AnnuAl report 2010 eXecutIon rISk mAnAgement creAtIng opportunItIeS commItment 2 letter to Shareholders 62 consolidated Statement of Income 6 Year in review 50 Directors’ report 62 consolidated Statement of comprehensive Income 63 consolidated Statement of Financial position 55 corporate governance 64 consolidated Statement of changes in equity 58 Director’s remuneration report 65 consolidated Statement of cash Flow 60 61 Statement of Directors’ responsibilities 66 notes to the consolidated Financial Statements Independent Auditors’ report 89 Directors, Secretary & Advisors CONTENTS Oil and Gas Production Oil and Gas Reserves Bottom lIne 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 50 40 30 20 10 e o b m m 0I n 2005 2006 2007 2008 2009 2010 2006 2008 2009 2010 oil and condensate gas 2p gas 2p oil oil production gas production Total Revenues EBITDA 80 70 60 50 40 30 20 10 0 D S u m m n I 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 -5,000 D S u f o d n a s u o h t n I 2005 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 oil and condensate gas Dear Shareholders, geopark’s bold founding objective was to build the leading latin production. our large acreage position, with over 3.4 million gross acres, American oil and gas finder and operator. we saw latin America contains a broad inventory of attractive production, development as an area of attractive hydrocarbon potential with immense and high-impact exploration opportunities. As the only oecD country opportunity for a technically-focused and agile independent in latin America, chile continues to provide an attractive base for company. Although we are still only at an early stage of investment and an ideal platform for expansion throughout latin development, we believe our results in 2010 – within a consistent America. we very much appreciated the support given by president trend of growth since our founding – position us closer to the Sebastián piñera of chile when he flew to and visited our field achievement of what is still our ambitious goal. operations this year in recognition of the company’s success. 2010 results new projects Initiative Bottom line, geopark improved in all key performance After proving our business model and team’s ability to convert measurements in 2010: under-performing assets into productive and economically- Operationally, oil and gas production increased by 10% (with a 59% to expand its asset base and project portfolio into new areas. our increase in oil production) and 2p oil and gas reserves grew 29%. partnership with lgI, our growing capital resources and our track Financially, revenues grew 77%, Adjusted eBItDA increased by record of performance place us in a favourable strategic position to attractive oil and gas projects, geopark is now working aggressively 132% and a uS$ 4.2million net profit was achieved. now achieve these goals. Strategically, the company entered into a partnership with lg • • • International (lgI), the korean conglomerate, to acquire new As a new development in march 2011, geopark and lgI further projects throughout latin America and raised uS$ 133 million cemented its relationship by entering into an in-principle agreement through a bond placement in chile (substantially over-subscribed) for lgI to acquire a 10% equity interest in geopark’s chile business to fund new project acquisitions. for uS$ 70 million. this development, which is expected to close • Organizationally, new experienced professionals joined the during the Second Quarter 2011, both strengthens each company’s company to bring further strength and structure to our technical commitment for a long-term acquisition partnership and shows the and management capabilities. underlying value of the business geopark has built in chile. In a related but separate agreement, geopark also agreed to invest up to In response to these achievements, our market value more than uS$ 10 million in lgI’s Block 8 in kazakhstan (subject to regulatory doubled – with geopark now rated among the top 15 international approvals) to participate in the drilling of a large pre-salt oil prospect. oil and gas firms listed on the lSe:AIm exchange. growth on the ground during 2010 was led by the drill bit. twelve successful wells were recorded out of a total of fifteen wells drilled – representing a balance of development and exploration wells. the delayed start-up in our new drilling rig and some steeper than forecasted well declines resulted in a slower increase in annual production than expected. this situation is being addressed in 2011 by the addition of a second drilling rig and improvements in operational efficiency. chile continued to be our principal area of focus where geopark has established itself as the first and only private oil and gas producer – today accounting for over 30% of chile’s total hydrocarbon 2 letter to Shareholders President Sebastián Piñera of Chile visited GeoPark's Fell Block in August 2010 letter to ShAreholDerS letter to Shareholders 3 Petreven Drilling Rig, Fell Block letter to ShAreholDerS 4 letter to Shareholders Alaktaluf Field, Fell Block 2011 outlook Aided by its successes in 2010, geopark is well-positioned for 2011 we express admiration and appreciation for the geopark team for its and beyond. we have a secure production base and positive cash important achievements over the years and to the experienced flow stream capable of supporting continued growth on the professionals who have joined us and are helping to make geopark company’s assets. we have substantial cash reserves to accelerate better every day. we are proud that all of geopark’s employees are capital investment and to acquire new projects. our technical and shareholders of the company and know they are committed to meet management team are built for growth and ready to handle any challenges and to drive us to success. increased activity. our low operating costs and discretionary investment programmes provide flexibility and security even in we also express our gratitude to our investors and shareholders for widely varying oil and gas price environments. your continued support during 2010 and look forward with confidence to continue to deliver growth in value in 2011 and geopark has implemented a uS$ 80-90 million capital investment programme in 2011 with the following priorities: beyond. Sincerely, • Execute to Grow: Drill 20-25 new wells on current blocks to increase oil and gas production by 15-20% and increase oil and gas reserves; and improve operating and investment efficiency to improve economic performance. • Manage Risk: continue to balance production profile between oil and gas; spread work programme exposure between production, development and high-impact exploration projects; expand funding Gerald E. O’Shaughnessy, exposure and capital sources; strengthen management and chairman technical team; expand country footprint; and farmout higher risk / non-core areas. • Expand the Business: Increase our portfolio of organic growth opportunities on existing properties and acquire new projects in latin America – targeting projects with proven reserves and production and with development and exploration upside. • Strengthen Commitment: continue to build the right kind of company – with a performance-driven culture which values and protects our shareholders, employees, environment and communities and thereby supports and enhances our long-term business plan. our confidence in geopark’s future is bolstered by our in-house culture of continuous improvement. As we grow, continuous efforts are made to evolve into an effectively managed company compatible with our increasing scale and scope. It is a vital and welcome challenge to successfully introduce the tools and structure necessary to run a larger company – and still maintain and encourage the original pioneering spirit which led us to be where we are today. James F. Park, chief executive officer letter to Shareholders 5 2010 PERFORMANCE Operational Performance Financial Performance Strategic Developments 80% Drilling Success: Drilled, completed and put into production 12 out of 15 wells as part of a US$58.0 million capital expenditure programme. 10% Oil and Gas Production Increase: Net oil and gas production increased to approximately 7,000 boepd, led by a 59% growth in oil production. 29% Growth in 2P Oil and Gas Reserves: DeGolyer & MacNaughton appraised 49.6 • • • • 77% Revenue Growth: Total revenues increased to US$79.6 million. 132% EBITDA Increase: EBITDA increased to US$41.1 million. EBITDA per boe produced increased by 112% from US$7.70 • LGI Latin American Acquisition Partnership: LG International and GeoPark entered into a strategic partnership to jointly acquire and develop upstream projects in Latin America, initially in the US$100-500 million range and targeting Chile, Argentina, Brazil, Peru and to US$16.30 per barrel. Colombia. US$4.2 Million Net Income: • Strengthening of the Team: Achieved profitability with a net Continued to add to operational income of US$4.2 million. and management capabilities. US$133 Million Funding: million boe of Proved and Probable Successfully placed US$133 million (2P) reserves –including a 62% of notes (7 3/4% 5 year Reg-S) growth in 2P oil reserves and 18% principally with Chilean investors to growth in 2P gas reserves; and 3P support new project acquisitions reserves of 156.8 million boe. and fund work program. High Impact Tranquilo Block • Market Capitalisation Up 120%: Prospect: Preparing to drill the Total market capitalisation grew Renoval prospect targeting from the end of 2009 to US$562 unrisked mean resources of 715 million at the end of 2010. billion cubic feet of gas. Infrastructure and Rigs: Gas production capacity was increased to 77 million cubic feet per day and two drilling rigs are now in operation for 2011. • • • • • Oil Gas 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 2010 6 performance • Year in review • • • • • 2010 PERFORMANCE Operational Performance Financial Performance Strategic Developments 80% Drilling Success: Drilled, 77% Revenue Growth: Total • LGI Latin American Acquisition completed and put into production revenues increased to US$79.6 Partnership: LG International and 12 out of 15 wells as part of a million. US$58.0 million capital expenditure GeoPark entered into a strategic partnership to jointly acquire and programme. 132% EBITDA Increase: EBITDA develop upstream projects in Latin increased to US$41.1 million. America, initially in the US$100-500 10% Oil and Gas Production EBITDA per boe produced million range and targeting Increase: Net oil and gas production increased to approximately 7,000 boepd, led by increased by 112% from US$7.70 Chile, Argentina, Brazil, Peru and to US$16.30 per barrel. Colombia. a 59% growth in oil production. US$4.2 Million Net Income: • Strengthening of the Team: 29% Growth in 2P Oil and income of US$4.2 million. and management capabilities. Achieved profitability with a net Continued to add to operational Gas Reserves: DeGolyer & MacNaughton appraised 49.6 US$133 Million Funding: million boe of Proved and Probable Successfully placed US$133 million (2P) reserves –including a 62% of notes (7 3/4% 5 year Reg-S) growth in 2P oil reserves and 18% principally with Chilean investors to growth in 2P gas reserves; and 3P support new project acquisitions reserves of 156.8 million boe. and fund work program. High Impact Tranquilo Block Market Capitalisation Up 120%: Prospect: Preparing to drill the Total market capitalisation grew Renoval prospect targeting from the end of 2009 to US$562 unrisked mean resources of 715 million at the end of 2010. billion cubic feet of gas. Infrastructure and Rigs: Gas production capacity was increased to 77 million cubic feet per day and two drilling rigs are now in operation for 2011. • • • • • Oil Gas YeAr In reVIew 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 2010 Year in review • performance 7 8 Execution • Year in Review ExecutionValue Driver.Proven technical experience in finding and producing oil and gas. The ability to plan, overcome obstacles, adapt, seize opportunities and achieve results. Year in Review • Execution 9 YeAr In reVIew DrIllIng geopark’s growth continued to be led by the drill bit – as directed by the company’s geoscience and operation team. All drilling occurred on the Fell Block in chile where fifteen wells were drilled with twelve wells successfully put on production. the chart below summarises geopark’s drilling programme on the Fell Block during 2010: Well Name Well Type Formation Hydrocarbon Dicky 16 Alakaluf 6 Alakaluf 8 guanaco 3 Aonikenk Sur 1 Alakaluf 7 Alakaluf 9 tetera 4 cerro Iturbe 1 Ayelén 2 Development Development Development exploration exploration Appraisal Appraisal Development exploration Appraisal Springhill Springhill Springhill Springhill Springhill Springhill Springhill Springhill Springhill tertiary Yagán norte 2 Development Springhill & tobifera guanaco 4 Development Dicky 18 Ayelén 1 exploration Appraisal guanaco 6 Development Springhill Springhill tertiary Springhill gas oil oil oil oil & gas oil oil oil gas woc woc oil gas - oil 10 execution • Year in review Dew Point Plant - Fell BlockDew Point Plant, Fell Block eXecutIon Year in review • execution 11 YeAr In reVIew monte Aymond Field, Fell Block 12 Execution • Year in Review oIl AnD gAS reSerVeS geopark has achieved consistent growth in oil and gas reserves from its investment activities since 2005. Degolyer & macnaughton, independent petroleum engineers, appraised a 29% increase in 2p reserves to a total of 49.6 million barrels oil equivalent (mmboe) in its report dated 31 December 2010. In this report, Degolyer & macnaughton estimated, on four of geopark’s six blocks, a total of 19.9 mmboe of proved reserves, a total of 29.6 mmboe of probable reserves, and a total of 107.3 mmboe of possible reserves. Degolyer & macnaughton also appraised 47.5 mmboe of contingent resources (total estimate). geopark’s drilling successes in early 2011 have not yet been appraised by Degolyer & macnaughton and will be Country chile Argentina included in a new reserve report targeted for completion at year-end. total the chart to the right summarises the reserves appraised by Degolyer & macnaughton in December 2010. 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 67% of 2p reserves and oil represents approximately 33% of 2p reserves. oIl AnD gAS proDuctIon geopark’s oil and gas production currently is generated from the Fell Block in chile and the Del mosquito Block in Argentina. During 2010, approximately 99% of the company’s total oil and gas production was produced in chile and approximately 1% in Argentina. During 2010, gas represented approximately 72% of the total production (80% in 2009) and oil represented approximately 28% of the total production volume (20% in 2009). oil and gas production is shown in the chart to the right: 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 eXecutIon Reserve Type Oil (MMBBL) Gas BOE (BCF) (MMBOE) p1 p2 p3 p1+p2 p1+p2+p3 p1 p2 p3 p1+p2 p1+p2+p3 p1 p2 p3 p1+p2 p1+p2+p3 5.9 7.9 18.4 13.8 32.2 0.7 1.7 3.3 2.4 5.7 6.6 9.6 21.7 16.2 37.9 80.0 119.9 513.5 199.9 713.4 0.2 0 0 0.2 0.2 80.2 119.9 513.5 200.1 713.6 19.2 27.9 104.0 47.1 151.1 0.8 1.7 3.3 2.5 5.7 19.9 29.6 107.3 49.5 156.8 2005 2006 2007 2008 2009 2010 oil and condensate gas Year in review • execution 13 Argentina Chile trAnQuIlo otwAY 14 execution • Year in review Strait of Magellan Del moSQuIto Fell ASSetS Year in review • execution 15 Atlantic OceanStrait of MagellanGeoPark’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 licences, 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 reservoirs, stranded and producing field development and medium to high impact exploration projects. YeAr In reVIew chIle lIcenceS 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 43% 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 Block Fell tranquilo otway Area (sq km) Operator Basin 1,780 6,648 5,992 geopark geopark geopark magellan / Austral magellan / Austral magellan / Austral kilometres) in chile represents an important platform for continued the Blocks are located in the continental magallanes region in a growth and expansion. geopark’s blocks in chile consist of: 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 16 execution • Year in review chIle lIcenceS • ASSetS Sofía lake, north tranquilo Block all of chile’s oil and gas production. Although it has been producing existing wells. Shut-in and abandoned fields also have the potential for over 50 years, the basin remains relatively underdeveloped with to be put back on production by constructing new pipelines and new exploration frontiers being opened in recent years. plants. geophysical interpretations by geopark suggest additional development potential in known fields and exploration potential in Substantial technical data (seismic, geological, drilling and new undrilled prospects and plays – including opportunities in the production information), both developed by geopark and enAp (the Springhill, tertiary, tobifera, and estratos con Favrella formations. chilean State oil company), provides an excellent base for technical During 2010, geopark successfully added to its oil and gas evaluation. log interpretations by engineers experienced in the production from new discoveries in the Springhill, tertiary and region indicate by-passed oil and gas production zones in certain tobifera formations. Year in review • execution 17 Fell Block the Fell Block has an area of approximately 440,000 acres (1,780 sq the magellan Basin – in the northwest area comprising the structural km) and its centre is located approximately 140 km northeast from platform (developing to the east) and the slope (developing the city of punta Arenas. the Fell Block’s northern border coincides to the west). the source rocks relate to the estratos con Favrella with the international border between Argentina and chile and (cretaceous) deposits. the principal producing reservoir is the its southern limit is bordered by the magellan Straits. Springhill formation sandstone (lower cretaceous) at depths of 2,200-3,500 metres. Additional reservoirs were discovered and the first exploration efforts began on the Fell Block in the 1950’s and put into production on the Fell Block in 2009 – namely the tobifera from then until 2005, enAp carried out 2,400 km of 2D seismic and (Jurassic) volcaniclastics (2,600 to 3,600 metres) and the upper 256 sq km of 3D seismic and drilled 146 wells. In 2006, geopark tertiary and upper cretaceous sandstones (700 to 2,000 meters). became operator and 100% interest owner of the Fell Block when trap types in the Fell Block are mainly structural traps defined by the Fell Block had no oil and gas production. Since geopark has been anticlines developed in the basement and involving the cretaceous operator, it has completed more than 1,000 sq km of 3D seismic and and tertiary sequences. Stratigraphic and combined traps drilled 50 exploration, appraisal and development wells resulting are developed in the southern and northern sector of the Block. in current oil and gas production of approximately 32 million cubic feet per day of gas and 2,000 barrels per day of oil. geopark’s geoscience team is continuing to identify and expand a the Block is located geologically in the cretaceous depocentre of on the Fell Block – both exploration and development projects – large and attractive inventory of prospects and drilling opportunities 18 Execution • Year in Review chIle lIcenceS • ASSetS and the company will be continuing its aggressive drilling programme over the next years. the recent oil and gas discoveries in the guanaco, Aonikenk Sur and cerro Iturbe fields (where three successful wells were drilled in 2010) have further opened up new oil and gas potential in the Block – and additional prospects have been identified. a m a a c c a a t t A A e e d d o o t t r r e e i i i s s e e D D s a p m a P Santiago In 2010, geopark discovered the new guanaco oil field in the Springhill formation which has further development opportunities. In the Santiago norte Field complex, where Degolyer & Chile Argentina Buenos Aires macnaughton estimated a total of approximately 415 bcf of 3p gas reserves and approximately 174 bcf of contingent gas resources, geopark has carried out a series of studies, including petrophysical analysis, reservoir simulation and fracture design analysis. geopark is currently drilling the williche 1 well to further appraise the attractive Santiago norte complex gas reserve. i a n o g a t a P Fell Argentina Chile Fell Estrecho de Magallanes Year in Review • Execution 19Alakaluf Field, Fell Block trAnQuIlo Block the tranquilo Block extends over an area of approximately 1,643,000 production and no reserves have been independently appraised by acres (6,648 sq km) and is located approximately 110 km northwest geopark’s engineering consultants on the Block. of punta Arenas. the first hydrocarbon exploration efforts began in the 1940's and the tranquilo gas field was discovered in 1958. enAp geologically, the tranquilo Block is located in the magellan Basin’s drilled 21 wells and carried out 1,428 km of 2D seismic on the Block. northwest area, comprising the Folded Belt and thrust Front and the tertiary Foreland Basin. the source rocks relate to the deep marine geopark is the operator of the tranquilo Block. Following a basin cretaceous deposits. the proven reservoirs with production partnership restructuring, the partners, subject to chilean government history relate to the loreto formation deltaic sandstones at depths of regulatory approvals, in the tranquilo Block consist of geopark (29%), 700-1,000 metres. other potential reservoirs include the morro chico pluspetrol (29%), wintershall (25%) and methanex (17%). the partners formation (Basal tertiary) sandstones and the rocallosa formation have requested the chilean government for an 18 month extension to (upper cretaceous) sandstones. trap types are fundamentally the first exploration period. historically, the Block has tested and structural traps defined by anticlines developed in the Folded Belt produced oil and gas, however, there is currently no oil or gas and thrust Front involving the basement and cretaceous and 20 execution • Year in review YEAR IN REVIEW chIle lIcenceS • ASSetS 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, Santiago a m a a c c a a t t A A e e d d o o t t r r e e i i i s s e e D D s a p m a P gales and kerber areas. In the southeast sector, marcou area, there is the potential of gas accumulations in stratigraphic traps. In 2010, geopark initiated the seismic programme which consisted of 160 sq km of 3D seismic and 292 sq km of 2D seismic. geological and geophysical interpretation of the seismic information identified a large prospect in the esperanza-gales region, with potential mean resources of 715 bcf of gas (possibility of success risked at 28%). this prospect will be drilled during 2011 with the renoval 1 well. Buenos Aires Chile Argentina Argentina i a n o g a t a P Tranquilo Tranquilo Chile Year in review • execution 21 Morro Chico, Tranquilo Block otwAY Block the otway Block consists of an area of approximately 1,480,000 acres (5,992 sq km) and is located approximately 110 km from the city of punta Arenas. the Block consists of onshore areas (peninsula Brunswick and Isla riesco) and offshore areas (Seno Skyring and Seno otway). the first hydrocarbon exploration activities began in the 1920’s and during the 1930's and 1940's several wells were drilled with gas manifestations. enAp drilled 31 wells and carried out 875 km of 2D seismic on the Block. During a drilling campaign in the 1970’s, gas was tested in three structures on the Block. geopark is the operator of the otway Block. Following a partnership restructuring, the partners in the otway Block consist of geopark (25%), pluspetrol chile limitada (25%), wintershall chile limitada (25%), International Finance corporation (12.5%), and methanex chile limitada Santiago (12.5%). historically, the Block has tested and produced oil and gas, however, there is currently no oil or gas production and no reserves have been independently appraised by geopark’s engineering a m a a c c a a t t A A e e d d o o t t r r e e i i i s s e e D D s a p m a P Buenos Aires consultants on the Block. Chile Argentina i a n o g a t a P geologically, the Block is located in the magellan Basin’s northwest area comprising the Folded Belt and thrust Front and the tertiary Foreland Basin. the source rocks relate to the deep marine basal cretaceous deposits. the proven reservoirs with production history relate to the Agua Fresca formations marine and/or deltaic sandstones at depths of 200-1,500 metres. other potential reservoirs include the chorillo chico Otway sandstones at depths of 1,500-1,900 metres and the loreto formation (upper tertiary) and rocallosa and rosa formations (upper cretaceous). trap types are fundamentally structural traps defined by anticlines developed in the Folded Belt and thrust Front and involving the basement and cretaceous and tertiary sequences. Stratigraphic traps are developed toward the Foreland Basin in the northern sector of peninsula Brunswick including upper cretaceous and lower tertiary Chile Otway deltaic and turbiditic deposits. geopark’s current exploration focus is in the Folded Belt (central and western areas of Isla riesco), where potential unrisked mean resources of 1,570 bcf of gas have been identified (possibility of success risked at 17%). In the Foreland Basin (northeastern sector of peninsula Brunswick), there is the potential of gas accumulations in stratigraphic traps in the upper tertiary (loreto formation), where potential unrisked mean resources of 162 bcf of gas have been identified (possibility of success risked at 17%). the seismic programme was initiated in 2010 and included 270 sq km of 3D seisimic and 175 km of 2D seismic. 22 execution • Year in review chIle lIcenceS • ASSetS Year in review • execution 23 Year in review • execution 16 Seismic Registration in Cabo Negro, Otway Block YeAr In reVIew 24 Execution • Year in ReviewPampa Larga Plant, Fell Block ArgentInA lIcenceS • ASSetS ArgentInA lIcenceS geopark has interests in the following blocks in Argentina: cerro DoÑA JuAnA & lomA cortADerAl BlockS 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 cerro Doña Juana and loma cortaderal Blocks (47,959 total acres) are located in the neuquén Basin (west-central Argentina) which represents the most prolific hydrocarbon producing basin in Argentina, accounting for over forty per cent of its total oil production and over sixty per cent of its total gas production. the blocks are located in the Andean fold and thrust belt, along a proven producing fairway, where large hydrocarbon accumulations exist. there are excellent source rocks, multiple reservoir objectives the Del mosquito Block is located in the Austral Basin in southern and large structural traps. the oil potential on the blocks can Argentina. the Austral Basin produces nearly ten per cent of be characterised as high risk with potentially high associated costs. Argentina’s total oil production and nearly twenty per cent of its total gas production. (Although the Fell and Del mosquito Blocks geopark is the operator of the cerro Doña Juana and loma are located in different countries, they are situated in the cortaderal Blocks and has a 100 per cent working interest same geological basin and, at their closest point, are less than in each block. In 2007, geopark established oil production on the 20 kilometres apart.) loma cortaderal Block after repairing an existing well. (well is shut-in waiting for a workover and the Blocks are not currently the Del mosquito Block (120,000 acres) is surrounded by producing in production). Further geological studies were performed oil and gas fields to the north, south, east and west. there is oil on the blocks during 2010 with the expectation of developing production currently from two fields and there is good infrastructure, a future exploration and development programme and providing nearby gas plants and pipelines and an easily accessible crude oil a basis to potentially farmout the blocks. market (40 kilometres by truck). eighty per cent of the block is at an early stage of exploration with sparse well coverage. two 3D seismic surveys, totaling an area of 355 square kilometres, cover approximately 73 per cent of the block and geopark’s geoscience team has identified and delineated multiple potential hydrocarbon- bearing prospects. the potential of the lower magallanes and tobifera geological formations has been underexplored. geopark is the operator of the Del mosquito Block and has a 100 per cent working interest. geopark established oil production on the block in 2002 by rehabilitating the abandoned Del mosquito field. In 2004, geopark discovered a new field – Del mosquito norte – which currently has two producing wells. the discovery well on Del mosquito norte was the first well drilled on the block since the 1980’s. geopark is evaluating potential drilling opportunities on Del mosquito and also evaluating the option of bringing a partner into the project to increase investment activity. During 2011, the company will reprocess and reinterpret a 3D seismic survey with the objective to drill a new exploration well on Del mosquito during 2011. a m a a c c a a t t A A e e d d o o t t r r e e i i i s s e e D D Argentina s a p m a P Loma Cortaderal Cerro Doña Juana Océano Atlántico Del Mosquito Argentina Chile Santiago Loma Cortaderal Doña Juana Buenos Aires Chile Argentina i a n o g a t a P Del Mosquito Year in review • execution 25 26 Risk Management • Year in Review Risk ManagementValue Driver.Understanding and continually building to accommodate risk among the subsurface, funding, organizational, partner/shareholder, oil and gas market, and regulatory/political environments.Year in Review • Risk Management 27 YeAr In reVIew 28 Risk Management • Year in Review rISk mAnAgement BuSIneSS plAn geopark’s management believes shareholder value is increased most economically by consistently pursuing a strategy of discovery and development of oil and gas deposits in areas in or nearby known reserves. geopark implements this strategy through a business plan which emphasises: 1. technical strength in economically finding, developing and producing new and bypassed oil and gas reserves; 2. commercial capabilities in acquiring high potential assets at attractive prices; 3. risk-management in expanding the portfolio, increasing options and protecting against uncertainties; and 4. Strategic mix of partners and allies to facilitate organic and inorganic growth. geopark’s opportunity portfolio includes multiple in-house projects and an asset foundation from which to pursue a targeted acquisition plan, which is expected to include both asset and corporate targets. Its full-cycle exploration and production work programme allows the company to move forward along different lines simultaneously and independently. this available mix of rehabilitation, development, exploration and acquisition opportunities allows geopark to balance its risk exposure and ensure continuous growth. Year in review • risk management 29 Since its founding, GeoPark has approached building its business with a long-term view and a keen appreciation of the inherent uncertainties associated with the oil and gas industry – both above and below ground. Consequently, efforts are consistently made to balance activities and diversify support. GeoPark’s consistent record of growth – including during the global crisis in 2009 - reflect the Company’s success in balancing these uncertainties and building a foundation to sustain continuous growth. Examples of key risk management elements addressed by GeoPark include:Subsurface / Geological: Invest in best people and balanced projects (proven production plus development and exploration upside).Regulatory / Political: Multi-country footprint; local knowledge and ownership; IFC shareholding; SPEED initiative.Capital / Balance Sheet: Multiple capital sources (funders and regions); creative and inexpensive financing. Partners: Associating with long-term strategic partners which understand the upstream oil and gas business.Market / Infrastructure: Areas with high market demand and infrastructure in place; financially-strong clients.Project Economics: Balanced work programme of production, development and exploration; invest in technology and operational efficiency.Organization / Management: Build good demographics (seasoned professionals with new recruits); local organizations; all employees are shareholders.••••••• YeAr In reVIew oIl AnD gAS mArket natural gas over the long-term, geopark has continued to benefit from the major changes undergoing the regional gas markets. In particular, the supply of gas from Argentina to chile has been severely limited and, as the only private-sector gas producer currently in chile, this market shift has substantially increased the value of geopark’s chilean gas reserves. located approximately 140 kilometres from geopark’s Fell Block, methanex operates a major plant in chile which has the capacity to consume 350 million cubic feet per day of gas and produce over 10 per cent of the world’s methanol supply. over sixty percent of the methanex gas supply, which historically has originated in Argentina, was cut-off by Argentina export duties and restrictions in 2007; thereby creating an important market opportunity. geopark captured this opportunity by entering into a strategic alliance with methanex providing for a ten year gas purchase and supply contract at an improved gas price (linked to the international price of methanol) and with the opportunity to pre-sell gas to generate future work programme funding and to jointly acquire new hydrocarbon blocks in chile. this marketing alliance has substantially de-risked geopark’s chile investment activities. A new step in this alliance was demonstrated in march 2011 with a new agreement with methanex aimed at increasing gas production by improving project economics. During 2010, commodity prices recovered from the global economic crisis suffered in 2009. global methanol prices increased by 50% during 2010 resulting in a corresponding 45% increase in natural gas prices for geopark in chile. the increasing price trend continued during the first quarter of 2011. 30 risk management • Year in review rISk mAnAgement crude oil crude oil markets in the region are both accessible and secure. In chile, geopark’s crude oil and condensate production are sold to enAp (the chilean State oil company) and delivered by truck from the geopark wells to enAp’s refining facilities or pipeline access. the sales price is equivalent to wtI less quality adjustments. 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. crude oil prices in chile increased 35% during 2010 in line with world petroleum markets. First Quarter 2011 crude oil prices in chile have increased by over 20% compared to average prices in 2010. Argentina oil prices remain relatively stable as a result of prevailing retention taxes which cap crude oil prices. Year in review • risk management 31 Petreven Drilling Rig YeAr In reVIew 32 risk management • Year in review Dew Point Plant, Fell Block rISk mAnAgement cApABIlItIeS geopark deems it critical to continuously develop creative and long-term to own and operate a workover rig for testing and completion solutions to build its capabilities and acquire the capital, tools, and operations. the workover rig was assembled and rebuilt during 2007 people necessary to achieve its growth plans. the company’s record and was used to test and complete twelve wells during 2010. In early of performance demonstrates that its attention to and investment in 2011, the management of the workover rig was subcontracted to these basics are creating an important differentiating factor and a petreven. competitive advantage over the longer term. tools and Infrastructure the kimiri Aike facility, which originated in Bolivia and is being leased from the exterran compression company under a long-term contract, was put into operation during 2007 after an investment (including the construction of associated tank batteries) of uS$ 8 In new regions such as chile where oilfield services are scarce or in million. the plant provides direct access to the main regional gas tight oilfield equipment supply markets (as recently experienced), pipeline and allows rapid commercialization of new wells. current geopark works to develop solutions to ensure the availability of plant capacity is 47 million cubic feet per day. needed services and equipment – including drilling and workover rigs. In order to quickly commercialise its oil and gas reserves, An additional gas delivery point at municion, with a capacity geopark also invests in and builds the infrastructure (plants and of 30 million cubic feet per day, was opened in 2010 allowing gas pipelines) necessary to produce, process, store and transport its production from the northeastern area of the Fell Block to hydrocarbon reserves to market. be transported and sold through an alternative pipeline system. this increased total Fell Block gas production delivery capacity examples of these projects in 2010 include: to 77 million cubic feet per day. operated a drilling rig with a depth capacity of 10,500 feet Built new oil and gas production gathering centres in guanaco and contracted from Quintana wellpro (uS/Argentine drilling contractor) Alakaluf fields (processing and storage facilities) and constructed an under a three year contract, with an option for an additional two additional 6 kilometres of gas pipelines on the Fell Block to connect years. this rig was imported from china as a result of the tight local new oil and gas fields to production. Approximately 141 kilometres rig market. the Quintana rig was used to drill fifteen wells in 2010. of gas pipelines have been built on the Block since 2006. Acquired a new state-of-art hydraulic drilling rig from petreven in operated a storage tank at the enAp San gregorio refinery to receive Italy to begin operating in early 2011 in an effort to decrease drilling and market new crude oil deliveries. rehabilitated and leased an costs and increase depth capabilities. existing enAp oil treatment and storage facility at Faro este to handle increased crude oil production until a new facility will be operated a service company subsidiary – Southern cross Services – constructed on the Fell Block in 2011. Year in review • risk management 33 ••••••• 34 Creating Opportunities • Year in Review Value Driver. Initiating and creatively building an attractive high-impact portfolio of organic and new project opportunities – coupled with the commercial skills to buy right and to close. Creating OpportunitiesYear in Review • Creating Opportunities 35 YeAr In reVIew A strategic pillar of geopark’s long-term business plan is based on creatively initiating and developing growth opportunities – both organically on existing assets and by acquiring new economically- attractive projects. there is a strong competitive environment for new project acquisitions and geopark has been focused to build foundation, capabilities and capital necessary to successfully acquire new projects. latin America is the focus of geopark’s growth and represents 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 latin America’s economic future is dependent on the development of secure energy supplies – and oil and gas will be the chief contributor to this mix. with its experience in the region, strong technical team and committed financial resources from strategic partners, geopark is well-positioned to participate in this growing opportunity. 36 creating opportunities • Year in review •••••••••Dew Point Plant, Fell Block creAtIng opportunItIeS Year in Review • Creating Opportunities 37 YeAr In reVIew orgAnIc growth with over 3.7 million gross acres and a large and balanced prospect inventory on its six hydrocarbon blocks in chile and Argentina, geopark has an attractive land position and high growth potential from its existing properties. In 2011, geopark will pursue a uS$ 80-90 million investment programme to drill 20-25 new wells and to expand its production facilities and infrastructure in chile and Argentina. the programme is targeted to develop existing fields and discover new fields in order to both increase oil and gas production and increase oil and gas reserves. efforts also will be focused on improving reservoir performance by fracture stimulation programmes, expanding the prospect inventory, and increasing the efficiency of expenditures. exploration driling has been initiated on geopark’s large tranquilo and otway blocks in chile with a well on tranquilo to be drilled during 2011 targeting the high potential 715 bcf esperanza prospect. 38 Creating Opportunities • Year in Review new proJectS Following its successful development of its chile project, geopark now intends to leverage its strategic operating and management base and its technical and commercial capabilities to acquire new assets where suitable opportunities arise. this represents a new growth phase for the company with assets being targeted which bring a mix of production and development opportunities with attractive exploration acreage, and which utilise where applicable, various forms of participation including block acquisitions, farm-ins, corporate transactions, work and investment commitments and/or operator-earned interests. From its history and work in the region, geopark has identified and screened multiple attractive properties which it believes can be available for acquisition at favourable terms. In march 2010, geopark entered into a strategic partnership with lg International for the purposes of this objective and to jointly acquire and develop upstream oil and gas projects in latin America. the intent of the lgI-geopark partnership is to build a risk-balanced portfolio of upstream opportunities across latin America – and to leverage the platform and experience of both partners to identify and carry out side-by-side acquisitions; initially targeting upstream projects in the uS$ 100-500 million range size. geopark will be vthe manager of the strategic partnership and operator of acquired 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 years and the target for closing the first acquisition is during 2011. Additional strategic relationships supporting geopark’s growth include the IFc (world Bank), enAp (chilean State oil company), and methanex (largest regional gas consumer). the company has acquisition initiatives now underway in chile, Argentina, Brazil, peru and colombia. CREATING OPPORTUNITIESYear in Review • Creating Opportunities 39 cApItAl to successfully participate in the capital-intensive oil and gas business, at gBp 3.94) in may 2008 from a strategic block of chilean investors geopark is continuously developing potential funding sources to and pension funds, the IFc and certain london institutional investors. ensure the efficient development of its assets. to date, more than the placing, which was limited to 10% of the current issued share uS$ 325 million has been raised by geopark – demonstrating its ability capital of the company, was significantly oversubscribed. to attract the capital and strong shareholders needed to facilitate its future growth. 2009 geopark has made continuos progress in strengthening its balance shares at gBp 2.25) in may 2009 from a block of geopark’s founders, sheet through new funding, increased revenues and debt repayments. directors and shareholders and including the IFc and certain london new equity funding of approximately uS$ 11.8 million (3,437,000 key financings included: 2006 and chilean institutional investors. the placing, which was limited to 10% of the current issued share capital of the company, was significantly oversubscribed. International Finance corporation of the world Bank (“IFc”) equity investment in February 2006 for uS$ 10 million following a thorough new equity funding of approximately uS$ 20.5 million (3,784,000 technical, financial and environmental review of geopark. shares at gBp 3.23) in november 2009 from a new strategic investor in Admission to the london Stock exchange Alternative Investment company. the placing was limited to 10% of the current issued share the uSA, a uk institutional investor, the IFc and a director of the market (AIm) in may 2006 which resulted in: uS$ 35 million for new capital investment Access to the capital markets A base of strong institutional shareholders capital of the company and was oversubscribed. methanex gas pre-Sale loan Facility for uS$ 15.0 million. this facility provided uS$ 15.0 million from methanex in order to increase Improvement in geopark’s ability to attract, recruit and retain key development of the Fell Block. the facility which was repayable in gas employees potential acquisition currency with an interest rate adjustable to the gas deliveries was repaid in full with the proceeds from the 2010 notes (see below). IFc loan in December 2006 for uS$ 20 million to accelerate the methanex loan for uS$ 3.3 million. this facility provides uS$ 3.3 development programme and which reconfirmed the IFc’s long-term million, interest-free, from methanex in order to finance the support for geopark. 2007 methanex gas pre-Sale loan Facility for uS$ 40 million. exploration, development and production of natural gas from the otway Block. (Approximately uS$ 1.8 million was disbursed from this loan in 2010.) this agreement provided uS$ 40 million from methanex in order IFc loan rescheduling of uS$ 14.0 million. In november 2009, the IFc to increase development of the Fell Block. conditions include: agreed to reschedule until 2016 the outstanding uS$ 14.0 million from pay back in gas production over six years in variable installments its 2006 loan to geopark. this facility was repaid in full with the An interest rate paid on borrowed funds of lIBor flat proceed form the notes issued in 2010 (see below). 2008 chile Stock exchange listing. Following the approval of the chilean new equity funding of approximately uS$ 24 million (3,080,000 shares Superintendencia de Valores y Seguros (SVS), geopark’s stock was 40 creating opportunities • Year in review ••-----••--••••••• creAtIng opportunItIeS admitted to trade on the Santiago offshore Stock exchange in chile in october 2009. this development strengthens geopark’s foundation in the region and ties to the chilean financial community which is an increasingly active supporter of the company’s efforts. 2010 Strategic partnership with lg International (lgI) to jointly acquire upstream oil and gas assets in latin America in side-by-side acquisitions. this partnership enables geopark to both accelerate and expand its current efforts to acquire new projects; with initial projects targeted in the uS$ 100-500 million range. on 2 December 2010, geopark chile limited successfully completed the private placement of a uS$ 133 million of reg S note. the notes carry a coupon of 7.75% per annum and mature on 15 December 2015. the notes are guaranteed by geopark and secured with the pledge of 51% of the shares of geopark chile. In addition, the note agreement allows for the placement of up to an additional uS$ 27 million of notes under the same indenture subject to the maintenance of certain financial ratios. 2011 As a new development in march 2011, geopark and lgI further cemented its relationship by entering into an in-principle agreement for lgI to acquire a 10% equity interest in geopark’s chile business for uS$ 70 million. this development, which is expected to close during the Second Quarter 2011, both strengthens each company’s commitment for a long-term acquisition partnership and shows the underlying value of the business geopark has built in chile. Four stock market oil and gas analysts cover geopark and provide valuations on the company. these include three analysts in london (as of march 2011) and one analyst in chile – with all four maintaining “Buy” recommendations. International Finance Corporation World Bank Group Year in review • creating opportunities 41 •••• 42 Commitment • Year in Review CommitmentValue Driver.An in-house performance-driven culture which values and protects our shareholders, employees, environment and communities --and supports our long-term business plan.Year in Review • Commitment 43 YeAr In reVIew 44 commitment • Year in review commItment 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. geopark is building the strongest oil and gas finding and producing team in the region. this is our competitive advantage. Year in review • commitment 45 YeAr In reVIew S.p.e.e.D. (Safety, prosperity, employees, environment, community Development) long-term success for international resource companies depends in. our long-term well-being requires us to properly fit within our upon solving complex logistical and operational challenges, natural surroundings. overcoming competition for new opportunities and good people, and meeting a broadening set of demands and standards from local geopark is committed to being the preferred neighbor and partner governments and core constituencies. meeting these challenges by creating a mutually beneficial exchange with the local and performing to these new standards are what differentiate a communities where we work. unlocking local knowledge creates successful company from the rest of the pack. 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 integrated do more. and market-based approach for meeting these challenges by aligning our business objectives with our core values and geopark’s specific methodology is focused on undertaking realistic responsibilities. geopark’s overall business plan is to create long- and practical programmes based on best world practices. our term value by finding and producing energy, based on good science emphasis is on building key principles and company-wide ownership and efficient operations, and to return that value to our core and then expanding programmes from within as we continue to constituencies, which we define as our: Shareholders, employees, grow. our comprehensive in-house designed ehSS management communities and environment. programme, entitled S.p.e.e.D. (for Safety, prosperity, employees, geopark is committed to delivering significant bottom-line financial accordance with: ISo 14001 for environmental management issues; value to our shareholders. only a financially-healthy company can oShAS 18001 for occupational health and safety management continue to grow, attract needed resources and create real long- issues; SA 8000 for social account-ability and worker rights issues; environment and community Development), is being developed in term benefits. the Development Standards of the world Bank; and the Quoted companies Alliance standards for good corporate governance. geopark is committed to creating a safe and motivating workplace for employees. with today’s short-age of capable energy “creating Value and giving Back” represents geopark’s underlying professionals, the company which is able to attract, protect, retain value system which provides us the leadership, confidence and and train the best team with the best attitude will always prevail. foundation required for long-term success. It is our competitive advantage. And, it reflects our pride in achieving an important geopark is committed to minimising the impact of our projects on mission in the right way. If we are the true performer, the best place the environment. As our footprint becomes cleaner and smaller – to work, the preferred partner and the cleanest operator -- our the more areas and opportunities will be opened up for us to work future is bigger, better and more secure. 46 commitment • Year in review •••• commItment examples of community efforts in 2010: • geopark... Simply, thanks (el pingüino editorial, April 5) “to be sincere, not all the companies in the region take actions on behalf of the community. In most cases (my apologies to the exceptions), profit takes precedence over investment. on Saturday, I went with my son Javier to the First Freestyle Biking contest... what moves a company to take action on behalf of the city's kids and youngsters? …to me all this is worthy of praise. good for you, geopark, thanks for the beautiful gift given to all of us… «creating Value and giving Back» still lingers on my mind… noteworthy, geopark…” • A praiseworthy Initiative (la prensa Austral editorial, April 6) “…Additionally, geopark is providing a great example of integration with the magallanic community, one that is doubly valuable given the focus on a group of youngsters often times stigmatized by society. other major companies should, as part of their social responsibility strategy, sponsor similar activities that have a direct impact on certain local groups. Sometimes, initiative and the desire to contribute to positive transformation in a community take precedence over financial resources…” • • • • geopark sponsored a new edition of the classic (out-of-print) illustrated book, Andes Patagónicos, on the exploration of patagonia by the Salesian priest, Father De Agostini, fifty years following its first Spanish edition and in commemoration of the 100th anniversary of the author’s birth. geopark founded the geopark Sports club in punta Arenas, chile to provide a supporting environment to young people and to improve their quality of life and personal skills through sports and team efforts. Sports include basketball, volleyball, rugby, badminton and BmX freestyle biking competitions – and geopark employs a coach / psychologist to assist developing individual skills and member responsibilities. geopark’s principle focus is helping to create jobs in regions where it operates. this includes assisting start-ups and providing preferential contracting to new small companies that can provide needed services. geopark has assisted in the start-up of over fifteen micro companies and contracts with over 150 regional companies in its operations. geopark and its employees donated uS$ 200,000 to the earthquake relief efforts following the devastating earthquake in chile in February 2010. Year in review • commitment 47 48 Financial Statements Financial Statements 49 Financial Statements Directors’ Report The Directors submit their report together with the audited consolidated On 2 December 2010, GeoPark Chile Limited successfully completed the financial statements of GeoPark Holdings Limited (the Company) for the year private placement of a US$ 133 million of Reg S Note as further described in ended 31 December 2010. The Company and its subsidiaries together are note 26 to the Financial Statements. The net proceeds of the Notes will be referred to herein as the Group. Addresses The Registered office address is Cumberland House, 9th Floor, 1 Victoria used to support the Company’s growth strategy, which include a combination of acquisition led growth and the exploration and development of its assets in Chile. From the proceeds of the Notes, US$ 14.5 million was used to repay the IFC loan and US$ 14.5 million was used to repay the loan held with Street, Hamilton HM 11, Bermuda. The Company has a representative office Methanex since 16 October 2009. at 35 Piccadilly, London, United Kingdom. 3. Principal Risks and Uncertainties Principal Activity The principal activity of the Group in the period under review was to produce, Given the nature of the upstream oil and gas business, effective operational develop and explore for oil and gas reserves in Chile and Argentina. The and financial risk management is a principal focus of the Group. Efforts are Group owns and operates six hydrocarbon blocks including the Fell, Otway continuously made to balance and manage long-term work programmes, and Tranquilo Blocks in Chile and the Del Mosquito, Cerro Doña Juana and capital sources, regulatory issues, oil and gas markets and organizational Loma Cortaderal Blocks in Argentina. issues in order to achieve continuous growth. Business Review The Business Review is intended to provide a balanced and comprehensive 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 analysis of the development and performance of the business of the are included in: Company during the year and its position at the year end. Key elements of the Business Review are contained within the Annual Report and a. Year in Review (Risk Management section); and accompanying documents. The Business Review has been divided in the b. Note 3 to the Financial Statements (Pages 71 to 72); following areas: 1. Development and Performance 4. Health, Safety, Environment and Community Development: SPEED The Group seeks to ensure that its operations are conducted in a safe manner The Group has successfully improved and strengthened its business during and to minimise any impact on the environment. The Group’s specific 2010. The Group achieved increases or improvements in oil and gas methodology is focused on undertaking realistic and practical programmes production, oil and gas reserves, revenues, adjusted EBITDA, profitability, based on best world practices, with an emphasis on building key principles balance sheet, organization, safety performance and market value. and company-wide ownership and then expanding programmes from within A detailed review of the operations, development and performance of the designed EHSS management programme, entitled S.P.E.E.D. (for Safety, Group’s business is included in this report and in: Prosperity, Employees, Environment and Community Development), is being as the Group continues to grow. The Group’s comprehensive in-house a. Chairman’s and Chief Executive’s Letter to Shareholders (Pages 2 to 5); and b. Year in Review (Pages 6 to 47). 2. Year-End Cash and Debt Position developed in accordance with: ISO 14001 for environmental management issues; OSHAS 18001 for occupational health and safety management issues; SA 8000 for social accountability and worker rights issues; the Development Standards of the World Bank; and the Quoted Companies Alliance standards for good corporate governance. During 2010, the Group continued to improve its SPEED Programme by establishing objectives, increasing the safety The Group’s year-end cash position was US$ 99.4 million. Year-end debt was training of all its employees, effective analysis and investigation of all US$ 169.4 million. incidents and the benchmarking against global industry standards. The SPEED Programme is described in further detail in the section titled “Commitment”. Directors’ Report 46 Directors’ Report 50 Key Performance Indicators The Group uses a number of financial and non-financial key performance Net Revenues indicators in order to measure performance, which are set out below: The Group directed most of the drilling efforts in late 2009 and 2010 towards 2010 2009 2010 vs 2009 and maintained gas production. the development of oil reserves, which resulted in increased oil production Oil and Gas 2P Reserve Growth (1) (millions of barrels of oil equivalent - boe) 49.6 42.2 + 29% Revenue growth was due to a rise in prices (both oil and gas) and the increase in oil production. Oil and Gas Production Growth (boe per day) Average Realised Sales Price (Chile) Oil (US$ per bbl) Gas (US$ per mcf) Total Net Revenues (US$ million) Adjusted EBITDA (2) US$ million US$ per boe Operating Costs US$ per boe Gearing Ratio (3) 6,947 6,320 + 10% 72.8 3.13 79.6 41.1 16.3 6.9 43% 54.1 2.16 44.8 17.7 7.7 5.9 30% + 35% + 45% + 78% + 132% + 112% + 17% + 43 % (1) As of 31 December 2010 and 31 August 2009; % change adjusted for production during the period (2) As defined in Note 6 (3) Calculated as total borrowing less cash and cash equivalent over total capital (borrowings - cash / capital) 1. Production, Prices and Revenue During 2010, oil and gas production increased as a result of the Group’s successful drilling programme on the Fell Block in Chile, which resulted in twelve productive wells out of fifteen wells drilled. The drilling programme represented a balance between exploration, appraisal and development prospects. Production Oil (in thousand of bbls) Gas (in thousand of mcf) 2010 719 10,901 2009 449 11,147 2010 vs 2009 59% -2% Directors’ Report 51 80,00070,00060,00050,00040,00030,00020,00010,000031.12.09Net Revenues 2009 vs 201044,84718,4021,59810,2157,68479,550in US$’000Increase in oil productionDecrease in gas productionIncrease ingas priceIncrease inoil price31.12.10 2. Reserves 3. Production Costs The Group achieved a 29% growth in 2P oil and gas reserves, after deducting Production costs in 2010 increased to US$ 43.6 million from US$ 29.6 million production for the period, to 49.6 million barrels of oil equivalent at year-end, in 2009 - resulting from an increase in depreciation charges and an increase in compared to the last independent reserve certification completed in July 2009 production volumes. as appraised by DeGolyer and MacNaughton and us. This increase results from a 62% growth in 2P oil reserves and a 18% growth in 2P gas reserves. a. Depreciation charges DeGolyer and MacNaughton further estimated 3P reserves of 156.8 million boe of which 24% or 38 million of barrels correspond to oil reserves and Capitalised costs of proved oil and gas properties are depreciated on a block- 76% or 722 billion cubic feet correspond to gas reserves. 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 United Kingdom Listing Authority (UKLA). Oil and gas reserves for this purpose are determined in accordance with Society of Petroleum Engineers definitions and were estimated by DeGolyer and MacNaughton, the Group’s independent reservoir engineers. The 2010 depreciation charge of US$ 22.3 million represented a 52% increase compared to 2009 (US$ 14.7 million) resulting principally from the increase in production volumes. The average depreciation charge in 2010 was US$ 7.45 per barrel of oil equivalent (boe) - (US$ 5.8 in 2009). b. Operating expenditures Operating expenditures (OPEX) per producing unit (boe) is a key indicator measuring the efficiency of the producing process. In 2010, OPEX per boe rose to US$ 6.86/bbl from US$ 5.91/bbl in 2009. This variance was driven by the change in production mix from gas to oil, which has higher productive cost than gas. In 2010 the production was split 27% oil and 73% gas, compared to 18% and 82%, in 2009. 4. Adjusted EBITDA Adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortization and certain non cash items such as write offs, impairments and share based payments. This measurement excludes the effects of non- recurring expenditures from the operating segments, such as impairments if it is a result of an isolated non-recurring event. Adjusted EBITDA for 2010 of US$ 41.1 million represented an increased from US$ 17.7 million in 2009. In terms of producing units, the 2010 Adjusted EBITDA equalled US$ 16.30 per boe, compared to US$ 7.70 per boe in 2009. 52 Directors’ Report 504030201002P JULY 2009(D&M)Reserves42.23.8511.249.6MM BOEProductionAdditions2P DEC 2010(D&M) 5. Net Result Dividends The Directors do not recommend the payment of any dividend for the period The Group generated a net profit of US$ 4.2 million in 2010 compared to ended 31 December 2010; (2009: nil). The Group is currently re-investing all a net loss of US$ 8.0 million in 2009. The chart below shows the reconciliation cash generated by its operations and intends to continue to re-invest these in 2010 of the Adjusted EBITDA to the Net Result. funds for the near future. Cumulative losses for the Group are US$ 19.5 million. Events since the Balance Sheet Date In 2010, GeoPark and LGI entered into a strategic partnership to acquire a portfolio of oil and gas upstream assets in Latin America. As a first step towards cementing this long-term growth partnership, in March 2011 GeoPark reached an in-principle agreement to sell to LGI a 10% interest in the Chilean business (participation in Fell, Otway and Tranquilo) for US$ 70 million. The transaction is expected to close in 2Q 2011. In addition, in a separate transaction, and subject to obtaining regulatory approvals, GeoPark has reached an in-principle agreement to invest up to US$ 10 million in the drilling of an exploration well on the Sholkara prospect in the LGI-operated Block 8 in Kazakhstan, which would give GeoPark effectively a 25% participating interest in Block 8. The Sholkara prospect has an unrisked mean oil resource estimate of 100-400 million barrels and represents an exciting opportunity for GeoPark outside its historical and principal area of focus. Both transactions are subject to the signing of definitive legal agreements and final approval of the GeoPark and LGI Boards of Directors. Community Development Efforts, Charitable and Political Donations For its community development efforts, the Group encourages the development of new local businesses by contracting services and people for its needs and work programme where it operates. The Group uses over 140 local Non cash adjustments include a US$ 0.9 million loss incurred by the Group due to exchange differences. Oil and gas exploration and production activities are accounted for in a contracting companies in its activities in Chile and has been credited with manner similar to the successful efforts method on a field by field basis. The assisting in the start-up of 14 small businesses. Group accounts for exploration and evaluation activities in accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources, capitalizing As a result of the devastating earthquake in Chile in March 2010, the Group exploration and evaluation costs until such time as the economic viability of producing the underlying resources is determined. Although 12 of the 15 and its employees pledged approximately US$ 200,000 to assist earthquake victims and in post-earthquake reconstruction efforts. Total charitable wells drilled during 2010 were brought onto production within the year (with donations in 2010 amounted to US$ 221,330 (2009: US$ 9,346). the remaining three wells still waiting completion and further evaluation works), the Group decided to take an impairment charge in respect to No political donations are made by the Group. previous years’ exploration activities of US$ 3.0 million which are no longer considered commercially viable for development within the Fell and Del Mosquito Blocks. Directors’ Report 53 454035302520151050EBITDANet Result and Adjusted EBITDA Reconciliation41,1(22,7)(3,1)(3,0)(4,9)(3,2)4,2in million of US DollarsDepreciationInterestsImpairment & write-offIncometaxNon cash adjustmentsNet profit 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 2010 Committees Ordinary share 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 Carlos Gulisano Non-Executive Director 28 July 2010 (*) 28 July 2010 (*) 28 July 2010 (*) 28 July 2010 (*) 28 July 2010 (*) 28 July 2010 (*) 28 July 2010 (*) 8,172,793 6,983,068 Committee Member Committee Chairman 34,711 (*) Most recent reappointment date 214,191 (1) Dr. Carlos Gulisano holds 50,000 IPO Stock 2,032,304 options vested and unexercised and 34,125 100,000 stock awards which will vest (1) 1,469 on 15 December 2012. 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 58 to 59). and/or potential loan covenant breaches. Auditor PricewaterhouseCoopers LLP has completed the audit of the 2010 Financial Considering macroeconomic environment conditions, the performance of the operations and Group’s cash position, the Directors have formed a Statements, as appointed in the Annual General Meeting held in July 2010 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 programme 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 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. On behalf of the Board Going Concern The Directors regularly monitor the Group’s cash position and liquidity risks James F. Park throughout the year to ensure that it has sufficient funds to meet forecast Chief Executive Officer operational and investment funding requirements. Sensitivities are run to 14 April 2011 54 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 and entrepreneurial manner for the benefit of all shareholders over the mix of skills and experience are in place to lead the Group. Chairman and longer term. The Directors strongly intend, as is feasible given the Group’s Chief Executive roles are not exercised by the same individual and the size and the constitution of the Board, to comply with the guidelines on Company has at least two independent non-Executive directors. All Directors corporate governance of the Quoted Companies Alliance for AIM companies. submit themselves for re-election at the Annual General Meetings each year GeoPark’s good corporate governance goals include: shareholders for election are accompanied by a biography and a description -a practice the Group has followed since 2006. All Directors proposed to • Efficiency: Creating a governing body of an appropriate size to permit efficient decision-taking with transparency for major decisions, clear The Chairman is responsible for the effective running of the Board, ensuring definition of responsibilities and performance targets, and procedures in that the Board plays a full and constructive part in the development and place to protect and ensure protection of the Company’s assets. determination of the Group’s strategy, and acting as guardian and facilitator of the skills and experience that the Group feels are relevant. of the Board’s decision-making process. • Effectiveness: Assembling a governing body with the required skills, provided with the proper information and collectively involved to make The Chief Executive is responsible for managing the Group’s business, the best decisions for the Company. proposing and developing the Group’s strategy and overall commercial objectives in consultation with the Board and, as leader of the Executive • Entrepreneurial: Defining a vision for the Company with an understanding team, implementing the decisions of the Board and its Committees. of goals, timing and necessary resources. In addition, the Chief Executive is responsible for maintaining regular dialogue with shareholders as part of the Group’s overall investor relations • Shareholder Common Good: Taking decisions which consider the good programme. of all shareholders and which, if they involve management, major shareholders and other related parties, are reported in a transparent manner. The Board comprises: Board Matters The Board sets the Group’s strategic aims, ensuring that the necessary Executive Directors: Gerald E. O’Shaughnessy - Chairman resources are in place to achieve those aims, and reviews management and James F. Park - Chief Executive Officer financial performance. It is accountable to shareholders for the creation and delivery of strong, sustainable financial performance and long-term Non-Executive Directors: shareholder value. Sir Michael R. Jenkins Christian M. Weyer To achieve this, the Board directs and monitors the Group’s affairs within a Juan Cristóbal Pavez framework of controls which enable risk to be assessed and managed Peter Ryalls effectively through clear procedures, lines of responsibility and delegated authorities. The Board also has responsibility for setting the Group’s core values Carlos Gulisano and standards of business conduct and for ensuring that these, together On 28 July 2010, following Shareholder’s approval at the Annual General with the Group’s obligations to its stakeholders, are widely understood Meeting Dr. Carlos Gulisano joined GeoPark’s Board as a Non-Executive throughout the Group. Director. Dr. Gulisano has an extensive and recognised experience in petroleum exploration and has been a key element of GeoPark’s growth as an advisor since 2002 and as Managing Director from 2008 until June 2010. Together, the Executive and Non-Executive Directors bring a broad range of business, commercial and other relevant experience to the Board, which is vital to the management of an expanding company. Corporate Governance 55 Board Meetings The Board meets at least quarterly and when issues arise and has a schedule Internal Control Review Directors review on an ongoing basis, inter alia, financial, operational, of matters reserved for decisions of the Board. In addition to those formal compliance matters and risk management, and approve the annual budget matters required by relevant local laws to be set before a Board of Directors, and monitor performance. The Board has the responsibility to establish the Board will also consider strategy and policy, acquisition and divestment and maintain the Group’s system of internal controls and reviewing its proposals, approval of major capital investments, risk management policy, effectiveness. The procedures are reviewed on an ongoing basis. significant financing matters and statutory shareholder reporting. The Board met eight times during 2010 and maintains regular communication with The Group has defined an approval system for capital expenditures and management. expenses. This system includes different levels of authorisation based on functions and position of individuals. The Board has approved the annual The Directors also regurarly visit the Group’s operations. These field visits budget and performance against the budget is monitored and reported. provide important perspective and expose the Directors directly to the quality and depth of the Group’s operations and workforce. In these visits, The internal control system can only provide reasonable and not absolute the Directors are also able to make recommendations regarding assurance against material misstatement or loss. The Board has considered improvements of the Group’s operations. the need for an internal audit function but does not consider it necessary Independence The Board reviews the independence of all Non-Executive Directors annually the Group initiated a thorough review of the key administrative processes. As a result, all the administrative and finance procedures have been reviewed and has determined that all current Non-Executive Directors are independent and formalised. at the current time. During 2010, with the assistance of PricewaterhouseCoopers, and have no cross-directorships or significant links which could materially interfere with the exercise of their independent judgment. Induction All new Directors receive an induction as soon as practicable after Board Support The Company Secretary, Mr. Martín Perez de Solay, is available to advise all appointment. This includes meetings with senior management, functional and business unit heads and where appropriate, visits to the Company’s Directors and ensure that Board procedures are complied with. The Board has main properties. The Company Secretary also provides new Directors with the power to appoint and remove the Company Secretary. an overview of their duties as Directors, corporate governance policies and established Board procedures as part of the induction process. Insurance The Company maintains Directors’ and Officers’ liability insurance cover, the level of which is reviewed annually. A procedure is in place to enable Directors, if they so wish, to seek independent professional advice at the Group’s expense. Timely Information Directors have access to a regular supply of financial, operational, strategic and regulatory information to assist them in the discharge of their duties. Much of this information is provided as part of the normal management reporting process. Board papers are circulated in time to allow Directors to be properly briefed in advance of meetings. In addition, Board meetings generally include a review of the history, performance and future potential 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 members to familiarise themselves with the key assets and operations of the Group. 56 Corporate Governance Audit Committee The Audit Committee is comprised of three independent Non-Executive The Committee’s specific responsibilities are: • Determining and agreeing with the Board the remuneration policy for Directors (currently being Sir Michael Jenkins, Mr. Peter Ryalls and Mr. Juan the Chief Executive Officer, Chairman, Executive Directors and other members Cristóbal Pavez). The Committee is chaired by Sir Michael Jenkins and of the Executive Management; met to approve the Financial Statements and as required during the year. • Reviewing the performance of the Executive Directors and other members The Committee’s specific responsibilities to the Board are: • Reviewing the design of the share incentive plans for approval by the Board of the Executive Management and • Reviewing financial statements and formal announcements relating to the and shareholders. Group’s performance; • Assessing the independence, objectivity and effectiveness of the external The Director’s Remuneration report on pages 58 to 59 contains further details auditors; of the role and activities of the Remuneration Committee. • Making recommendations for the appointment, re-appointment and removal of the external auditors and approving their remuneration and terms of engagement and; Shareholder Relations Communication with shareholders is given high priority and there is • Implementing and monitoring policy on the engagement of the external regular dialogue with institutional investors, as well as general presentations auditor to supply non-audit services to the Group. to analysts at the time of the release of the annual and interim results. Nomination Committee The Nomination Committee is comprised of three Directors (currently being Mr. Christian Weyer, Sir Michael Jenkins and Mr. Gerald O’Shaughnessy), the Throughout 2010, Executive Directors and senior management met with institutional investors and shareholders in Europe, North America and South America and conducted field trips to the Group’s operations. majority of whom are independent Non-Executive Directors. The Committee The Company maintains regular contact with analysts to ensure that the is chaired by Mr. Christian Weyer and meets as required. information regarding the business status and strategy is communicated to Shareholders. Analysts also visit the Company’s field operations and have The Committee’s specific responsibilities to the Board are: access to management and technical staff to ask questions. • Reviewing the structure, size and composition of the Board and making recommendations to the Board with regard to any changes required; Press releases have been issued throughout the year and the Company • Identifying and nominating, for Board approval, candidates to fill Board maintains a website (www.geo-park.com) on which all press releases vacancies as and when they arise; are posted and which also contains major corporate presentations and the • Making recommendations to the Board with regard to membership of the Financial Statements. Regular updates to record news in relation to the Audit and Remuneration Committees in consultation with the Chairman of Group and the status of exploration and development programmes are also each Committee; included on the website. Additionally, this Annual Report, which is sent to • Reviewing the outside directorship/commitments of the non-executive all registered shareholders, contains extensive information about the Group’s directors and activities. Enquiries from individual shareholders on matters relating to their • Succession planning for Directors and other senior executives. shareholdings and the business of the Group are welcomed. Shareholders Remuneration Committee The Remuneration Committee is comprised of three independent are also encouraged to attend the Annual General Meeting to discuss the progress of the Group. Notice of the Annual General Meeting is sent to shareholders at least 20 working days before the meeting and includes Non-Executive Directors (currently being Mr. Peter Ryalls, Mr. Christian Weyer further information on how to vote by proxy. and Mr. Juan Cristóbal Pavez). The Committee is chaired by Mr. Peter Ryalls and meets as required during the year. Financial Accounts A statement of Director’s responsibilities in respect of the accounts is set out on page 60. Corporate Governance 57 Directors’ Remuneration Report The following information is not subject to audit. IPO stock Options to Executive Directors Remuneration Committee The Company has a Remuneration Committee. The members of the Committee during 2010 were Peter Ryalls (Chairman), Christian Weyer and Juan Cristóbal Name Pavez who are Non-Executive Directors. Gerald O’Shaughnessy The Remuneration Committee agrees with the Board the framework for the James F. Park remuneration of the Chief Executive, the Chairman of the Company and such other members of the Executive Management as it is designated to consider. 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 No Director plays a part in any discussion about his own remuneration. None of these IPO Stock Options have been exercised. During 2010, the Remuneration Committee and the Board of Directors Executive remuneration packages are designed to attract, motivate and retain approved the granting of 1.0 million performance share awards to certain Directors of the calibre required to grow the business and enhance value to group of employees and management, under the Plan. The 2010 awards Shareholders. The performance measurement of the Executive Directors and encompass new employees that have joined the Company since the 2008 the determination of their annual remuneration package are undertaken by awards. The awards will vest on the fourth anniversary of the grant date and the Committee. will be subject to the award-holder remaining in employment during that period (following the rules set out in the Plan). As a result of executive The Company’s policy is that a substantial proportion of the remuneration of employment contract, 100,000 shares are subject to a vesting of three years. the Executive Directors should be performance related. Stock Awards to Management and Employees Performance-based Employee Long-Term Incentive Programme - Key Terms In order to align the interests of its management, employees and key No. of % of Issued advisors with those of the Company and its shareholders, the Directors have Underlying Common established a Performance-based Employee Long-Term Incentive Programme Common (“the Plan”). At the Annual General Meeting held on 19 November 2007, Shareholders voted to authorise the Board to use up to 12% of the issued Shares (1) Share Capital Approxi- share capital of the Company at the relevant time for the purposes of 1,000,000 mately 2.4% the Employee Long-Term Incentive Plan. GeoPark’s Shareholders authorised (2) Approxi- the Board of Directors to implement this plan and determine the specific 1,300,000 mately 3.1% Grant Date 15 Dec 2008 15 Dec 2010 conditions for each programme within some broadly-defined guidelines. Exercise Price (US$) 0.001 0.001 Earliest Exercise Date 15 Dec 2012 15 Dec 2014 Expiry Date 15 Dec 2018 15 Dec 2020 IPO Award Programme and Executive Stock Option plan: On admission to AIM, the Executive Directors, the management and key employees of the Company received the following options over Common (1) Dr. Carlos Gulisano holds 100,000 of these Stock awards. (2) Includes 300,000 Stock awards granted in October 2010 with a maximum vesting of two years. shares of the Company granted under the Executive stock options plan. Considering the previously issued IPO Awards, plus the 12% limit established IPO stock Options to Management and key employees management and Executive Directors represents approximately 13.4% of the for the Plan, the total share capital awarded and to be awarded to employees, No. of % of Issued Underlying Common Exercise Common Shares Share Capital Approxi- 605,000 mately 1.5% Grant Date 15 May 2006 Price (£) 4.00 Earliest Exercise Date 15 May 2008 Dr. Carlos Gulisano holds 50,000 of these IPO stock Options. shares issued. There are approximately 1,179,000 shares available for distribution under the Expiry Employee Long-Term Incentive Programme. Date 15 May 2013 58 Directors’ Remuneration Report Executive Directors’ Contracts It is the Group’s policy that Executive Directors should have contracts of b) Committee Chairman fee: annual remuneration of £ 5,750 payable quarterly in arrears in cash. an indefinite term providing for a maximum of one year’s notice. The details c) Notice for contract termination: 2 Months. of the Director’s contracts are summarised below: Gerald O’Shaughnessy Gerald O’Shaughnessy has a service contract with the Company which provides for him to act as Executive Chairman of the Company at a salary The following chart summarises the detail of payments made to Non-Executive Directors: 2010 Cash Payment Stock Payment Director Fees of US$ 200,000 per annum. The agreement is stated to continue indefinitely, Non-Executive Committee Paid in Shares subject to it being terminable by either party by giving not less than Director’s Fees Chairman Fees No. of Shares 12 months’ notice in writing at any time. The payment of any bonus to Mr. O’Shaughnessy is at the Company’s discretion. Mr. O’Shaughnessy’s service agreement contains restrictive covenants which restrict him, for a period of 12 months following the termination of employment, from soliciting Sir Michael Jenkins (1) Peter Ryalls (2) Christian Weyer (3) Juan Cristóbal Pavez senior employees of the Company and, for a period of 6 months following Carlos Gulisano £21,875 £17,500 £17,500 £17,500 £8,750 £5,750 £5,750 £5,750 - - 2,393 3,614 3,614 3,614 1,469 the termination of employment, from being involved in any competing undertaking. Additionally Dr. Carlos Gulisano received US$ 410,000 corresponding to technical consultancy and bonus during 2010. James Park James Park has a service contract with the Company which provides for him (1) Audit Committee Chairman to act as Chief Executive Officer of the Company at a salary of US$ 400,000 (2) Remuneration Committee Chairman per annum. The agreement is stated to continue indefinitely, subject (3) Nominations Committee Chairman to it being terminable by either party by giving not less than 12 months’ notice in writing at any time. The payment of any bonus to Mr. Park is at the Company’s discretion. Mr. Park’s service agreement contains restrictive Approval This report was approved by the Board of Directors on 14 April 2011 and covenants which restrict him, for a period of 12 months following the signed on its behalf by: termination of employment, from soliciting senior employees of the Company and, for a period of 6 months following the termination of employment, from being involved in any competing undertaking. No bonuses were awarded in 2010 to the Executive Directors. Non-Executive Directors Contracts In July 2010, at the Annual General Meeting the shareholders re-elected the Non-Executive Directors. Peter Ryalls Chairman, Remuneration Committee 14 April 2011 The remuneration package approved for Non-Executive Directors, which is detailed in the corresponding service contracts, contains the following components: 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 quarterly in arrears. The share price to determine the quantity of share is the simple average to the daily closing price of the stock in the quarter prior to the payment date. Directors’ Remuneration Report 59 Statement of Directors’ Responsibilities The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations in Bermuda. 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 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 each of 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. 60 Statement of Directors’ Responsibilities Independent Auditors’ Report To the Members of Geopark Holdings Limited Opinion on financial statements In our opinion the financial statements: We have audited the Group financial statements (the “financial statements”) of GeoPark Holdings Limited for the year ended 31 December 2010 which • give a true and fair view of the state of the Group’s affairs as at 31 December comprise the consolidated statement of income, the consolidated statement 2010 and of the Group's profit and cash flows for the year then ended; of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated statement • have been properly prepared in accordance with IFRSs as adopted by the of cash flow and the related notes. The financial reporting framework European Union; and that has been applied in their preparation is applicable law in Bermuda and International Financial Reporting Standards (IFRSs) as adopted by the • have been prepared in accordance with the requirements of the Companies European Union. Act 1981 (Bermuda). Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out Other matters a) The maintenance and integrity of the GeoPark Holdings Limited website on page 60 the Directors are responsible for the preparation of the financial is the responsibility of the Directors; the work carried out by the auditors statements and for being satisfied that they give a true and fair view. Our does not involve consideration of these matters and, accordingly, the auditors responsibility is to audit and express an opinion on the financial statements accept no responsibility for any changes that may have occurred to the in accordance with applicable law in Bermuda and International Standards financial statements since they were initially presented on the website. on Auditing (UK and Ireland). Those standards require us to comply with the UK Auditing Practices Board’s Ethical Standards for Auditors. b) Legislation in Bermuda and the United Kingdom governing the preparation This report, including the opinion, has been prepared for and only for and dissemination of financial statements may differ from legislation in other the Company’s members as a body in accordance with Section 90 of The jurisdictions. Companies Act 1981 (Bermuda) and for no other purpose. We do not, in giving the opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures PricewaterhouseCoopers LLP in the financial statements sufficient to give reasonable assurance Chartered Accountants that the financial statements are free from material misstatement, whether London caused by fraud or error. This includes an assessment of: whether the 14 April 2011 accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. Independent Auditors’ Report 61 Consolidated Statement of Income Amounts in US$ ´000 Note 2010 2009 Net Revenue Production costs Gross Profit Exploration costs Administrative costs Selling expenses Other operating costs Operating Profit / (Loss) Financial income Financial expenses Profit / (Loss) before Income Tax Income Tax Profit / (Loss) for the Year Attributable to: Owners of the Company 7 8 11 12 13 14 15 16 Earnings / (Loss) per share (in US$) for profit attributable to owners of the Company. Basic 18 Earnings / (Loss) per share (in US$) for profit attributable to owners of the Company. Diluted 18 Consolidated Statement of Comprehensive Income Amounts in US$ ´000 Income / (Loss) for the year Other comprehensive income: Currency translation differences Total comprehensive Income / (Loss) for year Attributable to: Owners of the Company 79,550 (43,551) 35,999 (5,183) (14,435) (2,027) (1,130) 13,224 239 (4,427) 9,036 (4,856) 4,180 4,180 0.10 0.09 2010 4,180 - 4,180 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) 4,180 (8,015) The notes on pages 66 to 86 are an integral part of these consolidated financial statements. 62 Consolidated Statement of Income Consolidated Statement of Financial Position Amounts in US$ ´000 Note 2010 2009 Assets Non Current Assets Property, plant and equipment Prepaid taxes Other financial assets Deferred income tax asset Prepayments and other receivables 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 23 22 23 23 21 24 25 25 25 26 27 17 26 28 156,497 122,447 2,655 5,601 374 183 2,965 2,214 302 - 165,310 127,928 3,472 13,071 3,158 1,341 99,411 120,453 285,763 42 107,858 3,919 (19,527) 92,292 143,824 3,153 6,014 152,991 25,564 12,710 2,206 40,480 193,471 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 Total Equity and Liabilities 285,763 162,285 The notes on pages 66 to 86 are an integral part of these consolidated financial statements. The financial statements were approved by the Board of Directors on 14 April 2011. Consolidated Statement of Financial Position 63 Consolidated Statement of Changes in Equity 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 2009 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 34 75,575 3,175 920 (19,207) 60,497 - - - 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 Comprehensive income: Profit for the year Other comprehensive income: Currency translation differences Total Comprehensive Income for the Year 2010 Transactions with owners: Proceeds from issue of shares Share based payment (Note 29) Total 2010 - - - - - - - - - - - - - - 334 334 (31) (31) - - - - - - 4,180 4,180 - - 4,180 4,180 - 2,327 2,327 - 2,630 2,630 Balances at 31 December 2010 42 107,858 3,025 894 (19,527) 92,292 The notes on pages 66 to 86 are an integral part of these consolidated financial statements. 64 Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flow Amounts in US$ ’000 Note 2010 2009 16 9 11 13 15 12 5 19 24 Cash flows from operating activities Income / (Loss) for the year Adjustments for: Income tax for the year Depreciation of the year Loss on disposal of property, plant and equipment Write off of unsuccessful efforts Impairment loss 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 Purchase of financial assets Cash flows used in investing activities - net Cash flows from financing activities Proceeds from borrowings Proceeds from the issue of bond Bond emission expenditures Proceeds from issue of common shares Principal paid Interest paid Cash flows from financing activities - net 4,180 4,856 22,700 115 3,033 - 2,758 259 2,630 55 (9,688) 30,898 (58,025) (3,387) (61,412) 1,853 130,296 (3,162) - (36,171) (1,666) 91,150 (7,989) 520 14,922 - 4,345 1,490 880 165 1,312 504 5,018 21,167 (40,440) (65) (40,505) 15,000 - - 31,688 (8,092) (1,191) 37,405 Net increase in cash and cash equivalents 60,636 18,067 Cash and cash equivalents at 1 January 23,760 5,710 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 Bank overdrafts Cash and cash equivalents - 84,396 99,408 3 (15,015) 84,396 (17) 23,760 23,757 3 - 23,760 The notes on pages 66 to 86 are an integral part of these consolidated financial statements. Consolidated Statement of Cash Flow 65 Notes Note 1 General Information sales price less costs incurred to execute the sale. Following industry practice and in absence of specific IFRS guidance in this respect, the accounting policy was changed, effective from 1 January 2010. The crude oil is valued at the GeoPark Holdings Limited (the Company) is a company incorporated under lower of cost and net realisable value. No restatement in respect of prior the laws of Bermuda. The addresses of its registered office and principal periods has been made as the effect on comparative figures is not material. places of business are disclosed in the introduction to the Directors’ Report. The principal activities of the Company and its subsidiaries (the Group) are Effective from 1 January 2010, GeoPark Argentina Ltd, the Group’s described in the Directors’ Report. Argentinean subsidiary, changed its functional currency from Argentinean Pesos to the US Dollars, reflecting the change in the balance of its operations The Company is quoted on the AIM London Stock Exchange. Also following to be primarily the provider of technical and administrative services to approval of the Superintendencia de Valores y Seguros (Securities and the Group’s other operations. As there has been a change in the underlying Insurance Supervisor) in Chile, its shares have been authorised for trading on transactions, conditions and events, IAS 21 requires the change to be the Santiago Off-Shore Stock Exchange, since 30 October 2009 (in US$) accounted for prospectively from the date of change and the comparatives under the trading symbol “GPK”. have not been restated. These consolidated financial statements were authorised for issue by the Board of Directors on 14 April 2011. New and amended standards adopted by the Group The new and amended accounting standards mandatory for the first time for the financial year beginning 1 January 2010 did not have an impact on the Group’s financial statements. Note 2 Summary of significant accounting policies IFRS 3 (revised), 'Business combinations', and consequential amendments to IAS 27, 'Consolidated and separate financial statements', IAS 28, The principal accounting policies applied in the preparation of these 'Investments in associates', and IAS 31, 'Interests in joint ventures', are consolidated financial statements are set out below. These policies have been effective prospectively to business combinations for which the acquisition consistently applied to the years presented, unless otherwise stated. date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. 2.1 Basis of preparation The consolidated financial statements of GeoPark Holdings Limited have The revised standard continues to apply the acquisition method to business been prepared in accordance with International Financial Reporting combinations but with some significant changes compared with IFRS 3. Standards as adopted by the European Union (IFRS). For example, all payments to purchase a business are recorded at fair value at The consolidated financial statements are presented in United States dollars re-measured through the income statement. There is a choice on an and all values are rounded to the nearest thousand (US$ ’000), except where acquisition-by-acquisition basis to measure the non-controlling interest in the the acquisition date, with contingent payments classified as debt subsequently otherwise indicated. The consolidated financial statements have been prepared on a historical cost basis. acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs are expensed. As the Group has adopted IFRS 3 (revised), it is required to adopt IAS 27 (revised), 'consolidated and separate financial statements', at the same time. The preparation of financial statements in conformity with IFRS requires the IAS 27 (revised) requires the effects of all transactions with non-controlling use of certain critical accounting estimates. It also requires management interests to be recorded in equity if here is no change in control and these to exercise its judgement in the process of applying the Group’s accounting transactions will no longer result in goodwill or gains and losses. The standard policies. The areas involving a higher degree of judgement or complexity, also specifies the accounting when control is lost. Any remaining interest in or areas where assumptions and estimates are significant to the consolidated the entity is re-measured to fair value, and a gain or loss is recognised in profit financial statements are disclosed in this note under the title “Accounting or loss. There has been no impact of IAS 27 (revised) on the current period, estimates and assumptions”. as none of the non-controlling interests have a deficit balance. 2.1.1 Changes in accounting policy and disclosure The Group’s accounting policy for the valuation of crude oil inventories was to measure it at net realisable value. The net realisation value was stated at New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2010 and not early adopted The Group’s assessment of the impact of these new standards and interpretations is set out below: 66 Notes to the Consolidated Financial Statements • IFRS 9, 'Financial instruments', issued in November 2009. This standard is Intercompany transactions, balances and unrealised gains on transactions the first step in the process to replace IAS 39, 'Financial instruments: between the Group and its subsidiaries are eliminated. Unrealised losses are recognition and measurement'. IFRS 9 introduces new requirements for also eliminated unless the transaction provides evidence of an impairment classifying and measuring financial assets and is likely to affect the group’s of the asset transferred. Amounts reported in the financial statements of accounting for its financial assets. The standard is not applicable until 1 subsidiaries have been adjusted where necessary to ensure consistency with January 2013 but is available for early adoption. However, the standard has the accounting policies adopted by the Group. not yet been endorsed by the EU. The group is yet to assess IFRS 9’s full impact. • Revised IAS 24 (revised), 'Related party disclosures', issued in November 2.4 Segment reporting Operating segments are reported in a manner consistent with the internal 2009. It supersedes IAS 24, 'Related party disclosures', issued in 2003. IAS 24 reporting provided to the chief operating decision-maker. The chief operating (revised) is mandatory for periods beginning on or after 1 January 2011. decision-maker, who is responsible for allocating resources and assessing Earlier application, in whole or in part, is permitted. The revised standard performance of the operating segments, has been identified as the strategic clarifies and simplifies the definition of a related party and removes the steering committee that makes strategic decisions. This committee consists of requirement for government-related entities to disclose details of all the CEO, Managing Director, CFO and managers in charge of the Geocience, transactions with the government and other government-related entities. Drilling, Operations and SPEED departments. This committee reviews The Group will apply the revised standard from 1 January 2011. the Group’s internal reporting in order to assess performance and allocate resources. Management has determined the operating segments based on None of the above is currently expected to have a material impact on the these reports. Group’s financial statements. There are other standards but they are not relevant to the operations of 2.5 Foreign currency translation 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 forecast a) Functional and presentation currency The consolidated financial statements are presented in US dollars, which is the Group’s presentation currency. operational and investment funding requirements. Sensitivities are run Items included in the financial statements of each of the Group’s entities are to reflect latest expectations of expenditures, oil and gas prices and other measured using the currency of the primary economic environment in factors to enable the Group to manage the risk of any funding short falls which the entity operates (the “functional currency”). The functional currency and/or potential loan covenant breaches. of Group companies incorporated in Chile is the US dollar. Considering macroeconomic environment conditions, the performance of the operations and Group’s cash position, the Directors have formed a b) Transactions and balances Foreign currency transactions are translated into the functional currency judgement, at the time of approving the financial statements, that there is using the exchange rates prevailing at the dates of the transactions. a reasonable expectation that the Group has adequate resources to continue with its investment programme in order to increase oil and gas reserves, Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period end exchange rates of production and revenues and meeting all its obligations for the foreseeable monetary assets and liabilities denominated in foreign currencies are future. For this reason, the Directors have continued to adopt the going recognised in the Statement of Income. Transaction gains and losses that concern basis in preparing the consolidated financial statements. arise from exchange rate fluctuations on transactions denominated in a 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. Subsidiaries are entities over which the Group has the power to control the currency other than the functional currency are included in other operating profit or other operating expenses. 2.6 Joint ventures The Company’s interests in oil and gas related joint ventures and other financial and operating policies so as to obtain benefits from its activities, agreements involved in oil and gas exploration and production, have been generally accompanying a shareholding of more than one half of the voting consolidated line by line on the basis of the Company’s proportional share rights. Subsidiaries are fully consolidated from the date on which control is in their assets, liabilities, revenues, costs and expenses. transferred to the Group. 2.7 Revenue recognition Revenue from the sale of crude oil and gas is recognised in the Statement of Notes to the Consolidated Financial Statements 67 Income when supply and risk transfer to the purchaser has taken place, installation of production facilities, development drilling costs (including dry and if the revenue can be measured reliably and is expected to be received. holes, service wells and seismic surveys for development purposes), project- Revenue is shown net of VAT and discounts related to the sale. related engineering and the acquisition costs of rights and concessions related to proved properties. 2.8 Production costs Production costs include wages and salaries incurred to achieve the net Workovers of wells made to develop reserves and/or increase production are revenue for the year. Direct and indirect costs of raw materials and capitalised as development costs. Maintenance costs are charged to income consumables, rentals and leasing, property, plant and equipment depreciation when incurred. and royalties are also included within this account. 2.9 Financial costs Financial costs include interest expenses, realised and unrealised gains and licenced area by licenced area basis, using the unit of production method, based on commercial proved and probable reserves. The calculation of losses arising from transactions in foreign currencies and the amortization the “unit of production” depreciation takes into account estimated future of financial assets and liabilities. The Company has capitalised borrowing finding and development costs and is based on current year end unescalated cost for wells and facilities that were initiated after 1 January 2009. Amounts price levels. Changes in reserves and cost estimates are recognised capitalised totalled US$ 397,164 (US$ 221,535 in 2009). prospectively. Reserves are converted to equivalent units on the basis of Capitalised costs of proved oil and gas properties are depreciated on a approximate relative energy content. 2.10 Property, plant and equipment Property, plant and equipment are stated at historical cost less depreciation, Commercial reserves are proved and probable oil and gas reserves as defined and impairment if applicable. Historical cost includes expenditure that is in chapter 19 of the listing rules of the United Kingdom Listing Authority directly attributable to the acquisition of the items; including provisions for (UKLA). Oil and gas reserves for this purpose are determined in accordance asset retirement obligation. with Society of Petroleum Engineers definitions and were estimated by DeGolyer and MacNaughton, the Group’s independent reservoir engineers. Oil and gas exploration and production activities are accounted for in a manner similar to the successful efforts method on a field by field basis. Depreciation of the remaining property, plant and equipment assets (i.e.: The Group accounts for exploration and evaluation activities in accordance furniture and vehicles) not directly associated with oil and gas activities has with IFRS 6, Exploration for and Evaluation of Mineral Resources, capitalizing been calculated by means of the straight line method by applying such exploration and evaluation costs until such time as the economic viability annual rates as required to write off their value at the end of their estimated of producing the underlying resources is determined. Costs incurred useful lives. The useful lives range between 3 years and 10 years. prior to obtaining legal rights to explore are expensed immediately to the income statement. Depreciation is allocated in the Statement of Income as production, exploration and administrative expenses, based on the nature of the Exploration and evaluation costs may include: licence acquisition, geological associated asset. and geophysical studies (i.e.: seismic), direct labour costs and drilling costs of exploratory wells. No depreciation and/or amortization is charged during the exploration and evaluation phase. Upon completion of the An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated evaluation phase, the prospects are either transferred to oil and gas recoverable amount (see Impairment of non financial assets in Note 2.12). properties or charged to expense (exploration costs) in the period in which the determination is made depending whether they have found reserves or not. If not developed, Exploration and evaluation assets are written off after three 2.11 Provisions Provisions for asset retirement obligations and legal claims are recognised years unless, it can be clearly demonstrated that the carrying value of the when: the Group has a present legal or constructive obligation as a result of investment is recoverable. past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring A charge of US$ 3,033,000 has been recognised in the Statement of Income provisions comprise lease termination penalties and employee termination within Exploration costs (US$ 4,345,000 in 2009) for write offs in Chile (see payments. Provisions are not recognised for future operating losses. Note 11). All field development costs are capitalised within oil and gas properties, to be required to settle the obligation using a pre-tax rate that reflects current and subject to depreciation. Such costs may include the acquisition and market assessments of the time value of money and the risks specific to the Provisions are measured at the present value of the expenditures expected 68 Notes to the Consolidated Financial Statements obligation. The increase in the provision due to passage of time is recognised as interest expense. 2.14 Inventories Inventories comprise crude oil and materials. The Group records the fair value of the liability for asset retirement Crude oil is measured at the lower of cost and net realisable value. Materials obligations in the period in which the wells are drilled. When the liability are measured at the lower between cost and recoverable amount. Cost is is initially recorded, the Group capitalises the cost by increasing the carrying determined using the first-in, first-out (FIFO) method. The cost of materials amount of the related long-lived asset. Over time, the liability is accreted and consumables is calculated at acquisition price with the addition of to its present value at each reporting period, and the capitalised cost is transportation and similar costs. depreciated over the estimated useful life of the related asset. According to interpretations and application of current legislation and on the basis of the changes in technology and the variations in the costs of restoration 2.15 Current and deferred income tax The tax expense for the year comprises current and deferred tax. Tax is necessary to protect the environment, the Group has considered convenient recognised in the Statement of Income. to periodically re-evaluate future costs of well-capping. The effects of this recalculation are included in the financial statements in which this The current income tax charge is calculated on the basis of the tax laws re-calculation is determined and reflected as an adjustment to the provision enacted or substantially enacted at the balance sheet date in the countries and the corresponding property, plant and equipment asset. where the Company’s subsidiaries operate and generate taxable income. 2.12 Impairment of non-financial assets Assets that are not subject to depreciation and/or amortization (i.e.: Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their exploration and evaluation assets) are tested annually for impairment. Assets carrying amounts in the consolidated financial statements. Deferred income that are subject to depreciation and/or amortization are reviewed for tax is determined using tax rates (and laws) that have been enacted or impairment whenever events or changes in circumstances indicate that the substantially enacted by the balance sheet date and are expected to apply carrying amount may not be recoverable. when the related deferred income tax asset is realised or the deferred income tax liability is settled. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is In addition, tax losses available to be carried forward as well as other income the higher of an asset’s fair value less costs to sell and value in use. For the tax credits to the Group are assessed for recognition as deferred tax assets. purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units), Deferred tax liabilities are provided in full, with no discounting. Deferred tax generally a licenced area. Non-financial assets other than goodwill that assets are recognised only to the extent that it is probable that the underlying suffered an impairment are reviewed for possible reversal of the impairment deductible temporary differences will be able to be offset against future at each reporting date. taxable income. No asset should be kept as an Exploration and Evaluation asset for a period of more than three years, except if it can be clearly demonstrated that the carrying value of the investment will be recoverable. 2.16 Financial assets Financial assets are divided into the following categories: loans and receivables; financial assets at fair value through the profit or loss; available- No impairment loss has been recognised during 2010 (US$ 1,490,000 was assigned to the different categories by management on initial recognition, recognised within Other operating costs as a result of the impairment test depending on the purpose for which the investments were acquired. The performed regarding operating fields in Argentina in 2009). designation of financial assets is re-evaluated at every reporting date at which for-sale financial assets; and held-to-maturity investments. Financial assets are a choice of classification or accounting treatment is available. 2.13 Lease contracts All current lease contracts are considered to be operating leases on the basis All financial assets are recognised when the Group becomes a party to the that the lessor retains substantially all the risks and rewards related to the contractual provisions of the instrument. All financial assets are initially ownership of the leased asset. Payments related to operating leases and other recognised at fair value, plus transaction costs. 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 Derecognition of financial assets occurs when the rights to receive cash to operating leases and rental agreements is disclosed in Note 31. flows from the investments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. An assessment for impairment is undertaken at each balance sheet date. Notes to the Consolidated Financial Statements 69 Interest and other cash flows resulting from holding financial assets are recognised in the Income Statement when receivable, regardless of how the 2.21 Borrowings Borrowings are obligations to pay cash and are recognised when the Group related carrying amount of financial assets is measured. becomes a party to the contractual provisions of the instrument. Loans and receivables are non-derivative financial assets with fixed or Borrowings are recognised initially at fair value, net of transaction costs determinable payments that are not quoted in an active market. They are incurred. Borrowings are subsequently stated at amortised cost; any difference included in current assets, except for maturities greater than 12 months between the proceeds (net of transaction costs) and the redemption value after the balance sheet date. These are classified as non-current assets. is recognised in the Statement of Income over the period of the borrowings The Group’s loans and receivables comprise trade receivables, prepayments using the effective interest method. and other receivables and cash and cash equivalents in the balance sheet. They arise when the Group provides money, goods or services directly to Direct issue costs are charged to the Statement of Income on an accruals a debtor with no intention of trading the receivables. Loans and receivables basis using the effective interest method. are subsequently measured at amortised cost using the effective interest method, less provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the Statement of Income. All of the Group’s financial assets are classified as loan and receivables. 2.22 Share capital Equity comprises the following: • “Share capital” representing the nominal value of equity shares. 2.17 Other financial assets Non current financial assets relate solely to the cash collateral account • “Share premium” representing the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the required under the terms of the Bond issued (see Note 26). This investment share issue. is intended to guarantee interest payments and will be recovered once • “Other reserve” representing the equity element attributable to shares the borrowing is fully paid. The 2009 balance related to the cash collateral granted according to IFRS 2 but not issued at year end. account required under the terms of the borrowing obtained from the IFC • “Reserve for exchange adjustment” representing the differences arising and has been released during 2010 following the repayment of the loan from translation of investments in overseas subsidiaries. principal. • “Retained earnings” representing retained profits and losses. 2.18 Impairment of financial assets Provision against trade receivables is made when objective evidence is 2.23 Share-based payment The Group operates a number of equity-settled, share-based compensation received that the Group will not be able to collect all amounts due to it in plans comprising share awards payments and stock options plans to certain accordance with the original terms of those receivables. The amount of employees and other third party contractors. the write down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows. Fair value of the stock option plan for employee or contractors services 2.19 Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted calculated using the Black- Scholes model. of three months or less, and bank overdrafts. Bank overdrafts, if any, are shown within borrowings in the current liabilities section of the Statement Non-market vesting conditions are included in assumptions about the received in exchange for the grant of the options is recognised as an expense. of Financial Position. 2.20 Trade and other payable Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of the business from suppliers. Accounts number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the Statement of Income, with a corresponding adjustment to equity. payable are classified as current liabilities if payment is due within one year The fair value of the share awards payments is determined at the grant date or less (or in the normal operating cycle of the business if longer). If not, by reference of the market value of the shares and recognised as an expense they are presented as non-current liabilities. over the vesting period. Trade payables are recognised initially at fair value and subsequently When the options are exercised, the Company issues new shares. The measured at amortised cost using the effective interest method. proceeds received net of any directly attributable transaction costs are 70 Notes to the Consolidated Financial Statements credited to share capital (nominal value) and share premium when against the US dollar, with all other variables held constant, post-tax profit the options are exercised. Note 3 Financial Instruments-risk management for the year would have been lower by US$ 127,000 (post-tax loss for the year would have been higher by US$ 632,000 in 2009). Price risk The price realised for the oil produced by the Group is linked to WTI (West Texas Intermediate) which is settled in the international markets in US dollars. The Group is exposed through its operations to the following financial risks: The market price of these commodities is subject to significant fluctuation • Currency risk • Price risk • Credit risk - concentration • Funding and Liquidity risk • Interest rate risk • Capital risk managment but the Board did not consider appropriate to manage the Group’s risk to such fluctuation through futures contracts or similar because to do so would not have been economic at the achieved production levels. In Chile, the oil price is based on WTI minus certain marketing and quality discounts such as, inter alia, API quality and mercury content. In Argentina, the oil price is also subject to the impact of the retention tax on oil exports defined by the Argentine government which limits the direct correlation The policy for managing these risks is set by the Board. Certain risks are to the WTI. managed centrally, while others are managed locally following guidelines communicated from the corporate office. The policy for each of the above The Company has signed a long-term Gas Supply Contract with Methanex risks is described in more detail below. in Chile. The price of the gas under this contract is indexed to the international methanol price. Currency risk In Argentina and Chile the functional currency is the US dollar. The If the market prices of WTI and methanol had fallen by 10% compared to fluctuation of the Argentine peso and the Chilean peso does not impact the actual prices during the year, with all other variables held constant, post-tax loans, costs and revenues held in US dollars; but it does impact the balances profit for the year would have been lower by US$ 6,619,000 (post-tax loss denominated in local currency. Such is the case of the prepaid taxes. As for the year would have been higher by US$ 3,669,347 in 2009). currency rate changes between the US dollar and the Argentine peso or the Chilean peso, the Group recognises gains and losses in the consolidated The Board will consider adopting a hedging policy when it deems it Statement of Income. appropriate according to the size of the business and market implied volatility. In both countries, most of the balances are denominated in US dollars, and since it is the functional currency of the subsidiaries, there is no exposure to Credit risk - concentration The Group’s credit risk relates mainly to accounts receivable where the credit currency fluctuation except from receivables originated in local currency risks correspond to the recognised values. There is not considered to be mainly corresponding to VAT credits for US$ 646,892 (US$ 611,572 in 2009) any significant risk in respect of the Group’s major customers. Substantially in Chile and US$ 2,661,000 in Argentina (no impact in 2009 as the functional currency was the Argentine Peso). all oil production in Argentina is sold to Petrobras, a Brazilian oil and gas company, which has good credit standing. The Group minimises the local currency positions in Argentina and Chile by In Chile, all gas production is sold to the local subsidiary of the Methanex seeking to equilibrate local and foreign currency assets and liabilities. Corporation, a Canadian public company (39% of total revenue). All the oil However tax receivables (VAT) are very difficult to match with local currency produced in Chile is sold to ENAP (59% of total revenue), the State owned liabilities. Therefore the Group maintanins a net exposure to them. oil and gas company. Both companies have a very good credit standing and despite the concentration of the credit risk, the Directors do not consider Most of the Group’s assets are associated with oil and gas productive assets. that this give rise to a significant collection risk. Such assets in the oil and gas industry even in the local markets are usually settled in US$ equivalents. The Group has US$ 100 million deposited at Citibank New York in low risk interest bearing CD’s aimed to have immediate access to the funds should During 2010, the Argentine peso weakened by 5% (10% in 2009) against they be required to pay for an acquisition. the US dollar and the Chilean peso strengthened by 8% (weakened by 20% in 2009). If the Argentine peso had weakened an additional 5% against See disclosure in Note 24. the US dollar and the Chilean peso had not strengthened by an additional 5% Notes to the Consolidated Financial Statements 71 Funding and Liquidity risk The extent of the global economic crisis and the accompanying oil and gas Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. price volatility have created substantial uncertainty in accurately forecasting Net debt is calculated as total borrowings (including 'current and non-current future activities. The Group, like virtually every enterprise in every industry borrowings' as shown in the consolidated balance sheet) less cash and cash today, faces a period of challenge and adjustment. Following its successes equivalent. Total capital is calculated as 'equity' as shown in the consolidated in 2009 and 2010, the Group is in the fortunate position of having a secure balance sheet plus net debt. production base and cash flow stream - coupled with low operating costs and the flexibility of a discretionary investment programme that can be The Group’s strategy, until 2010, was to keep the gearing ratio within a 40% maintained, reduced or increased in the short-term depending on the to 55% range. During 2010, as a result of the bond issuance for future environment economic conditions. The Group’s cost structure allows it to acquisitions, the gearing ratio increased but remains within the above range. sustain itself in a very low oil and gas price environment. The gearing ratios at 31 December 2010 and 2009 were as follows: The Group has a strong support from its financial partners and significant flexibility in adjusting the programme to ensure the development of the key Amounts in US$ ’000 properties. See Note 24 for disclosure analysis. Net Debt Total Equity Total Capital Gearing Ratio 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 Note 4 2010 69,977 92,292 2009 36,650 85,482 162,269 122,132 43% 30% interest rates. The Group’s interest rate risk arises from long-term borrowings Accounting estimates and assumptions issued at variable rates, which expose the Group’s to cash flow to interest rate risk. The loans from the IFC and Methanex Corporation accrue variable Estimates and assumptions are used in preparing the financial statements. interest rates which depends on the LIBOR rate. For the period covered Although these estimates are based on management’s best knowledge by these financial statements, the Group has decided not to buy any coverage of current events and actions, actual results may differ from them. Estimates for this risk. At 31 December 2010 the outstanding long-term borrowing and judgments are continually evaluated and are based on historical affected by variable rates amounted to US$ 25,848,000. experience and other factors, including expectations of future events that The Group analyses its interest rate exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of The key estimates and assumptions used in these consolidated financial are believed to be reasonable under the circumstances. existing positions, alternative financing and hedging. Based on these scenarios, statements are noted below: the Group calculates the impact on profit and loss of a defined interest rate shift. For each simulation, the same interest rate shift is used for all currencies. • The Group adopts an approach similar to the successful efforts method The scenarios are run only for liabilities that represent the major interest- bearing positions. of accounting. The Management of the Company makes assessments and estimates regarding whether an exploration asset should continue to be carried forward as an exploration and evaluation asset not yet determined At 31 December 2010, if interest rates on currency-denominated borrowings or when insufficient information exists for this type of cost to remain as had been 1% higher with all other variables held constant, post-tax profit for an asset. In making this assessment the Management takes professional the year would have been US$ 448,992 lower (post-tax loss for the year would advice from qualified independent experts. have been US$ 432,603 higher in 2009), mainly as a result of higher interest expense on floating rate borrowings. Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s • Cash flow estimates for impairment assessments require assumptions about two primary elements - future prices and reserves. Estimates of future prices require significant judgments about highly uncertain future events. Historically, oil and gas prices have exhibited significant volatility. Our ability to continue as a going concern in order to provide returns for forecasts for oil and gas revenues are based on prices derived from future shareholders and benefits for other stakeholders and to maintain an optimal price forecasts amongst industry analysts and our own assessments. Our capital structure to reduce the cost of capital. estimates of future cash flows are generally based on our assumptions of long-term prices and operating and development costs. Given the significant 72 Notes to the Consolidated Financial Statements assumptions required and the possibility that actual conditions will differ, we • Obligations related to the plugging of wells once operations are terminated; consider the assessment of impairment to be a critical accounting estimate. imply the recognition of significant obligations. Estimating the future abandonment costs is difficult and requires management to make estimates The process of estimating reserves is complex. It requires significant and judgments because most of the obligations are many years in the judgements and decisions based on available geological, geophysical, future. Technologies and costs are constantly changing as well as political, engineering and economic data. The estimation of economically recoverable environmental, safety and public relations considerations. The Company oil and natural gas reserves and related future net cash flows was performed has adopted the following criterion for recognizing well plugging and based on the Reserve Report dated December 2010 prepared by De-Goyler abandonment related costs: The present value of future costs necessary for and MacNaughton, an international consultancy to the oil and gas industry well plugging and abandonment is calculated for each area on the basis based in Dallas. It incorporates many factors and assumptions including: of a cash flow that is discounted at an average interest rate applicable to • expected reservoir characteristics based on geological, geophysical and Company’s indebtedness. The liabilities recognised are based upon estimated engineering assessments; future abandonment costs, wells subject to abandonment, time to • future production rates based on historical performance and expected abandonment, and future inflation rates. future operating and investment activities; • future oil and gas prices and quality differentials; • assumed effects of regulation by governmental agencies; and Note 5 • future development and operating costs. Statement of Cash Flow Management believes these factors and assumptions are reasonable based The Cash Flow Statement shows the Group’s cash flows for the year for on the information available to us at the time we prepare our estimates. operating, investing and financing activities and the change in cash and However, these estimates may change substantially as additional data cash equivalents during the year. from ongoing development activities and production performance becomes available and as economic conditions impacting oil and gas prices and Cash flows from operating activities are computed from the results for the costs change. year adjusted for non-cash operating items, changes in net working capital, and corporation tax. Tax paid is presented as a separate item under As part of this assessment, management has carried out an impairment operating activities. 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 The following chart describes non-cash transactions related to the Cash Flow sheet date with the expected discounted cash flows from the relevant Statement: projects (value in use). For the discounted cash flows to be calculated, management has used a production profile based on its best estimate of 31 December 2010 proven and probable reserves and a range of assumptions including a 10% pre-tax discount rate and an estimated oil price profile. • As detailed in the relevant accounting policies the selection of functional currencies for each entity in the Group is dependent on the primary economic Balance Sheet Items environment in which they operate which is determined by considering a Property, plant number of factors. As detailed the Board consider that the primary economic and equipment environment in which the Argentinean and the Chilean subsidiaries operates Prepaid taxes is the US dollar. The Board considers this assessment to be a significant Inventory judgement as it gives rise to exchange differences as detailed in Note 3. Trade receivables • Oil and gas assets held in property plant and equipment are mainly Prepayment and other receivables depreciated on a unit of production basis at a rate calculated by reference Other financial assets 34,050 363 1,214 7,163 1,578 3,387 to proven and probable reserves and incorporating the estimated future Cash and cash equivalents 60,636 cost of developing and extracting those reserves. Future development costs Borrowings are estimated using assumptions as to the numbers of wells required to Trade accounts payable produce those reserves, the cost of the wells, future production facilities and Deferred tax operating costs together with assumptions on oil and gas realisations. Other liabilities Equity (93,963) 213 (4,856) (2,975) (6,810) Movements Movements derived from Movements Other from Consolidated arising from Non-Cash Consolidated Financial Position Translation Currency Movements Cash Flow (*) Statement (1,873) 32,177 - - - - - - - - - 1,873 - 363 1,214 7,163 1,578 3,387 60,636 (93,963) 213 (4,856) (1,102) (6,810) - - - - - - - - - - - - Notes to the Consolidated Financial Statements 73 31 December 2009 Note 6 Movements Movements Segment information derived from Movements Other from Consolidated arising from Non-Cash Consolidated Management has determined the operating segments based on the Financial Currency Movements Cash Flow reports reviewed by the strategic steering committee that are used to make Balance Sheet Items Position Translation (*) Statement strategic decisions. Property, plant and equipment Prepaid taxes Inventory Trade receivables Prepayment and other receivables Other financial assets 17,645 (2,518) 1,087 (2,526) 380 73 Cash and cash equivalents 18,050 Borrowings Trade accounts payable Deferred tax Other liabilities Equity (6,730) (1,654) (523) 1,701 (24,985) 829 377 22 27 34 - 17 (379) (67) 3 (837) (26) 1,209 19,683 The committee considers the business from a geographic perspective. - (518) - - (8) - 8 - - (2,141) 591 The strategic steering committee assesses the performance of the operating (2,499) segments based on a measure of adjusted earnings before interest, tax, depreciation, amortization and certain non cash items such as write offs, 414 65 impairments and share based payments (Adjusted EBITDA). This measurement basis excludes the effects of non-recurring expenditure from the operating 18,067 segments, such as impairments when it is result of an isolated, non-recurring (7,101) event. Interest income and expenses are not included in the result for each (1,721) operating segment that is reviewed by the strategic steering committee. (520) Other information provided, except as noted below, to the strategic steering (691) 173 committee is measured in a manner consistent with that in the financial - (25,011) statements. (*) Mainly transfers, increase in the asset retirement obligation and deferred tax. Segment areas (geographical segments): Cash flows from investing activities include payments in connection with the Amounts in US$ ’000 Argentina Chile Corporate Total purchase and sale of property, plant and equipment and cash flows relating to the purchase and sale of enterprises. Cash flows from financing activities include changes in Shareholders’ equity, and proceeds from borrowings and repayment of loans. 2010 Net revenue Gross profit Adjusted EBITDA (1) Depreciation Cash and cash equivalents include bank overdraft and liquid funds with a Impairment and write off 1,119 367 (905) 78,431 35,632 49,973 - - (7,976) 79,550 35,999 41,092 (798) (240) (21,900) (2,793) (2) - (22,700) (3,033) term of less than three months. Total assets 10,806 (2) 273,450 1,507 285,763 Change in working capital shown in the Statement of Cash Flow is disclosed Employees (average) 70 111 1 182 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 74 Notes to the Consolidated Financial Statements 2010 (363) (1,214) (7,163) (1,578) 630 (9,688) 2009 2,141 (591) 2,499 (414) 1,383 5,018 Amounts in US$ ’000 Argentina Chile Corporate Total 2009 Net revenue Gross profit Adjusted EBITDA (1) 798 91 (528) 44,049 15,174 24,273 - - (6,015) 44,847 15,265 17,730 Depreciation Impairment and write off (756) (1,490) (14,166) (4,345) - - (14,922) (5,835) Total assets 10,785 125,856 25,644 162,285 Employees (average) 61 92 1 154 (1) Corporate expenses included in the Adjusted EBITDA are allocated within the Statement of Income as Exploration costs for an amount of US$ 1,093,000 (US$ 663,000 in 2009), Production costs for an amount of US$ 1,012,000 Note 9 (US$ 710,000 in 2009) and the remaining amount corresponds to Depreciation Administrative costs. (2) Includes cash received from bond issuance. Over 90% of CAPEX is allocated to Chile in 2010 and 2009. Amounts in US$ ’000 Oil and gas properties Production facilities and machinery Furniture, equipment and vehicles A reconciliation of total Adjusted EBITDA to total profit before income tax is Buildings and improvements 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 profit / (loss) Net finance cost Profit / (Loss) before tax 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 2010 41,092 (22,700) (2,630) (3,033) 495 13,224 (4,188) 9,036 2010 48,186 31,364 79,550 2010 22,301 3,067 3,940 2,936 2,206 1,876 1,293 1,319 614 870 312 239 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 2,578 43,551 1,392 29,582 Depreciation, property, plant and equipment Recognised as follows: 2009 Production costs 17,730 (14,922) Administrative expenses Other operating costs (1,312) Depreciation total (5,835) 571 (3,768) (3,701) (7,469) Note 10 Staff costs Average number of employees Amounts in US$ ’000 Wages and salaries Shared-based payment 2009 Social security charges 2010 16,171 6,209 185 135 2009 11,210 3,444 151 117 22,700 14,922 22,301 14,682 290 109 240 - 22,700 14,922 2010 182 7,665 2,630 1,446 11,741 2009 154 5,514 1,312 948 7,774 2010 2009 2,786 1,422 4,208 2,127 83 2,210 Board of Directors’ and key managers’ remuneration Salaries and fees Other benefits (a) (a) The Company have granted stock awards in connection with service agreements entered with key management, generating a charge of US$ 1,300,000 in 2010. These stock awards can be payable to key management or related companies to the key management. Note 11 Exploration costs Amounts in US$ ’000 Staff costs (Note 10) Write off of unsuccessful efforts (a) Other services 2010 1,749 3,033 401 5,183 2009 1,660 4,345 709 6,714 Notes to the Consolidated Financial Statements 75 (a) The 2010 charge corresponds to the write off of exploration and evaluation Note 15 assets amounting to US$ 2,793,000 and US$ 240,000 in the Fell Block and Financial expenses Del Mosquito Block, respectively. These assets have been kept for more than three years, so in accordance with the Group’s accounting policy and Amounts in US$ ’000 considering that no additional work will be performed, these assets have Bank charges and other financial costs been written off. During 2009 there were not any unsuccessful exploratory Tax credits: discount to present value wells. The impairment charge corresponds to prior years’ exploration Exchange difference activities which required additional appraisal and development work to Unwinding of long-term liabilities determine whether commercial reserve existed. During 2009, and based on Interest and amortization of debt issue costs new information, it was decided that the additional work would no longer Less: amounts capitalised on qualifying assets be carried out and therefore the related costs were written off. 2010 534 - 921 259 3,110 (397) 4,427 2009 277 429 1,793 165 1,323 (222) 3,765 Note 12 Administrative costs Amounts in US$ ’000 Staff costs (Note 10) Consultant fees Share-based payments (Notes 10 and 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 Depreciation Other expense / (income) Note 14 Financial income Amounts in US$ ’000 Exchange difference Interest received 2009 2,704 1,470 1,312 646 506 317 240 1,255 8,450 Note 16 Income Tax Amounts in US$ ’000 Current tax Deferred tax 2010 - 4,856 4,856 2009 - 520 520 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 Profit / (Loss) before tax Tax losses from non taxable jurisdictions Taxable profit / (loss) 2010 9,036 11,134 20,170 2009 (7,469) 6,443 (1,026) Income tax calculated at statutory tax rate 2,230 (1,277) 2009 1,186 1,490 Tax losses where no deferred income tax is recognised Expenses not deductible for tax purposes - (152) Difference between functional currency and tax currency 2,524 Non taxable profit Income tax 1,454 - 1,228 (56) 4,856 1,954 10 (167) - 520 Under current Bermuda law, the Company is not required to pay any taxes in Bermuda on income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that, in the event 2009 of any taxes being imposed, they will be exempt from taxation in Bermuda until March 2016. Income tax rates in those countries where the Group operates ranges from 15% in Chile to 35% in Argentina. 49 15 64 2010 4,426 2,499 2,630 696 1,026 454 290 2,414 14,435 2010 - - 109 1,021 1,130 2010 237 2 239 76 Notes to the Consolidated Financial Statements 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 2010 18,095 18,095 2009 Amounts in US$ ’000 13,370 13,370 Deferred tax liabilities Difference in depreciation rates At the balance sheet date deferred tax assets in respect of tax losses in Taxable losses (*) Argentina have not been recognised as there is insufficient evidence Borrowings of future taxable profits before the statute of limitation of these tax losses Other causes them to expire. Total 2010 Total 2009 (Charged)/ At the credited beginning to net of year profit/loss At end of year (8,508) 7,258 - 164 (1,086) (276) (4,832) (13,340) 713 (948) 139 (4,928) (810) 7,971 (948) 303 (6,014) (1,086) Expiring dates for tax losses accumulated at 31 December 2010 are: Expiring date Amounts in US$ ’000 (*) In Chile, taxable losses have no expiration date. 2011 2012 2013 2014 2015 Note 17 Deferred income tax 1,625 5,723 4,104 777 Note 18 Earnings / (Loss) per share 5,866 Amounts in US$ ’000 2010 2009 Numerator: Profit / (Loss) for the year Denominator: Weighted average number of shares 4,180 (7,989) used in basic EPS 41,673,256 36,998,702 The gross movement on the deferred income tax account is as follows: Earnings / (Loss) after tax per share (US$) - basic 0.10 (0.22) Amounts in US$ ’000 Deferred tax at 1 January Exchange differences Income statement charge Deferred tax at 31 December 2010 (784) - (4,856) (5,640) 2009 (261) (3) Amounts in US$ ’000 (520) Weighted average number (784) of shares used in basic EPS Effect of dilutive potential common shares The breakdown and movement of deferred tax assets and liabilities as of Stock award to employees at US$ 0.001 31 December 2010 and 2009 are as follows: (Charged)/ At the credited Amounts in US$ ’000 of year profit/loss differences beginning to net Exchange Deferred tax assets Difference in depreciation rates Taxable losses (*) Other Total 2010 Total 2009 (62) 352 12 302 15 (874) 958 (12) 72 290 - - - - (3) At end of year (936) 1,310 - 374 302 Stock option at £ 4.00 Executive Directors stock option at £ 3.20 Weighted average number of common shares for the purposes of diluted earnings per shares Earnings / (Loss) after tax per share (US$) - diluted 2010 2009 41,673,256 36,998,702 1,101,414 1,218,380 306,690 - - - 44,299,739 36,998,702 0.09 (0.22) Notes to the Consolidated Financial Statements 77 Note 19 Property, plant and equipment Furniture, Production Buildings Exploration Oil & gas equipment facilities and and Construction and evaluation Amounts in US$ ’000 properties and vehicles machinery improvements in progress Cost at 1 January 2009 Exchange rate adjustment Additions Disposals Write off / Impairment Transfers Cost at 31 December 2009 Additions Disposals Write off / Impairment Transfers Cost at 31 December 2010 Depreciation and write down at 1 January 2009 Depreciation Disposals Exchange rate adjustment Depreciation and write down 46,052 (623) - (740) (1,490) 39,707 82,906 2,129 (141) - 41,732 126,626 (6,416) (11,210) 5 239 950 (43) 82 - - - 989 418 (43) - 81 1,445 (566) (151) - 27 26,776 (122) 313 - - 3,003 29,970 379 - - 7,793 38,142 (3,693) (3,444) - 38 at 31 December 2009 (17,382) (690) (7,099) Depreciation Disposals Depreciation and write down (16,171) 45 (185) 24 (6,209) - 1,622 (21) 132 - - 70 1,803 199 - - 74 2,076 (274) (117) - 12 (379) (135) - at 31 December 2010 (33,508) (851) (13,308) (514) 3,189 (9) 8,412 - - (337) 11,255 32,344 - - (30,622) 12,977 - - - - - - - - assets 37,162 (327) 31,027 - (4,345) (42,443) 21,074 24,429 - (3,033) (19,058) 23,412 - - - - - - - - Total 115,751 (1,145) 39,966 (740) (5,835) - 147,997 59,898 (184) (3,033) - 204,678 (10,949) (14,922) 5 316 (25,550) (22,700) 69 (48,181) Carrying amount at 31 December 2009 Carrying amount at 31 December 2010 65,524 93,118 299 594 22,871 1,424 11,255 21,074 122,447 24,834 1,562 12,977 23,412 156,497 As of 31 December 2010, the Company has pledged, as security for a mortgage obtained for the acquisition of the operating base in Chile, assets amounting to US$ 708,000 (US$ 653,000 in 2009). See note 26. 78 Notes to the Consolidated Financial Statements 2010 3,347 649 3,996 1,341 2,655 3,996 2009 3,152 481 3,633 668 2,965 3,633 2010 199 3,273 3,472 2009 1,462 796 2,258 Note 20 Subsidiary undertakings Note 21 Prepaid taxes Details of the subsidiaries and Jointly controlled assets of the Company are Amounts in US$ ’000 set out below: Name and registered office Subsidiaries GeoPark Argentina Ltd. - Bermuda 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) Ownership interest 100% 100% (*) 100% 100% (*) 100% 100% (*) 30% 25% (**) (*) Indirectly owned. (**) On 15 July 2010 following Governmental approval the new ownership of the Otway Block was confirmed. The following chart illustrates the Group structure: V.A.T. 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 GeoPark Holdings Limited GeoPark Chile Limited - Bermuda GeoPark Argentina Limited - Bermuda Servicios Southern Cross Limitada GeoPark Chile Limited - Chilean Branch (1) GeoPark Magallanes Limitada GeoPark Argentina Limited - Argentine Branch (1) The Group is always seeking opportunities to access to new capital sources to finance the continuous growth and expansion of the business. Consequently, GeoPark Chile Limited - Chilean Branch has incorporated two new Chilean subsidiaries during December 2010 (Geopark Fell S.p.a. and Geoprak S.A.) in order to create the corporate structure that would enable a potential listing in the Chilean Stock Exchange among other financing alternatives. Accordingly the Board of Directors has agreed to continue exploring this alternative. Should the Company decide not to pursue this initiative these changes in the Corporate Structure will not affect the business. Notes to the Consolidated Financial Statements 79 Note 23 Note 24 Trade receivables and Prepayments and other receivables Financial instruments by category Amounts in US$ ’000 Trade accounts receivable To be recovered from co-venturers Prepayments and other receivables Total Classified as follows: Current Non current Total 2010 13,071 13,071 1,890 1,451 3,341 16,412 16,229 183 16,412 2009 5,908 5,908 731 1,032 1,763 7,671 7,671 - Amounts in US$ ’000 2010 2009 2010 Loans and receivables Assets as per statement of financial position Trade receivables Other financial assets (*) 13,071 5,601 Cash and cash equivalents 99,411 118,083 5,908 2,214 23,760 31,882 13,071 5,601 99,411 118,083 Other financial liabilities 7,671 Amounts in US$ ’000 2010 2009 2010 Liabilities as per statement Trade receivables that are aged by less than three months are not considered impaired. As of 31 December 2010, trade receivables of US$ 26,174 of financial position Trade and other payable (US$ 32,479 in 2009) were aged by more than 3 months, but not impaired. Borrowings These relate to customers for whom there is no recent history of default. Other liabilities 11,592 169,388 - 12,923 60,410 - 11,592 169,388 - Total 2009 5,908 2,214 23,760 31,882 Total 2009 12,923 60,410 - There are no balances due between 31 days and 90 days as of 31 December 180,980 73,333 180,980 73,333 2010 and 2009. Movements on the Group provision for impairment are as follows: Amounts in US$ ’000 At 1 January Provision for receivables impairment Currency translation 2010 33 - - 33 (*) Non current financial assets relate solely to the cash collateral account required under the terms of the Bond issued. This investment is intended to guarantee interest payments and will be recovered once the borrowing is 2009 fully paid. The 2009 balance related to the cash collateral account required 34 - (1) 33 under the terms of the borrowing obtained from the IFC and has been released during 2010 following the repayment of the loan principal. Credit quality of financial assets The credit quality of financial assets that are neither past due nor impaired The credit period for trade receivables is 30 days. The maximum exposure to can be assessed by reference to external credit ratings (if available) or to credit risk at the reporting date is the carrying value of each class of receivable. historical information about counterparty default rates: The Group does not hold any collateral as security. Amounts in US$ ’000 2010 2009 The carrying value of trade receivables is considered to represent a reasonable approximation of its fair value due to their short-term nature. Trade receivables Counterparties with external credit rating (Moody’s) A3 Ba1 Baa1 Counterparties without external credit rating Group1 (*) Total trade receivables 5,977 6,731 334 29 13,071 2,593 3,168 114 33 5,908 (*) Group 1 - existing customers (more than 6 months) with no defaults in the past. All trade receivables are denominated in US dollars. 80 Notes to the Consolidated Financial Statements Cash at bank and investments (1) Counterparties with external credit rating (Moody’s) Common shares As of 31 December 2010 the outstanding common shares confer the A1 Aa3 Total 3,694 25,971 following rights on the holder: 101,315 105,009 - 25,971 • the right to one vote per share; (1) The rest of the balance sheet item 'cash and cash equivalents' is cash on common shares provided that no dividends shall be declared or paid hand amounting to US$ 3,000. on common shares; • ranking pari passu, the right to any dividend declared and payable on Financial liabilities - contractual undiscounted cash flows The table below analyses the Group’s financial liabilities into relevant GeoPark Shares issued Shares closing US$(`000) maturity groupings based on the remaining period at the balance sheet to common shares history Date (millions) (millions) Closing the contractual maturity date. The amounts disclosed in the table are the Shares outstanding contractual undiscounted cash flows. at the end of 2008 Issue of shares to Between Between non-Executive Directors 2009 Less than 1 year 1 and 2 years 2 and 5 years Over Placing 5 years Placing May 2009 Nov 2009 21,970 11,592 33,562 10,553 12,923 23,476 7,391 212,182 - - 7,391 212,182 - - - Shares outstanding at the end of 2009 Issue of shares to non-Executive Directors 2010 Stock awards Dec 2010 11,027 35,827 9,587 Shares outstanding - - - at the end of 2010 11,027 35,827 9,587 0.05 3.44 3.78 0.02 0.02 34.4 34.5 37.9 41.7 41.7 41.7 41.7 41.7 34 35 38 42 42 42 42 42 Amounts in US$ ’000 At 31 December 2010 Borrowings Trade payables At 31 December 2009 Borrowings Trade payables Note 25 Share capital 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 US$ 11,796,438. 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 2010 42 41,703,011 41,703,011 2009 On 18 November 2009, the Company issued 3,784,000 ordinary shares 42 representing an additional 10% of the issued share capital of the Company at that time. Each share has been placed at a price of 323 pence per share, 41,666,307 generating a share premium of US$ 20,490,045. 41,666,307 Authorised share capital US$ per share Number of common shares (US$ 0.001 each) Amount in US$ The shares of the two above mentioned placings were placed by UK and Chilean institutional investors, the International Finance Corporation (“IFC”) 0.001 0.001 of the World Bank, certain Directors of the Company and a new strategic investor, Cartica Management LLC of Washington DC, an emerging market private equity specialist fund. 5,171,969,000 5,171,969,000 5,171,969 5,171,969 The proceeds of these placings was to provide for exploration and development investments on the Fell, Otway and Tranquilo Blocks in Chile Details regarding the share capital of the Company are set out below: in order to increase oil and gas reserves, production and revenue. Notes to the Consolidated Financial Statements 81 In accordance with the requirements of IAS 32, the costs associated with and a reduced repayment schedule thereafter. In December 2010 the issuance of these shares of US$ 606,393 in 2009 have been deducted the outstanding amount was fully cancelledrepaid (see point (e) below). from equity. During 2010, the Company issued 14,704 (46,121 in 2009) shares to into an agreement with Methanex Corporation (the worlds largest Non-Executive Directors in accordance with contracts as compensation. methanol producer), for a US$ 40,000,000 financing facility for development (b) In 2007, the Group, through its subsidiary GeoPark Chile Limited, entered and investing activities on the Fell Block. On 20 December 2010, 22,000 new common shares were issued, pursuant to a consulting agreement for services rendered to GeoPark Holdings The financing is structured as a gas pre-sale agreement with a six year pay- Limited generating a shared premium of US$ 243,000. back period and an interest rate of LIBOR flat. In each year, the Group will Other Reserve As stated above, the Company has issued 14,704 (46,121 in 2009) shares repay principal up to an amount equal to the loan amount multiplied by a specified percentage. Subject to that annual maximum principal repayment amount, the Group will repay principal and interest in an amount equal regarding Non-Executive Directors fees paid in shares. Shares are issued at to the amount of gas specified in the contract at the effective selling price. average price for the period, generating a share premium of US$ 91,000 (US$ 269,000 in 2009). On 16 October 2009 GeoPark Chile Limited entered into a new financing agreement with Methanex Corporation for a further US$ 15,000,000 The 23,530 shares granted in 2008 have been issued during 2009 and 2010 financing facility. resulting in a decrease of US$ 150,000 of Other Reserve (US$ 31,000 in 2010 and US$ 119,000 in 2009) The financing was also structured as a gas pre sale agreement with a five year pay-back period. The repayment is made in fixed installments starting in The accounting treatment of the shares is in line with the Group’s policy on September 2010. The applicable interest rate until 31 August 2012 will be share based payments. Note 26 Borrowings 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. In December 2010 the outstanding amount was fully repaid (see point (e) below). In addition on 30 October 2009 another financing agreement was signed Amounts in US$ ’000 2010 2009 with Methanex Corporation, under which Methanex will fund GeoPark’s Outstanding amounts as of 31 December International Finance Corporation (a) Methanex Corporation (b) Banco de Crédito e Inversiones (c) Overdrafts (d) Bond (e) Classified as follows: Non current Current - 25,848 541 15,015 127,984 169,388 143,824 25,564 portions of cash calls for the Otway Joint Venture up to US$ 3.3 million until 30 June 2011 (or earlier). The loan will be repaid by GeoPark funding Methanex’s portion of cash calls made between 30 June 2011 (or final 13,901 45,935 574 funding date) and 11 May 2012 (or earlier). If any amount of loan remains - - 60,410 outstanding on 11 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. 52,174 (c) Additionally, GeoPark Chile Limited acquired a facility to establish its 8,236 operational base in the Fell Block. This facility was acquired though a mortgage loan granted by the Banco de Crédito e Inversiones (BCI), a Chilean (a) On 12 December 2006, the Group entered into a loan agreement for an private bank (Note 19). The loan was granted in Chilean pesos and is repayable amount of US$ 20,000,000 with the International Finance Corporation (“IFC”), over a period of 8 years. The interest rate applicable to this loan is 6.6%. the private sector arm of the World Bank Group, to partially finance the 2007 Group investment programme. The IFC is also a shareholder in the Group. (d) The Group has been granted with credit lines for approximately In November 2009, the Company successfully agreed with IFC to reschedule US$ 15,000,000. the outstanding amount of US$ 14,000,000. The rescheduling extended the (e) GeoPark Chile Limited has successfully completed the private placement maturity until 2016 and includes an eighteen month repayment grace period of US$ 133 million of Reg S Notes announced on 2 December 2010. 82 Notes to the Consolidated Financial Statements The Notes will carry a coupon of 7.75% per annum and mature on 15 Note 29 December 2015. The Notes are guaranteed by the Company and secured Share based payments with the pledge of 51% of the shares of GeoPark Chile. In addition, the Note agreement allows for the placement of up to an additional US$ 27 million of Notes under the same indenture, subject to the maintenance of certain IPO Award Programme and Executive Stock Option plan The Group has established IPO Award Programme and Executive Stock financial ratios. The net proceeds of the Notes will be used to support the Option plans. These schemes were established to incentivise the Directors, Company’s growth strategy and improve the Company’s financial flexibility. senior management and employees, enabling them to benefit from the Also, US$ 14.5 million was used to repay the IFC loan and US$ 14.5 million increased market capitalization of the Company. was used to repay the loan held with Methanex since 16 October 2009. The fair value of these financial instruments at 31 December 2010 amounts included in the Statement of Income. Details of these costs are described in to US$ 158,492,000 (US$ 58,115,000 in 2009). the following table and explanations: The costs for these Programmes are expensed in the Administrative costs line, Note 27 Provisions for other long-term liabilities Amounts in US$ ’000 At 1 January 2009 Revision to provision Currency translation Unwinding of discount At 31 December 2009 Revision to provision Unwinding of discount At 31 December 2010 Amounts in US$ ’000 Stock awards 2010 (a) Stock awards 2010 (b) Stock awards 2008 (c) Stock awards 2006 (d) Stock option plan (e) Shares granted to Non-Executive Directors 2010 253 1,300 1,017 - - 60 2,630 2009 - - 1,162 - - 150 1,312 (a) The Board of Directors on 23 September 2010 has approved a Stock Award Programme for employees with the following characteristics: Assets retirement obligation 1,548 (691) (1) 165 1,021 1,873 259 • Grant date: 15 December 2010. 3,153 • All employees are eligible. • Vesting period of 4 years. The provision for decommissioning relates to the estimation of future • Exercise price is equal to the nominal value of shares. disbursements related to the abandonment and decommissioning of oil and gas wells. This provision will be utilised when the related wells are Specific Award amounts have been reviewed and approved by the Executive fully depleted. Directors and the Remuneration Committee of the Board of Directors for a Note 28 Trade and other payable Amounts in US$ ’000 V.A.T Trade payables total of 1,000,000 shares. (b) Stock awards granted to key management in connection with service agreement. See Note 10. 2010 1,118 11,592 12,710 2009 (c) 2008 Performance-based Employee Long-Term Incentive Programme - 12,923 During 2008 GeoPark Shareholders have voted to authorise the Board to use 12,923 up to 12% of the issued share capital of the Company at the relevant time for the purposes of the Performance-based Employee Long-Term Incentive Plan. The average credit period (expressed as creditor days) during the year ended 31 December 2010 was 49 days (2009: 63 days) The Board of Directors on 3 November 2008 has approved a Stock Award Programme for employees with the following characteristics: The fair value of these short-term financial instruments are not individually • Grant date: 15 December 2008. determined as the carrying amount is a reasonable approximation of fair value. • All employees are eligible. • Vesting period of 4 years. Notes to the Consolidated Financial Statements 83 Specific Award amounts have been reviewed and approved by the Executive Note 30 Directors and the Remuneration Committee of the Board of Directors for a Interests in Joint Ventures total of 1,000,000 shares. (d) Corresponds to 613,380 IPO Awards that were granted to all of the Group’s exploration of hydrocarbons in Chile (Note 20). 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 The following amounts represent the Company’s share in the assets, liabilities 2008, the Company issued 602,000 shares for nominal value of 0.001 each, and results of the joint ventures which have been consolidated line by line corresponding to the total IPO awards vested which are held in a Beneficiary in the consolidated statement of financial position and statement of income: The Group has interests in two joint ventures, which are involved in the Trust. There are 11,380 awards that did not vest and were cancelled since they corresponded to employees that had left the Group before vesting date. Joint venture Subsidiary During 2010, 241,500 (35,000 in 2009) of these shares were sold by the employees at a weighted average price of 5.81 (2.85 in 2009) pounds Interest per share. The shares held in the Employee Beneficiary Trust rank pari passu with GeoPark’s ordinary shares. (e) On admission to AIM the Company granted: i) 605,000 stock options to the senior management and some eligible Assets PP&E / E&E Other assets Total assets employees. The exercise price of these stock options is £ 4.00 (125 per cent Liabilities of placing price). The vesting date of these stock options was 15 May Current liabilities 2008 and they expire in five years from that date, on 15 May 2013. The stock Total liabilities options give no voting rights to the holders until they are exercised and Net assets / (liabilities) converted into common shares when they will rank pari passu with all existing common shares. None of these options has been exercised. Sales Net loss Tranquilo Block GeoPark Otway Block GeoPark Magallanes Ltda. Magallanes Ltda. 30% 2010 3,114 435 3,549 (495) (495) 3,054 - 547 2009 232 344 576 (101) (101) 475 - 371 25% 2010 1,108 176 1,284 (98) (98) 1,186 - 219 2009 105 169 274 (178) (178) 96 - 341 ii) to the Executive Directors 306,690 stock options at an exercise price of Capital commitments related to the Tranquilo and Otway Blocks are disclosed £ 3.20 and 613,380 at an exercise price of £ 4.00. The vesting conditions in Note 31 (b). of these options are equal to those described in i). None of these options has been exercised during 2010. Note 31 During 2010 none of the abovementioned options have been exercised, Commitments forfeited or elapsed. The fair value of the options granted was calculated using the Black-Scholes model. Due to the short trading history of the Company, expected volatility (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 was determined by comparison to a sample of AIM listed oil and gas at well head of those products. This value is equivalent to final sales price companies with a similar market capitalisation to the Group but a longer less transport, storage and treatment costs. trading history. Other share based payments As it is mentioned in note 25, the Company granted 14,704 (22,591 in 2009) (2.5 per cent on invoiced amount of crude oil obtained from wells at “Del Mosquito”, Province of Santa Cruz, Argentina) and to Occidental Petroleum shares at average price for each three months period for services rendered Argentina Inc., formerly Vintage Argentina Ltd. (8 per cent on invoiced by the Non-Executive Directors of the Company. Fees paid in shares amount of crude oil obtained from wells at “Loma Cortaderal” and “Cerro were directly expensed in the administrative costs line in the amount of Doña Juana”, Province of Mendoza, Argentina). In Argentina crude oil sales accrue private royalties payable to EPP Petróleo S.A. US$ 60,815 (US$ 149,074 in 2009). 84 Notes to the Consolidated Financial Statements In Chile, royalties are payable to the Chilean Government, which is calculated Note 32 at 5 per cent of crude oil production and 3 per cent of gas production. Related parties Additionally, GeoPark Chile Ltd -Chilean Branch- is committed to pay private royalties, calculated at 3 per cent on oil and gas revenues up to a total amount of US$ 3,250,000. Controlling interest The main shareholders of GeoPark Holdings Limited, a company registered in Bermuda, as of 31 December 2010, are: (b) Capital commitments The Group has committed to drill one exploratory well in Del Mosquito a) 19.60 per cent of share capital, by Gerald O’Shaughnessy (founder). b) 16.74 per cent of share capital, by Energy Holdings, LLC controlled by Block during 2011. The Group estimates a cost of US$ 1,800,000 to fulfil the James F. Park (founder). commitment that has been undertaken as a compensation of the obligation c) 10.31 per cent of share capital, by Cartica Corporate Governance Fund, L.P. of a cash payment for the exploratory annual concession fee payable in d) 8.29 per cent of share capital, by IFC (International Finance Corporation). Argentina in respect of the Del Mosquito concession. This annual concession e) 5.65 per cent of share capital, by PERSHING Keen, New Jersey (ND) fee is levied by the Province authorities and gives the right to maintain the f) 4.36 per cent of share capital, by MONEDA A.F.I. concession. g) 3.62 per cent of share capital, by ING Bank h) 3.30 per cent of share capital, by UBS Wealth Management (ND) The Tranquilo Block Consortium has committed to drill six exploratory wells, to perform 2D and 3D seismic during 2009, 2010 and 2011. The joint Balances outstanding and transactions with related parties venture estimates a total cost of US$ 14,360,000 for these works. GeoPark’s working interest is 30%. The Otway Block Consortium has committed to drill two exploratory wells and to perform 3D seismic during 2009, 2010 and 2011. The joint venture (Amounts in ´000) Account 2010 To be recovered Transaction Balances Party Relationship Related Joint Joint estimates a total cost of US$ 10,550,000 for these works. GeoPark’s working from co-ventures - 1,890 Ventures Ventures interest is 25%. (c) Operating lease commitments - Group company as lessee The Group leases various plant and machinery under non-cancellable operating lease agreements. Exploration costs 162 Borrowings 1,061 The Group also leases offices under non-cancellable operating lease agreements. The lease terms are between 2 and 3 years, and the majority of Administrative costs 248 lease agreements are renewable at the end of the lease period at market rate. 2009 To be recovered - - - IFC Share- holders Non Carlos Executive Gulisano Director (*) Non Carlos Executive Gulisano Director (**) Joint Joint A total amount of US$ 11,676,000 (US$ 11,225,000 in 2009) was charged to from co-ventures - 731 Ventures Ventures the income statement during 2010 related to operating leases. Borrowings 1,086 (13,901) The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Administrative costs IFC Lario Enterprises Peter Ryalls Share- holders (***) Non Executive Director (****) 6 20 Amounts in US$ ’000 Operating lease commitments Falling due within 1 year Falling due within 1 - 5 years Total minimum lease payments 2010 2009 13,224 30,301 43,525 11,066 11,113 22,179 Production costs (*) Corresponding to geosciences consultancy. (**) Corresponding to fees for his position of Managing Director held until June 2010 when he was appointed as Non-Executive Director. (***) The Company paid US$ 6,000 during 2009 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. Notes to the Consolidated Financial Statements 85 There have been no other transactions with the Board of Directors, Executive Board, Executive officers, significant shareholders or other related parties Agreement with Methanex In March 2011 GeoPark Chile Limited - Chilean Branch has signed an during the year besides the intercompany transactions which have been amendment to the Sale and Purchase of Natural Gas Agreement eliminated in the consolidated financial statements, and normal remuneration with Methanex Chile S.A. Under this new agreement the Group’s subsidiary of Board of Directors and Executive Board. has committed to drill twelve gas wells in the Fell Block during 2011. Methanex will contribute to the cost of drilling the wells in order to improve the project economics. Note 33 Fees paid to Auditors Amounts in US$ ’000 2010 2009 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 Non audit services Fees paid to auditors 115 28 98 146 387 105 28 71 168 372 Non audit services relates to tax services for US$ 94,000 (US$ 141,000 in 2009) and other services for US$ 52,000 (US$ 27,000 in 2009). Note 34 Subsequent Events Strategic partnership with LGI In 2010, GeoPark and LGI entered into a strategic partnership to acquire a portfolio of oil and gas upstream assets in Latin America. As a first step towards cementing this long-term growth partnership, in March 2011 GeoPark reached an in-principle agreement to sell to LGI a 10% interest in the Chilean business (participation in Fell, Otway and Tranquilo) for US$ 70 million. The transaction is expected to close in 2Q 2011. In addition, in a separate transaction, and subject to obtaining regulatory approvals, GeoPark has reached an in-principle agreement to invest up to US$ 10 million in the drilling of an exploration well on the Sholkara prospect in the LGI-operated Block 8 in Kazakhstan, which would give GeoPark effectively a 25% participating interest in Block 8. The Sholkara prospect has an unrisked mean oil resource estimate of 100-400 million barrels and represents an exciting opportunity for GeoPark outside its historical and principal area of focus. Both transactions are subject to the signing of definitive legal agreements and final approval of the GeoPark and LGI Boards of Directors. 86 Notes to the Consolidated Financial Statements Seno Obstrucción, Tranquilo Block Notes to the Consolidated Financial Statements 87 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. Carlos Gulisano | Non-Executive Director Dr. Gulisano is a respected leader in the fields of petroleum geology and geophysics in Latin America and has over 30 years of successful exploration, development and management experience in the oil and gas industry. Dr. Gulisano has worked with YPF, Petrolera Argentina San Jorge, Chevron and GeoPark and has been a leader on teams credited with significant oil and gas discoveries (including the giant Trapial Field in Argentina). He has worked in Argentina, Bolivia, Peru, Ecuador, Colombia, Venezuela, Brazil, Chile, and USA. Dr. Gulisano holds a B.Sc in Geology, a postgraduate degree in Petroleum Engineering and a PhD in Geology from the University of Buenos Aires and has authored and co-authored over 40 technical papers. He is a former adjunct professor at the Universidad del Sur, a former thesis director at the University of La Plata, and a former scholarship director at CONICET (the national technology research council) in Argentina. Dr. Gulisano has been a key element of GeoPark’s growth – as an adviser since 2002 and as the Managing Director from February 2008 until June 2010. James F. Park | Chief Executive Officer and Deputy Chairman Mr. Park has over 35 years of 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 which pioneered the development of commercial oil and gas production in Central America and, as a senior executive, and Board member, 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) until its sale 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 and has been the Chief Executive Officer since its founding. 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) Carlos Gulisano (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 Independent 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 1 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 89 AnnuAl report 2010 www.geo-pArk.com