AnnuAl report 2009 Assets cApAbilities performAnce opportunity commitment CONTENTS 2 12 Letter to Shareholders Performance 14 Assets 30 Capabilities 36 Opportunity 44 Commitment 56 57 58 59 60 61 Statement of Directors’ Responsibilities Report of the Independent Auditor Consolidated Income Statement Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flow 47 Directors’ Report 62 Notes to the Consolidated Financial Statements 51 Corporate Governance 84 Board of Directors 54 Directors’ Remuneration Report 85 Directors, Secretary & Advisors bottom line Oil and Gas Production Oil and Gas 2P Reserves Annual production growth: 124% / year 7 6 5 4 3 2 1 0 ) d / e o b m ( n o i t c u d o r p y l i a D e g a r e v A 45 40 35 30 25 20 15 10 e o b m m n i 5 0 2005 2006 2007 2008 2009 march 2006 march 2008 July 2009 oil and condensate gas 2p gas 2p oil oil production gas production Total Revenues Operating Costs 45 40 35 30 25 20 15 10 D s u m m n i 5 0 16 14 12 10 8 6 4 2 0 e o b / D s u n i 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 oil and condensate gas DeAr shAreholDers since our founding in 2002 – and beginning with no oil and gas production, revenues or reserves – geopark has consistently improved year by year in every key measurement of value employed in our industry. results in 2009 continued this important trend – demonstrating the durability of our business plan and establishing momentum for future growth. Despite global economic headwinds, including a collapse in oil and gas prices and a general paralysis in the oil and gas upstream industry, geopark forged a path forward and exceeded our targets. oil and gas production and reserves increased; revenues and operating cash flow grew; the balance sheet was strengthened; our portfolio of projects expanded; our team was further improved; and our market capitalisation almost doubled. As before, our growth was led by the drill bit. During 2009, nine successful wells were recorded out of a total of nine wells drilled. our principal focus continued to be chile, where geopark has established itself as the first and only private oil and gas producer. geopark accounts for over 30% of chile’s total hydrocarbon production, with the promise of further growth as we continue to develop our large land position and broad portfolio of attractive production, development and high-impact exploration opportunities. significantly, our organic growth is now self-funding and can be expected to deliver important future value to shareholders. we also believe there are additional opportunities for further expansion in chile, which recently received oecD status. having validated our business model in chile, geopark is preparing to expand its asset base and project portfolio. towards this goal, geopark entered into a strategic partnership agreement in march 2010 with lg international, the korean conglomerate, to jointly acquire and develop oil and gas upstream assets throughout 2 letter to shareholders letter to shAreholDers AgAin, our growth wAs leD by the Drill bit. in 2009, nine successful wells were recorDeD out of A totAl of nine wells DrilleD. Drilling the guanaco oil field discovery letter to shareholders 3 All key VAlue meAsurements improVeD in 2009: proDuction, reserVes AnD cAshflow increAseD; the bAlAnce sheet strengtheneD; our portfolio eXpAnDeD; AnD our teAm continueD to become stronger. 4 letter to shareholders letter to shAreholDers latin America – initially targeting projects in the us$100 to 500 million range. lgi has a long term commitment in the region and its participation both expands our range of opportunities and accelerates our efforts as geopark enters this new phase of development. VAlue DriVers geopark’s value proposition is built on five fundamental competitive advantages: • Self-Supporting Base: A growing high potential platform of acreage, production, revenues and reserves – which supports its own value growth and appreciation. • Best People / Proven Competence: technical excellence in finding and producing oil and gas reserves – and the ability to plan, execute, overcome obstacles, adapt, seize opportunities and achieve results. • Dynamic Balanced Investment: Aggressively applying the long term investment necessary to achieve success – sourced creatively and cost-effectively. risk management across the subsurface, funding, organizational, partner/shareholder, oil and gas market, and regulatory/political environments. • Big Potential: An attractive high-impact portfolio consisting of both organic growth and new project acquisition opportunities – coupled with the commercial abilities to buy right and supported by a strong long term strategic partner. • Commitment: An in-house culture which values and protects our shareholders, employees, environment and communities and supports our long term business plan. As our Annual report details herein, geopark effectively grew our business in 2009 and strengthened our core competences – thereby positioning us for another strong year in 2010. letter to shareholders 5 2009 performAnce operational results • 100% Drilling Success: geopark’s technical and operational • Expanded Production and Market Infrastructure: During 2009, strength was demonstrated by drilling 9 productive wells out of 9 the company expanded its oil and gas processing, storage and wells drilled and completed during 2009 and the rapid monetization transporting facilities on the fell block in chile to accommodate new of this production. the drilling program, focused on the fell block production and enable the rapid hook-up and commercialisation in chile, represented a balance of exploration, appraisal and of new wells. this included the construction of 10 kilometres of new development wells – and included three new field discoveries. two oil and gas pipelines and new oil treatment and storage facilities. of these discoveries resulted from testing new geological formations geopark’s natural gas processing and selling capacity in the fell in chile – tobifera (Jurassic) and el salto (tertiary) – which are block was increased to 60 million cubic feet per day (mmcfpd) – with expected to deliver new development opportunities and plans to further expand this capacity to 88 mmcfpd during 2010. new reserves. financial results • Oil and Gas Production Up 86%: Average annual oil and gas production increased by 86% from 3,390 barrels of oil equivalent per • Total Revenue Up 17%: Despite severe commodity price erosion day (boepd) during 2008 to 6,320 boepd during 2009. year-on-year (44% reduction in crude oil prices and 54% reduction in natural gas crude oil production increased by 287% and natural gas production prices), oil and gas production revenue increased by approximately increased by 55%, thereby helping geopark to rebalance its mix 17% to us$44.8 million in 2009 from us$38.4 million in 2008. of oil versus gas production. since 2005, geopark has increased its oil and gas production approximately 25 times with an average • Operating Cashflow Up 12%: During 2009’s depressed oil and gas annual growth rate of 124% per year. price environment, operating cashflow was increased by 39% to us$21.2 million compared to us$15.2 million in 2008. • 2P Reserves Up 27%: in its report as of 31 July 2009, and after deducting production during the period, independent engineering • Net Loss and Positive Adjusted EBITDA: impacted by the oil and consultants Degolyer & macnaughton reported a 27% increase in gas price decline (and despite increases in oil and gas production geopark's 2p (proved and probable) reserves to 42.3 million barrels and reductions in unit operating costs), Adjusted ebitDA (earnings of oil equivalent (mmboe). this includes a 16% increase in p1 before interest, taxes, Depreciation and Amortisation) in 2009 was (proved) reserves to 16.7 mmboe; a 35% increase in p2 (probable) us$17.7 million (which remained equal to an Adjusted ebitDA reserves to 25.6 mmboe; and an 8% increase in p3 (possible) reserves of us$17.7 million in 2008). After considering the effect of to 98.8 mmboe. in chile, where the company currently concentrates non-cash items, geopark had a us$8.0 million net loss for 2009 its investment activities, 2p crude oil reserves grew by 67% to 8.4 (compared to a net income of us$3.7 million for 2008). non cash mmboe and 2p natural gas reserves grew by 23% to 188.2 billion items include depreciation, exchange differences, stock awards cubic feet (bcf ). these figures do not include results since 31 and impairments and write-offs of approximately us$6.0 million July 2009, which the company estimates (internally) to represent for previous investments and certain assets in Argentina and chile. an additional 5 mmboe of 2p reserves. the net loss included a depreciation charge of us$14.9 million (compared to us$7.4 million in 2008) which resulted principally • Improved Economics - Reduced Operating and Capital Costs: from the increase in oil and gas production. operating costs were reduced to less than us$6 per boe representing a 30% reduction compared to 2008. Drilling operations • Year-End Debt and Cash Position: the company’s year-end cash were improved resulting in a 32% reduction in drilling times per well position was us$23.8 million. year-end debt was us$60.4 million drilled – including safer operations and better quality well-bores. – approximately 75% of which represents gas pre-sale funding from methanex corporation which is repaid in gas deliveries to methanex’s methanol plant in southern chile. 6 letter to shareholders letter to shAreholDers since 2005, geopArk hAs increAseD its oil AnD gAs proDuction 25 times with An AVerAge AnnuAl growth rAte of 124% per yeAr. letter to shareholders 7 • Market Capitalisation Up 86%: geopark’s total market corporation of canada – which is in addition to its previous capitalisation grew by 86% from us$137 million at the end of 2008 us$40 million gas pre-sale facility with methanex (us$30 million to us$255 million at the end of 2009. (current market capitalisation outstanding). the financing is structured in two parts: us$15 is now approximately us$330 million.) geopark’s share price grew by million as a gas pre-sale facility with a six year pay-back period; and approximately 48% from the beginning of 2009 to the beginning of us$3.3 million to fund geopark’s exploration investments on the 2010. geopark is now covered by four oil and gas market analysts: otway block. geopark has a ten year supply agreement with three in london and one in chile. methanex to provide natural gas to methanex’s large methanol plant located in punta Arenas, chile. (methanex’s plant, which has • Strategic Equity Placings: During 2009, geopark carried out two a demand of 350 million cubic feet of gas per day, is currently equity placings. in may 2009, geopark raised us$11.8 million from operating at approximately 40% capacity.) uk and chilean institutional investors, the international finance corporation of the world bank (ifc) and certain geopark board • Debt Rescheduling: in order to free-up funds for additional members and shareholders. in november 2009, geopark raised investment activities in chile during 2009, the ifc agreed to us$20.5 million from a new strategic us investor, uk and chilean reschedule approximately us$14 million of outstanding debt owed institutional investors, the ifc and certain geopark board members. by geopark to the ifc. the rescheduling provided a grace period the strong interest from the chilean investment community and longer principal repayment period. provides regional long term security for the company’s activities and growth plans. the ifc continues to provide long term financial and growth and new projects advisory support to the company as both a shareholder and lender. • Gas Pre-Sale Funding: to help fund its development activities, the corporation (“lgi”), the korean conglomerate, and geopark entered company agreed to a new us$18.3 million facility with the methanex into a new strategic partnership to jointly acquire and develop • New Strategic Partnership: in march 2010, lg international 8 letter to shareholders letter to shAreholDers upstream oil and gas projects in latin America. the objective of the otway and tranquilo blocks shall be the same and will consist of the lgi-geopark partnership is to build a risk-balanced portfolio of partners pluspetrol chile s.A. (25%), wintershall chile limitada (25%), upstream opportunities across latin America – and to leverage the international finance corporation (12.5%), methanex chile s.A. (12.5%) platform and experience of both partners to identify and carry out and geopark (25%). the objective of the restructuring is to create side-by-side acquisitions; initially targeting upstream projects in the stronger consortia with similar long term commitments in the region, us$100-500 million range size. geopark will be the manager of the as well as, provide synergistic operational benefits. geopark is the strategic partnership and operator of acquired projects. geopark operator of both blocks. will have the right to earn additional equity interests in each project, over and above its initial working interest, in accordance with • Strengthened Organization: During 2009, geopark continued to a formula based upon the financial performance of each acquired invest in its long term oil and gas finding, drilling and production project. the initial term of the partnership is three years and the capabilities. important additions were made to the management target for closing the first acquisition is during 2010. team, and to the drilling, reservoir engineering, production, • Operational Start-Up and Restructuring of New Chilean Blocks: company also expanded its employee share plans to include all geological and finance and administrative departments. the geopark initiated start-up activities on the new tranquilo and otway employees. blocks in chile which in total cover an area of approximately 12,640 square kilometres. the company initiated its seismic program on • Chilean Stock Exchange Listing: in october 2009, geopark was the tranquilo block in January 2010 and on the otway block in authorized to trade its shares on the santiago off-shore stock march 2010. in february 2010, the tranquilo and otway consortia exchange – thereby providing further exposure to the chilean partners submitted a request to the minister of energy in chile to financial community which is an increasingly active supporter restructure the working interest ownership in each block. subject of geopark’s efforts to grow in the region. geopark is the first to approval of the ministry of energy in chile, the new ownership of independent oil and gas company to list on the chilean exchange. letter to shareholders 9 the science, cApitAl, know-how AnD DriVe reQuireD to AchieVe our 2009 results represent the true meAsure of geopArk - AnD the engine for DeliVering continueD success. 10 letter to shareholders letter to shAreholDers 2010 outlook following its successes in 2009, geopark now has a secure 4. Grow and expand portfolio: in accordance with the partnership production base and positive cash flow stream capable of with lg international, jointly acquire new projects in latin America – supporting continued growth on the company’s existing blocks in targeting projects with proven reserves and production and chile and Argentina. commodity price swings and changes in the with development and exploration upside. work program may impact our level of activity; however, our low operating costs and the flexibility of a discretionary investment geopark is projecting to invest approximately us$50-60 million on program allow geopark to adapt to unexpected circumstances and its assets in chile and Argentina with the expectation of increasing to sustain ourselves in low oil and gas price environments. annual oil and gas production by 25%, and which will be funded by forecasted cashflow and current cash reserves. our priorities during 2010 will be to increase cash flow from existing assets by new development and exploration efforts, coupled with we salute the geopark team and express our appreciation and improving operating and investment efficiency, and to acquire a admiration for its accomplishments in 2009 and ability to adapt and new upstream oil and gas project. geopark’s 2010 capital investment continue to grow through the challenges created by the global crisis. program is designed to: the science, capital, experience and drive required to achieve this result represent the true measure of your company – as well as the 1. Increase oil and gas production and reserves: Drill new wells engine for delivering our continued success. (14-17) and perform workovers to explore for new fields and to develop existing fields; optimize reservoir performance by hydraulic Additionally, we express our appreciation to our shareholders for fracturing and stimulation; perform geological and geophysical your continued support during 2009. your board, management and surveys to increase inventory of drilling opportunities; and employees look forward to the exciting challenges and opportunities construct additional production facilities to accommodate new well of 2010 and to further demonstrate our performance and to deliver discoveries and production. results throughout the year. 2. Increase cash flow and improve project economics and sincerely, performance: reduce costs and increase efficiency in production operations and administrative management; reduce capital expenditures (drilling and facilities) by technological and design improvements; continue to strengthen core competences (i.e. the ability to economically find and produce oil and gas); and expand speeD (geopark’s integrated safety, shareholder, employee, environmental and community development program). 3. Manage risk: prioritise projects with short cycle time to production; continue to balance production profile between oil and gas; spread work program exposure between production, development and exploration projects; expand funding exposure and capital sources; strengthen management and technical team; expand country footprint; and farm-out higher risk / non-core areas. Gerald E. O’Shaughnessy, chairman James F. Park, chief executive officer letter to shareholders 11 THE MOMENTUM AND DURABILITY OF GEOPARK’S BUSINESS PLAN ARE BASED ON BUILDING A RISK-MANAGED FOUNDATION 2009 FOR THE LONG TERM AND CONSISTENT DAILY IMPROVEMENT: INVESTING IN THE BEST PEOPLE, SELECTING LOW RISK/HIGH POTENTIAL BLOCKS, ACQUIRING NEEDED TOOLS AND TECHNOLOGY, AND ASSEMBLING THE RIGHT MIX OF STRATEGIC AND CAPITAL PARTNERS. 2008 business plAn 7 6 5 4 3 2 1 0 ) d / e o b M ( n o i t c u d o r p y l i a d e g a r e v A IN 2009, DESPITE THE GLOBAL ECONOMIC HEADWINDS, INCLUDING AN EARLY COLLAPSE IN OIL AND GAS PRICES AND A GENERAL PARALYSIS IN THE UPSTREAM BUSINESS, GEOPARK FORGED A PATH FORWARD AND AGAIN EXCEEDED OUR TARGETS. Oil Gas 2007 2006 2005 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 12 year in review / performance 7 6 5 4 3 2 1 0 ) d / e o b M ( n o i t c u d o r p y l i a d e g a r e v A IN 2009, DESPITE THE GLOBAL ECONOMIC HEADWINDS, INCLUDING AN EARLY COLLAPSE IN OIL AND GAS PRICES AND A GENERAL PARALYSIS IN THE UPSTREAM BUSINESS, GEOPARK FORGED A PATH FORWARD AND AGAIN EXCEEDED OUR TARGETS. Oil Gas performAnce THE MOMENTUM AND DURABILITY OF GEOPARK’S BUSINESS PLAN ARE BASED ON BUILDING A RISK-MANAGED FOUNDATION 2009 FOR THE LONG TERM AND CONSISTENT DAILY IMPROVEMENT: INVESTING IN THE BEST PEOPLE, SELECTING LOW RISK/HIGH POTENTIAL BLOCKS, ACQUIRING NEEDED TOOLS AND TECHNOLOGY, AND ASSEMBLING THE RIGHT MIX OF STRATEGIC AND CAPITAL PARTNERS. 2008 2007 2006 2005 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec year in review / performance 13 Argentina Chile trAnQuilo otwAy 14 year in review / Assets Del mosQuito fell 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 track 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 Portfolio of oPPortunities includinG well reactivation, by-Passed P Passed reservoirs, stranded and ProducinG field develoPment and medium to hiGh imPact P Pact exPloration Projects. Atlantic Ocean year in review / Assets 15 yeAr in reView oil and gas reserves oil and gas production geopark has achieved consistent growth in oil and gas reserves from geopark’s oil and gas production currently is generated from the its investment activities since 2005. Degolyer & macnaughton, fell block in chile and the Del mosquito block in Argentina. independent petroleum engineers, appraised a 27% increase in 2p During 2009, approximately 98% of the company’s total oil and gas reserves to a total of 42.3 million barrels oil equivalent (mmboe) production was produced in chile and approximately 2% in in its report dated July 2009. in this report, Degolyer & macnaughton Argentina. During 2009, gas represented approximately 80% of the estimated, on four of geopark’s six blocks, a total of 16.7 mmboe total production (90% in 2008) and oil represented approximately of proved reserves, a total of 25.6 mmboe of probable reserves, and 20% of the total production volume (10% in 2008). a total of 98.8 mmboe of possible reserves. Degolyer & macnaughton also appraised 46.6 mmboe of contingent resources (best estimate). oil and gas production is shown in the chart below: Annual production growth: 124% / year 7 6 5 4 3 2 1 0 ) d / e o b m ( n o i t c u d o r p y l i a d e g a r e v A 2005 2006 2007 2008 2009 oil and condensate gas geopark’s drilling successes in the latter half of 2009 and early 2010 have not yet been appraised by Degolyer & macnaughton and will be included in a new reserve report targeted for completion at year-end. geopark management estimates an additional 5 mmboe of proved and possible reserves have been discovered in this period. the chart below summarizes the reserves appraised by Degolyer & macnaughton in July 2009. Approximately 96% of the company’s total oil and gas reserves are in chile and approximately 4% in Argentina. in this appraisal, gas represents approximately 80% of total reserves and oil represents approximately 20% of total reserves. Country chile Argentina Total Reserve Oil Type (MMBBL) p1 p2 p3 p1+p2 p1+p2+p3 p1 p2 p3 p1+p2 p1+p2+p3 p1 p2 p3 p1+p2 p1+p2+p3 3.0 5.4 13.2 8.4 21.6 0.7 1.7 3.3 2.5 5.8 3.7 7.2 16.4 10.9 27.4 Gas (BCF) 77.6 110.2 494.1 187.9 682.0 0.3 0.0 0.0 0.3 0.3 77.9 110.2 494.1 188.2 682.3 BOE (MMBOE) 15.9 23.8 95.5 39.7 135.3 0.8 1.7 3.3 2.5 5.8 16.7 25.6 98.8 42.3 141.1 16 year in review / Assets reserVes AnD proDuction / Assets production operations at Aonikenk oil field year in review / Assets 17 geopArk pioneereD priVAte sector oil AnD gAs DeVelopment in chile - AnD now contributes ApproXimAtely 30% of chile's Domestic hyDrocArbon proDuction. yeAr in reView 18 year in review / Assets chile blocks / Assets 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 50% of chile’s crude oil production and 20% of chile’s natural 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: Block fell tranquilo otway Area (Sq Km) Operator Basin 1,780 6,648 5,992 geopark magellan / Austral geopark magellan / Austral geopark magellan / Austral the blocks are located in the continental magallanes region in a proven oil and gas producing basin (magellan or Austral basin) and on trend with recent discoveries to the north in Argentina and to the south in tierra del fuego. the magallanes region currently produces all of chile’s oil and gas production. Although it has been producing for over 50 years, the basin remains relatively underdeveloped with new exploration frontiers being opened in recent years. substantial technical data (seismic, geological, drilling and production information), both developed by geopark and enAp (the chilean state oil company), provides an excellent base for technical 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 on production by constructing new pipelines and plants. geophysical interpretations by geopark suggest additional development potential in known fields and exploration potential in new undrilled prospects and plays – including opportunities in the springhill, tertiary, tobifera, and estratos con favrella formations. During 2009, geopark successfully added to its oil and gas production from new discoveries in the springhill, tertiary and tobifera formations. year in review / Assets 19 yeAr in reView fell block the fell block has an area of approximately 440,000 acres (1,780 sq km) and its center is located approximately 140 km north east from the city of punta Arenas. the fell block’s northern border coincides with the international border between Argentina and chile and its southern limit is bordered by the magellan strait. the first exploration efforts began on the fell block in the 1950’s and from then until 2005, enAp carried out 2,400 km of 2D seismic and 256 sq km of 3D seismic and drilled 146 wells. in 2006, geopark became operator and 100% interest owner of the fell block when the fell block had no oil and gas production. since geopark has been operator, it has completed 628 sq km of 3D seismic and drilled 35 exploration, appraisal and development wells resulting in current oil and gas production of approximately 30 mmcfpd of gas and 2,000 bpd of oil. t r e s e d a m a c a t A Santiago s a p m a P Chile Argentina i a n o g a t a P Fell 20 year in review / Assets Buenos Aires Argentina Chile Fell Strait of Magellan chile blocks / Assets Alakaluf 1 well on the fell block year in review / Assets 21 yeAr in reView our geoscience teAm continues to eXpAnD our AttrActiVe inVentory of DeVelopment AnD eXplorAtion prospects - Allowing us to continue An AggressiVe Drilling progrAm in 2010 AnD beyonD. the block is located geologically in the cretaceous depocenter of in 2009, while drilling the monte Aymond 34 well, geopark discovered the magellan basin – in the northwest area comprising the structural the new Ayelen gas field in the tertiary (el salto formation) which has platform (developing to the east) and the slope (developing further development opportunities. this discovery also opens up to the west). the source rocks relate to the estratos con favrella a new attractive play in the tertiary on the fell block. in the santiago (cretaceous) deposits. the principal producing reservoir is the norte field complex, Degolyer & macnaughton estimated a total springhill formation sandstone (lower cretaceous) at depths of of approximately 415 bcf of 3p gas reserves and approximately 2,200-3,500 metres. Additional reservoirs were discovered and put 174 bcf of contingent gas resources. geopark is currently developing into production on the fell block in 2009 -- namely the tobifera a reservoir stimulation and development program to further (Jurassic) volcaniclastics (2,600 to 3,600 metres) and the upper test and exploit this substantial gas resource potential, including the tertiary and upper cretaceous sandstones (700 to 2,000 metres). drilling of a new well in 2010. trap types in the fell block are mainly structural traps defined by anticlines developed in the basement and involving the cretaceous the chart below summarises geopark’s drilling program on the and tertiary sequences. stratigraphic and combined traps fell block during 2009: are developed in the southern and northern sector of the block. geopark’s geoscience team is continuing to identify and expand a Well name Well type Hydrocarbon large and attractive inventory of prospects and drilling opportunities on the fell block – both exploration and development projects – and the company will be continuing its aggressive drilling program over the next years. the recent oil discoveries in the Alakaluf and Aonikenk fields (where five successful wells were drilled in 2009) have opened up a new oil potential in the northeastern portion of the block – and additional prospects have been identified. A new oil yagán 1 Alakaluf 2 Alakaluf 3 Alakaluf 4 Aonikenk 3 yagán norte 1 pampa larga 15 monte Aymond 34 discovery in 2009 in the yagan norte field in the tobifera formation Alakaluf 5 is currently on production and has additional development potential. increased oil production on the fell block will further balance the hydrocarbon stream which is currently weighted towards gas. exploration Development Development Development Development exploration Development exploration Appraisal / Formation gas / springhill gas / springhill oil / springhill gas / springhill oil / springhill oil / tobífera gas / springhill gas / el salto (tertiary) oil / springhill 22 year in review / Assets chile blocks / Assets pumping unit in Alakaluf oil field year in review / Assets 23 yeAr in reView otwAy block the otway block consists of an area of approximately 1,480,000 acres of energy), the partners in the otway block consist of geopark (25%), (5,992 sq km) and is located approximately 110 km from the city of pluspetrol chile limitada (25%), wintershall chile limitada (25%), punta Arenas. the block consists of onshore areas (peninsula international finance corporation (12.5%), and methanex chile brunswick and isla riesco) and offshore areas (seno skyring and limitada (12.5%). historically, the block has tested and produced oil seno otway). the first hydrocarbon exploration activities began in and gas, however, there is currently no oil or gas production the 1920’s and during the 1930’s and 1940’s several wells were drilled and no reserves have been independently appraised by geopark’s with gas manifestations. to date, 31 wells have been drilled and 875 engineering consultants on the block. 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. geologically, the block is located in the magellan basin’s northwest area comprising the folded belt and thrust front and the tertiary geopark is the operator of the otway block. following a partnership foreland basin. the source rocks relate to the deep marine basal restructuring (and subject to the approval of the chilean ministry 24 year in review / Assets chile blocks / Assets t r e s e d a m a c a t A Santiago s a p m a P Buenos Aires Chile Argentina i a n o g a t a P Otway Chile Otway Block cretaceous deposits. the proven reservoirs with production history geopark’s current exploration focus is in the folded belt (central relate to the Agua fresca formations marine and/or deltaic sandstones and western areas of isla riesco). in the foreland basin (northeastern at depths of 200-1,500 metres. other potential reservoirs include sector of peninsula brunswick), there is the potential of gas the chorillo chico sandstones at depths of 1,500-1,900 metres and the accumulations in stratigraphic traps in the upper tertiary (loreto loreto formation (upper tertiary) and rocallosa and rosa formations formation). in 2009, geopark performed geological, geophysical and (upper cretaceous). trap types are fundamentally structural traps environmental surveys to further delineate the block’s potential defined by anticlines developed in the folded belt and thrust front and define the 2010 seismic program which will consist of 270 sq km and involving the basement and cretaceous and tertiary sequences. of 3D and 175 km of 2D. the seismic program was initiated in stratigraphic traps are developed toward the foreland basin in the march 2010. existing wells are also being studied to determine the northern sector of peninsula brunswick including upper cretaceous feasibility of early production opportunities in the sector of peninsula and lower tertiary deltaic and turbiditic deposits. brunswick (mina rica and corey areas). year in review / Assets 25 yeAr in reView t r e s e d a m a c a t A Santiago s a p m a P trAnQuilo block the tranquilo block extends over an area of approximately 1,643,000 acres (6,648 sq km) and is located approximately 110 km northwest of punta Arenas. the first hydrocarbon exploration efforts began in the 1940’s and the tranquilo gas field was discovered in 1958. to date, enAp has drilled 21 wells and carried out 1,428 km of 2D seismic on the block. geopark is the operator of the tranquilo block. following a partnership restructuring (and subject to the approval of the chilean ministry of energy), the partners in the tranquilo block consist of geopark (25%), pluspetrol chile limitada (25%), wintershall chile limitada (25%), international finance corporation (12.5%), and methanex chile limitada (12.5%). historically, the block has tested and produced oil and gas, however, there is currently Buenos Aires no oil or gas production and no reserves have been independently appraised by geopark’s engineering consultants on the block. Chile Argentina geologically, the tranquilo block is located in the magellan basin’s i a n o g a t a P Tranquilo Argentina Tranquilo Chile 26 year in review / Assets northwest area, comprising the folded belt and thrust front and the tertiary foreland basin. the source rocks relate to the deep marine basin cretaceous deposits. the proven reservoirs with production history relate to the loreto formation deltaic sandstones at depths of 700-1,000 metres. other potential reservoirs include the morro chico formation (basal tertiary) sandstones and the rocallosa formation (upper cretaceous) sandstones. trap types are fundamentally structural traps defined by anticlines developed in the folded belt and thrust front involving the basement and cretaceous and tertiary sequences. stratigraphic traps are developed toward the foreland basin including upper tertiary deltaic and turbiditic deposits (loreto and Agua fresca formations). geopark’s current exploration focus is in the folded belt, esperanza, kerber and Diana areas. in the southeast sector, there is the potential of gas accumulations in stratigraphic traps. in 2009, geopark performed geological, geophysical and environmental surveys to further delineate the block’s potential and define the 2010 seismic program which will include160 sq km of 3D and 370 km of 2D. the seismic program was initiated in march 2010. early geological re-interpretations suggest the potential for a very large structure in the esperanza-gales region. existing wells are also being evaluated to determine the feasibility of early production opportunities in the esperanza area. chile blocks / Assets year in review / Assets 27 yeAr in reView t r e s e d a m a c a t A s a p m a P Santiago Loma Cortaderal Doña Juana Buenos Aires Chile Argentina i a n o g a t a P Atlantic Ocean Del Mosquito Argentina Chile Loma Cortaderal Block Cerro Doña Juana Block Del Mosquito 28 year in review / Assets ArgentinA geopark has interests in the following blocks in Argentina: Block Del mosquito cerro Doña Juana loma cortaderal Area (Sq Km) Operator 485 80 115 geopark geopark geopark Basin Austral neuquén neuquén Del mosQuito block the Del mosquito block is located in the Austral basin in southern Argentina. the Austral basin produces nearly ten per cent of Argentina’s total oil production and nearly twenty per cent of its total gas production. (Although the fell and Del mosquito blocks are located in different countries, they are situated in the same geological basin and, at their closest point, are less than 20 kilometres apart.) Argentina the Del mosquito block (120,000 acres) is surrounded by producing oil and gas fields to the north, south, east and west. there is oil production currently from two fields and there is good infrastructure, nearby gas plants and pipelines and an easily accessible crude oil market (40 kilometres by truck). eighty per cent of the block is at an early stage of exploration with currently one 600 square kilometre ArgentinA blocks / Assets cerro DoñA JuAnA & lomA cortADerAl blocks area covered by only eight wells. two 3D seismic surveys, totaling an the cerro Doña Juana and loma cortaderal blocks (47,959 total area of 355 square kilometres, cover approximately 73 per cent of the acres) are located in the neuquén basin (west-central Argentina) block and geopark’s geoscience team has identified and delineated which represents the most prolific hydrocarbon producing basin in multiple potential hydrocarbon-bearing prospects. the potential Argentina, accounting for over forty per cent of its total oil of the lower magallanes and tobifera geological formations as been production and over sixty per cent of its total gas production. underexplored. geopark is the operator of the Del mosquito block and has a 100 proven producing fairway, where large hydrocarbon accumulations per cent working interest. geopark established oil production on the exist. there are excellent source rocks, multiple reservoir objectives block in 2002 by rehabilitating the abandoned Del mosquito field. and large structural traps. the oil potential on the blocks can be in 2004, geopark discovered a new field – Del mosquito norte – characterised as high risk with potentially high associated costs. the blocks are located in the Andean fold and thrust belt, along a which currently has two producing wells. the discovery well on Del mosquito norte was the first well drilled on the block since the geopark is the operator of the cerro Doña Juana and loma 1980’s. in accordance with prevailing regulations, geopark cortaderal blocks and has a 100 per cent working interest in each relinquished approximately 38% of the Del mosquito block back to block. in 2007, geopark established oil production on the loma the province of santa cruz at the end of 2008. geopark is evaluating cortaderal block after repairing an existing well. (well is currently potential drilling opportunities on Del mosquito and also evaluating shut-in waiting for a workover). in accordance with prevailing the option of bringing a partner into the project to increase regulations, geopark relinquished approximately 36% of the two investment activity. During 2010, the company will reprocess and blocks back to the province of mendoza at the end of 2007. further reinterpret a 3D seismic survey with the objective to drill a new geological studies were performed on the blocks during 2009 with well on Del mosquito during 2011. the expectation of developing a future exploration and development program and providing a basis to potentially farm-out the blocks. year in review / Assets 29 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. 30 year in review / capabilities people / cApAbilities geopArk is builDing the strongest oil AnD gAs finDing AnD proDucing teAm in the region. this is our competitiVe ADVAntAge. year in review / capabilities 31 Year In reVIeW 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 quickly commercialise its oil and gas reserves, GeoPark also invests in and builds the infrastructure (plants and pipelines) necessary to produce, process, store and transport • • 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 nine wells in 2009. created a new service company subsidiary – southern cross services its hydrocarbon reserves to market. – to own and operate a workover rig for testing and completion operations. The workover rig was assembled and rebuilt during 2007 examples of these projects in 2009 include: and was used to test and complete ten wells during 2009. 32 Year in review / capabilities Tools and InfrasTrucTure / capabIlITIes fell block driling operation • began expanding the capacity of the Kimiri aike gas production • built new oil and gas production gathering centers (processing plant (dew point and compression facility) on the fell block from and storage facilities) and constructed an additional 10 kilometres 35 million cubic feet per day of gas to 47 million cubic feet per day of gas pipelines on the fell block to connect new oil and gas with the addition of another compressor – and performed other fields to production. approximately 135 kilometres of gas pipelines works to expand Geopark’s total natural gas processing and have been built on the block since 2006. selling capacity to 60 million cubic feet per day. The Kimiri aike facility, which originated in bolivia and is being leased from the • built a new storage facility at the enap san Gregorio refinery to exterran compression company under a long term contract, was receive and market new crude oil deliveries. rehabilitated and leased put into operation during 2007 after an investment (including an existing enap oil treatment and storage facility at faro este to the construction of associated tank batteries) of us$6.5 million. handle the increased crude oil production until a new facility will be The plant provides direct access to the main regional gas pipeline constructed on the fell block in 2011. and allows rapid commercialisation of new production wells. Year in review / capabilities 33 Year In reVIeW 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. Kimiri aike dew point gas processing plant capITal To successfully participate in the capital-intensive oil and gas shareholders needed to facilitate its future growth. business, Geopark is continuously developing potential funding sources to ensure the efficient development of its assets. To every year, Geopark has made progress in strengthening its date, approximately us$180 million has been raised by Geopark balance sheet through new funding, increased revenues and – demonstrating its ability to attract the capital and strong debt repayments. Key financings included: International Fianance Corporation World Bank Group 34 Year in review / capabilities capITal / capabIlITIes • - 2006 International finance corporation of the World bank (“Ifc”) equity company. The placing was limited to 10% of the current issued share investment in february 2006 for us$10 million following a thorough capital of the company and was oversubscribed. technical, financial and environmental review of Geopark. - Methanex Gas pre-sale loan facility for us$15.0 million. This facility - admission to the london stock exchange alternative Investment provided us$15.0 million from Methanex in order to increase Market (aIM) in May 2006 which resulted in: - us$35 million for new capital investment - access to the capital markets development of the fell block. conditions include: - pay back in gas over five years in fixed installments beginning september 2010 - a base of strong institutional shareholders - an interest rate paid on borrowed funds determined by gas delivery - Improvement in Geopark’s ability to attract, volumes recruit and retain key employees - potential acquisition currency - Methanex loan for us$3.3 million. This facility provides us$3.3 million, interest-free, from Methanex in order to finance the - Ifc loan in december 2006 for us$20 million to accelerate the exploration, development and production of natural gas from the development program and which reconfirmed the Ifc’s long term otway block. • - support for Geopark. 2007 - Ifc loan rescheduling of us$14.0 million. In november 2009, the Ifc agreed to reschedule the outstanding us$14.0 million from its 2006 Methanex Gas pre-sale loan facility for us$40 million. This loan to Geopark. The rescheduling extends the maturity until 2016 agreement provided us$40 million from Methanex in order to and includes an eighteen month repayment grace period and a increase development of the fell block. conditions include: reduced repayment schedule thereafter. - pay back in gas production over six years in variable installments - an interest rate paid on borrowed funds of lIbor flat. - chile stock exchange listing. following the approval of the chilean • 2008 superintendencia de Valores y seguros (sVs), Geopark’s stock was admitted to trade on the santiago offshore stock exchange in new equity funding of approximately us$24 million (3,080,000 chile in october 2009. This development strengthens Geopark’s shares at Gbp 3.94) in May 2008 from a strategic block of chilean foundations in the region and ties to the chilean financial investors and pension funds, the Ifc and certain london institutional community which is becoming an increasingly active supporter of investors. The placing, which was limited to 10% of the current issued the company’s efforts. share capital of the company, was significantly oversubscribed. • - 2009 - as a result of Geopark’s performance, four stock market oil and gas analysts cover Geopark and provide valuations on the company. new equity funding of approximately us$11.8 million (3,437,000 These include three analysts in london (as of March 2010) and one shares at Gbp 2.25) in May 2009 from a block of Geopark’s founders, analyst in chile – with all four maintaining “buy” recommendations. directors and shareholders and including the Ifc and certain london and chilean institutional investors. The placing, which was limited to 10% of the current issued share capital of the company, was • - significantly oversubscribed. 2010 strategic partnership with lG International to jointly acquire upstream oil and gas assets in latin america in side-by-side acquisitions. This partnership enables Geopark to both accelerate - new equity funding of approximately us$20.5 million (3,784,000 and expand its current efforts to acquire new projects. (This shares at Gbp 3.23) in november 2009 from a new strategic investor agreement was entered into in March 2010.) in the usa, a uK institutional investor, the Ifc and a director of the Year in review / capabilities 35 Year In reVIeW Colombia Perú Brasil Santiago Buenos Aires Chile Argentina Punta Arenas Latin America is an attractive growth region for GeoPark because of the following fundamentals: • • • • • • • • • 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 balance Market: substantial immediate and long term energy requirements Trends: regional industry reorientation favours smaller technically-proficient companies 36 Year in review / opportunity opporTunITY laTIn aMerIca's econoMIc fuTure Is dependenT on THe deVelopMenT of secure enerGY supplIes - and GeoparK Is Well posITIoned To parTIcIpaTe In THIs GroWInG opporTunITY. pampa larga production facility Year in review / opportunity 37 Year In reVIeW GroWTH Geopark’s management believes shareholder value is increased most • strategic mix of partners to facilitate organic and inorganic growth. economically by consistently pursuing a strategy of discovery and development of oil and gas deposits in areas in or nearby known Geopark’s opportunity portfolio includes multiple in-house projects reserves. Geopark implements this strategy through a business plan and an asset foundation from which to pursue a targeted acquisition which emphasises: plan, which is expected to include both asset and corporate targets. Its full-cycle exploration and production work program allows the • Technical strength in economically finding, developing and company to move forward along different lines simultaneously and producing new and bypassed oil and gas reserves; independently. This available mix of rehabilitation, development, • commercial capabilities in acquiring high potential assets at exploration and acquisition opportunities allows Geopark to balance attractive prices; its risk exposure and ensure continuous growth. • risk-management in expanding the portfolio, increasing options and protecting against uncertainties; and GeoparK can noW delIVer Value To our sHareHolders boTH orGanIcallY on exIsTInG asseTs, supporTed bY InVesTMenT froM InTernallY GeneraTed casH floW, and bY expandInG InTo neW proJecTs THrouGHouT THe reGIon. 38 Year in review / opportunity GroWTH / opporTunITY rIsK ManaGeMenT since its founding, Geopark has approached building its business • Regulatory / Political: Multi-country footprint; local knowledge and with a long term view and a keen appreciation of the inherent ownership; Ifc shareholding; speed initiative. uncertainties associated with the oil and gas industry – both above • Capital / Balance Sheet: Multiple capital sources (funders and regions); and below ground. consequently, efforts are consistently made to creative and inexpensive financing; long term strategic partners. balance activities and diversify support. Geopark’s ability to continue • Market / Infrastructure: areas with high market demand and growing during the global crisis in 2009 reflected the company’s infrastructure in place; financially-strong clients. success in this regard. • Project Economics: balanced work program of production, examples of key risk management elements addressed efficiency. by Geopark include: • Organisation / Management: build good demographics (seasoned • Subsurface / Geological: Invest in best people and balanced projects professionals with new recruits); local organisations; all employees are (proven production plus development and exploration upside). shareholders. development and exploration; invest in technology and operational Year in review / opportunity 39 Year In reVIeW aonikenk oil field 40 Year in review / opportunity GroWTH / opporTunITY orGanIc GroWTH With over 3.7 million gross acres and a large and balanced prospect bring a mix of production and development opportunities with inventory on its six hydrocarbon blocks in chile and argentina, attractive exploration acreage and which utilise, where applicable, Geopark has an attractive land position and high growth potential various forms of participation including block acquisitions, farm-ins, from its existing properties. corporate transactions, work and investment commitments and/or operator-earned interests. from its history and work in the region, In 2010, Geopark will pursue a us$50-60 million investment program Geopark has identified and screened multiple attractive properties to drill 14-17 new wells and to expand its production facilities and which it believes can be available for acquisition at favourable terms. infrastructure in chile and argentina. The program is targeted to develop existing fields and discover new fields in order to both In March 2010, Geopark entered into a strategic partnership with lG increase oil and gas production and increase oil and gas reserves – International for the purposes of this objective and to jointly acquire with the objective of increasing total annual oil and gas production and develop upstream oil and gas projects in latin america. The (boepd) by approximately 25%. efforts also will be focused on intent of the lGI-Geopark partnership is to build a risk-balanced improving reservoir performance by fracture stimulation programs, portfolio of upstream opportunities across latin america – and to expanding the prospect inventory, and increasing the efficiency leverage the platform and experience of both partners to identify of expenditures. exploration also has been initiated on Geopark’s and carry out side-by-side acquisitions; initially targeting upstream new Tranquilo and otway blocks in chile, where some attractive projects in the us$100-500 million range size. Geopark will be targets are now being identified. the manager of the strategic partnership and operator of acquired neW proJecTs projects. Geopark will have the right to earn additional equity interests in each project, in addition to its working interest, in accordance with a formula based upon the financial performance of each acquired project. The initial term of the partnership is three following its successful development of its chile project, Geopark years and the target for closing the first acquisition is during 2010. now intends to leverage its strategic operating and management base and its technical and commercial capabilities to acquire new additional strategic relationships supporting Geopark’s growth assets where suitable opportunities arise. This represents a new include the Ifc (World bank), enap (chilean state oil company), growth phase for the company with assets being targeted which and Methanex (largest regional gas consumer). Year in review / opportunity 41 Year In reVIeW naTural Gas over the long term, Geopark has continued to benefit from the opportunity for Geopark. as a result, Geopark entered into a strategic major changes undergoing the regional gas markets. In particular, alliance with Methanex providing for a ten year gas purchase and the supply of gas from argentina to chile has been severely limited Este es una epigrafe and, as the only private-sector gas producer currently in chile, this figurado que debera market shift has substantially increased the value of Geopark’s ser redactado en su oportunidad. chilean gas reserves. 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. located approximately 140 kilometres from Geopark’s fell block, during 2009, the global economic crisis created a general collapse Methanex operates a us$1.2 billion plant in chile which has in commodity prices as world-wide industrial activity was severely the capacity to consume 350 million cubic feet per day of gas and cut back. Global methanol prices fell approximately 47% during produce over 10 per cent of the world’s methanol supply. over 2009 resulting in a corresponding decrease in natural gas prices for sixty percent of the Methanex gas supply, which historically has Geopark in chile of 54%. first quarter 2010 gas prices have recovered originated in argentina, was cut-off by argentina export duties and are currently 36% higher than 2009 average prices. and restrictions in 2007; thereby creating an important market 42 Year in review / opportunity MarKeT / opporTunITY crude oIl crude oil markets in the region are both accessible and secure. In crude oil prices in chile decreased 40% during 2009 in line with chile, Geopark’s crude oil and condensate production is sold to enap world petroleum markets. first Quarter 2010 crude oil prices have (the chilean state oil company) and delivered by truck from the recovered and are currently 38% higher than 2009 levels. (argentina Geopark wells to enap’s refining facilities or pipeline access. The sales prices fluctuate relatively minor amounts as a result of prevailing price is equivalent to WTI less quality adjustments (based on degrees retention taxes which cap crude oil prices.) apI and mercury content). To accommodate increased oil deliveries, Geopark has also built truck reception, metering and storage facilities at the enap san Gregorio refinery. In argentina, Geopark’s oil production is sold to petrobras (the brazilian state oil company) at WTI less quality and argentina retention tax adjustments. Geopark’s crude oil is trucked to a local facility located 40 km from the del Mosquito field. Methanex plant - cabo negro Year in review / opportunity 43 Year In reVIeW coMMITMenT long term success for international resource companies depends • Geopark is committed to delivering significant bottom-line financial upon solving complex logistical and operational challenges, value to our shareholders. only a financially-healthy company, with overcoming competition for new opportunities and good people, proper corporate governance, can continue to grow, attract needed and meeting a broadening set of demands and standards from local resources and create real long term benefits. governments and core constituencies. Meeting these challenges and performing to these new standards are what differentiate a • Geopark is committed to creating a safe and motivating successful company from the rest of the pack. workplace for employees. With today’s shortage of capable energy professionals, the company which is able to attract, protect, retain “creating Value and Giving back” represents Geopark’s integrated and train the best team with the best attitude will always prevail. and market-based approach for meeting these challenges by aligning our business objectives with our core values and • Geopark is committed to minimising the impact of our projects on responsibilities. Geopark’s overall business plan is to create long the environment. as our footprint becomes cleaner and smaller – term value by finding and producing energy, based on good the more areas and opportunities will be opened up for us to work science and efficient operations, and to return that value to our core in. our long term well-being requires us to properly fit within our constituencies, which we define as our: shareholders, employees, natural surroundings. communities and environment. 44 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. • Geopark is committed to being the preferred neighbour and for social accountability and worker rights issues; the development partner by creating a mutually beneficial exchange with the local standards of the World bank; and the Quoted companies alliance communities where we work. unlocking local knowledge creates standards for good corporate governance. and supports long term sustainable value in our projects. simply put, if our efforts enhance local goals and customs, we will be invited to “creating Value and Giving back” represents Geopark’s underlying do more. value system which provides us the leadership, confidence and foundation required for long term success. and, it reflects our pride Geopark’s specific methodology is focused on undertaking realistic in achieving an important mission in the right way. If we are the true and practical programs based on best world practices. our emphasis performer, the best place to work, the preferred partner and the is on building key principles and company-wide ownership and cleanest operator - our future is bigger, better and more secure. then expanding programs from within as we continue to grow. our comprehensive in-house designed eHss management program, entitled s.p.e.e.d. (for safety, prosperity, employees, environment and community development), is being developed in accordance with: Iso 14001 for environmental management issues; osHas 18001 for occupational health and safety management issues; sa 8000 Year in review / commitment 45 46 directors’ report Directors’ Report The Directors submit their report together with the audited consolidated 2. Year-End Cash and Debt Position financial statements of GeoPark Holdings Limited (the Company) for the year ended 31 December 2009. The Company and its subsidiaries together are The Group’s year-end cash position was US$23.8 Million. Year-end debt was referred to herein as the Group. Addresses The Registered office address is Milner House, 18 Parliament Street, Hamilton US$60.4 million - of which approximately 75% represents gas pre-sale funding from Methanex Corporation and which is repaid in gas deliveries to Methanex’s methanol plant in southern Chile. HM 12, Bermuda. The Company has a representative office at 35 Piccadilly, 3. Principal Risks and Uncertainties London, United Kingdom. Principal Activity The principal activity of the Group in the period under review was to Given the nature of the upstream oil and gas business, effective operational and financial risk management is a principal focus of the Group. Efforts are continuously made to balance and manage long-term work programs, capital produce, develop and explore for oil and gas reserves in Chile and Argentina. sources, regulatory issues, oil and gas markets and organisational issues in The Group owns and operates six hydrocarbon blocks including the Fell, order to achieve continuous growth. Otway and Tranquilo Blocks in Chile and the Del Mosquito, Cerro Doña Juana and Loma Cortaderal Blocks in Argentina. A description of the principal risks to which the Group are exposed and a description of financial risk management objectives and policies of the Group Business Review The Business Review is intended to provide a balanced and comprehensive are included in: analysis of the development and performance of the business of the a. Note 3 to the Financial Statements (Pages 68 to 69); and Company during the year and its position at the year end. Key elements b. Year In Review (Growth and Risk Management sections, Pages 38 to 39) of the Business Review are contained within the Annual Report and accompanying documents. The Business Review has been divided in the 4. Health, Safety, Environment and Community Development: S.P.E.E.D. following areas: 1. Development and Performance The Group seeks to ensure that its operations are conducted in a safe manner and to minimize any impact on the environment. The Group’s in-house designed EHSS management program, entitled S.P.E.E.D. (for The Group has successfully improved and strengthened its business during Safety, Prosperity, Employees, Environment and Community Development), 2009. Despite the backdrop of the global economic crisis and a significant is being developed in accordance with: ISO 14001 for environmental decline in oil and gas prices, the Group measured increases or improvements management issues; OSHAS 18001 for occupational health and safety in oil and gas production, oil and gas reserves, revenues, adjusted EBITDA, management issues; SA 8000 for social accountability and worker rights balance sheet, organisation, safety performance and market capitalisation. issues; the Development Standards of the World Bank; and the Quoted The Group had a net loss in 2009 principally resulting from certain non-cash Companies Alliance standards for good corporate governance. During 2009, and impairment charges. A detailed review of the operations, development and performance of the Group's business is included in: the Group worked to improve its S.P.E.E.D. Program by establishing objectives, increasing the safety training of all its employees, effective monitoring of all incidents and the benchmarking against global industry standards. The S.P.E.E.D. Program is described in further detail in the section titled “Commitment” (Pages 44 to 45). a. Letter to Shareholders (Pages 2 to 11); and b. Year in Review (Pages 12 to 45) Directors’ Report 47 Key Performance Indicators The Group uses a number of financial and non-financial key performance indicators in order to measure performance, which are set out below: 2009 2008 2009 vs 2008 Oil and Gas 2P Reserve Growth (millions of barrels of oil equivalent - boe) 42.2 (1) 33.1 + 27% Oil and Gas Production Growth (boe per day) 6,320 3,390 + 86% Average Realised Sales Price Oil (US$ per bbl) Gas (US$ per mcf) Total Revenues (US$ million) Adjusted EBITDA (2) US$ million US$ per boe Operating Costs US$ per boe Gearing Ratio (3) 54.1 2.2 44.8 17.7 7.7 5.9 41% 96.0 4.7 38.4 17.7 14.3 8.5 47% - 44% - 54% + 17% 0% - 46% - 30% - 6 % (1) Adjusted for production (2) As defined in Note 6 (3) Calculated as total borrowing over total capital (borrowings + equity) 1. Production and Revenue 2. Production Costs During 2009, oil and gas production increased as a result of the Group’s in 2008 - resulting principally from higher depreciation charges and to successful drilling program on the Fell Block in Chile, which resulted in nine a lesser extent an increase in operating expenditures resulting from larger Production costs in 2009 increased to US$29.6 million from US$19.1 million productive wells out of nine wells drilled. The drilling campaign also resulted production volumes. in increased oil production thereby rebalancing the mix of oil versus gas production. a. Depreciation charges Production Oil (in thousand of bbls) Gas (in thousand of mcf) 2009 402 11,798 2008 104 7,603 Capitalised costs of proved oil and gas properties are depreciated on a block- 2009 vs 2008 286% by-block basis, using the unit of production method and based on proved and probable reserves - as defined in chapter 19 of the listing rules of the 55% United Kingdom Listing Authority (UKLA). Oil and gas reserves for this purpose are determined in accordance with Society of Petroleum Engineers As a result of the sharp decline in oil and gas prices, the significant oil and definitions and were estimated by DeGolyer and MacNaughton, the Group’s gas production increases did not achieve a corresponding increase in revenue independent reservoir engineers. The 2009 depreciation charge of US$14.7 growth, which increased only 17% compared to 2008. million represented a 106% increase compared to 2008 (US$7.1 million) resulting principally from the increase in production volumes. The average depreciation charge in 2009 was US$5.80 per barrel of oil equivalent (boe). b. Operating expenditures Operating expenditures (OPEX) per producing unit (boe) is a key indicator measuring the efficiency of the producing process. In 2009, OPEX per boe was reduced to less than US$6.00 per boe representing a 30% reduction compared to 2008. This decrease resulted primarily because fixed operating costs remained at similar levels of 2008, but volumes of production increased. An increase in total OPEX results from an increase in variable costs such as transportation, consumables and other costs that increase in line with increased production volumes. 48 Directors’ Report -5-10EBITDADepreciationInterestsDrilling costsnot associatedto capitalisedprojectsImpairment& write-offNon cash adjustmentsNet loss60504030201002008Increase inoil productionIncrease ingas productionDecrease in gas priceDecrease in oil price2009Revenues 2008 vs 2009 in million of US Dollars38.416.29.2(15.8)(3.2)44.8(5,8)(2,4)(8,0) 3. Adjusted EBITDA Group accounts for exploration and evaluation activities in accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources, capitalising Adjusted EBITDA is another key performance indicator of the Group, and is exploration and evaluation costs until such time as the economic viability defined as earnings before interest, tax, depreciation, amortisation and of producing the underlying resources is determined. Although there were certain non cash items such as write-offs, impairments and share based only successful investments during 2009, the Group decided to take an payments. This measurement excludes the effects of non-recurring impairment charge in respect to previous years’ exploration activities expenditures from the operating segments, such as impairments when it including several wells and investments which required additional appraisal is a result of an isolated, non-recurring event. and development works to determine commercial viability. Consequently, Adjusted EBITDA for 2009 of US$17.7 million was in line with 2008 (US$17.7 and Loma Cortaderal fields in Argentina, and wrote off US$4.4 million of its million). In terms of producing units, the 2009 Adjusted EBITDA equalled previous exploration and development investment in the Fell Block. US$7.70 per boe, compared to US$14.30 per boe in 2008. The 2009 revenue increase resulted from significant production increases, but with lower selling prices, and therefore was not reflected in an Adjusted EBITDA increase since Dividends Cumulative losses for the Group are negative US$26.0 million and therefore higher production levels generated higher production costs. the Directors do not recommend the payment of any dividend for the period the Group took an impairment charge of US$1.4 million on the Del Mosquito 4. Net Result The Group generated a net loss of US$8.0 million in 2009 compared to a net profit of US$3.7 million in 2008. The chart below shows the reconciliation in 2009 of the Adjusted EBITDA to the Net Result. ended 31 December 2009; (2008: nil). The Group is currently reinvesting all cash generated by its operations and intends to continue to reinvest these funds for the near future. Events since the Balance Sheet Date In March 2010, the Group entered into a strategic partnership with LG International Corporation to jointly acquire and develop upstream oil and gas projects in Latin America. The objective of the partnership is to build a risk balanced portfolio of upstream opportunities across Latin America. The Group is the manager of the partnership and will be the operator of any acquired projects, with the right to earn additional equity interests based on the financial performance of each project. In February 2010, the Group submitted, along with its consortia partners in the Otway and Tranquilo Blocks in Chile, a request for Chilean Government approval to reorganise and strengthen the partnership structure of the Otway and Tranquilo Blocks. Following approval from the Chilean Ministry of Energy, the participating interests in both Otway and Tranquilo Blocks will be as follows: GeoPark (25% and Operator), Pluspetrol Chile S.A. (25%), Wintershall Chile Limitada (12.5%), the IFC (12.5%), and Methanex Chile S.A. (12.5%). Charitable and Political Donations During 2009, the Group made charitable donations of US$9,346 (2008: US$16,645). For its community development efforts, the Group encourages the development of new local businesses by contracting services and people for its needs and work program where it operates. The Group uses over 140 local contracting companies in its activities in Chile and has been credited with assisting in the start-up of 14 small businesses. As a result of the devastating earthquake in Chile in March 2010, the Group and its employees pledged approximately US$200,000 to assist earthquake Non cash adjustments include a US$1.2 million loss incurred by the Group victims and in post-earthquake reconstruction efforts. (GeoPark’s people, due to the devaluation of the Argentine peso. assets and operations were unaffected by the earthquake.) Oil and gas exploration and production activities are accounted for in a No political donations are made by the Group. manner similar to the successful efforts method on a field by field basis. The Directors’ Report 49 20151050-5-10EBITDADepreciationInterestsDrilling costsnot associatedto capitalisedprojectsImpairment& write-offNon cash adjustmentsNet lossNet Result and Adjusted EBITDA Reconciliationin million of US Dollars6050Revenues 2008 vs 2009 in million of US Dollars9.2(15.8)44.817,7(14,9)(1,3)(1,2)(5,8)(2,4)(8,0) Directors’ Interests The Directors who served the Company during the year and subsequently, together with their (and their families’) beneficial interests in shares in the Company, were as follows: Name Re-Appointment Audit Nomination Remuneration 31 December 2009 Committees Ordinary share holding of US$ 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 28 July 2009 (*) 28 July 2009 (*) 28 July 2009 (*) 28 July 2009 (*) 28 July 2009 (*) 28 July 2009 (*) (cid:195) (cid:195) 8,172,793 6,983,068 32,318 210,577 (cid:195) (cid:195) (cid:195) (cid:195) Committee Member 1,065,690 Committee Chairman (*)Most recent 30,511 reappointment date Directors’ Remuneration Executive and Non-Executive Directors remuneration is discussed in the 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 Director’s Remuneration Report (Pages 54 to 55). and/or potential loan covenant breaches. Auditor PriceWaterhouseCoopers LLP has completed the audit of the 2009 Financial Considering macroeconomic environment conditions, the performance of the operations and the Group’s cash position, the Directors have formed a Statements, as appointed in the Annual General Meeting held in July 2009 judgement, at the time of approving the financial statements, that there is a and offer themselves for reappointment. reasonable expectation that the Group has adequate resources to continue NOMAD Oriel Securities Limited is the Company's Nominated Advisor under the AIM rules of the London Stock Exchange. with its investment program in order to increase oil and gas reserves, production and revenues and meeting all its obligations for the foreseeable future. For this reason, the Directors have continued to adopt the going concern basis in preparing the consolidated financial statements. Annual General Meeting At the Annual General Meeting of the Company, resolutions will be proposed On behalf of the Board 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. Further details will be set forth in the formal Notice of Meeting. Going Concern The Directors regularly monitor the Group’s cash position and liquidity risks throughout the year to ensure that it has sufficient funds to meet forecast James F. Park Chief Executive Officer operational and investment funding requirements. Sensitivities are run to 12 April 2010 50 Directors’ Report Corporate Governance GeoPark is committed to maintaining high standards of corporate governance which it defines as managing the Group in an efficient, effective Board Members The composition of the Board is a key factor in ensuring that the right mix and entrepreneurial manner for the benefit of all shareholders over the of skills and experience are in place to lead the Group. Chairman and Chief longer term. The Directors strongly intend, as is feasible given the Group’s Executive roles are not exercised by the same individual and the Company size and the constitution of the Board, to comply with the guidelines on should have at least two independent Non-Executive directors. All Directors corporate governance of the Quoted Companies Alliance for AIM companies. submit themselves for reelection at the Annual General Meetings each year - a practice the Group has followed since 2006. All directors proposed to GeoPark’s good corporate governance goals include: shareholders for election are accompanied by a biography and a description - Efficiency: Creating a governing body of an appropriate size to permit The Board is responsible to shareholders for the proper management of of the skills and experience that the Group feels are relevant. efficient decision-making with transparency for major decisions, clear the Group. definition 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: Assembling a governing body with the required skills, determination of the Group’s strategy, and acting as guardian and facilitator provided with the proper information and collectively involved to make the of the Board’s decision-making process. best decisions for the Company. - Entrepreneurial: Defining a vision for the Company with an understanding proposing and developing the Group’s strategy and overall commercial The Chief Executive is responsible for managing the Group’s business, 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. - Shareholder Common Good: Taking decisions which consider the good of In addition, the Chief Executive is responsible for maintaining regular all shareholders and which, if they involve management, major shareholders dialogue with shareholders as part of the Group’s overall investor and other related parties, are reported in a transparent manner. relations programme. Board Matters The role of the Board is to provide strategic leadership, guidance and The Board comprises: perspective to the business on behalf of the shareholders and to ensure that Executive Directors: the risks and rewards of the business are properly managed through Gerald E. O’Shaughnessy - Chairman different phases of the industry’s cycle. James F. Park - Chief Executive Officer The Board sets the Group’s strategic aims, ensuring that the necessary Non-Executive Directors: resources are in place to achieve those aims, and reviews management and Sir Michael R. Jenkins financial performance. It is accountable to shareholders for the creation Christian M. Weyer and delivery of strong, sustainable financial performance and long-term shareholder value. To achieve this, the Board directs and monitors the Group’s Juan Cristóbal Pavez Peter Ryalls affairs within a framework of controls which enable risk to be assessed and managed effectively through clear procedures, lines of responsibility Together, the Executive and Non-Executive Directors bring a broad range and delegated authorities. The Board also has responsibility for setting of business, commercial and other relevant experience to the Board, which is the Group’s core values and standards of business conduct and for ensuring vital to the management of an expanding company. (Page 84 contains that these, together with the Group’s obligations to its stakeholders, are descriptions of the background of each Director). widely understood throughout the Group. Corporate Governance 51 Board Meetings The Board meets at least quarterly and when issues arise and has a schedule effectiveness. The procedures are reviewed on an ongoing basis. The Group has defined an approval system for capital expenditures and expenses. of matters reserved for decisions of the Board. In addition to those formal This system includes different levels of authorisation based on functions and matters required by relevant local laws to be set before a Board of Directors, position of individuals. The Board has approved the annual budget. the Board will also consider strategy and policy, acquisition and divestment Performance against budget is monitored and reported to the Board. The proposals, approval of major capital investments, risk management policy, internal control system can only provide reasonable and not absolute significant financing matters and statutory shareholder reporting. assurance against material misstatement or loss. The Board has considered the need for an internal audit function but does not consider it necessary The Directors also intend, as is feasible, to hold one meeting per year which at the current time. includes a site visit to the Group’s operation. This field visit, which has occurred every year since 2006, provides important perspective and exposes the Directors directly to the quality and depth of the Group’s operations Induction All new Directors receive an induction as soon as practicable after and workforce. appointment. This includes meetings with senior management, functional and business unit heads and where appropriate, visits to the Company’s Independence The Board reviews the independence of all Non-Executive Directors annually main properties. The Company Secretary also provides new Directors with an overview of their duties as Directors, corporate governance policies and and has determined that all current Non-Executive Directors are independent established Board procedures as part of the induction process. and have no cross-directorships or significant links which could materially interfere with the exercise of their independent judgment. Board Support The Company Secretary is available to advise all Directors and ensure that Board procedures are complied with. The Board has the power to appoint and remove the Company Secretary. A procedure is in place to enable Insurance The Company maintains Directors’ and Officers’ liability insurance cover, the level of which is reviewed annually. Audit Committee The Audit Committee is comprised of three independent Non-Executive Directors, if they so wish, to seek independent professional advice at the Directors (currently being Sir Michael Jenkins, Mr. Peter Ryalls and Group’s expense. Mr. Juan Cristóbal Pavez). The Committee is chaired by Sir Michael Jenkins and met three times during 2009. Timely Information Directors have access to a regular supply of financial, operational, strategic The Committee’s specific responsibilities to the Board are: and regulatory information to assist them in the discharge of their duties. - Reviewing financial statements and formal announcements relating to the Much of this information is provided as part of the normal management Group’s performance; reporting process. Board papers are circulated in time to allow Directors to - Reviewing the effectiveness of the Group’s internal control procedures and be properly briefed in advance of meetings. In addition, Board meetings risk management systems; generally include a review of the history, performance and future potential - Assessing the independence, objectivity and effectiveness of the external of a material individual asset or business unit. This is designed to ensure that all material assets are considered on a cyclical basis and to enable Board auditors; - Making recommendations for the appointment, re-appointment and members to familiarise themselves with the key assets and operations removal of the external auditors and approving their remuneration and terms of the Group. of engagement; Internal Control Review Directors review on an ongoing basis, inter alia, financial, operational, auditor to supply non-audit services to the Group; - Reviewing arrangements by which employees may, in confidence, raise compliance matters and risk management, and approve the annual budget concerns about possible improprieties in matters of financial reporting and - Implementing and monitoring policy on the engagement of the external and monitor performance. The Board has the responsibility to establish and other matters. maintain the Group’s system of internal controls and reviewing its 52 Corporate Governance Nomination Committee The Nomination Committee is comprised of three Directors (currently Throughout 2009, Executive Directors and senior management met with institutional investors and shareholders in Europe, North America and Mr. Christian Weyer, Sir Michael Jenkins and Mr. Gerald O’Shaughnessy), the South America. majority of whom are independent Non-Executive Directors. The Committee is chaired by Mr. Christian Weyer and meets as required. Press releases have been issued throughout the year and the Company maintains a website (www.geo-park.com) on which all press releases The Committee’s specific responsibilities to the Board are: are posted and which also contains major corporate presentations and the - Reviewing the structure, size and composition of the Board and making Financial Statements. Regular updates to record news in relation to the recommendations to the Board with regard to any changes required; Group and the status of exploration and development programmes are also - Identifying and nominating, for Board approval, candidates to fill Board included on the website. Additionally, this Annual Report, which is sent to all vacancies as and when they arise; registered shareholders, contains extensive information about the Group’s - Making recommendations to the Board with regard to membership of activities. Enquiries from individual shareholders on matters relating to their the Audit and Remuneration Committees in consultation with the Chairman shareholdings and the business of the Group are welcomed. Shareholders of each Committee; are also encouraged to attend the Annual General Meeting to discuss - Reviewing the outside directorship/commitments of the non-executive the progress of the Group. Notice of the Annual General Meeting is sent to directors; shareholders at least 20 working days before the meeting and includes - Succession planning for Directors and other senior executives. further information on how to vote by proxy. Remuneration Committee The Remuneration Committee is comprised of three independent In October 2009, following the approval of the SVS (“Superintendencia de Valores y Seguros”) GeoPark’s stock was admitted to trade on the Santiago Non-Executive Directors (currently being Mr. Peter Ryalls, Mr. Christian Weyer Offshore Stock Exchange in Chile. This development strengthens the Group’s and Mr. Juan Cristóbal Pavez). The Committee is chaired by Mr. Peter Ryalls foundations in the Southern Cone and also provides the local financial and meets as required during the year. community the opportunity to more actively participate in the Group. The Committee’s specific responsibilities are: - Determining and agreeing with the Board the remuneration policy for Financial Accounts A statement of Director’s responsibilities in respect of the accounts is set out the Chief Executive Officer, Chairman, Executive Directors and other members on page 56. of the Executive Management; - Reviewing the performance of the Executive Directors and other members of the Executive Management; - Reviewing the design of the share incentive plans for approval by the Board and shareholders. The Director’s Remuneration report on pages 54 to 55 contains further details of the role and activities of the Remuneration Committee. (As described in Note 32, Mr. Peter Ryalls provided operating consultancy to the Group at the beginning of 2009. It is the Board’s opinion that his role as a consultant does not affect his performance or independent judgment in carrying out his duties as a Director.) Shareholder Relations Communication with shareholders is given high priority and there is regular dialogue with institutional investors, as well as general presentations to analysts at the time of the release of the annual and interim results. Corporate Governance 53 Directors’ Remuneration Report The following information is not subject to audit. Remuneration Committee The Company has a Remuneration Committee. The members of the Committee during 2009 were Peter Ryalls (Chairman), Christian Weyer and IPO Award Program and Executive Stock Option Plan: On admission, the Executive Directors, the management and key employees of the Company received the following options over Common shares of the Company; granted under the Executive stock option plan: Juan Cristóbal Pavez who are Non-Executive Directors. IPO Stock Options to Management and Key Employees The Remuneration Committee agrees with the Board the framework for the Nº of % of Issued remuneration of the Chief Executive, the Chairman of the Company and such Underlying Common other members of the Executive Management as it is designated to consider. Common Shares Share Capital Grant Date Exercise Price (£) Earliest Exercise Date Expiry Date No Director plays a part in any discussion about his own remuneration. Approxi- 15 May 15 May 15 May 605,000 mately 1.5% 2006 4.00 2008 2013 Executive remuneration packages are designed to attract, motivate and retain Directors of the calibre required to grow the business and enhance value to IPO Stock Options to Executive Directors Shareholders. The performance measurement of the Executive Directors and the determination of their annual remuneration package are undertaken by the Committee. The Company’s policy is that a substantial proportion of the remuneration of Gerald Name the Executive Directors should be performance related. O’Shaughnessy James F. Park Performance-based Employee Long-Term Incentive Program - Key Terms Intending to align the interests of its management, employees and key 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 2013 15 May 2008 15 May 2013 advisors with those of the Company and its shareholders, the Directors 2008 Stock Awards to Management and Key Employees established a Performance-based Employee Long-Term Incentive Program (“the Plan”). At the Annual General Meeting held on 19 November 2007, Nº of % of Issued Shareholders voted to authorise the Board to use up to 12% of the issued Underlying Common share capital of the Company at the relevant time for the purposes of the Employee Long-Term Incentive Plan. GeoPark’s shareholders authorised the Board of Directors to implement this plan and determine the specific Common Shares Share Capital Approxi- conditions for each program within some broadly-defined guidelines. 1,000,000 mately 2.3% Grant Date 15 Dec 2008 Exercise Price (£) Earliest Exercise Date Expiry Date 15 Dec 15 Dec 0.001 2012 2018 The programs that were approved during 2008 continued to be in place and Considering the previously issued IPO Awards, the total share capital no awards were given during 2009. which can be awarded to employees represents approximately 13.5% of the shares issued. There are approximately 2.5 million shares available for distribution under the Employee Long-Term Incentive Program. 54 Directors’ Remuneration Report Executive Directors’ Contracts It is the Group’s policy that Executive Directors should have contracts of an The remuneration package approved for Non-Executive Directors, which is detailed in the corresponding service contracts, contains the following indefinite term providing for a maximum of one year’s notice. The details components: of the Director’s contracts are summarized below: Gerald O’Shaughnessy Gerald O’Shaughnessy has a service contract with the Company which a) Annual salary of £35,000; the fees payable shall be made up, at the option of the Company, of an issue of new shares in the Company on the basis determined by the Board and/or cash consideration payable provides for him to act as Executive Chairman of the Company at a salary quarterly in arrears. The share price to determine the quantity of shares of US dollars 200,000 per annum. The agreement is stated to continue is the simple average to the daily closing price of the stock in the quarter indefinitely, subject to it being terminable by either party by giving not less prior to the payment date. than 12 months’ notice in writing at any time. The payment of any bonus b) Committee Chairman fee: annual remuneration of £ 5,750 payable to Mr. O’Shaughnessy is at the Company’s discretion. Mr. O’Shaughnessy’s quarterly in arrears in cash. service agreement contains restrictive covenants which restrict him, for a c) Notice for contract termination: 2 Months. period of 12 months following the termination of employment, from soliciting senior employees of the Company and, for a period of 6 months following The following chart summarises the detail of payments made to the termination of employment, from being involved in any competing Non-Executive Directors: undertaking. James Park James Park has a service contract with the Company which provides for Sir Michael Jenkins (1) him to act as Chief Executive Officer of the Company at a salary of US dollars Peter Ryalls (2) 300,000 per annum. The agreement is stated to continue indefinitely, subject Christian Weyer (3) to it being terminable by either party by giving not less than 12 months’ Juan Cristóbal Pavez notice in writing at any time. The payment of any bonus to Mr. Park is at 2009 Cash Payment Stock Payment Non-Executive Committee Director Fees Director’s Fees Chairman Fees Paid in Shares £30,625 £17,500 £17,500 £17,500 £5,750 £5,750 £5,750 - 1,648 6,981 6,981 6,981 the Company’s discretion. Mr. Park’s service agreement contains restrictive Additionally Mr. Peter Ryalls received US$20,000 corresponding to operating covenants which restrict him, for a period of 12 months following the consultancy in 2009 (2008: US$123,000). termination of employment, from soliciting senior employees of the Company and, for a period of 6 months following the termination of employment, (1) Audit Committee Chairman from being involved in any competing undertaking. No bonuses were awarded in 2009 to the Executive Directors. (2) Remuneration Committee Chairman (3) Nominations Committee Chairman Non-Executive Directors Contracts In July 2009, at the Annual General Meeting the shareholders re-elected the Non-Executive Directors. Approval This report was approved by the Board of Directors on 12 April 2010 and signed on its behalf by: Peter Ryalls Chairman, Remuneration Committee 12 April 2010 Directors’ Remuneration Report 55 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 positions, financial performances 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. 56 Statement of Directors’ Responsibilities Independent Auditors’ Report To the Shareholders of GeoPark Holdings Limited We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with We have audited the financial statements of GeoPark Holdings Limited for the sufficient evidence to give reasonable assurance that the financial statements year ended 31 December 2009 which comprise the consolidated statement of are free from material misstatement, whether caused by fraud or other income, the statement of comprehensive income, the consolidated statement irregularity or error. In forming our opinion we also evaluated the overall of financial position, the consolidated statement of changes in equity, the adequacy of the presentation of information in the financial statements. consolidated statement of cash flow and the related notes. These financial statements have been prepared under the accounting policies set out therein. Respective responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the financial statements in accordance with applicable law and International Financial Reporting Standards as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Opinion In our opinion the financial statements give a true and fair view, in accordance with International Financial Reporting Standards as adopted in the European Union, of the state of the Company’s affairs as at 31 December 2009 and of its loss and cash flows for the year then ended. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been PricewaterhouseCoopers LLP prepared for and only for the Company’s shareholders in accordance with Chartered Accountants Section 90 of The Companies Act 1981 (Bermuda) and for no other purpose. London We do not, in giving this opinion, accept or assume responsibility for any 12 April 2010 other purpose or to any other person to whom this report is shown or in to whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, or if we have not received all the information and explanations we require for our audit. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. Independent Auditors’ Report 57 Consolidated Statement of Income 1 January - 31 December Amounts in US$ ´000 Note 2009 2008 7 8 11 12 13 14 15 16 18 18 Net Revenue Production costs Gross Profit Exploration costs Administrative costs Selling expenses Other operating costs Operating (Loss)/Profit Financial income Financial expenses (Loss)/Profit before Income Tax Income Tax (Loss)/Profit for the Year Attributable to: Owners of the Company (Loss)/Earnings per share (in US$) for profit attributable to owners of the Company. Basic (Loss) / Earnings per share (in US$) for profit attributable to owners of the Company. Diluted Statement of Comprehensive Income Amounts in US$ ´000 (Loss) / Income for the year Other comprehensive income: Currency translation differences Total comprehensive (Loss) / Income for year Attributable to: Owners of the Company 44,847 (29,582) 15,265 (6,714) (8,450) (1,345) (2,524) (3,768) 64 (3,765) (7,469) (520) (7,989) (7,989) (0.22) (0.22) 2009 (7,989) (26) (8,015) 38,376 (19,141) 19,235 (4,444) (6,988) (451) (170) 7,182 673 (3,928) 3,927 (276) 3,651 3,651 0.11 0.11 2008 3,651 (18) 3,633 (8,015) 3,633 The notes on pages 62 to 83 are an integral part of these consolidated financial statements. 58 Consolidated Statement of Income Consolidated Statement of Financial Position 31 December Amounts in US$ ´000 Note 2009 2008 Assets Non-Current Assets Property, plant and equipment Prepaid taxes Other financial assets Deferred income tax asset Total Non-Current Assets Current Assets Inventories Trade receivables Prepayments and other receivables Prepaid taxes Cash and cash equivalents Total Current Assets Total Assets Total Equity Equity attributable to owners of the Company Share capital Share premium Reserves Retained losses Total Equity Liabilities Non-Current Liabilities Borrowings Provisions for other long-term liabilities Deferred income tax liability Total Non-Current Liabilities Current Liabilities Borrowings Trade and other payable Provisions for other liabilities Total Current Liabilities Total Liabilities 19 21 24 17 22 23 23 21 24 25 25 25 26 27 17 26 28 122,447 2,965 2,214 302 104,802 3,463 2,141 15 127,928 110,421 2,258 5,908 1,763 668 23,760 34,357 162,285 42 107,524 3,950 (26,034) 85,482 52,174 1,021 1,086 54,281 8,236 12,923 1,363 22,522 76,803 1,171 8,434 1,383 2,688 5,710 19,386 129,807 34 75,575 4,095 (19,207) 60,497 42,253 1,548 276 44,077 11,427 11,269 2,537 25,233 69,310 Total Equity and Liabilities 162,285 129,807 The notes on pages 62 to 83 are an integral part of these consolidated financial statements. The financial statements were approved by the Board of Directors on 12 April 2010. Consolidated Statement of Financial Position 59 Consolidated Statement of Changes in Equity 1 January - 31 December Amount in US$ ’000 Capital Premium Reserve Reserve Losses Total Attributable to owners of the Company Share Share Other Translation Retained Equity at 1 January 2008 Comprehensive income: Profit for the year Other comprehensive income: Currency translation differences Total Comprehensive Income for the Year 2008 Transactions with owners: Proceeds from issue of shares Share based payment (Note 29) Total 2008 31 52,714 3,260 938 (24,337) 32,606 - - - 3 - 3 - - - 22,672 189 22,861 - - - - (85) (85) - 3,651 3,651 (18) (18) - (18) 3,651 3,633 - - - - 22,675 1,479 1,479 1,583 24,258 Balances at 31 December 2008 34 75,575 3,175 920 (19,207) 60,497 Comprehensive income: Loss for the year Other comprehensive income: Currency translation differences Total Comprehensive Income for the Year 2009 Transactions with owners: Proceeds from issue of shares Share based payment (Note 29) Total 2009 - - - 8 - 8 - - - 31,680 269 31,949 - - - - (119) (119) - (7,989) (7,989) (26) (26) - (26) (7,989) (8,015) - - - - 31,688 1,162 1,162 1,312 33,000 Balances at 31 December 2009 42 107,524 3,056 894 (26,034) 85,482 The notes on pages 62 to 83 are an integral part of these consolidated financial statements. 60 Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flow 1 January - 31 December Amounts in US$ ’000 Note 2009 2008 Cash flows from operating activities (Loss) / Income for the year Adjustments for: Income tax for the year Depreciation of the year Profit on disposal of property, plant and equipment Write-off of unsuccessful efforts Impairment loss Relinquishment of Del Mosquito Area Accrual of borrowing’s interests Unwinding of discount Accrual of stock options and stock awards Exchange difference generated by borrowings Changes in working capital Cash flows from operating activities - net Cash flows from investing activities Purchase of property, plant and equipment Proceeds on disposal of property, plant and equipment Purchase of financial assets 16 9 11 13 11 15 5 19 (7,989) 520 14,922 - 4,345 1,490 - 880 165 1,312 504 5,018 21,167 3,651 276 7,440 (143) 273 - 1,149 1,931 (434) 1,583 1,193 (1,723) 15,196 (40,440) (58,142) - (65) 209 - Cash flows used in investing activities - net (40,505) (57,933) Cash flows from financing activities Proceeds from borrowings Proceeds from issue of common shares Principal paid Interest paid Cash flows from financing activities - net 15,000 31,688 (8,092) (1,191) 37,405 26,319 22,675 (7,117) (2,183) 39,694 Net increase/(decrease) in cash and cash equivalents 18,067 (3,043) 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 in bank Cash in hand Cash and cash equivalents 5,710 (17) 23,760 23,757 3 23,760 The notes on pages 62 to 83 are an integral part of these consolidated financial statements. 8,710 43 5,710 5,707 3 5,710 Consolidated Statement of Cash Flow 61 Notes Note 1 General Information 2.1.1 Changes in accounting policy and disclosure New and amended standards adopted by the Group The following are the new and amended accounting standards mandatory GeoPark Holdings Limited (the Company) is a company incorporated under for the first time for the financial year beginning 1 January 2009, which had the laws of Bermuda. The addresses of its registered office and principal an impact on the Group’s financial statements: places of business are disclosed in the introduction to the Directors’ Report. The principal activities of the Company and its subsidiaries (the Group) are - IAS 1 (revised), “Presentation of financial statements”. The revised standard described in the Directors’ Report. prohibits the presentation of items of income and expenses (that is ’non- owner changes in equity’) in the statement of changes in equity, requiring The Company is quoted on the AIM London Stock Exchange. Also following ’non-owner changes in equity’ to be presented separately from owner approval of the Superintendencia de Valores y Seguros (Securities and changes in equity. All ’non-owner changes in equity’ are required to be shown Insurance Supervisor) in Chile, its shares are authorised for trading on the in a performance statement. The Company has elected to present all items Santiago Off-Shore Stock Exchange, and those shares commenced trading on of income and expense recognised in a year in two statements: a statement 30 October, 2009 (in US$) under the trading symbol “GPK”. displaying components of profit or loss (separate income statement) and a second statement beginning with profit or loss and displaying components These consolidated financial statements were authorised for issue by the of other comprehensive income (statement of comprehensive income). Board of Directors on 12 April 2010. Comparative information has been represented so that it also is in conformity with the revised standard. As the change in accounting policy only impacts presentation aspects, there is no impact on earning per share. Note 2 Summary of significant accounting policies - IFRS 8, “Operating segments”. IFRS 8 replaces IAS 14, “Segment reporting”. It The principal accounting policies applied in the preparation of these presented on the same basis as that used for internal reporting purposes. As consolidated financial statements are set out below. These policies have the change in accounting policy only impacts presentation aspects, there is been consistently applied to the years presented, unless otherwise stated. no impact on earning per share. requires a ’management approach’ under which segment information is 2.1 Basis of preparation The consolidated financial statements of GeoPark Holdings Limited have - IFRS 2 (amendment), ’Share-based payment’ (effective 1 January 2009) deals with vesting conditions and cancellations. It clarifies that vesting conditions been prepared in accordance with International Financial Reporting are service conditions and performance conditions only. Other features Standards as adopted by the European Union (IFRS). of a share-based payment are not vesting conditions. These features would The consolidated financial statements are presented in United States dollars employees and other providing similar services; they would not impact the and all values are rounded to the nearest thousand (US$’000), except where number of awards expected to vest or valuation there of subsequent to grant need to be included in the grant date fair value for transactions with otherwise indicated. The consolidated financial statements have been prepared on a historical cost date. All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group and Company has adopted IFRS 2 (amendment) from 1 January 2009. The amendment does not basis, modified by the recording of inventories at net realisable value. have a material impact on the Group or Company’s financial statements. The preparation of financial statements in conformity with IFRS requires the - IAS 23 (amendment), “Borrowing costs” requires an entity to capitalise use of certain critical accounting estimates. It also requires management borrowing costs directly attributable to the acquisition, construction to exercise its judgement in the process of applying the Group’s accounting or production of a qualifying asset (one that takes a substantial period of policies. The areas involving a higher degree of judgement or complexity, time to get ready for use or sale) as part of the cost of that asset. The option or areas where assumptions and estimates are significant to the consolidated of immediately expensing those borrowing costs has been removed. financial statements are disclosed in Note 4. The Company has capitalised borrowing cost for wells and facilities that were initiated after 1 January 2009. Amounts capitalised totalled US$ 221,535, using an average rate of 3.85%. 62 Notes to the Consolidated Financial Statements There are other new standards that are applicable for the year but they are not relevant to the operations of the Group. 2.2 Going concern The Directors regularly monitor the Group’s cash position and liquidity risks throughout the year to ensure that it has sufficient funds to meet Standards, amendments and interpretations to existing standards that are not forecast operational and investment funding requirements. Sensitivities are yet effective nor adopted early by the Group The following standards, amendments and interpretations to existing 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 standards have been published and are mandatory for the Group’s and/or potential loan covenant breaches. accounting periods beginning on or after 1 January 2010, but the Group has not early adopted them: Considering macroeconomic environment conditions, the performance of the operations and Group’s cash position, the Directors have formed a - IAS 27 (Revised), ’Consolidated and separate financial statements’ (effective judgement, at the time of approving the financial statements, that there is from 1 July 2009). The revised standard requires the effects of all transactions a reasonable expectation that the Group has adequate resources to continue with non-controlling interests to be recorded in equity if there is no change with its investment program in order to increase oil and gas reserves, in control and these transactions will no longer result in goodwill or production and revenues and meeting all its obligations for the foreseeable gains and losses. The standard also specifies the accounting when control future. For this reason, the Directors have continued to adopt the going is lost. Any remaining interest in the entity is remeasured to fair value, concern basis in preparing the consolidated financial statements. and a gain or loss is recognised in profit or loss. The Group will apply IAS 27 (revised) prospectively to transactions with non-controlling interests from 1 January 2010. 2.3 Consolidation The consolidated financial statements consolidate those of the Company and all of its subsidiary undertakings drawn up to the Balance Sheet date. - IFRS 3 (Revised), ’Business combinations’ (effective from 1 July 2009). Subsidiaries are entities over which the Group has the power to control the The revised standard continues to apply the acquisition method to business financial and operating policies so as to obtain benefits from its activities, combinations, with some significant changes. For example, all payments generally accompanying a shareholding of more than one half of the voting to purchase a business are to be recorded at fair value at the acquisition date, rights. Subsidiaries are fully consolidated from the date on which control with contingent payments classified as debt subsequently re-measured is transferred to the Group. through the income statement. There is a choice on an acquisition-by- acquisition basis to measure the non-controlling interest in the acquiree at Intercompany transactions, balances and unrealised gains on transactions fair value or at the non-controlling interest’s proportionate share of the between the Group and its subsidiaries are eliminated. Unrealised losses are acquiree’s net assets. All acquisition-related costs should be expensed. The also eliminated unless the transaction provides evidence of an impairment Group will apply IFRS 3 (revised) prospectively to all business combinations of the asset transferred. Amounts reported in the financial statements of from 1 January 2010. subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. - IFRS 2 (amendments), ’Group cash-settled and share-based payment transactions’. In addition to incorporating IFRIC 8, ’Scope of IFRS 2’, and IFRIC 11, ’IFRS 2 - Group and treasury share transactions’, the amendments expand on the guidance in IFRIC 11 to address the classification of group 2.4 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating arrangements that were not covered by that interpretation. decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the strategic None of the above is currently expected to have a material impact on the steering committee that makes strategic decisions. This committee is Group’s financial statements. integrated by the CEO, Managing Director, CFO and managers in charge of the Geoscience, Drilling, Operations and S.P.E.E.D. departments. This There are other standards but they are not relevant to the operations of committee reviews the Group’s internal reporting in order to assess the Group. performance and allocate resources. Management has determined the operating segments based on these reports. Notes to the Consolidated Financial Statements 63 2.5 Foreign currency translation a) Functional and presentation currency The consolidated financial statements are presented in US dollars, which is the Group’s presentation currency. Material intercompany transactions, balances and unrealised gains (losses) on transactions between the Group subsidiaries have been eliminated in consolidation. However, since the functional currency of some subsidiaries is its respective local currency, some financial gains (losses) arising from inter-company transactions are generated. During the year, US$ 740,267 were registered from intercompany loans denominated in US dollars from Items included in the financial statements of each of the Group’s entities are the parent company to subsidiaries in Argentina. These are included in measured using the currency of the primary economic environment in the Consolidated Income Statement under Financial expenses. which the entity operates (the “functional currency”). The functional currency of Group companies incorporated in Chile is the US dollar. Effective from 1 January 2008, the Chilean subsidiaries changed the functional currency 2.6 Joint ventures The Company’s interests in oil and gas related joint ventures and other from Chilean peso to the US dollar. agreements involved in oil and gas exploration and production, have been consolidated line by line on the basis of the Company’s proportional share For the Argentine subsidiary the functional currency is the Argentine peso. in their assets, liabilities, revenues, costs and expenses. b) Transactions and balances Foreign currency transactions are translated into the functional currency 2.7 Revenue recognition Revenue from the sale of crude oil and gas is recognised in the Statement of using the exchange rates prevailing at the dates of the transactions. Foreign Income when supply and risk transfer to the purchaser has taken place, exchange gains and losses resulting from the settlement of such transactions and if the revenue can be measured reliably and is expected to be received. and from the translation at period end exchange rates of monetary assets Revenue is shown net of VAT and discounts related to the sale. and liabilities denominated in foreign currencies are recognised in the Statement of Income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the 2.8 Production costs Production costs include wages and salaries incurred to achieve the functional currency are included in other operating profit or other operating net revenue for the year. Direct and indirect costs of raw materials and expenses. consumables, rentals and leasing, property, plant and equipment depreciation and royalties are also included within this account. c) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional 2.9 Financial costs Financial costs include interest expenses, realised and unrealised gains and currency different from the presentation currency are translated into losses arising from transactions in foreign currencies and the amortisation the presentation currency as follows: of financial assets and liabilities. The Company has capitalised borrowing (a) assets and liabilities for each balance sheet presented are translated at cost for wells and facilities that were initiated after 1 January 2009. Amounts the closing rate at the date of that balance sheet; capitalised totalled US$ 221,535. No finance costs have been capitalised (b) income and expenses for each income statement are translated at average during 2008. exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and 2.10 Property, plant and equipment Property, plant and equipment are stated at historical cost less depreciation and impairment if applicable. Historical cost includes expenditure that is (c) all resulting exchange differences are recognised as a separate component directly attributable to the acquisition of the items; including provisions for of equity. asset retirement obligation. On consolidation, exchange differences arising from the translation of Oil and gas exploration and production activities are accounted for in a the net investment in foreign operations, and of borrowings are taken to manner similar to the successful efforts method on a field by field basis. shareholders’ equity. On disposal of a foreign operation the cumulative The Group accounts for exploration and evaluation activities in accordance translation differences (including, if applicable, gains and losses on with IFRS 6, Exploration for and Evaluation of Mineral Resources, capitalising related hedges) are transferred to the Income Statement as part of the gain exploration and evaluation costs until such time as the economic viability or loss on disposal. 64 Notes to the Consolidated Financial Statements of producing the underlying resources is determined. Costs incurred prior to been calculated by means of the straight line method by applying such obtaining legal rights to explore are expensed immediately to the income annual rates as required to write-off their value at the end of their estimated statement. useful lives. The useful lives range between 3 years and 10 years. Exploration and evaluation costs may include: license acquisition, Depreciation is allocated in the Income Statement as production, exploration geological and geophysical studies (i.e.: seismic), direct labor costs and and administrative expenses, based on the nature of the associated asset. drilling costs of exploratory wells. No depreciation and/or amortisation is charged during the exploration and evaluation phase. Upon completion An asset’s carrying amount is written-down immediately to its recoverable of the evaluation phase, the prospects are either transferred to oil and amount if the asset’s carrying amount is greater than its estimated gas properties or charged to expense (exploration costs) in the period in recoverable amount (see Impairment of non financial assets in Note 2.12). which the determination is made depending whether they have found reserves or not. Exploration and evaluation assets are written-off after three years unless, it can be clearly demonstrated that the carrying value of the 2.11 Provisions Provisions for asset retirement obligations and legal claims are recognised investment is recoverable. when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be A charge of US$ 4,345,000 has been recognised in the Statement of required to settle the obligation; and the amount has been reliably Income within Exploration costs (US$ 273,000 in 2008) for write-off in Chile estimated. Restructuring provisions comprise lease termination penalties (see Note 11). and employee termination payments. Provisions are not recognised for future operating losses. All field development costs are capitalised within oil and gas properties, and subject to depreciation. Such costs may include the acquisition and Provisions are measured at the present value of the expenditures expected installation of production facilities, development drilling costs (including dry to be required to settle the obligation using a pretax rate that reflects current wells, service wells and seismic surveys for development purposes), project- market assessments of the time value of money and the risks specific to the related engineering and the acquisition costs of rights and concessions obligation. The increase in the provision due to passage of time is recognised related to proved properties. as interest expense. Workovers of wells made to develop reserves and/or increase production The Group records the fair value of the liability for asset retirement are capitalised as development costs. Maintenance costs are charged to obligations in the period in which the wells are drilled. When the liability is income when incurred. initially recorded, the Group capitalises the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted Capitalised costs of proved oil and gas properties are depreciated on a to its present value at each reporting period, and the capitalised cost is licensed area by licensed area basis, using the unit of production method, depreciated over the estimated useful life of the related asset. According based on commercial proved and probable reserves. The calculation of to interpretations and application of current legislation and on the basis of the “unit of production” depreciation takes into account estimated future the changes in technology and the variations in the costs of restoration finding and development costs and is based on current year end unescalated price levels. Changes in reserves and cost estimates are recognised necessary to protect the environment, the Group has considered convenient to periodically reevaluate future costs of well-capping. The effects of prospectively. Reserves are converted to equivalent units on the basis of this recalculation are included in the financial statements in which this approximate relative energy content. recalculation is determined and reflected as an adjustment to the provision and the corresponding property, plant and equipment asset. Commercial reserves are proved and probable oil and gas reserves as defined in chapter 19 of the listing rules of the United Kingdom Listing Authority (UKLA). Oil and gas reserves for this purpose are determined in accordance 2.12 Impairment of non-financial assets Assets that are not subject to depreciation and/or amortisation (i.e.: with Society of Petroleum Engineers definitions and were estimated by exploration and evaluation assets) are tested annually for impairment. Assets DeGolyer and MacNaughton, the Group’s independent reservoir engineers. that are subject to depreciation and/or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the Depreciation of the remaining property, plant and equipment assets (i.e.: carrying amount may not be recoverable. furniture and vehicles) not directly associated with oil and gas activities has Notes to the Consolidated Financial Statements 65 An impairment loss is recognised for the amount by which the asset’s carrying amounts in the consolidated financial statements. Deferred income carrying amount exceeds its recoverable amount. The recoverable amount is tax is determined using tax rates (and laws) that have been enacted or the higher of an asset’s fair value less costs to sell and value in use. For the substantially enacted by the balance sheet date and are expected to apply purposes of assessing impairment, assets are grouped at the lowest levels when the related deferred income tax asset is realised or the deferred income for which there are separately identifiable cash flows (cash-generating units), tax liability is settled. generally a licensed area. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment In addition, tax losses available to be carried forward as well as other income at each reporting date. tax credits to the Group are assessed for recognition as deferred tax assets. No asset should be kept as an Exploration and Evaluation asset for a period Deferred tax liabilities are provided in full, with no discounting. Deferred tax of more than three years, except when it can be clearly demonstrated that the assets are recognised only to the extent that it is probable that the underlying carrying value of the investment will be recoverable. We expect that assets deductible temporary differences will be able to be offset against future under these conditions will be a rare exemption. taxable income. An impairment loss of US$ 1,490,000 was recognised within Other operating expenses as a result of the impairment test perform regarding operating 2.16 Financial assets Financial assets are divided into the following categories: loans and fields in Argentina. See Note 19. receivables; financial assets at fair value through the profit or loss; available- for-sale financial assets; and held-to-maturity investments. Financial 2.13 Lease contracts All current lease contracts are considered to be operating leases on the basis assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were that the lessor retains substantially all the risks and rewards related to the acquired. The designation of financial assets is re-evaluated at every reporting ownership of the leased asset. Payments related to operating leases and other date at which a choice of classification or accounting treatment is available. rental agreements are recognised in the Income Statement on a straight line basis over the term of the contract. The Group’s total commitment relating to All financial assets are recognised when the Group becomes a party to the operating leases and rental agreements is disclosed in Note 31. contractual provisions of the instrument. All financial assets are initially 2.14 Inventories Inventories comprise crude oil and materials. recognised at fair value, plus transaction costs. Derecognition of financial assets occurs when the rights to receive cash flows from the investments expire or are transferred and substantially all of the risks Crude oil is measured at its net realisable value. The net realisable value of and rewards of ownership have been transferred. An assessment for inventories is stated at sales price less costs incurred to execute the sale. impairment is undertaken at each balance sheet date. Materials are measured at the lower between cost and recoverable amount. Cost is determined using the first-in, first-out (FIFO) method. The cost of Interest and other cash flows resulting from holding financial assets are materials and consumables is calculated at acquisition price with the recognised in the Income Statement when receivable, regardless of how the addition of transportation and similar costs. related carrying amount of financial assets is measured. 2.15 Current and deferred income tax The tax expense for the year comprises current and deferred tax. Tax is recognised in the Statement of Income. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. The current income tax charge is calculated on the basis of the tax laws The Group’s loans and receivables comprise trade receivables, prepayments enacted or substantially enacted at the balance sheet date in the countries and other receivables and cash and cash equivalents in the balance sheet. where the Company’s subsidiaries operate and generate taxable income. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. Loans and receivables Deferred income tax is recognised, using the liability method, on temporary are subsequently measured at amortised cost using the effective interest differences arising between the tax bases of assets and liabilities and their method, less provision for impairment. Any change in their value through 66 Notes to the Consolidated Financial Statements impairment or reversal of impairment is recognised in the Income Statement. All of the Group’s financial assets are classified as loans and receivables. 2.22 Share capital Equity comprises the following: 2.17 Other financial assets Non-current financial assets relate solely to the cash collateral account - “Share capital” representing the nominal value of equity shares. - “Share premium” representing the excess over nominal value of the fair required under the terms of the borrowing obtained from the IFC. value of consideration received for equity shares, net of expenses of This investment accrues interests and will be recovered once the borrowing the share issue. is fully paid. 2.18 Impairment of financial assets Provision against trade receivables is made when objective evidence is - “Other reserve” representing the equity element attributable to shares granted according to IFRS 2 but not issued at year end. - “Reserve for exchange adjustment” representing the differences arising from translation of investments in overseas subsidiaries. received that the Group will not be able to collect all amounts due to - “Retained earnings” representing retained profits and losses. it in accordance with the original terms of those receivables. The amount of the write-down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows. 2.23 Share-based payment The Group operates a number of equity-settled, share-based compensation plans comprising share awards payments and stock options plans to certain 2.19 Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with employees and other third party contractors. Fair value of the employee or contractors services received in exchange for the grant of the options is banks, other short-term highly liquid investments with original maturities recognised as an expense. The total amount to be expensed over the vesting of three months or less, and bank overdrafts. Bank overdrafts, if any, are period is determined by reference to the fair value of the options granted shown within borrowings in the current liabilities section of the Statement calculated using the Black-Scholes model. of Financial Position. 2.20 Trade and other payable Trade payables are obligations to pay for goods or services that have been 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 acquired in the ordinary course of the business from suppliers. Accounts to vest. It recognises the impact of the revision to original estimates, if any, payable are classified as current liabilities if payment is due within one year in the Statement of Income, with a corresponding adjustment to equity. Non-market vesting conditions are included in assumptions about the or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs Trade payables are recognised initially at fair value and subsequently are credited to share capital (nominal value) and share premium when the measured at amortised cost using the effective interest method. options are exercised. 2.21 Borrowings Borrowings are obligations to pay cash and are recognised when the Group becomes a party to the contractual provisions of the instrument. Note 3 Financial instruments-risk management Borrowings are recognised initially at fair value, net of transaction costs The Group is exposed through its operations to the following financial risks: incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the - Currency risk redemption value is recognised in the Statement of Income over the period - Price risk of the borrowings using the effective interest method. - Credit risk - concentration - Funding and Liquidity risk Direct issue costs are charged to the Statement of Income on an accruals - Interest rate risk basis using the effective interest method. - Capital risk management Notes to the Consolidated Financial Statements 67 The policy for managing these risks is set by the Board. Certain risks are managed centrally, while others are managed locally following guidelines Price risk The price collected for the oil produced by the Group is dependant on WTI communicated from the corporate office. The policy for each of the which is settled in the international markets in US dollars. The market price above risks is described in more detail below. of these commodities is subject to significant fluctuation but the Group did not consider appropriate to manage the Group’s risk to such fluctuation Currency risk There are activities in foreign countries in which its functional currency is through futures contracts or similar. its local currency (Argentine peso). The main exposure of the Group to In Chile, the oil price is based on WTI minus certain marketing and quality currency changes is related to the financial loans denominated in US dollars, discounts such as, inter alia, API quality and mercury content. In Argentina, and to a lower extent to receivables and cash balances held in US dollars. the oil price is also subject to the impact of the retention tax on oil exports As currency rate changes between the U.S. dollar and the Argentine peso, defined by the Argentine government. the Group recognises gains and losses in the consolidated Statement of Income. In Chile where the functional currency is the US dollar, the fluctuation The Company has signed a long-term Gas Supply Contract with Methanex of the Chilean peso does not impact the loans, costs and revenues held in Chile. The price of the gas under this contract is indexed to the in US dollars; but it does impact the balances denominated in Chilean pesos. international methanol price. Such is the case of the prepaid taxes, held in Chilean pesos. As currency rate changes between the U.S. dollar and the Chilean peso, the Group If the market prices of the WTI and methanol would have fallen by 10% recognises gains and losses in the consolidated Statement of Income. compared to actual prices during the year, with all other variables held In Argentina, the main exposure comes from the IFC loan. The amount (post-tax profit for the year would have been lower by US$ 3,188,110 in 2008). constant, post-tax loss for the year would have been higher by US$ 3,669,347 outstanding at the moment of the issue of these financial statements was US$ 4.2 million, which is fully exposed to a devaluation of the Argentine peso. The Board will adopt a hedging policy when it deems it appropriate according Given the high cost of a long-term peso/dollar hedge and the relatively low to the size of the business and market implied volatility. amount exposed, the management has decided not to hedge this exposure. In Chile, most of the balances are denominated in US dollars, and since Credit risk - concentration The Group’s credit risk relates mainly to accounts receivable where the credit it is the functional currency of the Chilean subsidiary, there is no exposure to risks correspond to the recognised values. There is not considered to be currency fluctuation except from receivables originated in Chilean peso any significant risk in respect of the Group’s major customers. Substantially all mainly corresponding to VAT credits for US$ 611,572 (US$ 2,536,000 in 2008). oil production in Argentina is sold to Petrobras, the Brazilian State oil and gas As most of the credit was recovered during 2009, the exposure is not company, which has good credit standing. significant. The Group minimises the local currency positions in Argentina and Chile by Corporation, a Canadian public company (51% of total revenue). All the oil seeking to equilibrate local and foreign currency assets and liabilities. produced in Chile is sold to ENAP (47% of total revenue), the Chilean State Most of the Group’s assets are associated with oil and gas productive assets. owned oil and gas company. Both companies have a very good credit standing and despite the concentration of the credit risk, the Directors do Such assets in the oil and gas industry even in the local markets are usually not consider that this gives rise to a significant collection risk. In Chile, all gas production is sold to the local subsidiary of the Methanex settled in local currency US$ equivalents. See disclosure in Note 24. During 2009, the Argentine peso weakened by 10% (10% in 2008) against the US dollar and the Chilean peso strengthened by 20% (weakened by 28% in 2008). If the Argentine peso had weakened an additional 5% against Funding and Liquidity risk The extent of the global economic crisis and the accompanying oil and gas the US dollar and the Chilean peso had not strengthened by an additional price volatility created uncertainty in forecasting future activities. Following its 5% against the US dollar, with all other variables held constant, post-tax loss successes in 2008 and 2009, the Group is in the position of having a for the year would have been higher by US$ 632,000 (post-tax profit for the secure production base and cash flow stream - coupled with low operating year would have been lower by US$ 597,000 in 2008). costs and the flexibility of a discretionary investment program that can be 68 Notes to the Consolidated Financial Statements maintained, reduced or increased in the short-term depending on the During 2009, the Group’s strategy, which was unchanged from 2008, was environment economic conditions. The Group’s cost structure allows it to to take the gearing ratio within 40% to 55% range. The gearing ratios at sustain itself in a very low oil and gas price environment. 31 December 2009 and 2008 were as follows: The Group has a strong support from its financial partners and significant Amounts in US$ ’000 flexibility in adjusting the program to ensure the development of the key properties. See Note 24 for disclosure analysis. Net Debt Total Equity Total Capital Gearing Ratio 2009 60,410 85,482 2008 53,680 60,497 145,892 114,177 41% 47% Interest rate risk As the Group has no significant interest-bearing assets, the Group’s profit and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from long-term borrowings The decrease in the gearing ratio during 2009 resulted primarily from the proceeds from the issue of common shares. issued at variable rates, which expose the Group’s cash flow to interest Note 4 rate risk. The loans from the IFC and Methanex Corporation accrue variable Accounting estimates and assumptions interest rates which depends on the LIBOR rate. For the period covered by these financial statements, the Group has decided not to buy any Estimates and assumptions are used in preparing the financial statements. coverage for this risk. Although these estimates are based on management’s best knowledge of current events and actions, actual results may differ from them. Estimates The Group analyses its interest rate exposure on a dynamic basis. Various and judgments are continually evaluated and are based on historical scenarios are simulated taking into consideration refinancing, renewal experience and other factors, including expectations of future events that of existing positions, alternative financing and hedging. Based on these are believed to be reasonable under the circumstances. scenarios, the Group calculates the impact on profit and loss of a defined interest rate shift. For each simulation, the same interest rate shift is The key estimates and assumptions used in these consolidated financial used for all currencies. The scenarios are run only for liabilities that represent statements are noted below: the major interest-bearing positions. At 31 December 2009, if interest rates on currency-denominated borrowings accounting. The management of the Company makes assessments had been 1% higher with all other variables held constant, post-tax loss and estimates regarding whether an exploration asset should continue to be for the year would have been US$ 432,603 higher (post-tax profit for the year carried forward as an exploration and evaluation asset not yet determined would have been US$ 356,183 lower in 2008), mainly as a result of higher or when insufficient information exists for this type of cost to remain as interest expense on floating rate borrowings. an asset. In making this assessment the management take professional advice - The Group adopts an approach similar to the successful efforts method of from qualified independent experts. Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s - Cash flow estimates for impairment assessments require assumptions ability to continue as a going concern in order to provide returns for about two primary elements: future prices and reserves. Estimates of future shareholders and benefits for other stakeholders and to maintain an optimal prices require significant judgments about highly uncertain future events. capital structure to reduce the cost of capital. Historically, oil and gas prices have exhibited significant volatility. The Group’s forecasts for oil and gas revenues are based on prices derived from Consistent with others in the industry, the Group monitors capital on the future price forecasts amongst industry analysts and our own assessments. basis of the gearing ratio. This ratio is calculated as net debt divided by total Estimates of future cash flows are generally based on assumptions of capital. Net debt is calculated as total borrowings (including ’current and long-term prices and operating and development costs. Given the significant non-current borrowings’ as shown in the consolidated balance sheet). Total assumptions required and the possibility that actual conditions will differ, capital is calculated as ’equity’ as shown in the consolidated balance sheet the Group considers the assessment of impairment to be a critical plus net debt. accounting estimate. Notes to the Consolidated Financial Statements 69 The process of estimating reserves is complex. It requires significant - As detailed in the relevant accounting policies the selection of functional judgements and decisions based on available geological, geophysical, currencies for each entity in the Group is dependent on the primary economic engineering and economic data. The estimation of economically recoverable environment in which they operate which is determined by considering a oil and natural gas reserves and related future net cash flows was performed number of factors. As detailed the Board consider that the primary economic based on the Reserve Report dated July 2009 prepared by DeGoyler and environment in which the Argentinean subsidiary operates is the Argentine MacNaughton, an international consultancy to the oil and gas industry based peso and for the Chilean subsidiaries is the US dollar. The Board considers this in Dallas, and updated for subsequent changes by the Group’s management. assessment to be a significant judgement as it gives rise to exchange It incorporates many factors and assumptions including: differences as detailed in Note 3. - expected reservoir characteristics based on geological, geophysical and engineering assessments; As a result of the LGI strategic alliance it is expected that the principal - future production rates based on historical performance and expected activities of the Argentinean branch will change from being primarily focused future operating and investment activities; on operating the Group’s existing Argentinean fields to being a technical - future oil and gas prices and quality differentials; services support function for the Group’s operations across Latin America. - assumed effects of regulation by governmental agencies; and This change is likely to mean that from 2010 the US$ will become the - future development and operating costs. currency which has the most significant impact on the Branch’s operations and as a result the Directors expect that this could result in a change in Management believes these factors and assumptions are reasonable based functional currency for the Argentinean Branch. on the information available at the time the Group prepares its estimates. However, these estimates may change substantially as additional data from ongoing development activities and production performance becomes available and as economic conditions impacting oil and gas prices and costs change. As part of this assessment, management has carried out an impairment test on the oil and gas assets within property, plant and equipment of the Argentine subsidiary. This test compares the carrying value at the balance sheet date with the expected discounted cash flows from the relevant projects (value in use). For the discounted cash flows to be calculated, management has used a production profile based on its best estimate of proven and probable reserves and a range of assumptions including a 10% pre-tax discount rate and an estimated oil price profile. The impairment loss recognised amounts to US$ 1,490,000. If the discount rate had been 1% higher than management’s estimates, the Group would have recognised a further impairment of US$ 238,000. - Reserves are also a key assumption for determining the depreciation of oil and gas properties that are depreciated using the unit of production method. As of 1 January 2009 the Group started using the proved and probable reserves for calculating the depreciation, instead of the proved reserves. This change was made to better reflect the consumption of oil and gas properties. If the previous approach would have been used, the depreciation charge of the year would have been US$ 4.6 million higher. 70 Notes to the Consolidated Financial Statements Note 5 Statement of Cash Flow 31 December 2008 The Cash Flow Statement shows the Group’s cash flows for the year Movements Movements Other from derived from arising from Non-Cash Consolidated Movements for operating, investing and financing activities and the change in cash Balance Sheet Consolidated Currency Movements Cash Flow and cash equivalents during the year. Items Balance Sheet Translation (*) Statement Cash flows from operating activities are computed from the results for the and equipment year adjusted for non-cash operating items, changes in net working Prepaid taxes capital, and corporation tax. Tax paid is presented as a separate item under Inventory Property, plant operating activities. The following chart describes non-cash transactions related to the Cash Flow Statement: 31 December 2009 Trade receivables Prepayment and other receivables Investments Cash and cash equivalents 49,262 (806) (911) 6,129 809 62 670 471 48 21 244 - (718) 49,214 - - - - (62) (335) (863) 6,150 1,053 - (3,000) (43) - (3,043) Movements Movements Other from decommissioning derived from arising from Non-Cash Consolidated Borrowings (284) - (18,939) (1,266) Movements Provision for Balance Sheet Consolidated Currency Movements Cash Flow Trade accounts payable Items Balance Sheet Translation (*) Statement Deferred tax 1,209 19,683 Equity Other liabilities (2,820) (276) (1,335) (27,891) (83) - (44) (18) 718 62 - 276 - (276) 434 (20,143) (2,903) - (1,379) (28,185) Property, plant and equipment Prepaid taxes Inventory Trade receivables Prepayment and other receivables Investments Cash and cash equivalents Borrowings Trade accounts payable Deferred tax Other liabilities Equity 17,645 (2,518) 1,087 (2,526) 380 73 18,050 (6,730) (1,654) (523) 1,701 (24,985) 829 377 22 27 34 - 17 (379) (67) 3 (837) (26) - (518) - - (8) - 8 - - (2,141) 591 (*) Mainly transfers, increase in the asset retirement obligation and (2,499) deferred tax. 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. 414 65 18,067 (7,101) Cash flows from financing activities include changes in Shareholders’ equity, (1,721) and proceeds from borrowings and repayment of loans. (520) (691) - 173 (25,011) Cash and cash equivalents include bank overdraft and liquid funds with a term of less than three months. Notes to the Consolidated Financial Statements 71 Change in working capital shown in the Statement of Cash Flow is disclosed Segment areas (geographical segments): as follows: Amounts in US$ ’000 Change in Prepaid taxes Change in Inventory Change in Trade receivables Change in Prepayments and other receivables Change in Current liabilities Change in Provision for other long-term liabilities Note 6 Segment information 2009 2,141 (591) 2,499 (414) 2,876 (1,493) 5,018 Amounts in US$ ’000 Argentina Chile Corporate Total 2008 335 863 2009 Net revenue Gross profit (6,150) Adjusted EBITDA (1) (1,053) 4,282 Depreciation - Impairment and write-off 798 91 (528) 44,049 15,174 24,273 - - (6,015) 44,847 15,265 17,730 (756) (1,490) (14,166) (4,345) - - (14,922) (5,835) (1,723) Total assets 10,785 125,856 25,644 162,285 Employees (average) 63 101 1 165 Amounts in US$ ’000 Argentina Chile Corporate Total Management has determined the operating segments based on the reports reviewed by the strategic steering committee that are used to make strategic decisions. The committee considers the business from a geographic perspective. 2008 Net Revenue Gross profit / (loss) Adjusted EBITDA (1) Depreciation The strategic steering committee assesses the performance of the Impairment and write-off 1,066 (306) (685) (610) (1,422) 37,310 19,541 22,396 (6,762) - - - (4,018) 38,376 19,235 17,693 (68) - (7,440) (1,422) operating segments based on a measure of adjusted earnings before interest, Total assets 13,842 109,834 6,131 129,807 tax, depreciation, amortisation and certain non cash items such as write-offs, impairments and share based payments (Adjusted EBITDA). This Employees (average) 63 97 1 161 measurement basis excludes the effects of non-recurring expenditure from the operating segments, such as impairments when it is result of an (1) Corporate expenses included in the Adjusted EBITDA are allocated isolated, non-recurring event. Interest income and expenses are not included within the Statement of Income as Exploration costs for an amount in the result for each operating segment that is reviewed by the strategic of US$ 663,000 (US$ 1,075,000 in 2008), Production costs for an amount steering committee. Other information provided, except as noted below, to of US$ 710,000 (US$ 569,000 in 2008) and the remaining amount the strategic steering committee is measured in a manner consistent with corresponds to Administrative costs. that in the financial statements. Over 90% of CAPEX is allocated to Chile in 2009 and 2008. A reconciliation of total Adjusted EBITDA to total profit before income tax is provided as follows: Amounts in US$ ’000 Adjusted EBITDA for reportable segments Depreciation Accrual of stock options and stock awards Impairment and write-off of unsuccessful efforts Others Operating (loss) / profit Financial results (Loss) / Income before tax 2009 17,730 (14,922) (1,162) (5,835) 421 (3,768) (3,701) (7,469) 2008 17,693 (7,440) (1,479) (1,422) (170) 7,182 (3,255) 3,927 72 Notes to the Consolidated Financial Statements Note 7 Net Revenue Amounts in US$ ’000 Sale of crude oil Sale of gas Note 8 Production costs Amounts in US$ ’000 Depreciation Gas plant costs Royalties Staff costs (Note 10) Facilities maintenance Transportation costs Well maintenance Consumables Pulling costs Vehicle rental and personnel transportation Insurance costs Landowners Other costs Note 9 Depreciation Amounts in US$ ’000 Oil and gas properties Production facilities and machinery Furniture, equipment and vehicles Buildings and improvements Depreciation, property plant and equipment Recognised as follows: Production costs Administrative expenses Exploration costs Depreciation total Note 10 Staff costs 2008 8,901 Average number of employees 29,475 Amounts in US$ ’000 38,376 Wages and salaries Shared-based payment Social security charges 2008 7,108 2,424 2,173 2,393 803 372 590 431 421 484 469 364 Board of Directors’ and key managers’ remuneration Salaries and fees Other benefits Note 11 Exploration costs Amounts in US$ ’000 Staff costs (Note 10) Write-off of unsuccessful efforts (a) 1,109 Other services 19,141 Relinquishment of Del Mosquito Block (b) 2009 22,064 22,783 44,847 2009 14,682 2,901 2,126 2,098 1,503 1,144 1,115 888 602 503 375 253 1,392 29,582 2009 165 5,514 1,162 948 7,624 2008 161 4,876 1,479 666 7,021 2009 2008 2,127 83 2,210 1,826 98 1,924 2009 1,660 4,345 709 - 6,714 2008 1,667 273 1,355 1,149 4,444 (a) Corresponds to the write-off of exploration and evaluations assets in Chile amounting to US$ 4,345,000. During 2009 there have not been any unsuccessful exploratory wells. The impairment charge corresponds to previous years’ exploration activities which required additional appraisal and development work to determine whether commercial reserves existed. During 2009, and based on new information, it was decided that the additional work would not be carried out and therefore the related costs have been written-off. 2009 11,210 3,444 151 117 14,922 2008 4,579 2,486 241 134 7,440 (b) In Argentina, on 30 December 2008 the Group relinquished 38.43% of 14,682 7,108 the Del Mosquito Block back to the government in accordance with the 240 - 277 55 terms of the Del Mosquito license, effectively from 1 January 2009. This area includes 135 square kilometres of seismic surveys which represents 33.75% 14,922 7,440 of the total seismic surveys (400 square kilometres). Notes to the Consolidated Financial Statements 73 Note 12 Administrative costs Amounts in US$ ’000 Staff costs (Note 10) Consultant fees Share-based payments (Note 29) Office expenses Travel expenses Communication and IT costs Depreciation Other administrative expenses Note 13 Other operating costs Amounts in US$ ’000 Costs not allocated to capitalised projects Impairment loss Other (income) / expense Note 14 Financial income Amounts in US$ ’000 Exchange difference Interest received Note 15 Financial expenses Amounts in US$ ’000 Bank charges and other financial costs Tax credits: discount to present value Exchange difference Unwinding of long-term liabilities Interest and amortisation of debt issue costs Less: amounts capitalised on qualifying assets 2009 2,704 1,470 1,162 646 506 317 234 1,411 8,450 2009 1,186 1,490 (152) 2,524 2009 49 15 64 2009 277 429 1,793 165 1,323 (222) 3,765 2008 1,482 1,165 1,479 482 433 197 277 1,473 6,988 Note 16 Income Tax Amounts in US$ ’000 Current tax Deferred tax 2009 - (520) (520) 2008 - (276) (276) The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows: Amounts in US$ ’000 (Loss) / Profit before tax Tax losses from non taxable jurisdictions Taxable (loss) / profit 2009 (7,469) 6,443 (1,026) 2008 3,927 4,503 8,430 Income tax calculated at statutory tax rate (1,277) 301 2008 Tax losses where no deferred income tax - - 170 170 2008 281 392 673 is recognised Expenses not deductible for tax purposes Difference between functional currency and tax currency Non taxable profit Income tax 1,954 10 (167) - 520 1,686 158 (1,862) (7) 276 GeoPark Holdings Limited is not subject to taxation. Income tax rates in those countries where the Group operates ranges from 15% to 35%. The Group has significant tax losses available which can be utilised against future taxable profit in those countries as set out below: Amounts in US$ ’000 Argentina Total tax losses at 31 December 2009 13,370 13,370 2008 13,144 13,144 At the balance sheet date, deferred tax assets in respect of tax losses 2008 in Argentina have not been recognised as there is insufficient evidence of 512 future taxable profits before the statute of limitation of these tax losses - causes them to expire. 1,654 (447) Expiring dates for tax losses accumulated at 31 December 2009 are: 2,209 - Expiring date 3,928 2010 2011 2012 2013 2014 Amounts in US$ ’000 680 1,713 5,988 3,563 1,426 74 Notes to the Consolidated Financial Statements Note 17 Deferred income tax Note 18 (Loss) / Earnings per share The gross movement on the deferred income tax account is as follows: Amounts in US$ ’000 2009 2008 Amounts in US$ ’000 Deferred tax at 1 January Exchange differences Income statement charge Deferred tax at 31 December Deferred tax asset (liability) relates to: Taxable losses (*) Property, plant and equipment Other temporary differences 2009 (261) (3) (520) (784) 3,149 (3,933) - (784) Numerator: 2008 (Loss) / Profit for the year 15 - Denominator: Weighted average number (276) of shares used in basic EPS (261) (Loss) / Earnings after tax per share (US$) - basic 3,669 (4,091) 161 Amounts in US$ ’000 (261) Weighted average number (7,989) 3,651 36,998,702 32,984,875 (0.22) 0.11 2009 2008 The breakdown and movement of deferred tax assets and liabilities as of Effect of dilutive potential common shares of shares used in basic EPS 36,998,702 32,984,875 31 December 2009 and 2008 are as follows: (Charged)/ At the credited Amounts in US$ ’000 of year profit/loss differences beginning to net Exchange At end of year Deferred tax assets Difference in depreciation rates Taxable losses (*) Other Total 2009 Total 2008 Deferred tax liabilities Difference in depreciation rates Taxable losses (*) Other Total 2009 Total 2008 - - 15 15 15 (62) 352 - 290 - (3,353) 2,955 122 (276) - (5,155) 4,303 42 (810) (276) - - (3) (3) - - - - - - (*) In Chile, taxable losses have no expiration date. Stock award to employees at US$ 0.001 Stock option at £ 4.00 Executive Directors stock option at £ 3.20 Non-Executive Directors fees Stock awards to Non-Executive Directors Weighted average number of common shares for the purposes of diluted earnings per shares - - - - - - - 48,425 10,938 10,397 36,998,702 33,054,635 (62) (Loss) / Earnings after tax per share (US$) - diluted (0.22) 0.11 352 12 302 15 (8,508) 7,258 164 (1,086) (276) Notes to the Consolidated Financial Statements 75 Note 19 Property, plant and equipment Furniture, Production Buildings Exploration and Oil & gas equipment facilities and and Construction evaluation Amounts in US$ ’000 properties and vehicles machinery improvements in progress Cost at 1 January 2008 Exchange rate adjustment Additions Disposals Transfers Write-off / Impairment Cost at 31 December 2008 Exchange rate adjustment Additions Disposals Write-off / Impairment Transfers Cost at 31 December 2009 Depreciation and write-down at 1 January 2008 Depreciation Exchange rate adjustment Depreciation and write-down at 31 December 2008 Depreciation Disposals Exchange rate adjustment Depreciation and write-down 15,498 (454) 5,240 - 25,768 - 46,052 (623) - (740) (1,490) 39,707 82,906 (2,088) (4,579) 251 (6,416) (11,210) 5 239 825 (37) 162 - - - 17,354 (132) 3,029 - 6,525 - 1,434 (23) 3 - 208 - 950 26,776 1,622 (43) 82 - - - 989 (351) (241) 26 (566) (151) - 27 (122) 313 - - 3,003 29,970 (1,245) (2,486) 38 (3,693) (3,444) - 38 (21) 132 - - 70 1,803 (153) (134) 13 (274) (117) - 12 (379) 433 (14) 9,736 (66) (6,900) - 3,189 (9) 8,412 - - (337) 11,255 - - - - - - - - assets 23,833 (338) 40,690 (1,149) (25,601) (273) 37,162 (327) 31,027 - (4,345) (42,443) 21,074 - - - - - - - - Total 59,377 (998) 58,860 (1,215) - (273) 115,751 (1,145) 39,966 (740) (5,835) - 147,997 (3,837) (7,440) 328 (10,949) (14,922) 5 316 (25,550) at 31 December 2009 (17,382) (690) (7,099) Carrying amount at 31 December 2008 Carrying amount at 31 December 2009 39,636 65,524 384 299 As of 31 December 2009, the Company has pledged, as security for a mortgage obtained for the acquisition of the operating base in Chile, assets amounting to US$ 653,000 (US$ 520,000 in 2008). See Note 26. 23,083 1,348 3,189 37,162 104,802 22,871 1,424 11,255 21,074 122,447 76 Notes to the Consolidated Financial Statements Note 20 Subsidiary undertakings Note 21 Prepaid taxes Details of the subsidiaries and jointly controlled assets of the Company Amounts in US$ ’000 are set out below: Name and registered office Subsidiaries Ownership interest GeoPark Argentina Ltd. - Bermuda 100% GeoPark Argentina Ltd. - Argentine Branch GeoPark Chile Ltd. - Bermuda GeoPark Chile Ltd. - Chilean Branch Servicios Southern Cross Limitada (Chile) GeoPark Magallanes Limitada (Chile) Jointly controlled assets Tranquilo Block (Chile) Otway Block (Chile) (*) Indirectly owned. 100% (*) 100% 100% (*) 100% 100% (*) 30% 42% VAT Other prepaid taxes Total prepaid taxes Classified as follows: Current Non-current Total prepaid taxes Note 22 Inventories Amounts in US$ ’000 Crude oil Materials and spares 2009 3,152 481 3,633 668 2,965 3,633 2008 5,651 500 6,151 2,688 3,463 6,151 2009 1,462 796 2,258 2008 464 707 1,171 In August 2008, GeoPark Holdings Limited established a new company Note 23 located in Chile named GeoPark Magallanes Limitada and which started its Trade receivables and Prepayments and other receivables operations in September 2008. Also in Chile, during 2008, the Group acquired a 30% interest in the Trade accounts receivable Tranquilo Block (with Pluspetrol, IPR and Manas) and was awarded, following To be recovered from co-venturers with Chilean bidding round, a 42% interest in the Otway Block (with Prepayments and other receivables Amounts in US$ ’000 Wintershall and Methanex). Both consortia have requested GeoPark to be the Operator. GeoPark Magallanes Limitada will hold the Group’s interests 2009 5,908 731 1,032 7,671 2008 8,434 312 1,071 9,817 in the Tranquilo and Otway Blocks. See Note 30. Trade receivables that are aged by less than three months are not considered The following chart illustrates the Group’s structure: (US$ 145,000 in 2008) were aged by more than 3 months, but not impaired. impaired. As of 31 December 2009, trade receivables of US$ 32,479 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 Notes to the Consolidated Financial Statements 77 These relate to customers for whom there is no recent history of default. There are no balances due between 31 days and 90 days as of 31 December 2009 and 2008. Credit quality of financial assets The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates: Movements on the Group provision for impairment are as follows: Amounts in US$ ’000 At 1 January Provision for receivables impairment Currency translation 2009 2008 34 - (1) 33 - 34 - 34 Amounts in US$ ’000 2009 2008 Trade receivables Counterparties with external credit rating (Moody’s) A3 Ba1 Baa1 Counterparties without external credit rating 2,593 3,168 114 33 - 690 7,498 94 152 - The costs providing for impaired receivables have been included in ’Selling expenses’ in the income statement. Group1 (*) Group2 (*) The credit period for trade receivables is 30 days. The maximum exposure to credit risk at the reporting date is the carrying value of each class of (*) Group 1 - new customers (less than 6 months). receivable. The Group does not hold any collateral as security. Group 2 - existing customers (more than 6 months) with no defaults in Total trade receivables 5,908 8,434 The carrying value of trade receivables is considered to represent a reasonable approximation of its fair value due to their short-term nature. All trade receivables are denominated in US dollars. the past. Note 24 Cash at bank and investments (1) Counterparties with external credit rating (Moody’s) Financial instruments by category AAA 25,971 7,848 Amounts in US$ ’000 2009 2008 2009 Loans and receivables Assets as per statement of financial position Trade receivables Other financial assets (*) 5,908 2,214 Cash and cash equivalents 23,760 8,434 2,141 5,710 31,882 16,285 5,908 2,214 23,760 31,882 Total 2008 8,434 2,141 5,710 (1) The rest of the balance sheet item ’cash and cash equivalents’ is cash on hand amounting to US$ 3,000. Financial liabilities - contractual undiscounted cash flows The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the 16,285 contractual undiscounted cash flows. Amounts in US$ ’000 2009 2008 2009 Other financial liabilities Liabilities as per statement of financial position Trade and other payable Borrowings Other liabilities 12,923 60,410 - 73,333 11,269 53,680 1,492 66,441 12,923 60,410 - 73,333 Total 2008 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. Amounts in US$ ’000 At 31 December 2009 Borrowings Trade payables At 31 December 2008 Borrowings Trade payables Other liabilities Between Between Less than 1 year 1 and 2 years 2 and 5 years Over 5 years 10,553 12,923 23,476 13,403 11,269 1,492 26,164 11,027 35,827 - - 11,027 35,827 16,818 26,472 - - - - 16,818 26,472 9,587 - 9,587 167 - - 167 78 Notes to the Consolidated Financial Statements Note 25 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$ On 29 May 2009, the Company issued 3,437,000 ordinary shares representing 10% of the issued share capital of the Company at that time. Each share has been placed at a price of 225 pence per share, generating a share premium of 2009 42 2008 US$ 11,796,438. 34 41,666,307 41,666,307 34,399,186 representing an additional 10% of the issued share capital of the Company 34,399,186 at that time. Each share has been placed at a price of 323 pence per share, On 18 November 2009, the Company issued 3,784,000 ordinary shares generating a share premium of US$ 20,490,045. 0.001 0.001 The shares of the two above mentioned placings were placed by UK and Chilean institutional investors, the International Finance Corporation (“IFC”) of the World Bank, certain Directors of the Company and a new strategic 5,171,969,000 5,171,969,000 investor, Cartica Management LLC of Washington DC, an emerging market 5,171,949 5,171,949 private equity specialist fund. Details regarding the share capital of the Company are set out below: The proceeds of these placings will allow to increase the exploration and Common shares As of 31 December 2009 the outstanding common shares confer the development investments on the Fell, Otway and Tranquilo blocks in Chile in order to increase oil and gas reserves, production and revenue and fund the Company’s acquisition program. following rights on the holder: - the right to one vote per share; On 9 May 2008, the Company issued 3,080,000 ordinary shares. Each share has been placed at a price of 394 pence per share, generating a share - ranking pari passu, the right to any dividend declared and payable on premium of US$ 23,612,067. common shares provided that no dividends shall be declared or paid on common shares; GeoPark common shares history Shares outstanding at the end of 2007 Issue of shares to Non-Executive Directors 2008 Placing Share awards to officers, employees May 2008 Included in the placing were a new strategic block of Chilean investors and pension funds, the IFC, and certain London institutional investors. The Placing Shares was limited to 10% of the current issued share capital of the Company. closing US$(’000) Shares issued Date (millions) (millions) Closing The gross proceeds of the Placing has been used principally to fund 30.7 30.7 33.8 0.03 3.08 the acquisition and work program for the Company’s farm-in on the new 31 Tranquilo block in Chile and to accelerate the investment program on the Company’s Fell Block in Chile. 31 34 34 In accordance with the requirements of IAS 32, the costs associated with the issuance of these shares of US$ 606,393 (US$ 940,404 in 2008) have been deducted from equity. and consultants July 2008 0.60 34.4 Shares outstanding at the end of 2008 Issue of shares to Non-Executive Directors 2009 Placing Placing Shares outstanding at the end of 2009 May 2009 Nov 2009 34.4 34 Non-Executive Directors in accordance with contracts as compensation. During 2009, the Company issued 46,121 (28,984 in 2008) shares to 0.05 3.44 3.78 34.5 37.9 41.7 35 38 42 Shares are issued at average price for the period, generating a share premium of US$ 268,000 (US$ 189,000 in 2008). Other Reserve As stated above, the Company has issued 46,121 shares regarding Non- 41.7 42 Executive Directors fees paid in shares. Additionally, 5,333 shares have been granted to Non-Executive Directors and have not been issued as of 31 December 2009 resulting in an amount of US$ 31,000 being included Notes to the Consolidated Financial Statements 79 within Other reserve. The 23,530 shares granted in 2008 have been issued On 16 October 2009 GeoPark Chile Limited entered into a new financing during 2009 resulting in a decrease of US$ 150,000 of Other reserve. agreement with Methanex Corporation for a further US$ 15,000,000 financing facility. The accounting treatment of the shares is in line with the Group’s policy on share based payments. Note 26 Borrowings The new financing was also structured as a gas pre sale agreement with a five year pay-back period. The repayment will made in fixed installments starting in September 2010. The applicable interest rate until 31 August 2012 will be LIBOR + 4%. From that date onwards, the spread will vary from 4% up to 10% depending on the amount of gas that GeoPark Chile Limited will deliver to Methanex Corporation. Amounts in US$ ’000 2009 2008 Outstanding amounts as of 31 December International Finance Corporation (a) Methanex Corporation (b) Banco de Crédito e Inversiones (c) Classified as follows: Non-current Current In addition on 30 October 2009 a new financing agreement was signed 13,901 45,935 574 16,245 36,898 with Methanex Corporation. Methanex shall fund GeoPark’s portions of cash calls for the Otway Joint Venture up to US$ 3.3 million until 31 January 2011 537 (or earlier). Loan shall be repaid by the Group funding Methanex’s portion 60,410 53,680 of cash calls made between 31 January 2011 (or final funding date) and 10 May 2012 (or earlier). If any amount of loan remains outstanding on 52,174 8,236 42,253 11,427 10 May 2012, it will be repaid in a lump sum on that date. The purpose is to finance the exploration, development and production of natural gas from the Otway Block. This financing does not bear interest. (a) On 12 December 2006, the Group entered into a loan agreement for an amount of US$ 20,000,000 with the International Finance Corporation (“IFC”), (c) Additionally, GeoPark Chile Limited acquired a facility to establish its the private sector arm of the World Bank Group, to partially finance the operational base in the Fell Block. This facility was acquired through a mortgage 2007 Group investment program. The IFC is also a shareholder in the Group. loan granted by the Banco de Crédito e Inversiones (BCI), a Chilean private bank (note 19). The loan was granted in Chilean pesos and is repayable over a In November 2009, the Company successfully agreed with IFC to reschedule period of 8 years. The interest rate applicable to this loan is 6.6%. the outstanding amount of US$ 14,000,000. The rescheduling extends the maturity until 2016 and includes an eighteen month repayment grace period Additionally, the Group has been granted with credit lines for US$ 3,000,000 and a reduced repayment schedule thereafter. The current interest rate which have not been used as of 31 December 2009. applicable to the outstanding loan is LIBOR + 5.5% ( LIBOR + 3% before the rescheduling). The fair value of these financial instruments at 31 December 2009 amounts 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. to US$ 58,115,000 (US$ 45,258,000 in 2008). Note 27 Provisions for other long-term liabilities (b) In 2007, the Group, through its subsidiary GeoPark Chile Limited, entered into an agreement with Methanex Corporation (the worlds largest methanol Amounts in US$ ’000 At 1 January 2008 Additional provisions producer), for a US$ 40,000,000 financing facility for development and Unwinding of discount investing activities on the Fell Block. At 31 December 2008 Revision to provision The financing is structured as a gas pre-sale agreement with a six year Currency translation pay-back period and an interest rate of LIBOR flat. In each year, the Group Unwinding of discount will repay principal up to an amount equal to the loan amount multiplied At 31 December 2009 by a specified percentage. Subject to that annual maximum principal Assets retirement obligation 1,264 718 (434) 1,548 (691) (1) 165 1,021 repayment amount, the Group will repay principal and interest in The provision for decommissioning relates to the estimation of future an amount equal to the amount of gas specified in the contract at the disbursements related to the abandonment and decommissioning of oil and effective selling price. gas wells. This provision will be utilised when the related wells are fully depleted. 80 Notes to the Consolidated Financial Statements Note 28 Trade and other payable Amounts in US$ ’000 Trade payables (b) Corresponds to 613,380 IPO Awards that were granted to all of the Group’s employees and certain consultants at the IPO date (May 2006). The Awards vested on 15 May 2008, the second anniversary of admission to IPO. On 3 July 2009 12,923 2008 2008, the Company issued 602,000 shares for nominal value of 0.001 each, 11,269 corresponding to the total IPO awards vested which are held in a Beneficiary Trust. There are 11,380 awards that did not vest and were cancelled since they The average credit period (expressed as creditor days) during the year ended corresponded to employees that had left the Group before vesting date. 31 December 2009 was 63 days (2008: 52 days). The fair value of these short-term financial instruments are not individually employees at a weighted average price of 2.85 (4.1675 in 2008) pounds per determined as the carrying amount is a reasonable approximation of fair share. The shares held in the employee Beneficiary Trust rank pari passu value. with the Company’s ordinary shares. During 2009, 35,000 (85,000 in 2008) of these shares were sold by the Note 29 Share based payments (c) On admission to AIM the Company granted: i) 605,000 stock options to the senior management and some eligible employees. The exercise price of these stock options is £ 4.00 (125 per cent of placing price). The vesting date of these stock options was 15 May 2008 and IPO Award Program and Executive Stock Option plan The Group has established IPO Award Program and Executive Stock Option they expire in five years from that date, on 15 May 2013. The stock options give no voting rights to the holders until they are exercised and converted plans. These schemes were established to incentivise the Directors, senior into common shares when they will rank pari passu with all existing common management and employees by enabling them to benefit from the increased shares. None of these options has been exercised. market capitalisation of the Company. The costs for these Programs are expensed in the Administrative costs line, £ 3.20 and 613,380 at an exercise price of £ 4.00. The vesting conditions included in the Statement of Income. Details of these costs are described of these options are equal to those described in i). None of these options in the following table and explanations: has been exercised during 2009. ii) to the Executive Directors 306,690 stock options at an exercise price of Amounts in US$ ’000 Stock awards 2008 (a) Stock awards 2006 (b) Stock option plan (c) 2009 1,162 - - 2008 During 2009 none of the abovementioned options have been exercised, - forfeited or elapsed. 687 792 The fair value of the options granted was calculated using the Black-Scholes 1,162 1,479 model. Due to the short trading history of the Company, expected volatility was determined by comparison to a sample of AIM listed oil and gas (a) 2008 Performance-based Employee Long-Term Incentive Program companies with a similar market capitalisation to the Group but a longer During 2008 the Group Shareholders have voted to authorise the Board to use up to 12% of the issued share capital of the Company at the relevant trading history. time for the purposes of the Performance-based Employee Long-Term Incentive Plan. Other share based payments As it is mentioned in note 25, the Company granted 27,924 (14,044 in 2008) shares at average price for each three months period for services rendered The Board of Directors on 3 November 2008 approved a Stock Award by the Non-Executive Directors of the Company. Fees paid in shares Program for employees with the following characteristics: were directly expensed in the administrative expenses line in the amount - Grant date: 15 December 2008. - All employees are eligible. - Vesting period of 4 years. of US$ 149,071 (US$104,405 in 2008). Specific Award amounts have been reviewed and approved by the Executive Interests in Joint Ventures Directors and the Remuneration Committee of the Board of Directors for a Note 30 total of 1,000,000. The Group has interests in two joint ventures, which are involved in the exploration of hydrocarbons in Chile (Note 20). Notes to the Consolidated Financial Statements 81 The following amounts represent the Company’s share in the assets, liabilities obligation of a cash payment for the exploratory annual concession fee and results of the joint ventures which have been consolidated line by line payable in Argentina in respect of the Del Mosquito concession. This annual in the consolidated statement of financial position and statement of income: concession fee is levied by the Province authorities and gives the right to Joint venture Tranquilo Block Otway Block maintain the concession. GeoPark GeoPark The Tranquilo Block Consortium has committed to drill six exploratory wells, Magallanes Ltda. Magallanes Ltda. to perform 2D and 3D seismic during 2009, 2010 and 2011. The joint venture 42% estimates a cost of US$ 14,360,000 for these works. 2009 2008 Subsidiary Interest Assets PP&E / E&E Other assets Total Assets Liabilities Current liabilities Total Liabilities Net Assets / (Liabilities) Sales Net loss 2009 232 344 576 (101) (101) 475 - 371 30% 2008 17 - 17 (113) (113) (96) - 96 105 169 274 (178) (178) 96 - 341 4 - 4 (37) (37) (33) - 33 Capital commitments related to the Tranquilo and Otway Blocks are disclosed in Note 31 (b). Note 31 Commitments 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. (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. A total amount of US$ 11,225,000 (US$ 12,271,000 in 2008) was charged to the income statement during 2009 related to operating leases. The future aggregate minimum lease payments under non-cancellable operating leases are as follows: (a) Royalty commitments In Argentina, crude oil production accrues royalties payable to the Provinces of Santa Cruz and Mendoza equivalent to 12 per cent on estimated value Amounts in US$ ’000 Operating lease commitments Falling due within 1 year at well head of those products. This value is equivalent to final sales price less Falling due within 1 - 5 years transport, storage and treatment costs. Falling due after 5 years Total minimum lease payments 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 “Del Mosquito”, Province of Santa Cruz, Argentina) and to Occidental Note 32 Petroleum Argentina INC, formerly Vintage Argentina Ltd. (8 per cent on Related parties invoiced amount of crude oil obtained from wells at “Loma Cortaderal” and “Cerro Doña Juana”, Province of Mendoza, Argentina). Controlling interest 2009 2008 11,066 11,113 - 22,179 13,322 14,005 1,200 28,527 In Chile, royalties are payable to the Chilean Government, which is calculated The main shareholders of GeoPark Holdings Limited, a company registered 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 in Bermuda, as of 31 December 2009, are: a) 19.61 per cent of share capital, by Gerald O’Shaughnessy (founder). royalties, calculated at 3 per cent on oil and gas revenues up to a total b) 16.76 per cent of share capital, by Energy Holdings, LLC controlled by amount of US$ 3,250,000. James F. Park (founder). (b) Capital commitments The Group has committed to drill one exploratory well in Del Mosquito Block d) 8.30 per cent of share capital, by IFC (International Finance Corporation). e) 7.6 per cent of share capital, by Cartica Corporate Governance Fund, L.P. during 2010 and 2011. The Group estimates a cost of US$ 1,800,000 to f) 4.57 per cent of share capital, by MONEDA A.F.I. fulfil the commitment that has been undertaken as a compensation of the g) 3.76 per cent of share capital, by PERSHING Keen, New Jersey (ND) c) 10.43 per cent of share capital, by SCHRODER Investment Management. 82 Notes to the Consolidated Financial Statements Balances outstanding and transactions with related parties Note 34 Subsequent Events (Amounts in ´000) Related Account Transaction Balances party Relationship 2009 To be recovered from co-ventures New Partnership structure for Otway and Tranquilo Blocks in Chile On 29 January 2010, Pluspetrol completed its acquisition of a 20% interest in - 731 Ventures Ventures are: GeoPark 33.6%, Pluspetrol 20%, Wintershall 33.6% and Methanex 12.8%. Joint Joint the Otway Block following government approval. Current working interests Share- The consortia have elected GeoPark to be the Operator. Borrowings 1,086 (13,901) IFC Lario holders On 1 February 2010, GeoPark submitted a request for Chilean government Administrative expense Production costs 2008 To be recovered from co-ventures 6 20 Enterprises (*) approval, to restructure and strengthen the participating interests of the Non Otway and Tranquilo Blocks in southern Chile. Peter Executive Ryalls Director (**) Subject to approval of the Ministry of Energy in Chile, the new members of the Otway and Tranquilo Blocks shall be Pluspetrol Chile S.A. (Pluspetrol), Joint Joint Wintershall Chile Limitada (Wintershall), International Finance Corporation, a 312 Ventures Ventures member of the World Bank Group (IFC), Methanex Chile S.A. (Methanex) and Share- GeoPark Magallanes Limitada (GeoPark). Borrowings 1,993 (16,245) IFC Lario holders The objective of the restructuring was to create a stronger consortia with Administrative expense 36 - Enterprises (*) similar long-term objectives in the region. The working interest of each Non partner shall be the same in each Block (as detailed in the chart below) and Peter Executive GeoPark shall be the Operator of both Blocks. IPR Chile Tranquilo Limitada Production costs 123 - Ryalls Director (**) and Manas Energía Chile Limitada have agreed to assign their working interests in the Tranquilo Block to the new consortium. (*) The Company paid US$ 6,000 during 2009 and US$ 36,000 during 2008 for services provided by Lario Enterprises LLC. Gerald O’Shaughnessy is a shareholder and director of GeoPark Holdings Limited, and is the beneficial owner of Lario Enterprises LLC through trusts. (**) Corresponding to operating consultancy. There have been no other transactions with the Board of Directors, Executive GeoPark (2) Board, Executive officers, significant shareholders or other related parties during the year besides the intercompany transactions which have been Pluspetrol Wintershall eliminated in the consolidated financial statements, and normal remuneration of Board of Directors and Executive Board. Methanex IFC IPR Manas Otway Block Tranquilo Block New Existing agreed (1) working interest working interest 33.6% 20.0% 33.6% 12.8% - - - 25.0% 25.0% 25.0% 12.5% 12.5% - - Existing working interest 30.0% 30.0% - - - 20.0% 20.0% New agreed (1) working interest 25.0% 25.0% 25.0% 12.5% 12.5% - - Note 33 Fees paid to Auditors Amounts in US$ ’000 2009 2008 Fees payable to the Group’s auditors for the audit of the consolidated financial statements Fees payable to the Group’s auditors for the review of interim financial results Fees payable for the audit of the Group’s subsidiaries pursuant to legislation Fees paid to auditors 105 28 71 204 85 22 57 164 (1) Subject to Chilean Ministry of Energy approval (2) Operator 83 Notes to the Consolidated Financial Statements 75 Notes to the Consolidated Financial Statements 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 onshore 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 Christian 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, with 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. 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. 84 Board of Directors dIrecTors, secreTarY & adVIsors Directors Registered Office Buenos Aires 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 pricewaterhousecoopers llp d1 embankment place london Wc2n 6rH, united Kingdom www.pwc.com 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 designed by: chiappini + becker Tel. +54 11 4314 7774 www.ch-b.com photographer: diego dicarlo, geologist. directors, secretary & advisors 85 AnnuAl report 2009 www.geo-pArk.com