Assets Share Capital Share Premium Other Reserve Reserve for Exchange Rate Adjustment Retained Earnings Equity Borrowings Provision for Decommissioning Deferred Tax Liabilities Long Term Liabilities Borrowings Trade Accounts Payable Other Liabilities Current Liabilities 14 15 17 20 12 18 19 19 17 21 22 23 12 22 24 2008 37,162 67,640 3,463 2,141 15 110,421 1,171 8,434 1,383 2,688 5,710 2007 23,833 31,707 3,068 2,079 15 60,702 2,082 2,305 574 3,889 8,710 19,386 17,560 129,807 78,262 34 75,575 3,175 920 (19,207) 60,497 42,253 1,548 276 44,077 11,427 11,269 2,537 25,233 31 52,714 3,260 938 (24,337) 32,606 29,958 1,264 - 31,222 4,783 8,449 1,202 14,434 Liabilities 69,310 45,656 Equity and Liabilities 129,807 78,262 The notes on pages 54 to 74 are an integral part of these consolidated financial statements. The financial statements were approved by the Board of Directors on 5 May 2009. Consolidated Balance Sheet 51 Consolidated Statement of Changes in Equity 1 January - 31 December Amounts in US$ ’000 Capital Premium Reserve Adjustment Earnings Total Share Share Other Exchange Retained Reserve for Equity at 1 January 2007 Foreign Currency Translation Loss for the Year Total Income and Expense for the Year Share Based Payment (notes 21 and 25) Equity Movements in the Year 31 52,595 3,025 - - - - - - - - 119 119 - - - 235 235 57 881 - (14,601) 41,107 - 881 (13,808) (13,808) 881 (13,808) (12,927) - - 4,072 4,072 4,426 4,426 Equity at 31 December 2007 31 52,714 3,260 938 (24,337) 32,606 Foreign Currency Translation Profit for the Year Total Income and Expense for the Year Issue of Shares (note 21) Costs of the Issue of Shares (note 21) Share Based Payment (notes 21 and 25) Equity Movements in the Year - - - 3 - - 3 - - - 23,612 (940) 189 22,861 - - - - - (85) (85) (18) - (18) - - - - - 3,651 3,651 - - 1,479 1,479 (18) 3,651 3,633 23,615 (940) 1,583 24,258 Equity at 31 December 2008 34 75,575 3,175 920 (19,207) 60,497 The notes on pages 54 to 74 are an integral part of these consolidated financial statements. 52 Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement 1 January - 31 December Amounts in US$ ’000 Profit / (Loss) for the Year Adjustments for: Income Tax Depreciation of the Year Profit on Disposal of Property, Plant and Equipment Write off of Unsuccessful Efforts Relinquishment of Del Mosquito Area Accrual of Financial Expenses Unwinding of Discount Accrual of Stock Options and Stock Awards Exchange Difference Generated by Borrowings Changes in Working Capital: Change in Prepaid Taxes Change in Inventory Change in Trade Receivables Change in Prepayments and Other Receivables Change in Legal Deposit Change in Current Liabilities (Excluding Bank, Tax and Dividend) Net Cash Generated by (used in) Operating Activities Cash Flows from Investing Activities Purchase of Intangible Assets Purchase of Property, Plant and Equipment Sale of Property, Plant and Equipment Purchase of Financial Assets Net Cash Used in Investing Activities Cash Flows from Financing Activities Proceeds from the Issue of Common Shares Proceeds from Borrowings Borrowings Paid Interest Paid Net Cash Generated from Financing Activities Net Decrease in Cash and Cash Equivalents Cash and Cash Equivalents at 1 January Currency Translation Differences Relating to Cash and Cash Equivalents Cash and Cash Equivalents at the End of the Year Ending Cash and Cash Equivalents are Specified as Follows: Cash at Bank Cash in Hand Cash and Cash Equivalents 2008 3,651 276 7,440 (143) 273 1,149 1,931 (434) 1,583 1,193 335 863 (6,150) (1,053) - 4,282 15,196 (40,690) (17,452) 209 - (57,933) 22,675 26,319 (7,117) (2,183) 39,694 (3,043) 8,710 43 5,710 5,707 3 5,710 2007 (13,808) 2 2,084 (38) 4,522 - 1,775 28 4,426 550 (3,890) (1,134) (743) (13) 11 4,608 (1,620) (29,472) (9,311) 62 (2,000) (40,721) - 17,311 - (962) 16,349 (25,992) 34,170 532 8,710 8,707 3 8,710 The notes on pages 54 to 74 are an integral part of these consolidated financial statements. Consolidated Cash Flow Statement 53 Notes to the Consolidated Financial Statements Note 1 General Information Standards, amendments and interpretations to existing standards that are not yet effective nor adopted early by the Group. GeoPark Holdings Limited (the Company) is a limited company incorporated The following standards, amendments and interpretations to existing under the laws of Bermuda. The addresses of its registered office and standards have been published and are mandatory for the Group’s principal places of business are disclosed in the introduction to the Directors’ accounting periods beginning on or after 1 January 2009 or later periods, Report. The principal activities of the Company and its subsidiaries (the but the Group has not early adopted them: Group) are described in the Directors’ Report. - IAS 23 (Amendment), ’Borrowing costs’ (effective from 1 January 2009). The Company has its listing on the AIM London Stock Exchange. Also The amendment requires an entity to capitalise borrowing costs directly The Company has applied to the Chilean Superintendent for Companies attributable to the acquisition, construction or production of a qualifying (Superintendencia de Valores y Seguros or SVS) for its authorization asset (one that takes a substantial period of time to get ready for use or sale) to trade the Group’s shares in the Chilean off-shore market. All required as part of the cost of that asset. The option of immediately expensing those documentation has been submitted, and the SVS has requested formal borrowing costs will be removed. The Group will apply IAS 23 (Amendment) clarifications, which are currently being processed. prospectively from 1 January 2009. These consolidated financial statements were authorised for issue by the January 2009). The revised standard will prohibit the presentation of items - IAS 1 (Revised), ’Presentation of financial statements’ (effective from 1 Board of Directors on 5 May 2009. Note 2 of income and expenses (that is, ’non owner changes in equity’) in the statement of changes in equity, requiring ’non owner changes in equity’ to be presented separately from owner changes in equity. All non owner changes in equity will be required to be shown in a performance statement, Summary of Significant Accounting Policies but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income The principal accounting policies applied in the preparation of these statement and statement of comprehensive income). Where entities restate consolidated financial statements are set out below. These policies have been or reclassify comparative information, they will be required to present a consistently applied to the years presented, unless otherwise stated. restated balance sheet as at the beginning of the comparative period in addition to the current requirement to present balance sheets at the end Basis of Preparation The consolidated financial statements of GeoPark Holdings Limited have of the current period and comparative period. The Group will apply IAS 1 (Revised) from 1 January 2009. It is likely that both the income statement been prepared in accordance with International Financial Reporting and statement of comprehensive income will be presented as performance Standards (IFRS). statements. - IFRS 2 (Amendment), ’Share-based payment’ (effective from 1 January 2009). The consolidated financial statements are presented in United States Dollars - IAS 32 (Amendment), ’Financial instruments: Presentation’, and IAS 1 and all values are rounded to the nearest thousand (US$ ’000), except (Amendment), ’Presentation of financial statements’ - ’Puttable financial where otherwise indicated. instruments and obligations arising on liquidation’ (effective from 1 January 2009). The consolidated financial statements have been prepared on a historical cost - IFRS 1 (Amendment) ’First time adoption of IFRS’, and IAS 27 ’Consolidated basis, modified by the recording of inventories at net realisable value. and separate financial statements’ (effective from 1 January 2009). The preparation of financial statements in conformity with IFRS requires the from 1 July 2009). use of certain critical accounting estimates. It also requires management - IFRS 3 (Revised), ’Business combinations’ (effective from 1 July 2009). to exercise its judgement in the process of applying the Group’s accounting - IFRS 8, ’Operating segments’, replaces IAS 14, ’Segment reporting’, and policies. The areas involving a higher degree of judgement or complexity, aligns segment reporting with the requirements of the US standard SFAS 131, or areas where assumptions and estimates are significant to the consolidated ’Disclosures about segments of an enterprise and related information’. financial statements are disclosed in this note under the title “Accounting - There are a number of minor amendments to IFRS 7, ’Financial instruments: - IAS 27 (Revised), ’Consolidated and separate financial statements’, (effective estimates and assumptions”. Disclosures’, IAS 8, ’Accounting policies, changes in accounting estimates and errors’, IAS 10, ’Events after the reporting period’, IAS 18, ’Revenue’ and 54 Notes to the Consolidated Financial Statements IAS 34, ’Interim financial reporting’, which are part of the IASB’s annual statements of subsidiaries have been adjusted where necessary to ensure improvements project published in May 2008 (not addressed above). consistency with the accounting policies adopted by the Group. These amendments are unlikely to have an impact on the Group’s accounts and have therefore not been analysed in detail. Acquisitions of subsidiaries are dealt with by the purchase method. The Going Concern The current global economic conditions have created uncertainties, purchase method involves the recognition at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary, at the acquisition date, regardless of whether or not they were recorded in particularly over future oil and gas prices and the availability and cost of new the financial statements of the subsidiary prior to acquisition. On initial finance. The directors regularly monitor the Group’s cash position and recognition, the assets and liabilities of the subsidiary are included in liquidity risks throughout the year to ensure that it has sufficient funds to the consolidated balance sheet at their fair values, which are also used as meet forecast operational and investment funding requirements. Sensitivities the basis for subsequent measurement in accordance with the Group are run to reflect latest expectations of expenditures, oil and gas prices accounting policies. Goodwill is stated after separating out identifiable and other factors to enable the Group to manage the risk of any funding intangible assets. Goodwill represents the excess of acquisition cost short falls and/or potential loan covenant breaches. As highlighted in note 30, over the fair value of the Group’s share of the identifiable net assets of the the Group remains in discussion with different financing sources to assist acquired subsidiary at the date of acquisition. with funding its 2009 capital expenditure program. The Directors prepare detailed cash flow forecasts under different scenarios Jointly Controlled Assets The joint ventures undertaking by the Group are classified as jointly that include the Group not obtaining additional financing. Such detailed short controlled assets under IAS 31 “Interest in Joint Ventures”. Therefore, the term cash flow forecasts are prepared for a period in excess of one year from Group recognised its share of assets and liabilities as well as its share the balance sheet date. These cash flow forecasts are based on current oil and of expenses and income from the use of its share of the output of both gas prices and operating costs. In the event that global economic conditions joint ventures. worsen and oil and gas prices fall further, the Directors would be able to manage the resulting impact on the Group’s cash position, by implementing cost reductions, deferring capital expenditure commitments and selling non core assets. Revenue Revenue from the sale of crude oil and gas is recognised in the Income Statement if supply and risk transfer to the purchaser has taken place before the end of the year, and if the revenue can be measured reliably After making enquiries, the Directors have formed a judgement, at the time and is expected to be received. Revenue is recognised exclusive of of approving the financial statements, that there is a reasonable expectation VAT and excluding discounts related to the sale. that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors have continued to adopt the going concern basis in preparing the consolidated financial Production Costs Production costs include wages and salaries incurred to achieve the statements. Consolidated Financial Statements The consolidated financial statements consolidate those of the Company net revenue for the year. Direct and indirect costs of raw materials and consumables, rentals and leasing, property, plant and equipment depreciation and royalties are also included within this account. and all of its subsidiary undertakings drawn up to the Balance Sheet date. Production costs also recognise the development costs that do not fulfil Subsidiaries are entities over which the Group has the power to control the criteria for capitalisation. the financial and operating policies so as to obtain benefits from its activities, generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Financial Costs Financial costs include interest expenses, realised and unrealised gains and losses arising from transactions in foreign currencies and the amortisation of financial assets and liabilities. No finance costs have been Intercompany transactions, balances and unrealised gains on transactions capitalised but have been written off as expensed. between the Group and its subsidiaries are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Amounts reported in the financial Costs of Exploration and Appraisal The Group applies IFRS 6 “Exploration and Evaluation of Mineral Resources”. Notes to the Consolidated Financial Statements 55 Oil and gas exploration and production properties and assets are accounted for in accordance with the “successful efforts” method of accounting for Decommissioning Provision for decommissioning is recognised to the extent that an exploration and appraisal costs. obligation has arisen which is usually at the start of oil and gas production. A corresponding asset of an amount equivalent to the provision is also Expenditure incurred on the acquisition of a licence interest is initially created and depreciated as part of the capital costs of the production capitalised on a licence-by-licence basis. Costs are held, undepleted, within facilities, on a unit of production basis. exploration until such a time as the exploration phase on the licence area is complete or commercial reserves have been discovered. Costs will either Provisions are measured at the present value of the expenditures expected be transferred to the development/producing assets or expensed in the to be required to settle the obligation using a pre-tax rate that reflects current Income Statement depending upon the success of the exploration and market assessments of the time value of money and the risks specific to the appraisal drilling. obligation. The increase in the provision due to passage of time is recognised as an interest expense. Licence acquisition costs are included in the total exploration cost to be tested for impairment should any indicators exist. Exploration expenditure incurred in the process of determining exploration Impairment Testing for Exploration and Appraisal Assets and Property, Plant and Equipment An impairment loss is recognised for the amount by which the asset’s or targets and other exploration costs not directly relating to drilling of cash-generating unit’s carrying amount exceeds its recoverable amount. The exploratory wells are written off as incurred. recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow Drilling costs of the exploratory wells, including wells for stratigraphical tests evaluation. and 3D seismic are capitalised as intangible assets in cost centres by field or exploration area as appropriate, pending the determination of commercial Where there are indicators that an exploration asset may be impaired, the reserves. If those reserves are not found, these costs are written off. Following exploration and appraisal assets are grouped with all development/producing the discovery of a commercially viable field, the attributable costs are assets belonging to the same geographic segment to form the Cash transferred to property, plant and equipment in single field cost centres. Generating Unit (CGU) for impairment testing. Where there are indicators that an property, plant and equipment asset is impaired, assets are grouped Works costs that increase the total commercially recoverable reserves or at the lowest levels for which there are separately identifiable cash flows to speed up the extraction of reserves are included in the carrying amount of the form the CGU. The combined cost of the CGU is compared against the CGU’s asset and are depreciated using the unit of production method. Workovers net present value and any resulting impairment loss is written off to the that merely restore production to its original level are charged to the Income Income Statement. No impairment has been recognised during the year. Statement during the fiscal period in which they are incurred. Commercial reserves are proven and probable oil and gas reserves as defined Other Property, Plant and Equipment Furniture, equipment and vehicles are measured at cost less accumulated in chapter 19 of the listing rules of the United Kingdom Listing Authority depreciation and impairment. The cost includes the acquisition price (UKLA). and costs incurred directly in connection with the acquisition until the time when the asset is ready for use. Development and property acquisition costs incurred in development wells (including seismic surveys for development purposes) and production The cost of an asset is divided into separate components which are facilities and machinery are capitalised within property, plant and equipment. depreciated individually if the useful lives are not identical. Depletion All expenditure carried within each field is amortised from the commencement Subsequent costs of replacement of components are recognised as property, plant and equipment when it is likely that they will lead to future economic of production, on a unit of production basis, which is the ratio of oil and gas benefits. The carrying amount of the replaced components is recognised in production in the period to the estimated quantities of commercial the Income Statement. All other costs of repair and maintenance are developed reserves at the end of the period plus the production of the recognised in the Income Statement when incurred. period on a field by field basis. A field is an area consisting of a single reservoir or multiple reservoirs which expected useful lives of the assets and their residual value, as follows: Straight-line depreciation is provided on the basis of an assessment of the are grouped or related to the same individual geographical structural feature and/or stratigraphic condition. 56 Notes to the Consolidated Financial Statements Communication and EDP equipment Furniture and fixtures Vehicles and production facilities Useful life an asset or liability in a transaction other than a business combination that at 3 years the time of the transaction affects neither accounting nor taxable profit or 10 years loss. Deferred income tax is determined using tax rates (and laws) that have 5 years been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or Depreciation is recognised in the Income Statement as production and selling the deferred income tax liability is settled. and administrative expenses, respectively. The principal temporary differences mainly arise from: The assets’ residual values and useful lives are reviewed, and adjusted if - Exploration costs that have been capitalized for accounting or tax purposes appropriate, at each balance sheet date. and have been expensed for tax or accounting purposes, respectively. - Differences in depreciation rates on property, plant and equipment for tax An asset’s carrying amount is written down immediately to its recoverable and accounting purposes. amount if the asset’s carrying amount is greater than its estimated - Inflation adjustments for tax purposes. recoverable amount. Profit or loss on the disposal of property, plant and equipment is calculated tax credits to the Group are assessed for recognition as deferred tax assets. as the difference between the net proceeds on disposal and the carrying amount at the time of sale. Profit or loss is recognised as other operating Deferred tax liabilities are provided in full, with no discounting. Deferred profit or operating expenses in the Income Statement. tax assets are recognised to the extent that it is probable that the underlying In addition, tax losses available to be carried forward as well as other income deductible temporary differences will be able to be offset against future Lease Contracts All current lease contracts are considered to be operating leases on the basis taxable income. that the lessor bears substantially all the risks and rewards related to the ownership of the leased asset. Payments related to operating leases and other Financial Assets Financial assets are divided into the following categories: loans and rental agreements are recognised in the Income Statement on a straight line receivables; financial assets at fair value through the profit or loss; available- basis over the term of the contract. The Group’s total commitment relating for-sale financial assets; and held-to-maturity investments. Financial assets to operating leases and rental agreements is disclosed in note 27. are assigned to the different categories by management on initial Inventories Inventories comprise crude oil and materials. recognition, depending on the purpose for which the investments were acquired. The designation of financial assets is re-evaluated at every reporting date at which a choice of classification or accounting treatment is available. Crude oil is measured at net realisable value. The net realisable value of All financial assets are recognised when the Group becomes a party to the inventories is stated at sales price less costs incurred to execute the sale. contractual provisions of the instrument. All financial assets are initially Materials are measured at the lower between cost and recoverable amount. recognised at fair value, plus transaction costs, unless they are classified as at Cost is determined using the first-in, first-out (FIFO) method. The cost of materials and consumables is calculated at acquisition price with the fair value through profit or loss. addition of transportation and similar costs. De-recognition of financial assets occurs when the rights to receive cash flows from the investments expire or are transferred and substantially all of the risks Current and Deferred Income Tax The tax expense for the year comprises current and deferred tax. Tax is and rewards of ownership have been transferred. An assessment for impairment is undertaken at each balance sheet date. recognised in the income statement. The current income tax charge is calculated on the basis of the tax laws recognised in the Income Statement when receivable, regardless of how the enacted or substantially enacted at the balance sheet date in the countries related carrying amount of financial assets is measured. where the Company’s subsidiaries operate and generate taxable income. Interest and other cash flows resulting from holding financial assets are Loans and receivables are non derivative financial assets with fixed or Deferred income tax is recognised, using the liability method, on temporary determinable payments that are not quoted in an active market. They are differences arising between the tax bases of assets and liabilities and their included in current assets, except for maturities greater than 12 months after carrying amounts in the consolidated financial statements. However, the the balance sheet date. These are classified as non current assets. The Group’s deferred income tax is not accounted for if it arises from initial recognition of loans and receivables comprise trade receivables, prepayments and other Notes to the Consolidated Financial Statements 57 receivables and cash and cash equivalents in the balance sheet. They arise At date of issue, the fair value of the liability component is estimated using when the Group provides money, goods or services directly to a debtor with the prevailing market interest rate for a similar debt instrument. The liability no intention of trading the receivables. Loans and receivables are subsequently component is accounted for as a financial liability. measured at amortised cost using the effective interest method, less provision for impairment. Any change in their value through impairment or The residual is the difference between the net proceeds of issue and the reversal of impairment is recognised in the Income Statement. liability component (at time of issue) and is the equity component, which is accounted for as an equity instrument. Provision against trade receivables is made when objective evidence is received that the Group will not be able to collect all amounts due to The interest expense on the liability component is calculated applying the it in accordance with the original terms of those receivables. The amount effective interest rate for the liability component of the instrument. The of the write-down is determined as the difference between the asset’s difference between this amount and any repayments is added to the carrying carrying amount and the present value of estimated future cash flows. amount of the liability in the balance sheet. Cash and Cash Equivalents Cash and cash equivalents includes cash in hand, deposits held at call with If a company revises its estimates of payments or receipts, the entity shall adjust the carrying amount of the financial asset or financial liability banks, other short-term highly liquid investments with original maturities (or group of financial instruments) to reflect actual and revised estimated of three months or less, and bank overdrafts. Bank overdrafts are shown cash flows. The Group recalculates the carrying amount by computing within borrowings in the current liabilities section of the Balance Sheet. the present value of estimated future cash flows at the financial instrument’s original effective interest rate. The adjustment is recognised as income or Investments Non current investments relate solely to the cash collateral account required expense in profit or loss. under the terms of the borrowing obtained from the IFC. This investment accrues interests and will be recovered once the borrowing is fully paid. Equity An equity instrument is any contract that evidences a residual interest in the Financial Liabilities Financial liabilities are obligations to pay cash or other financial assets and Equity comprises the following: are recognised when the Group becomes a party to the contractual - “Share capital” representing the nominal value of equity shares. assets of the entity after deducting all of its financial liabilities. provisions of the instrument. - “Share premium” representing the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the The Group has no financial liabilities categorised as at fair value through share issue. profit or loss at the reporting date. Therefore, all other financial liabilities are - “Other reserve” representing the equity element attributable to compound recorded at amortised cost using the effective interest method, with or linked financial instruments and shares granted according to IFRS 2 but interest-related charges recognised as an expense in finance cost in the not issued at year end, as noted above. income statement. - “Reserve for exchange adjustment” representing the differences arising Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the Income Statement over the period from translation of investments in overseas subsidiaries. - “Retained earnings” representing retained profits and losses. Stock Options Plan and Stock Awards The Group operates a number of equity-settled, share-based compensation of the borrowings using the effective interest method. plans comprising share awards payments and stock options plans to certain Finance charges, including premiums payable on settlement or redemption, services received in exchange for the grant of the options is recognised as and direct issue costs are charged to the Income Statement on an accruals an expense. The total amount to be expensed over the vesting period is basis using the effective interest method and are added to the carrying determined by reference to the fair value of the options granted calculated amount of the instrument to the extent that they are not settled in the using the Black-Scholes model, excluding the impact of any non market employees and other third party contractors. Fair value of the employee period in which they arise. vesting conditions (for example, profitability and sales growth targets). Non market vesting conditions are included in assumptions about the Compound Instruments Compound instruments comprise both a liability and an equity component. number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. 58 Notes to the Consolidated Financial Statements It recognises the impact of the revision to original estimates, if any, in the Income Statement, with a corresponding adjustment to equity. The proceeds b) Transactions and Balances Foreign currency transactions are translated into the functional currency received net of any directly attributable transaction costs are credited to share using the exchange rates prevailing at the dates of the transactions. Foreign capital (nominal value) and share premium when the options are exercised. exchange gains and losses resulting from the settlement of such transactions Foreign Currency Translation a) Functional and Presentational Currency The consolidated financial statements are presented in US Dollars, which is the Group’s presentational currency. Items included in the financial statements of each of the Group’s entities are and from the translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in other operating profit or other operating expenses. measured using the currency of the primary economic environment in which the entity operates (the functional currency). The functional currency c) Group Companies The results and financial position of all the Group entities (none of which has of Group companies incorporated in Bermuda (including the parent the currency of a hyper-inflationary economy) that have a functional currency company) is the US Dollar. different from the presentation currency are translated into the presentation For the Argentine subsidiaries the functional currency is the Argentine Peso. currency as follows: Sales are predominantly based on US Dollar pricing but influenced by the (a) assets and liabilities for each balance sheet presented are translated at local government policies. However, a significant proportion of operating the closing rate at the date of that balance sheet; costs (particularly labour) arises in Argentine Peso. Accordingly, changes (b) income and expenses for each income statement are translated at average in the exchange rates between these currencies and the US Dollar will impact exchange rates (unless this average is not a reasonable approximation of on the Group’s reported results. Subsidiaries hold certain monetary financial the cumulative effect of the rates prevailing on the transaction dates, in which liabilities denominated in currencies other than their functional currency, case income and expenses are translated at the rate on the dates of the in particular US Dollar denominated financial loans, and to a lesser extent, transactions); and cash and cash equivalents. Monetary assets and liabilities are converted (c) all resulting exchange differences are recognised as a separate into functional currencies at the closing rate. The resultant differences are component of equity. accounted for in the Income Statement in accordance with IFRS. Effective from 1 January 2008, the Chilean subsidiaries changed the functional investment in foreign operations, and of borrowings are taken to shareholders’ currency from Chilean Peso to the US Dollar. equity. On disposal of a foreign operation the cumulative translation As there has been a change in the underlying transactions, conditions and transferred to the Income Statement as part of the gain or loss on disposal. differences (including, if applicable, gains and losses on related hedges) are On consolidation, exchange differences arising from the translation of the net events, IAS 21 requires the change to be accounted for prospectively from the date of change and the comparatives have not been restated. In 2008 there have been several circumstances that lead to change the Accounting Estimates and Assumptions It should be noted that accounting estimates and assumptions are used in preparing the financial statements. Although these estimates are based on functional currency from the Chilean Peso to the US Dollar in order to better management’s best knowledge of current events and actions, actual results represent the transactions and balances of the Group’s Chilean subsidiaries. may differ from them. The most significant changes occurred during the year were driven by Estimates and judgments are continually evaluated and are based on the international financial crisis which had an impact on the ability historical experience and other factors, including expectations of future of the subsidiaries to finance their own operations from domestic financial events that are believed to be reasonable under the circumstances. institutions. The Group changed its expectations to finance its capital expenditure program through its current or other borrowers and in US Dollars. The key estimates and assumptions used in these consolidated financial statements are noted below: Due to the abovementioned, the importance of US Dollars in the operations increased in 2008 and will continue to do so because GeoPark Chile increased - The Group adopts the successful efforts basis of accounting. The Board working with international suppliers rather than local ones. In 2008 most of Directors of the Company makes assessments and estimates regarding of the operating costs were influenced by the US Dollar. whether an exploration asset should continue to be carried forward as Notes to the Consolidated Financial Statements 59 an intangible asset not yet determined or when insufficient information - The total calculation of the decommissioning provision is estimated by the exists for this type of cost to remain as an asset. In making this assessment Group’s engineers, based on individual well filling and coverage (note 23). the Directors take professional advice from qualified independent experts (note 14). - As detailed in the relevant accounting policies the selection of functional currencies for each entity in the Group is dependent on the primary economic - Cash flow estimates for the Group’s impairment assessments require environment in which they operate which is determined by considering a assumptions about two primary elements-future prices and reserves. number of factors. As detailed the Board consider that the primary economic Estimates of future prices require significant judgments about highly uncertain environment in which the Argentinean subsidiary operates is the Argentine future events. Historically, oil and gas prices have exhibited significant Peso and for the Chilean subsidiaries is the US Dollar. The Board considers this volatility. Forecasts for oil and gas revenues are based on prices derived from assessment to be a significant judgement as it gives rise to exchange future price forecasts amongst industry analysts and the Group’s assessments. differences as detailed in note 30. Our estimates of future cash flows are generally based on assumptions of long-term prices and operating and development costs. Given the significant assumptions required and the possibility that actual conditions will differ, Cash Flow Statement The Cash Flow Statement shows the Group’s cash flows for the year for management considers the assessment of impairment to be a critical operating, investing and financing activities and the change in cash and cash accounting estimate. equivalents during the year. The process of estimating reserves is complex. It requires significant Cash flows from operating activities are computed from the results for the judgements and decisions based on available geological, geophysical, year adjusted for non cash operating items, changes in net working capital, engineering and economic data. The estimation of economically recoverable and corporation tax. Tax paid is presented as a separate item under oil and natural gas reserves and related future net cash flows was performed operating activities. based on the Reserve Report dated March 2008 prepared by Degoyler and MacNaughton, an international consultancy to the oil and gas industry based The following chart describes non cash transactions related to the Cash Flow in Dallas, and updated for subsequent changes by the Group’s management. Statement: It incorporates many factors and assumptions including: • expected reservoir characteristics based on geological, geophysical and 31 December 2008 engineering assessments; • future production rates based on historical performance and expected future operating and investment activities; Movements Movements Other from Derived from Arising from Non Cash Consolidated Movements • future oil and gas prices and quality differentials; Balance Sheet Consolidated Balance Sheet Translation Currency Movements (*) Cash Flow Statement • assumed effects of regulation by governmental agencies; and Items • future development and operating costs. Property, plant and equipment Management believes these factors and assumptions are reasonable based Intangible assets on the information available at the time the estimates are prepared. However, these estimates may change substantially as additional data from ongoing Prepaid taxes Inventory development activities and production performance becomes available and Trade receivables as economic conditions impacting oil and gas prices and costs change. Prepayment and other receivables - The advances received under the gas pre-sale agreement entered into Investments with Methanex Corporation bears interest at a rate of LIBOR (note 22). Cash and cash 35,933 13,329 (806) (911) 6,129 809 62 332 338 471 48 21 244 - (26,319) 25,601 - - - - (62) 9,946 39,268 (335) (863) 6,150 1,053 - The Board of Directors considers that the advances are at fair value as a result equivalents (3,000) (43) - (3,043) of the security in the natural gas supply which Methanex have obtained Provision for through the agreement. decommissioning Borrowings (284) - (18,939) (1,266) - The fair value of the stock option rights were determined based upon the Trade accounts payable Black-Scholes model. For this purpose the Group has used appropriate risk Deferred tax free rates and volatilities of comparable oil and gas companies traded on AIM. Other liabilities Details of these assumptions and the result charged to the Income Statement Equity (2,820) (276) (1,335) (27,891) (83) - (44) (18) are provided in note 25. 718 62 - 276 - (276) 434 (20,143) (2,903) - (1,379) (28,185) (*) Mainly transfers, increase in the asset retirement obligation and deferred tax. 60 Notes to the Consolidated Financial Statements 31 December 2007 The property, plant and equipment of a segment include the assets that are Movements Movements Other from assets that are related directly to the operation of the segment, including Derived from Arising from Non Cash Consolidated inventory and accounts receivable. Movements used directly in the segment. The current assets of a segment include Balance Sheet Consolidated Balance Sheet Translation Currency Movements (*) Cash Flow Statement The liabilities of a segment include liabilities that are related directly to the operation of the segment, including trade payables and other debts. 7,203 24,950 Segment Areas (Geographical Segments) 3,890 (11) Amounts in US$ ’000 Argentina Chile Corporate Total 23,471 10,358 3,487 (11) 1,214 853 31 2,079 (71) (462) 403 - (80) (110) (18) - (16,197) 15,054 - - - - - 1,134 743 2008 Revenue Gross profit / (loss) 13 Profit / (Loss) before tax (79) 2,000 Profit / (Loss) for the year Capital expenditure 1,066 (306) (4,503) (4,503) 879 (610) 37,310 19,541 13,248 12,972 57,263 (6,762) (25,460) (532) - (25,992) Depreciation Total assets 13,842 109,834 (1,171) (18,236) (4,785) (331) 8,501 - (517) 477 29 881 1,143 (28) Liabilities 79 - 2 (2) (18,674) Cash flows from operations (4,308) Cash flows from investing (300) Cash flows from financing (1,648) 9,380 Employees (average) 63 (6,756) (4,371) (691) (62,283) 24,121 (57,242) 18,667 97 - - (4,818) (4,818) - (68) 6,131 (271) (4,554) - 22,675 1 38,376 19,235 3,927 3,651 58,142 (7,440) 129,807 (69,310) 15,196 (57,933) 39,694 161 Items Property, plant and equipment Intangible assets Prepaid taxes Legal deposit Inventory Trade receivables Prepayment and other receivables Investments Cash and cash equivalents Provision for decommissioning Borrowings Trade accounts payable Other liabilities Equity (*) Mainly transfers, increase in the asset retirement obligation and deferred tax. Amounts in US$ ’000 Argentina Chile Corporate Total Cash flows from investing activities include payments in connection with the purchase and sale of property, plant and equipment and cash flows relating to the purchase and sale of enterprises. 2007 Revenue Gross profit (loss) Loss before tax Cash flows from financing activities include changes in Shareholders’ equity, Loss for the year and proceeds from borrowings and repayment of loans. Capital expenditure Cash and cash equivalents include bank overdraft and liquid funds with a term of less than three months. Depreciation Total assets Liabilities Cash flows from operations Certain reclassification have been made to the cash flows reported in 2007 Cash flows from investing to ensure that the presentation is consistent with the 2008 balances. Cash flows from financing Employees (average) Segment Information The Group explores and operates in two different countries: Argentina and Chile. As operations are similar in both countries, the primary segments Note 3 of the Group have been made on a geographical basis, based on the location Net Revenue of the assets (which is similar to the location of the customers). Segment revenue and costs include items that are attributable directly to the relevant Amounts in US$ ’000 segment and items that can be distributed among the segments. Non Sale of crude oil distributed items include the Group’s administration, financial income, Sale of gas expenses and taxes. 1,341 (767) (7,250) (7,250) 4,735 (564) 14,752 (8,911) (3,347) (4,700) 2,751 49 9,687 3,968 (67) (69) 34,044 (1,452) 58,620 (36,635) 4,946 (34,021) 13,598 22 - - (6,489) (6,489) 4 (68) 4,890 (110) (3,219) (2,000) - 1 11,028 3,201 (13,806) (13,808) 38,783 (2,084) 78,262 (45,656) (1,620) (40,721) 16,349 72 2008 8,901 29,475 38,376 2007 3,123 7,905 11,028 Notes to the Consolidated Financial Statements 61 Note 4 Production Costs Amounts in US$ ’000 Wages and salaries Depreciation Royalties Gas Plant lease Insurance costs Other costs Note 5 Depreciation Amounts in US$ ’000 Oil and gas properties Furniture, equipment and vehicles Production facilities and machinery Buildings and improvements Depreciation, property plant and equipment Recognised as follows: Production costs Exploration costs Administrative expenses Depreciation total Note 6 Employees Average number of employees Amounts in US$ ’000 Wages and salaries (*) Social security charges Shared-based payment 2008 2,173 7,108 2,173 2,147 469 5,071 19,141 2008 4,579 241 2,486 134 7,440 7,108 55 277 7,440 2008 161 4,876 666 816 6,358 Board of Directors’ and key managers’ remuneration Salaries and fees Shared-based payment Other benefits in kind Note 7 Exploration Costs Amounts in US$ ’000 Wages and salaries Other services Relinquishment of Del Mosquito Block (a) Write off of unsuccessful efforts (b) 2008 2007 1,601 644 117 2,362 1,569 1,728 84 3,381 2008 1,406 1,616 1,149 273 4,444 2007 1,220 874 - 4,522 6,616 (a) See note 14. (b) The 2007 write offs relate to two exploratory wells in Del Mosquito during that period. These have been included within Exploration costs within 2007 1,552 1,815 486 400 250 3,324 7,827 2007 810 192 965 117 2,084 the Income Statement in 2007. Additional costs were incurred during 2008 in relation to these exploratory wells. During 2008 there have not been any unsuccessful exploratory wells. 1,815 67 202 2,084 2007 72 4,360 Note 8 Administrative Costs Amounts in US$ ’000 Administrative expenses Stock awards and ESOP (note 25) Note 9 Financial Income 492 Amounts in US$ ’000 2,047 6,899 Exchange difference Interest receivable 2008 5,509 1,479 6,988 2007 5,576 4,072 9,648 2008 281 392 673 2007 1,077 959 2,036 (*) The 2008 amount does not include US$ 1,632,000 (2007 nil) of salaries paid for drilling hours that were capitalised. In 2007, when the functional currency was the Chilean Peso, the exchange difference arose from the net exposure related to the existence of financial liabilities in US Dollars mainly in Chile. 62 Notes to the Consolidated Financial Statements Note 10 Financial Expenses Amounts in US$ ’000 Bank charges and other financial costs Exchange difference Interest and amortisation of debt issue costs 2008 65 1,654 2,209 3,928 211 197 1,854 2,262 The Group has significant tax losses available which can be utilised against future taxable profit in those countries as set out below: 2007 Amounts in US$ ’000 Argentina Total tax losses at 31 December 2008 13,144 13,144 2007 6,066 6,066 At the balance sheet date deferred tax asset in respect of tax losses in Argentina have not been recognised as there is insufficient evidence of future In 2008, both the Chilean Peso and the Argentine Peso weakened against taxable profits before the statute of limitation of these tax losses causes the US Dollar. The Group’s exchange differences arose from the net exposure them to expire. related to the existence of financial liabilities in US Dollars in Argentina and from the net exposure related to the existence of financial assets in Chilean Expiring dates for tax losses accumulated at 31 December 2008 are: Expiring date Amounts in US$ ’000 Pesos in Chile. Note 11 Income Tax Amounts in US$ ’000 Current tax Deferred tax 2010 2011 2012 2013 2008 - (276) (276) 2007 (2) - (2) Note 12 Deferred Income Tax The tax on the Group’s profit before tax differs from the theoretical amount Amounts in US$ ’000 that would arise using the weighted average tax rate applicable to profits Deferred tax at 1 January of the consolidated entities as follows: Amounts in US$ ’000 Profit / (loss) before tax Results in countries where no income tax is paid Tax losses where no deferred income tax is recognised Taxable profit / (loss) Effective tax rate in respect of taxable profit. Income tax calculated at statutory tax rate Expenses not deductible for tax purposes Difference between functional currency and tax currency Non taxable profit Income tax 2008 3,927 4,818 4,503 13,248 15% 1,987 158 (1,862) (7) 276 Exchange rate adjustment Movement in deferred tax 2007 (13,806) 6,489 Deferred tax at 31 December Deferred tax asset (liability) relates to: Taxable losses (*) Property, plant and equipment 7,250 Other temporary differences (*) In Chile, taxable losses have no expiration date. (67) 15% (10) 28 - (16) 2 The tax rate in Bermuda where GeoPark Holdings Limited is registered is 0%. Income tax rates in those countries where the Group operates ranges from 15% to 35%. 748 1,885 6,590 3,921 2007 15 - - 15 - (17) 32 15 2008 15 - (276) (261) 3,669 (4,091) 161 (261) Notes to the Consolidated Financial Statements 63 Note 13 Earnings / (Loss) per Share Amounts in US$ ’000 Numerator: Profit / (loss) for the year Denominator: In Argentina, on 30 December 2008 the Group relinquished 38.43% of the Del Mosquito Block back to the government in accordance with the terms of the Del Mosquito licence, effectively from 1 January 2009. This area includes 2008 2007 135 square kilometres of seismic surveys which represents 33.75% of the total seismic surveys (400 square kilometres). The relinquished seismic survey 3,651 (13,808) was charged within the income statement to Exploration costs. Weighted average number of shares During 2008, the 3D seismic registered in the Fell Block, relating to the areas used in basic EPS 32,984,875 30,683,536 that have been developed (243 square kilometres) has been transferred Earnings / (loss) after tax per share (US$) - basic 0.11 (0.45) to property, plant and equipment within “Oil & gas properties” and is being depreciated considering the unit of production method. Amounts in US$ ’000 Weighted average number of shares 2008 2007 Included in the carrying amount are 8 wells for US$ 22,013,000 that form part of the drilling campaign in Chile, 1 well in Argentina for US$ 752,000 and used in basic EPS 32,984,875 30,683,536 4 wells that formed part of the workover campaign in Chile for US$ 1,448,000. Effect of dilutive potential common shares Stock awards to employees at US$ 0.001 Stock option at £4.00 Executive Directors stock option at £3.20 Non Executive Directors fees (note 21) Stock awards to Non Executive Directors (note 21) Weighted average number of common shares - - 48,425 10,938 10,397 Four of the Chilean wells entered into production in 2009. It is planned that 613,380 the remaining wells will be refractured or retested in 2009 or 2010. Therefore, 1,218,380 the carrying amounts of these wells has been retained in Intangible assets. 306,690 11,716 21,876 As detailed in the Group’s accounting policies, where there are indicators that an exploration asset may be impaired, the exploration and appraisal assets are grouped with all development/producing assets belonging to the for the purposes of diluted earnings per share 33,054,635 32,855,578 same geographic segment to form the Cash Generating Unit (CGU) for Earnings / (loss) after tax per share (US$) - diluted 0.11 (0.45) impairment testing. The combined cost of the CGU is compared against the Note 14 Intangible Assets CGU’s net present value and any resulting impairment loss is written off to the Income Statement. The Group has the exclusive right to explore and exploit the Fell Block. The exploration phases are divided in four exploration periods, which will last for Amounts in US$ ’000 Exploration and evaluation assets six years in total, beginning on 25 August 2004. For exploitation, the CEOP Carrying amount at 1 January 2007 Additions Exchange rate adjustment Write off of unsuccessful efforts Transfers to property, plant and equipment Carrying amount at 31 December 2007 Additions Exchange rate adjustment Write off of unsuccessful efforts (note 6) Relinquishment of Del Mosquito Block Transfers to property, plant and equipment Carrying amount at 31 December 2008 13,475 29,472 grants the Contractor a period of 35 years, beginning on 25 August 1997. The exploration period ends in May 2011. Once oil or gas is discovered, that area 462 of the block which is to be produced may be converted into an exploitation (4,522) block and the Group has the right to exploit it until the end of the concession. (15,054) 23,833 40,690 (338) (273) To do this, the Contractor must declare the commerciality of the field, by means of a written letter to the Ministry of Mining. The exclusive right to produce, explore and develop hydrocarbons in the Del Mosquito Block was granted for a period of 25 years, commencing in April (1,149) 1991, with a possible extension of 10 years. This possible extension was not (25,601) considered to impact the calculation of the net present value of the CGU’s 37,162 related to Del Mosquito Block. Included in the carrying amounts are 265 (400 in 2007) square kilometres of 3D seismic surveys registered in Del Mosquito Block for US$ 2,107,315 Net present value is based upon calculations carried out by independent experts commissioned by the Group. On 31 December 2008 net present value (US$ 3,471,000 in 2007) and 450 (680 in 2007) square kilometres of 3D seismic calculations were carried out using a discount factor of 10 per cent based on surveys registered in the Fell Block for US$ 6,578,313 (US$ 8,669,000 in 2007). the Reserve Report dated March 2008 prepared by DeGolyer and MacNaughton and updated for subsequent changes by the Group’s management. No impairment was considered necessary as a result of these calculations. 64 Notes to the Consolidated Financial Statements Furniture, Production Buildings Oil & Gas Equipment Facilities and and Construction Properties and Vehicles Machinery Improvements in Progress 634 (1) 229 (37) - - 825 (37) 162 - - - 950 (175) (192) 3 13 - (351) (241) 26 (566) 474 384 3,683 221 3,370 - 5,190 4,890 17,354 (132) 3,029 - 5 6,520 26,776 (40) (965) (45) - (195) (1,245) (2,486) 38 (3,693) 16,109 23,083 330 3 79 - 1,022 - 1,434 (23) 3 - 25 183 1,622 (34) (117) (2) - - (153) (134) 13 (274) 717 4 5,419 - (5,707) - 433 (14) 9,736 (66) - (6,900) 3,189 - - - - - - - - - 1,281 1,348 433 3,189 Total 9,995 78 10,454 (37) - 15,054 35,544 (660) 18,170 (66) 25,601 - 78,589 (1,759) (2,084) (7) 13 - (3,837) (7,440) 328 (10,949) 31,707 67,640 Note 15 Property, Plant and Equipment Amounts in US$ ’000 Cost at 1 January 2007 Exchange rate adjustment Additions Disposals Transfers Transfers (from intangible assets) Cost at 31 December 2007 Exchange rate adjustment Additions Disposals Transfers (from intangible assets) Transfers Cost at 31 December 2008 Depreciation and write-down at 1 January 2007 Depreciation (note 5) Exchange rate adjustment Disposals Transfers Depreciation and write-down at 31 December 2007 Depreciation (note 5) Exchange rate adjustment 4,631 (149) 1,357 - (505) 10,164 15,498 (454) 5,240 - 25,571 197 46,052 (1,510) (810) 37 - 195 (2,088) (4,579) 251 Depreciation and write-down at 31 December 2008 (6,416) Carrying amount at 31 December 2007 Carrying amount at 31 December 2008 13,410 39,636 As of 31 December 2008, the Company has pledged, as security for a mortgage obtained for the acquisition of the operating base in Chile, assets amounting to US$ 520,000 (US$ 667,000 in 2007). See note 22. The additions in “Construction in progress” principally relate to the acquisition of tubing and casing amounting to US$ 2,813,512, a compressor amounting to US$ 628,731, the construction of a gathering system station in Nika Sur for US$ 1,222,583 and a gathering system station in Monte Aymond for US$ 1,369,196 as well as some other facilities in Chile. Notes to the Consolidated Financial Statements 65 Note 16 Subsidiary Undertakings Note 17 Prepaid Taxes In August 2008, GeoPark Holdings Limited established a new company Amounts in US$ ’000 located in Chile named GeoPark Magallanes Limitada which started VAT operations in September 2008. Also in Chile, the Group acquired a 30% interest in the Tranquilo Block Other prepaid taxes Total prepaid taxes Classified as follows: (with Pluspetrol, IPR and Manas) and was awarded, following with Chilean Current bidding round, a 42% interest in the Otway Block (with Wintershall and Non current Methanex). Both consortia have requested GeoPark to be the operator. Total prepaid taxes The Tranquilo participation has been approved by the Chilean government and final approval of the Otway Block is in process. GeoPark Magallanes Limitada will hold the Group’s interests in the Tranquilo and Otway Blocks. Note 18 Inventory In September 2007, GeoPark Holdings Limited established a new company located in Chile called Servicios Southern Cross Limitada, which started Amounts in US$ ’000 operations in 2008. Crude oil Materials and spares Details of the subsidiaries and jointly controlled assets of the Company are set out below: 2008 5,651 500 6,151 2,688 3,463 6,151 2007 6,360 597 6,957 3,889 3,068 6,957 2008 464 707 1,171 2007 351 1,731 2,082 Name and Registered Office Interest Trade Receivables and Prepayment and Other Receivables Ownership Note 19 Subsidiaries GeoPark Argentina Limited - Bermuda GeoPark Argentina Limited - Argentine Branch GeoPark Chile Limited - Bermuda GeoPark Chile Limited - Chilean Branch Servicios Southern Cross Limitada GeoPark Magallanes Limitada Jointly controlled assets Tranquilo Block Otway Block (*) Indirectly owned. 100% 100% (*) 100% 100% (*) 100% 100% (*) 30% 42% Amounts in US$ ’000 Trade accounts receivable To be recovered from joint venturer Prepayments and other receivables 2008 8,434 312 1,071 9,817 2007 2,305 - 574 2,879 Trade receivables that are aged by less than three months are not considered impaired. As of 31 December 2008, trade receivables of US$ 145,000 (US$ 50,000 in 2007) were aged by more than 3 months, but not impaired. These relate to customers for whom there is no recent history of default. The following chart illustrates the Group structure: GeoPark Holdings Limited GeoPark Chile Limited - Bermuda GeoPark Argentina Limited - Bermuda Servicios Southern Cross Limitada GeoPark Chile Limited - Chilean Branch GeoPark Magallanes Limitada GeoPark Argentina Limited - Argentine Branch 66 Notes to the Consolidated Financial Statements As of 31 December 2008, trade receivables of US$ 21,256 were impaired 2007 Loans and Receivables Total and provided for. The individually impaired receivables mainly relate to wholesalers, which are in unexpectedly difficult economic situations. Assets as per Balance Sheet Trade receivables Also prepayments and other receivables of US$ 12,259 were impaired and Investments provided for. The ageing of these receivables is over 12 months. Cash and cash equivalents 2,305 2,079 8,710 2,305 2,079 8,710 13,094 13,094 Movements on the Group provision for impairment are as follows: Amounts in US$ ’000 At 1 January Provision for receivables impairment The costs providing for impaired receivables have been included in ’Administrative costs’ in the income statement. 2008 2007 Other Financial Liabilities Total - 34 34 Liabilities as per Balance Sheet Trade payables Borrowings Other liabilities 8,449 34,741 285 8,449 34,741 285 43,475 43,475 The credit period for trade receivables is 30 days. The maximum exposure Credit Quality of Financial Assets The credit quality of financial assets that are neither past due nor impaired to credit risk at the reporting date is the carrying value of each class of can be assessed by reference to external credit ratings (if available) or receivable. The Group does not hold any collateral as security. to historical information about counterparty default rates: The carrying value of trade receivables is considered to represent a Amounts in US$ ’000 2008 2007 reasonable approximation of its fair value due to its short term nature. Trade receivables Counterparties with external credit rating (Moody’s) Note 20 Financial Instruments by Category Amounts in US$ ’000 Loans and Receivables Total A2 Ba1 Baa1 Counterparties without external credit rating Group1 (*) Group2 (*) Total trade receivables 690 7,498 94 152 - 297 1,659 144 149 56 8,434 2,305 2008 Assets as per Balance Sheet Trade receivables Investments (*) Cash and cash equivalents 2008 Liabilities as per Balance Sheet Trade payables Borrowings Other liabilities 8,434 2,141 5,710 8,434 2,141 5,710 Cash at Bank and Investments Counterparties with external credit rating (Moody’s) 16,285 16,285 AAA 7,848 10,786 Other Financial Liabilities Total hand. The rest of the balance sheet item ’cash and cash equivalents’ is cash on (*) Group 1 - new customers (less than 6 months). Group 2 - existing customers (more than 6 months) with no defaults in the past. 11,269 53,680 1,492 66,441 11,269 53,680 1,492 66,441 (*) Non current investments relate solely to the cash collateral account required under the terms of the borrowing obtained from the IFC. This investment accrues interests and will be recovered once the borrowing is fully paid. Notes to the Consolidated Financial Statements 67 Financial Liabilities - Contractual Undiscounted Cash Flows The table below analyses the Group’s financial liabilities into relevant GeoPark Common Shares Issued Shares Closing US$ (’000) maturity groupings based on the remaining period at the balance sheet to Shares History Date (millions) (millions) Closing the contractual maturity date. The amounts disclosed in the table are the Shares outstanding contractual undiscounted cash flows. at the end of 2006 Issue of shares to 30.7 Between Between non Executive Directors 2007 0.01 30.7 Less than 1 and 2 2 and 5 Over Shares outstanding Amounts in US$ ’000 1 Year Years Years 5 Years at the end of 2007 Issue of shares to At 31 December 2008 Borrowings Trade accounts payable Other liabilities At 31 December 2007 Borrowings Trade payable Other liabilities 13,403 11,269 1,492 26,164 13,448 8,449 285 16,818 26,472 167 non Executive Directors 2008 - - - - - - Placing Share awards to May 2008 0.03 3.08 16,818 26,472 167 officers, employees and consultants July 2008 0.60 34.4 11,149 13,543 301 Shares outstanding - - - - - - at the end of 2008 34.4 31 31 31 31 34 34 34 30.7 30.7 33.8 22,182 11,149 13,543 301 On 9 May 2008, the Company issued 3,080,000 ordinary shares. Each share Note 21 Share Capital Issued share capital Common stock (amounts in US$ ’000) The share capital is distributed as follows: Common shares, of nominal US$ 0.001 Total common shares in issue Authorised share capital US$ per share Number of common shares (US$ 0.001 each) Amount in US$ has been placed at a price of 394 pence per share, generating a share premium of US$ 23,612,067. Included in the placing were a new strategic block of Chilean investors and pension funds, the International Finance Corporation (“IFC”) of the World Bank, and certain London institutional investors. The Placing was limited to 10% of the current issued share capital 2008 34 2007 of the Company. 31 34,399,186 34,399,186 30,688,202 the acquisition and work program for the Company’s farm-in on the new 30,688,202 Tranquilo block in Chile and to accelerate the investment program on The gross proceeds of the Placing has been used principally to fund the Company’s Fell Block in Chile. 0.001 0.001 In accordance with the requirements of IAS 32, the costs associated with the issue of these shares and their admission to AIM of US$ 940,404 have been deducted from equity. 5,171,969,000 5,171,949 5,171,969,000 5,171,949 During 2008, the Company issued 48,219 (19,235 in 2007) shares to Non Executive Directors in accordance with contracts as compensation. Details regarding the share capital of the Company are set out below: Shares are issued at average price for the period, generating a share premium of US$ 307,000 (US$ 119,000 in 2007). Common Shares As of 31 December 2008 the outstanding common shares confer the following rights on the holder: - the right to one vote per share; Other Reserve As stated above, the Company has issued 48,219 shares regarding Non Executive Directors fees paid in shares. Additionally, 23,530 shares have been granted to Non Executive Directors and have not been issued as of 31 - ranking pari-passu, the right to any dividend declared and payable December 2008 resulting in an amount of US$ 150,000 being included within on common shares provided that no dividends shall be declared or paid on Other reserve. The 38,470 shares granted in 2007 have been issued during Common shares; 2008 resulting in a decrease of US$ 235,000 of Other reserve. 68 Notes to the Consolidated Financial Statements The accounting treatment of the shares is in line with the Group’s policy on The financing is structured as a gas pre-sale agreement with a six year share based payments. Note 22 Borrowings pay-back period and an interest rate of LIBOR flat. In each year, the Group will repay principal up to an amount equal to the loan amount multiplied by a specified percentage. Subject to that annual maximum principal repayment amount, the Group will repay principal and interest in an amount equal to the amount of gas specified by the price payable to the Chilean Government for such gas. Amounts in US$ ’000 2008 2007 Outstanding amounts as of 31 December As of 31 December 2007, US$ 13,681,000 have been drawn-down (which International Finance Corporation Methanex Corporation Banco de Crédito e Inversiones 16,245 36,898 537 20,373 13,675 according to IAS 32 has been recorded net of transaction costs at US$ 13,618,000). During 2008, the remaining amount has been drawn-down 693 for development and investing activities on the Fell Block. Classified as follows: Non current Current 53,680 34,741 Additionally, GeoPark Chile acquired a facility to establish its operational base 42,253 11,427 29,958 in the Fell Block. This facility was acquired though a mortgage loan granted 4,783 by the Banco de Crédito e Inversiones (BCI), a Chilean private bank (note 15). The loan was granted in Chilean pesos and is repayable over a period of 8 On 12 December 2006, the Group entered into a loan agreement for an years. The interest rate applicable to this loan is 6.6%. amount of US$ 20,000,000 with the International Finance Corporation (“IFC”), the private sector arm of the World Bank Group, to partially finance the The carrying value of these financial instruments is considered to represent 2007 Group investment program. The IFC is also a shareholder in the Group. a reasonable approximation of fair value for 2007 but changes in the international credit markets had affected and reduced the fair value of these Loan disbursements made on 27 December 2006 were US$ 17,000,000 financial instruments in 2008. The fair value of these financial instruments (which according to IAS 39 has been recorded net of transaction costs at at 31 December 2008 amounts to US$ 45,258,000. US$ 16,505,000). The remaining US$ 3,000,000 were disbursed by the IFC in January 2007. This loan facility has a one year grace period and it is payable in ten consecutive half year installments commencing on January 2008. Note 23 Provision for Decommissioning The interest rate applicable to this loan is LIBOR plus 3 per cent. In relation to the IFC loan, the Company has pledged the shares of GeoPark Argentina Ltd. and GeoPark Chile Ltd. as collected security. Under the IFC facility the Group has committed to comply with some financial covenants. Failure to comply with those covenants may result in total or partial acceleration of any outstanding under the loan agreement. During 2007 the Group requested and was granted a waiver for some of the Amounts in US$ ’000 At 1 January 2007 Additional provisions Unwinding of discount At 31 December 2007 Additional provisions Unwinding of discount At 31 December 2008 US$ ’000 93 1,143 28 1,264 718 (434) 1,548 financial covenants which was in place in 2007 and 2008. This waiver was The provision for decommissioning relates to the estimation of future requested pursuant to the agreement entered into with Methanex and the disbursements related to the abandonment and decommissioning of oil and acquisition of a facility through a mortgage as explained below. gas wells. This provision will be utilised when the related wells are fully In 2007, the Group, through its subsidiary GeoPark Chile Limited, entered into an agreement with Methanex Corporation (the worlds largest methanol producer), for a US$ 40,000,000 financing facility for development and investing activities on the Fell Block. depleted. Notes to the Consolidated Financial Statements 69 Note 24 Trade Accounts Payable Amounts in US$ ’000 Trade payables at the grant date. The vesting date of these stock options was 15 May 2008 and they will expire in five years on 15 May 2013. The stock options give no voting rights to the holders until they are exercised and converted 2008 11,269 2007 into common shares when they will rank pari-passu with all existing common 8,449 shares. The awards will vest in full in the event of a takeover, change of control or winding up of the Company. None of these options has been The average credit period (expressed as creditor days) during the year ended exercised since the stock price has been below the exercise price since their 31 December 2008 was 52 days (2007: 62 days). vesting period started. The fair value of these short term financial instruments are not individually ii) to the Executive Directors 306,690 stock options at an exercise price of determined as the carrying amount is a reasonable approximation of fair value. £3.20 and 613,380 at an exercise price of £4.00. The vesting conditions Note 25 Share Based Payments of these options are equal to those described in i). None of these options has been exercised during 2008. The fair value of the options granted was calculated using the Black-Scholes model. Due to the short trading history of the Company, expected volatility IPO Award Program and Executive Stock Option Plan In 2006, the Group established an IPO Award Program and Executive Stock was determined by comparison to a sample of AIM listed oil and gas companies with a similar market capitalisation to the Group but a longer Option plan. These schemes were established to incentivise the Directors, trading history. senior management and employees, enabling them to benefit from the increased market capitalisation of the Company. The expected life used in the model has been adjusted, based on The costs for these Programs are expensed in the Administrative costs line restrictions and behavioural considerations. included in the Income Statement. Details of these costs are described in the following table and explanations: The main inputs used in the model to calculate the fair value of the options management’s best estimate, for the effects of non transferability, exercise under the Executive stock option plan are the followings: Amounts in US$ ’000 Stock awards (a) Stock option plan (b) 2008 687 792 1,479 2007 1,995 2,077 4,072 Grant date share price (a) Corresponds to 613,380 IPO Awards that were granted to all of the Group’s Exercise price employees and certain consultants at the IPO date (May 2006). The Awards Expected volatility vested on 15 May 2008, the second anniversary of admission to AIM. On 3 July Vesting period 2008, the Company issued 602,000 shares for nominal value of 0,001 each, corresponding to the total IPO awards vested which are held in a Beneficiary Expected life Risk free interest rate Trust. There are 11,380 awards that did not vest and were cancelled since they Fair value of the option corresponded to employees that had left the Group before vesting date. Number of options Directors, Senior Management and Executive Directors Eligible Employees £3.20 £3.20 55% 2 years 4 years 4.73% £1.50 306,690 £3.20 £4.00 55% 2 years 4 years 4.73% £1.25 1,218,380 During 2008, 85,000 of these shares were sold by the employees at a No stock options have been granted during 2007. weighted average price of £4.1675 per share. The shares held in the employee Beneficiary Trust rank pari-passu with GeoPark’s ordinary shares. New Performance-Based Employee Long Term Incentive Program During 2008 GeoPark Shareholders voted to authorize the Board to use up (b) On admission to AIM the Company granted: to 12% of the issued share capital of the Company at the relevant time for the i) 605,000 stock options to the senior management and some eligible Considering the previously issued IPO Awards, the total share capital being employees. The exercise price of these stock options is £ 4.00 (125 per cent of awarded to employees will be approximately 14%. purposes of the Performance-based Employee Long Term Incentive Plan. placing price), and they can be exercised as long as the holder continues to be an employee of the Group or maintains the consultancy role they had 70 Notes to the Consolidated Financial Statements The 2008 Program consisted of Stock Awards, with all employees eligible Note 27 and with a vesting period of 4 years. Stock Awards will be determined Commitments for each employee in accordance with a formula and procedure based on: recruitment bonus and entry into the Company and value added and performance bonus. Specific Award amounts have been reviewed and (a) Royalty Commitments In Argentina, crude oil production accrues royalties payable to the Provinces approved by the Executive Directors and the Remuneration Committee of Santa Cruz and Mendoza equivalent to 12 per cent on estimated value of the Board of Directors. at mouth of well of those products. This value is equivalent to the final sales Further details of the Plan can be found in the Director’s Remuneration Report on page 46. price less transport, storage and treatment costs. In Argentina crude oil sales accrue private royalties payable to EPP Petróleo S.A. (2.5 per cent on invoiced amount of crude oil obtained from wells at Other Share Based Payments As it is mentioned in note 21, the Company granted 14,044 shares at “Del Mosquito”, Province of Santa Cruz, Argentina) and to Occidental Petroleum Argentina Inc, formerly Vintage Argentina Ltd. (8 per cent on average price for each three months period for services rendered by the Non invoiced amount of crude oil obtained from wells at “Loma Cortaderal” and Executive Directors of the Company. Fees paid in shares were directly “Cerro Doña Juana”, Province of Mendoza, Argentina). expensed in the administrative expenses line in the amount of US$ 104,405. Note 26 Interests in Joint Ventures The Group has interests in two joint ventures, which are involved in the exploration of hydrocarbons in Chile (Note 16). In Chile, royalties are payable to the Chilean Government, which is calculated at 5 per cent of crude oil production and 3 per cent of gas production. Additionally, GeoPark Chile Ltd -Chilean Branch- is committed to pay private royalties, calculated at 3 per cent on oil and gas revenues up to a total amount of US$ 3,250,000. (b) Capital Commitments The Group has committed to drill two exploratory wells in Del Mosquito The following amounts represent the Company’s share in the assets, liabilities Block during 2009 and 2010. The Group estimates a cost of US$ 3,200,000 for and results of the joint ventures which are included in the consolidated these two wells. This commitment has been undertaken as a compensation of balance sheet and statement of income: the obligation of a cash payment for the exploratory annual cannon payable in Argentina in respect of the Del Mosquito concession. This annual cannon is Joint venture Subsidiary Interest Assets PP&E / E&E Other assets Liabilities Non current liabilities Current liabilities Net liabilities Sales Loss before tax Income tax Net loss Tranquilo Block Otway Block levied by the Provincial authorities and gives the right to maintain the GeoPark GeoPark concession. Magallanes Ltda. Magallanes Ltda. 30% 2008 17 - 17 - 113 113 96 - 96 - 96 42% The Tranquilo Block Consortium has committed to drill six exploratory wells, 2008 to perform 2D and 3D seismic during 2009, 2010 and 2011. The joint venture estimates a cost of US$ 14,360,000 for these works. Regarding this 4 - 4 - 37 37 33 - 33 - 33 commitment, GeoPark Magallanes holds a 38.40% share. The Otway Block Consortium has committed to drill two exploratory wells and to perform 3D seismic during 2009, 2010 and 2011. The joint venture estimates a cost of US$ 10,550,000 for these works. Regarding this commitment, GeoPark Magallanes holds a 42% share. (c) Operating Lease Commitments - Group Company as Lessee The Group leases various plant and machinery under non cancellable operating lease agreements. The Group also leases offices under non cancellable operating lease agreements. The lease terms are between 2 and 3 years, and the majority of lease agreements are renewable at the end of the lease period at market rate. Capital commitments related to the Tranquilo and Otway Blocks are disclosed in Note 27 (b). Notes to the Consolidated Financial Statements 71 US$ 12,271,000 were charged to the income statement during 2008 related (*) The Company paid US$ 36,000 during 2008 and US$ 36,000 during 2007 for to operating leases. services provided by Lario Enterprises LLC. Gerald O’Shaughnessy is a shareholder and director of GeoPark Holdings Limited, and is the beneficial The future aggregate minimum lease payments under non cancellable owner of Lario Enterprises LLC through trusts. operating leases are as follows: (**) Corresponding to operating consultancy. Amounts in US$ ’000 Operating lease commitments Falling due within 1 year Falling due within 1 - 5 years Falling due after 5 years Total minimum lease payments Note 28 Related Parties 2008 2007 There have been no other transactions with the Board of Directors, Executive 13,322 14,005 1,200 28,527 2,253 5,483 1,680 9,416 Board, Executive officers, significant shareholders or other related parties during the year besides the intercompany transactions which have been eliminated in the consolidated financial statements, and normal remuneration of Board of Directors and Executive Board. Note 29 Fees Paid to Auditors Amounts in US$ ’000 2008 2007 Controlling Interest The main shareholders of GeoPark Holdings Limited, a company registered Fees payable to the Group’s Auditors for the audit of the consolidated financial statements in Bermuda, as of 31 December 2008, are: Fees payable to the Group’s Auditors for the a) 20.16 per cent of share capital, by Energy Holdings LLC, controlled by review of interim financial results James F. Park (founder). Fees payable for the audit of the Group’s b) 18.61 per cent of share capital, by GP Investments and The Globe subsidiaries pursuant to legislation Resources Group, both companies controlled by Gerald O’Shaughnessy Fees paid to auditors 85 22 57 164 131 30 56 217 (founder). c) 10.07 per cent of share capital, by SCHRODER Investment Management. d) 8.31 per cent of share capital, by IFC (International Finance Corporation). Note 30 Balances outstanding and transactions with related parties: Financial Instruments-Risk Management The Group is exposed through its operations to the following financial risks: (Amounts in ’000) Account 2008 Transaction Balances Party Relationship - Market price risk Related - Foreign currency risk - Credit risk - concentration Share- - Funding and Liquidity risk IFC Lario holders - Interest rate risk - Capital risk management Borrowings 1,993 (16,432) Administrative expense 36 - Enterprises (*) (**) Non Executive The policy for managing these risks is set by the Board. Certain risks are managed centrally, while others are managed locally following guidelines Production costs 123 - Peter Ryalls Director communicated from the centre. The policy for each of the above risks is 2007 described in more detail below. Borrowings 1,814 (20,740) IFC Lario Administrative expense 36 - Enterprises Share- holders (*) (**) Non Executive Foreign Currency Risk There are activities in foreign countries in which its functional currency is its local currency (Argentine Peso). The main exposure of the Group to currency changes is related to the financial loans denominated in US Dollars, and to a lower extent to receivables and cash balances held in US Dollars. As currency Administrative expenses 124 - Peter Ryalls Director rate changes between the US Dollar and the Argentine Peso, the Group 72 Notes to the Consolidated Financial Statements recognises gains and losses in the consolidated income statement. In Chile the oil price is also subject to the impact of the retention tax on oil exports where the functional currency is the US Dollar, the fluctuation of the Chilean defined by the Argentine government. Peso does not impact the loans, costs and revenues held in US Dollars; but it does impact the accounts denominated in Chilean Pesos. Such is the case The Company has signed a long term Gas Supply Contract with Methanex of the prepaid taxes held in Chilean Pesos. As currency rate changes between in Chile. The price of the gas under this contract is indexed to the the US Dollar and the Chilean Peso, the Group recognises gains and losses international methanol price. in the consolidated income statement. In Argentina, the main exposure comes from the IFC loan. The amount compared to actual prices during the year, with all other variables held outstanding at the issue of these financial statements was US$ 4.2 million, constant, post-tax profit for the year would have been lower by US$ 3,188,110 which is fully exposed to a devaluation of the Argentine Peso. Given the (post tax Group’s net loss would have been higher by US$ 877,000 in 2007). high cost of a long term Peso/Dollar hedge and the relatively low amount exposed, the management has decided not to hedge this exposure. The Board will adopt a hedging policy when it deems it appropriate If the market prices of the WTI and methanol would have fallen by 10% according to the size of the business and market implied volatility. In Chile, most of the balances are denominated in US Dollars, and since it is the functional currency of the Chilean subsidiary, there is no exposure to currency fluctuation except from receivables originated in Chilean Peso for Credit Risk - Concentration The Group’s credit risk relates mainly to accounts receivable where the credit an amount of US$ 3,265,000, mainly corresponding to VAT credits for risks correspond to the recognised values. There is not considered to be US$ 2,536,000. Management is working to collect this credit during 2009, any significant risk in respect of the Group’s major customers. Substantially all therefore the exposure is not significant and the decision has been made oil production in Argentina is sold to Petrobras, a Brazilian oil and gas not to hedge this risk. company, which has good credit standing. The Group minimises the local currency positions in Argentina and Chile by In Chile, all gas production is sold to the local subsidiary of the Methanex seeking to equilibrate local and foreign currency assets and liabilities. Corporation (a Canadian public company). All the oil produced in Chile is sold Most of the Group’s assets are associated with oil and gas productive assets. good credit standing and despite the concentration of the sale they do not Such assets in the oil and gas industry even in the local markets are usually represent a significant collection risk. See disclosure in Note 20. to ENAP, the State owned oil and gas company. Both companies have a settled in local currency US$ equivalents. Exchange adjustments in respect of investments in subsidiary undertakings are recognised directly in equity. Funding and Liquidity Risk The extent of the global economic crisis and the accompanying oil and gas price volatility have created substantial uncertainty in accurately forecasting future activities. The Group, like virtually every enterprise in every industry During 2008, the Argentine Peso had weakened by 10% (3% in 2007) today, faces a period of challenge and adjustment. Following its successes against the US Dollar and the Chilean Peso had weakened by 28% in 2008, the Group is in the fortunate position of having a secure production (strengthened by 7% in 2007). If both the Argentine and Chilean Peso had weakened an additional 5% against the US Dollar, with all other variables base and cash flow stream - coupled with low operating costs and the flexibility of a discretionary investment program that can be maintained, held constant, post-tax profit for the year would have been lower by reduced or increased in the short term depending on the severity or duration US$ 597,000 (US$ 1,734,000 higher post-tax loss in 2007). of the downturn. The Group’s cost structure allows it to sustain itself in a very low oil and gas price environment. Market Price Risk The price collected for the oil produced by the Group is dependant on WTI To manage through the current global crisis, the Group has adjusted which is settled in the international markets in US Dollars. The market price its 2009 investment program, restructured internal costs and refocused its of these commodities is subject to significant fluctuation but the Board approach to: did not consider appropriate to manage the Group’s risk to such fluctuation - prioritise and protect cash flow, through futures contracts or similar because to do so would not have been - lower its breakeven operating position by cost reductions, economical at the achieved production levels. - increase production by accessing quick cash flow-producing investments In Chile, the oil price is based on WTI minus certain marketing and quality - protect the core competences of the Company (that is, the ability to discounts such as, inter alia, API quality and mercury content. In Argentina, economically find and produce oil and gas). within its portfolio, and Notes to the Consolidated Financial Statements 73 Although the Group may have to raise additional funds to support its 2009 investment program, it has a strong support from its financial partners and Capital Risk Management The Group’s objectives when managing capital are to safeguard the Group’s significant flexibility in adjusting the program to ensure the development of ability to continue as a going concern in order to provide returns for the key properties. shareholders and benefits for other stakeholders and to maintain an optimal Interest Rate Risk As the Group has no significant interest-bearing assets, the Group’s profit Consistent with others in the industry, the Group monitors capital on the and operating cash flows are substantially independent of changes in market basis of the gearing ratio. This ratio is calculated as net debt divided by total interest rates. The Group’s interest rate risk arises from long-term borrowings capital. Net debt is calculated as total borrowings (including ’current and issued at variable rates, which expose the Group’s to cash flow to interest non current borrowings’ as shown in the consolidated balance sheet). Total rate risk. The loans from the IFC and Methanex Corporation accrue variable capital is calculated as ’equity’ as shown in the consolidated balance sheet capital structure to reduce the cost of capital. interest rates which depends on the LIBOR rate. For the period covered plus net debt. by these financial statements, the Group has decided not to buy any coverage for this risk. During 2008, the Group’s strategy, which was unchanged from 2007, was to take the gearing ratio within 45% to 55% range. The gearing ratios The Group analyses its interest rate exposure on a dynamic basis. Various at 31 December 2008 and 2007 were as follows: scenarios are simulated taking into consideration refinancing, renewal of existing positions, alternative financing and hedging. Based on these scenarios, Amounts in US$ ’000 the Group calculates the impact on profit and loss of a defined interest rate Net debt shift. For each simulation, the same interest rate shift is used for all currencies. Total equity The scenarios are run only for liabilities that represent the major interest- bearing positions. Total capital Gearing ratio 2008 53,680 60,497 114,177 47% 2007 34,741 32,606 67,347 52% At 31 December 2008, if interest rates on currency-denominated borrowings The decrease in the gearing ratio during 2008 resulted primarily from the had been 1% higher with all other variables held constant, post-tax profit proceeds from the issue of common shares. for the year would have been US$ 356,183 lower (post tax Group’s net loss would have been higher by US$ 178,000 in 2007), mainly as a result of higher interest expense on floating rate borrowings. 74 Notes to the Consolidated Financial Statements We express our appreciation to Diego Dicarlo, geologist, for his photographs of the blocks. Notes to the Consolidated Financial Statements 75 Board of Directors Gerald E. O’Shaughnessy | Executive Chairman Mr. O’Shaughnessy graduated from the University of Notre Dame with degrees in government and law, and thereafter practiced law until joining Lario Oil and Gas (his family company and one of the oldest independent oil and gas companies in the USA) as Senior Vice President. From 1986 to date, Mr. O’Shaughnessy has focused on private venture capital investment activities, including international oil and gas exploration and development through the Globe Resources Group. In 1992, Mr. O’Shaughnessy acquired a geophysical service company which co-founded the first energy sector joint venture in Russia during perestroika and from 1992 to 1995 he initiated and managed the largest well servicing and rehabilitation project in Western Siberia, involving sophisticated logistical operations and the rehabilitation of 700 wells (increasing production from 0 to 100,000 bpd). Mr. O’Shaughnessy’s participation in this project made him the first western partner of OAO Lukoil, and he subsequently entered into other partnerships with OAO Lukoil including building and managing one of the world’s largest oilfield pump repair facilities. Mr. O’Shaughnessy co-founded GeoPark in 2002. Sir Michael Romilly Heald Jenkins | Non Executive Director After graduating from Cambridge University in 1959, Sir Michael joined the British Diplomatic Service and served in several European capitals, including ten years in the European Commission in Brussels with terms as Chef de Cabinet to the Commissioner for Regional Policy, Principal Adviser to the EC President Roy Jenkins and Deputy Secretary-General of the Commission. Sir Michael was Assistant Under-Secretary of State at the Foreign & Commonwealth Office responsible for European affairs and East/West relations before becoming Minister and deputy head of mission at the British Embassy in Washington D.C from 1986 to 1988. From 1988 to 1992, he was British Ambassador to The Netherlands. Sir Michael joined the board of investment bank Kleinwort Benson in 1993 as an Executive Director and became Vice-Chairman of Dresdner Kleinwort Wasserstein in 1996 with particular focus on the investment bank’s continental European activities. Sir Michael was a non Executive director of the Dutch insurance group AEGON from 1995 to 2001; Chairman of the British Group of the Trilateral Commission from 1996 to 1998; and President of Boeing UK from 2003 to 2005. Sir Michael joined GeoPark in April 2006. Peter Ryalls | Non Executive Director Mr. Ryalls, who joined GeoPark in April 2006, obtained a Master’s Degree in Petroleum Engineering from Imperial College in London and began working in the oil industry in 1972 with oil service company Schlumberger in Angola, Gabon and Nigeria. Mr. Ryalls then joined Mobil North Sea and later Unocal where he worked in increasingly senior positions, including Managing Director in Aberdeen, and where he developed extensive experience in offshore production and drilling operations in the North Sea and internationally. In 1994, Mr. Ryalls represented Unocal in the Azerbaijan International Operating Company (AIOC) as Vice President of Operations based in Baku and was responsible for production, drilling, reservoir engineering and logistics. In 1998, Mr. Ryalls moved to Buenos Aires, Argentina as General Manager for Unocal in Argentina. He subsequently moved to Louisiana as Vice President of Unocal’s Gulf of Mexico oil and gas business and then Vice President Global Engineering & Construction of Unocal, responsible for the implementation of all major capital projects ranging from deepwater developments in Indonesia and the Gulf of Mexico to conventional oil and gas projects in Thailand. Mr. Ryalls strengths are in risk management across the project development cycle with a strong focus on health, safety and environment. Christian Maurice Weyer | Non Executive Director Mr. Weyer is an international banker and financier with over 50 years of experience. Mr. Weyer began his banking career with Chase Manhattan Bank as a senior credit officer in Paris and Geneva and subsequently worked as an executive at Banque Paribas until becoming President of Banque Paribas (Suisse) in 1984-5. During his career, Mr. Weyer has been credited with innovating new forms of trade finance and lines of credit as one of the leaders of the Geneva banking industry. Mr. Weyer also was instrumental in the growth of several large oil trading firms; as well as supporting the development of oil and gas exploration companies. From 1988 to 1992, Mr. Weyer was special adviser to Banque Indosuez for energy matters. Since 1992, he has been President of ENERFIN in Geneva, Switzerland, an advisory firm providing investment banking services to junior oil and gas companies. Mr. Weyer joined GeoPark in 2002 as an advisory board member and in 2003 as a Director. In April 2006, he was appointed as a Non Executive Director. Juan Cristóbal Pavez | Non Executive Director Mr. Pavez graduated from the Universidad Católica de Chile (Catholic University of Chile) in 1992 with a degree in Commercial Engineering, and immediately joined Grupo CB (CB Group) as a research analyst. Thereafter, he obtained a master’s degree in Business Administration from the Massachusetts Institute of Technology. He was then portfolio analyst at Moneda Asset Management until 1998, when he joined Santana, an investment company, as CEO. At Santana he focused mainly on investments in capital markets and real estate. While at Santana, he was appointed CEO of Laboratorios Andrómaco (Andrómaco Laboratories), one of Santana’s principal assets. In 1999, Mr. Pavez co-founded Eventures, an internet company with subsidiaries in Argentina and Brazil. Since 2001 he has been CEO at Centinela, a company with diversified global investments and a special focus in the energy industry through the development of wind parks and run-of-the-river hydropower plants. Mr. Pavez is also a board member of Grupo Security, Vida Security, Quintec, Inversiones Frimetal, Trayenko and Norvind. James F. Park | Chief Executive Officer and Deputy Chairman Mr. Park has extensive experience in all phases of the upstream oil and gas business - with a strong background in the acquisition, implementation and management of international joint ventures, including assignments in North America, Latin America, Asia, Europe and the Middle East. He graduated from the University of California at Berkeley with a degree in geophysics, following which he worked as a research scientist in earthquake and tectonic studies. In 1978, Mr. Park joined an oil and gas exploration project in Guatemala (Basic Resources International Limited) which pioneered the development of commercial oil and gas production in Central America and, as a Senior Executive, was closely involved in the development of the Company (including grass-roots exploration activities, drilling and production operations, surface and pipeline construction, legal and regulatory issues, crude oil marketing and transportation, and raising substantial investment funds). He remained as a member of the board of Directors until the company was successfully sold in 1997 after reaching an oil production rate exceeding 20,000 bopd. Mr. Park has also participated in projects in California, Louisiana, Argentina, Yemen, and China. Mr. Park has lived in Argentina and Chile since co-founding GeoPark in 2002. 76 Board of Directors Directors, Secretary & Advisors Directors Registered Office Head Office Gerald Eugene O’Shaughnessy (Executive Chairman) James Franklin Park (Chief Executive Officer and Deputy Chairman) Sir Michael Romily Heald Jenkins (Non-Executive Director) Peter Ryalls (Non-Executive Director) Christian Maurice Weyer (Non-Executive Director) Juan Cristóbal Pavez (Non-Executive Director) Milner House 18 Parliament Street Hamilton HM 12 Bermuda Florida 981 Fourth Floor C1005AAS Buenos Aires Argentina + 54 11 4312 9400 Secretary Martín Pérez de Solay Nominated Advisor and Broker Solicitors to the Company as to English Law Solicitors to the Company as to Bermuda Law Solicitors to the Company as to Chilean Law Solicitors to the Company as to Argentine Law Reporting Accountants and Auditors Petroleum Consultant Registrar Registrar to the Depositary Oriel Securities Norton Rose Kempson House Camomile Street London EC3A 7AN United Kingdom Cox Hallett Wilkinson Milner House 18 Parliament Street PO Box HM 1561 Hamilton HMFX Bermuda Aylwin Abogados Avenida Isidora Goyenechea 3162 Of. 801 Las Condes, Santiago Chile Maciel, Norman & Asociados San Martín 323, Piso 19 C1004AAG Buenos Aires Argentina Grant Thornton UK LLP Grant Thornton House Melton Street London NW1 2 EP United Kingdom DeGolyer and MacNaughton 5001 Spring Valley Road Suite 800 East Dallas, Texas 75244 USA Computershare Investor Services (Channel Islands) Ltd Ordnance House, 31 Pier Road St Helier, Jersey JE4 8PW Channel Islands, United Kingdom Computershare Investor Services plc PO Box 82 The Pavilions, Bridgewater Road Bristol BS99 7 NH United Kingdom Realization: Chiappini + Becker Tel. +54 11 4314 7774 www.ch-b.com 77 Notes to the Consolidated Financial Statements 76 Directors, Secretary & Advisors A N N UA L R E P O R T 2 0 0 8 W W W. G E O - PA R K . CO M 

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